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 September 30, 2018, we had total assets of $1.92 billion, total loans of $1.34 billion, total deposits of $1.62 billion and shareholders' equity of
$184.0 million. For the third quarter of 2018, we recognized net income of $6.9 million compared to $4.9 million in the third quarter of 2017. For the nine months ended September 30, 2018, we recognized net income of $19.3 million compared to
$14.1 million for the same period in 2017. The Bank was categorized as “well capitalized” under regulatory capital standards at September 30, 2018.
We paid a dividend of $0.04 per share in the first and second quarters of 2017 and $0.05 per share in the third and fourth quarters of 2017. We increased
the dividend to $0.06 per share for the first, second and third quarters of 2018.
RESULTS OF OPERATIONS
Summary:
Net income for the quarter ended September 30, 2018 was
$6.9 million compared to $4.9 million in the third quarter of 2017. Net income per common share on a diluted basis was $0.20 for the third quarter of 2018 and $0.14 for the third quarter of 2017. Net income for the nine months ended September 30,
2018 was $19.3 million, compared to $14.1 million for the same period in 2017. Net income per share on a diluted basis for the nine months ended September 30, 2018 was $0.57 compared to $0.42 for the same period in 2017.
The increase in earnings in the three months ended September 30, 2018 compared to the same period in 2017 was due primarily to increased net interest
income and lower income tax expense. Net interest income increased by $2.0 million to $15.2 million in the three months ended September 30, 2018 compared to $13.1 million in the same period in 2017. Income tax expense was lower by $587,000 in the
third quarter of 2018 primarily due to the effects of tax reform signed at the end of 2017, reducing the corporate federal income tax rate from 35% to 21%.
The increase in earnings in the nine months ended September 30, 2018 compared to the same periods in 2017 was also due primarily to increased net interest
income and lower income tax expense. Net interest income increased by $5.6 million to $44.0 million in the nine months ended September 30, 2018 compared to $38.4 million in the same period in 2017. Income tax expense was lower by $2.0 million in
the nine months ended September 30, 2018 primarily due to the effects of tax reform signed at the end of 2017.
Other items impacting earnings in the three and nine month periods ended September 30, 2018 included nonperforming asset expenses (including administration
costs and losses), which were $108,000 for the three months ended September 30, 2018 and $652,000 for the nine months ended September 30, 2018 compared to a negative $77,000 and a negative $140,000 for the same periods in 2017 as we experienced net
gains on sales of other real estate owned in the 2017 periods. Also, there was no provision for loan losses for the three months ended September 30, 2018 and negative $400,000 for the nine months ended September 30, 2018 compared to a negative
$350,000 and a negative $1.4 million for the same periods in 2017. We again were in a net loan recovery position for the three months ended September 30, 2018, with $108,000 in net loan recoveries, compared to $214,000 in net loan recoveries in
the same period in 2017. We were also in a net loan recovery position for the year to date period, with $603,000 in net loan recoveries in the nine month period ended September 30, 2018 compared to $822,000 in the same period in 2017. Each of
these items is discussed more fully below.
Net Interest Income:
Net interest income totaled $15.2 million
for the three months ended September 30, 2018 compared to $13.1 million for the same period in 2017. Net interest income totaled $44.0 million for the nine months ended September 30, 2018 compared to $38.4 million in the same period in 2017.
For the three months ended September 30, 2018, net interest income increased $2.0 million compared to the same period in 2017. Of this increase $1.1
million was due to changes in rates earned or paid, while $0.9 million was from changes in average interest earning assets and interest bearing liabilities. The largest changes came in commercial loan interest income which increased by $1.8
million in the third quarter of 2018. Of the $1.8 million increase in interest income on commercial loans, $1.2 million was due to increases in rates earned. For the nine month period ended September 30, 2018, net interest income increased by
$5.6 million, with $3.2 million due to changes in average balances and $2.4 million due to changes in rates. As with the third quarter 2018, the largest changes for the nine month period came in commercial loan interest income which increased by
$4.5 million. Of the $4.5 million increase, $2.9 million came from changes in rates and $1.6 million came from changes in average balances.
Net interest income was positively impacted in three months ended September 30, 2018 by an increase in average earning assets of $147.6 million compared to
the same period in 2017. Also, our average yield on earning assets for the three months ended September 30, 2018 increased 35 basis points compared to the same period in 2017 from 3.57% to 3.92%.
Average interest earning assets totaled $1.80 billion for three months ended September 30, 2018 compared to $1.65 billion for the same period in 2017. An
increase of $33.6 million in average securities between periods and an increase of $70.9 million in average loans were the primary drivers of the increase. The net interest margin was 3.37% for the three months ended September 30, 2018 compared to
3.21% for the same period in 2017. Yield on commercial loans increased from 4.11% for three months ended September 30, 2017 to 4.60% for the same period in 2018. Yield on residential mortgage loans increased from 3.47% for the three months ended
September 30, 2017 to 3.58% for the same period in 2018, while yields on consumer loans increased from 4.32% for the third quarter of 2017 to 4.87% for the third quarter of 2018.
Average interest earning assets totaled $1.76 billion for nine months ended September 30, 2018 compared to $1.61 billion for the same period in 2017. An
increase of $48.2 million in average securities between periods and an increase of $61.3 million in average loans were the primary drivers of the increase. The net interest margin was 3.36% for the nine months ended September 30, 2018 compared to
3.24% for the same period in 2017. Yield on commercial loans increased from 4.06% for nine months ended September 30, 2017 to 4.45% for the same period in 2018. Yield on residential mortgage loans increased from 3.47% for the nine months ended
September 30, 2017 to 3.54% for the same period in 2018, while yields on consumer loans increased from 4.16% for the first nine months of 2017 to 4.69% for the first nine months of 2018.
The Federal Reserve Board increased the target federal funds rate by 175 basis points between December 2016 and December 2017 and September 2018. These
increases have had a net positive impact on our net interest margin in the three and nine months periods ended September 30, 2018 as more loans repriced at the higher rate than our funding sources.
Also impacting net interest income and resulting yields was the recognition of interest that had been deferred on nonaccrual commercial loans upon payoff
of these loans. This interest totaled $44,000 in the three months ended September 30, 2018 and $120,000 in the nine months ended September 30, 2018 and $315,000 in nine months ended September 30, 2017.
