MCBC - Macatawa Bank Corporation Reports Second Quarter 2020 Results

HOLLAND, Mich., July 23, 2020 (GLOBE NEWSWIRE) -- Macatawa Bank Corporation (NASDAQ: MCBC) today announced its results for the second quarter of 2020.

• Net income of $7.6 million in second quarter 2020 versus $8.0 million in second quarter 2019 – down 5%
• Loan charge-off of $4.1 million recorded in second quarter 2020 caused increase in provision for loan losses
• Provision for loan losses of $1.0 million in second quarter 2020, up from negative $200,000 in second quarter 2019
• Net interest margin decreased to 2.74% in second quarter 2020 versus 3.45% in second quarter 2019 due to Fed rate decreases since then and high on-balance sheet liquidity
• Origination of $336 million in Paycheck Protection Program (PPP) loans in second quarter 2020
• Growth in noninterest income of $756,000 (15%) driven by increased residential mortgage volume
• Reduction in total non-interest expense – down $830,000 (7%) from second quarter 2019
• Loan portfolio balances up by $219.2 million (16%) from second quarter 2019, driven by PPP loans
• Core deposit balances up by $457.2 million (28%) from second quarter 2019
• Capital and liquidity levels remain strong

Macatawa reported net income of $7.6 million, or $0.22 per diluted share, in the second quarter 2020 compared to $8.0 million, or $0.24 per diluted share, in the second quarter 2019. 

"We are pleased to report solid profitability for the second quarter of 2020,” said Ronald L. Haan, President and CEO of the Company.  “The COVID-19 pandemic has had a significant impact on our community, but the Bank has proven resilient and consistent in serving the financial needs of our customers and our community.  We were active participants in the Small Business Adminstration’s Paycheck Protection Program (PPP) and originated 1,635 PPP loans totaling $336 million in the second quarter of 2020.  The loans were distributed to many local small businesses in order to protect jobs and allow continued paychecks to employees in those companies.  Despite the challenging environment in the second quarter of 2020, we produced $7.6 million in earnings for the quarter.  Mortgage gains in the second quarter of 2020 were three times higher than a year ago and more than offset the reduction in net interest income caused by the significant decrease in market interest rates in 2020. An increase in provision for loan losses was the primary cause for the reduction in net income in the second quarter of 2020 compared to the second quarter of 2019.  We experienced a chargeoff of $4.1 million on a single loan relationship in the second quarter of 2020.  This was a bankruptcy liquidation, and the COVID-19 environment significantly impacted the level of bids on the borrower’s properties, which were primarily movie theatres.  This was our only borrower in that particular industry, so we believe this to be an isolated loss incident.” 

Mr. Haan concluded:  "We will continue to experience challenges relating to the impact of COVID-19 on our customers and our business.  We have actively worked with our borrowers to provide payment relief where possible while protecting the Bank’s position.  We provided short-term modifications on $248.8 million of loans in the second quarter of 2020.  Our capital levels significantly exceed regulatory requirements, and our strong balance sheet should ensure the strength and stability to weather these difficult times.”

Operating Results
Net interest income for the second quarter 2020 totaled $15.0 million, a decrease of $256,000 from the first quarter 2020 and an decrease of $908,000 from the second quarter 2019.  Net interest margin for the second quarter 2020 was 2.74 percent, down 51 basis points from the first quarter 2020, and down 71 basis points from the second quarter 2019.  Net interest income for the second quarter 2020 benefitted from amortization of $938,000 in fees from loans issued under the SBA’s Paycheck Protection Program (PPP) in the second quarter 2020.  These fees are amortized over the loans’ contractual maturity, which is 24 months.  Upon SBA  forgiveness, the remaining unamortized fees will be recognized into interest income.  Forgiveness applications are expected to begin in the third quarter of 2020 and, as such, the Bank expects the related fee income amortization to accelerate in the third and fourth quarters of 2020, positively impacting net interest income.  Net interest margin was negatively impacted in the second quarter 2020 by these same loans carrying an interest rate of 1.00 percent.  These low-yielding loans caused a six basis point decrease in net interst margin in the second quarter 2020.  Even more significant was the impact of the 225 basis point decrease in the federal funds rate between second quarter 2019 and second quarter 2020.  Floor rates established by the Bank on its variable rate loans over recent years served to soften the negative impact on net interst income of these Fed rate decreases.  Without these floors net interst income would have been lower than stated by approximately $1 million.   Higher balances of overnight funds receiving interest at just 10 basis points also negatively impacted net interest margin for the second quarter of 2020.  Positively impacting net interest margin for the second quarter 2020 were prepayment fees on commercial loans of $113,000, primarily related to one commercial relationship.  Prepayment fees on commercial loans were only $70,000 in the first quarter 2020 and $6,000 in the second quarter 2019.

