MACKINAC FINANCIAL CORPORATION Forward Looking Statements/Risk Factors
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of the Corporation, are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. The Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements include, but are not limited to: RISK FACTORS
Risks Related to our Lending and Credit Activities
The outbreak of the COVID-19 pandemic, including the severity, magnitude,
? duration and businesses' and governments' responses thereto, may have a
negative impact on the Corportion's operations and personnel, as well as on
activity and demand across the customers it serves.
Our business may be adversely affected by conditions in the financial markets
? and economic conditions generally, as our borrowers' ability to repay loans and
the value of the collateral securing our loans decline.
Weakness in the markets for residential or commercial real estate, including
? the secondary residential mortgage loan markets, could reduce our net income
and profitability.
As a community banking organization, the Corporation's success depends upon
? local and regional economic conditions and the Corporation has different
lending risks than larger banks.
We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is estimated based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments. We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition.
? Our allowance for loan losses may be insufficient.
Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses.
Risks Related to Our Operations
? We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. There are many factors which influence interest rates that are beyond our control, including but not limited to general economic conditions and governmental policy, in particular, the
policies of the FRB.
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? Changes in our accounting policies or in accounting standards could materially
affect how we report our financial results and condition.
? We may not realize the expected benefits of our acquisitions of First Federal
of
? Our controls and procedures may fail or be circumvented.
? Impairment of deferred income tax assets could require charges to earnings,
which could result in an adverse impact on our results of operations. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some allowance requires management to evaluate all available evidence, both negative and positive. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carry back and carry forward periods is available under the tax law, including the use of tax planning strategies. When negative evidence (e.g. cumulative losses, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary. AtMarch 31, 2021 , net deferred tax assets were approximately$2.492 million . If a valuation allowance becomes necessary with respect to such balance, it could have a material adverse effect on our business, results of operations and financial condition.
? Our information systems may experience an interruption or breach in security.
Risks Related to Legal and Regulatory Compliance
? We operate in a highly regulated environment, which could increase our cost
structure or have other negative impacts on our operations. Strategic Risks
? Maintaining or increasing our market share may depend on lowering prices and
market acceptance of new products and services.
? Future growth or operating results may require us to raise additional capital
but that capital may not be available. Reputation Risks
Unauthorized disclosure of sensitive or confidential client or customer
? information, whether through a breach of our computer system or otherwise,
could severely harm our business. Liquidity Risks
? We could experience an unexpected inability to obtain needed liquidity.
The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.
Risks Related to an Investment in Our Common Stock
? Limited trading activity for shares of our common stock may contribute to price
volatility.
? Our securities are not an insured deposit.
? You may not receive dividends on your investment in common stock.
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Our ability to pay dividends is dependent upon our receipt of dividends from the
Bank, which is subject to regulatory restrictions. Such restrictions, which
govern state-chartered banks, generally limit the payment of dividends on bank
stock to the bank's undivided profits after all payments of all necessary
expenses, provided that the bank's surplus equals or exceeds its capital.
These risks and uncertainties should be considered in evaluating forward-looking
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission . All forward-looking statements contained in this report
are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
The following discussion covers results of operations, asset quality, financial
position, liquidity, interest rate sensitivity, and capital resources for the
periods indicated. The information included in this discussion is intended to
assist readers in their analysis of, and should be read in conjunction with, the
consolidated financial statements, the related notes, and other supplemental
information presented elsewhere in this report. It should be noted that there
may be non-GAAP disclosures presented within this discussion to further assist
readers in their analysis of the financial condition of the Corporation. This
discussion should also be read in conjunction with the consolidated financial
statements and footnotes contained in the Corporation's Annual Report and
Form 10-K for the year-ended December 31, 2020 . Throughout this discussion and
elsewhere in this report, the term "Bank" refers to mBank, the principal banking
subsidiary of the Corporation.
FINANCIAL OVERVIEW
The Corporation recorded first quarter 2021 net income of $3.880 million , or
$.37 per share, compared to net income of $3.051 million , or $.28 per share, for
the first quarter of 2020.