The cost of funds increased to 0.81% in the third quarter of 2018 compared to 0.53% in the third quarter of 2017. For the first nine months of 2018, the
cost of funds increased to 0.71% compared to 0.50% for the same period in 2017. Increases in the rates paid on our savings and money market accounts in response to the federal funds rate increases over the past year caused the increase in our cost
of funds.
The following table shows an analysis of net interest margin for the three month periods ended September 30, 2018 and 2017 (dollars in thousands):
|
|
For the three months ended September 30,
|
2018
|
|
|
2017
|
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
180,648
|
|
|
$
|
945
|
|
|
|
2.09
|
%
|
|
$
|
162,729
|
|
|
$
|
741
|
|
|
|
1.83
|
%
|
Tax-exempt securities (1)
|
|
|
120,082
|
|
|
|
846
|
|
|
|
3.63
|
|
|
|
104,387
|
|
|
|
574
|
|
|
|
3.51
|
|
Commercial loans (2)
|
|
|
1,001,930
|
|
|
|
11,766
|
|
|
|
4.60
|
|
|
|
946,105
|
|
|
|
9,930
|
|
|
|
4.11
|
|
Residential mortgage loans
|
|
|
238,092
|
|
|
|
2,138
|
|
|
|
3.58
|
|
|
|
219,532
|
|
|
|
1,905
|
|
|
|
3.47
|
|
Consumer loans
|
|
|
85,445
|
|
|
|
1,049
|
|
|
|
4.87
|
|
|
|
88,933
|
|
|
|
969
|
|
|
|
4.32
|
|
Federal Home Loan Bank stock
|
|
|
11,558
|
|
|
|
129
|
|
|
|
4.39
|
|
|
|
11,558
|
|
|
|
122
|
|
|
|
4.15
|
|
Federal funds sold and other short-term investments
|
|
|
161,845
|
|
|
|
814
|
|
|
|
1.97
|
|
|
|
118,784
|
|
|
|
385
|
|
|
|
1.27
|
|
Total interest earning assets (1)
|
|
|
1,799,600
|
|
|
|
17,687
|
|
|
|
3.92
|
|
|
|
1,652,028
|
|
|
|
14,626
|
|
|
|
3.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
33,403
|
|
|
|
|
|
|
|
|
|
|
|
29,940
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
82,652
|
|
|
|
|
|
|
|
|
|
|
|
93,334
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,915,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,775,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
413,775
|
|
|
$
|
330
|
|
|
|
0.32
|
%
|
|
$
|
352,661
|
|
|
$
|
98
|
|
|
|
0.11
|
%
|
Savings and money market accounts
|
|
|
595,887
|
|
|
|
890
|
|
|
|
0.60
|
|
|
|
551,917
|
|
|
|
454
|
|
|
|
0.33
|
|
Time deposits
|
|
|
110,303
|
|
|
|
389
|
|
|
|
1.40
|
|
|
|
88,933
|
|
|
|
180
|
|
|
|
0.81
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds
|
|
|
72,989
|
|
|
|
364
|
|
|
|
1.95
|
|
|
|
74,190
|
|
|
|
314
|
|
|
|
1.66
|
|
Long-term debt
|
|
|
41,238
|
|
|
|
552
|
|
|
|
5.24
|
|
|
|
41,238
|
|
|
|
442
|
|
|
|
4.20
|
|
Total interest bearing liabilities
|
|
|
1,234,192
|
|
|
|
2,525
|
|
|
|
0.81
|
|
|
|
1,108,939
|
|
|
|
1,488
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand accounts
|
|
|
494,186
|
|
|
|
|
|
|
|
|
|
|
|
488,028
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
5,948
|
|
|
|
|
|
|
|
|
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
181,329
|
|
|
|
|
|
|
|
|
|
|
|
171,987
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,915,655
|
|
|
|
|
|
|
|
|
|
|
$
|
1,775,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
15,162
|
|
|
|
|
|
|
|
|
|
|
$
|
13,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
Net interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
145.82
|
%
|
|
|
|
|
|
|
|
|
|
|
148.97
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Yields are presented on a tax equivalent basis using a 21% and a 35% tax rate at September 30, 2018 and 2017, respectively.
|
(2)
|
Includes loan fees of $199,000 and $117,000 for the three months ended September 30, 2018 and 2017. Includes average nonaccrual loans of approximately $124,000 and
$558,000 for the three months ended September 30, 2018 and 2017.
|
The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2018 and 2017 (dollars in thousands):
|
|
For the nine months ended September 30,
|
|
2018
|
|
|
2017
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned
or Paid
|
|
|
Average
Yield
or Cost
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
179,914
|
|
|
$
|
2,730
|
|
|
|
2.03
|
%
|
|
$
|
152,043
|
|
|
$
|
2,025
|
|
|
|
1.78
|
%
|
Tax-exempt securities (1)
|
|
|
126,787
|
|
|
|
2,627
|
|
|
|
3.55
|
|
|
|
106,481
|
|
|
|
1,658
|
|
|
|
3.29
|
|
Commercial loans (2)
|
|
|
1,002,871
|
|
|
|
33,848
|
|
|
|
4.45
|
|
|
|
952,987
|
|
|
|
29,317
|
|
|
|
4.06
|
|
Residential mortgage loans
|
|
|
234,666
|
|
|
|
6,234
|
|
|
|
3.54
|
|
|
|
217,223
|
|
|
|
5,649
|
|
|
|
3.47
|
|
Consumer loans
|
|
|
85,068
|
|
|
|
2,986
|
|
|
|
4.69
|
|
|
|
91,141
|
|
|
|
2,834
|
|
|
|
4.16
|
|
Federal Home Loan Bank stock
|
|
|
11,558
|
|
|
|
447
|
|
|
|
5.10
|
|
|
|
11,558
|
|
|
|
367
|
|
|
|
4.19
|
|
Federal funds sold and other short-term investments
|
|
|
