Add
MCBC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MCBC > SEC Filings for MCBC > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
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 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 generally experienced rapid growth. Since the end of 2007, the Company has managed its growth at a slower rate to focus on maintaining asset quality within the generally weak economic conditions in West Michigan. 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 have provided expansion opportunities for us. We anticipate expansion opportunities to occur when economic conditions begin to strengthen again, adding to growth in our balance sheet and earnings. We anticipate additional branch openings within the next few years in the greater Grand Rapids area as we believe there is a significant opportunity for market share growth in this market. We also continue to enjoy success in building new and existing relationships in both our Holland/Zeeland and Grand Haven markets.
RESULTS OF OPERATIONS
Summary: Net loss available to common shares for the quarter ended March 31, 2009 was $5.1 million, compared to first quarter 2008 net income of $2.4 million. Loss per common share on a diluted basis was $0.30 for the first quarter of 2009 compared to earnings per common share of $0.14 for the same period in 2008.
The decrease in net income for the three months ended March 31, 2009 compared to the same period in the prior year was primarily due to an increase in the provision for loan losses. Also contributing to the decrease was 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 $12.8 million for the first quarter of 2009, a decrease of $1.9 million as compared to the first quarter of 2008. The decrease in net interest income was from both a decline in average earning assets and net interest margin. The net interest margin decreased 33 basis points to 2.66% for the first quarter of 2009 when compared to the same period in the prior year. The majority of the margin decline was related to rising balances of nonperforming assets. Also contributing to the margin decline was the Federal funds and prime rate cuts that occurred throughout 2008. Average earning assets decreased $11.4 million to $1.96 billion for the first quarter of 2009 compared to the same period of the prior year.
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 cost of funds decreased 91 basis points for the three months ended March 31, 2009 compared to the same period 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.
The level of earning assets is expected to decline slightly due to the generally weak economic conditions in Michigan. A continued decline in the cost of funds, primarily from the repricing of term funding at lower costs, is expected to have a positive impact on net interest income throughout the remainder of 2009.
For the three months ended March 31,
------------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or paid or cost Balance or paid or cost
----------- --------- --------- ----------- --------- ---------
(Dollars in thousands)
Assets
Taxable securities $ 124,677 $ 1,264 4.06 % $ 145,128 $ 1,643 4.53 %
Tax-exempt securities (1) 52,022 547 6.46 % 51,418 542 6.48 %
Loans(2) 1,738,985 23,146 5.33 % 1,759,959 28,965 6.53 %
Federal Home Loan Bank stock 12,275 123 4.02 % 12,275 153 4.93 %
Federal funds sold and other
short-term
investments 31,400 44 0.56 % 2,005 14 2.64 %
----------- --------- --------- ----------- --------- ---------
Total interest earning
assets (1) 1,959,359 25,124 5.20 % 1,970,785 31,317 6.37 %
Noninterest earning assets:
Cash and due from banks 23,191 27,752
Other 118,374 118,068
----------- -----------
Total assets $ 2,100,924 $ 2,116,605
----------- -----------
Liabilities
Deposits:
Interest bearing demand $ 230,468 403 0.71 % $ 261,429 1,172 1.80 %
Savings and money market
accounts 406,718 873 1.02 % 402,094 2,393 2.39 %
Time deposits 812,101 7,704 3.85 % 724,353 8,269 4.59 %
Borrowings:
Other borrowed funds 276,790 2,902 4.19 % 338,654 3,856 4.50 %
Long-term debt 41,238 446 4.32 % 41,238 780 7.48 %
Federal funds purchased 28 --- 0.00 % 16,979 150 3.50 %
----------- --------- --------- ----------- --------- ---------
Total interest bearing
liabilities 1,767,343 12,328 2.82 % 1,784,747 16,620 3.73 %
Noninterest bearing
liabilities:
Noninterest bearing demand
accounts 170,872 160,525
Other noninterest bearing
liabilities 11,962 6,830
Shareholders' equity 150,747 164,503
----------- -----------
Total liabilities and
shareholders' equity $ 2,100,924 $ 2,116,605
----------- -----------
Net interest income $ 12,796 $ 14,697
--------- ---------
Net interest spread (1) 2.38 % 2.64 %
Net interest margin (1) 2.66 % 2.99 %
Ratio of average interest
earning assets to
average interest bearing
liabilities 110.86 % 110.42 %
|
(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 period 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 month period ended March 31, 2009 increased to $5.3 million from $5.0 million for the same period in the prior year. The three month period ended March 31, 2008 included $832,000 of gains realized on the settlement of interest rate swaps. An increase of approximately $1.1 million of net gains on mortgage loans to $1.62 million for the first quarter of 2009 was the primary reason for the increase, and was largely associated with a significant increase in refinancing activity from the decline in mortgage rates during the quarter. An increase in revenue from ATM and debit card processing offset slight declines in revenue from deposit and trust services and are the primary reasons for remaining changes in non-interest income. The lower level of equity market valuations in the first quarter of 2009 versus the first quarter of 2008 was the primary reason for the decrease in trust income.
