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 September 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: 34,189,799 shares of the Company’s Common Stock (no par value) were outstanding as of October 28, 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.


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


   
September 30,
2021
   
December 31,
2020
 
ASSETS
           
Cash and due from banks
 
$
30,413
   
$
31,480
 
Federal funds sold and other short-term investments
   
1,239,525
     
752,256
 
Cash and cash equivalents
   
1,269,938
     
783,736
 
Debt securities available for sale, at fair value
   
241,475
     
236,832
 
Debt securities held to maturity (fair value 2021 - $140,412 and 2020 - $83,246)
   
137,569
     
79,468
 
Federal Home Loan Bank (FHLB) stock
   
11,558
     
11,558
 
Loans held for sale, at fair value
   
2,635
     
5,422
 
Total loans
   
1,136,613
     
1,429,331
 
Allowance for loan losses
   
(16,532
)
   
(17,408
)
Net loans
   
1,120,081
     
1,411,923
 
Premises and equipment – net
   
42,343
     
43,254
 
Accrued interest receivable
   
4,005
     
5,625
 
Bank-owned life insurance
   
52,781
     
42,516
 
Other real estate owned - net
   
2,343
     
2,537
 
Net deferred tax asset
   
2,126
     
2,059
 
Other assets
   
14,646
     
17,096
 
Total assets
 
$
2,901,500
   
$
2,642,026
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Noninterest-bearing
 
$
934,477
   
$
809,437
 
Interest-bearing
   
1,618,698
     
1,489,150
 
Total deposits
   
2,553,175
     
2,298,587
 
Other borrowed funds
   
85,000
     
70,000
 
Long-term debt
   
     
20,619
 
Accrued expenses and other liabilities
   
11,112
     
12,977
 
Total liabilities
   
2,649,287
     
2,402,183
 
Commitments and contingent liabilities
   
     
 
Shareholders’ equity
               
Common stock, no par value, 200,000,000 shares authorized; 34,189,799 and 34,197,519 shares issued and outstanding at September 30, 2021 and December 31, 2020
   
218,991
     
218,528
 
Retained earnings
   
31,728
     
17,101
 
Accumulated other comprehensive income
   
1,494
     
4,214
 
Total shareholders’ equity
   
252,213
     
239,843
 
Total liabilities and shareholders’ equity
 
$
2,901,500
   
$
2,642,026
 

See accompanying notes to consolidated financial statements.

-4-

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

   
Three Months
Ended
September 30,
2021
   
Three Months
Ended
September 30,
2020
   
Nine Months
Ended
September 30,
2021
   
Nine Months
Ended
September 30,
2020
 
Interest income
                       
Loans, including fees
 
$
12,761
   
$
13,854
   
$
39,530
   
$
43,194
 
Securities
                               
Taxable
   
786
     
867
     
2,365
     
2,881
 
Tax-exempt
   
777
     
861
     
2,295
     
2,607
 
FHLB Stock
   
44
     
100
     
162
     
339
 
Federal funds sold and other short-term investments
   
474
     
140
     
948
     
802
 
Total interest income
   
14,842
     
15,822
     
45,300
     
49,823
 
Interest expense
                               
Deposits
   
209
     
621
     
732
     
3,118
 
Other borrowings
   
325
     
364
     
1,006
     
1,069
 
Long-term debt
   
12
     
163
     
319
     
612
 
Total interest expense
   
546
     
1,148
     
2,057
     
4,799
 
Net interest income
   
14,296
     
14,674
     
43,243
     
45,024
 
Provision for loan losses
   
(550
)
   
500
     
(1,300
)
   
