Item
2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank, Macatawa Statutory Trust I and
Macatawa Statutory Trust II. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the FDIC. The Bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of
commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities.
These trusts are not consolidated in our Consolidated Financial Statements. For further information regarding consolidation, see the Notes to Consolidated Financial Statements.
At March 31, 2019, we had total assets of $1.93 billion, total loans of $1.38 billion, total deposits of $1.62 billion and shareholders' equity of
$198.0 million. For the three months ended March 31, 2019, we recognized net income of $7.6 million compared to $5.8 million for the same period in 2018. The Bank was categorized as “well capitalized” under regulatory capital standards at
March 31, 2019.
We paid a dividend of $0.06 per share in the first, second and third quarters of 2018 and $0.07 per share in the fourth quarter of 2018 and the first
quarter of 2019.
RESULTS OF OPERATIONS
Summary:
Net income for the three months ended March 31,
2019 was $7.6 million, compared to $5.8 million for the same period in 2018. Net income per share on a diluted basis for the three months ended March 31, 2019 was $0.22 compared to $0.17 for the same period in 2018.
The increase in earnings in the three months ended March 31, 2019 compared to the same period in 2018 was due primarily to increased net interest
income. Net interest income increased to $16.0 million in the three months ended March 31, 2019 compared to $14.2 million in the same period in 2018.
Other items impacting earnings included nonperforming asset expenses (including administration costs and losses), which were $53,000 for three months
ended March 31, 2019 compared to $461,000 for the same period in 2018. Also, the provision for loan losses was a negative $250,000 for the three months ended March 31, 2019, compared to a negative $100,000 for the same period in 2018. We again
were in a net loan recovery position for the three months ended March 31, 2019, with $266,000 in net loan recoveries, compared to $175,000 in net loan recoveries in the same period in 2018. Each of these items is discussed more fully below.
Net Interest Income:
Net interest income totaled $16.0 million
for the three months ended March 31, 2019 compared to $14.2 million for the same period in 2018.
Net interest income was positively impacted in the three months ended March 31, 2019 by an increase in average earning assets of $103.3 million
compared to the same period in 2018. Also, our average yield on earning assets for the three months ended March 31, 2019 increased 48 basis points compared to the same period in 2018 from 3.76% to 4.24%.
Net interest income for the first quarter of 2019 increased $1.8 million compared to the same period in 2018. Of this increase, $1.0 million was due
to changes in rates earned or paid, while $832,000 was from changes in the volume of average interest assets and interest bearing liabilities. The largest changes came in commercial loan interest income which increased by $2.4 million in the
first quarter of 2019. Of the $2.4 million increase in interest income on commercial loans, $1.5 million was due to increases in rates earned and $880,000 was due to increases in average balances. Net interest income in the first quarter of
2019 also benefitted from a prepayment fee of $211,000 collected upon early payoff of a commercial loan.
Average interest earning assets totaled $1.83 billion for three months ended March 31, 2019 compared to $1.73 billion for the same period in 2018. An
increase of $84.5 million in average loans between periods and an increase of $27.6 million in average federal funds sold and other short-term investments were the primary drivers of the increase. The net interest margin was 3.54% for the
three months ended March 31, 2019 compared to 3.34% for the same period in 2018. Yield on commercial loans increased from 4.31% for three months ended March 31, 2018 to 4.89% for the same period in 2019. Yield on residential mortgage loans
increased from 3.49% for the three months ended March 31, 2018 to 3.69% for the same period in 2019, while yields on consumer loans increased from 4.48% for the first quarter of 2018 to 5.27% for the first quarter of 2019. The increases in
yields on commercial loans and consumer loans, in particular, were the result of the predominance of loans in these categories with variable rates of interest tied to prime and LIBOR which increased significantly from 2018 to 2019.
The Federal Reserve Board increased the target federal funds rate by 100 basis points between December 2016 and December 2017, and by another 100 basis
points in 2018. These increases have had a net positive impact on our net interest margin position as more loans repriced at the higher rate than our funding sources.
The cost of funds increased to 1.00% in the first quarter of 2019 compared to 0.61% in the first quarter of 2018. Increases in the rates paid on our
interest-bearing checking, savings and money market accounts in response to the federal funds rate increases over the past two years caused the increase in our cost of funds.
