NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation
: The accompanying
consolidated financial statements include the accounts of Macatawa Bank Corporation (“Macatawa” or the “Company”) 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 owns all of the common securities of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are grantor trusts that issued trust
preferred securities and are discussed in a separate note. Under generally accepted accounting principles, these trusts are not consolidated into the financial statements of the Company.
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.
Concentration of Credit Risk
: Loans are granted to, and deposits are obtained
from, customers primarily in the western Michigan area as described above. Substantially all loans are secured by specific items of collateral, including residential real estate, commercial real estate, commercial assets and consumer assets.
Commercial real estate loans are the largest concentration, comprising 40% of total loans at December 31, 2018. Commercial and industrial loans total 37%, while residential real estate and consumer loans make up the remaining 23%. Other financial
instruments, which potentially subject the Company to concentrations of credit risk, include deposit accounts in other financial institutions.
Cash and Cash Equivalents
: Cash and cash equivalents include cash on hand,
demand deposits with other financial institutions and short-term securities (securities with maturities equal to or less than 90 days and federal funds sold).
Cash Flow Reporting
: Cash flows are reported net for customer loan and deposit
transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less.
Restrictions on Cash
: Cash on hand or on deposit with the Federal Reserve
Bank of $7.0 million and $6.1 million at December 31, 2018 and 2017, respectively, was required to meet regulatory reserve and clearing requirements.
Securities
: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield
and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of
tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method
without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market
conditions warrant such an evaluation. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320,
Investments — Debt and Equity Instruments
.
In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required
to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in
time. Management has determined that no OTTI charges were necessary during 2018 and 2017.
Federal Home Loan Bank (FHLB) Stock
: The Bank is a member of the FHLB
system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated
for impairment. Because this stock is viewed as a long term investment, impairment is based on ultimate recovery of par value. Management has determined that there is no impairment of FHLB stock. Both cash and stock dividends are reported as
income.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 December 31, 2018 and 2017, these loans had a net unrealized gain of $10,000 and $21,000, 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 servicing released; therefore no mortgage servicing right assets are established.
Loans
: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs and an allowance for loan losses.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in
interest income over the respective term of the loan using the level
-
yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process
of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for
on the cash-basis or cost
-
recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the estimated allowance for loan losses 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 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.
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 environmental factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan
class as well as the loan risk grade assignment for commercial loans. At December 31, 2018, an 18 month (six quarter) annualized historical loss experience was used for commercial loans and a 12 month (four quarter) historical loss experience
period was applied to residential mortgage and consumer loan portfolios. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends,
valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates, 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 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 so that the loan is reported, net, 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, accordingly, 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.
Transfers of Financial Assets
: Transfers of financial assets are accounted
for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Premises and Equipment
: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight
-
line method with useful lives ranging from 5 to 40 years.
Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 15 years. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major
improvements are capitalized.
Bank-Owned Life Insurance (BOLI):
The Bank has purchased life insurance
policies on certain officers. BOLI is recorded at its currently realizable cash surrender value. Changes in cash surrender value are recorded in other income.
Goodwill and Acquired Intangible Assets
: Goodwill resulting from business
combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are
not amortized, but tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. The Company had no goodwill at December 31, 2018 and
2017.
Acquired intangible assets consist of core deposit and customer relationship intangible assets arising from acquisitions. They are initially measured at
fair value and then are amortized on an accelerated method over their estimated useful lives, which range from ten to sixteen years. The Company had no acquired intangible assets at December 31, 2018 and 2017.
Long-term Assets
: Premises and equipment and other long-term assets are
reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. The Company had one property held for sale included in other assets
that was determined to be impaired and an impairment charge of $234,000 was applied at December 31, 2018. The Company had no impairment of long term assets in 2017.
Loan Commitments and Related Financial Instruments
: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.
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 on the loan is locked. At times, the Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to
hedge the change in interest rates resulting from its commitments to fund the loans.
Changes in the fair values of these interest rate lock and forward commitment derivatives are included in net gains on mortgage loans. The net fair value
of mortgage banking derivatives was approximately $15,000 and $5,000 at December 31, 2018 and 2017, respectively.
Revenue Recognition
: The Company recognizes revenues as they are earned based
on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s primary source of revenue is interest income from the Bank’s loans and investment securities. The Company also earns
noninterest revenue from various banking services offered by the Bank.
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.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivatives
: Certain of our 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, both of which are carried at fair value. As the terms mirror
each other, there is no income statement impact to the Bank. At December 31, 2018, the total notional amount of such agreements was $66.0 million and resulted in a derivative asset with a fair value of $700,000 which was included in other assets
and a derivative liability of $700,000 which was included in other liabilities. At December 31, 2017, the total notional amount of such agreements was $42.3 million and resulted in a derivative asset with a fair value of $197,000 which was
included in other assets and a derivative liability of $197,000 which was included in other liabilities.
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. In December 2017, a law was enacted which changed the corporate federal income tax rate from 35% to 21%,
beginning January 1, 2018. Accordingly, the Company’s deferred tax assets and liabilities were adjusted at December 31, 2017 using the 21% corporate federal income tax rate resulting in a $2.5 million reduction to earnings in 2017.
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/or penalties related to income tax matters in income tax expense.
During the first quarter of 2018, the Company adopted ASU 2018-02, allowing for the reclassification of the income tax effects of the revaluation the
deferred tax impact on accumulated other comprehensive income (“AOCI”) due to the enactment of tax reform at the end of 2017. The Company’s only component of AOCI is the fair value adjustment for securities available for sale. Upon adoption of
this ASU, a transfer was made from AOCI to retained earnings in the amount of $278,000.
Earnings Per Common Share
: Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the period. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation
and are included in both basic and diluted earnings per share. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. In the event of a net loss, our unvested restricted
stock awards are excluded from both basic and diluted earnings per share.
Comprehensive Income
: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale.
Loss Contingencies
: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stock Splits and Dividends
: Stock dividends in excess of 20% are reported as
stock splits, resulting in no adjustment to the Company’s equity accounts. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex
-
dividend
date, of the stock issued from retained earnings to common stock. Fractional share amounts are paid in cash with a reduction in retained earnings. All share and per share amounts are retroactively adjusted for stock splits and dividends.
Dividend Restriction
: Banking regulations require maintaining certain capital
levels and impose limitations on dividends paid by the Bank to the Company and by the Company to shareholders.
Subsequent Event
: The FDIC Deposit Insurance Fund exceeded its targeted
reserve ratio of 1.35% and the FDIC sent the Bank a letter dated January 24, 2019 notifying the Bank that it would be apportioned a share of the excess in the form of credits to offset future assessments. The preliminary assessment credit for the
Bank was approximately $400,000. Total FDIC assessment expense for 2018 was $518,000, so this will significantly reduce the Bank’s expense in 2019.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Values of Financial Instruments
: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other
factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on-and off-balance sheet financial instruments
do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.
Segment Reporting
: The Company, through the branch network of the Bank,
provides a broad range of financial services to individuals and companies in western Michigan. These services include demand, time and savings deposits; lending; ATM and debit card processing; cash management; and trust and brokerage services.
While the Company’s management team monitors the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking
operations are considered by management to be aggregated in one operating segment – commercial banking.
