NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations:
Level One Bancorp, Inc. (the “Company,” “Level One,” “we,” “our,” or “us”) is a financial holding company headquartered in Farmington Hills, Michigan. Including the Company headquarters, as of December 31, 2020, its wholly owned bank subsidiary, Level One Bank (the "Bank"), had 17 offices, including 11 banking centers (our full service branches) in Metro Detroit, one banking center in Grand Rapids, one banking center in Jackson, three banking centers in Ann Arbor and one 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"), was a wholly owned insurance subsidiary of the Company that provided 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 have been 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 was incorporated in Nevada. As of January 19, 2021, Hamilton Court exited the pool resources relationship and was dissolved.
Preferred Stock Public Offering:
On August 10, 2020, the Company sold 1,000,000 depositary shares, each representing 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.
Merger with Ann Arbor Bancorp, Inc.:
On January 2, 2020, the Company completed its previously announced acquisition of Ann Arbor Bancorp, Inc. (“AAB”) and its wholly owned subsidiary, Ann Arbor State Bank. The transaction was completed pursuant to a merger of the Company’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the Agreement and Plan of 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.
Initial Public Offering:
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. The aggregate offering price for the shares sold by the Company was $32.2 million, and after deducting $2.1 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 million. The Company did not receive any proceeds from the sales of shares by the selling shareholders.
Basis of Presentation:
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to predominant practices within the banking industry. Management of the Company has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare the consolidated financial statements in conformity with GAAP. Actual results may differ from
those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for annual periods presented herein, have been included. Some items in the prior year financial statements were reclassified to conform to the current presentation. Such items had no impact on net income or shareholder’s equity.
Principles of Consolidation:
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.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Under the acquisition method, tangible and intangible identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree are recorded at fair value as of the acquisition date. The Company includes the results of operations of the acquired companies in the consolidated statements of income from the date of acquisition. Transaction costs and costs to restructure the acquired company are expensed as incurred. Goodwill is recognized as the excess of the acquisition price over the estimated fair value of the net assets acquired. If the fair value of the net assets acquired is greater than the acquisition price, a bargain purchase gain is recognized and recorded in noninterest income.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, which includes amounts on deposit with the Federal Reserve, interest-bearing deposits with banks or other financial institutions and federal funds sold. Generally, federal funds are sold for one‑day periods, but not longer than 30 days.
Investment Securities
Investment securities consist of debt securities of the U.S. Treasury, government sponsored entities, states, counties, municipalities, corporations, agency mortgage-backed securities and non-agency mortgage-backed securities. Securities transactions are recorded on a trade date basis. Securities are classified as available for sale when the Company intends to sell them before maturity. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are included in other comprehensive income and the related accumulated unrealized holding gains and losses are reported as a separate component of shareholders’ equity until realized.
On a quarterly basis, the Company makes an assessment to determine whether there have been any events or circumstances to indicate that a security for which there is an unrealized loss is impaired on an other than temporary basis. This determination requires significant judgment. A decline in the fair value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. In estimating other-than-temporary impairment (“OTTI”) losses, we consider the severity and duration of the impairment; the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; projected cash flows on covered non-agency mortgage-backed securities; and the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value. Management evaluates securities for other-than-temporary impairment more frequently when economic or market conditions warrant such an evaluation.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Also, when applicable, realized gains and losses are reported as a reclassification adjustment, net of tax, in other comprehensive income.
Other Investments
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Bank also invests in an equity security that does not have a readily determinable fair value because its ownership is restricted and lacks a market for trading. As a result, this security is carried at cost and is periodically evaluated for impairment.
Loans Held for Sale
Loans held for sale consist of loans originated with the intent to sell. Loans held for sale are carried at fair value, determined individually, as of the balance sheet date. The Company believes the fair value method reflects the economic risks
associated with these loans. Fair value measurements on loans held for sale are based on quoted market prices for similar loans in the secondary market, market quotes from anticipated sales contracts and commitments, or contract prices from firm sales commitments. Fair value includes the servicing value of the loans as well as any accrued interest. The changes in the fair value of loans held for sale are reflected in mortgage banking activities on the consolidated statements of income.
Loans held for sale are sold with either servicing rights released or servicing rights retained. In addition to the Small Business Administration and United States Department of Agriculture guaranteed loans, which are sold with servicing retained, the Company starting selling loans held for sale with servicing retained directly to FNMA during the third quarter of 2019. Refer to the mortgage servicing rights section below for further discussion.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unamortized deferred loan fees and costs and net of any purchase premiums and discounts. Interest income is recorded on the accrual basis, in accordance with the terms of the respective loan. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income without anticipating prepayments.
Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Interest income on mortgage and commercial loans is discontinued when principal or interest payments are past due 90 days, unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Certain Purchased Loans
The Company purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid or at fair value at acquisition in a business combination, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the provision for loan losses.
These PCI loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, an impairment loss is recognized by establishing an allocation for the loan or pool in the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized, prospectively, as loan interest income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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.
Loans over $250 thousand are 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 present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, are classified as impaired, regardless of size, and are measured for impairment based upon the present value of estimated future cash flows using the loan’s effective rate at inception or, if considered collateral dependent, based upon the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
An allowance for loan losses for purchased credit impaired loans is recorded when projected future cash flows decrease. The measurement of impairment on these loans or pools of loans is based upon the excess of the loan or pool’s carrying value over the present value of the projected future cash flows, discounted at the last accounting yield applicable to the loan or pool of loans.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 36 months. The historical loss analysis incorporates and fully relies on the Bank’s own historical loss data. The historical loss estimates are established by loan type including commercial and industrial and commercial real estate. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: local and national economic conditions; trends in underwriting standards and lending policies; trends in portfolio volume, maturity and composition (impact of credit concentrations); experience, ability and depth of lending management and staff; trends in delinquencies and nonaccruals; results of independent loan review; change in value for collateral dependent loans; high loan growth; unseasoned bank portfolio; specialized financing; and other factors (legal, regulatory, competition). The following portfolio segments have been identified:
Commercial real estate loans are secured by a mortgage lien on the real estate property. Owner-occupied real estate loans generally are considered to carry less risk than non-owner occupied real estate (properties) because the Company considers them to be less sensitive to the condition of the commercial real estate market. Repayment is based on the operations of the business. Investment real estate loans rely on rental income for loan repayment, which involves risk such as rent rollover, tenants going out of business, and competitive properties in the area. Construction and land development loans generally are considered the riskiest class of commercial real estate, due to possible cost overruns, contractor/lien issues, loss of tenant, etc. Risk of loss is managed by adherence to standard loan policies that establish certain levels of performance prior to the extension of a loan to the borrower.
Commercial and Industrial loans have varying degrees of risk, but overall are considered to have less risk than commercial real estate. These loans are generally short-term in nature and are almost always backed by collateral. Unsecured commercial loans are supported by strong borrower(s)/guarantor(s) in terms of liquidity, net worth, cash flow, etc. Collateral security of these loans is relatively liquid (i.e., accounts receivable, inventory, equipment) and readily available to cover potential loan loss. Credit risk is managed through standardized loan policies, established and authorized credit limits, portfolio management and the diversification of industries. The PPP loans funded during the second and third quarters of 2020, which are guaranteed by the SBA, are reported within this loan category.
Consumer and Residential Real Estate loan portfolios, unlike commercial, tend to be composed of many relatively homogeneous loans. Loan repayment is based on personal cash flow. To assess the risk of a consumer loan request, loan purpose, collateral, debt to income ratio, credit bureau report, and cash flow/employment verification are analyzed. A certain level of security is provided through liens on credits supported by collateral.
Economic conditions that affect consumers in the Bank’s market have a direct impact on the credit quality of these loans. Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may adversely impact consumer loan credit quality.
The majority of residential real estate loans originated by the Bank conform to secondary market underwriting standards and are sold within a short timeframe to unaffiliated third parties, including the future servicing rights to the loans. The credit underwriting standards for these loans require a certain level of documentation, verifications, valuations, and overall credit performance of the borrower.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the asset or the expected term of the lease.
We periodically review the carrying value of our long‑lived assets to determine if impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, we evaluate the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.
Other Real Estate Owned ("OREO") and Repossessed Assets
Other real estate owned and repossessed assets represent properties/assets acquired through acquisition, foreclosure, repossession process or other proceedings, and are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Fair value for OREO is based on an appraisal performed upon foreclosure. Property is evaluated regularly to ensure the recorded amount is supported by its fair value less estimated costs to dispose. After the initial foreclosure appraisal, fair value is generally determined by an annual appraisal unless known events warrant adjustments to the recorded value. Revenue from the operations of OREO is included in other income in the consolidated statements of income, and expense from the operations of OREO and decreases in valuations are included in other expense in the consolidated statements of income.
Goodwill and Core Deposit Intangible
Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120-month period and is subject to periodic impairment evaluation. Management will periodically review the carrying value of its long-lived and intangible assets to determine if any impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, in which case an impairment charge would be recorded as an expense in the period of impairment. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible.
Mortgage Servicing Rights
When loans are sold with servicing retained, the servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. The servicing rights are amortized in proportion to and over the period of estimated net servicing income.
Servicing rights are evaluated for impairment on a quarterly basis based upon the fair value obtained from an independent third party valuation model requiring the incorporation of assumptions that market participants would use in estimating future net servicing income, which include estimates of prepayment speeds, discount rate, cost to service, contractual servicing fee income, ancillary income, late fees, replacement reserves and other economic factors that are determined based on current market conditions.
Servicing fee income is recorded for fees earned for servicing loans and is based on contractual percentage of the outstanding principal or a fixed amount per loan. Servicing fees totaled $331 thousand, $43 thousand and $117 thousand for the years ended December 31, 2020, 2019 and 2018, respectively, most of which related to servicing fees earned on SBA loans sold with serving retained during the years ended December 31, 2019 and 2018. Servicing fees for the year ended December 31, 2020 were related to residential mortgage loans.
Bank-owned Life Insurance
The Bank has purchased life insurance policies on certain key executives and senior managers. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Derivatives
All derivatives are recognized on the consolidated balance sheet as a component of other assets or other liabilities at their fair value.
