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, 2022

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: 34,253,962 shares of the Company’s Common Stock (no par value) were outstanding as of April 28, 2022.



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  COVID-19 pandemic on the business, financial conditions 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, future amounts of unrecognized tax benefits 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. 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, 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 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, 2021. 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 March 31, 2022 (unaudited) and December 31, 2021
(Dollars in thousands, except per share data)


   
March 31,
2022
   
December 31,
2021
 
ASSETS
           
Cash and due from banks
 
$
31,957
   
$
23,669
 
Federal funds sold and other short-term investments
   
1,078,983
     
1,128,119
 
Cash and cash equivalents
   
1,110,940
     
1,151,788
 
Debt securities available for sale, at fair value
   
346,114
     
416,063
 
Debt securities held to maturity (fair value 2022 - $246,715 and 2021 - $139,272)
   
254,565
     
137,003
 
Federal Home Loan Bank (FHLB) stock
   
10,211
     
11,558
 
Loans held for sale, at fair value
   
855
     
1,407
 
Total loans
   
1,101,902
     
1,108,993
 
Allowance for loan losses
   
(14,616
)
   
(15,889
)
Net loans
   
1,087,286
     
1,093,104
 
Premises and equipment – net
   
41,413
     
41,773
 
Accrued interest receivable
   
4,896
     
4,088
 
Bank-owned life insurance
   
52,720
     
52,468
 
Other real estate owned - net
   
2,343
     
2,343
 
Net deferred tax asset
   
4,859
     
2,163
 
Other assets
   
13,681
     
14,993
 
Total assets
 
$
2,929,883
   
$
2,928,751
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Noninterest-bearing
 
$
918,907
   
$
886,115
 
Interest-bearing
   
1,663,390
     
1,691,843
 
Total deposits
   
2,582,297
     
2,577,958
 
Other borrowed funds
   
85,000
     
85,000
 
Accrued expenses and other liabilities
   
16,984
     
11,788
 
Total liabilities
   
2,684,281
     
2,674,746
 
Commitments and contingent liabilities
   
     
 
Shareholders’ equity
               
Common stock, no par value, 200,000,000 shares authorized; 34,253,962 and 34,259,945 shares issued and outstanding at March 31, 2022 and December 31, 2021
   
219,266
     
219,082
 
Retained earnings
   
38,492
     
35,220
 
Accumulated other comprehensive loss
   
(12,156
)
   
(297
)
Total shareholders’ equity
   
245,602
     
254,005
 
Total liabilities and shareholders’ equity
 
$
2,929,883
   
$
2,928,751
 

See accompanying notes to consolidated financial statements.

-4-


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three month periods ended March 31, 2022 and 2021
(unaudited)
(Dollars in thousands, except per share data)


   
Three Months
Ended
March 31,
2022
   
Three Months
Ended
March 31,
2021
 
Interest income
           
Loans, including fees
 
$
10,397
   
$
13,467
 
Securities
               
Taxable
   
1,434
     
787
 
Tax-exempt
   
732
     
758
 
FHLB Stock
   
51
     
61
 
Federal funds sold and other short-term investments
   
529
     
201
 
Total interest income
   
13,143
     
15,274
 
Interest expense
               
Deposits
   
158
     
279
 
Other borrowings
   
320
     
352
 
Long-term debt
   
     
153
 
Total interest expense
   
478
     
784
 
Net interest income
   
12,665
     
14,490
 
Provision for loan losses
   
(1,500
)
   
 
Net interest income after provision for loan losses
   
14,165
     
14,490
 
Noninterest income
               
Service charges and fees
   
1,211
     
992
 
Net gains on mortgage loans
   
308
     
2,015
 
Trust fees
   
1,088
     
1,005
 
ATM and debit card fees
   
1,599
     
1,485
 
Bank owned life insurance (“BOLI”) income
   
240
     
276
 
Other
   
519
     
766
 
Total noninterest income
   
4,965
     
6,539
 
Noninterest expense
               
Salaries and benefits
   
6,289
     
6,412
 
Occupancy of premises
   
1,172
     
1,037
 
Furniture and equipment
   
1,016
     
937
 
Legal and professional
   
194
     
222
 
Marketing and promotion
   
195
     
175
 
Data processing
   
884
     
908
 
FDIC assessment
   
180
     
170
 
Interchange and other card expense
   
373
     
358
 
Bond and D&O Insurance
   
130
     
111
 
Other
   
1,306
     
1,155
 
Total noninterest expenses
   
11,739
     
11,485
 
Income before income tax
   
7,391
     
9,544
 
Income tax expense
   
1,391
     
1,766
 
Net income
 
$
6,000
   
$
7,778
 
Basic earnings per common share
 
$
0.18
   
$
0.23
 
Diluted earnings per common share
 
$
0.18
   
$
0.23
 
Cash dividends per common share
 
$
0.08
   
$
0.08
 

See accompanying notes to consolidated financial statements.

