Add
MCBC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MCBC > SEC Filings for MCBC > Form 10-Q on 26-Apr-2012 | All Recent SEC Filings |
26-Apr-2012
Quarterly Report
Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the FDIC. 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 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 our Consolidated Financial Statements. For further information regarding consolidation, see the Notes to the Consolidated Financial Statements.
At March 31, 2012, we had total assets of $1.50 billion, total loans of $1.06 billion, total deposits of $1.21 billion and shareholders' equity of $98.9 million. During the first quarter of 2012, we recognized net income of $4.5 million compared to net income of $1.3 million in the first quarter of 2011. This represented our eighth consecutive quarter (or two full years) of profitability. As described more fully below, a significant recovery on a previously charged-off loan and continued reductions in net charge-offs and nonperforming loans led to a negative loan loss provision for the most recent quarter.
In response to our losses during 2008, 2009 and the first quarter of 2010, our Board of Directors implemented additional corporate governance practices and disciplined business and banking principles, including more conservative lending principles. The focus of our management team turned from growth in our business to executing these disciplined business and banking procedures and policies designed to limit future losses, preserve capital and improve operational efficiencies. In addition, the Board of Directors added experienced members to provide further oversight and guidance. These and other efforts were reflected in our results of operations for the past two years with lower levels of charge-offs and provision for loan losses, reductions in operating expenses and reduction in balance sheet totals resulting in improvement in our regulatory capital and liquidity ratios. We successfully completed our shareholder rights offering and public offering of common stock in June 2011 resulting in net proceeds of $20.3 million and contributed $10.0 million of the proceeds from the stock offering to the Bank retaining the remaining $10.3 million at the holding company. As of March 31, 2012, the Company's and the Bank's regulatory capital ratios were the highest they have been since December 31, 1999.
On February 22, 2010, Macatawa Bank entered into a Consent Order with the FDIC and OFIR, the primary banking regulators of the Bank. The Company also entered into a Written Agreement with the FRB with an effective date of July 23, 2010. Upon completion of the Bank's 2011 joint examination, the FDIC and OFIR terminated the Bank's Consent Order effective March 2, 2012. As of March 31, 2012, the Bank's capital ratios were at levels comfortably exceeding those required to be categorized as "well capitalized" under applicable regulatory guidance. With the termination of the Bank's Consent Order effective March 2, 2012, the Bank was categorized as "well capitalized" at March 31, 2012.
In connection with the termination of the Consent Order, the Bank reached an understanding with the regulators in the form of a Memorandum of Understanding ("MOU"). As of March 31, 2012, we believe that the Bank was in compliance in all material respects with all of the provisions of the MOU. As of the same date, we believe that the Company was in compliance in all material respects with all of the provisions of the Written Agreement. See Note 1 to the Consolidated Financial Statements for more information.
Additional information further describing changes in our business, including those in response to the Consent Order, MOU and the Written Agreement, are described in detail in our 2011 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Summary: Net income available to common shares for the quarter ended March 31, 2012 was $4.5 million, compared to net income of $1.3 million in the first quarter of 2011. Net income per common share on a diluted basis was $0.17 for the first quarter of 2012 and $0.07 for the first quarter of 2011.
The improvement in earnings in the first quarter of 2012 is a continuation of improvement in the past several quarters, led by a significantly lower level of net charge-offs from $3.6 million in the first quarter of 2011 to a net recovery of $1.4 million in the first quarter of 2012. This, coupled with a decline in non-performing and impaired loan levels, resulted in a decrease of $2.1 million in the provision for loan losses. The provision for loan losses was a negative $3.6 million for the three month period ended March 31, 2012 compared to a negative $1.5 million for the same period in 2011.
Operating results in recent periods have been significantly impacted by the expense associated with problem loans and nonperforming assets. Apart from the provision for loan losses, expenses associated with nonperforming assets (including administration costs and losses) were $3.1 million for the first quarter of 2012 compared to $4.4 million for the first quarter of 2011. Significant valuation writedowns on other real estate owned and higher levels of legal costs associated with nonperforming assets in the first quarter of 2011 are the primary reasons for the change between periods. Lost interest from elevated levels of nonperforming assets was approximately $1.1 million for the three months ended March 31, 2012 compared to $1.6 million for the three months ended March 31, 2011. Each of these items is discussed more fully below.
Net Interest Income: Net interest income totaled $11.3 million for the first quarter of 2012 compared to $11.6 million for the first quarter of 2011.