Reclassifications
: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Adoption of New Accounting Standards
: FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The new standard requires equity
investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The ASU also requires public
business entities to use exit price notation when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of
financial asset. The new standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of adoption of this ASU by the Company was not material, but did result in a
reclassification of an equity investment from securities available for sale to other assets with its related market value changes reflected in earnings for the year ended December 31, 2018. In addition, the fair value disclosures for financial
instruments in Note 5 are computed using an exit price notion as required by the ASU.
FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic
606).
The amendments in this Update create a new topic in the Codification, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606
establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures
about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40,
Other Assets and Deferred Costs: Contracts with Customers
, to
provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the
scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to
facilitate sales to customers. The amendments were effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Adoption of this ASU effective January 1, 2018 did not materially affect the
financial results of the Company. Additional disclosure has been added to Note 1 disclosing the composition of the Company’s noninterest revenue.
FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).
This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds;
(3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance
policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments were effective for
annual periods beginning after December 15, 2017, and for interim periods within those annual periods. The impact of adoption of this ASU by the Company on January 1, 2018 was not material.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
FASB issued ASU No. 2018-02,
Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income.
This ASU allows a company to make a one-time reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs
Act, which was enacted at the end of 2017. ASU 2018-02 is effective for all entities with periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim
period for which financial statements have not yet been issued. The amendments in ASU 2018-02 are to be applied either in the period of adoption, or retrospectively to each period in which the effect of the change in the US federal corporate
income tax rate is recognized. The ASU requires a disclosure of the accounting policy for releasing income tax effects from accumulated other comprehensive income. The Company early adopted this ASU in the first quarter of 2018 and has recorded a
reclassification adjustment of $278,000 decreasing accumulated other comprehensive income and increasing retained earnings, effective December 31, 2017, and has included discussion as part of the Income Taxes accounting policy disclosure.
Newly Issued Not Yet Effective Standards
: FASB issued ASU 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all
leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. An entity may adopt the new guidance either by restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period
presented or by recording a cumulative effect adjustment at the beginning of the period of adoption. The Company plans to apply the standard by recording a cumulative effect adjustment at January 1, 2019. As the Company owns most of its branch
locations, this ASU applied primarily to operating leases and the impact of adoption of this ASU by the Company was not material and will result in an $800,000 increase in assets and liabilities in the Company’s consolidated balance sheets upon
adoption.
FASB 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. This ASU is effective for fiscal years beginning after December 15, 2019, and for interim
periods within those years. The Company has selected a software vendor for applying this new ASU, began implementation of the software in the second quarter of 2018, completed data integration in the third quarter of 2018 and ran parallel
computations using the current GAAP incurred loss model in the fourth quarter of 2018. The Company will use the new software beginning in January 2019 for the current GAAP incurred loss model as well as for more robust modeling of the impact of
the new current expected credit loss model presented by the ASU throughout 2019. The Company is currently evaluating the impact of this new ASU on its consolidated financial statements.
FASB issued ASU 2017-12,
Targeted Improvements to Accounting for
Hedging Activities
. This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the
application of Topic 815,
Derivatives and Hedging
, through targeted improvements in key practice areas. This includes expanding the list of items eligible
to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow
preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to
recognize hedge ineffectiveness separately in earnings in the current period.
The ASU is effective for years beginning after December 15, 2018, and interim periods within those
years. The Company does not expect the impact of adoption of this ASU to be material.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 2 – SECURITIES
The amortized cost and fair value of securities were as follows (dollars in thousands):
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
97,102
|
|
|
$
|
6
|
|
|
$
|
(1,710
|
)
|
|
$
|
95,398
|
|
U.S. Agency MBS and CMOs
|
|
|
33,287
|
|
|
|
97
|
|
|
|
(494
|
)
|
|
|
32,890
|
|
Tax-exempt state and municipal bonds
|
|
|
45,212
|
|
|
|
246
|
|
|
|
(331
|
)
|
|
|
45,127
|
|
Taxable state and municipal bonds
|
|
|
46,565
|
|
|
|
59
|
|
|
|
(690
|
)
|
|
|
45,934
|
|
Corporate bonds and other debt securities
|
|
|
7,703
|
|
|
|
2
|
|
|
|
(68
|
)
|
|
|
7,637
|
|
|
|
$
|
229,869
|
|
|
$
|
410
|
|
|
$
|
(3,293
|
)
|
|
$
|
226,986
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipal bonds
|
|
$
|
70,334
|
|
|
$
|
1,488
|
|
|
$
|
(317
|
)
|
|
$
|
71,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
103,309
|
|
|
$
|
—
|
|
|
$
|
(1,345
|
)
|
|
$
|
101,964
|
|
U. S. Agency MBS and CMOs
|
|
|
23,797
|
|
|
|
7
|
|
|
|
(419
|
)
|
|
|
23,385
|
|
Tax-exempt state and municipal bonds
|
|
|
41,684
|
|
|
|
519
|
|
|
|
(146
|
)
|
|
|
42,057
|
|
Taxable state and municipal bonds
|
|
|
44,267
|
|
|
|
10
|
|
|
|
(542
|
)
|
|
|
43,735
|
|
Corporate bonds and other debt securities
|
|
|
8,149
|
|
|
|
1
|
|
|
|
(41
|
)
|
|
|
8,109
|
|
Other equity securities
|
|
|
1,500
|
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
1,470
|
|
|
|
$
|
222,706
|
|
|
$
|
537
|
|
|
$
|
(2,523
|
)
|
|
$
|
220,720
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipal bonds
|
|
$
|
85,827
|
|
|
$
|
806
|
|
|
$
|
(181
|
)
|
|
$
|
86,452
|
|
There were no sales of securities available for sale during the year ended December 31, 2018. Proceeds from the sale of securities available for sale were
$5.8 million for the year ended December 31, 2017, resulting in net gains on sale of $3,000 as reported in the consolidated statements of income. This resulted in reclassifications of $3,000 ($2,000 net of tax) from accumulated other comprehensive
income to gain on sale of securities in the consolidated statements of income in the year ended December 31, 2017.
