10-Q 1 mcbc20240331_10q.htm FORM 10-Q mcbc20240331_10q.htm
0001053584 MACATAWA BANK CORP false --12-31 Q1 2024 291,651 322,098 0 0 200,000,000 200,000,000 34,361,562 34,361,562 34,361,562 34,361,562 0.08 1,338 0.09 2 0 1.3 0 0 2.0 41.0 37.7 7.5 8.5 8.4 303 2.0 41.0 37.5 7.5 8.5 8.4 2024 2024 2024 20.0 0 0 69,000 Beginning January 1, 2023, calculation is based on CECL methodology. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

Commission file number: 000-25927

 

MACATAWA BANK CORPORATION

(Exact name of registrant as specified in its charter)

 

Michigan

38-3391345

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

10753 Macatawa Drive, Holland, Michigan 49424

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (616) 820-1444

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock

MCBC

NASDAQ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 34,361,562 shares of the Company's Common Stock (no par value) were outstanding as of April 25, 2024.

 

 

 

Forward-Looking Statements

 

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation ("Macatawa" or the "Company"). Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to future levels of earning assets, future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for credit losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future interest rate levels, future net interest margin levels, the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, loan demand and loan growth, future amounts of unrecognized tax benefits, the future level of other revenue sources and future amounts of unrealized gains or losses in our investment securities portfolio. Management's determination of the provision and allowance for credit losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, respond to a changing interest rate environment, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets, interest rates and the national and regional economy on the banking industry, generally, and Macatawa, specifically, are also inherently uncertain.

 

In addition, forward-looking statements include statements regarding the outlook and expectations of Macatawa with respect to its planned merger with Wintrust Financial Corporation ("Wintrust") pursuant to the Agreement and Plan of Merger dated April 15, 2024 (the "Merger Agreement"), the strategic benefits and financial benefits of the merger, including the expected impact of the transaction on the combined company's future financial performance and the timing of the closing of the transaction.

 

These statements reflect current beliefs as to the expected outcomes of future events and are not guarantees of future performance.  These statements involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, Macatawa does not undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.  Such risks, uncertainties and assumptions, include, among others, the following:

 

 

the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in a materially burdensome regulatory condition (as defined in the Merger Agreement));

 

the failure of Macatawa to obtain shareholder approval, or for either party to satisfy any of the other closing conditions to the transaction on a timely basis or at all;

 

the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Merger Agreement;

 

the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Macatawa and Wintrust do business, or as a result of other unexpected factors or events;

 

the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

 

diversion of management’s attention from ongoing business operations and opportunities;

 

potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; and

 

the outcome of any legal proceedings that may be instituted against Macatawa or Wintrust.

 

Additional risk factors include, but are not limited to, the risk factors described in Item 1A in Macatawa's Annual Report on Form 10-K for the year ended December 31, 2023 and in any of Macatawa's subsequent SEC filings, and in Item 1A in Wintrust's Annual Report on Form 10-K for the year ended December 31, 2023 and in any of Wintrust's subsequent SEC filings. 

 

 

 
 

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of March 31, 2024 (unaudited) and December 31, 2023

(Dollars in thousands, except per share data)


 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

ASSETS

        

Cash and due from banks

 $27,081  $32,317 

Federal funds sold and other short-term investments

  331,400   418,035 

Cash and cash equivalents

  358,481   450,352 

Debt securities available for sale, at fair value

  491,214   508,798 

Debt securities held to maturity (fair value 2024 - $291,651 and 2023 - $322,098)

  300,751   331,523 

Federal Home Loan Bank (FHLB) stock

  10,211   10,211 

Loans held for sale, at fair value

      

Total loans

  1,342,208   1,338,386 

Allowance for credit losses

  (17,440)  (17,442)

Net loans

  1,324,768   1,320,944 

Premises and equipment – net

  38,971   38,604 

Accrued interest receivable

  10,266   8,976 

Bank-owned life insurance

  54,535   54,249 

Deferred tax asset - net

  7,385   7,202 

Other assets

  18,324   17,840 

Total assets

 $2,614,906  $2,748,699 

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Deposits

        

