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| MCBC > SEC Filings for MCBC > Form 10-Q/A on 17-Oct-2008 | All Recent SEC Filings |
17-Oct-2008
Quarterly Report
Macatawa Bank Corporation is a Michigan corporation and is the holding company for a wholly owned subsidiary, Macatawa Bank and for two trusts, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank Corporation is a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust and brokerage services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. These trusts are not consolidated in the Corporation's financial statements. For further information regarding consolidation, see the Notes to the Consolidated Financial Statements included herein.
Since opening in November of 1997, Macatawa Bank has experienced substantial growth. We believe that growth in core deposits is key to our long-term success and is our primary funding source for asset growth. Establishing a branching network in our markets has been of high importance in order to facilitate this core deposit growth. We have gained community awareness and acceptance in our markets through our expanding branch network and high quality service standards.
The West Michigan markets within which we operate continue to provide expansion opportunities for us. We opened our twenty-sixth branch in Cascade on the east side of the greater Grand Rapids area during the second quarter of 2007. Because of the significance of the greater Grand Rapids market and the great opportunity for market share growth, we anticipate additional branch openings in this market. We also continue to enjoy success in building new and existing relationships in both our Holland/Zeeland and Grand Haven markets. We anticipate that we will continue to experience long-term growth in our balance sheet and in our earnings due to these expansion opportunities.
Summary: Net loss for the quarter ended June 30, 2008 was $(8.1) million, a decrease of 12.7 million as compared to second quarter 2007 net income of $4.6 million. Loss per share was $(0.48) for the second quarter of 2008 compared to diluted earnings per share of $0.26 for the same period in 2007. Net loss for the six months ended June 30, 2008 was $(5.7) million, a decrease of 15.1 million compared to net income of $9.4 million for the same period in the prior year. Loss per share was $(0.33) for the six months ended June 30, 2008 compared to diluted earnings per share of $0.54 for the same period in the prior year.
The decrease in net income for both the three and six months ended June 30, 2008 compared to the same periods in the prior year was primarily due to increases in the provision for loan losses. Also contributing to the decrease in net income for both periods were a decrease in net interest income and an increase in noninterest expense partially offset by an increase in noninterest income.
Net Interest Income: Net interest income totaled $15.1 million for the second quarter of 2008, a decrease of $1.2 million, or 8%, as compared to the second quarter of 2007. Net interest income for the first six months of 2008 totaled $29.8 million, a decrease of $2.6 million or 8% as compared to $32.4 million for the same period in 2007. The decrease in net interest income for both the three and six month periods was primarily from a decline in the net interest margin partially offset by an increase in average earning assets. The net interest margin decreased 26 basis points to 3.06% for the second quarter of 2008 and 30 basis points to 3.03% for the first six months of 2008 when compared to the same periods in the prior year. Only 6 and 11 basis points, respectively, of the declines for both the three and six month periods ended June 30, 2008 compared to the same periods in the prior year were primarily related to the impact of the 325 basis point decline in the Federal funds and prime rates that began in September of 2007. The remaining margin declines were associated with higher balances of nonperforming assets. Average earning assets increased $13.4 million to $1.98 billion for the second quarter of 2008 and $23.3 million to $1.98 billion for the six month period ended June 30, 2008 compared to the same periods of the prior year.
During both the three and six month periods, the decrease in the yield on assets exceeded the decrease in the cost of funds and was the primary reason for the decline in the net interest margin.
The yield on earning assets decreased by 135 basis points for the three months ended June 30, 2008 and 113 basis points for the six months ended June 30, 2008 compared to the same periods in the prior year. The short-term interest rate cuts that began in the third quarter of 2007 caused a decrease in the yield on our variable rate loan portfolio and were the primary reason for the decrease in yield on earning assets. Also contributing to the decrease was the impact of rising balances of nonperforming loans throughout 2007 and into 2008 which resulted in a decline of approximately 20 basis points for both the three and six months ended June 30, 2008.
The cost of funds decreased 119 basis points for the three months ended June 30, 2008 and 91 basis points for the six months ended June 30, 2008 compared to the same periods in the prior year. A decrease in the rates paid on our deposit accounts, the rollover of time deposits at lower rates, and the repositioning of other borrowings within the lower rate environment were the primary reasons for the decrease in the cost of funds.