Customer-initiated derivatives refer to the Company utilizing interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies. Therefore, these derivatives are not used to manage interest rate risk in the Company's assets or liabilities. The Company generally takes offsetting positions with dealer counterparties to mitigate the valuation risk of the customer-initiated derivatives. Income primarily results in the spread between the customer derivatives and offsetting dealer positions. The gains or losses derived from changes in fair value are recognized in current earnings during the period of change in other non-interest income on the consolidated statements of income.
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as freestanding derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in mortgage banking activities in the consolidated statements of income.
Secured borrowing
Transfers of financial assets that do not qualify for sale accounting are reported as collateralized borrowings. Accordingly, the related assets remain on the Company’s balance sheet and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with attributable interest expense recognized over the life of the related transactions.
Loan Commitments and Related Financial Instruments
Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any matters at this time that will have a material effect on the consolidated financial statements.
Earnings per Share
The Company's restricted stock awards that pay non-forfeitable common stock dividends meet the criteria of a participating security. Accordingly, beginning in 2019, earnings per share is calculated using the two-class method under which earnings are allocated to both common shares and participating securities.
Debt Issuance Costs
Costs associated with the issuance of debt are presented in the consolidated balance sheet as a direct reduction from the carrying value of that debt liability. The deferred issuance costs are amortized over the life the related debt instrument, and included within the debt’s interest expense.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards as there is no market or performance metrics that must be met. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Additionally, the Company accounts for forfeitures as they occur.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of taxes and reclassifications.
Income Taxes
Income tax expense or benefit is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to shareholders. The total amount of dividends which may be paid out at any date is also generally limited to retained earnings.
Operating Segments
While chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Emerging Growth Company Status:
We are 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 the 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 Adopted 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.
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 - We receive referral fees for referring our customers to a merchant servicer. Fees are immaterial and recognized as received.
Gain (loss) on sale of other real estate owned - The Company records income or expense only upon consummation of the sale of 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 became effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and was to be applied prospectively with a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted ASU 2016-01 and related issues on January 1, 2019 and determined that the implementation of this standard did not have a material impact to our consolidated financial statements.
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 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 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 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.
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.
The guidance is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating 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 frame noted above.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of the cessation of LIBOR, the amendments in this ASU provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this ASU are elective and were effective March 12, 2020 for all entities. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2—BUSINESS COMBINATIONS
On January 2, 2020, the Company 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. The Company engaged in this transaction with the expectation that it would be accretive to income and expand our footprint in the Ann Arbor and Jackson markets.
AAB's results of operations were included in the Company’s results beginning January 2, 2020. Acquisition-related costs of $1.7 million are included in the Company’s income statement for the year ended December 31, 2020.
Goodwill of $26.2 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining 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 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
|
|
Core deposit intangibles of $3.7 million arising from the acquisition are being amortized over 10 years on an accelerated basis using the sum of the years digits method.
Loans acquired in the acquisition were initially recorded at fair value with no separate allowance for loan losses. The Company 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 not all contractually required payments will be collected. Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the 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 changes 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 effects. 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 assumed date. Due diligence, professional fees, and other expenses related to the merger were incurred by the Company and AAB during the year ended December 31, 2020, but the pro forma condensed combined statement of income is not adjusted to exclude these costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands, except per share data)
|
|
|
|
2020
|
|
2019
|
Net interest income
|
|
|
|
$
|
66,796
|
|
|
$
|
61,103
|
|
Noninterest income
|
|
|
|
29,714
|
|
|
17,206
|
|
Noninterest expense
|
|
|
|
60,300
|
|
|
53,174
|
|
Net income
|
|
|
|
20,433
|
|
|
17,647
|
|
Net income per diluted share
|
|
|
|
2.57
|
|
2.26
|
NOTE 3—SECURITIES
The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2020 and December 31, 2019 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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities & agencies
|
|
$
|
26,575
|
|
|
$
|
103
|
|
|
$
|
(320)
|
|
|
$
|
26,358
|
|
State and political subdivision
|
|
124,053
|
|
|
8,751
|
|
|
(81)
|
|
|
132,723
|
|
Mortgage-backed securities: residential
|
|
25,729
|
|
|
352
|
|
|
—
|
|
|
26,081
|
|
Mortgage-backed securities: commercial
|
|
11,434
|
|
|
484
|
|
|
—
|
|
|
11,918
|
|
Collateralized mortgage obligations: residential
|
|
13,320
|
|
|
138
|
|
|
(12)
|
|
|
13,446
|
|
Collateralized mortgage obligations: commercial
|
|
57,398
|
|
|
1,206
|
|
|
(92)
|
|
|
58,512
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
17,639
|
|
|
61
|
|
|
(107)
|
|
|
17,593
|
|
Asset backed securities
|
|
10,229
|
|
|
—
|
|
|
(157)
|
|
|
10,072
|
|
Corporate bonds
|
|
5,998
|
|
|
34
|
|
|
(3)
|
|
|
6,029
|
|
Total available-for-sale
|
|
$
|
292,375
|
|
|
$
|
11,129
|
|
|
$
|
(772)
|
|
|
$
|
302,732
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivision
|
|
$
|
89,304
|
|
|
$
|
4,463
|
|
|
$
|
(20)
|
|
|
$
|
93,747
|
|
Mortgage-backed securities: residential
|
|
10,609
|
|
|
82
|
|
|
(126)
|
|
|
10,565
|
|
Mortgage-backed securities: commercial
|
|
8,567
|
|
|
224
|
|
|
(12)
|
|
|
8,779
|
|
Collateralized mortgage obligations: residential
|
|
8,541
|
|
|
39
|
|
|
(51)
|
|
|
8,529
|
|
Collateralized mortgage obligations: commercial
|
|
22,891
|
|
|
300
|
|
|
(10)
|
|
|
23,181
|
|
U.S. Treasury
|
|
1,976
|
|
|
23
|
|
|
—
|
|
|
1,999
|
|
SBA
|
|
22,051
|
|
|
87
|
|
|
(154)
|
|
|
21,984
|
|
Asset backed securities
|
|
10,390
|
|
|
—
|
|
|
(306)
|
|
|
10,084
|
|
Corporate bonds
|
|
2,030
|
|
|
20
|
|
|
(13)
|
|
|
2,037
|
|
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 year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Proceeds
|
|
|
|
|
$
|
42,640
|
|
|
$
|
69,846
|
|
|
$
|
3,625
|
|
Gross gains
|
|
|
|
|
1,871
|
|
|
1,566
|
|
|
2
|
|
Gross losses
|
|
|
|
|
(9)
|
|
|
(392)
|
|
|
(73)
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
Within one year
|
|
$
|
10,717
|
|
|
$
|
10,807
|
|
One to five years
|
|
24,573
|
|
|
25,421
|
|
Five to ten years
|
|
105,041
|
|
|
107,713
|
|
Beyond ten years
|
|
152,044
|
|
|
158,791
|
|
Total
|
|
$
|
292,375
|
|
|
$
|
302,732
|
|
Securities pledged at December 31, 2020 and December 31, 2019 had a carrying amount of $98.7 million and $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 December 31, 2020, the Bank held 66 tax-exempt state and local municipal securities totaling $49.0 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at December 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders' equity.
The following table summarizes securities with unrealized losses at December 31, 2020 and December 31, 2019 aggregated by security type and length of time in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
(Dollars in thousands)
|
|
Fair
value
|
|
Unrealized
Losses
|
|
Fair
value
|
|
Unrealized
Losses
|
|
Fair
value
|
|
Unrealized
Losses
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities & agencies
|
|
$
|
19,680
|
|
|
$
|
(320)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,680
|
|
|
$
|
(320)
|
|
State and political subdivision
|
|
4,880
|
|
|
(81)
|
|
|
—
|
|
|
—
|
|
|
4,880
|
|
|
(81)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: residential
|
|
—
|
|
|
—
|
|
|
1,109
|
|
|
(12)
|
|
|
1,109
|
|
|
(12)
|
|
Collateralized mortgage obligations: commercial
|
|
26,467
|
|
|
(92)
|
|
|
—
|
|
|
—
|
|
|
26,467
|
|
|
(92)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
—
|
|
|
—
|
|
|
12,206
|
|
|
(107)
|
|
|
12,206
|
|
|
(107)
|
|
Asset backed securities
|
|
—
|
|
|
—
|
|
|
10,072
|
|
|
(157)
|
|
|
10,072
|
|
|
(157)
|
|
Corporate bonds
|
|
2,497
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
2,497
|
|
|
(3)
|
|
Total available-for-sale
|
|
$
|
53,534
|
|
|
$
|
(496)
|
|
|
$
|
23,390
|
|
|
$
|
(276)
|
|
|
$
|
76,924
|
|
|
$
|
(772)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivision
|
|
$
|
5,109
|
|
|
$
|
(20)
|
|
|
$
|
305
|
|
|
$
|
—
|
|
|
$
|
5,414
|
|
|
$
|
(20)
|
|
Mortgage-backed securities: residential
|
|
4,022
|
|
|
(39)
|
|
|
3,982
|
|
|
(87)
|
|
|
8,004
|
|
|
(126)
|
|
Mortgage-backed securities: commercial
|
|
1,769
|
|
|
(11)
|
|
|
430
|
|
|
(1)
|
|
|
2,199
|
|
|
(12)
|
|
Collateralized mortgage obligations: residential
|
|
770
|
|
|
(1)
|
|
|
4,631
|
|
|
(50)
|
|
|
5,401
|
|
|
(51)
|
|
Collateralized mortgage obligations: commercial
|
|
—
|
|
|
—
|
|
|
1,716
|
|
|
(10)
|
|
|
1,716
|
|
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
3,961
|
|
|
(13)
|
|
|
12,405
|
|
|
(141)
|
|
|
16,366
|
|
|
(154)
|
|
Asset backed securities
|
|
8,220
|
|
|
(232)
|
|
|
1,864
|
|
|
(74)
|
|
|
10,084
|
|
|
(306)
|
|
Corporate bonds
|
|
489
|
|
|
(13)
|
|
|
—
|
|
|
—
|
|
|
489
|
|
|
(13)
|
|
Total available-for-sale
|
|
$
|
24,340
|
|
|
$
|
(329)
|
|
|
$
|
25,333
|
|
|
$
|
(363)
|
|
|
$
|
49,673
|
|
|
$
|
(692)
|
|
As of December 31, 2020, the Company's investment portfolio consisted of 313 securities, 37 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 December 31, 2020.