121,750
|
|
|
|
1,670
|
|
|
|
1.81
|
|
|
|
77,710
|
|
|
|
666
|
|
|
|
1.13
|
|
Total interest earning assets (1)
|
|
|
1,762,614
|
|
|
|
50,542
|
|
|
|
3.85
|
|
|
|
1,609,143
|
|
|
|
42,516
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
31,131
|
|
|
|
|
|
|
|
|
|
|
|
28,911
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
84,552
|
|
|
|
|
|
|
|
|
|
|
|
97,371
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,878,297
|
|
|
|
|
|
|
|
|
|
|
$
|
1,735,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
401,193
|
|
|
$
|
729
|
|
|
|
0.24
|
%
|
|
$
|
333,148
|
|
|
$
|
237
|
|
|
|
0.09
|
%
|
Savings and money market accounts
|
|
|
602,421
|
|
|
|
2,273
|
|
|
|
0.51
|
|
|
|
552,903
|
|
|
|
1,094
|
|
|
|
0.27
|
|
Time deposits
|
|
|
104,585
|
|
|
|
919
|
|
|
|
1.18
|
|
|
|
82,035
|
|
|
|
440
|
|
|
|
0.71
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowed funds
|
|
|
77,906
|
|
|
|
1,056
|
|
|
|
1.79
|
|
|
|
86,945
|
|
|
|
1,053
|
|
|
|
1.60
|
|
Long-term debt
|
|
|
41,238
|
|
|
|
1,567
|
|
|
|
5.02
|
|
|
|
41,238
|
|
|
|
1,266
|
|
|
|
4.05
|
|
Total interest bearing liabilities
|
|
|
1,227,343
|
|
|
|
6,544
|
|
|
|
0.71
|
|
|
|
1,096,269
|
|
|
|
4,090
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand accounts
|
|
|
467,727
|
|
|
|
|
|
|
|
|
|
|
|
465,191
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
5,869
|
|
|
|
|
|
|
|
|
|
|
|
5,756
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
177,358
|
|
|
|
|
|
|
|
|
|
|
|
168,209
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,878,297
|
|
|
|
|
|
|
|
|
|
|
$
|
1,735,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
43,998
|
|
|
|
|
|
|
|
|
|
|
$
|
38,426
|
|
|
|
|
|
Net interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
Ratio of average interest earning assets to average interest bearing liabilities
|
|
|
143.61
|
%
|
|
|
|
|
|
|
|
|
|
|
146.78
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Yields are presented on a tax equivalent basis using a 21% and a 35% tax rate at September 30, 2018 and 2017, respectively.
|
(2)
|
Includes loan fees of $496,000 and $484,000 for the nine months ended September 30, 2018 and 2017. Includes average nonaccrual loans of approximately $249,000 and $511,000
for the nine months ended September 30, 2018 and 2017.
|
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 September 30,
2018 vs 2017
Increase (Decrease) Due to
|
|
|
For the nine months ended September 30,
2018 vs 2017
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
$
|
87
|
|
|
$
|
117
|
|
|
$
|
204
|
|
|
$
|
401
|
|
|
$
|
304
|
|
|
$
|
705
|
|
Tax-exempt securities
|
|
|
200
|
|
|
|
72
|
|
|
|
272
|
|
|
|
647
|
|
|
|
322
|
|
|
|
969
|
|
Commercial loans
|
|
|
609
|
|
|
|
1,227
|
|
|
|
1,836
|
|
|
|
1,587
|
|
|
|
2,944
|
|
|
|
4,531
|
|
Residential mortgage loans
|
|
|
165
|
|
|
|
68
|
|
|
|
233
|
|
|
|
461
|
|
|
|
124
|
|
|
|
585
|
|
Consumer loans
|
|
|
(211
|
)
|
|
|
291
|
|
|
|
80
|
|
|
|
(281
|
)
|
|
|
433
|
|
|
|
152
|
|
Federal Home Loan Bank stock
|
|
|
---
|
|
|
|
7
|
|
|
|
7
|
|
|
|
---
|
|
|
|
80
|
|
|
|
80
|
|
Federal funds sold and other short-term investments
|
|
|
170
|
|
|
|
259
|
|
|
|
429
|
|
|
|
487
|
|
|
|
517
|
|
|
|
1,004
|
|
Total interest income
|
|
|
1,020
|
|
|
|
2,041
|
|
|
|
3,061
|
|
|
|
3,302
|
|
|
|
4,724
|
|
|
|
8,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
20
|
|
|
$
|
212
|
|
|
$
|
232
|
|
|
$
|
57
|
|
|
$
|
435
|
|
|
$
|
492
|
|
Savings and money market accounts
|
|
|
39
|
|
|
|
397
|
|
|
|
436
|
|
|
|
106
|
|
|
|
1,073
|
|
|
|
1,179
|
|
Time deposits
|
|
|
51
|
|
|
|
158
|
|
|
|
209
|
|
|
|
144
|
|
|
|
335
|
|
|
|
479
|
|
Other borrowed funds
|
|
|
(32
|
)
|
|
|
82
|
|
|
|
50
|
|
|
|
(153
|
)
|
|
|
156
|
|
|
|
3
|
|
Long-term debt
|
|
|
---
|
|
|
|
110
|
|
|
|
110
|
|
|
|
---
|
|
|
|
301
|
|
|
|
301
|
|
Total interest expense
|
|
|
78
|
|
|
|
959
|
|
|
|
1,037
|
|
|
|
154
|
|
|
|
2,300
|
|
|
|
2,454
|
|
Net interest income
|
|
$
|
942
|
|
|
$
|
1,082
|
|
|
$
|
2,024
|
|
|
$
|
3,148
|
|
|
$
|
2,424
|
|
|
$
|
5,572
|
|
Provision for Loan Losses:
There was no provision for loan losses
for the three months ended September 30, 2018 compared to a negative $350,000 provision for the same period in 2017. The 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 $108,000 in the three months ended September 30, 2018 and $214,000 in the same period in 2017. At September 30, 2018, we had experienced net loan recoveries in each
of the past fifteen quarters. The provision for loan losses for the first nine months of 2018 was a negative $400,000 compared to a negative $1.4 million for the same period in 2017.