The decrease in net interest income in the first quarter of 2012 was due primarily to an $87.4 million reduction in our average interest earning assets as a result of our focus on reducing credit exposure within certain segments of our loan portfolio, liquidity improvement and capital preservation. The net interest margin was 3.32% for the first quarter of 2012 compared to 3.22% for the first quarter of 2011. Average interest earning assets decreased from $1.44 billion for the first quarter of 2011 to $1.35 billion for the same period in 2012. Our average yield on earning assets for the first quarter of 2012 declined 27 basis points compared to the same period in 2011 from 4.42% to 4.15%. Margin improvement for the most recent quarter was driven by a significant reduction in the cost of average interest bearing liabilities, which more than offset the effect of the decline in yield on earning assets. An increase of $48.3 million in average taxable securities in the first quarter of 2012 also contributed to the improvement in net interest margin.
The decline in yields on interest earning assets for the three month period ended March 31, 2012 was from decreases in the yield on our commercial, residential and consumer loan portfolios, which have repriced in the generally lower rate environment during this period. Our margin has been negatively impacted by our decision to hold significant balances in liquid and short-term investments during the past two years. As we deploy these balances in building our investment portfolio and booking high quality loans, we expect our margin to be positively impacted.
The cost of funds decreased 39 basis points to 1.03% in the first quarter of 2012 from 1.42% in the same period in 2011. A decrease in the rates paid on our deposit accounts in response to declining market rates and the rollover of time deposits and other borrowings at lower rates within the current rate environment caused the reduction in our cost of funds. Also contributing to the reduction was a shift in our deposit mix from higher costing time deposits to lower costing demand and savings accounts.
The following table shows an analysis of net interest margin for the three month periods ended March 31, 2012 and 2011.
For the three months ended March 31,
2012 2011
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 $ 59,895 318 2.12 % $ 11,632 $ 26 0.91 %
Tax-exempt securities
(1) 6,194 42 4.73 % 76 1 6.95 %
Loans (2) 1,069,052 13,526 5.02 % 1,184,429 15,582 5.27 %
Federal Home Loan
Bank stock 11,236 85 2.99 % 11,932 76 2.56 %
Federal funds sold
and other short-term
investments 203,905 128 0.25 % 229,569 168 0.29 %
Total interest
earning assets (1) 1,350,282 14,099 4.15 % 1,437,638 15,853 4.42 %
Noninterest earning
assets:
Cash and due from
banks 21,362 21,868
Other 126,371 106,276
Total assets $ 1,498,015 $ 1,565,782
Liabilities
Deposits:
Interest bearing
demand $ 210,507 97 0.18 % $ 178,942 103 0.23 %
Savings and money
market accounts 395,294 509 0.52 % 370,640 543 0.59 %
Time deposits 296,151 1,044 1.42 % 434,534 2,266 2.11 %
Borrowings:
Other borrowed funds 149,386 778 2.06 % 186,340 1,000 2.15 %
Long-term debt 41,238 390 3.75 % 41,238 343 3.34 %
Total interest
bearing liabilities 1,092,576 2,818 1.03 % 1,211,694 4,255 1.42 %
Noninterest bearing
liabilities:
Noninterest bearing
demand accounts 303,331 278,998
Other noninterest
bearing liabilities 6,584 6,166
Shareholders' equity 95,524 68,924
Total liabilities and
shareholders' equity $ 1,498,015 $ 1,565,782
Net interest income $ 11,281 $ 11,598
Net interest spread
(1) 3.12 % 3.00 %
Net interest margin
(1) 3.32 % 3.22 %
Ratio of average
interest earning
assets to average
interest bearing
liabilities 123.59 % 118.65 %
|
(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans of approximately $31.2 million and $73.5 million for the three months ended March 31, 2012 and 2011.
Provision for Loan Losses: The provision for loan losses for the first quarter of 2012 was a negative $3.6 million compared to a negative $1.5 million for the first quarter of 2011. The reduction in the provision for loan losses was primarily associated with a $4.4 million recovery on a previously charged-off loan. This was partially offset by first quarter 2012 charge-offs of $3.5 million. Provision was also impacted by a reduction in the balance and required reserves on nonperforming loans, stabilizing real estate values on problem credits and continued shrinkage in the overall loan portfolio.
Net recoveries were $1.4 million for the first quarter of 2012 compared to net charge-offs of $3.6 million for the first quarter of 2011. Most of the charge-offs taken during the first quarter of 2012 were from impaired loans with previously established reserves. The charge-offs for each period have largely been driven by declines in the value of real estate securing our loans. The pace of the decline in real estate value, however, has been slowing, translating into a decline in charge-offs. We are also experiencing positive results from our collection efforts with recoveries increasing as evidenced by the large recovery collected in the first quarter of 2012. Recoveries increased from $499,000 for the first quarter of 2011 to $4.9 million for the same period in 2012. While we expect our collection efforts to produce further recoveries, the amount achieved in the first quarter of 2012 was unusually high and may not recur at this level in future quarters.