We expect growth in earning assets to be at lower levels than we have experienced in the past due to the generally weak economic conditions in Michigan. The 225 basis point cuts in the Federal funds and prime rates that occurred in the first six months of 2008 are anticipated to have a minimal impact on net interest income over the next twelve months. The Company's variable rate loan portfolio exceeds the level of variable rate funding, but the fixed rate funding portfolio that reprices over the next twelve months is expected to offset this excess.
For the three months ended June 30,
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2008 2007
----------------------------------------------------------------------------------------
Interest Average Interest Average
Earned Yield Earned Yield
Average Balance or paid or cost Average Balance or paid or cost
----------------- --------- --------- ----------------- --------- ---------
(Dollars in thousands)
Assets
Taxable securities $ 135,826 $ 1,497 4.41 % $ 148,593 $ 1,644 4.42 %
Tax-exempt securities (1) 51,427 543 6.50 % 52,105 548 6.48 %
Loans(2) 1,771,590 26,934 6.03 % 1,733,992 33,105 7.57 %
Federal Home Loan Bank stock 12,275 174 5.60 % 12,275 123 3.95 %
Federal funds sold 9,352 51 2.15 % 20,090 263 5.18 %
----------------- --------- --------- ----------------- --------- ---------
Total interest earning assets
(1) 1,980,470 29,199 5.91 % 1,967,055 35,683 7.26 %
Noninterest earning assets:
Cash and due from banks 25,940 30,919
Other 125,569 117,000
----------------- -----------------
Total assets $ 2,131,979 $ 2,114,974
----------------- -----------------
Liabilities
NOWs and MMDAs $ 605,666 2,218 1.47 % $ 739,338 6,735 3.65 %
Savings 45,339 46 0.41 % 42,514 61 0.58 %
IRAs 43,482 437 4.04 % 43,103 513 4.78 %
Time deposits 730,445 7,382 4.07 % 656,362 7,987 4.88 %
Other borrowed funds 310,072 3,379 4.31 % 248,549 3,102 4.94 %
Long-term debt 41,238 603 5.66 % 41,238 860 8.25 %
Federal funds borrowed 10,473 47 2.23 % 6,548 90 5.44 %
----------------- --------- --------- ----------------- --------- ---------
Total interest bearing
liabilities 1,786,715 14,112 3.16 % 1,777,652 19,348 4.35 %
Noninterest bearing liabilities:
Noninterest bearing demand
accounts 168,520 164,532
Other noninterest bearing
liabilities 12,515 7,088
Shareholders' equity 164,229 165,702
----------------- -----------------
Total liabilities and
shareholders' equity $ 2,131,979 $ 2,114,974
----------------- -----------------
Net interest income $ 15,087 $ 16,335
--------- ---------
Net interest spread (1) 2.75 % 2.91 %
Net interest margin (1) 3.06 % 3.32 %
Ratio of average interest
earning assets to
average interest bearing
|
(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans.
For the six months ended June 30,
----------------------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------------------
Interest Average Interest Average
Earned Yield Earned Yield
Average Balance or paid or cost Average Balance or paid or cost
----------------- --------- --------- ----------------- --------- ---------
(Dollars in thousands)
Assets
Taxable securities $ 140,477 $ 3,140 4.47 % $ 149,570 $ 3,308 4.42 %
Tax-exempt securities (1) 51,423 1,085 6.49 % 52,244 1,100 6.48 %
Loans(2) 1,765,774 55,899 6.28 % 1,724,251 65,563 7.58 %
Federal Home Loan Bank stock 12,275 327 5.27 % 12,275 280 4.54 %
Federal funds sold 5,679 64 2.23 % 13,965 364 5.19 %
----------------- --------- --------- ----------------- --------- ---------
Total interest earning assets
(1) 1,975,628 60,515 6.14 % 1,952,305 70,615 7.27 %
Noninterest earning assets:
Cash and due from banks 26,846 31,067
Other 121,818 113,466
----------------- -----------------
Total assets $ 2,124,292 $ 2,096,838
----------------- -----------------
Liabilities
NOWs and MMDAs $ 614,114 5,726 1.88 % $ 733,888 13,293 3.66 %
Savings 43,150 103 0.48 % 41,557 120 0.58 %
IRAs 42,853 914 4.29 % 42,174 988 4.72 %
Time deposits 706,287 15,174 4.32 % 667,196 16,133 4.78 %
Other borrowed funds 324,363 7,234 4.41 % 232,477 5,751 4.92 %
Long-term debt 41,238 1,371 6.57 % 41,238 1,712 8.26 %
Federal funds borrowed 13,726 209 3.02 % 8,138 223 5.45 %
----------------- --------- --------- ----------------- --------- ---------
Total interest bearing
liabilities 1,785,731 30,731 3.44 % 1,766,668 38,220 4.35 %
Noninterest bearing liabilities:
Noninterest bearing demand
accounts 164,523 161,013
Other noninterest bearing
liabilities 9,672 6,117
Shareholders' equity 164,366 163,040
----------------- -----------------
Total liabilities and
shareholders' equity $ 2,124,292 $ 2,096,838
----------------- -----------------
Net interest income $ 29,784 $ 32,395
--------- ---------
Net interest spread (1) 2.70 % 2.92 %
Net interest margin (1) 3.03 % 3.33 %
Ratio of average interest
earning assets to
average interest bearing
|
(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans.
