Macatawa Bank(US:MCBC)2024-04-25 20:35Part I. Financial Information Item 1. Consolidated Financial Statements Presents Macatawa Bank Corporation's unaudited consolidated financial statements for Q1 2024, including balance sheets, income, comprehensive income, equity, and cash flows Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Total Assets | 2,614,906 | 2,748,699 | | Net Loans | 1,324,768 | 1,320,944 | | Total Deposits | 2,284,401 | 2,415,730 | | Total Liabilities | 2,321,933 | 2,461,614 | | Total Shareholders' Equity | 292,973 | 287,085 | Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended Mar 31, 2024 ($ thousands) | Three Months Ended Mar 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Net Interest Income | 20,727 | 22,616 | | Provision for Credit Losses | 0 | 0 | | Noninterest Income | 4,660 | 4,528 | | Noninterest Expense | 13,245 | 12,165 | | Net Income | 9,793 | 12,004 | | Diluted EPS | $0.29 | $0.35 | Consolidated Cash Flow Highlights (Unaudited) | Activity | Three Months Ended Mar 31, 2024 ($ thousands) | Three Months Ended Mar 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 10,116 | 12,729 | | Net Cash from (for) Investing Activities | 42,424 | (60,166) | | Net Cash for Financing Activities | (144,411) | (286,995) | | Net Change in Cash and Cash Equivalents | (91,871) | (334,432) | Notes to Consolidated Financial Statements Details accounting policies, including the Wintrust merger and CECL adoption, and provides breakdowns of securities, loans, fair value, and regulatory capital Note 1 – Summary of Significant Accounting Policies Outlines significant accounting policies, highlighting the Wintrust merger agreement and the adoption of the CECL standard on January 1, 2023 - On April 15, 2024, the Company entered into a definitive merger agreement to be acquired by Wintrust Financial Corporation in an all-stock transaction valued at approximately $510.3 million, or $14.85 per share, subject to a collar mechanism, with the merger expected to close in the second half of 2024272830 - The Company adopted the CECL standard on January 1, 2023, resulting in a transition adjustment that increased the allowance for loans by $1.5 million and established a $62,000 reserve for unfunded commitments, leading to a $1.2 million decrease in retained earnings37 Note 2 – Securities Details the securities portfolio composition (AFS and HTM), providing amortized cost and fair value, noting unrealized losses are due to interest rate changes Securities Portfolio Summary (March 31, 2024) | Category | Amortized Cost ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Available for Sale | 521,555 | 491,214 | | U.S. Treasury and federal agency | 245,896 | 235,081 | | Agency MBS and CMOs | 120,328 | 107,032 | | State and municipal bonds | 143,776 | 137,782 | | Held to Maturity | 300,751 | 291,651 | | U.S. Treasury | 221,211 | 213,266 | | Tax-exempt state and municipal bonds | 79,540 | 78,385 | - As of March 31, 2024, the company had total unrealized losses of $30.4 million on AFS securities and $9.3 million on HTM securities, which management attributes to changes in interest rates, not credit quality, with no allowance for credit losses established on securities86 Note 3 – Loans and Allowance for Credit Losses Provides a comprehensive overview of the loan portfolio and allowance for credit losses, including loan types, ACL activity, credit quality, and modified loans Loan Portfolio Composition | Loan Type | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Commercial and industrial | 516,400 | 506,974 | | Commercial real estate | 572,769 | 585,099 | | Consumer | 253,039 | 246,313 | | Total Loans | 1,342,208 | 1,338,386 | | Allowance for credit losses | (17,440) | (17,442) | | Net Loans | 1,324,768 | 1,320,944 | - The allowance for credit losses remained stable at $17.4 million as of March 31, 2024, with no provision for credit losses recorded in Q1 2024 and net charge-offs of only $2,00093 - Nonperforming loans were exceptionally low, totaling just $1,000 at both March 31, 2024, and December 31, 2023101103 - As of March 31, 2024, the company had 36 loans with a total balance of $3.26 million that were modified for borrowers experiencing financial difficulty, all of which were current on payments110 Note 4 – Fair Value Explains the fair value hierarchy for financial instruments, with most recurring fair value measurements, like AFS securities, classified as Level 2 using observable inputs - At March 31, 2024, total assets measured at fair value on a recurring basis were $498.1 million, all classified as Level 2, indicating valuation based on observable inputs like benchmark quoted securities139 Note 12 – Shareholders' Equity Details the company's and bank's regulatory capital levels, showing both significantly exceed minimum requirements and are considered "well capitalized" Consolidated Regulatory Capital Ratios (March 31, 2024) | Ratio | Actual | Minimum with Buffer | | :--- | :--- | :--- | | CET1 Capital Ratio | 18.2% | 7.0% | | Tier 1 Capital Ratio | 18.2% | 8.5% | | Total Capital Ratio | 19.2% | 10.5% | | Tier 1 Leverage Ratio | 11.8% | 4.0% | - The Bank was categorized as "well capitalized" under