Noninterest-bearing

 $614,325  $643,035 

Interest-bearing

  1,670,076   1,772,695 

Total deposits

  2,284,401   2,415,730 

Other borrowed funds

  20,000   30,000 

Accrued expenses and other liabilities

  17,532   15,884 

Total liabilities

  2,321,933   2,461,614 

Commitments and contingent liabilities

        

Shareholders' equity

        

Common stock, no par value, 200,000,000 shares authorized; 34,361,562 issued and outstanding, respectively

  220,421   220,255 

Retained earnings

  96,471   89,760 

Accumulated other comprehensive loss

  (23,919)  (22,930)

Total shareholders' equity

  292,973   287,085 

Total liabilities and shareholders' equity

 $2,614,906  $2,748,699 

 

See accompanying notes to consolidated financial statements.

 

 

 

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three month period ended March 31, 2024 and 2023

(unaudited)

(Dollars in thousands, except per share data)


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Interest income

               

Loans, including fees

  $ 19,171     $ 15,660  

Securities

               

Taxable

    4,428       4,481  

Tax-exempt

    698       698  

FHLB Stock

    120       65  

Federal funds sold and other short-term investments

    4,660       6,362  

Total interest income

    29,077       27,266  

Interest expense

               

Deposits

    8,221       4,494  

Other borrowings

    129       156  

Total interest expense

    8,350       4,650  

Net interest income

    20,727       22,616  

Provision (benefit) for credit losses

           

Net interest income after provision (benefit) for credit losses

    20,727       22,616  

Noninterest income

               

Service charges and fees

    1,003       994  

Net gains on mortgage loans

    8       11  

Trust fees

    1,220       1,033  

ATM and debit card fees

    1,583       1,662  

BOLI income

    274       199  

Other

    572       629  

Total noninterest income

    4,660       4,528  

Noninterest expense

               

Salaries and benefits

    6,950       6,698  

Occupancy of premises

    999       1,137  

Furniture and equipment

    1,062       1,031  

Legal and professional

    664       348  

Marketing and promotion

    211       219  

Data processing

    1,084       955  

FDIC assessment

    330       330  

Interchange and other card expense

    406       384  

Bond and D&O Insurance

    122       122  

Other

    1,417       941  

Total noninterest expenses

    13,245       12,165  

Income before income tax

    12,142       14,979  

Income tax expense

    2,349       2,975  

Net income

  $ 9,793     $ 12,004  
                 

Basic and diluted earnings per common share

  $ 0.29     $ 0.35  

Cash dividends per common share

  $ 0.09     $ 0.08  

 

See accompanying notes to consolidated financial statements.

 

 

 

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three month period ended March 31, 2024 and 2023

(unaudited)

(Dollars in thousands)


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Net income

  $ 9,793     $ 12,004  

Other comprehensive income (loss):

               

Unrealized gains (losses):

               

Net change in unrealized gains (losses) on debt securities available for sale

    (1,246 )     6,738  

Amortization of net unrealized gains on securities transferred to held-to-maturity

    (5 )     (5 )

Tax effect

    262       (1,414 )

Net change in unrealized gains (losses) on debt securities available for sale, net of tax

    (989 )     5,319  
                 

Other comprehensive income (loss), net of tax

    (989 )     5,319  

Comprehensive income

  $ 8,804     $ 17,323  

 

See accompanying notes to consolidated financial statements.

 

 

 

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Three month period ended March 31, 2024 and 2023

(unaudited)

(Dollars in thousands, except per share data)


 

 

          

Accumulated

     
          

Other

  

Total

 
  

Common

  

Retained

  

Comprehensive

  

Shareholders'

 
  

Stock

  

Earnings

  

Income (Loss)

  

Equity

 

Balance, January 1, 2023

 

$219,578

  

$59,036

  

$(31,576

)  

Adoption of ASU 2016-13, net of tax

     (1,215)     (1,215)

Net income for the three months ended March 31, 2023

     12,004      12,004 

Cash dividends at $0.08 per share

     (2,733)     (2,733)

Repurchase of 1,338 shares for taxes withheld on vested restricted stock

  (15)        (15)

Other comprehensive income, net of tax

        5,319   5,319 

Stock compensation expense

  170         170 

Balance, March 31, 2023

 $219,733  $67,092  $(26,257) $260,568 
                 
                 

Balance, January 1, 2024

 $220,255  $89,760  $(22,930) $287,085 

Net income for the three months ended March 31, 2024

     9,793      9,793 

Cash dividends at $0.09 per share

     (3,082)     (3,082)

Repurchase of shares for taxes withheld on vested restricted stock

            

Other comprehensive loss, net of tax

        (989)  (989)

Stock compensation expense

  166         166 

Balance, March 31, 2024

 $220,421  $96,471  $(23,919) $292,973 

See accompanying notes to consolidated financial statements.