2,200
 
Net interest income after provision for loan losses
   
14,846
     
14,174
     
44,543
     
42,824
 
Noninterest income
                               
Service charges and fees
   
1,183
     
987
     
3,240
     
2,957
 
Net gains on mortgage loans
   
851
     
1,546
     
4,177
     
4,045
 
Trust fees
   
1,079
     
921
     
3,217
     
2,801
 
ATM and debit card fees
   
1,676
     
1,542
     
4,844
     
4,199
 
Bank owned life insurance (“BOLI”) income
   
260
     
215
     
787
     
688
 
Other
   
593
     
881
     
2,084
     
2,214
 
Total noninterest income
   
5,642
     
6,092
     
18,349
     
16,904
 
Noninterest expense
                               
Salaries and benefits
   
6,278
     
6,480
     
19,192
     
18,937
 
Occupancy of premises
   
992
     
1,026
     
3,023
     
2,984
 
Furniture and equipment
   
1,014
     
967
     
2,929
     
2,704
 
Legal and professional
   
272
     
260
     
768
     
798
 
Marketing and promotion
   
175
     
239
     
525
     
716
 
Data processing
   
839
     
761
     
2,602
     
2,309
 
FDIC assessment
   
204
     
131
     
532
     
207
 
Interchange and other card expense
   
391
     
367
     
1,137
     
1,041
 
Bond and D&O Insurance
   
112
     
104
     
334
     
313
 
Other
   
1,273
     
1,198
     
3,711
     
3,750
 
Total noninterest expenses
   
11,550
     
11,533
     
34,753
     
33,759
 
Income before income tax
   
8,938
     
8,733
     
28,139
     
25,969
 
Income tax expense
   
1,736
     
1,613
     
5,341
     
4,800
 
Net income
 
$
7,202
   
$
7,120
   
$
22,798
   
$
21,169
 
Basic earnings per common share
 
$
0.21
   
$
0.21
   
$
0.67
   
$
0.62
 
Diluted earnings per common share
 
$
0.21
   
$
0.21
   
$
0.67
   
$
0.62
 
Cash dividends per common share
 
$
0.08
   
$
0.08
   
$
0.24
   
$
0.24
 

See accompanying notes to consolidated financial statements.

-5-


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

   
Three Months
Ended
September 30,
2021
   
Three Months
Ended
September 30,
2020
   
Nine Months
Ended
September 30,
2021
   
Nine Months
Ended
September 30,
2020
 
Net income
 
$
7,202
   
$
7,120
   
$
22,798
   
$
21,169
 
Other comprehensive income:
                               
Unrealized gains (losses):
                               
Net change in unrealized gains (losses) on debt securities available for sale
   
(792
)
   
39
     
(3,443
)
   
3,865
 
Tax effect
   
166
     
(8
)
   
723
     
(814
)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
   
(626
)
   
31
     
(2,720
)
   
3,051
 
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
   
(626
)
   
31
     
(2,720
)
   
3,051
 
Comprehensive income
 
$
6,576
   
$
7,151
   
$
20,078
   
$
24,220
 

See accompanying notes to consolidated financial statements.

-6-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three and nine month periods ended September 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, July 1, 2020
 
$
218,349
   
$
6,425
   
$
4,564
   
$
229,338
 
Net income for the three months ended September 30, 2020
   
     
7,120
     
     
7,120
 
Cash dividends at $0.08 per share
   
     
(2,720
)
   
     
(2,720
)
Repurchase of 1,696 shares for taxes withheld on vested restricted stock
    (13 )                 (13 )
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
31
     
31
 
Stock compensation expense
   
109
     
     
     
109
 
Balance, September 30, 2020
 
$
218,445
   
$
10,825
   
$
4,595
   
$
233,865
 
                                 
                                 
Balance, July 1, 2021
 
$
218,846
   
$
27,251
   
$
2,120
   
$
248,217
 
Net income for the three months ended September 30, 2021
   
     
7,202
     
     
7,202
 
Cash dividends at $0.08 per share
   
     
(2,725
)
   
     
(2,725
)
Repurchase of 2,518 shares for taxes withheld on vested restricted stock
   
(21
)
   
     
     
(21
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
(626
)
   
(626
)
Stock compensation expense
   
166
     
     
     
166
 
Balance, September 30, 2021
 
$
218,991
   
$
31,728
   
$
1,494
   
$
252,213
 

 
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 nine months ended September 30, 2020
   
     
21,169
     
     
21,169
 
Cash dividends at $0.24 per share
   
     
(8,160
)
   
     
(8,160
)
Repurchase of 3,304 shares for taxes withheld on vested restricted stock
   
(24
)
   
     
     
(24
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
3,051
     
3,051
 
Stock compensation expense
   
360
     
     
     
360
 
Balance, September 30, 2020
 
$
218,445
   
$
10,825
   
$
4,595
   
$
233,865
 
                                 
                                 