The following table shows an analysis of net interest margin for the three month periods ended March 31, 2019 and 2018 (dollars in thousands):
|
|
For the three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
183,487
|
|
|
$
|
996
|
|
|
|
2.17
|
%
|
|
$
|
179,123
|
|
|
$
|
868
|
|
|
|
1.94
|
%
|
Tax-exempt securities (1)
|
|
|
116,094
|
|
|
|
839
|
|
|
|
3.72
|
|
|
|
129,217
|
|
|
|
876
|
|
|
|
3.49
|
|
Commercial loans (2)
|
|
|
1,077,500
|
|
|
|
13,169
|
|
|
|
4.89
|
|
|
|
999,622
|
|
|
|
10,761
|
|
|
|
4.31
|
|
Residential mortgage loans
|
|
|
238,558
|
|
|
|
2,197
|
|
|
|
3.69
|
|
|
|
228,687
|
|
|
|
1,994
|
|
|
|
3.49
|
|
Consumer loans
|
|
|
83,348
|
|
|
|
1,084
|
|
|
|
5.27
|
|
|
|
86,590
|
|
|
|
955
|
|
|
|
4.48
|
|
Federal Home Loan Bank stock
|
|
|
11,558
|
|
|
|
160
|
|
|
|
5.55
|
|
|
|
11,558
|
|
|
|
197
|
|
|
|
6.81
|
|
Federal funds sold and other short-term investments
|
|
|
123,379
|
|
|
|
744
|
|
|
|
2.41
|
|
|
|
95,779
|
|
|
|
368
|
|
|
|
1.54
|
|
Total interest earning assets (1)
|
|
|
1,833,924
|
|
|
|
19,189
|
|
|
|
4.24
|
|
|
|
1,730,576
|
|
|
|
16,019
|
|
|
|
3.76
|
|
Noninterest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
28,833
|
|
|
|
|
|
|
|
|
|
|
|
28,606
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
85,544
|
|
|
|
|
|
|
|
|
|
|
|
86,729
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,948,301
|
|
|
|
|
|
|
|
|
|
|
$
|
1,845,911
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
422,109
|
|
|
$
|
406
|
|
|
|
0.39
|
%
|
|
$
|
380,100
|
|
|
$
|
146
|
|
|
|
0.16
|
%
|
Savings and money market accounts
|
|
|
622,829
|
|
|
|
1,225
|
|
|
|
0.80
|
|
|
|
605,249
|
|
|
|
615
|
|
|
|
0.41
|
|
Time deposits
|
|
|
137,717
|
|
|
|
625
|
|
|
|
1.84
|
|
|
|
97,926
|
|
|
|
233
|
|
|
|
0.97
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds
|
|
|
59,779
|
|
|
|
327
|
|
|
|
2.19
|
|
|
|
87,474
|
|
|
|
370
|
|
|
|
1.69
|
|
Long-term debt
|
|
|
41,238
|
|
|
|
586
|
|
|
|
5.68
|
|
|
|
41,238
|
|
|
|
473
|
|
|
|
4.59
|
|
Total interest bearing liabilities
|
|
|
1,283,672
|
|
|
|
3,169
|
|
|
|
1.00
|
|
|
|
1,211,987
|
|
|
|
1,837
|
|
|
|
0.61
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand accounts
|
|
|
463,613
|
|
|
|
|
|
|
|
|
|
|
|
454,101
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
7,553
|
|
|
|
|
|
|
|
|
|
|
|
5,910
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
193,463
|
|
|
|
|
|
|
|
|
|
|
|
173,913
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,948,301
|
|
|
|
|
|
|
|
|
|
|
$
|
1,845,911
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
16,020
|
|
|
|
|
|
|
|
|
|
|
$
|
14,182
|
|
|
|
|
|
Net interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
142.87
|
%
|
|
|
|
|
|
|
|
|
|
|
142.79
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Yields are presented on a tax equivalent basis using a 21% at March 31, 2019 and 2018, respectively.
|
(2)
|
Includes loan fees of $350,000 and $126,000 for the three months ended March 31, 2019 and 2018. Includes average nonaccrual loans of approximately $757,000 and
$497,000 for the three months ended March 31, 2019 and 2018.
|
The following table presents the dollar amount of changes in net interest income due to changes in volume and rate:
|
|
For the three months ended March 31,
2019 vs 2018
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
22
|
|
|
$
|
106
|
|
|
$
|
128
|
|
Tax-exempt securities
|
|
|
(382
|
)
|
|
|
345
|
|
|
|
(37
|
)
|
Commercial loans
|
|
|
880
|
|
|
|
1,528
|
|
|
|
2,408
|
|
Residential mortgage loans
|
|
|
88
|
|
|
|
115
|
|
|
|
203
|
|
Consumer loans
|
|
|
(218
|
)
|
|
|
347
|
|
|
|
129
|
|
Federal Home Loan Bank stock
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Federal funds sold and other short-term investments
|
|
|
126
|
|
|
|
250
|
|
|
|
376
|
|
Total interest income
|
|
|
516
|
|
|
|
2,654
|
|
|
|
3,170
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
18
|
|
|
$
|
242
|
|
|
$
|
260
|
|
Savings and money market accounts
|
|
|
18
|
|
|
|
592
|
|
|
|
610
|
|
Time deposits
|
|
|
121
|
|
|
|
271
|
|
|
|
392
|
|
Other borrowed funds
|
|
|
(473
|
)
|
|
|
430
|
|
|
|
(43
|
)
|
Long-term debt
|
|
|
—
|
|
|
|
113
|
|
|
|
113
|
|
Total interest expense
|
|
|
(316
|
)
|
|
|
1,648
|
|
|
|
1,332
|
|
Net interest income
|
|
$
|
832
|
|
|
$
|
1,006
|
|
|
$
|
1,838
|
|
Provision for Loan Losses:
The provision for loan losses for
the three months ended March 31, 2019 was a negative $250,000 compared to a negative $100,000 for the same period in 2018. The negative provisions for loan losses for each period were the result of continued stabilization of real estate values
on problem credits, continued improvement in asset quality metrics and net loan recoveries of $266,000 in the three months ended March 31, 2019 and $175,000 in the same period in 2018.
Gross loan recoveries were $423,000 for the three months ended March 31, 2019 and $272,000 for the same period in 2018. In the three months ended
March 31, 2019, we had $157,000 in charge-offs, compared to $97,000 in the same period in 2018. We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries. While we expect our collection
efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.
The amounts of loan loss provision in both the most recent quarter and comparable prior year period were the result of establishing our allowance for
loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained level of quarterly net recoveries over the past several quarters had a significant effect on the historical loss
component of our methodology. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.