The ultimate amounts of loan loss provision in both the current and prior year periods were a byproduct of establishing our allowance for loan losses at levels deemed necessary in our methodology for determining the adequacy of the allowance. For more information about our allowance for loan losses and our methodology for establishing its level, see the discussion below under Portfolio Loans and Asset Quality.
Noninterest Income:Noninterest income for the three and six month periods ended June 30, 2008 increased to $5.1 million and $10.1 million, respectively, from $4.0 million and $7.8 million for the same periods in the prior year. The increase for both the three and six month periods included approximately $412,000 and $243,000, respectively, of gains on the sale of securities and the termination of certain borrowings. The increase in the six month period included $832,000 of gains realized on the settlement of interest rate swaps which were free standing derivatives carried at fair value. The Company chose to execute each of these transactions to support its shift to a more balanced sensitivity to future interest rate changes. For more information about the interest rate swaps, refer to Note 9 of the Financial Statements. Increases in revenues from deposit services, investment services, ATM and debit card processing were offset by slight declines in trust income for both the three and six month periods ended June 30, 2008.
Noninterest Expense:Noninterest expense for the three and six month periods ended June 30, 2008 increased to $14.5 million and $28.1 million, respectively, from $12.6 million and $24.4 million for the same periods in the prior year. Increases of $530,000 and $1.3 million in salaries and benefits for the three and six month periods primarily related to general staff additions and merit increases since the prior year. Staff additions were in varied positions throughout the Company, including risk management, credit administration and problem asset departments, and selective sales personnel to support growth in deposits and commercial and industrial lending.
The increase in legal and professional fees and the increase of $1.2 million and $1.8 million in other expense for the three and six month periods primarily related to the impact of higher levels of nonperforming assets. Costs associated with nonperforming assets include writedowns of other real estate owned, legal costs, survey and appraisal fees, repossession expenses and disposition and other carrying costs. These costs increased by approximately $1.3 million and $1.6 million for the three and six month periods ended June 30, 2008 compared to the same periods in the prior year. Approximately $1.1 million of the increase for both the three and six month periods ended June 30, 2008 related to writedowns of other real estate owned. FDIC assessments increased by $84,000 and $222,000 for the three and six month periods due to an increase in insurance rates related to higher nonperforming asset levels. The Company was able to manage costs in other areas to offset these increases. We expect efficiency to continue to improve by better utilizing our capacity as we grow. We believe the additional capacity within our branch network will provide future growth opportunities without significant additional costs.
Federal Income Tax Expense (Benefit): The Company's federal income tax benefit was $4.7 million and $3.7 million for the three and six month periods ended June 30, 2008. This compared to federal income tax expense of $2.2 million and $4.5 million for the same periods in the prior year. The difference between the Company's financial statement tax expense (benefit) and the amount computed by applying the Company's statutory federal tax rate of 35% for all periods is primarily due to tax exempt income from bank-owned life insurance and interest on municipal securities.
Summary: Total assets were $2.11 billion at June 30, 2008, a decrease of $20.3 million from $2.13 billion at December 31, 2007. The decline was primarily from a decrease of $32.1 million in available for sale securities.