regulatory standards at both March 31, 2024, and December 31, 2023180 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 financial performance and condition, covering net income drivers, balance sheet changes, asset quality, capital, liquidity, and the Wintrust merger Overview High-level Q1 2024 summary, noting $2.61 billion in assets and $9.8 million net income, highlighting the Wintrust merger and strong liquidity - The company entered into a definitive merger agreement with Wintrust Financial Corporation on April 15, 2024, in an all-stock transaction valued at approximately $510.3 million184 - The company maintains a strong liquidity position, with sufficient resources to cover all uninsured deposits, which totaled approximately $940.6 million (41% of total deposits) at March 31, 2024190 Results of Operations Analyzes Q1 2024 income statement, showing net income decreased to $9.8 million from $12.0 million due to lower net interest income and higher noninterest expense, compressing net interest margin to 3.26% - Net income for Q1 2024 was $9.8 million ($0.29 per diluted share), a decrease from $12.0 million ($0.35 per diluted share) in Q1 2023191 - Net interest income decreased by $1.9 million year-over-year, driven by lower average balances of earning assets and a significant increase in deposit costs196 Net Interest Margin Analysis | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Asset Yield | 4.58% | 4.15% | | Cost of Funds | 1.94% | 1.07% | | Net Interest Margin | 3.26% | 3.44% | - Noninterest expense increased by $1.1 million, primarily due to a $316,000 increase in legal and professional fees related to strategic matters, including the pending merger, and a $252,000 rise in salaries and benefits208 Financial Condition Reviews Q1 2024 balance sheet changes, noting total assets decreased by $133.8 million to $2.61 billion due to deposit runoff, while loans grew slightly to $1.34 billion with strong asset quality - Total loans increased by $3.8 million in Q1 2024 to $1.34 billion, with the commercial portfolio decreasing by $2.9 million and the residential mortgage portfolio growing by $6.1 million217 - Asset quality is excellent, with nonperforming assets totaling only $1,000, representing 0.00% of total assets at March 31, 2024235238 - The allowance for credit losses was stable at $17.4 million, representing 1.30% of total loans at March 31, 2024238 - Total deposits decreased by $131.3 million to $2.28 billion, attributed to seasonal runoff of business deposits that had peaked at year-end 2023253 Capital Resources Details the company's strong capital position, with shareholders' equity increasing by $5.9 million to $293.0 million, and all regulatory capital ratios significantly exceeding "well capitalized" thresholds Consolidated Capital Ratios Trend | Ratio | Mar 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total capital to risk weighted assets | 19.2% | 18.7% | | Tier 1 capital to risk weighted assets | 18.2% | 17.7% | | Tier 1 capital to average assets | 11.8% | 11.4% | Liquidity Describes the company's robust liquidity management, with diverse sources including core deposits, borrowing capacity, and securities cash flows, ensuring significant on-balance sheet liquidity - At March 31, 2024, the company had significant liquidity sources, including $331.4 million in federal funds sold, $354.0 million in available borrowing capacity, and $411.0 million in bond maturities and paydowns expected over the next 24 months266 - The holding company's primary liquidity source is dividends from the Bank; in Q1 2024, the Bank paid a $2.9 million dividend to the Company to fund the shareholder dividend, with the Company's cash balance at $8.2 million at March 31, 2024268269 Item 3. Quantitative and Qualitative Disclosures About Market Risk Addresses market risk, primarily interest rate risk, using a simulation model to analyze net interest income (NII) and economic value of equity (EVE) sensitivity to interest rate changes Interest Rate Sensitivity Analysis (as of March 31, 2024) | Interest Rate Scenario | % Change in Net Interest Income (Next 12 Months) | % Change in Economic Value of Equity | | :--- | :--- | :--- | | +200 bps | +3.61% | -2.58% | | +100 bps | +1.84% | -1.21% | | Base Case | — | — | | -100 bps | -2.95% | +0.33% | | -200 bps | -8.82% | -1.37% | Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as of March 31, 2024, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2024284 - 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 controls284 Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no purchases of the company's own equity securities during Q1 2024, and no publicly announced share repurchase plan exists - The Company did not purchase any of its common stock during the first quarter of 2024 and has no publicly announced repurchase plans285286 Item 6. Exhibits Lists exhibits filed with the Form 10-Q report, including the Agreement and Plan of Merger with Wintrust Financial Corporation and corporate governance documents - Exhibit 2.1, the Agreement and Plan of Merger with Wintrust Financial Corporation dated April 15, 2024, is incorporated by reference288