Noninterest Income:
Noninterest income for the three periods
ended March 31, 2019 was $4.3 million compared to $4.1 million for the same period in 2018. The components of noninterest income are shown in the table below (in thousands):
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
Service charges and fees on deposit accounts
|
|
$
|
1,050
|
|
|
$
|
1,049
|
|
Net gains on mortgage loans
|
|
|
211
|
|
|
|
141
|
|
Trust fees
|
|
|
890
|
|
|
|
925
|
|
Gain as sales of securities
|
|
|
—
|
|
|
|
—
|
|
ATM and debit card fees
|
|
|
1,326
|
|
|
|
1,278
|
|
Bank owned life insurance (“BOLI”) income
|
|
|
236
|
|
|
|
238
|
|
Investment services fees
|
|
|
295
|
|
|
|
224
|
|
Other income
|
|
|
320
|
|
|
|
277
|
|
Total noninterest income
|
|
$
|
4,328
|
|
|
$
|
4,132
|
|
Net gains on mortgage loans were up $70,000 in the three months ended March 31, 2019 compared to same period in 2018 as a result of a slight increase
in the volume of loans originated for sale. Mortgage loans originated for sale in the three months ended March 31, 2019 were $6.9 million, compared to $5.1 million in the same period in 2018. Mortgage loans originated for portfolio in the
three months ended March 31, 2019 were $6.2 million, compared to $16.1 million in the same period in 2018. Investment services fees were up in the first three months of 2019 due to success in growing the number of investment services customer
relationships we have and favorable investment market value changes. ATM and debit card fees were up in the three months ended March 31, 2019 due to higher volume of usage by our customers.
Noninterest Expense:
Noninterest expense decreased to $11.2
million for the three month period ended March 31, 2019, from $11.4 million for the same period in 2018. The components of noninterest expense are shown in the table below (in thousands):
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
Salaries and benefits
|
|
$
|
6,244
|
|
|
$
|
6,194
|
|
Occupancy of premises
|
|
|
1,093
|
|
|
|
1,072
|
|
Furniture and equipment
|
|
|
844
|
|
|
|
805
|
|
Legal and professional
|
|
|
230
|
|
|
|
202
|
|
Marketing and promotion
|
|
|
228
|
|
|
|
229
|
|
Data processing
|
|
|
730
|
|
|
|
695
|
|
FDIC assessment
|
|
|
120
|
|
|
|
132
|
|
Interchange and other card expense
|
|
|
345
|
|
|
|
332
|
|
Bond and D&O insurance
|
|
|
104
|
|
|
|
110
|
|
Net (gains) losses on repossessed and foreclosed properties
|
|
|
(35
|
)
|
|
|
406
|
|
Administration and disposition of problem assets
|
|
|
88
|
|
|
|
55
|
|
Outside services
|
|
|
452
|
|
|
|
390
|
|
Other noninterest expense
|
|
|
795
|
|
|
|
812
|
|
Total noninterest expense
|
|
$
|
11,238
|
|
|
$
|
11,434
|
|
Most categories of noninterest expense were relatively unchanged compared to the three months ended March 31, 2018 due to our ongoing efforts to manage
expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by $50,000 in the three months ended March 31, 2019 from same period in 2018. This increase is due to a higher level of costs
associated with employee medical insurance, which was up $36,000 for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Variable based compensation was down $11,000 for the three months ended March 31,
2019 compared to the three months ended March 31, 2018 due to lower mortgage production.
Occupancy expenses were up $21,000 in the three months ended March 31, 2019 compared to the same period in 2018 due to higher property taxes and
maintenance costs incurred associated with certain branch facilities.
Our FDIC assessment costs decreased by $12,000 in the first quarter of 2019 compared to the same period in 2018 due primarily to positive changes in
our assessment rates. These costs have been trending down for the past few years and we believe the rate has stabilized and future expense fluctuations will likely be dependent on changes in our asset size. In January 2019, the FDIC notified
us that the Bank would receive an assessment credit of approximately $400,000 to offset future assessment as the FDIC Deposit Insurance Fund had exceeded its target ratio of 1.35% as of September 30, 2018. However, in March 2019, the FDIC
provided an update that the Deposit Insurance Fund ratio was 1.36% at December 31, 2018, below the 1.38% threshold required for assessment credits to be applied. As such, the Bank recognized FDIC assessment expense in the first quarter of
2019. Future expense may be reduced by these assessment credits depending on the level of the Deposit Insurance Fund.
While costs associated with administration and disposition of problem assets have increased slightly in the first quarter of 2019 versus the same
quarter of the prior year, they have decreased significantly over the past several years. These expenses include legal costs and repossessed and foreclosed property administration expense. Repossessed and foreclosed property administration
expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Net (gains) losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and
unrealized losses from value declines for outstanding properties. The net of these two line items decreased from 2018 to 2019, primarily due to our realizing net gains on sales in the first three months of 2019 compared to net losses on sales
in same period in 2018.
These costs are itemized in the following table (in thousands):
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
Legal and professional – nonperforming assets
|
|
$
|
43
|
|
|
$
|
13
|
|
Repossessed and foreclosed property administration
|
|
|
45
|
|
|
|
42
|
|
Net (gains) losses on repossessed and foreclosed properties
|
|
|
(35
|
)
|
|
|
406
|
|
Total
|
|
$
|
53
|
|
|
$
|
461
|
|
As the level of problem loans and assets has declined, the costs associated with these nonperforming assets have decreased significantly over the past
several years. Other real estate owned decreased from $5.2 million at March 31, 2018 to $3.3 million at March 31, 2019.