Contractual maturities of debt securities at December 31, 2018 were as follows (dollars in thousands):
|
|
Held
–
to-Maturity Securities
|
|
|
Available-for-Sale Securities
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
8,337
|
|
|
$
|
8,363
|
|
|
$
|
24,685
|
|
|
$
|
24,549
|
|
Due from one to five years
|
|
|
28,588
|
|
|
|
29,008
|
|
|
|
134,460
|
|
|
|
132,314
|
|
Due from five to ten years
|
|
|
13,769
|
|
|
|
13,789
|
|
|
|
38,390
|
|
|
|
38,188
|
|
Due after ten years
|
|
|
19,640
|
|
|
|
20,345
|
|
|
|
32,334
|
|
|
|
31,935
|
|
|
|
$
|
70,334
|
|
|
$
|
71,505
|
|
|
$
|
229,869
|
|
|
$
|
226,986
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 2 – SECURITIES
(Continued)
Securities with unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that individual securities have been
in a continuous unrealized loss position, are as follows (dollars in thousands):
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2018
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
1,974
|
|
|
$
|
(26
|
)
|
|
$
|
82,895
|
|
|
$
|
(1,622
|
)
|
|
$
|
84,869
|
|
|
$
|
(1,648
|
)
|
U.S. Agency MBS and CMOs
|
|
|
1,728
|
|
|
|
(13
|
)
|
|
|
18,712
|
|
|
|
(481
|
)
|
|
|
20,440
|
|
|
|
(494
|
)
|
Tax-exempt state and municipal bonds
|
|
|
8,987
|
|
|
|
(69
|
)
|
|
|
10,785
|
|
|
|
(262
|
)
|
|
|
19,772
|
|
|
|
(331
|
)
|
Taxable state and municipal bonds
|
|
|
4,035
|
|
|
|
(19
|
)
|
|
|
37,021
|
|
|
|
(671
|
)
|
|
|
41,056
|
|
|
|
(690
|
)
|
Corporate bonds and other debt securities
|
|
|
2,698
|
|
|
|
(12
|
)
|
|
|
8,170
|
|
|
|
(118
|
)
|
|
|
10,868
|
|
|
|
(130
|
)
|
Total
|
|
$
|
19,422
|
|
|
$
|
(139
|
)
|
|
$
|
157,583
|
|
|
$
|
(3,154
|
)
|
|
$
|
177,005
|
|
|
$
|
(3,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipal bonds
|
|
$
|
8,533
|
|
|
$
|
(76
|
)
|
|
$
|
4,683
|
|
|
$
|
(241
|
)
|
|
$
|
13,216
|
|
|
$
|
(317
|
)
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2017
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
50,614
|
|
|
$
|
(439
|
)
|
|
$
|
43,787
|
|
|
$
|
(876
|
)
|
|
$
|
94,401
|
|
|
$
|
(1,315
|
)
|
U.S. Agency MBS and CMOs
|
|
|
16,719
|
|
|
|
(249
|
)
|
|
|
6,228
|
|
|
|
(170
|
)
|
|
|
22,947
|
|
|
|
(419
|
)
|
Tax-exempt state and municipal bonds
|
|
|
7,576
|
|
|
|
(62
|
)
|
|
|
4,208
|
|
|
|
(82
|
)
|
|
|
11,784
|
|
|
|
(144
|
)
|
Taxable state and municipal bonds
|
|
|
30,331
|
|
|
|
(279
|
)
|
|
|
9,781
|
|
|
|
(265
|
)
|
|
|
40,112
|
|
|
|
(544
|
)
|
Corporate bonds and other debt securities
|
|
|
8,021
|
|
|
|
(42
|
)
|
|
|
2,250
|
|
|
|
(29
|
)
|
|
|
10,271
|
|
|
|
(71
|
)
|
Other equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,470
|
|
|
|
(30
|
)
|
|
|
1,470
|
|
|
|
(30
|
)
|
Total temporarily impaired
|
|
$
|
113,261
|
|
|
$
|
(1,071
|
)
|
|
$
|
67,724
|
|
|
$
|
(1,452
|
)
|
|
$
|
180,985
|
|
|
$
|
(2,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt state and municipal bonds
|
|
$
|
12,548
|
|
|
$
|
(181
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,548
|
|
|
$
|
(181
|
)
|
Other-Than-Temporary-Impairment
Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
At December 31, 2018, 250 securities available for sale with fair values totaling $177.0 million had unrealized losses totaling $3.3 million. At December 31, 2018, 27 securities held to maturity with fair values totaling $13.2 million had
unrealized losses totaling $317,000. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. In addition, management
believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. Management determined that the unrealized losses for each period were attributable to changes in interest
rates and not due to credit quality. As such, no OTTI charges were necessary during 2018 and 2017.
Securities with a carrying value of approximately $2.0 million and $2.0 million were pledged as security for public deposits, letters of credit and for
other purposes required or permitted by law at December 31, 2018 and 2017, respectively.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
Portfolio loans were as follows at year end (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Commercial and industrial
|
|
$
|
513,345
|
|
|
$
|
465,208
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
14,825
|
|
|
|
11,888
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
2,332
|
|
Vacant and unimproved
|
|
|
44,169
|
|
|
|
39,752
|
|
Commercial development
|
|
|
712
|
|
|
|
1,103
|
|
Residential improved
|
|
|
98,500
|
|
|
|
90,467
|
|
Commercial improved
|
|
|
295,618
|
|
|
|
298,714
|
|
Manufacturing and industrial
|
|
|
114,887
|
|
|
|
97,679
|
|
Total commercial real estate
|
|
|
568,711
|
|
|
|
541,935
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
238,174
|
|
|
|
224,452
|
|
Unsecured
|
|
|
130
|
|
|
|
226
|
|
Home equity
|
|
|
78,503
|
|
|
|
82,234
|
|
Other secured
|
|
|
6,795
|
|
|
|
6,254
|
|
Total consumer
|
|
|
323,602
|
|
|
|
313,166
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,405,658
|
|
|
|
1,320,309
|
|
Allowance for loan losses
|
|
|
(16,876
|
)
|
|
|
(16,600
|
)
|
|
|
$
|
1,388,782
|
|
|
$
|
1,303,709
|
|
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2018 and 2017 (dollars in
thousands):
2018
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
6,478
|
|
|
$
|
6,590
|
|
|
$
|
3,494
|
|
|
$
|
38
|
|
|
$
|
16,600
|
|
Charge-offs
|
|
|
(1,206
|
)
|
|
|
—
|
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
(1,335
|
)
|
Recoveries
|
|
|
86
|
|
|
|
922
|
|
|
|
153
|
|
|
|
—
|
|
|
|
1,161
|
|
Provision for loan losses
|
|
|
1,498
|
|
|
|
(968
|
)
|
|
|
(69
|
)
|
|
|
(11
|
)
|
|
|
450
|
|
Ending Balance
|
|
$
|
6,856
|
|
|
$
|
6,544
|
|
|
$
|
3,449
|
|
|
$
|
27
|
|
|
$
|
16,876
|
|
2017
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
6,345
|
|
|
$
|
6,703
|
|
|
$
|
3,871
|
|
|
$
|
43
|
|
|
$
|
16,962
|
|
Charge-offs
|
|
|
(108
|
)
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
—
|
|
|
|
(266
|
)
|
Recoveries
|
|
|
123
|
|
|
|
821
|
|
|
|
310
|
|
|
|
—
|
|
|
|
1,254
|
|
Provision for loan losses
|
|
|
118
|
|
|
|
(934
|
)
|
|
|
(529
|
)
|
|
|
(5
|
)
|
|
|
(1,350
|
)
|
|
|
$
|
6,478
|
|
|
$
|
6,590
|
|
|
$
|
3,494
|
|
|
$
|
38
|
|
|
$
|
16,600
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment
method (dollars in thousands):
December 31, 2018
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
449
|
|
|
$
|
181
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
Collectively evaluated for impairment
|
|
|
6,407
|
|
|
|
6,363
|
|
|
|
2,981
|
|
|
|
27
|
|
|
|
15,778
|
|
Total ending allowance balance
|
|
$
|
6,856
|
|
|
$
|
6,544
|
|
|
$
|
3,449
|
|
|
$
|
27
|
|
|
$
|
16,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
7,375
|
|
|
$
|
3,499
|
|
|
$
|
6,347
|
|
|
$
|
—
|
|
|
$
|
17,221
|
|
Collectively evaluated for impairment
|
|
|
505,970
|
|
|
|
565,212
|
|
|
|
317,255
|
|
|
|
—
|
|
|
|
1,388,437
|
|
Total ending loans balance
|
|
$
|
513,345
|
|
|
$
|
568,711
|
|
|
$
|
323,602
|
|
|
$
|
—
|
|
|
$
|
1,405,658
|
|
December 31, 2017
|
|
Commercial
and
Industrial
|
|
|
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
497
|
|
|
$
|
197
|
|
|
$
|
514
|
|
|
$
|
—
|
|
|
$
|
1,208
|
|
Collectively evaluated for impairment
|
|
|
5,981
|
|
|
|
6,393
|
|
|
|
2,980
|
|
|
|
38
|
|
|
|
15,392