NOTE 4—LOANS
The following table presents the recorded investment in loans at December 31, 2020 and December 31, 2019. The recorded investment in loans excludes accrued interest receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Originated
|
|
Acquired
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
587,631
|
|
|
$
|
133,201
|
|
|
$
|
720,832
|
|
Commercial and industrial
|
|
629,434
|
|
|
56,070
|
|
|
685,504
|
|
Residential real estate
|
|
280,645
|
|
|
34,831
|
|
|
315,476
|
|
Consumer
|
|
748
|
|
|
977
|
|
|
1,725
|
|
Total
|
|
$
|
1,498,458
|
|
|
$
|
225,079
|
|
|
$
|
1,723,537
|
|
December 31, 2019
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
551,565
|
|
|
$
|
53,081
|
|
|
$
|
604,646
|
|
Commercial and industrial
|
|
403,922
|
|
|
6,306
|
|
|
410,228
|
|
Residential real estate
|
|
201,787
|
|
|
10,052
|
|
|
211,839
|
|
Consumer
|
|
864
|
|
|
32
|
|
|
896
|
|
Total
|
|
$
|
1,158,138
|
|
|
$
|
69,471
|
|
|
$
|
1,227,609
|
|
At December 31, 2020 and December 31, 2019, the Company had residential loans held for sale, which were originated with the intent to sell, totaling $43.5 million and $13.9 million, respectively. During the years ended December 31, 2020 and 2019, the Company sold residential real estate loans with proceeds totaling $545.6 million and $270.4 million, respectively. At December 31, 2020, $290.1 million of PPP loans were included in the commercial and industrial loan balance.
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 $12 thousand and $1.2 million in commitments to lend additional funds to borrowers whose loans were classified as nonaccrual as of December 31, 2020 and December 31, 2019, respectively.
Information as to nonperforming assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Nonaccrual loans:
|
|
|
|
|
Commercial real estate
|
|
$
|
7,320
|
|
|
$
|
4,832
|
|
Commercial and industrial
|
|
7,490
|
|
|
11,112
|
|
Residential real estate
|
|
3,991
|
|
|
2,569
|
|
Consumer
|
|
15
|
|
|
16
|
|
Total nonaccrual loans
|
|
18,816
|
|
|
18,529
|
|
Other real estate owned
|
|
—
|
|
|
921
|
|
Total nonperforming assets
|
|
$
|
18,816
|
|
|
$
|
19,450
|
|
Loans 90 days or more past due and still accruing
|
|
$
|
269
|
|
|
$
|
157
|
|
At December 31, 2020 and December 31, 2019, the loans that were 90 days or more past due and still accruing were PCI loans.
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
714,196
|
|
|
$
|
4,863
|
|
|
$
|
1,773
|
|
|
$
|
—
|
|
|
$
|
720,832
|
|
Commercial and industrial
|
|
681,106
|
|
|
893
|
|
|
3,505
|
|
|
—
|
|
|
685,504
|
|
Residential real estate
|
|
305,800
|
|
|
5,420
|
|
|
1,110
|
|
|
3,146
|
|
|
315,476
|
|
Consumer
|
|
1,723
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
1,725
|
|
Total
|
|
$
|
1,702,825
|
|
|
$
|
11,176
|
|
|
$
|
6,388
|
|
|
$
|
3,148
|
|
|
$
|
1,723,537
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
597,892
|
|
|
$
|
3,630
|
|
|
$
|
1,286
|
|
|
$
|
1,838
|
|
|
$
|
604,646
|
|
Commercial and industrial
|
|
407,692
|
|
|
377
|
|
|
1,275
|
|
|
884
|
|
|
410,228
|
|
Residential real estate
|
|
206,002
|
|
|
3,286
|
|
|
1,429
|
|
|
1,122
|
|
|
211,839
|
|
Consumer
|
|
892
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
896
|
|
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)
|
|
December 31, 2020
|
|
December 31, 2019
|
Nonaccrual loans
|
|
$
|
18,816
|
|
|
$
|
18,529
|
|
Performing troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
546
|
|
|
547
|
|
Residential real estate
|
|
432
|
|
|
359
|
|
Total performing troubled debt restructurings
|
|
978
|
|
|
906
|
|
Total impaired loans, excluding purchase credit impaired loans
|
|
$
|
19,794
|
|
|
$
|
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. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends the relief related to troubled debt restructurings to the earlier of January 1, 2022 or 60 days after the national emergency termination date. 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. As of December 31, 2020, we had $20.1 million of loans that remained on a COVID-related deferral of which $11.6 million of loans had payments deferred greater than six months. These loans were primarily commercial loans and represented 1.16% of our total loan portfolio. In addition, $2.5 million of those loans deferred greater than six months were moved to nonaccrual. 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 December 31, 2020 and December 31, 2019, the Company had a recorded investment in troubled debt restructurings of $4.8 million and $3.9 million, respectively. The Company allocated a specific reserve of $317 thousand and $384 thousand for those loans at December 31, 2020 and 2019, respectively. The Company had not committed to lend additional amounts to borrowers whose loans have been modified as of December 31, 2020 or December 31, 2019. As of December 31, 2020, there were $3.8 million of nonperforming TDRs and $978 thousand of performing TDRs included in impaired loans. As of December 31, 2019, there were $3.0 million of nonperforming TDRs and $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 years ended December 31, 2020, 2019 and 2018 by type of concession granted. 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)
|
|
Principal
deferral
|
|
Interest
rate
|
|
Forbearance
agreement
|
|
Total
number of
loans
|
|
Total
recorded
investment
|
|
Net
charge-offs
|
|
Provision
for loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,654
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
1,654
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
—
|
|
|
74
|
|
|
—
|
|
|
1
|
|
|
74
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,654
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
1,728
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
332
|
|
|
2
|
|
|
$
|
332
|
|
|
$
|
—
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
332
|
|
|
2
|
|
|
$
|
332
|
|
|
$
|
—
|
|
|
$
|
174
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
2,073
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
4
|
|
|
$
|
2,073
|
|
|
$
|
101
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
1,031
|
|
|
106
|
|
|
—
|
|
|
4
|
|
|
1,137
|
|
|
—
|
|
|
14
|
|
Residential real estate
|
|
113
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
113
|
|
|
—
|
|
|
5
|
|
Total
|
|
$
|
3,217
|
|
|
$
|
106
|
|
|
$
|
—
|
|
|
10
|
|
|
$
|
3,323
|
|
|
$
|
101
|
|
|
$
|
19
|
|
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 December 31, 2020, 2019 and 2018 for which there was a subsequent payment default, including the recorded investment as of the period end. A payment on a TDR is considered to be in default once it is greater than 30 days past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
(Dollars in thousands)
|
|
Total number of
loans
|
|
Total recorded
investment
|
|
Provision for loan losses following a
subsequent default
|
Commercial real estate
|
|
1
|
|
|
$
|
203
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1
|
|
|
$
|
203
|
|
|
$
|
—
|
|
|
|
For the year ended December 31, 2019
|
(Dollars in thousands)
|
|
Total number of
loans
|
|
Total recorded
investment
|
|
Provision for loan losses following a
subsequent default
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
1
|
|
|
$
|
42
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1
|
|
|
$
|
42
|
|
|
$
|
12
|
|
|
|
For the year ended December 31, 2018
|
(Dollars in thousands)
|
|
Total number of
loans
|
|
Total recorded
investment
|
|
Provision for loan losses following a
subsequent default
|
Commercial real estate
|
|
3
|
|
|
$
|
2,073
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
1
|
|
|
904
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
4
|
|
|
$
|
2,977
|
|
|
$
|
—
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
685,690
|
|
|
$
|
21,570
|
|
|
$
|
13,045
|
|
|
$
|
527
|
|
|
$
|
720,832
|
|
Commercial and industrial
|
|
637,285
|
|
|
25,727
|
|
|
21,876
|
|
|
616
|
|
|
685,504
|
|
Total
|
|
$
|
1,322,975
|
|
|
$
|
47,297
|
|
|
$
|
34,921
|
|
|
$
|
1,143
|
|
|
$
|
1,406,336
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
591,419
|
|
|
$
|
8,325
|
|
|
$
|
4,042
|
|
|
$
|
860
|
|
|
$
|
604,646
|
|
Commercial and industrial
|
|
383,756
|
|
|
8,967
|
|
|
16,527
|
|
|
978
|
|
|
410,228
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
311,485
|
|
|
$
|
3,991
|
|
|
$
|
315,476
|
|
Consumer
|
|
1,710
|
|
|
15
|
|
|
1,725
|
|
Total
|
|
$
|
313,195
|
|
|
$
|
4,006
|
|
|
$
|
317,201
|
|
December 31, 2019
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
209,270
|
|
|
$
|
2,569
|
|
|
$
|
211,839
|
|
Consumer
|
|
880
|
|
|
16
|
|
|
896
|
|
Total
|
|
$
|
210,150
|
|
|
$
|
2,585
|
|
|
$
|
212,735
|
|
Purchased Credit Impaired Loans:
As part of the Company's previous five 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
|
December 31, 2020
|
|
|
|
|
Commercial real estate
|
|
$
|
5,109
|
|
|
$
|
1,773
|
|
Commercial and industrial
|
|
643
|
|
|
274
|
|
Residential real estate
|
|
4,017
|
|
|
2,949
|
|
|
|
|
|
|
Total PCI loans
|
|
$
|
9,769
|
|
|
$
|
4,996
|
|
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
|
|
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 year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Accretable yield at beginning of period
|
|
|
|
|
$
|
9,141
|
|
|
$
|
10,947
|
|
|
$
|
14,452
|
|
Additions due to acquisitions
|
|
|
|
|
35
|
|
|
—
|
|
|
—
|
|
Accretion of income
|
|
|
|
|
(1,760)
|
|
|
(2,313)
|
|
|
(3,794)
|
|
Adjustments to accretable yield
|
|
|
|
|
(319)
|
|
|
507
|
|
|
304
|
|
Other activity, net
|
|
|
|
|
—
|
|
|
—
|
|
|
(15)
|
|
Accretable yield at end of period
|
|
|
|
|
$
|
7,097
|
|
|
$
|
9,141
|
|
|
$
|
10,947
|
|
"Additions 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.