Net (gains) losses on repossessed assets and foreclosed properties for the three month period ended March 31, 2019 swung favorably by $441,000 compared
to the same period in 2018. The decrease was due to lower writedowns in valuation of other real estate properties and an improvement in net gains/losses in these periods. In the three month period ended March 31, 2019, valuation writedowns
totaled $10,000 compared to valuation writedowns of $280,000 for the same period in 2018. In the three month period ended March 31, 2019, net realized gains totaled $45,000, compared to net realized losses of $126,000 for the same period in
2018.
Federal Income Tax Expense:
We recorded $1.7 million in
federal income tax expense for the three month period ended March 31, 2019 compared to $1.2 million in the same period in 2018. Our effective tax rate for the three period ended March 31, 2019 was 18.31% compared to 17.55% for the same period
in 2018.
FINANCIAL CONDITION
Total assets were $1.93 billion at March 31, 2019, a decrease of $49.2 million from $1.98 billion at December 31, 2018. This change reflected decreases
of $27.3 million in cash and cash equivalents, $21.1 million in our loan portfolio, $2.3 million in securities available for sale and $119,000 in other real estate owned, offset by increases of $1.3 million in other assets and $97,000 in loans
held for sale. Total deposits decreased by $58.9 million at March 31, 2019 compared to December 31, 2018.
Cash and Cash Equivalents:
Our cash and cash equivalents,
which include federal funds sold and short-term investments, were $144.0 million at March 31, 2019 compared to $171.3 million at December 31, 2018. The decrease in these balances related primarily to the decrease in total deposits.
Securities:
Debt securities available for sale were $224.6
million at March 31, 2019 compared to $227.0 million at December 31, 2018. The balance at March 31, 2019 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity
portfolio was $70.3 million at December 31, 2018 and $70.3 million at March 31, 2019. Our held to maturity portfolio is comprised of state, municipal and privately placed commercial bonds.
Portfolio Loans and Asset Quality:
Total portfolio loans
decreased by $21.1 million in the first three months of 2019 and were $1.38 billion at March 31, 2019 compared to $1.41 billion at December 31, 2018. During the first three months of 2019, our commercial portfolio decreased by $15.4 million,
while our consumer portfolio decreased by $4.8 million and our residential mortgage portfolio decreased by $1.0 million.
Mortgage loans originated for portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less.
Mortgage loans originated for portfolio in the first three months of 2019 decreased $9.9 million compared to the same period in 2018, from $16.1 million in the first three months of 2018 to $6.2 million in the same period in 2019.
The volume of residential mortgage loans originated for sale in the first three months of 2019 increased $1.8 million compared to the same period in
2018. Residential mortgage loans originated for sale were $6.9 million in the first three months of 2019 compared to $5.1 million in the first three months of 2018.
The following table shows our loan origination activity for loans to be held in portfolio during the first three months of 2019 and 2018, broken out by
loan type and also shows average originated loan size (dollars in thousands):
|
|
Three months ended March 31, 2019
|
|
|
Three months ended March 31, 2018
|
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
849
|
|
|
|
1.1
|
%
|
|
$
|
283
|
|
|
$
|
3,977
|
|
|
|
3.9
|
%
|
|
$
|
994
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
1,952
|
|
|
|
2.5
|
|
|
|
651
|
|
|
|
1,030
|
|
|
|
1.0
|
|
|
|
206
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
0.2
|
|
|
|
250
|
|
Residential improved
|
|
|
9,913
|
|
|
|
12.7
|
|
|
|
310
|
|
|
|
15,237
|
|
|
|
14.9
|
|
|
|
381
|
|
Commercial improved
|
|
|
17,986
|
|
|
|
23.0
|
|
|
|
1,285
|
|
|
|
3,252
|
|
|
|
3.2
|
|
|
|
296
|
|
Manufacturing and industrial
|
|
|
7,949
|
|
|
|
10.1
|
|
|
|
1,590
|
|
|
|
5,785
|
|
|
|
5.7
|
|
|
|
578
|
|
Total commercial real estate
|
|
|
38,649
|
|
|
|
49.4
|
|
|
|
678
|
|
|
|
29,531
|
|
|
|
28.9
|
|
|
|
416
|
|
Commercial and industrial
|
|
|
24,446
|
|
|
|
31.3
|
|
|
|
461
|
|
|
|
46,639
|
|
|
|
45.8
|
|
|
|
549
|
|
Total commercial
|
|
|
63,095
|
|
|
|
80.7
|
|
|
|
574
|
|
|
|
76,170
|
|
|
|
74.7
|
|
|
|
488
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
6,235
|
|
|
|
8.0
|
|
|
|
231
|
|
|
|
16,150
|
|
|
|
15.9
|
|
|
|
224
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
8,399
|
|
|
|
10.7
|
|
|
|
122
|
|
|
|
8,902
|
|
|
|
8.7
|
|
|
|
93
|
|
Other secured
|
|
|
501
|
|
|
|
0.6
|
|
|
|
23
|
|
|
|
694
|
|
|
|
0.7
|
|
|
|
22
|
|
Total consumer
|
|
|
15,135
|
|
|
|
19.3
|
|
|
|
128
|
|
|
|
25,746
|
|
|
|
25.3
|
|
|
|
129
|
|
Total loans
|
|
$
|
78,230
|
|
|
|
100.0
|
%
|
|
|
343
|
|
|
$
|
101,916
|
|
|
|
100.0
|
%
|
|
|
286
|
|
The following table shows a breakout of our commercial loan activity during the first three months of 2019 and 2018 (dollars in thousands):
|
|
Three Months
Ended
March 31,
2019
|
|
|
Three Months
Ended
March 31,
2018
|
|
Commercial loans originated
|
|
$
|
63,095
|
|
|
$
|
76,170
|
|
Repayments of commercial loans
|
|
|
(59,123
|
)
|
|
|
(75,520
|
)
|
Change in undistributed - available credit
|
|
|
(19,337
|
)
|
|
|
(835
|
)
|
Net decrease in total commercial loans
|
|
$
|
(15,365
|
)
|
|
$
|
(185
|
)
|
Overall, the commercial loan portfolio decreased $15.4 million in the first three months of 2019. Our commercial and industrial portfolio decreased by
$19.4 million while our commercial real estate loans increased by $4.1 million. Our production of commercial loans decreased by $13.1 million from $76.2 million in the first three months of 2018 to $63.1 million in the same period of 2019.