 

 

 

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three month periods ended March 31, 2024 and 2023

(unaudited)

(Dollars in thousands)


 

 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Cash flows from operating activities

               

Net income

  $ 9,793     $ 12,004  

Adjustments to reconcile net income to net cash from operating activities:

               

Depreciation and amortization

    477       160  

Stock compensation expense

    166       170  

Provision (benefit) for credit losses

           

Origination of loans for sale

    (402 )     (179 )

Proceeds from sales of loans originated for sale

    410       318  

Net gains on mortgage loans

    (8 )     (11 )

Net gain on sales of other real estate

          (356 )

Deferred income tax expense

    80       150  

Bank-owned life insurance

    (274 )     (199 )

Change in accrued interest receivable and other assets

    (1,774 )     (217 )

Change in accrued expenses and other liabilities

    1,648       889  

Net cash from operating activities

    10,116       12,729  

Cash flows from investing activities

               

Loan originations and payments, net

    (3,824 )     (43,158 )

Purchases of securities available for sale

          (24,072 )

Purchases of securities held to maturity

    (2,399 )     (3,966 )

Proceeds from:

               

Maturities and calls of securities available for sale

    13,313       1,626  

Maturities and calls of securities held to maturity

    32,512       1,126  

Principal paydowns on securities available for sale

    3,413       2,878  

Principal paydowns on securities held to maturity

    312       3,197  

Sales of other real estate

          2,699  

Additions to premises and equipment

    (903 )     (496 )

Net cash from (for) investing activities

    42,424       (60,166 )

Cash flows from financing activities

               

Change in deposits

    (131,329 )     (284,247 )

Repayments and maturities of other borrowed funds

    (10,000 )      

Repurchase of shares for taxes withheld on vested restricted stock

          (15 )

Cash dividends paid

    (3,082 )     (2,733 )

Net cash for financing activities

    (144,411 )     (286,995 )

Net change in cash and cash equivalents

    (91,871 )     (334,432 )

Cash and cash equivalents at beginning of period

    450,352       755,170  

Cash and cash equivalents at end of period

  $ 358,481     $ 420,738  

 

See accompanying notes to consolidated financial statements.

 

 

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Three month periods ended March 31, 2024 and 2023

(unaudited)

(Dollars in thousands)


 

   

Three Months

   

Three Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Supplemental cash flow information

               

Interest paid

  $ 8,334     $ 4,307  

Income taxes paid

           

 

See accompanying notes to consolidated financial statements.

 

 

-9-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("the Company", "our", "we") and its wholly-owned subsidiary, Macatawa Bank ("the Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank operates 26 full service branch offices providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.

 

Recent Events:  On April 15, 2024, the Company entered into a definitive merger agreement with Wintrust Financial Corporation (“Wintrust”) (Nasdaq: WTFC) for Wintrust to acquire the Company in an all-stock transaction.  Subject to possible adjustment as provided in the merger agreement, the aggregate purchase price to the Company's shareholders is estimated to be approximately $510.3 million, or $14.85 per share.  In the merger, each share of the Company's common stock outstanding will be converted into the right to receive merger consideration paid in shares of Wintrust common stock. 

 

The exchange ratio used to determine the number of shares to be issued will be subject to a symmetrical $12.00 collar using a reference price of $101.03 for Wintrust common stock to establish the high and low ends of the collar.  The exchange ratio will be variable within the collar, such that if the closing price is within the collar, the aggregate value of the merger consideration will be fixed at approximately $510.3 million; and if the closing price is outside of the collar, the exchange ratio will be a fixed amount both at the high and low ends of the collar, resulting in the aggregate value of the merger consideration being variable outside of the collar. 