|
|
Total ending allowance balance
|
|
$
|
6,478
|
|
|
$
|
6,590
|
|
|
$
|
3,494
|
|
|
$
|
38
|
|
|
$
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
6,402
|
|
|
$
|
7,332
|
|
|
$
|
8,345
|
|
|
$
|
—
|
|
|
$
|
22,079
|
|
Collectively evaluated for impairment
|
|
|
458,806
|
|
|
|
534,603
|
|
|
|
304,821
|
|
|
|
—
|
|
|
|
1,298,230
|
|
Total ending loans balance
|
|
$
|
465,208
|
|
|
$
|
541,935
|
|
|
$
|
313,166
|
|
|
$
|
—
|
|
|
$
|
1,320,309
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018 (dollars in thousands):
December 31, 2018
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
Allocated
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,515
|
|
|
$
|
1,375
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
143
|
|
|
|
143
|
|
|
|
—
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential improved
|
|
|
140
|
|
|
|
140
|
|
|
|
—
|
|
Commercial improved
|
|
|
1,675
|
|
|
|
1,675
|
|
|
|
—
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
1,958
|
|
|
|
1,958
|
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total with no related allowance recorded
|
|
$
|
4,473
|
|
|
$
|
3,333
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
$
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
172
|
|
|
|
172
|
|
|
|
2
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential improved
|
|
|
193
|
|
|
|
193
|
|
|
|
13
|
|
Commercial improved
|
|
|
794
|
|
|
|
794
|
|
|
|
155
|
|
Manufacturing and industrial
|
|
|
382
|
|
|
|
382
|
|
|
|
11
|
|
|
|
|
1,541
|
|
|
|
1,541
|
|
|
|
181
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
5,029
|
|
|
|
5,029
|
|
|
|
371
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
1,318
|
|
|
|
1,318
|
|
|
|
97
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
6,347
|
|
|
|
6,347
|
|
|
|
468
|
|
Total with an allowance recorded
|
|
$
|
13,888
|
|
|
$
|
13,888
|
|
|
$
|
1,098
|
|
Total
|
|
$
|
18,361
|
|
|
$
|
17,221
|
|
|
$
|
1,098
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017 (dollars in thousands):
December 31, 2017
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
Allocated
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,438
|
|
|
$
|
3,438
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial development
|
|
|
190
|
|
|
|
190
|
|
|
|
—
|
|
Residential improved
|
|
|
15
|
|
|
|
15
|
|
|
|
—
|
|
Commercial improved
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
205
|
|
|
|
205
|
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total with no related allowance recorded
|
|
$
|
3,643
|
|
|
$
|
3,643
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,964
|
|
|
$
|
2,964
|
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
179
|
|
|
|
179
|
|
|
|
4
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
126
|
|
|
|
126
|
|
|
|
3
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential improved
|
|
|
1,715
|
|
|
|
1,715
|
|
|
|
69
|
|
Commercial improved
|
|
|
4,928
|
|
|
|
4,928
|
|
|
|
119
|
|
Manufacturing and industrial
|
|
|
179
|
|
|
|
179
|
|
|
|
2
|
|
|
|
|
7,127
|
|
|
|
7,127
|
|
|
|
197
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
6,638
|
|
|
|
6,638
|
|
|
|
409
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
1,707
|
|
|
|
1,707
|
|
|
|
105
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
8,345
|
|
|
|
8,345
|
|
|
|
514
|
|
Total with an allowance recorded
|
|
$
|
18,436
|
|
|
$
|
18,436
|
|
|
$
|
1,208
|
|
Total
|
|
$
|
22,079
|
|
|
$
|
22,079
|
|
|
$
|
1,208
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the years ended
December 31, 2018 and 2017 (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Average of impaired loans during the period:
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
5,398
|
|
|
$
|
5,505
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
175
|
|
|
|
182
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
208
|
|
|
|
287
|
|
Commercial development
|
|
|
32
|
|
|
|
189
|
|
Residential improved
|
|
|
845
|
|
|
|
2,732
|
|
Commercial improved
|
|
|
3,303
|
|
|
|
5,768
|
|
Manufacturing and industrial
|
|
|
357
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
7,191
|
|
|
|
9,889
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized during impairment:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,034
|
|
|
|
935
|
|
Commercial real estate
|
|
|
219
|
|
|
|
411
|
|
Consumer
|
|
|
295
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Cash-basis interest income recognized
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,034
|
|
|
|
931
|
|
Commercial real estate
|
|
|
172
|
|
|
|
414
|
|
Consumer
|
|
|
293
|
|
|
|
392
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2018 and 2017 (dollars in thousands):
December 31, 2018
|
|
Nonaccrual
|
|
|
Over 90 days
Accruing
|
|
Commercial and industrial
|
|
$
|
874
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
Residential improved
|
|
|
15
|
|
|
|
—
|
|
Commercial improved
|
|
|
303
|
|
|
|
—
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
|
318
|
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
111
|
|
|
|
—
|
|
Unsecured
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
1
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
|
111
|
|
|
|
1
|
|
Total
|
|
$
|
1,303
|
|
|
$
|
1
|
|
December 31, 2017
|
|
Nonaccrual
|
|
|
Over 90 days
Accruing
|
|
Commercial and industrial
|
|
$
|
4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
Commercial development
|
|
|
190
|
|
|
|
—
|
|
Residential improved
|
|
|
89
|
|
|
|
—
|
|
Commercial improved
|
|
|
106
|
|
|
|
—
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
|
385
|
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
2
|
|
|
|
—
|
|
Unsecured
|
|
|
4
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
|
6
|
|
|
|
—
|
|
Total
|
|
$
|
395
|
|
|
$
|
—
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans (dollars in thousands):
December 31, 2018
|
|
30-90
Days
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Loans Not
Past Due
|
|
|
Total
|
|
Commercial and industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
513,345
|
|
|
$
|
513,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,825
|
|
|
|
14,825
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
57
|
|
|
|
—
|
|
|
|
57
|
|
|
|
44,112
|
|
|
|
44,169
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
712
|
|
|
|
712
|
|
Residential improved
|
|
|
86
|
|
|
|
16
|
|
|
|
102
|
|
|
|
98,398
|
|
|
|
98,500
|
|
Commercial improved
|
|
|
100
|
|
|
|
303
|
|
|
|
403
|
|
|
|
295,215
|
|
|
|
295,618
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
114,887
|
|
|
|
114,887
|
|
|
|
|
243
|
|
|
|
319
|
|
|
|
562
|
|
|
|
568,149
|
|
|
|
568,711
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
—
|
|
|
|
110
|
|
|
|
110
|
|
|
|
238,064
|
|
|
|
238,174
|
|
Unsecured
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
|
123
|
|
|
|
130
|
|
Home equity
|
|
|
67
|
|
|
|
1
|
|
|
|
68
|
|
|
|
78,435
|
|
|
|
78,503
|
|
Other secured
|
|
|
130
|
|
|
|
—
|
|
|
|
130
|
|
|
|
6,665
|
|
|
|
6,795
|
|
|
|
|
204
|
|
|
|
111
|
|
|
|
315
|
|
|
|
323,287
|
|
|
|
323,602
|
|
Total
|
|
$
|
447
|
|
|
$
|
430
|
|
|
$
|
877
|
|
|
$
|
1,404,781
|
|
|
$
|
1,405,658
|
|