Our commercial and industrial portfolio is subject to seasonal fluctuations and we typically experience large paydowns on agricultural credits in the first part of each year. We also had two large relationships pay off during the first quarter
of 2019, one of which amounted to $8.5 million resulting from the sale of the business.
Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 77.0% of the total loan portfolio at both
March 31, 2019 and December 31, 2018. Residential mortgage and consumer loans comprised approximately 23.0% of total loans at both March 31, 2019 and December 31, 2018.
A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
Commercial real estate: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
14,723
|
|
|
|
1.1
|
%
|
|
$
|
14,825
|
|
|
|
1.1
|
%
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
45,423
|
|
|
|
3.3
|
|
|
|
44,169
|
|
|
|
3.1
|
|
Commercial development
|
|
|
701
|
|
|
|
—
|
|
|
|
712
|
|
|
|
0.1
|
|
Residential improved
|
|
|
100,801
|
|
|
|
7.3
|
|
|
|
98,500
|
|
|
|
7.0
|
|
Commercial improved
|
|
|
291,612
|
|
|
|
21.1
|
|
|
|
295,618
|
|
|
|
21.0
|
|
Manufacturing and industrial
|
|
|
119,540
|
|
|
|
8.6
|
|
|
|
114,887
|
|
|
|
8.2
|
|
Total commercial real estate
|
|
|
572,800
|
|
|
|
41.4
|
|
|
|
568,711
|
|
|
|
40.5
|
|
Commercial and industrial
|
|
|
493,891
|
|
|
|
35.6
|
|
|
|
513,345
|
|
|
|
36.5
|
|
Total commercial
|
|
|
1,066,691
|
|
|
|
77.0
|
|
|
|
1,082,056
|
|
|
|
77.0
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
237,207
|
|
|
|
17.1
|
|
|
|
238,174
|
|
|
|
16.9
|
|
Unsecured
|
|
|
367
|
|
|
|
0.1
|
|
|
|
130
|
|
|
|
—
|
|
Home equity
|
|
|
73,631
|
|
|
|
5.3
|
|
|
|
78,503
|
|
|
|
5.6
|
|
Other secured
|
|
|
6,671
|
|
|
|
0.5
|
|
|
|
6,795
|
|
|
|
0.5
|
|
Total consumer
|
|
|
317,876
|
|
|
|
23.0
|
|
|
|
323,602
|
|
|
|
23.0
|
|
Total loans
|
|
$
|
1,384,567
|
|
|
|
100.0
|
%
|
|
$
|
1,405,658
|
|
|
|
100.0
|
%
|
(1)
|
Includes both owner occupied and non-owner occupied commercial real estate.
|
Commercial real estate loans accounted for 41.4% and 40.5% of the total loan portfolio at March 31, 2019 and December 31, 2018, respectively, and
consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real
estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are
secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.
Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised 17.1% of
portfolio loans at March 31, 2019 and 16.9% at December 31, 2018. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to
diversify our credit risk and deploy our excess liquidity.
The volume of residential mortgage loans originated for sale during the first three months of 2019 increased from the first three months of 2018 as a
result of interest rate conditions. We are also experiencing a shift in production to financing new home purchases versus refinancings. Volume has been negatively impacted by a shortage in the number of available residential properties for
sale in our market areas.
Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loans
decreased by $4.8 million to $80.7 million at March 31, 2019 from $85.4 million at December 31, 2018, due primarily to a decrease in home equity loans. Consumer loans comprised 5.9% of our portfolio loans at March 31, 2019 and 6.1% at December
31, 2018.
Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan
originators and credit administration. An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets quarterly to manage our internal watch list and proactively manage high risk loans.
When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any
interest previously accrued but not collected is reversed and charged against current earnings.
Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At March 31, 2019, nonperforming assets totaled
$3.7 million compared to $4.7 million at December 31, 2018. There were no additions to other real estate owned in the first three months of 2019 compared to $293,000 of additions in the first three months of 2018. At March 31, 2019, there was
just one loan in redemption, so we expect there to be few additions to other real estate owned in 2019. Proceeds from sales of foreclosed properties were $154,000 in the first three months of 2019, resulting in net realized gain on sales of
$45,000. Proceeds from sales of foreclosed properties were $431,000 in the first three months of 2018 resulting in net realized loss on sales of $126,000.
Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of March 31, 2019, nonperforming
loans were negligible and totaled $409,000, or 0.03% of total portfolio loans, compared to $1.3 million, or 0.09% of total portfolio loans, at December 31, 2018.
Nonperforming loans at March 31, 2019 consisted of $213,000 of commercial real estate loans and $196,000 of consumer and residential mortgage loans.
Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $3.3 million at March 31, 2019 and $3.4
million at December 31, 2018. The entire balance at March 31, 2019 was comprised of nine commercial real estate properties. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated
costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.