Weighted average shares outstanding for the three month period in 2021 totaled 10,522,899, compared to 10,717,967 shares in the same period of 2020.
The net interest income and net interest margin for the first quarter of 2021 was$13.778 million , or 4.52%, compared to$13.397 million , or 4.60%, for the first quarter of 2020. Net interest income in the first quarter of 2021 was positively impacted by the recognition of$2.152 million of fees generated by participation in the PPP loan program. Total assets of the Corporation atMarch 31, 2021 were$1.508 billion , up by$6.518 million , or .43%, from the$1.502 billion in total assets reported at year-end 2020. A large portion of this increase is a result of participation in the Paycheck Protection Program, of which we have current loan balances of$109.733 million . As of the end of the first quarter of 2021, the Corporation had experienced no material adverse systemic issues or material deterioration in its loan portfolio prior to the COVID-19 pandemic. At the onset of COVID-19, the Corporation began to actively work to identify potential heightened industry and consumer exposure within the portfolio based on its footprint. The Corporation does expect that COVID-19 will unavoidably impact many of its customer's businesses and will be prepared to assist these customers with appropriate relief using the regulatory guidance provided, particularly for industries experiencing negative environmental factors and risk trends. The Corporation will continue to refine these measures and continually assess its financial reporting and loan loss reserves as the Corporation and its customers work through the pandemic crisis in the upcoming quarters. FINANCIAL CONDITION Cash and Cash Equivalents
Cash and cash equivalents increased$24.515 million during the first three months of 2021, compared to 2020 year end. See further discussion of the change in cash and cash equivalents in the Liquidity section of this Quarterly Report on Form 10-Q. 32 Table of ContentsInvestment Securities Securities available for sale decreased$2.422 million fromDecember 31, 2020 toMarch 31, 2021 , with the balance onMarch 31, 2021 totaling$109.414 million . Investment securities are increased or decreased as appropriate as a result of managing interest rate risk and liquidity. As ofMarch 31, 2021 , investment securities with an estimated fair value of$23.172 million were pledged against borrowings at the FHLB and certain customer relationships. Loans
Through the first three months of 2021, loan balances decreased by$13.836 million fromDecember 31, 2020 balances of$1.078 billion . During the first three months of 2021, the Bank had total loan production of$79.837 million , exclusive of PPP loans, which included$35.131 million of secondary market loan production. This loan production, however, was partially offset by loan amortization and payoffs. When including the PPP loans, total production was$133.564 million , which includes$53.727 million of PPP loans. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with a diligent loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue to pursue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing. The Corporation is highly competitive in structuring loans to meet borrowing needs, while maintaining strong underwriting requirements.
Following is a summary of the loan portfolio at
March 31 , Percent of
2021 Total 2020 Total
Commercial real estate $ 496,257 46.65% $ 498,450 46.25%
Commercial, financial, and agricultural 273,087 25.67 273,759 25.40
Commercial construction 49,240 4.63 47,698 4.43
One to four family residential real estate 214,034 20.12 227,044 21.07
Consumer 18,392 1.73 18,980 1.76
Consumer construction 12,746 1.20
11,661 1.08
Total loans $ 1,063,756 100.00% $ 1,077,592 100.00%
Following is a table showing the significant industry types in the commercial
loan portfolio as of March 31, 2021 and December 31, 2020 (dollars in
thousands).