Balance, January 1, 2021
 
$
218,528
   
$
17,101
   
$
4,214
   
$
239,843
 
Net income for the nine months ended September 30, 2021
   
     
22,798
     
     
22,798
 
Cash dividends at $0.24 per share
   
     
(8,171
)
   
     
(8,171
)
Repurchase of 3,859 shares for taxes withheld on vested restricted stock
   
(34
)
   
     
     
(34
)
Net change in unrealized gain on debt securities available for sale, net of tax
   
     
     
(2,720
)
   
(2,720
)
Stock compensation expense
   
497
     
     
     
497
 
Balance, September 30, 2021
 
$
218,991
   
$
31,728
   
$
1,494
   
$
252,213
 

See accompanying notes to consolidated financial statements.

-7-

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


   
Nine Months
Ended
September 30,
2021
   
Nine Months
Ended
September 30,
2020
 
Cash flows from operating activities
           
Net income
 
$
22,798
   
$
21,169
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
1,863
     
2,105
 
Stock compensation expense
   
497
     
360
 
Provision for loan losses
   
(1,300
)
   
2,200
 
Origination of loans for sale
   
(107,845
)
   
(120,171
)
Proceeds from sales of loans originated for sale
   
114,809
     
124,002
 
Net gains on mortgage loans
   
(4,177
)
   
(4,045
)
Write-down of other real estate
   
4
     
32
 
Net loss on sales of other real estate
   
20
     
 
Deferred income tax expense (benefit)
   
656
   
(1,174
)
Change in accrued interest receivable and other assets
   
4,071
     
(7,450
)
Earnings in bank-owned life insurance
   
(787
)
   
(688
)
Change in accrued expenses and other liabilities
   
(1,865
)
   
4,483
 
Net cash from operating activities
   
28,744
     
20,823
 
Cash flows from investing activities
               
Loan originations and payments, net
   
293,142
     
(159,550
)
Purchases of securities available for sale
   
(71,864
)
   
(102,158
)
Purchases of securities held to maturity
   
(72,916
)
   
(29,745
)
Purchase of bank-owned life insurance
    (10,000 )      
Proceeds from:
               
Maturities and calls of securities
   
47,220
     
86,667
 
Principal paydowns on securities
   
31,317
     
27,423
 
Sales of other real estate
   
170
     
92
 
Proceeds from payout of bank-owned insurance claim
   
560
     
 
Additions to premises and equipment
   
(935
)
   
(2,103
)
Net cash from investing activities
   
216,694
     
(179,374
)
Cash flows from financing activities
               
Change in deposits
   
254,588
     
417,285
 
Repayments and maturities of other borrowed funds
    (30,619 )      
Proceeds from other borrowed funds
   
25,000
     
10,000
 
Repurchase of shares for taxes withheld on vested restricted stock
   
(34
)
   
(24
)
Cash dividends paid
   
(8,171
)
   
(8,160
)
Net cash from financing activities
   
240,764
     
419,101
 
Net change in cash and cash equivalents
   
486,202
     
260,550
 
Cash and cash equivalents at beginning of period
   
783,736
     
272,450
 
Cash and cash equivalents at end of period
 
$
1,269,938
   
$
533,000
 

See accompanying notes to consolidated financial statements.

-8-

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


   
Nine Months
Ended
September 30,
2021
   
Nine Months
Ended
September 30,
2020
 
Supplemental cash flow information
           
Interest paid
 
$
2,227
   
$
5,043
 
Income taxes paid
   
4,750
     
5,315
 
Supplemental noncash disclosures:
               
Security settlement
   
     
1,937
 

See accompanying notes to consolidated financial statements.


-9-

 Index
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 previously owned all of the common stock of Macatawa Statutory Trust II. This was a grantor trust that issued trust preferred securities and was not consolidated with the Company under accounting principles generally accepted in the United States of America.  On July 7, 2021, the Company redeemed all of the $20.0 million of outstanding trust preferred securities and $619,000 of 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 September 30, 2021, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  As of September 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 nine months ended September 30, 2021, the Bank had generated and received SBA approval on 1,000 PPP loans totaling $128.1 million and generated $5.6 million in related deferred PPP fees.  In the nine months ended September 30, 2021, 1,742 PPP loans totaling $279.9 million had been forgiven by the SBA and a total of $7.1 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 fisc