The following table presents the aging of the recorded investment in past due loans as of December 31, 2017 by class of loans (dollars in thousands):
December 31, 2017
|
|
30-90
Days
|
|
|
Greater
Than
90 Days
|
|
|
Total
Past Due
|
|
|
Loans Not
Past Due
|
|
|
Total
|
|
Commercial and industrial
|
|
$
|
290
|
|
|
|
—
|
|
|
$
|
290
|
|
|
$
|
464,918
|
|
|
$
|
465,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,888
|
|
|
|
11,888
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332
|
|
|
|
2,332
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,752
|
|
|
|
39,752
|
|
Commercial development
|
|
|
—
|
|
|
|
190
|
|
|
|
190
|
|
|
|
913
|
|
|
|
1,103
|
|
Residential improved
|
|
|
—
|
|
|
|
89
|
|
|
|
89
|
|
|
|
90,378
|
|
|
|
90,467
|
|
Commercial improved
|
|
|
125
|
|
|
|
—
|
|
|
|
125
|
|
|
|
298,589
|
|
|
|
298,714
|
|
Manufacturing and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,679
|
|
|
|
97,679
|
|
|
|
|
125
|
|
|
|
279
|
|
|
|
404
|
|
|
|
541,531
|
|
|
|
541,935
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
215
|
|
|
|
—
|
|
|
|
215
|
|
|
|
224,237
|
|
|
|
224,452
|
|
Unsecured
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
216
|
|
|
|
226
|
|
Home equity
|
|
|
76
|
|
|
|
—
|
|
|
|
76
|
|
|
|
82,158
|
|
|
|
82,234
|
|
Other secured
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,254
|
|
|
|
6,254
|
|
|
|
|
301
|
|
|
|
—
|
|
|
|
301
|
|
|
|
312,865
|
|
|
|
313,166
|
|
Total
|
|
$
|
716
|
|
|
$
|
279
|
|
|
$
|
995
|
|
|
$
|
1,319,314
|
|
|
$
|
1,320,309
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The Company had allocated $1,098,000 and $1,208,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings
(“TDRs”) as of December 31, 2018 and 2017, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash
flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. The Company has been active at utilizing these programs and working with its customers to reduce the risk of
foreclosure. For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the note into two notes with
the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This
modification type is commonly referred to as an A-B note structure. For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive
credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured
debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a
nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual
restructured loan is reviewed for possible upgrade to accruing status.
Based upon regulatory guidance issued in 2014, the Company has determined that in situations where there is a subsequent modification or renewal and the
loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed. In addition, the TDR
designation may also be removed from loans modified under an A-B note structure. If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan
can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms. The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information
gathered from peers and use of a loan pricing model. The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk. In the model, credits with
higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.
As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For
impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where repayment is expected from cash
flows from business operations, the allowance is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted
cash flow computation on the change in weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the
original contractual rate.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
The following table presents information regarding TDRs as of December 31, 2018 and 2017 (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
|
|
Number of
Loans
|
|
|
Outstanding
Recorded
Balance
|
|
|
Number of
Loans
|
|
|
Outstanding
Recorded
Balance
|
|
Commercial and industrial
|
|
|
18
|
|
|
$
|
6,502
|
|
|
|
19
|
|
|
$
|
6,403
|
|
Commercial real estate
|
|
|
22
|
|
|
|
3,305
|
|
|
|
33
|
|
|
|
7,332
|
|
Consumer
|
|
|
83
|
|
|
|
6,346
|
|
|
|
99
|
|
|
|
8,345
|
|
|
|
|
123
|
|
|
$
|
16,153
|
|
|
|
151
|
|
|
$
|
22,080
|
|
The following table presents information related to accruing TDRs as of December 31, 2018 and 2017. The table presents the amount of accruing TDRs that
were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of December
31, 2018 and 2017 (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Accruing TDR - nonaccrual at restructuring
|
|
$
|
—
|
|
|
$
|
—
|
|
Accruing TDR - accruing at restructuring
|
|
|
10,336
|
|
|
|
16,809
|
|
Accruing TDR - upgraded to accruing after six consecutive payments
|
|
|
5,693
|
|
|
|
4,955
|
|
|
|
$
|
16,029
|
|
|
$
|
21,764
|
|
The following tables present information regarding troubled debt restructurings executed during the years ended December 31, 2018 and 2017 (dollars in
thousands):
|
|
2018
|
|
|
2017
|
|
|
|
# of
Loans
|
|
|
Pre-TDR
Balance
|
|
|
Writedown
Upon
TDR
|
|
|
# of
Loans
|
|
|
Pre-TDR
Balance
|
|
|
Writedown
Upon
TDR
|
|
Commercial and industrial
|
|
|
2
|
|
|
$
|
244
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
|
|
3
|
|
|
|
492
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,018
|
|
|
|
—
|
|
Consumer
|
|
|
10
|
|
|
|
456
|
|
|
|
—
|
|
|
|
6
|
|
|
|
410
|
|
|
|
—
|
|
|
|
|
15
|
|
|
$
|
1,192
|
|
|
$
|
—
|
|
|
|
7
|
|
|
$
|
1,428
|
|
|
$
|
—
|
|
According to the accounting standards, not all loan modifications are TDRs. TDRs are modifications or renewals where the Company has granted a concession
to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession. These
modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a
competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs. As with other loans not considered TDR or
impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.
Payment defaults on TDRs have been minimal and during the twelve months ended December 31, 2018 and 2017 the balance of loans that became delinquent by
more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information,
historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually and classifies these relationships by credit risk grading. The Company
uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits. All commercial loans are assigned a grade at origination, at each renewal or any amendment. When a credit is first downgraded to a watch
credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer. All watch credits have an ALR completed monthly
which analyzes the collateral position and cash flow of the borrower and its guarantors. The loan officer is required to complete both a short term and long term plan to rehabilitate or exit the credit and to give monthly comments on the progress
to these plans. Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled. When necessary, the loan officer proposes changes to the assigned loan grade as
part of the ALR. Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process. The credit will stay on the ALR until either its grade has improved to a 4
or the credit relationship is at a zero balance. The Company uses the following definitions for the risk grades:
1. Excellent
- Loans supported by extremely strong
financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.