March 31, 2021 December 31, 2020
Outstanding Percent of Percent of Outstanding Percent of Percent of
Balance Loans Capital Balance Loans Capital
Real estate - operators of nonresidential buildings 137,356 16.78% 80.71% 138,992 16.95% 82.80% Hospitality and tourism
105,077 12.84 61.75 100,237 12.23 59.71 Lessors of residential buildings
51,288 6.27 30.14 52,035 6.35 31.00
Gasoline stations and convenience stores 27,562 3.37 16.20 29,046 3.54 17.30 Logging 16,756 2.05 9.85 18,651 2.27 11.11 Commercial construction 49,240 6.02 28.93 47,698 5.82 28.41 Other 431,305 52.67 253.45 433,248 52.84 258.09 Total Commercial Loans$ 818,584 100.00%$ 819,907 100.00% Management recognizes that additional risks presented by concentration in certain segments of the portfolio. Management does not believe that its current portfolio composition has increased such risk related to any specific industry concentration as ofMarch 31, 2021 . The current concentration of commercial real estate-related loans represents a broad customer base composed of a high percentage of owner-occupied developments. The company will slow, and has slowed, growth and origination of certain industry concentrations where internal limits have been reached. Our residential real estate portfolio predominantly includes one to four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for 33
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qualifying customers. As of
Due to the seasonal nature of many of the Corporation's commercial loan
customers, our loan payment terms provide flexibility by structuring payments to
coincide with our customers' business cycles. The lending staff evaluates the
collectability of past due loans based on documented collateral values and
payment history. The Corporation discontinues the accrual of interest on loans
when, in the opinion of management, there is an indication that the borrower may
be unable to meet the payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed. Loans are returned to accrual status when
all principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Credit Quality
The table below shows period end balances of nonperforming assets (dollars in
thousands):
March 31, December 31,
2021 2020
Nonperforming Assets:
Nonaccrual loans $ 5,024 $ 5,458
Loans past due 90 days or more - -
Restructured loans on nonaccrual - -
Total nonperforming loans 5,024 5,458
Other real estate owned 1,692 1,752
Total nonperforming assets $ 6,716 $ 7,210
Nonperforming loans as a % of loans .47% .51%
Nonperforming assets as a % of assets .45% .48%
Reserve for Loan Losses:
At period end $ 5,842 $ 5,816
As a % of outstanding loans .55% .54%
As a % of nonperforming loans 116.28% 106.56%
As a % of nonaccrual loans 116.28% 106.56%
Texas Ratio 4.41% 4.82%
The following ratios provide additional information relative to the Corporation's credit quality (dollars in thousands):
At Period End
March 31, December 31,
2021 2020
Total loans, at period end $ 1,063,756 1,077,592
Average loans for the period $ 1,078,022 $ 1,117,132
For the Period Ended
Three Months Twelve Months
Ended Ended
March 31, December 31,
2021 2020
Net charge-offs during the period $ 24
492
Net charge-offs to average loans, annualized .01%
.04%
Management seeks to address market issues, if any, impacting its loan customer
base. In conjunction with the Corporation's senior lending staff and bank
regulatory examinations, management reviews the Corporation's loans, related
collateral evaluations, and the overall lending process. The Corporation also
utilizes an outside loan consultant to perform a review of the loan portfolio.
The opinion of this consultant upon completion of the 2020 independent review
provided findings similar to management's findings with respect to credit
quality.
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During the first three months of 2021, the Corporation recorded a provision for loan losses of$50,000 . The Corporation is not yet subject to the requirements of CECL and management will actively refine the provision and loan reserves as client impact and broader economic data from the pandemic become more clear in the second quarter and beyond. COVID-19 loan modifications resided at approximately$5.6 million , or .59% of total loans with no commercial loans remaining in total payment deferral atMarch 31, 2021 . This is compared to peak leves of$201 million in the second quarter of 2020. As ofMarch 31, 2021 , the allowance for loan losses represented .55% of total loans. The total coverage ratio (equivalent to ALLL plus remaining purchase accounting credit marks to total loans less PPP balances) is .95%. AtMarch 31, 2021 , the allowance included specific reserves in the amount of$.871 million , as compared to specific reserves of$1.155 million atDecember 31, 2020 . In management's opinion, the allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio. Purchased impaired credits do not have an effect on the allowance for loan losses, unless they experience further deterioration subsequent to acquisition, in accordance with ASC 310-30. As part of the process of resolving problem credits, the Corporation may acquire ownership of collateral which secured such credits. The Corporation carries this collateral in other real estate on the balance sheet.
