Macatawa Bank(MCBC) - 2020 Q4 - Annual Report

Part I Item 1: Business Macatawa Bank Corporation, a Michigan-based bank holding company, provides full banking services across 26 branches, with $2.64 billion in assets as of December 31, 2020, significantly impacted by the COVID-19 pandemic and Federal Reserve rate cuts Key Financial Metrics | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $2.64 billion | - | | Total Loans | $1.43 billion | - | | Total Deposits | $2.30 billion | - | | Shareholders' Equity | $239.8 million | - | | Net Income | $30.2 million | $32.0 million | - The company's earnings were impacted by higher provisions for loan losses due to the COVID-19 pandemic and lower net interest income from the 150 basis point decrease in the federal funds rate in March 2020[14] - The company actively participated in the Small Business Administration's (SBA) Paycheck Protection Program (PPP), originating 1,738 loans totaling $346.7 million in 2020, with $113.5 million of these loans forgiven by year-end[19][20] - In response to the pandemic, the company modified 726 individual loans with aggregate principal balances of $337.2 million, with only 6 loans totaling $2.1 million remaining under COVID-19 modification by December 31, 2020[18] Nonperforming Assets | (Dollars in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Nonperforming loans | $533 | $203 | $1,304 | | Other real estate owned | $2,537 | $2,748 | $3,380 | | Total nonperforming assets | $3,070 | $2,951 | $4,684 | Loan Portfolio The loan portfolio is diversified across commercial & industrial, commercial real estate, residential mortgage, and consumer loans, totaling $1.43 billion as of December 31, 2020, with commercial and industrial loans (including PPP) representing the largest segment at 47% Loan Portfolio Composition (Dec 31, 2020) | Loan Category | Amount (Dec 31, 2020) | % of Total Loans | | :--- | :--- | :--- | | Commercial and industrial (incl. PPP) | $665.4 million | 47% | | Real estate - mortgage (Commercial) | $488.0 million | 34% | | Residential mortgage | $149.6 million | 11% | | Real estate - construction | $64.2 million | 4% | | Consumer | $62.2 million | 4% | | Total Loans | $1,429.3 million | 100% | - Commercial and industrial loans increased from $513.3 million at year-end 2018 to $665.4 million at year-end 2020, with the 2020 balance including $229.1 million of PPP loans[28][48] - The bank's policy is to sell the majority of its fixed-rate residential mortgage loans in the secondary market, retaining 18% of the total dollar volume originated in 2020, down from 34% in 2019[41] Deposit Portfolio The bank offers a broad range of deposit services, with total average deposits growing to $2.04 billion in 2020, led by a significant increase in noninterest-bearing demand deposits Average Deposit Balances (in thousands) | Average Deposit Balances (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Noninterest bearing demand | $659,387 | $472,987 | | Interest bearing demand | $535,922 | $446,452 | | Savings and money market accounts | $715,135 | $625,307 | | Time | $134,199 | $148,189 | | Total deposits | $2,044,643 | $1,692,935 | - The weighted average rate paid on total deposits decreased from 0.7% in 2019 to 0.3% in 2020, reflecting the lower interest rate environment[59] Securities Portfolio The $316.3 million securities portfolio at year-end 2020 is primarily invested in lower credit risk bonds, classified for sale or held to maturity, focusing on safety, earnings, and liquidity Securities Portfolio Composition (in thousands) | Securities Category (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Tax-exempt state and municipal bonds | $125,110 | $128,682 | | U.S. Agency MBS and CMOs | $64,983 | $46,201 | | U.S. Treasury and federal agency securities | $64,110 | $74,749 | | Taxable state and municipal bonds | $57,177 | $52,022 | | Corporate bonds | $4,920 | $6,315 | | Total | $316,300 | $307,969 | Supervision and Regulation The company and its bank subsidiary are extensively regulated by federal and state authorities, adhering to Basel III capital requirements and categorized as 'well capitalized' as of December 31, 2020 - Macatawa Bank Corporation is a registered bank holding company subject to regulation by the Federal Reserve Board and is expected to act as a source of financial strength to the Bank[84][85] - The Bank is subject to Basel III capital rules, requiring a minimum Common Equity Tier 1 (CET1) ratio of 7.0%, and was categorized as 'well capitalized' as of December 31, 