Securities Available for Sale: Securities available for sale were $169.4 million at June 30, 2008 compared to $201.5 million at December 31, 2007. The decrease was primarily due to calls and maturities and the sale of approximately $21.7 million of U.S. Government Agency bonds, partially offset by purchases of U.S. Government Agency bonds. The sales of securities helped support the Company's interest in positioning its assets and liabilities to a more balanced sensitivity to interest rates and resulted in gross gains of $412,000.
Portfolio Loans and Asset Quality: Total portfolio loans were $1.75 billion at both June 30, 2008 and December 31, 2007. Growth in residential mortgage loans was offset by declines in commercial and consumer loans. Because of the relatively short duration of our assets, we have viewed the recent improvement in rates on residential mortgage loans as an opportunity to hold more of these higher quality loans in our portfolio. During the first six months of 2008, our residential mortgage loan portfolios increased by $34.6 million, while our commercial and consumer loan portfolios declined $33.8 million and $3.1 million, respectively. The majority of the decline in the commercial portfolio relates to the $25.0 million of net charge-offs recorded during the first six months of 2008 as more fully discussed below under Allowance for Loan Losses.
The slower loan growth in commercial and consumer loans in recent quarters is a reflection of the weak economic conditions in West Michigan and our interest in maintaining the quality of our loan portfolio. In particular, deterioration in residential land development has impacted both asset growth and asset quality.
Commercial and commercial real estate loans still remain our largest loan segment and accounted for approximately 72% and 74% of the total loan portfolio at June 30, 2008 and December 31, 2007. Residential mortgage loans and consumer loans comprised 17% and 11% of total loans at June 30, 2008, and 15% and 11% at December 31, 2007.
A further breakdown of the composition of commercial loans is shown in the table below (in thousands):
June 30, 2008 December 31, 2007
--------------- -------------------
Construction/Land Development $ 308,060 $ 335,366
Farmland and Agriculture 23,186 30,371
Nonfarm, Nonresidential 459,676 454,764
Multi-family 29,921 35,381
--------------- -------------------
Total Commercial Real Estate Loans 820,843 855,882
Commercial and Industrial 439,986 438,743
--------------- -------------------
Total Commercial Loans $ 1,260,829 $ 1,294,625
--------------- -------------------
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Loans for the development or sale of 1-4 family residential properties were approximately $228.3 million at June 30, 2008, representing approximately 74% of the construction and land development portfolio. Of this total, approximately $31.8 million was secured by vacant land, $121.3 million was secured by developed residential land and $75.2 million was secured by 1-4 family properties held for speculative purposes. Vacant land is land zoned for residential purposes but with no further development. Developed residential land is land that has been further developed for future residential construction, including but not limited to completed lot surveys, road work, water, sewer and other utility preparation and general land grade. 1-4 family properties held for speculative purposes are on developed residential lots and include completed residential homes or residential homes in the process of construction. The balances of these loan portfolios remained relatively stable compared to December 31, 2007.
Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. Nonperforming loans include loans on non-accrual status, restructured loans and loans delinquent more than 90 days but still accruing. Foreclosed and repossessed assets include assets acquired in settlement of loans.
As of June 30, 2008, nonperforming loans totaled $78.9 million or 4.51% of total portfolio loans compared to $73.9 million or 4.22% of total portfolio loans at December 31, 2007.
Nonperforming loans for the development or sale of 1-4 family residential properties were approximately $62.8 million or 80% of total non-performing loans at June 30, 2008. Of this total, approximately $2.8 million was secured by vacant land, $43.3 million was secured by developed residential land and $16.7 million was secured by 1-4 family properties held for speculative purposes. The remaining balance of nonperforming loans at June 30, 2008 consisted of a number of commercial loans most of which were on nonaccrual and which we consider to be well collateralized or adequately reserved through the allowance for loan losses.
Foreclosed assets totaled $7.2 million at June 30, 2008 compared to $5.7 million at December 31, 2007. The balance at June 30, 2008 was comprised of a number of real estate properties carried at their fair value less costs to sell.
The following table shows the composition and amount of our nonperforming assets:
(Dollars in thousands) June 30, 2008 December 31, 2007
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