Average interest earning assets for the second quarter 2020 increased $319.0 million from the first quarter 2020 and were up $355.8 million from the second quarter 2019.  The addition of $344 million in PPP loans in the second quarter 2020 was the primary reason for the increase in average interest earning assets between quarters. 

Non-interest income increased $895,000 in the second quarter 2020 compared to the first quarter 2020 and increased $756,000 from the second quarter 2019.  These changes were largely due to fluctuations in gains on sales of mortgage loans.  Gains on sales of mortgage loans in the second quarter 2020 were up $1.2 million compared to the first quarter 2020 and were up $1.2 million from the second quarter 2019.  The Bank originated $50.1 million in mortgage loans for sale in the second quarter 2020 compared to $29.4 million in the first quarter 2020 and $21.4 million in the second quarter 2019.  Deposit service charges were down $250,000 in the second quarter 2020 compared to the first quarter 2020 and were down $218,000 compared to the second quarter 2019 due to lower overdraft fees as customers have generally retained higher deposit balances due to uncertaintly related to the COVID-19 pandemic.

Non-interest expense was $10.5 million for the second quarter 2020, compared to $11.7 million for the first quarter 2020 and $11.3 million for the second quarter 2019.  The largest component of non-interest expense was salaries and benefit expenses.  Salaries and benefit expenses were down $925,000 compared to the first quarter 2020 and were down $613,000 compared to the second quarter 2019.  The decreases compared to the first quarter 2020 and second quarter 2019 were due to a combination of actions taken to mitigate the negative effects of the COVID-19 shutdown on the economy including personnel freezes, salary reductions for senior management, and halting of 401k matching contributions and bonus accruals.  Also causing expense decreases were lower claims experience in the medical insurance plan and higher cost deferrals from commercial loan production of 1,635 PPP loans.  The table below identifies the primary components of the changes in salaries and benefits between periods.

Nonperforming asset expenses remained low in the second quarter 2020 at just $17,000 compared to $61,000 in the first quarter 2020 and $15,000 in the second quarter 2019.  There were no sales of foreclosed properties in the first two quarters of 2020, while net gains of $34,000 were incurred on sales in the second quarter 2019.   FDIC assessment expense was $76,000 in the second quarter 2020.  There was no FDIC assessment expense in the first quarter 2020 as the FDIC assessment credits fully covered the assessment in the first quarter 2020.  All of the Bank’s FDIC assessment credits have been applied in the second quarter 2020, so expense will increase slightly in the third quarter 2020.  Other categories of non-interest expense were relatively flat compared to the first quarter 2020 and the second quarter 2019 due to a continued focus on expense management. 

Federal income tax expense was $1.8 million for the second quarter 2020 compared to $1.4 million for the first quarter 2020 and $1.9 million for the second quarter 2019.  The effective tax rate was 18.7 percent for the second quarter 2020, compared to 18.2 percent for the first quarter 2020 and 19.3 percent for the second quarter 2019. 

Asset Quality
A provision for loan losses of $1.0 million was recorded in the second quarter of 2020.  There was a negative provision of $200,000 in the second quarter 2019.  Net loan chargeoffs for the second quarter 2020 were $4.0 million, compared to first quarter 2020 net loan recoveries of $989,000 and second quarter 2019 net loan recoveries of $194,000.  The large provision in the second quarter 2020 was primarily due to a $4.1 million charge-off on a single loan relationship in the movie theater business.  The Bank has no other borrowers in that particular industry, so Management believes the loss was an isolated incident.  At June 30, 2020, the Company had experienced net loan recoveries in twenty of the past twenty-two quarters.  Partially offsetting the downward impact on the allowance for loan losses of the large charge-off was the significant reduction in total loan balances which decreased by $168 million, excluding PPP loans, during the second quarter 2020.  Delinquencies were up at June 30, 2020 due primarily to the remaining balance of the movie theater loan being in the process of liquidation.  Total loans past due on payments by 30 days or more amounted to $3.3 million at June 30, 2020, up from $513,000 at March 31, 2020 and up from $360,000 at June 30, 2019.  Delinquency as a percentage of total loans was 0.21 percent at June 30, 2020, still well below the Company’s peer level.

The allowance for loan losses of $15.9 million was 1.01 percent of total loans at June 30, 2020, compared to 1.35 percent of total loans at March 31, 2020, and 1.26 percent at June 30, 2019.  The ratio at June 30, 2020 is skewed by the $336 million in PPP loans originated during the quarter.  These loans are fully guaranteed by the SBA and receive no allowance allocation.  The ratio at June 30, 2020 excluding these loans was 1.29%.  The coverage ratio of allowance for loan losses to nonperforming loans continued to be strong and significantly exceeded 1-to-1 coverage at 536 percent as of June 30, 2020.