At March 31, 2019, our foreclosed asset portfolio had a weighted average age held in portfolio of 7.3 years. Below is a breakout of our foreclosed
asset portfolio at March 31, 2019 and December 31, 2018 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was
loan collateral (dollars in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Foreclosed Asset Property Type
|
|
Carrying
Value
|
|
|
Foreclosed
Asset
Writedown
|
|
|
Combined
Writedown
(Loan and
Foreclosed
Asset)
|
|
|
Carrying
Value
|
|
|
Foreclosed
Asset
Writedown
|
|
|
Combined
Writedown
(Loan and
Foreclosed
Asset)
|
|
Single Family
|
|
$
|
—
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
|
—
|
%
|
Residential Lot
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
|
|
57.6
|
|
|
|
70.1
|
|
Multi-Family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant Land
|
|
|
343
|
|
|
|
41.9
|
|
|
|
47.9
|
|
|
|
352
|
|
|
|
40.5
|
|
|
|
46.6
|
|
Residential Development
|
|
|
701
|
|
|
|
41.1
|
|
|
|
84.3
|
|
|
|
815
|
|
|
|
38.6
|
|
|
|
82.3
|
|
Commercial Office
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial Industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial Improved
|
|
|
2,217
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,175
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
3,261
|
|
|
|
18.4
|
|
|
|
55.7
|
|
|
$
|
3,380
|
|
|
|
19.2
|
|
|
|
55.4
|
|
The following table shows the composition and amount of our nonperforming assets (dollars in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Nonaccrual loans
|
|
$
|
408
|
|
|
$
|
1,303
|
|
Loans 90 days or more delinquent and still accruing
|
|
|
1
|
|
|
|
1
|
|
Total nonperforming loans (NPLs)
|
|
|
409
|
|
|
|
1,304
|
|
Foreclosed assets
|
|
|
3,261
|
|
|
|
3,380
|
|
Repossessed assets
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming assets (NPAs)
|
|
$
|
3,670
|
|
|
$
|
4,684
|
|
NPLs to total loans
|
|
|
0.03
|
%
|
|
|
0.09
|
%
|
NPAs to total assets
|
|
|
0.19
|
%
|
|
|
0.24
|
%
|
The following table shows the composition and amount of our troubled debt restructurings (TDRs) at March 31, 2019 and December 31, 2018 (dollars in
thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
Performing TDRs
|
|
$
|
9,616
|
|
|
$
|
6,073
|
|
|
$
|
15,689
|
|
|
$
|
9,682
|
|
|
$
|
6,347
|
|
|
$
|
16,029
|
|
Nonperforming TDRs (1)
|
|
|
212
|
|
|
|
—
|
|
|
|
212
|
|
|
|
124
|
|
|
|
-
|
|
|
|
124
|
|
Total TDRs
|
|
$
|
9,828
|
|
|
$
|
6,073
|
|
|
$
|
15,901
|
|
|
$
|
9,806
|
|
|
$
|
6,347
|
|
|
$
|
16,153
|
|
(1)
|
Included in nonperforming asset table above
|
We had a total of $15.9 million and $16.2 million of loans whose terms have been modified in TDRs as of March 31, 2019 and December 31, 2018,
respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that
renewed at existing contractual rates, but below market rates for comparable credit. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms
is performed to assess whether the structure can be successful and whether cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status.
Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it
would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status. In situations where there is a subsequent
modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be
removed. Total TDRs decreased by $252,000 from December 31, 2018 to March 31, 2019 due to payoffs and paydowns on existing TDRs. No new TDRs were added during the quarter. There were 111 loans identified as TDRs at March 31, 2019 compared to
123 loans at December 31, 2018.
As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For
impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where repayment is expected from
cash flows from business operations, the allowance is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a
discounted cash flow computation on the change in weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms
discounted at the original contractual rate.
Allowance for loan losses:
The allowance for loan losses at
March 31, 2019 was $16.9 million, an increase of $16,000 from December 31, 2018. The allowance for loan losses represented 1.22% of total portfolio loans at March 31, 2019 and 1.20% at December 31, 2018. The allowance for loan losses to
nonperforming loan coverage ratio increased from 1294% at December 31, 2018 to 4130% at March 31, 2019.
The table below shows the changes in certain credit metrics over the past five quarters:
(Dollars in millions)
|
|
Quarter Ended
March 31,
2019
|
|
|
Quarter Ended
December 31,
2018
|
|
|
Quarter Ended
September 30,
2018
|
|
|
Quarter Ended
June 30,
2018
|
|
|
Quarter Ended
March 31,
2018
|
|
Commercial loans
|
|
$
|
1,066.7
|
|
|
$
|
1,082.1
|
|
|
$
|
1,020.6
|
|
|
$
|
1,005.5
|
|
|
$
|
1,007.0
|
|
Nonperforming loans
|
|
|
0.4
|
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Other real estate owned and repo assets
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
3.5
|
|
|
|
3.9
|
|
|
|
5.2
|
|
Total nonperforming assets
|
|
|
3.7
|
|
|
|
4.7
|
|
|
|
3.6
|
|
|
|
4.0
|
|
|
|
5.5
|
|
Net charge-offs (recoveries)
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Total delinquencies
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.6
|
|
We have had net loan recoveries in sixteen of the past seventeen quarters. Our total delinquencies have continued to be negligible and were $674,000
at March 31, 2019 and $877,000 at December 31, 2018. Our delinquency percentage at March 31, 2019 was just 0.05%.