The following table represents the activity in other real estate for the periods indicated (dollars in thousands):
Three Months Year Ended
Ended
March 31, December 31, 2020
2021
Balance at beginning of period $ 1,752 $ 2,194
Other real estate transferred from loans due to foreclosure 448 874
Proceeds from sale of other real estate (560) (1,338)
Writedowns on other real estate held for sale - (65)
Gain on other real estate held for sale 52 87
Balance at end of period $ 1,692 $ 1,752
During the first three months of 2021, the Corporation received real estate in lieu of loan payments of$.448 million . In determining the carrying value of other real estate held for sale, the Corporation generally starts with a third party appraisal of the underlying collateral and then deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management periodically re-evaluates the recorded balances and records any additional reductions in the fair value as a write-down of other real estate held for
sale. Deposits The Corporation had an increase in deposits in the first three months of 2021. Total deposits increased by$14.503 million , or 11.52%, in the first three months of 2021. The increase in deposits for the first three months of 2021 is composed of a increase in core deposits of$51.210 million and a decrease in noncore deposits of$36.707 million . Management utilizes brokered deposits as a funding source, which provides flexibility in managing interest rate risk for fixed rate longer term loan fundings. Management continues to monitor existing deposit products in order to stay competitive, both as to terms and pricing, which will remain important as we move through the current rate cycle to protect our margin. This focus on deposits has become especially important with changing client banking habits and demographics, as well as customer desire for more electronic and mobile based banking products and services, particularly in light of the pandemic. It is the intent of management to focus on growing core deposit levels, as the comparatively inexpensive core deposits, in relation to wholesale deposit sources, will continue to prove valuable as rates continue to increase. 35 Table of Contents
The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):
March 31, December 31,
2021 % of Total 2020 % of Total
Noninterest bearing $ 443,956 34.86% $ 414,804 32.94%
NOW, money market, checking 478,181 37.56 450,556 35.79
Savings 137,134 10.77 130,755 10.39Certificates of Deposit <$250,000 190,320 14.95 202,266 16.07 Total core deposits 1,249,591 98.14
1,198,381 95.20
Certificates of Deposit >$250,000 10,337 .81
15,224 1.21
Brokered CDs 13,351 1.05 45,171 3.59
Total non-core deposits 23,688 1.86 60,395 4.80
Total deposits $ 1,273,279 100.00% $ 1,258,776 100.00%
Borrowings
The Corporation also utilizes FHLB borrowings as a source of funding. At March
31, 2021 , this source of funding totaled $53 million and the Corporation secured
this funding by pledging loans and investments. The $53 million of FHLB
borrowings have a weighted average maturity of 1.99 years and a weighted average
interest rate of 1.64% at March 31, 2021 . The Corporation also has a USDA Rural
Development loan held by its wholly owned subsidiary, First Rural Relending,
that has an outstanding balance of $.324 million , with a fixed interest rate of
1% that matures in August 2024 .
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), created the
Paycheck Protection Program to support lending to small businesses that have
been affected by the disruption caused by COVID-19. The Federal Reserve created
the Paycheck Protection Program Lending Facility (PPPLF) to offer a source of
liquidity to the financial institution lenders who lend to small businesses
through the Small Business Administration's (SBA) Paycheck Protection Program.
The PPPLF bears an interest rate of 0.35% and is collateralized by the PPP loans
pledged. There were no PPP loans pledged as of March 31, 2021 as the balance was
repaid in the third quarter of 2020.
The Corporation currently has one correspondent banking borrowing relationship.
As of March 31, 2021 the relationship consisted of a $15.0 million revolving
line of credit, which had no balance. The line of credit bears an interest rate
of LIBOR plus 2.00%, with a floor rate of 3.00% and a ceiling of 22%. The line
of credit expires April 30, 2022 . LIBOR at March 31, 2021 was 0.20%. This
relationship is secured by all of the outstanding mBank stock.
Shareholders' Equity
Total shareholders' equity increased$2.312 million fromDecember 31, 2020 toMarch 31, 2021 . Contributing to the change in shareholders' equity was net income of$3.880 million , offset by a reduction for cash dividends on common stock of$1.477 million , an increase due to stock compensation of$.233 million , and an decrease in the market value of securities of$.324 million . RESULTS OF OPERATIONS Summary
The Corporation recorded first three months of 2021 net income of
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Net Interest Income
Net interest income is the Corporation's primary source of core earnings. Net
interest income represents the difference between the average yield earned on
interest earning assets and the average rate paid on interest bearing
obligations. Net interest income is impacted by economic and competitive factors
that influence rates, loan demand, and the availability of funding.