2. Above Average
- Loans supported by sound financial
statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these
credits is very high.
3. Good Quality
- Loans supported by satisfactory asset
quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.
4. Acceptable Risk
- Loans carrying an acceptable risk to
the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored
closely by the Relationship Manager.
5. Marginally Acceptable
- Loans are of marginal quality
with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of
repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.
6. Substandard
- Loans are inadequately protected by the
net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that
the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.
7. Doubtful
- Loans supported by weak or no financial
statements, as well as the ability to repay the entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the
weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to
minimize the loss or maximize the recovery.
8. Loss
- Loans are considered uncollectible and of little
or no value as a bank asset.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
At year end, the risk grade category of commercial loans by class of loans was as follows (dollars in thousands):
December 31, 2018
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
Total
|
|
Commercial and industrial
|
|
$
|
15,000
|
|
|
$
|
15,708
|
|
|
$
|
164,901
|
|
|
$
|
299,622
|
|
|
$
|
11,186
|
|
|
$
|
6,054
|
|
|
$
|
874
|
|
|
$
|
—
|
|
|
$
|
513,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,220
|
|
|
|
605
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,825
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
7,635
|
|
|
|
3,543
|
|
|
|
30,688
|
|
|
|
2,303
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,169
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
86
|
|
|
|
626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
712
|
|
Residential improved
|
|
|
—
|
|
|
|
—
|
|
|
|
19,645
|
|
|
|
78,337
|
|
|
|
311
|
|
|
|
192
|
|
|
|
15
|
|
|
|
—
|
|
|
|
98,500
|
|
Commercial improved
|
|
|
—
|
|
|
|
5,292
|
|
|
|
62,756
|
|
|
|
222,152
|
|
|
|
4,751
|
|
|
|
364
|
|
|
|
303
|
|
|
|
—
|
|
|
|
295,618
|
|
Manufacturing & industrial
|
|
|
—
|
|
|
|
3,372
|
|
|
|
24,799
|
|
|
|
81,261
|
|
|
|
5,455
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
114,887
|
|
|
|
$
|
15,000
|
|
|
$
|
32,007
|
|
|
$
|
275,730
|
|
|
$
|
726,906
|
|
|
$
|
24,611
|
|
|
$
|
6,610
|
|
|
$
|
1,192
|
|
|
$
|
—
|
|
|
$
|
1,082,056
|
|
December 31, 2017
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
Total
|
|
Commercial and industrial
|
|
$
|
—
|
|
|
$
|
15,002
|
|
|
$
|
137,774
|
|
|
$
|
291,373
|
|
|
$
|
15,170
|
|
|
$
|
5,885
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
465,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developed
|
|
|
—
|
|
|
|
—
|
|
|
|
48
|
|
|
|
11,068
|
|
|
|
772
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,888
|
|
Unsecured to residential developers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332
|
|
Vacant and unimproved
|
|
|
—
|
|
|
|
—
|
|
|
|
19,244
|
|
|
|
17,332
|
|
|
|
3,176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,752
|
|
Commercial development
|
|
|
—
|
|
|
|
—
|
|
|
|
104
|
|
|
|
809
|
|
|
|
—
|
|
|
|
—
|
|
|
|
190
|
|
|
|
—
|
|
|
|
1,103
|
|
Residential improved
|
|
|
—
|
|
|
|
—
|
|
|
|
7,275
|
|
|
|
80,818
|
|
|
|
1,533
|
|
|
|
752
|
|
|
|
89
|
|
|
|
—
|
|
|
|
90,467
|
|
Commercial improved
|
|
|
—
|
|
|
|
1,398
|
|
|
|
64,043
|
|
|
|
228,888
|
|
|
|
3,353
|
|
|
|
926
|
|
|
|
106
|
|
|
|
—
|
|
|
|
298,714
|
|
Manufacturing & industrial
|
|
|
—
|
|
|
|
927
|
|
|
|
44,714
|
|
|
|
49,238
|
|
|
|
2,311
|
|
|
|
489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,679
|
|
|
|
$
|
—
|
|
|
$
|
17,327
|
|
|
$
|
273,202
|
|
|
$
|
681,858
|
|
|
$
|
26,315
|
|
|
$
|
8,052
|
|
|
$
|
389
|
|
|
$
|
—
|
|
|
$
|
1,007,143
|
|
Commercial loans rated a 6, 7 or 8 per the Company’s internal risk rating system are considered substandard, doubtful or loss, respectively.
Commercial loans classified as substandard or worse were as follows at year-end (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Not classified as impaired
|
|
$
|
—
|
|
|
$
|
2,010
|
|
Classified as impaired
|
|
|
7,802
|
|
|
|
6,431
|
|
Total commercial loans classified substandard or worse
|
|
$
|
7,802
|
|
|
$
|
8,441
|
|
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also
evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables present the recorded investment in consumer loans based on payment activity as of December 31, 2018 and
2017 (dollars in thousands):
December 31, 2018
|
|
Residential
Mortgage
|
|
|
Consumer
Unsecured
|
|
|
Home
Equity
|
|
|
Consumer
Other
|
|
Performing
|
|
$
|
238,064
|
|
|
$
|
130
|
|
|
$
|
78,502
|
|
|
$
|
6,795
|
|
Nonperforming
|
|
|
110
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total
|
|
$
|
238,174
|
|
|
$
|
130
|
|
|
$
|
78,503
|
|
|
$
|
6,795
|
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 3 –
LOANS
(Continued)
December 31, 2017
|
|
Residential
Mortgage
|
|
|
Consumer
Unsecured
|
|
|
Home
Equity
|
|
|
Consumer
Other
|
|
Performing
|
|
$
|
224,452
|
|
|
$
|
226
|
|
|
$
|
82,234
|
|
|
$
|
6,254
|
|
Nonperforming
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
224,452
|
|
|
$
|
226
|
|
|
$
|
82,234
|
|
|
$
|
6,254
|
|
NOTE 4 – OTHER REAL ESTATE OWNED
Other real estate owned was as follows (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
9,140
|
|
|
$
|
22,864
|
|
Additions, transfers from loans
|
|
|
293
|
|
|
|
120
|
|
Proceeds from sales of other real estate owned
|
|
|
(2,212
|
)
|
|
|
(7,034
|
)
|
Valuation allowance reversal upon sale
|
|
|
(2,893
|
)
|
|
|
(7,367
|
)
|
Gain (loss) on sales of other real estate owned
|
|
|
(145
|
)
|
|
|
557
|
|
|
|
|
4,183
|
|
|
|
9,140
|
|
Less: valuation allowance
|
|
|
(803
|
)
|
|
|
(3,373
|
)
|
Ending balance
|
|
$
|
3,380
|
|
|
$
|
5,767
|
|
Activity in the valuation allowance was as follows (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
3,373
|
|
|
$
|
10,611
|
|
Additions charged to expense
|
|
|
323
|
|
|
|
129
|
|
Reversals upon sale
|
|
|
(2,893
|
)
|
|
|
(7,367
|
)
|
Ending balance
|
|
$
|
803
|
|
|
$
|
3,373
|
|
At December 31, 2018, the balance of other real estate owned included no foreclosed residential real estate properties recorded as a result of obtaining
physical possession of the property. At December 31, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $0.