We have also experienced a decline in the pace of commercial loans migrating to a lower loan grade, which receive higher allocations in our loan loss reserve, as more fully discussed under the heading "Allowance for Loan Losses" below. In addition to experiencing fewer downgrades of credits, we continue to see an increase in the quality of some credits resulting in an improved loan grade. Over the past six quarters, we have experienced improvements in our weighted average loan grade. We believe efforts that began in late 2009 and in early 2010 to improve loan administration and loan risk management practices have had a significant impact, ultimately allowing for the reduction in the level of the provision for loan losses in 2012.
The amounts of loan loss provision in both the most recent and comparable prior year periods were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained lower level of quarterly net charge-offs over the past several quarters had a significant effect on the historical loss component of our methodology. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.
Noninterest Income: Noninterest income for the three month period ended March 31, 2012 was stable at $3.7 million compared to $3.7 million for the same period in 2011. The components of noninterest income are shown in the table below (in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2012 2011
Service charges and fees on deposit accounts $ 795 $ 949
Net gains on mortgage loans 471 435
Trust fees 609 651
ATM and debit card fees 981 918
Bank owned life insurance income 223 215
Investment services fees 229 233
Other income 403 278
Total noninterest income $ 3,711 $ 3,679
|
Service charges on deposit accounts decreased for the three month period ended March 31, 2012 as a result of declines in overdraft fee income, consistent with banking industry trends. We recognized increases in gains on sales of mortgage loans for the first quarter of 2012, due in part to increased focus on growth in our residential mortgage loan origination volume. The low interest rate environment has also contributed significantly to this increase in sales volume. Trust income is down for the three month period ended March 31, 2012 due primarily to a decline in trust asset balances and market conditions. Income from ATM and debit card fees was up for the most recent quarter due to increased volume of activity during 2012.
Noninterest Expense: Noninterest expense decreased to $14.1 million for the three month period ended March 31, 2012, from $15.4 million for the same period in 2011. The components of noninterest expense are shown in the table below (in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2012 2011
Salaries and benefits $ 5,720 $ 5,347
Occupancy of premises 971 1,011
Furniture and equipment 828 817
Legal and professional 212 270
Marketing and promotion 210 224
Data processing 351 304
FDIC assessment 710 978
ATM and debit card processing 288 271
Bond and D&O insurance 268 379
Administration and disposition of problem assets 3,058 4,434
Outside services 378 421
Other noninterest expense 1,113 980
Total noninterest expense $ 14,107 $ 15,436
|
Several components of noninterest expense experienced a decline due to our ongoing efforts to manage expenses and scale our operations in response to prolonged economic weakness. However, our largest component of noninterest expense, salaries and benefits, increased in the first quarter of 2012 by $373,000 from the first quarter of 2011. We had 382 full-time equivalent employees at March 31, 2012 compared to 385 at March 31, 2011. The increased expense for the first quarter of 2012 was primarily attributable to increased commissions paid for mortgage origination activity which was 2.6 times greater in the first quarter of 2012 compared to the first quarter of 2011. In March 2012, our board authorized a cost of living increase for the first time in several years, which will result in an increase in compensation expense beginning in the second quarter of 2012. This will be at least partially offset by managed attrition and reductions in certain areas as we adjust for personnel needs with changes in our size and complexity.
The next largest noninterest expense was our cost related to administration and disposition of problem assets. Costs associated with administration and disposition of problem assets include legal costs, repossessed and foreclosed property administration expense and losses on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. Losses on repossessed and foreclosed properties include both net losses on the sale of properties and unrealized losses from value declines for outstanding properties.
These costs are itemized in the following table (in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2012 2011
Legal and professional - nonperforming assets $ 441 $ 825
Repossessed and foreclosed property administration 1,021 1,116
Losses on repossessed and foreclosed properties 1,596 2,493
Total $ 3,058 $ 4,434
|
Losses on repossessed assets and foreclosed properties decreased significantly for the three month period ended March 31, 2012, decreasing $897,000 from the same period in 2011. The overall level of losses on repossessed and foreclosed properties remains elevated due to the level of other real estate owned.
Costs associated with administration and disposition of problem assets remained elevated. As loans work through the collection process to resolution or foreclosure these costs tend to increase. As our level of problem loans and other real estate owned decreases, we believe we will experience meaningful reductions in these costs.