2020[98][101] - The Bank's ability to pay dividends to the holding company is restricted by Michigan law and federal regulations, requiring maintenance of certain surplus and capital levels[90][102][103] Item 1A: Risk Factors The company faces significant risks from the COVID-19 pandemic, credit losses, geographic concentration, interest rate fluctuations, extensive regulation, cybersecurity threats, and reliance on key personnel - The COVID-19 pandemic poses a significant risk, potentially leading to increased loan deferrals, higher delinquencies and loan losses, and decreased loan demand[116] - The company's loan portfolio has substantial exposure to commercial and residential real estate, making it sensitive to downturns in the local real estate market and general economic conditions[122][123] - Changes in interest rates can negatively affect net interest income; the low-rate environment has compressed net interest spread, and unexpected changes could adversely impact financial results[128][129] - The banking industry is heavily regulated, and changes in laws or regulations could adversely affect profitability and capital levels[131] - Cybersecurity incidents, unauthorized disclosure of customer information, and technological changes pose significant operational and reputational risks[141][144][145] Item 2: Properties The company operates from 28 owned or leased facilities in western Michigan, with its main administrative offices located in Holland, Michigan - As of February 18, 2021, the company operated from 28 locations, including its main office, a loan center, and 26 branch offices, with three of these facilities being leased[164] Part II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under MCBC, with 2020 prices ranging from $6.01 to $11.24, and quarterly dividends totaling $0.32 per share, while 7,976 shares were repurchased for tax obligations Common Stock Market and Dividend Information (2020) | Quarter 2020 | High Price | Low Price | Dividend Declared | | :--- | :--- | :--- | :--- | | First Quarter | $11.24 | $6.01 | $0.08 | | Second Quarter | $8.48 | $6.15 | $0.08 | | Third Quarter | $7.97 | $6.23 | $0.08 | | Fourth Quarter | $8.75 | $6.45 | $0.08 | - As of February 18, 2021, there were approximately 730 owners of record and 5,303 beneficial owners of the company's common stock[170] Item 6: Selected Financial Data This section provides a five-year summary of key financial data, showing consistent asset growth to $2.64 billion in 2020, with net income of $30.2 million and improved credit quality Selected Consolidated Financial Data (2016-2020) | (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $2,642,026 | $2,068,770 | $1,975,124 | $1,890,232 | $1,741,013 | | Net income | $30,165 | $31,979 | $26,379 | $16,292 | $15,951 | | Diluted EPS | $0.88 | $0.94 | $0.78 | $0.48 | $0.47 | | Dividends per common share | $0.32 | $0.28 | $0.25 | $0.18 | $0.12 | | Return on average assets | 1.27% | 1.59% | 1.40% | 0.93% | 0.95% | | Nonperforming assets to total assets | 0.12% | 0.14% | 0.24% | 0.33% | 0.72% | Item 7: Management's Discussion and Analysis of Results of Operations and Financial Condition Management's discussion provides a detailed analysis of the company's financial performance and condition for 2020 compared to 2019, highlighting a decrease in net income due to lower net interest income and higher loan loss provisions, despite significant asset and deposit growth Results of Operations Net income decreased to $30.2 million in 2020 from $32.0 million in 2019, primarily due to lower net interest income from margin compression and a $3.0 million provision for loan losses, partially offset by increased noninterest income from mortgage loan sales Key Operating Metrics (2019-2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $61.5 million | $63.5 million | | Net Interest Margin | 2.75% | 3.38% | | Provision for Loan Losses | $3.0 million | ($0.45 million) | | Noninterest Income | $24.0 million | $19.7 million | | Noninterest Expense | $45.7 million | $44.2 million | | Net Income | $30.2 million | $32.0 million | - The decrease in net interest income was primarily due to a 104 basis point drop in the yield on earning assets, which was not fully offset by a 56 basis point decrease in the cost of funds[187][190] - Net gains on sales of mortgage loans increased by $4.1 million due to higher sales volume ($160.8 million in 2020 vs. $81.7 million in 2019) and an improved loan sale margin (4.03% in 2020 vs. 2.87% in 2019)[201][202] Financial Condition Total assets grew by $573.3 million to $2.64 billion at year-end 2020, driven by a $545.3 million surge in deposits and a $43.7 million increase in total loans, while shareholders' equity rose by $22.4 million - Total assets grew 27.7% from $2.07 billion at YE 2019 to $2.64 billion at YE 2020[217] - Total deposits increased by $545.3 million (31.1%) during 2020, with noninterest-bearing checking accounts growing by $326.9 million[217][268] - The commercial loan portfolio grew by $119.6 million, which includes a remaining balance of $229.1 million in PPP loans at year-end[221] Allowance for Loan Losses The allowance for loan losses was $17.4 million, or 1.22% of total loans, at year-end 2020, reflecting a $3.0 million provision and $2.8 million in net charge-offs, including a significant single commercial loan charge-off Allowance for Loan Losses Metrics | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Allowance for Loan Losses | $17.4 million | $17.2 million | | ALL as % of Total Loans | 1.22% | 1.24% | | ALL as % of Total Loans (ex-PPP) | 1.45% | N/A | | ALL to Nonperforming Loans | 3,266% | 8,473% | - The company added a total of 22 basis points in qualitative factor adjustments to the ALL during 2020 to address the economic uncertainty caused by the COVID-19 pandemic[253] - Net charge-offs were $2.8 million in 2020, compared to net recoveries of $774,000 in 2019, driven by a single $4.1 million charge-off on a loan to a movie theater business[196][246] Item 7A: Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a simulation model projecting that a 100 basis point gradual rate increase would raise net interest income by 4.67% over twelve months Interest Rate Sensitivity Analysis | Interest Rate Scenario | % Change in Net Interest Income (12-month forecast) | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | Up 200 bps | +9.94% | +7.19% | | Up 100 bps | +4.67% | +3.56% | | Down 100 bps | +0.36% | +0.13% | Item 8: Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, including balance sheets, income statements, cash flows, and detailed notes, with an unqualified audit opinion from BDO USA, LLP - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position of the company[304] - The critical audit matter identified by the auditor was the estimation of the qualitative general reserve adjustment to the allowance for loan losses, due to the highly subjective nature of management's assumptions[311] Note 3 – Loans This note details the loan portfolio, credit quality, and allowance for loan losses activity, showing total loans of $1.43 billion at year-end 2020, minimal nonaccrual loans, and decreased Troubled Debt Restructurings Loan Portfolio Breakdown (in thousands) | Loan Category (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total commercial and industrial | $665,410 | $499,572 | | Total commercial real estate | $552,173 | $598,458 | | Total consumer | $211,748 | $287,597 | | Total loans | $1,429,331 | $1,385,627 | - Total Troubled Debt Restructurings (TDRs) decreased from $13.7 million at YE 2019 to $9.4 million at YE 2020[410] - Of the $1.22 billion in commercial loans at year-end 2020, $5.8 million were classified as substandard or worse, compared to $6.6 million of a $1.10 billion portfolio at year-end 2019[422][423] Note 17 – Shareholders' Equity This note details regulatory capital requirements, confirming both the consolidated company and the Bank exceeded all minimum Basel III capital ratios, categorized as 'well capitalized' as of December 31, 2020 Consolidated Capital Ratios (Dec 31, 2020) | Consolidated Ratios | Dec 31, 2020 | Minimum w/ Buffer | | :--- | :--- | :--- | | CET1 capital ratio | 15.8% | 7.0% | | Tier 1 capital ratio | 17.1% | 8.5% | | Total capital ratio | 18.3% | 10.5% | | Tier 1 leverage ratio | 9.9% | 4.0% | Item 9A: Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion affirmed by an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[487] - The independent auditor issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[492][494] Part III Items 10-14 Information for Items 10 through 14, covering governance, compensation, security ownership, and related transactions, is incorporated by reference from the company's definitive Proxy Statement for the May 4, 2021 Annual Meeting - The company's equity compensation plan, the Stock Incentive Plan of 2015, had 1,108,519 securities available for future issuance as of December 31, 2020[507] Part IV Item 15: Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including auditor consents and CEO/CFO certifications