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| MCBC > SEC Filings for MCBC > Form 10-Q on 25-Oct-2012 | All Recent SEC Filings |
25-Oct-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 September 30, 2012, we had total assets of $1.52 billion, total loans of $1.02 billion, total deposits of $1.24 billion and shareholders' equity of $109.4 million. During the third quarter of 2012, we recognized net income of $6.6 million compared to net income of $1.05 million in the third quarter of 2011. This represented our tenth consecutive quarter of profitability. As described more fully below, 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 September 30, 2012, the Company's and the Bank's risk-based regulatory capital ratios were the highest they have ever been. The Bank was categorized as "well capitalized" at September 30, 2012.
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.
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 September 30, 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 September 30, 2012 was $6.6 million, compared to net income of $1.05 million in the third quarter of 2011. Net income per common share on a diluted basis was $0.24 for the third quarter of 2012 and $0.04 for the third quarter of 2011. For the nine months ended September 30, 2012, net income was $14.3 million, compared to $4.7 million for the same period in 2011. Net income per common share on a diluted basis for the nine months ended September 30, 2012 was $0.53, compared to $0.22 for the same period in 2011.
The improvement in earnings in the third quarter and first nine months of 2012 was a continuation of improvement in the past several quarters, led by a significantly lower level of net charge-offs from $1.4 million in the third quarter of 2011 to a net recovery of $341,000 in the third quarter of 2012. This, coupled with a decline in non-performing and impaired loan levels, resulted in a negative provision for loan losses for the most recent quarter. The provision for loan losses was a negative $1.25 million for the three month periods ended September 30, 2012 and 2011. For the nine month period ended September 30, 2012, we recognized a negative $6.6 million provision for loan losses compared to a negative $4.7 million provision for loan losses for the same period in 2011. The increased negative provision for loan losses in the nine month period ended September 30, 2012 was largely attributable to a sizeable recovery recognized in the first quarter of 2012, as discussed in previous filings.
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 $1.7 million for the third quarter of 2012 compared to $4.5 million for the third quarter of 2011. For the first nine months of 2012, these expenses totaled $8.0 million compared to $12.7 million for the same period in 2011. Valuation writedowns on other real estate owned and legal costs associated with nonperforming assets have significantly decreased in the three and nine month periods ended September 30, 2012 compared to the same periods in 2011. Lost interest from elevated levels of nonperforming assets was approximately $852,000 and $3.0 million, respectively, for the three and nine months ended September 30, 2012 compared to $1.6 million and $7.7 million, respectively, for the same periods in 2011. Each of these items is discussed more fully below.
Another factor positively impacting earnings for the three and nine month periods ending September 30, 2012 was the collection of a one-time prepayment penalty of $2.8 million on a commercial loan. This fee was reflected in net interest income.
Net Interest Income: Net interest income totaled $13.9 million for the third quarter of 2012 compared to $11.5 million for the third quarter of 2011. For the first nine months of 2012, net interest income was $36.5 million compared to $34.9 million for the same period in 2011.
The increase in net interest income in the third quarter of 2012 was due primarily to the collection of a one-time prepayment penalty of $2.8 million on a commercial loan. The net interest margin was 4.02% for the third quarter of 2012, of which 82 basis points related to the prepayment penalty, compared to 3.25% for the third quarter of 2011. Average interest earning assets decreased from $1.39 billion for the third quarter of 2011 to $1.37 billion for the same period in 2012. Our average yield on earning assets for the third quarter of 2012 increased 49 basis points compared to the same period in 2011 from 4.22% to 4.71%. Average interest bearing liabilities decreased $58.9 million from $1.11 billion for the third quarter of 2011 to $1.06 billion for the same period in 2012. The cost of average interest bearing liabilities decreased 31 basis points compared to the same period in 2011 from 1.20% to 0.89%.
Average interest earning assets decreased from $1.40 billion for the first nine months of 2011 to $1.36 billion for the same period in 2012. Our average yield on earning assets declined 5 basis points for the first nine months of 2012 in comparison with the same period in 2011. Our net interest margin was 3.56% for the first nine months in 2012 compared to 3.29% for the same period in 2011. The increase in margin was primarily due to the $2.8 million one-time prepayment penalty discussed above. Also positively affecting margin was a 34 basis points decline in the average cost of interest bearing liabilities, as we continued to payoff wholesale funding upon maturity.
Absent the $2.8 million one-time prepayment fee, our yields on interest earning assets would have decreased for the three and nine month periods ended September 30, 2012 due to 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 declines in cost of funds for the three and nine month periods ended September 30, 2012 were due to 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. 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 September 30, 2012 and 2011.