Noninterest Expense:Noninterest expense for the three month period ended March 31, 2009 increased to $14.5 million compared to $13.6 million for the same period in the prior year. The primary reason for the increase for the three month period related to the cost 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. Losses on foreclosed properties include both net losses on the sale of foreclosed properties and subsequent reductions from value declines for outstanding foreclosed properties. These costs amounted to approximately $2.2 million for the three month period ended March 31, 2009 compared to $377,000 for the same period in 2008 as itemized in the following table (in thousands):
Three Months Three Months
Ended Ended
March 31, 2009 March 31, 2008
---------------- ----------------
Legal and professional $ 236 $ 85
Repossessed and foreclosed
property administration 868 35
Losses on foreclosed properties 1,055 257
---------------- ----------------
Total $ 2,159 $ 377
---------------- ----------------
|
FDIC assessments also increased by $410,000 to $771,000 for the first quarter of 2009 compared to $361,000 for the first quarter of 2008 due to higher assessment rates implemented by the FDIC.
When excluding nonperforming asset costs and FDIC assessments, non-interest expense would have been approximately $11.6 million for the quarter, down 10% from $12.9 million for the first quarter of 2008.
Expense reduction initiatives that began in early 2008 have allowed the Company to manage costs in nearly all other areas of non-interest expense to offset the increases driven by higher nonperforming asset levels. Salaries and benefit expense decreased $758,000, or 11%, in the first quarter of 2009 compared to the first quarter of 2008 largely due to staff reductions that occurred in 2008 and a curtailment of bonuses and wage increases in response to the deteriorating economic conditions. We expect efficiency to continue to improve in 2009 in response to these initiatives.
FINANCIAL CONDITION
Summary: Total assets were $2.09 billion at March 31, 2009 a decrease of $57.0 million from $2.15 billion at December 31, 2008. The overall decrease in total assets reflects a decline of $74.1 in our loan portfolio and $10.1 million in available for sale securities partially used to increase short-term investments by $34.2 million.
Federal Funds Sold and Other Short Term Investments: The increase in Federal funds sold and other short-term investments to $73.4 at March 31, 2009 was from liquid money market investments held to improve the liquidity of the balance sheet during this period of economic slowdown. The Company expects to maintain these higher balances until conditions improve and more attractive investment opportunities emerge.
Securities Available for Sale: Securities available for sale were $174.6 million at March 31, 2009 compared to $184.7 million at December 31, 2008. The decrease was primarily due to calls and maturities of approximately $16.5 million of U.S. Government Agency bonds, partially offset by purchases of U.S. Government Agency bonds.
Portfolio Loans and Asset Quality: Total portfolio loans declined by $74.1 million to $1.70 billion at March 31, 2009 compared to $1.77 billion at December 31, 2008. During the first three months of 2009, our commercial, residential mortgage and consumer loan portfolios decreased by $46.8 million, $21.3 million and $5.5 million, respectively.
Despite the decline in the residential mortgage portfolio, the volume of activity in this segment remained strong during the quarter. As a result of the drop in mortgage interest rates in response to the weakening economic conditions and resulting government action, the company experienced a significant increase in refinancing activity. Much of the decline in the residential mortgage portfolio was from this refinancing and subsequent sale in the secondary market. Mortgage loans originated for sale were $74.5 million in the first quarter of 2009 compared to $33.5 million for the same period in the prior year.
The decline in the commercial loan portfolio 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. The Company continues to focus its efforts on reducing its reliance on residential land development, diversifying its commercial loan portfolios and improving asset quality.
Commercial and commercial real estate loans still remain our largest loan segment and accounted for approximately 78% of the total loan portfolio at both March 31, 2009 and December 31, 2008. Residential mortgage loans and consumer loans each comprised 11% of total loans at both March 31, 2009 and December 31, 2008.
March 31, 2009 December 31, 2008
---------------- -------------------
Construction and Development $ 228,499 $ 237,108
Commercial Real Estate 688,068 690,525
---------------- -------------------
Total Commercial Real Estate 916,567 927,633
Commercial and Industrial 415,635 451,826
---------------- -------------------
Total Commercial Loans $ 1,332,202 $ 1,379,459
---------------- -------------------
|
Commercial real estate consists primarily of loans to business owners and developers of owner and non-owner occupied properties, secured by single and multi-family residential as well as non-residential real estate. Loans for the development or sale of 1-4 family residential properties were approximately $196.9 million at March 31, 2009 compared to $203.7 million at December 31, 2008. Although it represents a narrow and declining slice of our commercial real estate portfolio, this segment has also been the major source of the Company's asset quality challenges discussed more fully below. Of the total at March 31, 2009, approximately $24.2 million was secured by vacant land, $114.4 million was secured by developed residential land and $58.3 million was secured by 1-4 family properties held for speculative purposes. Vacant land is zoned for residential purposes but with no further development. Developed residential land 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.
Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan originators. An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets monthly to manage the Company's internal watch list and proactively manage high risk loans. When reasonable doubt exists concerning collectibility of interest or principal of one of our loans, that loan is placed in non-accrual status. Any interest previously accrued but not collected is reversed and charged against current earnings.
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 March 31 2009, nonperforming loans totaled $113.6 million or 6.68% of total portfolio loans compared to $92.3 million or 5.20% of total portfolio loans at December 31, 2008.
Loans for the development or sale of 1-4 family residential properties were approximately $70.2 million or 62% of total non-performing loans at March 31, 2009 compared to $59.9 million or 65% of total non-performing loans at December 31, 2008. Of the total at March 31, 2009, approximately $3.4 million was secured by vacant land, $47.3 million was secured by developed residential land and $19.2 million was secured by 1-4 family properties held for speculative purposes.
Foreclosed assets totaled $18.5 million at March 31, 2009 compared to $19.5 million at December 31, 2008. Of the $18.5 million, there were 32 commercial real estate relationships totaling approximately $17.7 million. The remaining balance was comprised of 11 residential mortgage properties totaling approximately $1.8 million. All properties are carried at their fair value less costs to sell.
The Company experienced an increase in sales of foreclosed properties during the quarter. Proceeds from sales of foreclosed properties were $3.1 million during the first quarter of 2009 resulting in a net loss of $6,000.
Nonaccrual loans $ 110,120 $ 89,049
Renegotiated loans 1,942 21
Loans 90 days past due and still accruing 1,545 3,200
--------- ---------
Total nonperforming loans 113,607 92,270
Foreclosed assets 18,510 19,516
Repossessed assets 564 306
--------- ---------
Total nonperforming assets $ 132,681 $ 112,092
--------- ---------
Nonperforming loans to total loans 6.68 % 5.20 %
Nonperforming assets to total assets 6.33 % 5.21 %
|
Allowance for loan losses: The allowance for loan losses as of March 31, 2009 was $39.1 million or 2.30% of total portfolio loans, compared to $38.3 million or 2.16% of total portfolio loans at December 31, 2008. Net charge-offs for the three months ended March 31, 2009 totaled $9.7 million, an increase of $5.5 million compared to $4.2 million for the same period in 2008. The provision for loan losses increased $7.8 million to $10.5 million for the three months ended March 31, 2009 compared to $2.7 million for the same period of the prior year.
The increase in both net charge-offs and the provision for loan losses was largely associated with continued declines in the value of collateral for the residential land development loan portfolio and an increase in impaired loans during the period. For residential land development loans, cash flow to service the debt is primarily expected from sales of lots and properties securing these loans, which has declined markedly throughout 2008 and into 2009. This deterioration in cash flows and resulting expected future cash flows is the primary reason for the declines in the value of the real estate securing these loans.
The ratio of net charge-offs to average loans was 2.23% on an annualized basis for the first three months of 2009 compared to 0.95% for the first three months of 2008.
Our allowance for loan losses is maintained at a level considered appropriate based upon our regular, quarterly assessments of the probable incurred credit losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance is comprised of several key elements, which include specific allowances for loans considered impaired, formula allowance for graded loans, general allocations based on historical trends for pools of similar loan types, and under certain circumstances, reserves related to current market conditions that are pertinent to certain aspects of the loan portfolio.
Specific allowances are established in cases where senior credit management has identified significant conditions or circumstances related to an individually impaired credit that we believe indicates the probability that a loss has been incurred. This amount is determined by methods prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". Impaired loans increased to $165.7 million at March 31, 2009 from $151.9 million at December 31, 2008. The increase in impaired loans is primarily from loans associated with residential land development. The specific allowance for impaired loans was $21.8 million at March 31, 2009 and $20.0 million at December 31, 2008 and is the primary reason for the increase in the allowance for loan losses during the quarter.
Groups of homogeneous loans, such as residential real estate, open- and closed-end consumer loans, etc., receive allowance allocations based on loan type. As with commercial loans, the determination of the allowance allocation percentage includes consideration of historical loss trends based on industry and peer experience as well as our historical loss experience. General economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience are considered in connection with allocation factors for these similar pools of loans. The homogeneous loan allowance was . . .
|
|