Net interest income and net interest margin on a fully taxable equivalent basis
amounted to $13.862 million and 4.55% of average earning assets, respectively,
in the first three months of 2021, compared to $13.481 million and 4.63% of
average earning assets, respectively, in the first three months of 2020.
Included in the net interest income for the first three months of 2021 is $2.782
million of fee recognition on the PPP loans. The $2.782 million of fee
recognition included $.826 million to offset direct origination costs involved
in the program, as well as $.296 million of accretion of the remaining deferred
fees.
The following table presents the amount of interest income from average
interest-earning assets and the yields earned on those assets, as well as the
interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances are daily average balances.
Three Months Ended
2021-2020
Average Balances Average Rates Interest Income/ Rate/
March 31, Increase/ March 31, March 31, Expense Volume Rate Volume(dollars in thousands) 2021 2020 (Decrease) 2021
2020 2021 2020 Variance Variance Variance Variance
Loans (1,2,3) $ 1,078,022 $ 1,047,144 $ 30,878 5.35% 5.66% $ 14,225 $ 14,749 $ (524) $ 431 $ (809) $ (146)
Taxable securities 86,502 93,577 (7,075) 2.28 2.66 487 620 (133) (46) (88) 1
Nontaxable securities 3.22
(2) 22,704 14,917 7,787 2.99 180 111 69 57 8 4
Federal funds sold 40,558 1,044 39,514 .10 1.54 10 4 6 150 (4) (140)
Other interest-earning 4.03
assets 7,449 14,869 (7,420) 7.17 74 265 (191) (131) (115) 55
Total earning assets 1,235,235 1,171,551 63,684 4.92 5.41 14,976 15,749 (773) 461 (1,008) (226)
Reserve for loan
losses (5,660) (5,269) (391)
Cash and due from
banks 197,014 66,967 130,047
Fixed Assets 25,350 24,171 1,179
Other Real Estate 1,666 2,180 (514)
Other assets 58,891 61,534 (2,643)
Total assets $ 1,512,496 $ 1,321,134 $ 191,362
NOW and money market
deposits $ 360,824 $ 284,315 $ 76,509 .20 0.42 $ 179 $ 296 $ (117) $ 79 $ (153) $ (43)
Interest checking 107,323 93,922 13,401 .02 0.07 6 17 (11) 2 (12) (1)
Savings deposits 132,404 110,351 22,053 .19 0.87 61 238 (177) 47 (185) (39)
Certificates of
deposit 207,635 242,882 (35,247) .99 1.82 508 1,101 (593) (158) (498) 63
Brokered deposits 44,287 60,059 (15,772) 1.24 1.84 135 275 (140) (72) (90) 22
Borrowings 54,799 72,911 (18,112) 1.67 1.88 225 341 (116) (84) (39) 7
Total interest-bearing
liabilities 907,272 864,440 42,832 .49 1.06 1,114 2,268 (1,154) (186) (977) 9
Demand deposits 426,890 284,677 142,213
Other liabilities 9,311 9,356 (45)
Shareholders' equity 169,023 162,661 6,362
Total liabilities and
shareholders' equity $ 1,512,496 $ 1,321,134 $ 191,362
Rate spread 4.42% 4.35%
Net interest
margin/revenue 4.55%4.63%$ 13,862 $ 13,481 $ 381 $ 647$ (31) $ (235)
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(2) The amount of interest income on loans and nontaxable securities has been
adjusted to a tax equivalent basis, using a 21% tax rate.
(3) Interest income on loans includes fees.
The Corporation continues to reprice a significant portion of its loan
portfolio. Management has been diligent when repricing maturing or new loans in
establishing interest rate floors in order to maintain our interest rate spread.