FDIC assessments decreased by $268,000 to $710,000 for the first quarter of 2012 compared to $978,000 for the first quarter of 2011 as a result of our reduced level of deposits, changes to the assessment base implemented by the FDIC and due to a change in our assessment category resulting from the termination of our Consent Order effective March 2, 2012. We expect savings to be even more for the second quarter of 2012 as the Bank will be assessed at the lower rate for the full quarter. We estimate an annual FDIC assessment cost savings of $1.2 million related to the Consent Order termination. Because the Consent Order was not terminated until March 2, 2012, we will not realize the full amount of annual savings in 2012.
We realized a $111,000 reduction in our bond and D&O insurance costs in the first quarter of 2012 compared to the first quarter 2011 as a result of our improving financial condition and the decreased risk perceived by our insurance carriers.
Federal Income Tax Expense/Benefit: We recorded no federal income tax expense for the three month periods ended March 31, 2012 and 2011. Since June 30, 2009, we have concluded that a full valuation allowance must be maintained for all of our net deferred tax assets based primarily on our net operating losses in recent years and the continued challenging environment confronting banks that could negatively impact future operating results. At March 31, 2012, the valuation allowance on our net deferred tax assets totaled $22.6 million. Under certain conditions according to accounting standards, the valuation allowance may be reversed to income in future periods to the extent that the related deferred tax assets are realized or when we return to consistent, sustained profitability.
FINANCIAL CONDITION
Summary: Due to the Consent Order and the continuing soft economic conditions, in recent periods we had been focused on reducing our loan portfolio, including reducing exposure in higher loan concentration types, to improve our financial condition through increased liquidity, diversification of credit risk, improved capital ratios, and reduced reliance on non-core funding. With the successful capital raise in the second quarter of 2011, our improving financial condition and the termination of the Consent Order, we are beginning to focus on high quality, measured growth in our investment and loan portfolios.
Total assets were $1.50 billion at March 31, 2012, a decrease of $4.7 million from $1.51 billion at December 31, 2011. This change reflected increases of $34.0 million in securities available for sale, offset by declines of $11.0 million in our loan portfolio and $27.7 million in short-term investments. Total deposits were stable ($818,000 decrease) and other borrowed funds were paid down by $11.1 million during the first quarter of 2012.
Federal Funds Sold and Other Short Term Investments: The $27.7 million decrease in federal funds sold and other short-term investments to $184.4 million at March 31, 2012 was used to fund the increase in securities available for sale and pay down other borrowed funds. We expect these balances to decrease further in 2012 as we continue to rebuild our investment portfolio.
Securities Available for Sale: Securities available for sale were $88.7 million at March 31, 2012 compared to $54.7 million at December 31, 2011. We began rebuilding our investment portfolio during the second quarter of 2011. The balance at March 31, 2012 primarily consisted of U.S. agency securities and various municipal investments. We expect to continue to reinvest excess liquidity and selectively rebuild our investment portfolio to continue our diversification of asset quality throughout the remainder of 2012.
Portfolio Loans and Asset Quality: Total portfolio loans declined by $11.0 million to $1.06 billion at March 31, 2012 compared to $1.07 billion at December 31, 2011. During the first quarter of 2012, our commercial and consumer loan portfolios (excluding residential mortgages) decreased by $22.2 million and $1.5 million, respectively, while our residential mortgage portfolio increased by $12.6 million as a result of our initiative to increase this portfolio segment to further diversify our credit risk.
We also saw an increase in the volume of residential mortgage loans originated for sale in the first quarter of 2012 compared to the same period in 2011. Residential mortgage loans originated for sale were $26.5 million in the first quarter of 2012 compared to $16.7 million for the same period in 2011. This increase was primarily due to market conditions and our focus on increasing our residential mortgage lending volume.
The decline in the commercial loan portfolio balances in recent quarters reflected the continuing weak economic conditions in West Michigan and our interest in improving the quality of our loan portfolio through reducing our exposure to these generally higher credit risk assets. We have focused our efforts on reducing our exposure to residential land development loans, diversifying our commercial loan portfolio and improving asset quality. As discussed earlier, we believe our loan portfolio has stabilized and we expect to begin measured high quality loan portfolio growth.
Commercial and commercial real estate loans still remained our largest loan segment and accounted for approximately 73% of the total loan portfolio at March 31, 2012 and 74% at December 31, 2011. Residential mortgage and consumer loans comprised approximately 27% and 26% of total loans at March 31, 2012 and December 31, 2011, respectively.
A further breakdown of the composition of the commercial loan portfolio is shown . . .
|
|