NOTE 5 – FAIR VALUE
ASC Topic 820,
Fair Value Measurements and Disclosures
,
establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:
Level 1
:
|
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
|
Level 2
:
|
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
Level 3
:
|
Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
|
Investment Securities:
The fair values of investment securities are determined
by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).
Loans Held for Sale:
The fair value of loans held for sale is based upon
binding quotes from third party investors (Level 2 inputs).
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 5 – FAIR VALUE
(Continued)
Impaired Loans
: Loans identified as impaired are measured using one of three
methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows. For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan
has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3. The fair value of collateral of impaired loans is generally
based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the
appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned
: Other real estate owned (OREO) properties are
initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor
evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the
appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value,
less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.
Interest Rate Swaps:
For interest rate swap agreements, we measure fair
value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.
Assets measured at fair value on a recurring basis are summarized below (in thousands):
|
|
Fair
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
95,398
|
|
|
$
|
—
|
|
|
$
|
95,398
|
|
|
$
|
—
|
|
U.S. Agency MBS and CMOs
|
|
|
32,890
|
|
|
|
—
|
|
|
|
32,890
|
|
|
|
—
|
|
Tax-exempt state and municipal bonds
|
|
|
45,127
|
|
|
|
—
|
|
|
|
45,127
|
|
|
|
—
|
|
Taxable state and municipal bonds
|
|
|
45,934
|
|
|
|
—
|
|
|
|
45,934
|
|
|
|
—
|
|
Corporate bonds and other debt securities
|
|
|
7,637
|
|
|
|
—
|
|
|
|
7,637
|
|
|
|
—
|
|
Other equity securities
|
|
|
1,438
|
|
|
|
—
|
|
|
|
1,438
|
|
|
|
—
|
|
Loans held for sale
|
|
|
415
|
|
|
|
—
|
|
|
|
415
|
|
|
|
—
|
|
Interest rate swaps
|
|
|
700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
Interest rate swaps
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agency securities
|
|
$
|
101,964
|
|
|
$
|
—
|
|
|
$
|
101,964
|
|
|
$
|
—
|
|
U.S. Agency MBS and CMOs
|
|
|
23,385
|
|
|
|
—
|
|
|
|
23,385
|
|
|
|
—
|
|
Tax-exempt state and municipal bonds
|
|
|
42,057
|
|
|
|
—
|
|
|
|
42,057
|
|
|
|
—
|
|
Taxable state and municipal bonds
|
|
|
43,735
|
|
|
|
—
|
|
|
|
43,735
|
|
|
|
—
|
|
Corporate bonds and other debt securities
|
|
|
8,109
|
|
|
|
—
|
|
|
|
8,109
|
|
|
|
—
|
|
Other equity securities
|
|
|
1,470
|
|
|
|
—
|
|
|
|
1,470
|
|
|
|
—
|
|
Loans held for sale
|
|
|
1,208
|
|
|
|
—
|
|
|
|
1,208
|
|
|
|
—
|
|
Interest rate swaps
|
|
|
197
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197
|
|
Interest rate swaps
|
|
|
(197
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(197
|
)
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 5 – FAIR VALUE
(Continued)
Assets measured at fair value on a non-recurring basis are summarized below (in thousands):
|
|
Fair
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,211
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,211
|
|
Other real estate owned
|
|
|
1,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,278
|
|
Other real estate owned
|
|
|
3,658
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,658
|
|
Quantitative information about Level 3 fair value measurements measured on a non-recurring basis were as follows at year end (dollars in thousands).
|
|
Asset
Fair
Value
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range (%)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,211
|
|
Sales comparison approach
|
|
Adjustment for differences
between comparable sales
|
|
1.0 to 15.0
|
|
|
|
|
|
Income approach
|
|
Capitalization rate
|
|
9.5 to 11.0
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
1,205
|
|
Sales comparison approach
|
|
Adjustment for differences
between comparable sales
|
|
3.0 to 20.0
|
|
|
|
|
|
Income approach
|
|
Capitalization rate
|
|
9.5 to 11.0
|
|
|
Asset
Fair
Value
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range (%)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,278
|
|
Sales comparison approach
|
|
Adjustment for differences
between comparable sales
|
|
2.0 to 15.0
|
|
|
|
|
|
Income approach
|
|
Capitalization rate
|
|
9.5 to 11.0
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
3,658
|
|
Sales comparison approach
|
|
Adjustment for differences
between comparable sales
|
|
3.0 to 22.0
|
|
|
|
|
|
Income approach
|
|
Capitalization rate
|
|
9.5 to 11.0
|
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 5 – FAIR VALUE
(Continued)
The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at year end (dollars in thousands).
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Level in
Fair Value
Hierarchy
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
Level 1
|
|
$
|
40,526
|
|
|
$
|
40,526
|
|
|
$
|
34,945
|
|
|
$
|
34,945
|
|
Federal funds sold and other short-term investments
|
|
Level 2
|
|
|
130,758
|
|
|
|
130,758
|
|
|
|
126,522
|
|
|
|
126,522
|
|
Securities held to maturity
|
|
Level 3
|
|
|
70,334
|
|
|
|
71,505
|
|
|
|
85,827
|
|
|
|
86,452
|
|
FHLB stock
|
|
|
|
|
11,558
|
|
|
NA
|
|
|
|
11,558
|
|
|
NA
|
|
Loans, net
|
|
Level 2
|
|
|
1,385,571
|
|
|
|
1,403,005
|
|
|
|
1,301,431
|
|
|
|
1,296,633
|
|
Bank owned life insurance
|
|
Level 3
|
|
|
41,185
|
|
|
|
41,185
|
|
|
|
40,243
|
|
|
|
40,243
|
|
Accrued interest receivable
|
|
Level 2
|
|
|
5,279
|
|
|
|
5,279
|
|
|
|
4,680
|
|
|
|
4,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
Level 2
|
|
|
(1,676,739
|
)
|
|
|
(1,677,634
|
)
|
|
|
(1,579,010
|
)
|
|
|
(1,579,016
|
)
|
Other borrowed funds
|
|
Level 2
|
|
|
(60,000
|
)
|
|
|
(59,092
|
)
|
|
|
(92,118
|
)
|
|
|
(91,313
|
)
|
Long-term debt
|
|
Level 2
|
|
|
(41,238
|
)
|
|
|
(37,046
|
)
|
|
|
(41,238
|
)
|
|
|
(36,546
|
)
|
Accrued interest payable
|
|
Level 2
|
|
|
(503
|
)
|
|
|
(503
|
)
|
|
|
(604
|
)
|
|
|
(604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet credit-related items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The methods and assumptions used to estimate fair value are described as follows.
Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand
deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as
discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions and deposits, and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of
FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet credit-related items is not significant.