These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses increased
$16,000 in the first three months of 2019. We recorded a negative provision for loan losses of $250,000 for the three months ended March 31, 2019 compared to a negative $100,000 for the same period of 2018. Net loan recoveries were $266,000
for the three months ended March 31, 2019, compared to net recoveries of $175,000 for the same period in 2018. The ratio of net recoveries to average loans was -0.08% on an annualized basis for the first three months of 2019, compared to -0.05%
for the first three months of 2018.
We are encouraged by the reduced level of gross charge-offs over recent quarters. We do, however, recognize that future charge-offs and resulting
provisions for loan losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets.
Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the
loan portfolio. Our methodology for measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for
commercial loans not considered impaired based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.
Overall, impaired loans declined by $1.3 million to $15.9 million at March 31, 2019 compared to $17.2 million at December 31, 2018. The specific
allowance for impaired loans decreased $171,000 to $927,000 at March 31, 2019, compared to $1.1 million at December 31, 2018. The specific allowance for impaired loans represented 5.8% of total impaired loans at March 31, 2019 and 6.4% at
December 31, 2018.
The general allowance allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans. We
use a loan rating method based upon an eight point system. Loans are stratified between real estate secured and non-real estate secured. The real estate secured portfolio is further stratified by the type of real estate. Each stratified
portfolio is assigned a loss allocation factor. A higher numerical grade assigned to a loan category generally results in a greater allocation percentage. Changes in risk grade of loans affect the amount of the allowance allocation.
The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's
judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month actual net chargeoff history as the base for our computation. Over the past few years, the 18 month period computations have reflected
sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. Adjustments to the qualitative factors also involved consideration of
different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods. We also considered the extended period of improved asset quality in assessing the overall qualitative component. Considering the change in our qualitative
factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was $13.0 million at March 31, 2019 and $12.8 million at December 31, 2018. The qualitative component of our allowance allocated to
commercial loans was $11.7 million at March 31, 2019, down from $12.0 million at December 31, 2018.
Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan
type. A rolling 12 month (four quarter) historical loss experience period was applied to residential mortgage and consumer loan portfolios. As with commercial loans that are not considered impaired, the determination of the allowance
allocation percentage is based principally on our historical loss experience. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent
loss experience for these similar pools of loans. The homogeneous loan allowance was $3.0 million at March 31, 2019 and $3.0 million at December 31, 2018.
The allowance allocations are not intended to imply limitations on usage of the allowance for loan losses. The entire allowance for loan losses is
available for any loan losses without regard to loan type.
Premises and Equipment:
Premises and equipment totaled $44.8
million at March 31, 2019, down $57,000 from $44.9 million at December 31, 2018.
Deposits and Other Borrowings:
Total deposits decreased $58.9
million to $1.62 billion at March 31, 2019, as compared to $1.68 billion at December 31, 2018. Non-interest checking account balances decreased $18.9 million during the three months of 2019. Interest bearing demand account balances decreased
$49.7 million and savings and money market account balances decreased $4.6 million in the first three months of 2019 as municipal and business customers deployed their seasonal increase of year-end deposits. Certificates of deposits increased
by $14.3 million in the first three months of 2019. We believe our success in maintaining the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of
customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our sophisticated product line.
Noninterest bearing demand accounts comprised 29% of total deposits at March 31, 2019 and 29% of total deposits at December 31, 2018. These balances
typically increase at year end for many of our commercial customers, then decline in the first quarter. Because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their
balances in these more liquid noninterest bearing demand account types. Interest bearing demand, including money market and savings accounts, comprised 62% of total deposits at March 31, 2019 and 64% at December 31, 2018. Time accounts as a
percentage of total deposits were 9% at March 31, 2019 and 7% December 31, 2018.
At both March 31, 2019 and December 31, 2018, borrowed funds totaled $101.2 million at March 31, 2019, including $60.0 million of Federal Home Loan
Bank (“FHLB”) advances and $41.2 million in long-term debt associated with trust preferred securities. Borrowed funds were unchanged in the first three months of 2019 primarily due to the scheduled maturity of a $10.0 million FHLB advance in
February 2019 being replaced with the addition of a $10.0 million FHLB advance in February 2019.
CAPITAL RESOURCES
Total shareholders' equity of $198.0 million at March 31, 2019 increased $7.1 million from $190.9 million at December 31, 2018. The increase was
primarily a result of net income of $7.6 million earned in the first three months of 2018 and an increase of $1.8 million in accumulated other comprehensive income, partially offset by a payment of $2.4 million in cash dividends to
shareholders. The Bank was categorized as “well capitalized” at March 31, 2019.
In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking
Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common
equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, effectively resulted in a minimum CET1 ratio of 7.0%. Basel III raised the minimum ratio of Tier 1
capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), effectively resulted in a minimum total capital to risk-weighted assets ratio of
10.5% (with the capital conservation buffer), and required a minimum leverage ratio of 4.0%. Basel III also made changes to risk weights for certain assets and off-balance-sheet exposures. The capital ratios for the Company and the Bank under
Basel III have continued to exceed the well capitalized minimum capital requirements.