For the years ended December 31, 2020 and 2019, allowance for loan losses on PCI loans decreased by $95 thousand and $158 thousand, respectively.
Related Party Loans:
We have extended loans to certain of our directors, executive officers, principal shareholders and their affiliates. The aggregate loans outstanding to the directors, executive officers, principal shareholders and their affiliates as of December 31, 2020 and 2019 totaled approximately $8.9 million and $4.1 million, respectively. During 2020 and 2019, there were $6.6 million and $1.1 million, respectively, of new loans and other additions, while repayments and other reductions totaled $1.8 million and $924 thousand, respectively.
NOTE 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 December 31, 2020, the Company had six PCI loan pools and 12 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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,320
|
|
|
$
|
—
|
|
|
$
|
7,320
|
|
|
$
|
7,720
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
7,964
|
|
|
630
|
|
|
8,594
|
|
|
9,208
|
|
|
307
|
|
Residential real estate
|
|
2,153
|
|
|
192
|
|
|
2,345
|
|
|
2,447
|
|
|
25
|
|
Total
|
|
$
|
17,437
|
|
|
$
|
822
|
|
|
$
|
18,259
|
|
|
$
|
19,375
|
|
|
$
|
332
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,832
|
|
|
$
|
—
|
|
|
$
|
4,832
|
|
|
$
|
5,156
|
|
|
$
|
—
|
|
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 year ended December 31, 2020
|
|
|
|
|
|
|
Individually evaluated impaired loans: (1)
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,981
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Commercial and industrial
|
|
14,008
|
|
|
46
|
|
|
87
|
|
Residential real estate
|
|
3,304
|
|
|
36
|
|
|
55
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,293
|
|
|
$
|
82
|
|
|
$
|
152
|
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
Individually evaluated impaired loans: (1)
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,233
|
|
|
$
|
2
|
|
|
$
|
209
|
|
Commercial and industrial
|
|
8,514
|
|
|
43
|
|
|
573
|
|
Residential real estate
|
|
1,904
|
|
|
29
|
|
|
9
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,651
|
|
|
$
|
74
|
|
|
$
|
791
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
Individually evaluated impaired loans: (1)
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
9,471
|
|
|
$
|
1,622
|
|
|
$
|
142
|
|
Commercial and industrial
|
|
7,673
|
|
|
91
|
|
|
112
|
|
Residential real estate
|
|
5,182
|
|
|
369
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,326
|
|
|
$
|
2,082
|
|
|
$
|
254
|
|
(1) December 31, 2018 individually evaluated impaired loans included PCI loans, whereas December 31, 2020 and 2019 individually evaluated impaired loans excluded PCI loans.
Activity in the allowance for loan losses is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
Real Estate
|
|
Commercial
and Industrial
|
|
Residential
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,773
|
|
|
$
|
5,515
|
|
|
$
|
1,384
|
|
|
$
|
2
|
|
|
$
|
12,674
|
|
Provision for loan losses
|
|
4,190
|
|
|
5,302
|
|
|
2,343
|
|
|
37
|
|
|
11,872
|
|
Gross chargeoffs
|
|
—
|
|
|
(2,118)
|
|
|
(285)
|
|
|
(58)
|
|
|
(2,461)
|
|
Recoveries
|
|
12
|
|
|
87
|
|
|
85
|
|
|
28
|
|
|
212
|
|
Net (chargeoffs) recoveries
|
|
12
|
|
|
(2,031)
|
|
|
(200)
|
|
|
(30)
|
|
|
(2,249)
|
|
Ending allowance for loan losses
|
|
$
|
9,975
|
|
|
$
|
8,786
|
|
|
$
|
3,527
|
|
|
$
|
9
|
|
|
$
|
22,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,227
|
|
|
$
|
5,174
|
|
|
$
|
1,164
|
|
|
$
|
1
|
|
|
$
|
11,566
|
|
Provision for loan losses
|
|
632
|
|
|
533
|
|
|
143
|
|
|
75
|
|
|
1,383
|
|
Gross chargeoffs
|
|
(92)
|
|
|
(438)
|
|
|
—
|
|
|
(106)
|
|
|
(636)
|
|
Recoveries
|
|
6
|
|
|
246
|
|
|
77
|
|
|
32
|
|
|
361
|
|
Net (chargeoffs) recoveries
|
|
(86)
|
|
|
(192)
|
|
|
77
|
|
|
(74)
|
|
|
(275)
|
|
Ending allowance for loan losses
|
|
$
|
5,773
|
|
|
$
|
5,515
|
|
|
$
|
1,384
|
|
|
$
|
2
|
|
|
$
|
12,674
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
4,852
|
|
|
$
|
5,903
|
|
|
$
|
950
|
|
|
$
|
8
|
|
|
$
|
11,713
|
|
Provision for loan losses
|
|
464
|
|
|
(269)
|
|
|
191
|
|
|
26
|
|
|
412
|
|
Gross chargeoffs
|
|
(112)
|
|
|
(1,283)
|
|
|
(47)
|
|
|
(35)
|
|
|
(1,477)
|
|
Recoveries
|
|
23
|
|
|
823
|
|
|
70
|
|
|
2
|
|
|
918
|
|
Net (chargeoffs) recoveries
|
|
(89)
|
|
|
(460)
|
|
|
23
|
|
|
(33)
|
|
|
(559)
|
|
Ending Allowance for loan losses
|
|
$
|
5,227
|
|
|
$
|
5,174
|
|
|
$
|
1,164
|
|
|
$
|
1
|
|
|
$
|
11,566
|
|
Allocation of the allowance for loan losses is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
Real Estate
|
|
Commercial
and Industrial
|
|
Residential
Real Estate
|
|
Consumer
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
307
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
332
|
|
Collectively evaluated for impairment
|
|
9,550
|
|
|
8,465
|
|
|
3,273
|
|
|
9
|
|
|
21,297
|
|
Acquired with deteriorated credit quality
|
|
425
|
|
|
14
|
|
|
229
|
|
|
—
|
|
|
668
|
|
Ending allowance for loan losses
|
|
$
|
9,975
|
|
|
$
|
8,786
|
|
|
$
|
3,527
|
|
|
$
|
9
|
|
|
$
|
22,297
|
|
Balance of loans:
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
7,320
|
|
|
$
|
8,594
|
|
|
$
|
2,345
|
|
|
$
|
—
|
|
|
$
|
18,259
|
|
Collectively evaluated for impairment
|
|
711,739
|
|
|
676,636
|
|
|
310,182
|
|
|
1,725
|
|
|
1,700,282
|
|
Acquired with deteriorated credit quality
|
|
1,773
|
|
|
274
|
|
|
2,949
|
|
|
—
|
|
|
4,996
|
|
Total loans
|
|
$
|
720,832
|
|
|
$
|
685,504
|
|
|
$
|
315,476
|
|
|
$
|
1,725
|
|
|
$
|
1,723,537
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
363
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
385
|
|
Collectively evaluated for impairment
|
|
5,062
|
|
|
5,124
|
|
|
1,339
|
|
|
2
|
|
|
11,527
|
|
Acquired with deteriorated credit quality
|
|
711
|
|
|
28
|
|
|
23
|
|
|
—
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
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
|
|
|
—
|
|
|
5,973
|
|
Total loans
|
|
$
|
604,646
|
|
|
$
|
410,228
|
|
|
$
|
211,839
|
|
|
$
|
896
|
|
|
$
|
1,227,609
|
|
NOTE 6—PREMISES AND EQUIPMENT
Premises and equipment were as follows at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Land
|
|
$
|
3,514
|
|
|
$
|
2,254
|
|
Buildings
|
|
10,656
|
|
|
9,825
|
|
Leasehold improvements
|
|
3,017
|
|
|
2,714
|
|
Furniture, fixtures and equipment
|
|
7,786
|
|
|
6,539
|
|
Total premises and equipment
|
|
$
|
24,973
|
|
|
$
|
21,332
|
|
Less: Accumulated depreciation
|
|
9,139
|
|
|
7,494
|
|
Net premises and equipment
|
|
$
|
15,834
|
|
|
$
|
13,838
|
|
Depreciation expense was $1.7 million, $1.3 million, and $1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense was $1.8 million, $1.2 million, and $1.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Rent commitments under non-cancelable operating leases (including renewal options that the Company will likely exercise) were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2020
|
2021
|
|
$
|
1,731
|
|
2022
|
|
1,760
|
|
2023
|
|
1,718
|
|
2024
|
|
1,318
|
|
2025
|
|
1,191
|
|
Thereafter
|
|
3,775
|
|
Total lease commitments
|
|
$
|
11,493
|
|
NOTE 7—GOODWILL AND INTANGIBLE ASSETS
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 of $4.6 million, $4.8 million, and $26.2 million, respectively. Total goodwill was $35.6 million at December 31, 2020 and $9.4 million at December 31, 2019.
Goodwill is not amortized but is evaluated annually for 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.
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 as 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 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 required.
The Company completed their annual goodwill impairment review as of October 1, 2020 noting 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 October 1, 2020. Management also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through December 31, 2020 and that it is more likely than not that there was no goodwill impairment as of December 31, 2020.
Intangible Assets: The Company 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)
|
|
December 31, 2020
|
|
December 31, 2019
|
Gross carrying amount
|
|
$
|
5,708
|
|
|
$
|
2,045
|
|
Accumulated amortization
|
|
(2,512)
|
|
|
(1,744)
|
|
Net Intangible
|
|
$
|
3,196
|
|
|
$
|
301
|
|
Amortization expense for the CDIs was $768 thousand, $146 thousand, $220 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
As of December 31, 2020, estimated amortization expense for each of the next five years is as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
2021
|
|
$
|
667
|
|
2022
|
|
586
|
|
2023
|
|
506
|
|
2024
|
|
425
|
|
2025
|
|
344
|
|
NOTE 8—MORTGAGE SERVICING RIGHTS, NET
The Company has recorded a mortgage servicing rights asset for residential real estate mortgage loans that are sold to the secondary market for which servicing has been retained. Residential real estate mortgage loans serviced for others are not included in the consolidated balance sheets. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The unpaid principal balance of these loans at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Residential real estate mortgage loan portfolios serviced for:
|
|
|
|
|
|
FNMA
|
$
|
320,467
|
|
|
$
|
9,016
|
|
|
|
|
|
|
|
|
|
Custodial escrow balances maintained with these serviced loans were $1.9 million and $52 thousand at December 31, 2020 and 2019, respectively.