The estimated fair values of financial instruments disclosed above as of December 31, 2018 follow the guidance in ASU 2016-01 which prescribes an “exit
price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability factors. The fair values shown as of December 31, 2017 and prior use an “entry price” approach for
loans.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 6 – PREMISES AND EQUIPMENT – NET
Year-end premises and equipment were as follows (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
15,861
|
|
|
$
|
16,384
|
|
Building
|
|
|
43,912
|
|
|
|
43,625
|
|
Leasehold improvements
|
|
|
263
|
|
|
|
782
|
|
Furniture and equipment
|
|
|
20,176
|
|
|
|
21,680
|
|
Construction in progress
|
|
|
508
|
|
|
|
243
|
|
|
|
|
80,720
|
|
|
|
82,714
|
|
Less accumulated depreciation
|
|
|
(35,858
|
)
|
|
|
(36,085
|
)
|
|
|
$
|
44,862
|
|
|
$
|
46,629
|
|
Depreciation expense was $2,493,000 and $2,606,000 for 2018 and 2017, respectively.
The Bank leases certain office and branch premises and equipment under operating lease agreements. Total rental expense for all operating leases
aggregated to $440,000 and $410,000 for 2018 and 2017, respectively. Future minimum rental expense under noncancelable operating leases as of December 31, 2018 is as follows (dollars in thousands):
2019
|
|
$
|
353
|
|
2020
|
|
|
241
|
|
2021
|
|
|
100
|
|
2022
|
|
|
86
|
|
2023
|
|
|
29
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
809
|
|
NOTE 7 – DEPOSITS
Deposits at year-end were as follows (dollars in thousands):
|
|
2018
|
|
|
2017
|
|
Noninterest-bearing demand
|
|
$
|
485,530
|
|
|
$
|
490,583
|
|
Interest bearing demand
|
|
|
456,260
|
|
|
|
408,865
|
|
Savings and money market accounts
|
|
|
609,425
|
|
|
|
587,931
|
|
Certificates of deposit
|
|
|
125,524
|
|
|
|
91,631
|
|
|
|
$
|
1,676,739
|
|
|
$
|
1,579,010
|
|
The following table depicts the maturity distribution of certificates of deposit at December 31, 2018 (dollars in thousands):
2019
|
|
$
|
78,878
|
|
2020
|
|
|
30,703
|
|
2021
|
|
|
12,396
|
|
2022
|
|
|
2,828
|
|
2023
|
|
|
719
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
125,524
|
|
Time deposits that exceed the FDIC insurance limit of $250,000 at year end 2018 and 2017 were approximately $39.6 million and $25.0 million, respectively.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 8 - OTHER BORROWED FUNDS
Other borrowed funds include advances from the Federal Home Loan Bank and borrowings from the Federal Reserve Bank.
Federal Home Loan Bank Advances
At year-end, advances from the Federal Home Loan Bank were as follows (dollars in thousands):
Principal Terms
|
|
Advance
Amount
|
|
Range of Maturities
|
|
Weighted
Average
Interest Rate
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Single maturity fixed rate advances
|
|
$
|
40,000
|
|
February 2019 to July 2024
|
|
|
2.27
|
%
|
Putable Advances
|
|
|
20,000
|
|
November 2024
|
|
|
1.81
|
%
|
|
|
$
|
60,000
|
|
|
|
|
|
|
Principal Terms
|
|
Advance
Amount
|
|
Range of Maturities
|
|
Weighted
Average
Interest Rate
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Single maturity fixed rate advances
|
|
$
|
70,000
|
|
February 2018 to April 2021
|
|
|
1.59
|
%
|
Amortizable mortgage advances
|
|
|
2,118
|
|
March 2018 to July 2018
|
|
|
3.78
|
%
|
Putable Advances
|
|
|
20,000
|
|
November 2024
|
|
|
1.81
|
%
|
|
|
$
|
92,118
|
|
|
|
|
|
|
Each advance is subject to a prepayment fee if paid prior to its maturity date. Fixed rate advances are payable at maturity. Amortizable mortgage
advances are fixed rate advances with scheduled repayments based upon amortization to maturity. These advances were collateralized by residential and commercial real estate loans totaling $476.4 million and $493.2 million under a blanket lien
arrangement at December 31, 2018 and 2017, respectively.
Scheduled repayments of FHLB advances as of December 31, 2018 were as follows (in thousands):
2019
|
|
$
|
10,000
|
|
2020
|
|
|
—
|
|
2021
|
|
|
10,000
|
|
2022
|
|
|
—
|
|
2023
|
|
|
10,000
|
|
Thereafter
|
|
|
30,000
|
|
|
|
$
|
60,000
|
|
Federal Reserve Bank Borrowings
The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at December 31, 2018 and 2017, and the Company
had approximately $16.9 million and $11.0 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling $18.2 million and $13.2 million at December 31, 2018 and 2017, respectively.
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE 9 – LONG TERM DEBT
The Company has outstanding $40.0 million aggregate liquidation amount of pooled trust preferred securities (“TRUPs”) issued through its wholly-owned
subsidiary grantor trusts. Macatawa Statutory Trust I issued $619,000 of common securities to the Company and $20.0 million aggregate liquidation amount of Preferred Securities with a floating interest rate of three-month LIBOR plus 3.05%,
maturing on July 15, 2033. Macatawa Statutory Trust II issued $619,000 of common securities and $20.0 million aggregate liquidation amount of Preferred Securities with a floating interest rate of three-month LIBOR plus 2.75%, maturing on March 18,
2034.
The Company issued subordinated debentures (“Debentures”) to each trust in exchange for ownership of all of the common securities of each trust and the
$41,238,000 in proceeds of the offerings, which Debentures represent the sole asset of each trust. The Preferred Securities represent an interest in the Company’s Debentures, which have terms that are similar to the Preferred Securities. The
Company is not considered the primary beneficiary of each trust (variable interest entity), therefore each trust is not consolidated in the Company’s financial statements, rather the Debentures are shown as a liability.
The Company has the option to defer interest payments on the Debentures from time to time for up to twenty consecutive quarterly payments, although
interest continues to accrue on the outstanding balance. During any deferral period, the Company may not declare or pay any dividends on the Company’s common stock or preferred stock or make any payment on any outstanding debt obligations that
rank equally with or junior to the Debentures. The Company also has the option to redeem and prepay both the TRUPs and the Debentures. At December 31, 2018, the Company does not have any intention to redeem or prepay either of the TRUPs or
Debentures.
At December 31, 2018 and 2017, Debentures totaling $41,238,000 are reported in liabilities as long-term debt, and the common securities of $1,238,000 and
unamortized debt issuance costs are included in other assets. The Preferred Securities may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. At December 31, 2018 and 2017,
approximately $40.0 million of the Preferred Securities issued qualified as Tier 1 capital for regulatory capital purposes.
NOTE 10 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates were as follows (dollars in thousands).
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
28,538
|
|
|
$
|
24,333
|
|
New loans and renewals
|
|
|
19,200
|
|
|
|
31,560
|
|
Repayments and renewals
|
|
|
(18,995
|
)
|
|
|
(27,355
|
)
|
Effect of changes in related parties
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
28,743
|
|
|
$
|
28,538
|
|
Deposits from principal officers, directors, and their affiliates at December 31, 2018 and 2017 were $112.7 million and $125.8 million, respectively. The
majority of the deposit balances for each year are associated with institutional accounts of affiliated organizations of one of the Company’s directors and are at market rates.
During 2015, the Bank entered into a back-to-back swap agreement (see Note 1 – Derivatives) with a company affiliated with one of the Company’s directors.
Terms were at market rates and the total notional amount of the agreement was $15.0 million and $15.9 million at December 31, 2018 and 2017, respectively.