Macatawa Bank(MCBC) - 2019 Q1 - Quarterly Report

Part I. Financial Information This section provides the company's unaudited consolidated financial statements, detailed notes, and management's analysis for the quarter Consolidated Financial Statements This section presents Macatawa Bank Corporation's unaudited consolidated financial statements, including balance sheets, income, and cash flow statements, for the quarter ended March 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,925,880 | $1,975,124 | | Net Loans | $1,367,675 | $1,388,782 | | Total Deposits | $1,617,864 | $1,676,739 | | Total Liabilities | $1,727,914 | $1,784,271 | | Total Shareholders' Equity | $197,966 | $190,853 | Consolidated Statement of Income Highlights (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | | :--- | :--- | :--- | | Net Interest Income | $16,020 | $14,182 | | Provision for Loan Losses | $(250) | $(100) | | Net Income | $7,646 | $5,755 | | Diluted Earnings Per Share | $0.22 | $0.17 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $8,672 | $7,588 | | Net Cash from Investing Activities | $25,283 | $(6,954) | | Net Cash from Financing Activities | $(61,253) | $(31,249) | | Net Change in Cash and Cash Equivalents | $(27,298) | $(30,615) | Notes to Consolidated Financial Statements This section provides detailed disclosures on significant accounting policies, securities, loan portfolios, credit quality, and regulatory capital, supplementing the financial statements Note 1 – Summary of Significant Accounting Policies This note outlines fundamental accounting policies, including basis of presentation, consolidation, estimates, loan loss allowance, revenue recognition, and new accounting standard adoptions - The company adopted ASU 2016-02 (Leases) on January 1, 2019, which resulted in the recognition of a right-of-use asset of $800,000 and a corresponding lease obligation liability of $800,000[42] - The company is preparing for the adoption of ASU 2016-13 (CECL), which replaces the incurred loss model with an expected credit loss model. The company implemented new software in 2018 and began modeling the new standard's assumptions in Q1 2019, with an effective date after December 15, 2019[45] Note 2 – Securities This note details the company's investment securities portfolio, categorized as Available for Sale and Held to Maturity, including fair value and unrealized gains/losses Securities Portfolio Summary (in thousands) | Category | March 31, 2019 (Fair Value) | December 31, 2018 (Fair Value) | | :--- | :--- | :--- | | Available for Sale | $224,645 | $226,986 | | Held to Maturity | $72,733 | $71,505 | - At March 31, 2019, the company had unrealized losses of $1.7 million on AFS securities and $75,000 on HTM securities. Management determined these were temporary and not due to credit quality, so no other-than-temporary-impairment (OTTI) charges were recorded[50] Note 3 – Loans This note analyzes the loan portfolio composition, allowance for loan losses, credit quality indicators, and details on nonperforming and restructured loans Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Commercial and industrial | $493,891 | $513,345 | | Commercial real estate | $572,800 | $568,711 | | Consumer | $317,876 | $323,602 | | Total Loans | $1,384,567 | $1,405,658 | - The allowance for loan losses was $16.89 million at March 31, 2019. A negative provision of $250,000 was recorded for the quarter, driven by net recoveries of $266,000[53] - Nonaccrual loans significantly decreased to $408,000 at March 31, 2019, from $1.3 million at December 31, 2018[59][61] - Troubled Debt Restructurings (TDRs) totaled $15.9 million at March 31, 2019, a slight decrease from $16.15 million at year-end 2018[67] Note 12 – Shareholders' Equity This note details the company's and bank's regulatory capital position, providing Basel III capital ratios and confirming 'well capitalized' status Regulatory Capital Ratios (Consolidated) - March 31, 2019 | Ratio | Actual | Minimum Adequacy | To Be Well Capitalized (Bank only) | | :--- | :--- | :--- | :--- | | CET1 Capital Ratio | 12.6% | 4.5% | 6.5% | | Tier 1 Capital Ratio | 15.1% | 6.0% | 8.0% | | Total Capital Ratio | 16.1% | 8.0% | 10.0% | | Tier 1 Leverage Ratio | 12.2% | 4.0% | 5.0% | - Both the consolidated entity and Macatawa Bank were categorized as 'well capitalized' under regulatory standards as of March 31, 2019[117] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and results of operations for Q1 2019, covering performance drivers, balance sheet, asset quality, capital, and liquidity Results of Operations Net income increased to $7.6 million in Q1 2019, driven by a $1.8 million rise in net interest income from higher asset yields and reduced nonperforming asset expenses Q1 Performance Summary | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $7.6 million | $5.8 million | | Diluted EPS | $0.22 | $0.17 | | Net Interest Income | $16.0 million | $14.2 million | | Net Interest Margin | 3.54% | 3.34% | - The increase in net interest income was driven by a $103.3 million increase in average earning assets and a 48 basis point increase in the average yield on those assets compared to Q1 2018[124] - Expenses related to nonperforming assets fell sharply to $53,000 in Q1 2019 from $461,000 in Q1 2018, contributing to higher profitability[123][142] Financial Condition Total assets decreased to $1.93 billion due to seasonal deposit declines, while the loan portfolio slightly decreased, and asset quality significantly improved with nonperforming assets at 0.19% - Total assets decreased by $49.2 million from year-end 2018, driven by a $58.9 million decrease in deposits, a typical seasonal pattern for the bank's commercial customers[145][180] - Total portfolio loans decreased by $21.1 million in the first three months of 2019, mainly from a $15.4 million reduction in the commercial portfolio[148] Asset Quality Metrics | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Nonperforming Assets (NPAs) | $3.7 million | $4.7 million | | NPAs to Total Assets | 0.19% | 0.24% | | Nonperforming Loans (NPLs) to Total Loans | 0.03% | 0.09% | - The allowance for loan losses to nonperforming loan coverage ratio increased dramatically to 4,130% at March 31, 2019 from 1,294% at year-end 2018, reflecting a significant drop in nonperforming loans[169] Capital Resources and Liquidity The company maintained strong capital and liquidity, with shareholders' equity increasing to $198.0 million, all regulatory capital ratios exceeding 'well capitalized' standards, and ample borrowing capacity - Total shareholders' equity increased to $198.0 million at March 31, 2019, up from $190.9 million at year-end 2018, primarily due to net income[183] - The Bank was categorized as 'well capitalized' with a consolidated Total Capital to risk-weighted assets ratio of 16.1% at March 31, 2019[183][185] - The bank maintained a strong liquidity position with $115.8 million in federal funds sold and other short-term investments, and had available borrowing capacity of approximately $359.4 million as of March 31, 2019[189] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation analysis indicating an asset-sensitive position poised to benefit from rising interest rates Interest Rate Sensitivity Analysis (as of March 31, 2019) | Interest Rate Scenario | Change in Net Interest Income (12-month) | Change in Economic Value of Equity | | :--- | :--- | :--- | | +200 bps | +3.48% | -3.21% | | +100 bps | +1.69% | -1.37% | | -100 bps | -1.92% | -4.00% | Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[210] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[210] Part II – Other Information This section covers other required information not included in Part I, such as unregistered sales of equity securities and a list of exhibits Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds for the period - The company reported 'None' for this item[212] Exhibits This section lists the exhibits filed with the Form 10-Q, including required certifications from the Chief Executive Officer and Chief Financial Officer, as well as interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1) and various XBRL documents[213]