 

If the closing Price is greater than or equal to $89.03 but less than or equal to $113.03, Macatawa shareholders will be entitled to receive between 0.1314 and 0.1668 shares of Wintrust common stock per share of Macatawa common stock. Macatawa shareholders will be entitled to receive 0.1668 shares of Wintrust common Stock per share of Macatawa common stock if the closing price is below $89.03, and 0.1314 shares of Wintrust common stock per share of Macatawa common stock if the closing price is above $113.03.  The “closing price” will be determined using the volume-weighted average price of Wintrust common stock as reported under the heading “Bloomberg VWAP” on the Bloomberg page for Wintrust, for each trading day during the ten trading day period ending on the second trading day prior to the closing date of the merger.

 

Following the effective time of the merger, the Company's bank subsidiary, Macatawa Bank, will maintain its separate bank charter and will continue to operate under the Macatawa Bank name.  Macatawa Bank will maintain a separate, legally constituted board of directors consisting of certain existing directors and new directors generally residing and doing business locally in the West Michigan community.  Completion of the merger is subject to shareholder and regulatory approvals and the satisfaction of other customary closing conditions and is expected to occur in the second half of 2024. 

 

Additional information about the merger may be found in the Company's Current Report on Form 8-K dated April 15, 2024, which is incorporated herein by reference.

 

Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) believed necessary for a fair presentation have been included.

 

Operating results for the three month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

 

Use of 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 the disclosures provided, and future results could differ. The allowance for credit losses and fair values of financial instruments are particularly subject to change.

 

FASB issued ASU No. 2016-13, as amended, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, commonly referred to as Current Expected Credit Loss ("CECL"), provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. FASB also issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

 

The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL. The transition adjustment of the CECL adoption included an increase in the allowance for loans of $1.5 million and an increase of $62,000 to establish a reserve for unfunded commitments, with a $1.2 million decrease to retained earnings, with the $323,000 income tax portion being recorded as part of the deferred tax asset in the Company's Consolidated Balance Sheet.

 

Securities: Securities are classified as held to maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale ("AFS") consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as AFS are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of tax.

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Accrued interest receivable on securities totaled $4.4 million at March 31, 2024 and $3.4 million at December 31, 2023.

 

- 10-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with an allowance being established under CECL.  For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors.  In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses ("ACL") is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.  Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense.  Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met.  Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes.  The Company has never experienced a loss on any debt securities AFS.  At March 31, 2024, there was no ACL related to debt securities AFS.  Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

 

Securities Held to Maturity - Since the adoption of CECL, the Company measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected.  HTM securities are charged off against the ACL when deemed uncollectible.  Adjustments to the ACL are reported in the Company's Consolidated Statements of Income in the provision for credit losses.  Accrued interest receivable on HTM securities is excluded from the estimate of credit losses.  With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities.  With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities.  The Company has never experienced any loss on HTM securities.  At March 31, 2024, there was no ACL related to securities HTM.

 

Allowance for Credit Losses ("ACL") - Loans: Since the adoption of CECL, the allowance for credit losses (allowance) is a valuation account that is deducted from the loan portfolios' amortized cost basis to present the net amount expected to be collected on loans.  The allowance is increased by the provision for credit losses and recoveries and decreased by charge-offs of loans. Management believes the allowance balance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, current and forecasted economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance.

 

The allowance is measured on a collective pool basis when similar risk characteristics exist.  Loans with similar risk characteristics are grouped into homogeneous classes, or pools, for allowance calculation.  Commercial loans are divided into eight classes based primarily on property type and risk characteristics.  They are further segmented based on commercial loan risk grade.  Retail loans are segmented into categories including residential mortgage, home equity, unsecured and other secured and then further segmented based on delinquency status.