Activity for mortgage servicing rights was as follows for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
Mortgage servicing rights:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
|
|
|
$
|
76
|
|
|
$
|
—
|
|
Originated servicing
|
|
|
|
|
|
3,540
|
|
|
77
|
|
Amortization
|
|
|
|
|
|
(255)
|
|
|
(1)
|
|
Balance, end of period
|
|
|
|
|
|
$
|
3,361
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income, net of amortization of servicing rights and changes in the valuation allowance was $24 thousand for the year ended December 31, 2020. There was no servicing fee income for the years ended December 31, 2019 and 2018.
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 December 31, 2020. There was no valuation allowance related to mortgage servicing rights during the year ended December 31, 2019.
The fair value of mortgage servicing rights was $4.0 million and $87 thousand at December 31, 2020 and 2019, respectively. The fair value of mortgage servicing rights is highly sensitive to changes in underlying assumptions. The fair value at December 31, 2020 was determined using a discount rate of 7.75% and prepayment speeds ranging from 8.44% to 10.41%, depending on the stratification of the specific rights. The fair value at December 31, 2019 was determined using a discount rate of 8.50% and prepayment speeds ranging from 12.12% to 14.73%, depending on the stratification of the specific right.
NOTE 9—DEPOSITS
Time deposits that met or exceeded the FDIC insurance limit of $250,000 were $380.3 million and $205.9 million at December 31, 2020 and 2019, respectively. At December 31, 2020, brokered deposits totaled $29.3 million, compared to $67.4 million at December 31, 2019.
As of December 31, 2020, the scheduled maturities of total time deposits were as follows:
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2020
|
Due in 2021
|
$
|
437,211
|
|
Due in 2022
|
114,707
|
|
Due in 2023
|
39,052
|
|
Due in 2024
|
3,821
|
|
Due in 2025
|
2,024
|
|
Thereafter
|
—
|
|
Total
|
$
|
596,815
|
|
Related party deposits totaled $112.0 million and $31.3 million at December 31, 2020 and 2019, respectively.
NOTE 10—BORROWINGS AND SUBORDINATED DEBT
The following table presents the components of our short-term borrowings and long-term debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Amount
|
|
Weighted
Average
Rate(1)
|
|
Amount
|
|
Weighted
Average
Rate(1)
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
FHLB Advances
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
60,000
|
|
|
1.61
|
%
|
Securities sold under agreements to repurchase
|
|
3,204
|
|
|
0.30
|
|
|
851
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
1.90
|
|
Total short-term borrowings
|
|
3,204
|
|
|
0.30
|
|
|
65,851
|
|
|
1.62
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Secured borrowing due in 2022
|
|
1,304
|
|
|
1.00
|
|
|
1,374
|
|
|
1.00
|
|
FHLB advances due in 2022 to 2029(2)
|
|
181,176
|
|
|
1.09
|
|
|
145,000
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes due in 2025 and 2029(3)
|
|
44,592
|
|
|
5.29
|
|
|
44,440
|
|
|
5.29
|
|
Total long-term debt
|
|
227,072
|
|
|
1.91
|
|
|
190,814
|
|
|
2.04
|
|
Total short-term and long-term borrowings
|
|
$
|
230,276
|
|
|
1.89
|
%
|
|
$
|
256,665
|
|
|
1.93
|
%
|
_______________________________________________________________________________
(1) Weighted average rate presented is the contractual rate which excludes premiums and discounts related to purchase accounting.
(2) At December 31, 2020, the long-term FHLB advances consisted of 0.42% - 2.93% fixed rate notes and can be called through 2024 without penalty by the issuer. The December 31, 2020 balance includes FHLB advances of $181.0 million and purchase accounting premiums of $176 thousand.
(3) The December 31, 2020 balance includes subordinated notes of $45.0 million and debt issuance costs of $408 thousand. The December 31, 2019 balance includes subordinated notes of $45.0 million and debt issuance costs of $560 thousand.
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 December 31, 2020 were secured by a blanket lien on $512.3 million of real estate-related loans. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional $180.9 million from the FHLB at December 31, 2020. In addition, the Bank can borrow up to $122.5 million through the unsecured lines of credit it has established with other correspondent banks, as well as $5.3 million through a secured line with the Federal Reserve Bank. The Bank had no outstanding federal funds purchased as of December 31, 2020 and $5.0 million outstanding federal funds purchased as of December 31, 2019.
At December 31, 2020, the Company had $3.2 million 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 $3.7 million at December 31, 2020.
The Company had a secured borrowing of $1.3 million as of December 31, 2020 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.
At December 31, 2020, the Company had $45.0 million outstanding subordinated notes and $408 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 issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. As of December 15, 2020, the notes bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly through maturity. The notes mature on 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 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 on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a Tier 2 capital event or tax event.
The Company has a short term line of credit of $30.0 million with Comerica Bank with a fixed interest rate of 4.05% per annum and a commitment fee of 0.20% on the average daily balance of the unused portion of the line of credit. As of December 31, 2020, the Company had no balance on the Comerica Bank line of credit. The Company participates in the PPP and also has the ability to borrow from the Federal Reserve's special purpose Paycheck Protection Program Liquidity Facility ("PPPLF") for additional funding. At December 31, 2020, the Company had no borrowings from the PPPLF.
NOTE 11—INCOME TAXES
The Company and its subsidiaries are subject to U.S. federal income tax. In the ordinary course of business, we are routinely subject to audit by Internal Revenue Service. Currently, the Company is subject to examination by taxing authorities for the 2016 tax return year and forward.
The current and deferred components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Current expense
|
|
$
|
7,268
|
|
|
$
|
3,995
|
|
|
$
|
2,974
|
|
|
|
|
|
|
|
|
Deferred expense (benefit)
|
|
(3,315)
|
|
|
(592)
|
|
|
29
|
|
Total
|
|
$
|
3,953
|
|
|
$
|
3,403
|
|
|
$
|
3,003
|
|
A reconciliation of expected income tax expense using the federal statutory rate of 21% as of December 31, 2020, 2019 and 2018 and actual income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income tax expense based on federal corporate tax rate
|
|
|
|
|
|
$
|
5,117
|
|
|
$
|
4,098
|
|
|
$
|
3,651
|
|
Changes resulting from:
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
|
|
|
(589)
|
|
|
(538)
|
|
|
(406)
|
|
|
|
|
|
|
|
|
|
|
|
|
Captive insurance benefit
|
|
|
|
|
|
(156)
|
|
|
(182)
|
|
|
(198)
|
|
Net operating loss carryback due to CARES Act
|
|
|
|
|
|
(290)
|
|
|
—
|
|
|
—
|
|
Disqualified dispositions from stock options
|
|
|
|
|
|
(178)
|
|
|
(13)
|
|
|
(23)
|
|
Other, net
|
|
|
|
|
|
49
|
|
|
38
|
|
|
(21)
|
|
Income tax expense
|
|
|
|
|
|
$
|
3,953
|
|
|
$
|
3,403
|
|
|
$
|
3,003
|
|
In March 2020, the United States government approved the CARES Act, allowing companies to carryback net operating losses generated in 2018 through 2020 for five years to periods in which the tax rate was 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.
Upon exercise or vesting of a share-based award, if the tax deduction exceeds the compensation cost that was previously recorded for financial statement purposes, this will result in an excess tax benefit. A tax benefit of $189 thousand and $18 thousand was recorded during the years ended December 31, 2020 and 2019, respectively, as a result of share awards vesting/exercised during the year.
The tax effects of temporary differences that resulted in the significant components of deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Allowance for loan losses
|
|
$
|
4,682
|
|
|
$
|
2,662
|
|
Net operating loss
|
|
757
|
|
|
—
|
|
Deferred compensation
|
|
215
|
|
|
142
|
|
Restricted stock awards
|
|
290
|
|
|
223
|
|
Stock options
|
|
126
|
|
|
117
|
|
Deferred loan fees
|
|
1,403
|
|
|
248
|
|
|
|
|
|
|
Nonaccrued interest
|
|
215
|
|
|
155
|
|
Accrued expenses
|
|
370
|
|
|
365
|
|
Other
|
|
63
|
|
|
65
|
|
Total gross deferred tax assets
|
|
8,121
|
|
|
3,977
|
|
Deferred tax liabilities:
|
|
|
|
|
Unrealized gain—available for sale securities
|
|
(2,175)
|
|
|
(955)
|
|
Depreciation
|
|
(914)
|
|
|
(808)
|
|
Prepaid expenses
|
|
(212)
|
|
|
(239)
|
|
Business combination adjustments
|
|
(1,080)
|
|
|
(369)
|
|
Partnership investments
|
|
(381)
|
|
|
(366)
|
|
Other
|
|
(47)
|
|
|
(23)
|
|
Total gross deferred tax liabilities
|
|
(4,809)
|
|
|
(2,760)
|
|
Net deferred tax assets
|
|
$
|
3,312
|
|
|
$
|
1,217
|
|
Management has determined that a valuation allowance is not required for the deferred tax assets at December 31, 2020 because it is more likely than not that these assets could be realized through carry back to taxable income in prior years, future reversals of existing taxable temporary differences, tax planning strategies and future taxable income. This conclusion is based on the Company's historical earnings, its current level of earnings and prospects for continued growth and profitability.
There were no unrecognized tax benefits at December 31, 2020, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense when applicable. The Company did not record any interest and penalties for 2020, 2019 and 2018.
NOTE 12—STOCK BASED COMPENSATION
On March 15, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive 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 such awards are no longer outstanding.
The Company reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the years ended December 31, 2020 and 2019, the Company issued 38,170 and 39,483 restricted stock awards, respectively, under the 2018 Plan. There were 165,597 shares available for issuance as of December 31, 2020.