Gross loan recoveries were $138,000 for the three months ended September 30, 2018 and $269,000 for the same period in 2017. In the three months ended
September 30, 2018, we had $30,000 in charge-offs, compared to $55,000 in the same period in 2017. For the nine months ended September 30, 2018, we experienced gross loan recoveries of $759,000 compared to $1.0 million for the same period in
2017. Gross charge-offs for the nine months ended September 30, 2018 were $156,000 compared to $221,000 for the same period in 2017. 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 and nine
month periods ended September 30, 2018 was $4.5 million and $13.1 million compared to $4.3 million and $13.0 million and for the same periods in 2017. The components of noninterest income are shown in the table below (in thousands):
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Service charges and fees on deposit accounts
|
|
$
|
1,132
|
|
|
$
|
1,172
|
|
|
|
3,242
|
|
|
$
|
3,342
|
|
Net gains on mortgage loans
|
|
|
270
|
|
|
|
369
|
|
|
|
633
|
|
|
|
1,273
|
|
Trust fees
|
|
|
889
|
|
|
|
801
|
|
|
|
2,759
|
|
|
|
2,412
|
|
Gain on sales of securities
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3
|
|
ATM and debit card fees
|
|
|
1,426
|
|
|
|
1,324
|
|
|
|
4,117
|
|
|
|
3,863
|
|
Bank owned life insurance (“BOLI”) income
|
|
|
239
|
|
|
|
249
|
|
|
|
715
|
|
|
|
730
|
|
Investment services fees
|
|
|
229
|
|
|
|
239
|
|
|
|
724
|
|
|
|
705
|
|
Other income
|
|
|
314
|
|
|
|
146
|
|
|
|
908
|
|
|
|
681
|
|
Total noninterest income
|
|
$
|
4,499
|
|
|
$
|
4,300
|
|
|
$
|
13,098
|
|
|
$
|
13,009
|
|
Net gains on mortgage loans were down $99,000 in the three months ended September 30, 2018 and down $640,000 in the nine months ended September 30, 2018
compared to same periods in 2017 as a result of an overall shift in the mix from loans originated for sale to loans originated for portfolio as well as lower overall origination volume. Mortgage loans originated for sale in the three months ended
September 30, 2018 were $8.4 million, compared to $11.4 million in the same period in 2017. Mortgage loans originated for portfolio in three months ended September 30, 2018 were $16.8 million, compared to $16.2 million in the same period in 2017.
For the first nine months of 2018, mortgages originated for sale were $23.6 million, compared to $45.0 million for the same period in 2017. Mortgage loans originated for portfolio in the first nine months of 2018 were $51.7 million, compared to
$37.4 million for the first nine months of 2017.
ATM and debit card fees were up in the three months ended September 30, 2018 due to higher volume of usage by our customers. Trust fees were up for the
three and nine months ended September 30, 2018 due to success in growing the number of trust customer relationships we have and favorable investment market value changes. Other income was up in the three and nine months ended September 30, 2018
due to losses incurred on sales of bank properties in the second and third quarters of 2017.
Noninterest Expense:
Noninterest expense increased to $11.2
million for the three month period ended September 30, 2018, from $10.8 million for the same period in 2017. Noninterest expense increased to $33.9 million for the nine month period ended September 30, 2018 compared to $32.4 million for the same
period in 2017. The components of noninterest expense are shown in the table below (in thousands):
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Salaries and benefits
|
|
$
|
6,360
|
|
|
$
|
6,211
|
|
|
$
|
18,942
|
|
|
$
|
18,363
|
|
Occupancy of premises
|
|
|
939
|
|
|
|
922
|
|
|
|
2,984
|
|
|
|
2,939
|
|
Furniture and equipment
|
|
|
760
|
|
|
|
797
|
|
|
|
2,338
|
|
|
|
2,278
|
|
Legal and professional
|
|
|
188
|
|
|
|
199
|
|
|
|
606
|
|
|
|
621
|
|
Marketing and promotion
|
|
|
228
|
|
|
|
226
|
|
|
|
685
|
|
|
|
678
|
|
Data processing
|
|
|
747
|
|
|
|
655
|
|
|
|
2,239
|
|
|
|
2,068
|
|
FDIC assessment
|
|
|
127
|
|
|
|
134
|
|
|
|
391
|
|
|
|
404
|
|
Interchange and other card expense
|
|
|
361
|
|
|
|
333
|
|
|
|
1,053
|
|
|
|
970
|
|
Bond and D&O insurance
|
|
|
111
|
|
|
|
119
|
|
|
|
330
|
|
|
|
353
|
|
Net (gains) losses on repossessed and foreclosed properties
|
|
|
26
|
|
|
|
(190
|
)
|
|
|
450
|
|
|
|
(575
|
)
|
Administration and disposition of problem assets
|
|
|
82
|
|
|
|
113
|
|
|
|
202
|
|
|
|
435
|
|
Outside services
|
|
|
499
|
|
|
|
423
|
|
|
|
1,299
|
|
|
|
1,280
|
|
Other noninterest expense
|
|
|
811
|
|
|
|
814
|
|
|
|
2,413
|
|
|
|
2,620
|
|
Total noninterest expense
|
|
$
|
11,239
|
|
|
$
|
10,756
|
|
|
$
|
33,932
|
|
|
$
|
32,434
|
|
Most categories of noninterest expense were relatively flat or had reductions compared to the three months ended September 30, 2017
due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by $149,000 in the three months ended
September 30, 2018 from same period in 2017 and was up $579,000 for the first nine months of 2018. This increase is due to annual performance adjustments and inflationary increases in salaries as well as a higher level of costs associated with
employee benefits.
Data processing costs continue to increase as more customers choose to use electronic and mobile banking options. Data processing costs were up $92,000 in
the three months ended September 30, 2018 and were up $171,000 for the first nine months of 2018.
While costs associated with administration and disposition of problem assets have increased in 2018, they have decreased significantly over the past
several years and have normalized. These expenses include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense
includes survey and appraisal, property maintenance and management and other disposition and carrying costs. 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 expense increased from 2017 to 2018, primarily due to realizing net losses on sales in the first three and nine months of 2018 compared to net gains on sales in same periods in 2017. Actual
holding costs were down in 2018.
These costs are itemized in the following table (in thousands):
|
|
Three Months
Ended
September 30,
2018
|
|
|
Three Months
Ended
September 30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Legal and professional – nonperforming assets
|
|
$
|
29
|
|
|
$
|
39
|
|
|
$
|
51
|
|
|
$
|
74
|
|
Repossessed and foreclosed property administration
|
|
|
53
|
|
|
|
74
|
|
|
|
152
|
|
|
|
361
|
|
Net (gains) losses on repossessed and foreclosed properties
|
|
|
26
|
|
|
|
(190
|
)
|
|
|
449
|
|
|
|
(575
|
)
|
Total
|
|
$
|
108
|
|
|
$
|
(77
|
)
|
|
$
|
652
|
|
|
$
|
(140
|
)
|
As the level of problem loans and assets have declined, the costs associated with these nonperforming assets have decreased significantly over the past
several years. Other real estate owned decreased from $6.7 million at September 30, 2017 to $3.5 million at September 30, 2018. During the second quarter of 2017, we sold our largest individual other real estate owned property at that time (carry
value of $3.4 million) for a net gain of $68,000. This property was responsible for a significant portion of our nonperforming asset expense, including maintenance, property taxes and utility costs.