At June 30, 2020, the Company's nonperforming loans were $3.0 million, representing 0.19 percent of total loans.  This compares to $7.2 million (0.52 percent of total loans) at March 31, 2020 and $293,000 (0.02 percent of total loans) at June 30, 2019.  Other real estate owned and repossessed assets were $2.6 million at June 30, 2020, compared to $2.6 million at March 31, 2020 and $3.1 million at June 30, 2019. Total nonperforming assets, including other real estate owned and nonperforming loans, increased by $2.2 million from June 30, 2019 to June 30, 2020 due to the addition of a single commercial loan relationship to nonaccrual status in the first quarter 2020, $4.1 million of which was charged-off in the second quarter 2020.  The remaining balance of this single commercial loan relationship is deemed fully collectible. 

A break-down of non-performing loans is shown in the table below.

Total non-performing assets were $5.6 million, or 0.23 percent of total assets, at June 30, 2020.  A break-down of non-performing assets is shown in the table below.

Balance Sheet, Liquidity and Capital

Total assets were $2.45 billion at June 30, 2020, an increase of $420.1 million from $2.03 billion at March 31, 2020 and an increase of $472.7 million from $1.98 billion at June 30, 2019.  Assets were elevated at June 30, 2020 due to a higher level of deposits from customers holding a higher level of liquid deposits during the COVID-19 pandemic, including unused balances from PPP loan proceeds.  Total loans were $1.56 billion at June 30, 2020, an increase of $167.3 million from $1.40 billion at March 31, 2020 and an increase of $219.2 million from $1.34 billion at June 30, 2019.

Commercial loans increased by $279.6 million from June 30, 2019 to June 30, 2020, partially offset by a decrease of $50.1 million in the residential mortgage portfolio, and a decrease of $10.9 million in the consumer loan portfolio.  Commercial real estate loans increased by $6.0 million while commercial and industrial loans increased by $273.5 million during the same period.  The growth in commercial and industrial loans was due to PPP loan originations during the second quarter 2020.

The composition of the commercial loan portfolio is shown in the table below:

Total deposits were $2.12 billion at June 30, 2020, up $412.9 million, or 24 percent, from $1.71 billion at March 31, 2020 and were up $457.2 million, or 28 percent, from $1.66 billion at June 30, 2019.  The increase in total deposits from March 31, 2020 was primarily in demand deposits (up $348.9 million) as business customers account balances increased from proceeds from Paycheck Protection Program loans providing additional liquidity to those customers.  Demand deposits were up $372.0 million in the second quarter 2020 compared to the second quarter 2019.  Money market deposits and savings deposits were up $74.6 million from the first quarter 2020 and were up $97.7 million from the second quarter 2019.  Certificates of deposit were down $10.6 million at June 30, 2020 compared to March 31, 2020 and were down $12.7 million compared to June 30, 2019 as customers reacted to changes in market interest rates.  As deposit rates have dropped, the Bank has experienced some shifting between deposit types and overall, deposit customers are holding higher levels of liquid deposit balances during this pandemic and low interest rate environment.  The Bank continues to be successful at attracting and retaining core deposit customers.  Customer deposit accounts remain insured to the highest levels available under FDIC deposit insurance.

The Bank's total risk-based regulatory capital ratio at June 30, 2020 was higher than the ratios at both March 31, 2020 and June 30, 2019.  The Bank’s risk-based regulatory capital ratios continue to be at levels comfortably above those required to be categorized as “well capitalized” under applicable regulatory capital guidelines.  As such, the Bank was categorized as "well capitalized" at June 30, 2020.

About Macatawa Bank
Headquartered in Holland, Mich., Macatawa Bank offers a full range of banking, retail and commercial lending, wealth management and ecommerce services to individuals, businesses and governmental entities from a network of 26 full-service branches located throughout communities in Kent, Ottawa and northern Allegan counties.  The bank is recognized for its local management team and decision making, along with providing customers excellent service, a rewarding experience and superior financial products. Macatawa Bank has been recognized for ten years as “West Michigan’s 101 Best and Brightest Companies to Work For”. For more information, visit www.macatawabank.com.

CAUTIONARY STATEMENT:  This press release contains forward-looking statements that are based on management's current beliefs, expectations, assumptions, estimates, plans and intentions.  Forward-looking statements are identifiable by words or phrases such as “anticipates,” "believe," "expect," "may," "should," "will," ”intend,” "continue," "improving," "additional," "focus," "forward," "future," "efforts," "strategy," "momentum," "positioned," and other similar words or phrases.  Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.  These statements include, among others, statements related to risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the businesss, financial condition and results of operations of our company and our customers, trends in our key operating metrics and financial performance, future levels of earnings and profitability, future levels of earning assets, future asset quality, future growth, and future net interest margin.  All statements with references to future time periods are forward-looking.  Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. Our ability to sell other real estate owned at its carrying value or at all, reduce non-performing asset expenses, utilize our deferred tax asset, successfully implement new programs and initiatives, increase efficiencies, maintain our current level of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, improve profitability, and produce consistent core earnings is not entirely within our control and is not assured.  The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed in or implied by such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019.  These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

Contact:Jon Swets, CFO616-494-7645