Stock Options
As of December 31, 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 year 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 the stock options granted during the year ended December 31, 2018 was determined using the weighted-average assumptions as of the grant date shown below. There were no stock options granted during the years ended December 31, 2020 or December 31, 2019.
|
|
|
|
|
|
|
December 31, 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 years ended December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average Remaining Contractual
Term
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average Remaining Contractual
Term
|
Options outstanding, beginning of period
|
|
355,218
|
|
|
$
|
16.63
|
|
|
5.0
|
|
376,768
|
|
|
$
|
16.26
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(10,000)
|
|
|
9.57
|
|
|
|
|
(21,550)
|
|
|
10.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period
|
|
345,218
|
|
|
16.83
|
|
|
4.1
|
|
355,218
|
|
|
16.63
|
|
|
5.0
|
Options exercisable
|
|
335,216
|
|
|
$
|
16.59
|
|
|
4.0
|
|
335,214
|
|
|
$
|
16.14
|
|
|
4.8
|
The aggregate intrinsic value was $1.4 million for both options outstanding and exercisable as of December 31, 2020. The aggregate intrinsic value of both options outstanding and exercisable as of December 31, 2019 was $3.0 million. As of December 31, 2020, there was $6 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 0.13 years.
The total intrinsic value and cash received from options exercised, including tax benefit, was $130 thousand and $96 thousand, respectively, for the year ended December 31, 2020, $295 thousand and $232 thousand, respectively for the year ended December 31, 2019, and $1.8 million and $1.4 million, respectively, for the year ended December 31, 2018.
Share-based compensation expense charged against income was $45 thousand, $54 thousand and $155 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
Restricted Stock Awards
A summary of changes in the Company's nonvested shares for the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
Nonvested at January 1, 2020
|
|
80,370
|
|
|
$
|
24.28
|
|
Granted
|
|
38,170
|
|
|
24.90
|
|
Vested
|
|
(23,870)
|
|
|
23.40
|
|
Forfeited
|
|
(1,400)
|
|
|
24.46
|
|
Nonvested at December 31, 2020
|
|
93,270
|
|
|
$
|
24.75
|
|
As of December 31, 2020, there was $973 thousand 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 1.75 years. The total fair value of shares vested during the year ended December 31, 2020 was $559 thousand compared to a fair value of $211 thousand for the year ended December 31, 2019.
Total expense for restricted stock awards totaled $842 thousand, $659 thousand and $660 thousand for the years ended December 31, 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, there was $64 thousand, $43 thousand and $14 thousand, respectively, of restricted stock redeemed to cover the payroll taxes due at the time of vesting.
NOTE 13 - OTHER BENEFIT PLANS
401(k) Plan: The Company sponsors a 401(k) plan in which substantially all employees are eligible to participate. The plan is a "safe harbor" plan in accordance with the Internal Revenue Code. In 2020, the Company updated the plan to provide a matching contribution equal to 100% of the first 3% and 50% of the next 2% of employee contributions for each eligible employee. In 2019 and earlier, the plan required the Company to make a 3% non-elective contribution for each eligible employee. Contributions to the plan were approximately $1.1 million, $690 thousand and $537 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
Deferred Compensation Plan: The Company's deferred compensation plan, established in 2015, covers all executive officers. Under the plan, the Company pays each participant, or his or her beneficiary, the amount of contributions deferred into the plan plus adjustments for deemed investment experience. The Company accrues a liability for the obligation under the plan. The expense incurred for deferred compensation was $350 thousand, $261 thousand and $148 thousand for the years ended December 31, 2020, 2019 and 2018, respectively, which resulted in a deferred compensation liability of $1.0 million, $676 thousand and $415 thousand as of December 31, 2020, 2019 and 2018, respectively.
NOTE 14—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. Commitments 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 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 December 31, 2020, the allowance for off-balance sheet risk was $490 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in thousands)
|
|
Fixed
|
|
Variable
|
|
Fixed
|
|
Variable
|
Commitments to make loans
|
|
$
|
18,269
|
|
|
$
|
17,058
|
|
|
$
|
16,276
|
|
|
$
|
20,128
|
|
Unused lines of credit
|
|
28,898
|
|
|
385,307
|
|
|
28,723
|
|
|
288,086
|
|
Unused standby letters of credit and commercial letters of credit
|
|
2,340
|
|
|
1,992
|
|
|
4,895
|
|
|
—
|
|
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments of $18.3 million as of December 31, 2020, had interest rates ranging from 3.5% to 4.26% and maturities ranging from 3 years to 30 years.
NOTE 15—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 December 31, 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 2.5% above the minimum risk-weighted assets ratios, which is the fully phased-in amount of the capital conservation buffer.
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 December 31, 2020 and December 31, 2019, the Company's and the Bank's capital ratios were in excess of the requirement to be "well capitalized" under regulatory guidelines. There are no conditions or events that management believes have changed the Company or 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
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
144,938
|
|
|
9.30
|
%
|
|
$
|
70,141
|
|
|
4.50
|
%
|
|
$
|
109,108
|
|
|
7.00
|
%
|
|
|
|
|
Bank
|
|
185,655
|
|
|
11.94
|
%
|
|
69,950
|
|
|
4.50
|
%
|
|
108,812
|
|
|
7.00
|
%
|
|
$
|
101,040
|
|
|
6.50
|
%
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
168,310
|
|
|
10.80
|
%
|
|
$
|
93,521
|
|
|
6.00
|
%
|
|
$
|
132,488
|
|
|
8.50
|
%
|
|
|
|
|
Bank
|
|
185,655
|
|
|
11.94
|
%
|
|
93,267
|
|
|
6.00
|
%
|
|
132,129
|
|
|
8.50
|
%
|
|
$
|
124,356
|
|
|
8.00
|
%
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
232,386
|
|
|
14.91
|
%
|
|
$
|
124,695
|
|
|
8.00
|
%
|
|
$
|
163,662
|
|
|
10.50
|
%
|
|
|
|
|
Bank
|
|
205,127
|
|
|
13.20
|
%
|
|
124,356
|
|
|
8.00
|
%
|
|
163,218
|
|
|
10.50
|
%
|
|
$
|
155,446
|
|
|
10.00
|
%
|
Tier 1 capital to average assets (leverage ratio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
168,310
|
|
|
6.93
|
%
|
|
$
|
97,200
|
|
|
4.00
|
%
|
|
$
|
97,200
|
|
|
4.00
|
%
|
|
|
|
|
Bank
|
|
185,655
|
|
|
7.67
|
%
|
|
96,809
|
|
|
4.00
|
%
|
|
96,809
|
|
|
4.00
|
%
|
|
$
|
121,011
|
|
|
5.00
|
%
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
157,659
|
|
|
11.72
|
%
|
|
$
|
60,533
|
|
|
4.50
|
%
|
|
$
|
94,163
|
|
|
7.00
|
%
|
|
|
|
|
Bank
|
|
165,199
|
|
|
12.27
|
%
|
|
60,568
|
|
|
4.50
|
%
|
|
94,217
|
|
|
7.00
|
%
|
|
$
|
87,487
|
|
|
6.50
|
%
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
157,659
|
|
|
11.72
|
%
|
|
$
|
80,711
|
|
|
6.00
|
%
|
|
$
|
114,341
|
|
|
8.50
|
%
|
|
|
|
|
Bank
|
|
165,199
|
|
|
12.27
|
%
|
|
80,757
|
|
|
6.00
|
%
|
|
114,406
|
|
|
8.50
|
%
|
|
$
|
107,676
|
|
|
8.00
|
%
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
215,091
|
|
|
15.99
|
%
|
|
$
|
107,615
|
|
|
8.00
|
%
|
|
$
|
141,244
|
|
|
10.50
|
%
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
157,659
|
|
|
10.41
|
%
|
|
$
|
60,580
|
|
|
4.00
|
%
|
|
$
|
60,580
|
|
|
4.00
|
%
|
|
|
|
|
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%.
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 December 31, 2020, the Bank had the capacity to pay the Company a dividend of up to $41.9 million without the need to obtain prior regulatory approval.
NOTE 16—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). For securities where pricing on similar securities is not available, a third party is engaged to calculate the fair value using 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 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)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities and agencies
|
|
$
|
26,358
|
|
|
$
|
—
|
|
|
$
|
26,358
|
|
|
$
|
—
|
|
State and political subdivision
|
|
132,723
|
|
|
—
|
|
|
131,259
|
|
|
1,464
|
|
Mortgage-backed securities: residential
|
|
26,081
|
|
|
—
|
|
|
26,081
|
|
|
—
|
|
Mortgage-backed securities: commercial
|
|
11,918
|
|
|
—
|
|
|
11,918
|
|
|
—
|
|
Collateralized mortgage obligations: residential
|
|
13,446
|
|
|
—
|
|
|
13,446
|
|
|
—
|
|
Collateralized mortgage obligations: commercial
|
|
58,512
|
|
|
—
|
|
|
58,512
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SBA
|
|
17,593
|
|
|
—
|
|
|
17,593
|
|
|
—
|
|
Asset backed securities
|
|
10,072
|
|
|
—
|
|
|
10,072
|
|
|
—
|
|
Corporate bonds
|
|
6,029
|
|
|
—
|
|
|
6,029
|
|
|
—
|
|
Total securities available for sale
|
|
302,732
|
|
|
—
|
|
|
301,268
|
|
|
1,464
|
|
Loans held for sale
|
|
43,482
|
|
|
—
|
|
|
43,482
|
|
|
—
|
|
Loans measured at fair value:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
8,037
|
|
|
—
|
|
|
—
|
|
|
8,037
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
Customer-initiated derivatives
|
|
12,515
|
|
|
—
|
|
|
12,515
|
|
|
—
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
|
46
|
|
|
—
|
|
|
46
|
|
|
—
|
|
Interest rate lock commitments
|
|
2,194
|
|
|
—
|
|
|
2,194
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
369,006
|
|
|
$
|
—
|
|
|
$
|
359,505
|
|
|
$
|
9,501
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Customer-initiated derivatives
|
|
12,515
|
|
|
—
|
|
|
12,515
|
|
|
—
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
|
423
|
|
|
—
|
|
|
423
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
12,938
|
|
|
$
|
—
|
|
|
$
|
12,938
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2019
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivision
|
|
$
|
93,747
|
|
|
$
|
—
|
|
|
$
|
93,747
|
|
|
$
|
—
|
|
Mortgage-backed securities: residential
|
|
10,565
|
|
|
—
|
|
|
10,565
|
|
|
—
|
|
Mortgage-backed securities: commercial
|
|
8,779
|
|
|
—
|
|
|
8,779
|
|
|
—
|
|
Collateralized mortgage obligations: residential
|
|
8,529
|
|
|
—
|
|
|
8,529
|
|
|
—
|
|
Collateralized mortgage obligations: commercial
|
|
23,181
|
|
|
—
|
|
|
23,181
|
|
|
—
|
|
U.S. Treasury
|
|
1,999
|
|
|
—
|
|
|
1,999
|
|
|
—
|
|
SBA
|
|
21,984
|
|
|
—
|
|
|
21,984
|
|
|
—
|
|
Asset backed securities
|
|
10,084
|
|
|
—
|
|
|
10,084
|
|
|
—
|
|
Corporate bonds
|
|
2,037
|
|
|
—
|
|
|
2,037
|
|
|
—
|
|
Total securities available for sale
|
|
$
|
180,905
|
|
|
$
|
—
|
|
|
$
|
180,905
|
|
|
$
|
—
|
|
Loans held for sale
|
|
13,889
|
|
|
—
|
|
|
13,889
|
|
|
—
|
|
Loans measured at fair value:
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
4,063
|
|
|
—
|
|
|
—
|
|
|
4,063
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
Customer-initiated derivatives
|
|
4,684
|
|
|
—
|
|
|
4,684
|
|
|
—
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
|
34
|
|
|
—
|
|
|
34
|
|
|
—
|
|
Interest rate lock commitments
|
|
256
|
|
|
—
|
|
|
256
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
203,831
|
|
|
$
|
—
|
|
|
$
|
199,768
|
|
|
$
|
4,063
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Customer-initiated derivatives
|
|
4,684
|
|
|
—
|
|
|
4,684
|
|
|
—
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
Total liabilities at fair value
|
|
$
|
4,717
|
|
|
$
|
—
|
|
|
$
|
4,717
|
|
|
$
|
—
|
|
There were no transfers between levels within the fair value hierarchy, within a specific category, during the years ended December 31, 2020 or 2019. The level 3 investment securities disclosed as of December 31, 2020 were acquired from Ann Arbor State Bank during the first quarter of 2020.