The Corporation is anticipating some margin pressure in future periods as we
continue to see extremely competitive pricing on new and renewable loans.
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Provision for Loan Losses
The Corporation records a provision for loan losses when it believes it is necessary to adjust the allowance for loan losses to maintain an adequate level after considering factors such as loan charge-offs and recoveries, changes in identified levels of risk in the loan portfolio, changes in the mix of loans in the portfolio, loan growth, and other economic factors. During the first quarter of 2021, the Corporation recorded a loan loss provision of$50,000 compared to$100,000 in the first quarter of 2020. There were net charge-offs of$24,000 in the first three months of 2021, compared to net charge-offs of$116,000 for the same period in 2020. There was no provision for loan losses for acquired loans as a result of acquisition fair value adjustments. Other Income
Other income was$2.398 million in the first three months of 2021, compared to$1.937 million in the same period in 2020. The increase year over year was largely a result of increased income from loans sold in the secondary market. Management continues to evaluate deposit products and services for ways to better serve its customer base and also enhance service fee income through a broad array of products that price services based on income contribution and cost attributes.
The following table details other income for the three months ended
Three Months Ended
March 31,
Increase/(Decrease)
2021 2020 Dollars Percent
Deposit service fees $ 257 $ 403 $ (146) (36.23)%Income from loans sold in the secondary market 1,302 538 764 142.01 SBA/USDA loan sale gains 433 710 (277) (39.01) Net mortgage servicing (amortization) income 241 189
52 27.51
Net realized security gains 36 - 36 NM
Other noninterest income 129 97 32 32.99
Total other income $ 2,398 $ 1,937 $ 461 23.80%
Other Expense
For the first three months of 2021, the Corporation recorded other expenses of$11.848 million , compared to$11.372 million in 2020, an increase of$.476 million . The increase in salaries and benefits was largely a result of personnel expenses incurred with participation in the PPP loan program and other general related pandemic expenses, and other customary operating expenses related to our efforts to ensure our platform infrastructure keeps pace with our growing asset base and the associated regulatory and risk management needs. 38 Table of Contents
The following table details other expense for the three months ended
Three Months Ended
March 31,
Increase/(Decrease)
2021 2020 Dollars Percentage
Salaries and employee benefits$ 6,824 $ 6,051
$ 773 12.77% Occupancy 1,183 1,124 59 5.25 Furniture and equipment 842 802 40 4.99 Data processing 770 825 (55) (6.67) Advertising 113 212 (99) (46.70) Professional service fees 498 498 - - Loan origination expenses and deposit and card related fees 450 381 69 18.11 Writedowns and losses on other real estate held for sale (52) 3 (55) NM FDIC insurance assessment 140 150
(10) (6.67)
Communications 241 213 28 13.15
Other 839 1,113 (274) (24.62)
Total other expense $ 11,848 $ 11,372 $ 476 4.19%
Federal Income Taxes
The Corporation recognized a federal income tax expense for the three months
ended
The Corporation has reported deferred tax assets of$2.492 million atMarch 31, 2021 . A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. As ofMarch 31, 2021 , the Corporation had a net operating loss carryforwards for tax purposes of approximately$8.0 million . The carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL and credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is$2.0 million for the NOL and the equivalent value of tax credits, which is approximately$.420 million . These limitations for use were established in conjunction with the recapitalization of the Corporation inDecember 2004 . The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted. LIQUIDITY
We define liquidity as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of customers and making payments on any existing borrowing commitments. The Bank's principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing a secondary source of liquidity is the available for sale investment portfolio, FHLB borrowings and brokered deposits. As a final source of liquidity, the Bank can exercise existing credit arrangements. Current balance sheet liquidity consists of$243.492 million in cash and cash equivalents and$86.242 million of unpledged investment securities. Although current liquidity is deemed adequate, management has the ability to increase on hand liquidity by acquiring brokered CDs in order to fund any anticipated loan growth. During the first three months of 2021, the Corporation increased cash and cash equivalents by$24.515 million . The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30 day period, a 30- to 90- day period and from 90 days until the end of the year. This funding forecast model is completed weekly. The Corporation's primary source of liquidity on a stand-alone basis is dividends from the Bank. During the first three months of 2021, the Bank paid dividends of$3.5 million to theCorporation. Bank capital remains strong and above the "well-capitalized" level for regulatory purposes as ofMarch 31, 2021 . The Corporation also has a line of credit with a correspondent bank that had borrowing availability atMarch 31, 2021 of$15 million . The Corporation's current plan for dividends from the Bank are dependent upon the profitability of the Bank, growth of assets at the Bank and the level of 39
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capital needed to stay "adequately capitalized." The Corporation will continue to explore opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.