Net gains/losses on repossessed assets and foreclosed properties for the three month period ended September 30, 2018 swung unfavorably by $216,000 compared
to the same period in 2017. For the first nine months of 2018, net gains/losses swung unfavorably by $1.0 million compared to 2017. These changes were primarily due to net gains/losses on sales of other real estate properties in these periods.
In the three month period ended September 30, 2018, net realized losses of $26,000, compared to net realized gains of $190,000 for the same period in 2017. For the nine month period ended September 30, 2018, net realized losses totaled $158,000,
compared to net realized gains of $660,000 for the same period in 2017.
Federal Income Tax Expense:
We
recorded $1.6 million and $4.2 million in federal income tax expense for the three and nine month periods ended September 30, 2018 compared to $2.2 million and $6.3 million in the same
periods in 2017. Our effective tax rate for the three and nine month periods ended September 30, 2018 was 18.64% and 17.94%, compared to 30.67% and 30.73%, respectively, for the same periods in 2017. Federal income tax expense and related
effective tax rates were lower in the 2018 periods due to the effect of tax reform legislation enacted at the end of 2017.
FINANCIAL CONDITION
Total assets were $1.92 billion at September 30, 2018, an increase of $29.0 million from $1.89 billion at December 31, 2017. This change reflected
increases of $21.7 million in cash and cash equivalents and $24.4 million in our loan portfolio, offset by decreases of $14.1 million in securities held to maturity and $2.3 million in other real estate owned. Total deposits increased by $38.7
million and other borrowed funds decreased by $22.1 million at September 30, 2018 compared to December 31, 2017.
Cash and Cash Equivalents:
Our cash and cash equivalents, which
include federal funds sold and short-term investments, were $183.2 million at September 30, 2018 compared to $161.5 million at December 31, 2017. The increase in these balances related primarily to the increase in total deposits.
Securities:
Debt securities available for sale were $218.6
million at September 30, 2018 compared to $220.7 million at December 31, 2017. The balance at September 30, 2018 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to
maturity portfolio decreased from $85.8 million at December 31, 2017 to $71.7 million at September 30, 2018 Our held to maturity portfolio is comprised of state, municipal and privately placed commercial bonds.
Portfolio Loans and Asset Quality:
Total portfolio loans increased
by $24.4 million in the first nine months of 2018 and were $1.34 billion at September 30, 2018 compared to $1.32 billion at December 31, 2017. During the first nine months of 2018, our commercial portfolio increased by $13.5 million, while our
consumer portfolio decreased by $1.8 million and our residential mortgage portfolio increased by $12.7 million.
Mortgage loans originated for portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less or have
adjustable rates. Mortgage loans originated for portfolio in the first nine months of 2018 increased $14.3 million compared to the same period in 2017, from $37.4 million in the first nine months of 2017 to $51.7 million in the same period in
2018. Instead of selecting 30-year fixed rate mortgages, many of our customers selected adjustable rate mortgages (“ARMs”) as the general rise in interest rates caused ARM rates to be more attractive than fixed rates.
The volume of residential mortgage loans originated for sale in the first nine months of 2018 decreased $21.4 million compared to the same period in 2017
due to a higher interest rate environment. Residential mortgage loans originated for sale were $23.6 million in the first nine months of 2018 compared to $45.0 million in the first nine months of 2017.
The following table shows our loan origination activity for loans to be held in portfolio during the first nine months of 2018 and 2017, broken out by loan
type and also shows average originated loan size (dollars in thousands):
|
|
Nine months ended September 30, 2018
|
|
|
Nine months ended September 30, 2017
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
|
Portfolio
Originations
|
|
|
Percent of
Total
Originations
|
|
|
Average
Loan Size
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
14,933
|
|
|
|
4.1
|
%
|
|
$
|
785
|
|
|
$
|
7,477
|
|
|
|
2.2
|
%
|
|
$
|
831
|
|
Unsecured to residential developers
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Vacant and unimproved
|
|
|
11,124
|
|
|
|
3.0
|
|
|
|
695
|
|
|
|
6,284
|
|
|
|
1.9
|
|
|
|
524
|
|
Commercial development
|
|
|
350
|
|
|
|
0.1
|
|
|
|
175
|
|
|
|
125
|
|
|
|
---
|
|
|
|
125
|
|
Residential improved
|
|
|
59,463
|
|
|
|
16.2
|
|
|
|
457
|
|
|
|
40,281
|
|
|
|
12.1
|
|
|
|
247
|
|
Commercial improved
|
|
|
28,772
|
|
|
|
7.8
|
|
|
|
587
|
|
|
|
66,245
|
|
|
|
19.8
|
|
|
|
1,142
|
|
Manufacturing and industrial
|
|
|
38,827
|
|
|
|
10.6
|
|
|
|
1,252
|
|
|
|
24,061
|
|
|
|
7.2
|
|
|
|
776
|
|
Total commercial real estate
|
|
|
153,469
|
|
|
|
41.8
|
|
|
|
621
|
|
|
|
144,473
|
|
|
|
43.2
|
|
|
|
527
|
|
Commercial and industrial
|
|
|
126,239
|
|
|
|
34.3
|
|
|
|
682
|
|
|
|
116,192
|
|
|
|
34.8
|
|
|
|
692
|
|
Total commercial
|
|
|
279,708
|
|
|
|
76.1
|
|
|
|
647
|
|
|
|
260,665
|
|
|
|
78.0
|
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
51,697
|
|
|
|
14.1
|
|
|
|
253
|
|
|
|
37,439
|
|
|
|
11.2
|
|
|
|
234
|
|
Unsecured
|
|
|
32
|
|
|
|
---
|
|
|
|
16
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Home equity
|
|
|
33,195
|
|
|
|
9.0
|
|
|
|
88
|
|
|
|
34,070
|
|
|
|
10.2
|
|
|
|
85
|
|
Other secured
|
|
|
2,744
|
|
|
|
0.8
|
|
|
|
24
|
|
|
|
1,850
|
|
|
|
0.6
|
|
|
|
16
|
|
Total consumer
|
|
|
87,668
|
|
|
|
23.9
|
|
|
|
126
|
|
|
|
73,359
|
|
|
|
22.0
|
|
|
|
108
|
|
Total loans
|
|
$
|
367,376
|
|
|
|
100.0
|
%
|
|
|
325
|
|
|
$
|
334,024
|
|
|
|
100.0
|
%
|
|
|
298
|
|
The following table shows a breakout of our commercial loan activity during the first nine months of 2018 and 2017 (dollars in thousands):
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
Commercial loans originated
|
|
$
|
279,707
|
|
|
$
|
260,665
|
|
Repayments of commercial loans
|
|
|
(240,839
|
)
|
|
|
(224,420
|
)
|
Change in undistributed - available credit
|
|
|
(25,368
|
)
|
|
|
(54,368
|
)
|
Net increase/(decrease) in total commercial loans
|
|
$
|
13,500
|
|
|
$
|
(18,123
|
)
|
Overall, the commercial loan portfolio increased $13.5 million in the first nine months of 2018. Our commercial and industrial portfolio increased by $2.5
million and our commercial real estate loans increased by $11.0 million. Our overall production of commercial loans increased by $19.0 million from $260.7 million in the first nine months of 2017 compared to $279.7 million in the same period of
2018. Considering our pipeline of commercial credits at September 30, 2018, we expect to achieve measured, high quality loan portfolio growth throughout the remainder of 2018 consistent with growth experienced in the latter part of the previous
two years.
Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately 76.0% and 76.3% of the total loan portfolio
at September 30, 2018 and December 31, 2017. Residential mortgage and consumer loans comprised approximately 24.1% and 23.7% of total loans at September 30, 2018 and December 31, 2017.
A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
|
Balance
|
|
|
Percent of
Total Loans
|
|
Commercial real estate: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
$
|
14,766
|
|
|
|
1.1
|
%
|
|
$
|
11,888
|
|
|
|
0.9
|
%
|
Unsecured to residential developers
|
|
|
---
|
|
|
|
---
|
|
|
|
2,332
|
|
|
|
0.2
|
|
Vacant and unimproved
|
|
|
38,334
|
|
|
|
2.9
|
|
|
|
39,752
|
|
|
|
3.1
|
|
Commercial development
|
|
|
722
|
|
|
|
0.1
|
|
|
|
1,103
|
|
|
|
---
|
|
Residential improved
|
|
|
92,690
|
|
|
|
6.9
|
|
|
|
90,467
|
|
|
|
6.9
|
|
Commercial improved
|
|
|
294,275
|
|
|
|
21.9
|
|
|
|
298,714
|
|
|
|
22.6
|
|
Manufacturing and industrial
|
|
|
112,153
|
|
|
|
8.4
|
|
|
|
97,679
|
|
|
|
7.4
|
|
Total commercial real estate
|
|
|
552,940
|
|
|
|
41.2
|
|
|
|
541,935
|
|
|
|
41.1
|
|
Commercial and industrial
|
|
|
467,703
|
|
|
|
34.8
|
|
|
|
465,208
|
|
|
|
35.2
|
|
Total commercial
|
|
|
1,020,643
|
|
|
|
76.0
|
|
|
|
1,007,143
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
237,146
|
|
|
|
17.6
|
|
|
|
224,452
|
|
|
|
17.0
|
|
Unsecured
|
|
|
145
|
|
|
|
---
|
|
|
|
226
|
|
|
|
---
|
|
Home equity
|
|
|
79,860
|
|
|
|
5.9
|
|
|
|
82,157
|
|
|
|
6.2
|
|
Other secured
|
|
|
6,889
|
|
|
|
0.5
|
|
|
|
6,331
|
|
|
|
0.5
|
|
Total consumer
|
|
|
324,040
|
|
|
|
24.1
|
|
|
|
313,166
|
|
|
|
23.7
|
|
Total loans
|
|
$
|
1,344,683
|
|
|
|
100.0
|
%
|
|
$
|
1,320,309
|
|
|
|
100.0
|
%
|
(1)
|
Includes both owner occupied and non-owner occupied commercial real estate.
|
Commercial real estate loans accounted for 41.2% and 41.1 of the total loan portfolio at September 30, 2018 and December 31, 2017 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 17.6% of
portfolio loans at September 30, 2018 and 17.0% at December 31, 2017. 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. We typically hold for portfolio the originations of adjustable rate mortgages while selling into the secondary market the originations of fixed rate mortgages.
The volume of residential mortgage loans originated for sale during the first nine months of 2018 decreased from the first nine months of 2017 as a result
of interest rate conditions. We are also experiencing a shift in production to financing 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 $1.8 million to $86.9 million at September 30, 2018 from $88.7 million at December 31, 2017, due primarily to a decrease in home equity loans. Consumer loans comprised 6.5% of our portfolio loans at September 30, 2018 and 6.7% at
December 31, 2017.
Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan
originators and credit administration. An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets quarterly to manage our internal watch list and proactively manage high risk loans.
When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any interest
previously accrued but not collected is reversed and charged against current earnings.
Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At September 30, 2018, nonperforming assets totaled
$3.6 million compared to $6.2 million at December 31, 2017. Additions to other real estate owned in the first nine months of 2018 were $293,000, compared to $60,000 in the first nine months of 2017. At September 30, 2018, there were no loans in
the redemption period following foreclosure, so we expect there to be few, if any, additions to other real estate owned in 2018. Proceeds from sales of foreclosed properties were $2.1 million in the first nine months of 2018, resulting in net
realized loss on sales of $158,000. Proceeds from sales of foreclosed properties were $6.2 million in the first nine months of 2017 resulting in net realized gains on sales of $660,000. Based upon purchase agreements in place at September 30,
2018 and the sale of our largest individual property in the second quarter of 2017, we expect the level of sales of foreclosed properties to be lower in 2018 than experienced in 2017.
Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of September 30, 2018, nonperforming
loans were negligible and totaled $123,000, or 0.01% of total portfolio loans, compared to $395,000, or 0.03% of total portfolio loans, at December 31, 2017.
Nonperforming loans at September 30, 2018 consisted of $121,000 of commercial real estate loans and $2,000 of consumer and residential mortgage loans.
Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $3.5 million at September 30, 2018 and $5.8
million at December 31, 2017. Of this balance at September 30, 2018, there were 11 commercial real estate properties totaling approximately $3.4 million. The remaining balance was comprised of 2 residential properties totaling approximately
$52,000. 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 September 30, 2018, our foreclosed asset portfolio had a weighted average age held in portfolio of 6.80 years. Below is a breakout of our foreclosed
asset portfolio at September 30, 2018 and December 31, 2017 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):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
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
|
|
$
|
---
|
|
|
|
---
|
%
|
|
|
---
|
%
|
|
$
|
60
|
|
|
|
---
|
%
|
|
|
24.3
|
%
|
Residential Lot
|
|
|
52
|
|
|
|
50.1
|
|
|
|
63.4
|
|
|
|
109
|
|
|
|
46.9
|
|
|
|
73.1
|
|
Multi-Family
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Vacant Land
|
|
|
465
|
|
|
|
31.0
|
|
|
|
41.7
|
|
|
|
1,345
|
|
|
|
56.1
|
|
|
|
60.5
|
|
Residential Development
|
|
|
815
|
|
|
|
38.6
|
|
|
|
82.3
|
|
|
|
2,167
|
|
|
|
30.0
|
|
|
|
71.8
|
|
Commercial Office
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial Industrial
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial Improved
|
|
|
2,133
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,086
|
|
|
|
6.7
|
|
|
|
8.0
|
|
|
|
$
|
3,465
|
|
|
|
18.2
|
|
|
|
54.9
|
|
|
$
|
5,767
|
|
|
|
33.4
|
|
|
|
58.3
|
|
The following table shows the composition and amount of our nonperforming assets (dollars in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Nonaccrual loans
|
|
$
|
123
|
|
|
$
|
395
|
|
Loans 90 days or more delinquent and still accruing
|
|
|
---
|
|
|
|
---
|
|
Total nonperforming loans (NPLs)
|
|
|
123
|
|
|
|
395
|
|
Foreclosed assets
|
|
|
3,465
|
|
|
|
5,767
|
|
Repossessed assets
|
|
|
---
|
|
|
|
11
|
|
Total nonperforming assets (NPAs)
|
|
$
|
3,588
|
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
|
NPLs to total loans
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
NPAs to total assets
|
|
|
0.19
|
%
|
|
|
0.33
|
%
|
The following table shows the composition and amount of our troubled debt restructurings (TDRs) at September 30, 2018 and December 31, 2017 (dollars in
thousands):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
Performing TDRs
|
|
$
|
9,742
|
|
|
$
|
6,713
|
|
|
$
|
16,455
|
|
|
$
|
13,420
|
|
|
$
|
8,344
|
|
|
$
|
21,764
|
|
Nonperforming TDRs (1)
|
|
|
121
|
|
|
|
---
|
|
|
|
121
|
|
|
|
315
|
|
|
|
1
|
|
|
|
316
|
|
Total TDRs
|
|
$
|
9,863
|
|
|
$
|
6,713
|
|
|
$
|
16,576
|
|
|
$
|
13,735
|
|
|
$
|
8,345
|
|
|
$
|
22,080
|
|
(1)
|
Included in nonperforming asset table above
|
We had a total of $16.6 million and $22.1 million of loans whose terms have been modified in TDRs as of September 30, 2018 and December 31, 2017,
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 that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally,
if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have
cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status. In situations where there is a subsequent modification or
renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed. Total TDRs
decreased by $5.5 million from December 31, 2017 to September 30, 2018. The decrease was due to paydowns and payoffs of TDRs in the first nine months of 2018. There were 133 loans identified as TDR at September 30, 2018 compared to 151 loans at
December 31, 2017.
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
September 30, 2018 was $16.8 million, an increase of $203,000 from $16.6 million at December 31, 2017. The balance of the allowance for loan losses represented 1.25% of total portfolio loans at September 30, 2018 and 1.26% at December 31, 2017.
The allowance for loan losses to nonperforming loan coverage ratio increased from 4,203% at December 31, 2017 to 13,661% at September 30, 2018.
The table below shows the changes in certain credit metrics over the past five quarters (dollars in millions):
|
|
Quarter Ended
September 30,
2018
|
|
|
Quarter Ended
June 30,
2018
|
|
|
Quarter Ended
March 31,
2018
|
|
|
Quarter Ended
December 31,
2017
|
|
|
Quarter Ended
September 30,
2017
|
|
Commercial loans
|
|
$
|
1,020.6
|
|
|
$
|
1,005.5
|
|
|
$
|
1,007.0
|
|
|
$
|
1,007.1
|
|
|
$
|
949.2
|
|
Nonperforming loans
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Other real estate owned and repo assets
|
|
|
3.5
|
|
|
|
3.9
|
|
|
|
5.2
|
|
|
|
5.8
|
|
|
|
6.7
|
|
Total nonperforming assets
|
|
|
3.6
|
|
|
|
4.0
|
|
|
|
5.5
|
|
|
|
6.2
|
|
|
|
7.2
|
|
Net charge-offs (recoveries)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Total delinquencies
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
0.8
|
|
As discussed earlier, we have had net loan recoveries in each of the last fifteen quarters. Our total delinquencies have continued to be negligible and
were $0.5 million at September 30, 2018 and $1.0 million at December 31, 2017. Our delinquency percentage at September 30, 2018 was just 0.04%.
These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses increased
$203,000 in the first nine months of 2018. We recorded a negative provision for loan losses of $400,000 for the nine months ended September 30, 2018 compared to a negative $1.4 million for the same period of 2017. Net loan recoveries were
$603,000 for the nine months ended September 30, 2018, compared to net recoveries of $822,000 for the same period in 2017. The ratio of net recoveries to average loans was -0.06% on an annualized basis for the first nine months of 2018, compared to
-0.09% for the first nine months of 2017.
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. We believe we have seen stabilization and improvement in economic conditions and real estate markets.
Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the loan
portfolio. Our methodology for measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for commercial
loans not considered impaired based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.
Overall, impaired loans declined by $5.5 million to $16.6 million at September 30, 2018 compared to $22.1 million at December 31, 2017. The specific
allowance for impaired loans increased $62,000 to $1.3 million at September 30, 2018. The specific allowance for impaired loans represented 7.7% of total impaired loans at September 30, 2018 and 5.5% at December 31, 2017.
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 $12.3 million at September 30, 2018 and $12.4 million at December 31, 2017. The qualitative component of our allowance allocated to commercial
loans was $12.3 million at September 30, 2018 down from $12.6 million at December 31, 2017.
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 $3.2 million at September 30, 2018 and $3.0 million at December 31, 2017.
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 $45.6
million at September 30, 2018, down $998,000 from $46.6 million at December 31, 2017 as a result of depreciation expense exceeding acquisition cost during that period.