The following table shows our regulatory capital ratios (on a consolidated basis) for the past several quarters:
Macatawa Bank
Corporation
|
|
March 31,
2019
|
|
|
Dec 31,
2018
|
|
|
Sept 30,
2018
|
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
Total capital to risk weighted assets
|
|
|
16.1
|
%
|
|
|
15.5
|
%
|
|
|
15.8
|
%
|
|
|
15.5
|
%
|
|
|
15.4
|
%
|
Common Equity Tier 1 to risk weighted assets
|
|
|
12.6
|
|
|
|
12.0
|
|
|
|
12.1
|
|
|
|
11.8
|
|
|
|
11.7
|
|
Tier 1 capital to risk weighted assets
|
|
|
15.1
|
|
|
|
14.5
|
|
|
|
14.7
|
|
|
|
14.4
|
|
|
|
14.3
|
|
Tier 1 capital to average assets
|
|
|
12.2
|
|
|
|
12.1
|
|
|
|
11.9
|
|
|
|
11.9
|
|
|
|
11.8
|
|
Approximately $40.0 million of trust preferred securities outstanding at March 31, 2019 qualified as Tier 1 capital.
LIQUIDITY
Liquidity of Macatawa Bank:
The liquidity of a financial
institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus on developing
access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the FRB's discount window, the
Federal Home Loan Bank, federal funds purchased lines of credit and other secured borrowing sources with our correspondent banks, loan payments by our borrowers, maturity and sales of our securities available for sale, growth of our deposits,
federal funds sold and other short-term investments, and the various capital resources discussed above.
Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs
or depositors wanting to withdraw funds. Our liquidity management involves periodic monitoring of our assets considered to be liquid and illiquid, and our funding sources considered to be core and non-core and short-term (less than 12 months)
and long-term. We have established parameters that monitor, among other items, our level of liquid assets to short-term liabilities, our level of non-core funding reliance and our level of available borrowing capacity. We maintain a diversified
wholesale funding structure and actively manage our maturing wholesale sources to reduce the risk to liquidity shortages. We have also developed a contingency funding plan to stress test our liquidity requirements arising from certain events
that may trigger liquidity shortages, such as rapid loan growth in excess of normal growth levels or the loss of deposits and other funding sources under extreme circumstances.
We have actively pursued initiatives to maintain a strong liquidity position. The Bank has reduced its reliance on non-core funding sources, including
brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We continue to maintain significant on-balance sheet
liquidity. At March 31, 2019, the Bank held $115.8 million of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks of approximately $359.4 million as of March 31,
2019.
In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity
management. The table below summarizes our significant contractual obligations at March 31, 2019 (dollars in thousands):
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Long term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,238
|
|
Time deposit maturities
|
|
|
87,755
|
|
|
|
50,710
|
|
|
|
1,736
|
|
|
|
—
|
|
Other borrowed funds
|
|
|
—
|
|
|
|
10,000
|
|
|
|
20,000
|
|
|
|
30,000
|
|
Operating lease obligations
|
|
|
339
|
|
|
|
289
|
|
|
|
89
|
|
|
|
—
|
|
Total
|
|
$
|
88,094
|
|
|
$
|
60,999
|
|
|
$
|
21,825
|
|
|
$
|
71,238
|
|
In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan
commitments and standby letters of credit. The level and fluctuation of these commitments is also considered in our overall liquidity management. At March 31, 2019, we had a total of $472.0 million in unused lines of credit, $100.6 million in
unfunded loan commitments and $16.3 million in standby letters of credit.
Liquidity of Holding Company:
The primary sources of liquidity
for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises. Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the
amount of dividends the Bank may declare and pay to the Company in any calendar year. Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2018, the Bank paid
dividends to the Company totaling $11.1 million. In the same period, the Company paid dividends to its shareholders totaling $8.5 million. On February 26, 2019, the Bank paid a dividend totaling $2.9 million to the Company in anticipation of
the common share cash dividend of $0.07 per share paid on February 27, 2019 to shareholders of record on February 12, 2019. The cash distributed for this cash dividend payment totaled $2.4 million. The Company retained the remaining balance
in each period for general corporate purposes. At March 31, 2019, the Bank had a retained earnings balance of $70.1 million.
During 2018, the Company received payments from the Bank totaling $5.8 million, representing the Bank’s intercompany tax liability for the 2018 tax
year, in accordance with the Company’s tax allocation agreement. In the same period, the Company made tax payments totaling $5.3 million.
The Company has the right to defer interest payments for 20 consecutive quarters on its trust preferred securities if necessary for liquidity
purposes. During the deferral period, the Company may not declare or pay any dividends on its common stock or make any payment on any outstanding debt obligations that rank equally with or junior to the trust preferred securities.
The Company’s cash balance at March 31, 2019 was $6.5 million. The Company believes that it has sufficient liquidity to meet its cash flow
obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for loan losses, other real estate owned valuation, loss
contingencies, revenue recognition and income taxes are deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.
Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan
Losses" discussion. This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the
allowance for loan losses and the related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our
analysis has properly identified all of the probable losses in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in the first three months of
2019.
Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell
when acquired, establishing a new cost basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense.
Estimating the initial and ongoing fair value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.
Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
This, too, is an accounting area that involves significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes
in the status of such contingencies could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.
Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms. Most of our
noninterest revenue comes from services that are transaction based and such revenue is recognized as the related service is provided.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of
the recognition of revenues and expenses for financial reporting and tax purposes. At March 31, 2019, we had gross deferred tax assets of $4.4 million, gross deferred tax liabilities of $1.6 million resulting in a net deferred tax asset of
$2.8 million. Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not"
standard. At December 31, 2018, a valuation allowance of $92,000 was established against a capital loss carryforward created by the liquidation of the assets of a partnership interest the Bank acquired through a loan settlement thereby
reducing net deferred tax assets. This valuation allowance was maintained at March 31, 2019, resulting in a net deferred tax asset balance of $2.7 million. With the positive results in 2018 and the first quarter of 2019, we concluded at March
31, 2019 that no other valuation allowance on our net deferred tax asset was required. Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax
asset.