For the three months ended September 30,
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 $ 85,939 $ 414 1.93 % $ 29,769 $ 156 2.09 %
Tax-exempt securities
(1) 16,685 102 4.05 % 1,165 10 5.70 %
Loans (2) 1,038,704 15,532 5.89 % 1,090,465 14,498 5.22 %
Federal Home Loan
Bank stock 11,236 84 2.92 % 11,236 73 2.56 %
Federal funds sold
and other short-term
investments 214,602 137 0.25 % 255,601 163 0.25 %
Total interest
earning assets (1) 1,367,166 16,269 4.71 % 1,388,236 14,900 4.22 %
Noninterest earning
assets:
Cash and due from
banks 25,191 24,912
Other 124,017 118,547
Total assets $ 1,516,374 $ 1,531,695
Liabilities
Deposits:
Interest bearing
demand $ 230,246 $ 82 0.14 % $ 185,619 $ 106 0.22 %
Savings and money
market accounts 423,513 487 0.46 % 360,263 488 0.54 %
Time deposits 243,877 827 1.35 % 352,339 1,510 1.70 %
Borrowings:
Other borrowed funds 117,005 594 1.99 % 175,355 944 2.10 %
Long-term debt 41,238 387 3.68 % 41,238 351 3.34 %
Total interest
bearing liabilities 1,055,879 2,377 0.89 % 1,114,814 3,399 1.20 %
Noninterest bearing
liabilities:
Noninterest bearing
demand accounts 347,476 316,916
Other noninterest
bearing liabilities 8,411 6,875
Shareholders' equity 104,608 93,090
Total liabilities and
shareholders' equity $ 1,516,374 $ 1,531,695
Net interest income $ 13,892 $ 11,501
Net interest spread
(1) 3.82 % 3.02 %
Net interest margin
(1) 4.02 % 3.25 %
Ratio of average
interest earning
assets to average
interest bearing
liabilities 129.48 % 124.53 %
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(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans of approximately $20.8 million and $39.9 million for the three months ended September 30, 2012 and 2011, respectively.
The following table shows an analysis of net interest margin for the nine month periods ended September 30, 2012 and 2011.
For the nine months ended September 30,
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 $ 73,984 $ 1,116 2.01 % $ 19,462 $ 267 1.83 %
Tax-exempt securities
(1) 10,966 210 4.32 % 425 11 5.70 %
Loans (2) 1,054,402 42,295 5.29 % 1,137,818 45,274 5.26 %
Federal Home Loan
Bank stock 11,236 252 2.95 % 11,641 223 2.53 %
Federal funds sold
and other short-term
investments 207,280 394 0.25 % 230,936 468 0.27 %
Total interest
earning assets (1) 1,357,868 44,267 4.32 % 1,400,282 46,243 4.37 %
Noninterest earning
assets:
Cash and due from
banks 22,906 23,127
Other 125,797 113,461
Total assets $ 1,506,571 $ 1,536,870
Liabilities
Deposits:
Interest bearing
demand $ 221,429 $ 264 0.16 % $ 183,208 $ 317 0.23 %
Savings and money
market accounts 412,675 1,500 0.49 % 367,965 1,558 0.57 %
Time deposits 270,628 2,806 1.39 % 388,904 5,557 1.91 %
Borrowings:
Other borrowed funds 132,847 2,045 2.02 % 178,611 2,886 2.13 %
Long-term debt 41,238 1,158 3.69 % 41,238 1,044 3.34 %
Total interest
bearing liabilities 1,078,817 7,773 0.96 % 1,159,926 11,362 1.30 %
Noninterest bearing
liabilities:
Noninterest bearing
demand accounts 319,755 291,583
Other noninterest
bearing liabilities 7,528 7,083
Shareholders' equity 100,471 78,278
Total liabilities and
shareholders' equity $ 1,506,571 $ 1,536,870
Net interest income $ 36,494 $ 34,881
Net interest spread
(1) 3.36 % 3.06 %
Net interest margin
(1) 3.56 % 3.29 %
Ratio of average
interest earning
assets to average
interest bearing
liabilities 125.87 % 120.72 %
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(1) Yield adjusted to fully tax equivalent.
(2) Includes non-accrual loans of approximately $25.6 million and $56.0 million for the nine months ended September 30, 2012 and 2011, respectively.
Provision for Loan Losses: The provision for loan losses for the third quarter of 2012 and 2011 was a negative $1.25 million. The negative provision for loan losses in both periods resulted from continued significant declines in the level of net charge-offs, reduction in the balances and required reserves on nonperforming loans, and stabilizing real estate values on problem credits. The provision for loan losses for the first nine months of 2012 was a negative $6.6 million, compared to a negative $4.7 million for the same period in 2011. The larger negative provision for loan losses in the first nine months of 2012 was primarily associated with a $4.4 million recovery on a previously charged-off loan in the first quarter of 2012.
