HOLLAND — Breaking from its historical growth pattern, Macatawa Bank Corp. reported an earnings downturn for the first quarter.
The bank posted a 7 percent decrease in net income and a 9 percent decrease in earnings per share for the just passed quarter. Net income was $4.84 million for the quarter, or 29 cents per diluted share, versus net income of $5.22 million, or 32 cents per diluted share, for the first quarter of 2006. It was the second consecutive quarter of decreased earnings for a bank that has seen nothing but successive periods of quarter-over-quarter growth since opening its doors in November 1997.
Macatawa’s earnings for the fourth quarter of 2006, which were originally reported as up by 6 percent over the previous year, had to be revised in March to reflect an additional loan-loss provision of $4.7 million related to $5.2 million in outstanding commercial loans to a local yacht broker. The loans had become impaired, so the company revised fourth-quarter and full-year 2006 net income to $2.7 million and $19.8 million, respectively, instead of the $5.9 million and $22.9 million it had disclosed two months earlier. The borrower is now under federal investigation for alleged fraud. CFO Jon Swets said the $4.7 million loss was the primary reason net income was down.
“Our internal investigations reveal that we were the victim of a sophisticated fraud,” said President Phil Koning, noting that the bank is continuing efforts to recover what it can and is cooperating fully with law enforcement. “While we felt our current systems were adequate, we are contracting with third-party-lending review experts to completely examine our loan approval and loan administration process and procedures to make sure we have the best practices in place.”
Chairman Ben Smith told shareholders at the annual shareholder meeting Thursday that he would personally oversee the review.
Koning said he couldn’t comment further on the loan, due to the bank’s ongoing collection efforts, possible litigation and anticipated law enforcement action. He noted that Macatawa’s level of non-performing loans, while down from the fourth quarter of 2006, remains higher than management would like. Additional loans were moved into the “non- performing” category during the quarter. The majority of the past-due and non-performing loans are centered in residential lot developments and spec houses constructed by builders and developers.
Koning said most of the borrowers are working with the bank to liquidate these assets, and the bank will normally work through these situations with customers if they are cooperative.
“Some borrowers are not as cooperative, and we then need to go through the foreclosure, redemption, possession and sales process,” he said. “While we do believe we can work through most of these situations with very limited losses, I do expect that our non- performing loans will remain at higher levels throughout 2007.”
CFO Jon Swets said first-quarter results reflect the environment in which the bank operates; the economy in West Michigan and Michigan is soft compared to the rest of the country. The current interest rate environment has impacted banks, as well.
“Still, the earnings for the quarter came out right where we expected them to be when we budgeted for them last October, so we’re very encouraged by that,” Swets said.
For the quarter, total loans increased $10 million, while total deposits decreased by $28 million. Core deposits within Macatawa’s market, however, grew by $12 million during the quarter. That increase, coupled with an increase in other borrowings at more attractive terms and pricing, allowed the company to reduce its reliance on brokered deposits by more than $40 million in the first quarter, Swets pointed out.
Total assets increased $216.1 million, or 11 percent, from March 31, 2006, to $2.12 billion by March 31, 2007. During the same one-year period, total loans increased $131.1 million, and total deposits increased $96.8 million.
Swets said 1,000 new checking accounts were opened in the first quarter, and there has been “very good” activity at Macatawa’s new Breton Village branch in Grand Rapids, which opened in January. The branch opened nearly 200 new accounts and is nearing $3 million in total deposits. Macatawa’s downtown Holland and Byron Center offices have grown by more than $7 million and $2.5 million in total deposits, respectively, since relocating to new branches in February.
Compared to the first quarter of 2006, each category of non-interest income grew, Swets said. The largest increase was in trust-fee income, which was up 45 percent. Most of it, he explained, relates to Macatawa’s acquisition of Smith & Associates asset management group and the new fees it has been bringing in since Jan. 1.
Smith announced at last week’s shareholder meeting that the board of directors had declared a stock dividend in the amount of 5 percent, to be paid May 30 to stockholders of record on May 11.