Liquidity is managed by the Corporation through itsAsset and Liability Committee ("ALCO"). The ALCO Committee meets regularly to discuss asset and liability management in order to address liquidity and funding needs to provide a process to seek the best alternatives for investments of assets, funding costs, and risk management. The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds. The Bank's liquidity is best illustrated by the mix in the Bank's core and noncore funding dependence ratio, which explains the degree of reliance on noncore liabilities to fund long-term assets. Core deposits are herein defined as demand deposits, NOW (negotiable order withdrawals), money markets, savings and certificates of deposit under$250,000 . Noncore funding consists of certificates of deposit greater than$250,000 , brokered deposits, and FHLB,Farmers' Home Administration and other borrowings. AtMarch 31, 2021 , the Bank's core deposits in relation to total funding were 94.19% compared to 90.63% atDecember 31, 2020 . These ratios indicate that atMarch 31, 2021 , that the Bank had slightly decreased its reliance on noncore deposits and borrowings to fund the Bank's long-term assets, namely loans and investments. This decrease is the result of the Bank having taken precautionary measures to augment its cash position at the onset of the COVID-19 pandemic in the first quarter of 2020. The Bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As ofMarch 31, 2021 , the Bank had$106 million of unsecured lines available and additional funding sources available if secured. The Bank believes that its liquidity position remains sufficient to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank's liquidity, including any additional liquidity pressure that may stem from the effects of the COVID-19 pandemic. From a long-term perspective, the Corporation's strategy is to increase core deposits in the Corporation's local markets. Management continually evaluates deposit products it offers in order to remain competitive in its goal of increasing core deposits. The Corporation also has the ability to augment local deposit growth efforts with wholesale CD funding. REGULATORY CAPITAL The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 capital and Common Equity Tier 1 Capital to risk-weighted assets and of Tier 1 capital to average assets. Management has determined that, as ofMarch 31, 2021 , the Corporation is well-capitalized. In order to be "well-capitalized" under the current guidelines, a depository institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; an Additional Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. 40 Table of Contents The Corporation's and the Bank's actual capital and ratios compared to generally applicable regulatory requirements as ofMarch 31, 2021 are as follows (dollars in thousands): Actual Adequacy Purposes Well-Capitalized Amount Ratio Amount Ratio Amount Ratio
Total capital to risk weighted assets: Consolidated$ 148,694 15.3% >$ 77,555 > 8.0% > $ N/A > N/A mBank$ 141,712 14.6% >$ 77,394
> 8.0% >
Tier 1 capital to risk weighted assets: Consolidated$ 142,852 14.7% >$ 58,166 > 6.0% > $ N/A > N/A mBank$ 135,911 14.0% >$ 58,046 > 6.0% >$ 77,394 > 8.0% Common equity Tier 1 capital to risk weighted assets Consolidated$ 142,852 14.7% >$ 43,625 > 4.5% > $ N/A > N/A mBank$ 135,911 14.0% >$ 43,534
> 4.5% >
Tier 1 capital to average assets: Consolidated$ 142,852 9.6% >$ 59,354 > 4.0% > $ N/A > N/A mBank$ 135,911 9.2% >$ 59,355
> 4.0% >$ 74,193 > 5.0%
Regulatory capital is not the same as shareholders' equity reported in the
accompanying condensed consolidated financial statements. Certain assets cannot
be considered assets for regulatory purposes, such as acquisition intangibles
and noncurrent deferred tax benefits.
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