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| MCBC > SEC Filings for MCBC > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-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 it 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.
RESULTS OF OPERATIONS
Summary: Net income for the quarter ended September 30, 2008 was $1.9 million, a decrease of 24% as compared to third quarter 2007 net income of $2.5 million. Earnings per share on a diluted basis were $0.11 for the third quarter of 2008 compared to $0.14 for the same period in 2007. Net loss for the nine months ended September 30, 2008 was $(3.8) million, a decrease of $15.7 million compared to net income of $11.9 million for the same period in the prior year. Loss per share was $(0.22) for the nine months ended September 30, 2008 compared to diluted earnings per share of $0.68 for the same period in the prior year.
The decrease in net income for the three months ended September 30, 2008 compared to the same period in the prior year was primarily due to an increase in noninterest expense and a decrease in net interest income partially offset by a decrease in the provision for loan losses. The decrease in net income for the nine months ended September 30, 2008 compared to the same period in the prior year was primarily due to increases in the provision for loan losses. Also contributing to the decrease was an increase in noninterest expense and a decrease in net interest income partially offset by an increase in noninterest income.
During both the three and nine month periods, the decrease in the yield on assets exceeded the decrease in the cost of funds and was reflected by the decline in the net interest margin.
The yield on earning assets decreased by 140 basis points for the three months ended September 30, 2008 and 122 basis points for the nine months ended September 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 12 and 15 basis points, respectively, for both the three and nine months ended September 30, 2008.
The cost of funds decreased 133 basis points for the three months ended September 30, 2008 and 106 basis points for the nine months ended September 30, 2008 compared to the same periods in the prior year. A decrease in the rates paid on our deposit accounts in response to declining market rates, 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 the growth rate of earning assets to be slower than we have experienced in the past due to the generally weak economic conditions in Michigan. The 275 basis point cuts in the Federal funds and prime rates that have occurred so far in 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 September 30,
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2008 2007
--------------------------------------------------------------------------------------------------
Interest Average Interest Average
Earned or Yield or Earned or Yield or
Average Balance paid cost Average Balance paid cost
----------------- ----------- ------------ ----------------- ----------- ------------
(Dollars in thousands)
Assets
Taxable securities $ 114,099 $ 1,210 4.24 % $ 148,480 $ 1,663 4.48 %
Tax-exempt securities (1) 51,355 542 6.49 % 51,588 545 6.50 %
Loans(2) 1,757,839 26,388 5.90 % 1,722,511 32,633 7.43 %
Federal Home Loan Bank stock 12,275 164 5.22 % 12,275 140 4.44 %
Federal funds sold and other
short-term
investments 48,979 310 2.48 % 31,301 410 5.13 %
----------------- ----------- ------------ ----------------- ----------- ------------
Total interest earning assets
(1) 1,984,547 28,614 5.73 % 1,966,155 35,391 7.13 %
Noninterest earning assets:
Cash and due from banks 27,947 31,687
Other 129,571 118,632
----------------- -----------------
Total assets $ 2,142,065 $ 2,116,474
----------------- -----------------
Liabilities
NOWs and MMDAs $ 631,828 2,213 1.39 % $ 747,614 6,896 3.66 %
Savings 47,213 35 0.30 % 41,082 59 0.57 %
IRAs 44,803 436 3.87 % 43,864 531 4.80 %
Time deposits 740,877 7,159 3.84 % 651,293 8,047 4.91 %
Other borrowed funds 296,254 3,328 4.39 % 244,039 3,102 4.98 %
Long-term debt 41,238 600 5.69 % 41,238 871 8.27 %
Federal funds borrowed 1,284 7 2.26 % 3,793 50 5.14 %
----------------- ----------- ------------ ----------------- ----------- ------------
Total interest bearing
liabilities 1,803,497 13,778 3.03 % 1,772,923 19,556 4.36 %
Noninterest bearing
liabilities:
Noninterest bearing demand
accounts 176,266 170,501
Other noninterest bearing
liabilities 10,083 6,854
Shareholders' equity 152,219 166,196
----------------- -----------------
Total liabilities and
shareholders' equity $ 2,142,065 $ 2,116,474
----------------- -----------------
Net interest income $ 14,836 $ 15,835
----------- -----------
Net interest spread (1) 2.70 % 2.77 %
Net interest margin (1) 2.98 % 3.20 %
Ratio of average interest
earning assets to
average interest bearing
liabilities 110.04 % 110.90 %
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(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans.