Net recoveries were $341,000 for the third quarter of 2012 compared to net charge-offs of $1.4 million for the third quarter of 2011. Our charge-offs have largely been driven by declines in the value of real estate securing our loans. The pace of the decline in real estate values, however, has been slowing, translating into a decline in charge-offs and resulting in net recoveries for the first and third quarters of 2012. We are also experiencing positive results from our collection efforts as evidenced by the $4.4 million recovery collected in the first quarter of 2012 and net recoveries again in the third quarter of 2012. For the third quarter of 2012, total recoveries were $956,000 compared to $2.3 million for the same period in 2011. For the nine months ended September 30, 2012, we experienced net recoveries of $1.2 million compared to net charge-offs of $7.9 million for the same period in 2011. For the nine months ended September 30, 2012, total recoveries were $6.2 million, compared to $4.4 million for the same period in 2011. While we expect our collection efforts to produce further recoveries, the amount achieved in 2012, particularly 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 worse 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 seven 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 all periods presented 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 and nine month periods ended September 30, 2012 increased to $4.1 million and $11.8 million, respectively, from $3.9 million and $11.2 million, respectively, for the same periods in 2011. The components of noninterest income are shown in the table below (in thousands):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Service charges and fees on deposit accounts $ 810 $ 889 $ 2,381 $ 2,806
Net gains on mortgage loans 940 697 2,192 1,393
Trust fees 595 644 1,802 1,915
Gain on sale of securities 14 --- 73 ---
ATM and debit card fees 1,049 1,013 3,094 2,958
Bank owned life insurance income 210 245 657 711
Investment services fees 196 157 585 644
Other income 292 282 1,033 794
Total noninterest income $ 4,106 $ 3,927 $ 11,817 $ 11,221
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Service charges on deposit accounts decreased for the three and nine month periods ended September 30, 2012 as a result of declines in overdraft fee income, consistent with banking industry-wide trends. We recognized substantial increases in gains on sales of mortgage loans for the third quarter of 2012 and for the first nine months of 2012, due in part to increased focus on growth in our residential mortgage loan origination volume. The low interest rate environment and recent Federal Reserve actions have also contributed significantly to this increase in sales volume. Trust income is down slightly for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 due primarily to a decline in trust asset balances and market conditions. We sold one security in the second quarter of 2012 and one in the third quarter of 2012, resulting in gains of $59,000 and $14,000 respectively. No securities were sold in the 2011 periods presented. Income from ATM and debit card fees was up for the most recent quarter and the first nine months of 2012 compared to the same periods in 2011 due to increased volume of activity during 2012. The increase in other income in the three and nine month periods ended September 30, 2012 compared to the same periods in 2011 was primarily attributable to rental income on other real estate owned. Rental income from these properties increased $28,000 and $265,000, respectively, for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011.
Noninterest Expense: Noninterest expense decreased to $12.4 million for the three month period and decreased to $40.4 million for the nine month period ended September 30, 2012, respectively, from $15.6 million and $46.1 million, respectively, for the same periods in 2011. The components of noninterest expense are shown in the table below (in thousands):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2012 2011 2012 2011
Salaries and benefits $ 5,621 $ 5,668 $ 17,065 $ 16,615
Occupancy of premises 948 961 2,860 2,961
Furniture and equipment 806 812 2,491 2,458
Legal and professional 160 187 551 779
Marketing and promotion 213 228 634 677
Data processing 269 314 988 952
FDIC assessment 504 842 1,692 2,660
ATM and debit card processing 316 337 912 918
Bond and D&O insurance 213 379 696 1,136
FHLB advance prepayment penalty 322 --- 322 ---
Administration and disposition of
problem assets 1,724 4,485 7,973 12,660
Outside services 289 412 1,048 1,238
Other noninterest expense 1,003 1,001 3,148 3,005
Total noninterest expense $ 12,388 $ 15,626 $ 40,380 $ 46,059
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Several components of noninterest expense experienced a decline due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, decreased in the third quarter of 2012 by $47,000 from the third quarter of 2011. We had 364 full-time equivalent employees at September 30, 2012 compared to 396 at September 30, 2011. The decreased expense for the third quarter of 2012 was primarily attributable the decrease in full-time equivalent employees, partially offset by an increase in commissions paid for mortgage origination activity, which was more than two times greater in the third quarter of 2012 compared to the third quarter of 2011. Also, in March 2012, our board authorized a cost of living increase for the first time in several years, which resulted in an increase in compensation expense beginning in the second quarter of 2012. In addition, our medical insurance costs increased by $176,000 for the third quarter of 2012 compared to the third quarter of 2011. For the first nine month periods, salaries and benefits increased by $450,000 from $16.6 million in 2011 to $17.1 million in 2012. The increase for the first nine months of 2012 compared to the first nine months of 2011 is also due to the cost of living adjustments made in the second quarter of 2012, the increased mortgage commissions from higher loan . . .
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