-5-


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three month periods ended March 31, 2022 and 2021
(unaudited)
(Dollars in thousands)


   
Three Months
Ended
March 31,
2022
   
Three Months
Ended
March 31,
2021
 
Net income
 
$
6,000
   
$
7,778
 
Other comprehensive income (loss):
               
Unrealized gains (losses):
               
Net change in unrealized gains (losses) on debt securities available for sale
   
(15,119
)
   
(3,390
)
Net unrealized gain at time of transfer on securities transferred to held-to-maturity
    113        
Amortization of net unrealized gains on securities transferred to held-to-maturity
    (6 )      
Tax effect
   
3,153
     
712
 
Net change in unrealized gains (losses) on debt securities available for sale, net of tax
   
(11,859
)
   
(2,678
)
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
   
(11,859
)
   
(2,678
)
Comprehensive income (loss)
 
$
(5,859
)
 
$
5,100
 

See accompanying notes to consolidated financial statements.

-6-


MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three month periods ended March 31, 2022 and 2021
(unaudited)
(Dollars in thousands, except per share data)


   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders’
Equity
 
Balance, January 1, 2021
 
$
218,528
   
$
17,101
   
$
4,214
   
$
239,843
 
Net income for the three months ended March 31, 2021
   
     
7,778
     
     
7,778
 
Cash dividends at $0.08 per share
   
     
(2,723
)
   
     
(2,723
)
Repurchase of 526 shares for taxes withheld on vested restricted stock
   
(5
)
   

     

     
(5
)
Other comprehensive income, net of tax
   
     
     
(2,678
)
   
(2,678
)
Stock compensation expense
   
164
     
     
     
164
 
Balance, March 31, 2021
 
$
218,687
   
$
22,156
   
$
1,536
   
$
242,379
 

Balance, January 1, 2022
 
$
219,082
   
$
35,220
   
$
(297
)
 
$
254,005
 
Net income for the three months ended March 31, 2022
   
     
6,000
     
     
6,000
 
Cash dividends at $0.08 per share
   
     
(2,728
)
   
     
(2,728
)
Repurchase of 1,338 shares for taxes withheld on vested restricted stock
   
(13
)
   
     
     
(13
)
Other comprehensive income, net of tax
                   
(11,859
)
   
(11,859
)
Stock compensation expense
   
197
     
     
     
197
 
Balance, March 31, 2022
 
$
219,266
   
$
38,492
   
$
(12,156
)
 
$
245,602
 

See accompanying notes to consolidated financial statements.

-7-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month periods ended March 31, 2022 and 2021
(unaudited)
(Dollars in thousands)


   
Three Months
Ended
March 31,
2022
   
Three Months
Ended
March 31,
2021
 
Cash flows from operating activities
           
Net income
 
$
6,000
   
$
7,778
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
737
     
498
 
Stock compensation expense
   
197
     
164
 
Provision for loan losses
   
(1,500
)
   
 
Origination of loans for sale
   
(10,148
)
   
(47,296
)
Proceeds from sales of loans originated for sale
   
11,008
     
45,418
 
Net gains on mortgage loans
   
(308
)
   
(2,015
)
Write-down of other real estate
   
     
4
 
Net loss on sales of other real estate
   
     
14
 
Deferred income tax expense (benefit)
   
456
     
(528
)
Earnings in bank-owned life insurance
   
(240
)
   
(276
)
Change in accrued interest receivable and other assets
   
504
     
505
 
Change in accrued expenses and other liabilities
   
(551
)
   
421
 
Net cash from operating activities
   
6,155
     
4,687
 
Cash flows from investing activities
               
Loan originations and payments, net
   
7,318
     
46,424
 
Purchases of securities available for sale
   
(72,557
)
   
(23,106
)
Purchases of securities held to maturity
   
(28,120
)
   
(10,172
)
Proceeds from:
               
Maturities and calls of securities
   
8,305
     
14,239
 
Principal paydowns on securities
   
35,341
     
9,197
 
Sales of other real estate
   
     
148
 
Proceeds from redemption of FHLB stock
    1,347        
Proceeds from payout of bank-owned insurance claim
   
     
560
 
Additions to premises and equipment
   
(235
)
   
(458
)
Net cash from investing activities
   
(48,601
)
   
36,832
 
Cash flows from financing activities
               
Change in deposits
   
4,339
     
89,358
 
Repayments and maturities of other borrowed funds
    (25,000 )      
Proceeds from other borrowed funds
   
25,000
     
 
Repurchase of shares for taxes withheld on vested restricted stock
   
(13
)
   
(5
)
Cash dividends paid
   
(2,728
)
   
(2,723
)
Net cash from financing activities
   
1,598
     
86,630
 
Net change in cash and cash equivalents
   
(40,848
)
   
128,149
 
Cash and cash equivalents at beginning of period
   
1,151,788
     
783,736
 
Cash and cash equivalents at end of period
 
$
1,110,940
   
$
911,885
 

See accompanying notes to consolidated financial statements.

-8-

MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three month periods ended March 31, 2022 and 2021
(unaudited)
(Dollars in thousands)


   
Three Months
Ended
March 31,
2022
   
Three Months
Ended
March 31,
2021
 
Supplemental cash flow information
           
Interest paid
 
$
481
   
$
786
 
Income taxes paid
   
     
 
Supplemental noncash disclosures:
               
Security settlement
   
5,747
     
 
Transfer of securities from available for sale to held to maturity
    123,469        

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.

