Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND INTANGIBLE ASSETS

Goodwill: The Company has acquired three banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill of $4.6 million, $4.8 million, and $26.2 million, respectively. Total goodwill was $35.6 million at September 30, 2020 and $9.4 million at December 31, 2019.

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. The Company's most recent annual goodwill impairment review as of October 1, 2019 did not indicate that an impairment existed.

As a result of the unprecedented decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including our stock price, saw a significant decline in March 2020, which then continued into second quarter of 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment in the second quarter of 2020. As a result of the analysis, we concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.

Since the price of our stock did not fully recover during the third quarter of 2020, the Company concluded to engage a reputable, third-party valuation firm to perform a quantitative analysis of goodwill as of August 31, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of our common stock and other relevant events. In addition, the valuation relied on financial projections through 2023 and growth rates prepared by management. Based on the valuation prepared, it was determined that the Company's estimated fair value of the reporting unit at August 31, 2020 was greater than its book value and impairment of goodwill was not required.

Furthermore, management noted that despite the market capitalization declining from December 2019 to September 2020 as a result of the COVID-19 pandemic, the Bank’s financial performance has remained positive. This is evidenced by the strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net SBA fees related to Paycheck Protection Program ("PPP") loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the valuation date and September 30, 2020. As such, management concluded that it is more likely than not that there was no goodwill impairment as of September 30, 2020.

Intangible Assets: The Company recorded core deposit intangibles ("CDIs") associated with each of its acquisitions. CDIs are amortized on an accelerated basis over their estimated useful lives.

The table below presents the Company's net carrying amount of CDIs:


(Dollars in thousands)	September 30, 2020		December 31, 2019
Gross carrying amount	$	5,708	$	2,045
Accumulated amortization	(2,320)		(1,744)
Net Intangible	$	3,388	$	301

Amortization expense for the CDIs was $191 thousand and $29 thousand for the three months ended September 30, 2020 and 2019, and $576 thousand and $117 thousand for the nine months ended September 30, 2020 and 2019, respectively.

Mortgage Servicing Rights ("MSRs"): The Company has recorded MSRs for loans that are sold with servicing retained. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. MSRs are amortized in proportion to and over the period of estimated net servicing income. The Company serviced residential mortgage loans for others with unpaid principal balances of approximately $211.0 million and $9.0 million as of September 30, 2020 and December 31, 2019, respectively.

Changes in our mortgage servicing rights were as follows for the three and nine months ended September 30, 2020 . The Company had $1 thousand in mortgage servicing rights as of September 30, 2019:


	For the three months ended September 30,		For the nine months ended September 30,
(Dollars in thousands)	2020		2020
Mortgage servicing rights:
Balance, beginning of period	$	1,213	$	76
Originated servicing	1,073		2,250
Amortization	(93)		(133)
Balance, end of period	2,193		2,193






Fair value:
At beginning of period	$	1,256	$	87
At end of period	2,567		2,567