The following table summarizes the changes in Level 3 loans measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
Loans held for investment
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
$
|
4,063
|
|
|
$
|
4,571
|
|
Transfers from loans held for sale
|
|
|
|
|
|
5,217
|
|
|
2,186
|
|
Gains:
|
|
|
|
|
|
|
|
|
Recorded in "Mortgage banking activities"
|
|
|
|
|
|
123
|
|
|
126
|
|
Repayments
|
|
|
|
|
|
(1,366)
|
|
|
(2,820)
|
|
Ending balance
|
|
|
|
|
|
$
|
8,037
|
|
|
$
|
4,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were $105 thousand loans held for investment measured at fair value that were on nonaccrual status or 90 days past due with a fair value of $109 thousand as of December 31, 2020. There were no loans held for investment that were on nonaccrual status or 90 days past due as of December 31, 2019. 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.
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. There were no loans held for sale that were on nonaccrual status or 90 days past due as of December 31, 2020 or December 31, 2019.
As of December 31, 2020 and December 31, 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)
|
|
December 31, 2020
|
|
December 31, 2019
|
Aggregate fair value
|
|
$
|
43,482
|
|
|
$
|
13,889
|
|
Contractual balance
|
|
41,808
|
|
|
13,510
|
|
Unrealized gain
|
|
1,674
|
|
|
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 years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Change in fair value
|
|
|
|
|
|
$
|
1,295
|
|
|
$
|
296
|
|
|
$
|
1
|
|
Assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Total
|
|
Significant Unobservable Inputs
(Level 3)
|
December 31, 2020
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,270
|
|
|
$
|
1,270
|
|
Mortgage servicing rights
|
|
3,981
|
|
|
3,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,251
|
|
|
$
|
5,251
|
|
December 31, 2019
|
|
|
|
|
Impaired loans:
|
|
|
|
|
Commercial real estate
|
|
$
|
265
|
|
|
$
|
265
|
|
Commercial and industrial
|
|
261
|
|
|
261
|
|
Mortgage servicing rights
|
|
87
|
|
|
87
|
|
Other real estate owned
|
|
921
|
|
|
921
|
|
Total
|
|
$
|
1,534
|
|
|
$
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded specific reserves of $95 thousand and $161 thousand to reduce the value of the impaired loans noted above at December 31, 2020 and December 31, 2019, respectively, based on the estimated fair value of the underlying collateral. The Company also recorded chargeoffs of $315 thousand during the year ended December 31, 2020 related to the impaired loans at fair value. There were chargeoffs of $298 thousand related to impaired loans at fair value during the year ended December 31, 2019.
There were no write downs recorded in other real estate owned during the year ended December 31, 2020 or December 31, 2019.
The table below presents quantitative information about the significant unobservable inputs for assets measured at fair value on a nonrecurring basis at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Fair value at
December 31, 2020
|
|
Valuation
Technique(s)
|
|
Significant
Unobservable Input(s)
|
|
Discount % Range/Amount
|
Impaired loans
|
|
$
|
1,270
|
|
|
Discounted appraisals; estimated net realizable value of collateral
|
|
Collateral discounts
|
|
10.00-90.00%
|
Mortgage servicing rights
|
|
3,981
|
|
|
Discounted cash flow
|
|
Prepayment speed
|
|
8.71
|
%
|
|
|
|
|
|
|
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%
|
The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at December 31, 2020 and December 31, 2019 are noted in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
264,071
|
|
|
$
|
25,245
|
|
|
$
|
238,826
|
|
|
$
|
—
|
|
|
$
|
264,071
|
|
Other investments
|
|
14,398
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Net loans
|
|
1,701,240
|
|
|
—
|
|
|
—
|
|
|
1,740,093
|
|
|
1,740,093
|
|
Accrued interest receivable
|
|
7,511
|
|
|
—
|
|
|
1,460
|
|
|
6,051
|
|
|
7,511
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,963,312
|
|
|
—
|
|
|
2,022,399
|
|
|
—
|
|
|
2,022,399
|
|
Borrowings
|
|
185,684
|
|
|
—
|
|
|
192,546
|
|
|
—
|
|
|
192,546
|
|
Subordinated notes
|
|
44,592
|
|
|
—
|
|
|
45,902
|
|
|
—
|
|
|
45,902
|
|
Accrued interest payable
|
|
1,081
|
|
|
—
|
|
|
1,081
|
|
|
—
|
|
|
1,081
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,930
|
|
|
$
|
19,990
|
|
|
$
|
83,940
|
|
|
$
|
—
|
|
|
$
|
103,930
|
|
Other investments
|
|
11,475
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Net loans
|
|
1,214,935
|
|
|
—
|
|
|
—
|
|
|
1,203,639
|
|
|
1,203,639
|
|
Accrued interest receivable
|
|
4,403
|
|
|
—
|
|
|
1,236
|
|
|
3,167
|
|
|
4,403
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,135,428
|
|
|
—
|
|
|
1,138,202
|
|
|
—
|
|
|
1,138,202
|
|
Borrowings
|
|
212,225
|
|
|
—
|
|
|
212,125
|
|
|
—
|
|
|
212,125
|
|
Subordinated notes
|
|
44,440
|
|
|
—
|
|
|
47,100
|
|
|
—
|
|
|
47,100
|
|
Accrued interest payable
|
|
1,574
|
|
|
—
|
|
|
1,574
|
|
|
—
|
|
|
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)Other Investments
It is not practical to determine the fair value of FHLB stock and Arctaris investment bond due to restrictions placed on their 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 valued at the lower of cost or fair value as described previously.
