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 June 30, 2021

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 checkmark 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: 34,192,317 shares of the Company’s Common Stock (no par value) were outstanding as of July 22, 2021.



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. 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 the risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the business, financial condition and results of operations of our company and our customers, 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 loan 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 and the future level of other revenue sources. Management’s determination of the provision and allowance for loan 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. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and 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 or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.


INDEX



Page
Number



Part I.
Financial Information:
 
     

Item 1.


4




10




Item 2.


37




Item 3.


51




Item 4.


52



Part II.
Other Information:





Item 2.


53




Item 6.


53




54

Part I
Financial Information
Item 1.
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2021 (unaudited) and December 31, 2020
(Dollars in thousands, except per share data)


   
June 30,
2021
   
December 31,
2020
 
ASSETS
           
Cash and due from banks
 
$
31,051
   
$
31,480
 
Federal funds sold and other short-term investments
   
1,189,266
     
752,256
 
Cash and cash equivalents
   
1,220,317
     
783,736
 
Debt securities available for sale, at fair value
   
239,955
     
236,832
 
Debt securities held to maturity (fair value 2021 - $124,972 and 2020 - $83,246)
   
121,867
     
79,468
 
Federal Home Loan Bank (FHLB) stock
   
11,558
     
11,558
 
Loans held for sale, at fair value
   
4,752
     
5,422
 
Total loans
   
1,238,327
     
1,429,331
 
Allowance for loan losses
   
(16,806
)
   
(17,408
)
Net loans
   
1,221,521
     
1,411,923
 
Premises and equipment – net
   
42,906
     
43,254
 
Accrued interest receivable
   
4,539
     
5,625
 
Bank-owned life insurance
   
52,507
     
42,516
 
Other real estate owned - net
   
2,343
     
2,537
 
Net deferred tax asset
   
2,759
     
2,059
 
Other assets
   
16,062
     
17,096
 
Total assets
 
$
2,941,086
   
$
2,642,026
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Noninterest-bearing
 
$
956,961
   
$
809,437
 
Interest-bearing
   
1,643,115
     
1,489,150
 
Total deposits
   
2,600,076
     
2,298,587
 
Other borrowed funds
   
60,000
     
70,000
 
Long-term debt
   
20,619
     
20,619
 
Accrued expenses and other liabilities
   
12,174
     
12,977
 
Total liabilities
   
2,692,869
     
2,402,183
 
Commitments and contingent liabilities
   
     
 
Shareholders’ equity
               
Common stock, no par value, 200,000,000 shares authorized; 34,192,317 and 34,197,519 shares issued and outstanding at June 30, 2021 and December 31, 2020
   
218,846
     
218,528
 
Retained earnings
   
27,251
     
17,101
 
Accumulated other comprehensive income
   
2,120
     
4,214
 
Total shareholders’ equity
   
248,217
     
239,843
 
Total liabilities and shareholders’ equity
 
$
2,941,086
   
$
2,642,026
 

See accompanying notes to consolidated financial statements.

-4-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and six month periods ended June 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)

   
Three Months
Ended
June 30,
2021
   
Three Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2021
   
Six Months
Ended
June 30,
2020
 
Interest income
                       
Loans, including fees
 
$
13,303
   
$
14,488
   
$
26,770
   
$
29,339
 
Securities
                               
Taxable
   
792
     
954
     
1,579
     
2,015
 
Tax-exempt
   
760
     
864
     
1,518
     
1,746
 
FHLB Stock
   
56
     
115
     
117
     
239
 
Federal funds sold and other short-term investments
   
273
     
86
     
474
     
662
 
Total interest income
   
15,184
     
16,507
     
30,458
     
34,001
 
Interest expense
                               
Deposits
   
244
     
895
     
523
     
2,497
 
Other borrowings
   
328
     
356
     
681
     
705
 
Long-term debt
   
155
     
209
     
307
     
449
 
Total interest expense
   
727
     
1,460
     
1,511
     
3,651
 
Net interest income
   
14,457
     
15,047
     
28,947
     
30,350
 
Provision for loan losses
   
(750
)
   
1,000
     
(750
)
   