 

The Company's loan portfolio classes as of March 31, 2024 were as follows:

 

Commercial Loans:

 

Commercial and Industrial - Risks to this category include industry concentration and limitations associated with monitoring the adequacy and condition of collateral which can include inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

 

Residential developed - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area, inadequate long-term financing arrangements and velocity of sales. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates as well as market demand and supply of similar property. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

 

Unsecured to residential developers - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

 

Vacant and unimproved - Risks to this category include industry concentration, valuation of farmland, agricultural properties and residential properties as well as velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

 

Commercial development - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

 

Residential improved - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

 

Commercial improved - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates, cost overruns, changes in market demand for property or services and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

- 11-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Manufacturing and industrial - Risks to this category include industry concentration, valuation of commercial properties, changes in market demand for products produced and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

 

Consumer Loans:

 

Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

 

Unsecured - Unsecured loans are susceptible to weakening general economic conditions and increases in unemployment rates.

 

Home equity - Home equity loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

 

Other secured - Other secured loans are susceptible to weakening general economic conditions and increases in unemployment rates, regulatory risks as well as the inability to monitor collateral consisting of personal property.

 

The remaining life methodology is used for all loan pools. This nondiscounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Given the bank's limited loss history over the past twelve years, a loss rate computed for a comparable sized peer group (banks with assets between $1-3 billion) is then applied to future loan balances at the instrument level based on the remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period and reversion periods.

 

Reasonable and supportable economic forecasts have to be incorporated in determining expected losses. The forecast period represents the time frame from the current period end through the point in time that the Company can reasonably forecast. Ideally, the economic forecast period would cover the contractual terms of all loans; however, the ability to produce a forecast that is both reasonable and supportable becomes more difficult the longer the period is projected.

 

For periods beyond the forecast period, the loss rate reverts back to the baseline lifetime loss.  As of March 31, 2024, the Company used a one-year reasonable and supportable economic forecast period, with a two-quarter straight-line reversion period for all loan classes.  In determining the reasonable and supportable economic forecast period, the Company used a consensus economic forecast from a third-party provider that provided forecasts from twenty-five leading economists.  The Company considered the March  31, 2024 report's consensus/mean estimates for gross domestic product and unemployment rates and selected a loss period for the reasonable and supportable forecast period that most closely matched that consensus.

 

A number of qualitative factors are considered including economic forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, impact of rising interest rates, external factors and other considerations. During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods.

 

The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by the Company. Any allowance for off-balance sheet credit exposures is reported as an other liability on the Company's Consolidated Balance Sheet and is increased or decreased via a provision for credit losses on the Company's Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.

 

- 12-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments. Accrued interest on loans totaled $4.8 million at March 31, 2024 and $5.3 million at December 31, 2023.

 

Accrued interest receivable for loans is included as a separate line item on the Company's Consolidated Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest.

 

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The Company records a valuation allowance when management believes it is "more likely than not" that deferred tax assets will not be realized.

 

The Company recognizes a tax position as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

 

Revenue From Contracts With Customers: The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) it satisfies a performance obligation. No revenue has been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

The Company's primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

 

The Company generally satisfies its performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

Interest Income: The Company’s largest source of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.

 

Noninterest Revenue: The Company derives the majority of its noninterest revenue from: (1) service charges for deposit related services, (2) gains related to mortgage loan sales, (3) trust fees and (4) debit and credit card interchange income. Most of these services are transaction based and revenue is recognized as the related service is provided.

 

 

- 13-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Derivatives: Certain of the Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank. At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer. This is known as a back-to-back swap agreement. Under this arrangement the Bank has two freestanding interest rate swaps, each of which is carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At March 31, 2024 and December 31, 2023, the total notional amount of such agreements was $105.7 million and $108.2 million, respectively, and resulted in a derivative asset with a fair value of $5.6 million and $4.9 million, respectively, which were included in other assets and a derivative liability of $5.6 million and $4.9 million, respectively, which were included in other liabilities.

 

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Bank enters into commitments to sell mortgage-backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline. At times, the Bank also enters into forward commitments for the future delivery of mortgage loans when loans are closed but not yet sold, in order to hedge the change in interest rates resulting from its commitments to sell the loans.

 

Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage loans.  The fair value of interest rate lock commitments was $(2,000) at March 31, 2024 and $1,000 at December 31, 2023.  The net fair value of mortgage-backed security derivatives was $1,000 at March 31, 2024 and $ (17,000) at December 31, 2023.