Deposits and Other Borrowings:
Total deposits increased $38.7
million to $1.62 billion at September 30, 2018, as compared to $1.58 billion at December 31, 2017. Non-interest checking account balances increased $10.1 million during the first nine months of 2018. Interest bearing demand account balances
decreased $323,000 and savings and money market account balances increased $11.1 million in the first nine months of 2018. Certificates of deposits increased by $18.4 million in the first nine months of 2018. 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 31% of total deposits at September 30, 2018 and 31% at December 31, 2017. Because of the generally low rates
paid on interest bearing account alternatives, many of our business customers have chosen 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 September 30, 2018 and 63% at December 31, 2017. Time accounts as a percentage of total deposits were 7% at September 30, 2018 and 6% December 31, 2017. We are experiencing growth in time deposits after several
years of decline due to the low interest rate environment. As deposit rates have begun to rise, customers are finding time deposits to be more attractive and this has resulted in some shift from non-maturing deposit types. Most of the growth is
for maturity periods less than 18 months.
Borrowed funds totaled $111.2 million at September 30, 2018, including $70.0 million of Federal Home Loan Bank (“FHLB”) advances and $41.2 million in
long-term debt associated with trust preferred securities. Borrowed funds totaled $133.4 million at December 31, 2017, including $92.1 million of FHLB advances and $41.2 million in long-term debt associated with trust preferred securities.
Borrowed funds decreased by $22.1 million in the first nine months of 2018 primarily due to the scheduled maturities of $42.1 million in FHLB advances during the first nine months of 2018, partially offset by the addition of a $5.0 million advance
taken in May 2018 and two advances totaling $15.0 million taken in the third quarter of 2018.
CAPITAL RESOURCES
Total shareholders' equity of $184.0 million at September 30, 2018 increased $11.0 million from $173.0 million at December 31, 2017. The increase was
primarily a result of net income of $19.3 million earned in the first nine months of 2018 partially offset by a decrease of $3.2 million in accumulated other comprehensive income and the payment of $6.1 million in cash dividends to shareholders.
The Bank was categorized as “well capitalized” at September 30, 2018.
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, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements
will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of
risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises 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% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a
minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. We expect that the capital ratios for the Company and the Bank under Basel III will continue 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
|
September 30,
2018
|
|
|
June 30,
2018
|
|
|
March 31,
2018
|
|
|
Dec 31,
2017
|
|
|
Sept 30,
2017
|
|
Total capital to risk weighted assets
|
|
|
15.8
|
%
|
|
|
15.5
|
%
|
|
|
15.4
|
%
|
|
|
15.0
|
%
|
|
|
15.5
|
%
|
Common Equity Tier 1 to risk weighted assets
|
|
|
12.1
|
|
|
|
11.8
|
|
|
|
11.7
|
|
|
|
11.3
|
|
|
|
11.7
|
|
Tier 1 capital to risk weighted assets
|
|
|
14.7
|
|
|
|
14.4
|
|
|
|
14.3
|
|
|
|
13.9
|
|
|
|
14.4
|
|
Tier 1 capital to average assets
|
|
|
11.9
|
|
|
|
11.9
|
|
|
|
11.8
|
|
|
|
11.9
|
|
|
|
12.0
|
|
Approximately $40.0 million of trust preferred securities outstanding at September 30, 2018 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 September 30, 2018, the Bank held $152.3 million of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks of approximately $324.5 million as of September
30, 2018.
In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity
management. The table below summarizes our significant contractual obligations at September 30, 2018 (dollars in thousands):
|
Maturing in
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Long term debt
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
41,238
|
|
Time deposit maturities
|
|
|
68,412
|
|
|
|
38,746
|
|
|
|
2,291
|
|
|
|
---
|
|
Other borrowed funds
|
|
|
20,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
30,000
|
|
Operating lease obligations
|
|
|
247
|
|
|
|
191
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
88,659
|
|
|
$
|
48,937
|
|
|
$
|
12,291
|
|
|
$
|
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 September 30, 2018, we had a total of $489.5 million in unused lines of credit, $101.7 million in unfunded
loan commitments and $15.3 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
2017, the Bank paid dividends to the Company totaling $7.9 million and the Company paid dividends to its shareholders totaling $6.1 million. In the first nine months of 2018, the Bank paid dividends to the Company totaling $8.0 million and the
Company paid dividends to its shareholders totaling $6.0 million. The Company retained the remaining balance in each period for general corporate purposes. At September 30, 2018, the Bank had a retained earnings balance of $60.3 million.
During 2017, the Company received payments from the Bank totaling $5.5 million, representing the Bank’s intercompany tax liability for the 2017 tax year,
in accordance with the Company’s tax allocation agreement. In the same period, the Company made tax payments totaling $4.7 million. In the first nine months of 2018, the Company received tax payments from the Bank totaling $3.9 million and made
federal income tax payments totaling $3.5 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 September 30, 2018 was $6.8 million. The Company believes that it has sufficient liquidity to meet its cash flow
obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and
assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and future results could differ. The allowance for loan losses, other real estate owned valuation, loss
contingencies, revenue recognition and income taxes are deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.
Our methodology for determining the allowance for loan losses and the related provision for loan losses is described above in the "Allowance for Loan
Losses" discussion. This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan. Unanticipated changes in these factors could significantly change the level of the allowance
for loan losses and the related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan losses, there can be no assurance that our analysis has
properly identified all of the probable losses in our loan portfolio.
As a result, we could record future provisions for loan losses that may be significantly different than the
levels that we recorded in the first nine months of 2018.
Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell
when acquired, establishing a new cost basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense.
Estimating the initial and ongoing fair value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.
Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. This,
too, is an accounting area that involves significant judgment. Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the
status of such contingencies could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.
Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms. Most of our
noninterest revenue comes from services that are transaction based and such revenue is recognized as the related service is provided.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the
recognition of revenues and expenses for financial reporting and tax purposes. At September 30, 2018, we had gross deferred tax assets of $5.4 million, gross deferred tax liabilities of $1.4 million resulting in a net deferred tax asset of $4.0
million.
Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all
available evidence using a "more likely than not" standard. Each reporting period we consider all reasonably available positive and negative evidence and determine whether it is “more likely than not” that we would be able to realize our
deferred tax assets
. With the positive results in the first nine months of 2018, we concluded at September 30, 2018 that no valuation allowance on our net deferred tax asset was required.
Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.