(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 Notes
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 17—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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
136,023
|
|
|
$
|
12,515
|
|
|
$
|
103,941
|
|
|
$
|
4,684
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
10,191
|
|
|
46
|
|
|
6,018
|
|
|
34
|
|
Interest rate lock commitments
|
91,531
|
|
|
2,194
|
|
|
25,519
|
|
|
256
|
|
Total derivatives included in other assets
|
$
|
237,745
|
|
|
$
|
14,755
|
|
|
$
|
135,478
|
|
|
$
|
4,974
|
|
Included in other liabilities:
|
|
|
|
|
|
|
|
Customer-initiated and mortgage banking derivatives:
|
|
|
|
|
|
|
|
Customer-initiated derivatives
|
$
|
136,023
|
|
|
$
|
12,515
|
|
|
$
|
103,941
|
|
|
$
|
4,684
|
|
Forward contracts related to mortgage loans to be delivered for sale
|
92,899
|
|
|
423
|
|
|
20,633
|
|
|
33
|
|
Interest rate lock commitments
|
—
|
|
|
—
|
|
|
928
|
|
|
—
|
|
Total derivatives included in other liabilities
|
$
|
228,922
|
|
|
$
|
12,938
|
|
|
$
|
125,502
|
|
|
$
|
4,717
|
|
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 year ended December 31,
|
(Dollars in thousands)
|
Location of Gain (Loss)
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Forward contracts related to mortgage loans to be delivered for sale
|
Mortgage banking activities
|
|
|
|
|
|
$
|
(5,011)
|
|
|
$
|
(509)
|
|
|
$
|
(69)
|
|
Interest rate lock commitments
|
Mortgage banking activities
|
|
|
|
|
|
1,938
|
|
|
58
|
|
|
142
|
|
Total loss recognized in income
|
|
|
|
|
|
|
$
|
(3,073)
|
|
|
$
|
(451)
|
|
|
$
|
73
|
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer initiated derivatives
|
$
|
12,515
|
|
|
$
|
—
|
|
|
$
|
12,515
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,515
|
|
Offsetting derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Customer initiated derivatives
|
12,515
|
|
|
—
|
|
|
12,515
|
|
|
—
|
|
|
15,383
|
|
|
(2,868)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer initiated derivatives
|
$
|
4,684
|
|
|
$
|
—
|
|
|
$
|
4,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,684
|
|
Offsetting derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Customer initiated derivatives
|
4,684
|
|
|
—
|
|
|
4,684
|
|
|
—
|
|
|
4,375
|
|
|
309
|
|
NOTE 18—PARENT COMPANY FINANCIAL STATEMENTS
Balance Sheets—Parent Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,779
|
|
|
$
|
35,210
|
|
Investment in banking subsidiary
|
|
232,671
|
|
|
178,240
|
|
Investment in captive insurance subsidiary
|
|
1,625
|
|
|
1,668
|
|
Income tax benefit
|
|
355
|
|
|
520
|
|
Other assets
|
|
63
|
|
|
99
|
|
Total assets
|
|
$
|
260,493
|
|
|
$
|
215,737
|
|
Liabilities
|
|
|
|
|
Subordinated notes
|
|
$
|
44,592
|
|
|
$
|
44,440
|
|
Accrued expenses and other liabilities
|
|
574
|
|
|
594
|
|
Total liabilities
|
|
45,166
|
|
|
45,034
|
|
Shareholders' equity
|
|
215,327
|
|
|
170,703
|
|
Total liabilities and shareholders' equity
|
|
$
|
260,493
|
|
|
$
|
215,737
|
|
Statements of Income and Comprehensive Income—Parent Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(Dollars in thousands)
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income
|
|
|
|
|
|
|
|
|
|
|
Dividend income from bank subsidiary
|
|
|
|
|
|
$
|
41,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Dividend income from captive subsidiary
|
|
|
|
|
|
815
|
|
|
860
|
|
|
—
|
|
Total income
|
|
|
|
|
|
$
|
42,315
|
|
|
$
|
860
|
|
|
$
|
—
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowed funds
|
|
|
|
|
|
40
|
|
|
4.00
|
|
|
—
|
|
Interest on subordinated notes
|
|
|
|
|
|
2,537
|
|
|
1,074
|
|
|
1,015
|
|
Other expenses
|
|
|
|
|
|
1,238
|
|
|
1,196
|
|
|
715
|
|
Total expenses
|
|
|
|
|
|
$
|
3,815
|
|
|
$
|
2,274
|
|
|
$
|
1,730
|
|
Income (loss) before income taxes and equity in (overdistributed) undistributed net earnings of subsidiaries
|
|
|
|
|
|
38,500
|
|
|
(1,414)
|
|
|
(1,730)
|
|
Income tax benefit
|
|
|
|
|
|
781
|
|
|
427
|
|
|
425
|
|
Equity in (overdistributed) undistributed earnings of subsidiaries
|
|
|
|
|
|
(18,868)
|
|
|
17,098
|
|
|
15,691
|
|
Net income
|
|
|
|
|
|
$
|
20,413
|
|
|
$
|
16,111
|
|
|
$
|
14,386
|
|
Other comprehensive income
|
|
|
|
|
|
4,590
|
|
|
5,344
|
|
|
(801)
|
|
Total comprehensive income, net of tax
|
|
|
|
|
|
$
|
25,003
|
|
|
$
|
21,455
|
|
|
$
|
13,585
|
|
Statements of Cash Flows—Parent Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,413
|
|
|
$
|
16,111
|
|
|
$
|
14,386
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity in over (under) distributed earnings of subsidiaries
|
|
18,868
|
|
|
(17,098)
|
|
|
(15,691)
|
|
|
|
Stock based compensation expense
|
|
101
|
|
|
74
|
|
|
314
|
|
|
|
(Increase) decrease in other assets, net
|
|
201
|
|
|
(205)
|
|
|
(45)
|
|
|
|
Increase (decrease) in other liabilities, net
|
|
59
|
|
|
257
|
|
|
(79)
|
|
|
|
Net cash provided by (used in) operating activities
|
|
39,642
|
|
|
(861)
|
|
|
(1,115)
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Cash used in acquisitions
|
|
(67,944)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital infusion to subsidiaries
|
|
—
|
|
|
—
|
|
|
(20,000)
|
|
|
|
Net cash used in investing activities
|
|
(67,944)
|
|
|
—
|
|
|
(20,000)
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock related to initial public offering
|
|
—
|
|
|
—
|
|
|
29,030
|
|
|
|
Preferred stock offering, net of issuance costs
|
|
23,372
|
|
|
—
|
|
|
—
|
|
|
|
Net proceeds from issuance of subordinated debt
|
|
—
|
|
|
29,487
|
|
|
—
|
|
|
|
Share buyback - redeemed stock
|
|
(2,648)
|
|
|
(2,165)
|
|
|
—
|
|
|
|
Common stock dividends paid
|
|
(1,469)
|
|
|
(1,160)
|
|
|
(662)
|
|
|
|
Preferred stock dividends paid
|
|
(479)
|
|
|
—
|
|
|
—
|
|
|
|
Proceeds from exercised stock options
|
|
95
|
|
|
219
|
|
|
1,279
|
|
|
|
Net cash provided by financing activities
|
|
18,871
|
|
|
26,381
|
|
|
29,647
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(9,431)
|
|
|
25,520
|
|
|
8,532
|
|
|
|
Beginning cash and cash equivalents
|
|
35,210
|
|
|
9,690
|
|
|
1,158
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
25,779
|
|
|
$
|
35,210
|
|
|
$
|
9,690
|
|
|
|
NOTE 19—EARNINGS PER COMMON SHARE
Beginning in the second quarter of 2019, the Company elected to prospectively use the two-class method in calculating earnings per share due to the unvested 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 the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(In thousands, except per share data)
|
|
|
|
|
|
2020
|
|
2019
|
Net income
|
|
|
|
|
|
$
|
20,413
|
|
|
$
|
16,111
|
|
Preferred stock dividends
|
|
|
|
|
|
479
|
|
|
—
|
|
Net income available to common shareholders
|
|
|
|
|
|
19,934
|
|
|
16,111
|
|
Net income allocated to participating securities
|
|
|
|
|
|
244
|
|
|
159
|
|
Net income allocated to common shareholders (1)
|
|
|
|
|
|
$
|
19,690
|
|
|
$
|
15,952
|
|
Weighted average common shares - issued
|
|
|
|
|
|
7,723
|
|
|
7,733
|
|
Average unvested restricted share awards
|
|
|
|
|
|
(96)
|
|
|
(78)
|
|
Weighted average common shares outstanding - basic
|
|
|
|
|
|
7,627
|
|
|
7,655
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted average common stock equivalents
|
|
|
|
|
|
59
|
|
|
115
|
|
Weighted average common shares outstanding - diluted
|
|
|
|
|
|
7,686
|
|
|
7,770
|
|
EPS available to common shareholders
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
|
|
|
|
$
|
2.58
|
|
|
$
|
2.08
|
|
Diluted earnings per common share
|
|
|
|
|
|
$
|
2.57
|
|
|
$
|
2.05
|
|
(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 year ended December 31, 2018, the basic and diluted earnings per share were calculated using the treasury stock method, as disclosed in the table below.
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(In thousands, except per share data)
|
|
2018
|
Basic:
|
|
|
Net Income attributable to common shareholders
|
|
$
|
14,386
|
|
Weighted average common shares outstanding
|
|
7,376,507
|
|
Basic earnings per share
|
|
$
|
1.95
|
|
Diluted:
|
|
|
Net Income attributable to common shareholders
|
|
$
|
14,386
|
|
Weighted average common shares outstanding
|
|
7,376,507
|
|
Add: Dilutive effects of assumed exercises of stock options
|
|
147,411
|
|
Weighted average common and dilutive potential common shares outstanding
|
|
7,523,918
|
|
Diluted earnings per common share
|
|
$
|
1.91
|
|
Stock options for 117,334, 30,000 and 26,301 of common stock were not considered in computing diluted earnings per common share for the years ended December 31, 2020, 2019 and 2018, respectively, because they were antidilutive.
NOTE 20—QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present the unaudited quarterly financial data for the years ended December 31, 2020 and 2019:
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For the year ended December 31, 2020
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(In thousands, except per share data)
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First Quarter
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Second Quarter
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Third Quarter
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Fourth Quarter
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Interest income
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$
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19,817
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$
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20,396
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$
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20,245
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$
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22,181
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Interest expense
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4,997
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4,163
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3,648
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3,075
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Net interest income
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14,820
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16,233
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16,597
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19,106
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Provision for loan losses
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489
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5,575
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4,270
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1,538
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Net interest income after provision for loan losses
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14,331
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10,658
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12,327
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17,568
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Noninterest income
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4,690
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7,789
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9,125
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8,110
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Noninterest expense
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14,562
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15,083
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15,126
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15,461
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Income before income taxes
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4,459
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3,364
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6,326
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10,217
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Income tax provision
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349
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643
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1,117
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1,844
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Net income
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4,110
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2,721
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5,209
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8,373
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Preferred stock dividends
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—
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—
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—
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479
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Net income attributable to common shareholders
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$
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4,110
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$
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2,721
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$
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5,209
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$
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7,894
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Earnings per common share:
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Basic
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$
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0.53
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$
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0.35
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$
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0.68
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$
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1.02
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Diluted
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0.53
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0.35
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0.67
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1.02
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Cash dividends declared per common share
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0.05
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0.05
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0.05
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0.05
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For the year ended December 31, 2019
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(In thousands, except per share data)
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First Quarter
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Second Quarter
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Third Quarter
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Fourth Quarter
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Interest income
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$
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17,442
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$
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17,657
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$
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17,983
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$
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17,366
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Interest expense
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4,724
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5,216
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4,995
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4,458
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Net interest income
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12,718
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12,441
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12,988
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12,908
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Provision (benefit) for loan losses
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422
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429
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(16)
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548
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Net interest income after provision (benefit) for loan losses
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12,296
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12,012
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13,004
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12,360
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Noninterest income
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2,286
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3,477
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3,858
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4,590
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Noninterest expense
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10,368
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11,167
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11,539
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11,295
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Income before income taxes
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4,214
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4,322
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5,323
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5,655
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Income tax provision
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747
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767
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914
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975
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Net income
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$
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3,467
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$
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3,555
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$
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4,409
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$
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4,680
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Earnings per common share:
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Basic
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$
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0.45
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$
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0.46
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$
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0.57
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$
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0.60
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Diluted
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0.44
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0.45
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0.56
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0.60
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Cash dividends declared per common share
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0.04
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0.04
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0.04
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0.04
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NOTE 21—SUBSEQUENT EVENTS
Captive dissolution
As of January 19, 2021, Hamilton Court exited the pool resources relationship and was dissolved. The capital investment in Hamilton Court of $1.6 million was returned to the Company on January 20, 2021.