 

Loans Held for Sale:  Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. As of both  March 31, 2024 and December 31, 2023, these loans had net unrealized gains of $0 which are reflected in their carrying value.  Changes in fair value of loans held for sale are included in net gains on mortgage loans.  Loans are sold with servicing released; therefore, no mortgage servicing right assets are established.

 

- 14-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Accounting Standards Updates: ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures:  This ASU enhances disclosures about significant segment expenses.  The key amendments: (1) require that a public entity disclose on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss, (2) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition, (3) require that a public entity provide all annual disclosures about a reportable segment's profit or loss currently required by GAAP in interim periods as well, (4) clarify that if CODM uses more than one measure of a segment's profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit, (5) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources and (6) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures.  This ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  As the Company has one reportable segment, the requirements of this standard for such entities will apply beginning with the Company's annual report ending December 31, 2024.  The Company does not expect adoption of the ASU to have a material effect on the Company's consolidated financial statements.

 

ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures:  This ASU requires that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold.  The ASU requires that all entities disclose on an annual basis (1) the amount of income taxes paid, disaggregated by federal, state and foreign taxes and (2) the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal or greater than 5 percent of total income taxes paid.  The ASU also requires that all entities disclose (1) income (loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic or foreign and (2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign.  This ASU is effective for public business entities for annual periods beginning after December 15, 2024.  The Company does not expect adoption of the ASU to have a material effect on the Company's consolidated financial statements.

 

-15-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 2 SECURITIES

 

The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

March 31, 2024

                

Available for Sale

                

U.S. Treasury and federal agency securities

 $245,896  $  $(10,815) $235,081 

Agency MBS and CMOs

  120,328   35   (13,331)  107,032 

Tax-exempt state and municipal bonds

  30,800      (519)  30,281 

Taxable state and municipal bonds

  112,976   53   (5,528)  107,501 

Corporate bonds and other debt securities

  11,555      (236)  11,319 
  $521,555  $88  $(30,429) $491,214 
                 

Held to Maturity

                

U.S. Treasury

 $221,211  $  $(7,945) $213,266 

Tax-exempt state and municipal bonds

  79,540   230   (1,385)  78,385 
  $300,751  $230  $(9,330) $291,651 

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

December 31, 2023

                

Available for Sale:

                

U.S. Treasury and federal agency securities

 $256,234  $25  $(10,767) $245,492 

Agency MBS and CMOs

  123,767   173   (12,604)  111,336 

Tax-exempt state and municipal bonds

  30,850   31   (284)  30,597 

Taxable state and municipal bonds

  115,516   105   (5,545)  110,076 

Corporate bonds and other debt securities

  11,527   3   (233)  11,297 
  $537,894  $337  $(29,433) $508,798 

Held to Maturity

                

U.S. Treasury

 $251,229  $  $(8,520) $242,709 

Tax-exempt state and municipal bonds

  80,294   284   (1,189)  79,389 
  $331,523  $284  $(9,709) $322,098 

 

There were no sales of securities in the three month periods ended March 31, 2024 and 2023.

 

- 16-

MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 2 SECURITIES (Continued)

 

Contractual maturities of debt securities at March 31, 2024 were as follows (dollars in thousands):

 

  

Held–to-Maturity Securities

  

Available-for-Sale Securities

 
  

Amortized

  

Fair

  

Amortized

  

Fair

 
  

Cost

  

Value

  

Cost

  

Value

 

Due in one year or less

 $133,656  $132,252  $141,534  $140,076 

Due from one to five years

  155,020   147,346   253,495   238,070 

Due from five to ten years

  12,075   12,053   6,198   6,036 

Due after ten years

            

Agency MBS and CMOs

        120,328   107,032 
  $300,751  $291,651  $521,555  $491,214 

 

Securities with unrealized losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

 

  

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

March 31, 2024

 

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

Available for Sale

                        

U.S. Treasury and federal agency securities

 $28,390  $(53) $206,691  $(10,761) $235,081  $(10,814)

Agency MBS and CMOs

  15,544   (150)  84,892   (13,181)  100,436   (13,331)

Tax-exempt state and municipal bonds

  11,316   (98)  18,965   (423)  30,281   (521)

Taxable state and municipal bonds

  8,442   (29)  92,753