Recent Events:   In response to the COVID-19 pandemic, federal state and local governments have taken and continue to take actions designed to mitigate the effect on public health and to address the economic impact from the virus.  The effects of COVID-19 and its related variants, such as Omicron and Delta, could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all.  Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations.

In March 2020, guidance issued by the federal banking agencies in consultation with FASB and the Coronavirus Aid, Relief and Economic Security (“CARES”) Act collectively 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.   Through March 31,2022, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  As of March 31, 2022, all of these modifications had expired and the loans had returned to their contractual payment terms.

The Bank was a participating lender in the Small Business Administration’s (“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. Fees generated based on the origination of PPP loans 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.  

In 2020:
 
The Bank originated 1,738 PPP loans totaling $346.7 million in principal.
 
Fees generated totaled $10.0 million.
 
765 PPP loans totaling $113.5 million were forgiven.
 
Total net fees of $5.4 million were recognized.
 
In 2021: 
 
The Bank originated 1,000 PPP loans totaling $128.1 million in principal.
 
Fees generated totaled $5.6 million.
 
1,722 PPP loans totaling $318.4 million were forgiven.
   
 
Total net fees of $8.3 million were recognized.

In the three months ended March 31, 2022:
 
175 PPP loans totaling $35.5 million were forgiven.
 
Total net fees of $1.0 million were recognized.

As of March 31, 2022, 70 PPP loans totaling $7.7 million in principal remained outstanding and total net fees of $281,000 remained unrecognized.

-10-


MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.

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 loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair values of financial instruments are particularly subject to change.

Allowance for Loan Losses: The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance for loan losses 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, 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 uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance for loan losses.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At March 31, 2022, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

A loan is impaired when, based on current information and events, it is believed to be probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Commercial and commercial real estate loans with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated and the loan is reported at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.

Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed unless they add value to the property.

-11-


MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to 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 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.

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, 2022 and December 31, 2021, the total notional amount of such agreements was $138.3 million and $140.7 million, respectively, and resulted in a derivative asset with a fair value of $3.9 million and $3.3 million, respectively, which were included in other assets and a derivative liability of $3.9 million and $3.3 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.
    
-12-


MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $(74,000) at March 31, 2022 and $25,000 at December 31, 2021.  The net fair value of mortgage backed security derivatives was $94,000 at March 31, 2022 and $(13,000) at December 31, 2021.

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 March 31, 2022 and December 31, 2021, these loans had net unrealized gains of $2,000 and $51,000, respectively, 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.
 
Newly Issued Not Yet Effective StandardsFASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU 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 in current GAAP 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. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down.

ASU No. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates updated the effective date of this ASU for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022.  The Company selected a software vendor for applying this new ASU for Current Expected Credit Losses (“CECL”), began implementation of the software in the second quarter of 2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018.  The Company went live with this software beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation.  In the periods since, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments.  The Company anticipates continuing to run parallel computations as it continues to evaluate the impact of adoption of the new standard.

ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination.  Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.  We are utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period.  We have discontinued the use of new LIBOR-based loans and interest rate derivatives, according to regulatory guidelines.  The amended guidance under Topic 848 and our ability to elect its temporary optional expedients and exceptions are effective for us through December 31, 2022.  We expect to adopt the LIBOR transition relief allowed under this standard.

-13-


MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ASU No. 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.  This ASU expands the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio.  To reflect this expansion, the last-of-layer method is renamed the portfolio layer method.  This ASU expands the scope of the portfolio layer method to include nonprepayable assets, specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on the accounting for and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.  This ASU is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  As the Company does not engage in this type of hedging activity, the Company does not believe adoption of this ASU will have any impact on its financial results or disclosures.

ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  This ASU eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty.  This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan.  Additionally, the ASU requires disclosure of current period gross writeoffs by year of origination for financing receivables.  This ASU is effective for the Company for fiscal years beginning after December 15, 2022.  The Company does not believe adoption of this ASU will have a material impact on its financial results and will add the required disclosures for gross chargeoffs in its financial statements upon adoption of the new standard.

-14-


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):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2022
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$
143,432
   
$
14
   
$
(6,511
)
 
$
136,935
 
U.S. Agency MBS and CMOs
   
92,674
     
11
     
(5,511
)
   
87,174
 
Tax-exempt state and municipal bonds
   
37,476
     
211
     
(136
)
   
37,551
 
Taxable state and municipal bonds
   
82,278
     
78
     
(3,531
)
   
78,825
 
Corporate bonds and other debt securities
   
5,749
     
9
     
(129
)
   
5,629
 
   
$
361,609
   
$
323
   
$
(15,818
)
 
$
346,114
 
                                 
Held to Maturity
                               
U.S. Treasury
  $ 123,347     $     $ (5,834 )   $ 117,513  
Tax-exempt state and municipal bonds
    131,218
      178
      (2,194 )     129,202
 

 
$
254,565
   
$
178
   
$
(8,028
)
 
$
246,715
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2021
                       
Available for Sale
                       
U.S. Treasury and federal agency securities
 
$