1,700
 
Net interest income after provision for loan losses
   
15,207
     
14,047
     
29,697
     
28,650
 
Noninterest income
                               
Service charges and fees
   
1,065
     
860
     
2,057
     
1,970
 
Net gains on mortgage loans
   
1,311
     
1,849
     
3,326
     
2,499
 
Trust fees
   
1,133
     
945
     
2,138
     
1,880
 
ATM and debit card fees
   
1,683
     
1,321
     
3,168
     
2,658
 
Bank owned life insurance (“BOLI”) income
   
250
     
231
     
526
     
472
 
Other
   
727
     
648
     
1,492
     
1,334
 
Total noninterest income
   
6,169
     
5,854
     
12,707
     
10,813
 
Noninterest expense
                               
Salaries and benefits
   
6,502
     
5,766
     
12,914
     
12,457
 
Occupancy of premises
   
994
     
949
     
2,031
     
1,958
 
Furniture and equipment
   
978
     
882
     
1,915
     
1,737
 
Legal and professional
   
274
     
247
     
496
     
538
 
Marketing and promotion
   
175
     
239
     
350
     
477
 
Data processing
   
855
     
787
     
1,762
     
1,547
 
FDIC assessment
   
159
     
76
     
329
     
76
 
Interchange and other card expense
   
388
     
327
     
746
     
674
 
Bond and D&O Insurance
   
111
     
104
     
222
     
209
 
Other
   
1,282
     
1,127
     
2,438
     
2,553
 
Total noninterest expenses
   
11,718
     
10,504
     
23,203
     
22,226
 
Income before income tax
   
9,658
     
9,397
     
19,201
     
17,237
 
Income tax expense
   
1,840
     
1,759
     
3,605
     
3,188
 
Net income
 
$
7,818
   
$
7,638
   
$
15,596
   
$
14,049
 
Basic earnings per common share
 
$
0.23
   
$
0.22
   
$
0.46
   
$
0.41
 
Diluted earnings per common share
 
$
0.23
   
$
0.22
   
$
0.46
   
$
0.41
 
Cash dividends per common share
 
$
0.08
   
$
0.08
   
$
0.16
   
$
0.16
 

See accompanying notes to consolidated financial statements.

-5-


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and six month periods ended June 30, 2021 and 2020
(unaudited)
(Dollars in thousands)

   
Three Months
Ended
June 30,
2021
   
Three Months
Ended
June 30,
2020
   
Six Months
Ended
June 30,
2021
   
Six Months
Ended
June 30,
2020
 
Net income
 
$
7,818
   
$
7,638
   
$
15,596
   
$
14,049
 
Other comprehensive income:
                               
Unrealized gains (losses):
                               
Net change in unrealized gains (losses) on debt securities available for sale
   
739
     
884
     
(2,651
)
   
3,823
 
Tax effect
   
(155
)
   
(186
)
   
557
     
(803
)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
   
584
     
698
     
(2,094
)
   
3,020
 
Less: reclassification adjustments:
                               
Reclassification for gains included in net income
   
     
     
     
 
Tax effect
   
     
     
     
 
Reclassification for gains included in net income, net of tax
   
     
     
     
 
Other comprehensive income (loss), net of tax
   
584
     
698
     
(2,094
)
   
3,020
 
Comprehensive income
 
$
8,402
   
$
8,336
   
$
13,502
   
$
17,069
 

See accompanying notes to consolidated financial statements.

-6-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three and six month periods ended June 30, 2021 and 2020
(unaudited)
(Dollars in thousands, except per share data)

 
Common
Stock
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Balance, April 1, 2020
 
$
218,207
   
$
1,507
   
$
3,866
   
$
223,580
 
Net income for the three months ended June 30, 2020
   
     
7,638
     
     
7,638
 
Cash dividends at $0.08 per share
   
     
(2,720
)
   
     
(2,720
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
698
     
698
 
Stock compensation expense
   
142
     
     
     
142
 
Balance, June 30, 2020
 
$
218,349
   
$
6,425
   
$
4,564
   
$
229,338
 
                                 
                                 
Balance, April 1, 2021
 
$
218,687
   
$
22,156
   
$
1,536
   
$
242,379
 
Net income for the three months ended June 30, 2021
   
     
7,818
     
     
7,818
 
Cash dividends at $0.08 per share
   
     
(2,723
)
   
     
(2,723
)
Repurchase of 815 shares for taxes withheld on vested restricted stock
   
(7
)
   
     
     
(7
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
584
     
584
 
Stock compensation expense
   
166
     
     
     
166
 
Balance, June 30, 2021
 
$
218,846
   
$
27,251
   
$
2,120
   
$
248,217
 

 
Common
Stock
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
 
Balance, January 1, 2020
 
$
218,109
   
$
(2,184
)
 
$
1,544
   
$
217,469
 
Net income for the six months ended June 30, 2020
   
     
14,049
     
     
14,049
 
Cash dividends at $0.16 per share
   
     
(5,440
)
   
     
(5,440
)
Repurchase of 1,608 shares for taxes withheld on vested restricted stock
   
(11
)
   
     
     
(11
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
3,020
     
3,020
 
Stock compensation expense
   
251
     
     
     
251
 
Balance, June 30, 2020
 
$
218,349
   
$
6,425
   
$
4,564
   
$
229,338
 
                                 
                                 
Balance, January 1, 2021
 
$
218,528
   
$
17,101
   
$
4,214
   
$
239,843
 
Net income for the six months ended June 30, 2021
   
     
15,596
     
     
15,596
 
Cash dividends at $0.16 per share
   
     
(5,446
)
   
     
(5,446
)
Repurchase of 1,341 shares for taxes withheld on vested restricted stock
   
(12
)
   
     
     
(12
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
(2,094
)
   
(2,094
)
Stock compensation expense
   
330
     
     
     
330
 
Balance, June 30, 2021
 
$
218,846
   
$
27,251
   
$
2,120
   
$
248,217
 

See accompanying notes to consolidated financial statements.