For the nine months ended September 30,
--------------------------------------------------------------------------------------------------
2008 2007
--------------------------------------------------------------------------------------------------
Interest Average Interest Average
Earned or Yield or Earned or Yield or
Average Balance paid cost Average Balance paid cost
----------------- ----------- ------------ ----------------- ----------- ------------
(Dollars in thousands)
Assets
Taxable securities $ 131,620 $ 4,350 4.41 % $ 149,203 $ 4,971 4.44 %
Tax-exempt securities (1) 51,400 1,627 6.49 % 52,023 1,645 6.48 %
Loans(2) 1,763,110 82,287 6.15 % 1,723,665 98,195 7.53 %
Federal Home Loan Bank stock 12,275 491 5.25 % 12,275 420 4.51 %
Federal funds sold and other
short-term
investments 20,218 375 2.44 % 19,807 774 5.15 %
----------------- ----------- ------------ ----------------- ----------- ------------
Total interest earning assets
(1) 1,978,623 89,130 6.00 % 1,956,973 106,005 7.22 %
Noninterest earning assets:
Cash and due from banks 27,216 31,276
Other 124,420 115,206
----------------- -----------------
Total assets $ 2,130,259 $ 2,103,455
----------------- -----------------
Liabilities
NOWs and MMDAs $ 620,062 7,939 1.71 % $ 738,514 20,190 3.65 %
Savings 44,514 138 0.41 % 41,397 179 0.58 %
IRAs 43,508 1,350 4.14 % 42,744 1,519 4.75 %
Time deposits 717,901 22,333 4.15 % 661,836 24,179 4.88 %
Other borrowed funds 314,925 10,562 4.42 % 236,373 8,853 4.94 %
Long-term debt 41,238 1,970 6.28 % 41,238 2,583 8.26 %
Federal funds borrowed 9,548 217 2.98 % 6,674 273 5.39 %
----------------- ----------- ------------ ----------------- ----------- ------------
Total interest bearing
liabilities 1,791,696 44,509 3.30 % 1,768,776 57,776 4.36 %
Noninterest bearing
liabilities:
Noninterest bearing demand
accounts 168,465 164,211
Other noninterest bearing
liabilities 9,811 6,365
Shareholders' equity 160,287 164,103
----------------- -----------------
Total liabilities and
shareholders' equity. $ 2,130,259 $ 2,103,455
----------------- -----------------
Net interest income $ 44,621 $ 48,229
----------- -----------
Net interest spread (1) 2.70 % 2.87 %
Net interest margin (1) 3.01 % 3.29 %
Ratio of average interest
earning assets to
average interest bearing
liabilities 110.43 % 110.64 %
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(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 nine month periods ended September 30, 2008 increased to $4.1 million and $14.2 million, respectively, from $4.0 million and $11.8 million for the same periods in the prior year. The increase in the nine month period included approximately $412,000, $243,000, and $832,000, respectively, of gains on the sale of securities, gains on the termination of certain borrowings and 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, and ATM and debit card processing were offset by slight declines in trust income and gains on loans sold for both the three and nine month periods ended September 30, 2008. General declines in customer stock portfolio values associated with the decline in the stock market was the primary reason for the decrease in trust income, and a combination of elevated mortgage rates and lower mortgage volume associated with corrections in the housing market have caused the decrease in gains on mortgage loans sold.
Noninterest Expense:Noninterest expense for the three and nine month periods ended September 30, 2008 increased to $14.0 million and $42.1 million, respectively, from $12.7 million and $37.1 million for the same periods in the prior year.
The primary reason for the increase in total noninterest expense for the three and nine month periods related to the administrative impact of higher levels of nonperforming assets. Costs associated with nonperforming assets include legal costs, repossessed and foreclosed property administration expense and losses on foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. These costs amounted to approximately $1.6 million and $3.5 million for the three and nine month periods ended September 30, 2008 compared to $308,000 and $701,000 for the same periods in 2007 as itemized in the following table (in thousands):
Three Months Nine Months
Three Months Ended Nine Months Ended
Ended September September 30, Ended September September 30,
30, 2008 2007 30, 2008 2007
----------------- ------------- ---------------- -------------
Legal and professional $ 153 $ 123 $ 437 $ 329
Repossessed and
foreclosed
property administration 898 97 1,416 248
Losses on foreclosed
properties 515 88 1,667 124
----------------- ------------- ---------------- -------------
Total $ 1,566 $ 308 $ 3,520 $ 701
----------------- ------------- ---------------- -------------
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FDIC assessments also increased by $62,000 and $283,000 for the three and nine month periods due to an increase in insurance rates related to these higher nonperforming asset levels.
The increase for the nine month period was largely associated with a $1.4 million in salaries and benefits 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. Salary and benefit levels have begun to experience a slight decline primarily from staff attrition in certain operational and sales functions associated with improved efficiency.
Expense reduction initiatives that began in early 2008 have allowed the Company to manage costs in other areas to offset the increases driven by higher nonperforming asset levels. We expect efficiency to continue to improve in response to these initiatives and by better utilizing our capacity as we grow.
Federal Income Tax Expense (Benefit): The Company's federal income tax expense was $639,000 and $1.0 million for the three months ended September 30, 2008 and 2007 resulting in an effective tax rate of 25.5% and 29.7%, respectively. The decline in the effective tax rate was primarily due to tax exempt income representing a higher percentage of total income in 2008. The Company had a federal income tax benefit of $3.1 million for the nine month period ended September 30, 2008 associated with the net loss reported for this period compared to federal income tax expense of $5.5 million for the same period 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.
FINANCIAL CONDITION
Summary: Total assets were $2.20 billion at September 30, 2008, an increase of $65.8 million from $2.13 billion at December 31, 2007. The increase was primarily from an increase of $88.2 million in Federal funds sold and other short-term investments and partially offset by a decrease of $37.7 million in available for sale securities.
Federal Funds Sold and Other Short Term Investments: The increase in Federal funds sold and other short-term investments to $88.2 at September 30, 2008 was from liquid investments with maturities of 7 days or less primarily associated with an increase in seasonal deposits. The Company expects these balances to decline during the fourth quarter as these deposit funds are used by these seasonal customers.
Securities Available for Sale: Securities available for sale were $163.8 million at September 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 $1.76 billion at September 30, 2008 compared to $1.75 billion at December 31, 2007. Growth in residential mortgage loans and consumer loans was offset by a decline in commercial loans. During the first nine months of 2008, our residential mortgage loan portfolios increased by $40.7 million, our consumer loan portfolio increased $1.5 million and we saw a decline of $31.4 million in our commercial loan portfolio.
The majority of the decline in the commercial portfolio relates to the $26.5 million of net charge-offs recorded during the first nine 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 September 30, 2008 and December 31, 2007, respectively. Residential mortgage . . .
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