-7-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month periods ended June 30, 2021 and 2020
(unaudited)
(Dollars in thousands)


   
Six Months
Ended
June 30,
2021
   
Six Months
Ended
June 30,
2020
 
Cash flows from operating activities
           
Net income
 
$
15,596
   
$
14,049
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
1,143
     
1,457
 
Stock compensation expense
   
330
     
251
 
Provision for loan losses
   
(750)
)
   
1,700
 
Origination of loans for sale
   
(86,498)
)
   
(79,415)
)
Proceeds from sales of loans originated for sale
   
90,494
     
83,531
 
Net gains on mortgage loans
   
(3,326)
)
   
(2,499)
)
Write-down of other real estate
   
4
     
32
 
Net loss on sales of other real estate
   
20
     
 
Deferred income tax expense
   
(144)
)
   
(1,483)
)
Change in accrued interest receivable and other assets
   
1,384
     
(6,634)
)
Earnings in bank-owned life insurance
   
(526)
)
   
(472)
)
Change in accrued expenses and other liabilities
   
(803)
)
   
5,190
 
Net cash from operating activities
   
16,924
     
15,707
 
Cash flows from investing activities
               
Loan originations and payments, net
   
191,152
     
(180,106)
)
Purchases of securities available for sale
   
(50,605)
)
   
(77,214)
)
Purchases of securities held to maturity
   
(51,232)
)
   
(19,815)
)
Purchase of bank-owned life insurance
    (10,000) )      
Proceeds from:
               
Maturities and calls of securities
   
31,013
     
64,342
 
Principal paydowns on securities
   
23,429
     
15,808
 
Sales of other real estate
   
170
     
92
 
Proceeds from payout of bank-owned insurance claim
   
560
     
 
Additions to premises and equipment
   
(861)
)
   
(805)
)
Net cash from investing activities
   
133,626
     
(197,698)
)
Cash flows from financing activities
               
Change in deposits
   
301,489
     
364,997
 
Repayments and maturities of other borrowed funds
    (10,000) )      
Proceeds from other borrowed funds
   
     
10,000
 
Repurchase of shares for taxes withheld on vested restricted stock
   
(12)
)
   
(11)
)
Cash dividends paid
   
(5,446)
)
   
(5,440)
)
Net cash from financing activities
   
286,031
     
369,546
 
Net change in cash and cash equivalents
   
436,581
     
187,555
 
Cash and cash equivalents at beginning of period
   
783,736
     
272,450
 
Cash and cash equivalents at end of period
 
$
1,220,317
   
$
460,005
 

See accompanying notes to consolidated financial statements.

-8-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six month periods ended June 30, 2021 and 2020
(unaudited)
(Dollars in thousands)


   
Six Months
Ended
June 30,
2021
   
Six Months
Ended
June 30,
2020
 
Supplemental cash flow information
           
Interest paid
 
$
1,535
   
$
3,793
 
Income taxes paid
   
4,000
     
3,515
 
Supplemental noncash disclosures:
               
Security settlement
   
736
     
475
 

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. 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.

The Company owns all of the common stock of Macatawa Statutory Trust II. This is a grantor trust that issued trust preferred securities and is not consolidated with the Company under accounting principles generally accepted in the United States of America.  On July 7, 2021, the Company redeemed the $20.0 million outstanding trust preferred securities and $619,000 common securities associated with this trust.

Recent Events: On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”  The guidance explained that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, another COVID-19 relief bill was signed that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through June 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  As of June 30, 2021, all of these modifications had expired and the loans returned to their contractual payment terms.

The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738 PPP loans totaling $346.7 million in principal, with an average loan size of $200,000.  Fees totaling $10.0 million were generated from the SBA for these loans in the year ended December 31, 2020.  These fees are deferred and amortized into interest income over the contractual period of 24 months or 60 months, as applicable.  Upon SBA forgiveness, unamortized fees are then recognized into interest income.  Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off.  The initial PPP expired on August 8, 2020.  Through December 31, 2020, 765 PPP loans totaling $113.5 million had been forgiven by the SBA and a total of $5.4 million in PPP fees had been recognized by the Bank.

On December 27, 2020, another COVID-19 relief bill was signed that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  The SBA reactivated the PPP on January 11, 2021.  The Bank originated additional loans through the PPP, which expired on May 31, 2021.  In the six months ended June 30, 2021, the Bank had generated and received SBA approval on 1,000 PPP loans totaling $128.4 million and generated $5.6 million in related deferred PPP fees.  In the six months ended June 30, 2021, 833 PPP loans totaling $187.5 million had been forgiven by the SBA and a total of $4.4 million in PPP fees had been recognized by the Bank including fees recognized upon forgiveness and continuing amortization of fees from the 2020 and 2021 PPP originations.

While the Company continues to evaluate the disruption caused by the pandemic and impact of the CARES Act, these events may have a material adverse impact on the Company’s results of future operations, financial position, capital, and liquidity in fiscal year 2021 and beyond.

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