Macatawa Bank points to improved results

HOLLAND — Macatawa Bank Corp.(Nasdaq:MCBC) has reported a return to profitability and improvements in several key capital and operational ratios in the second quarter 2010.

Macatawa reported in a news release net income available to common shares of $1.7 million, or $0.10 per diluted share, for the second quarter 2010, compared to a net loss available to common shares of $31.3 million, or ($1.82) per diluted share, for the second quarter 2009 and a net loss of $21.1 million for the first quarter 2010. For the first half of 2010, the Company's net loss available to common shares totaled $19.4 million in 2010 compared to $36.4 million for the same period in 2009.

"Eight months ago, in an extremely challenging environment, we began an all out effort to instill business discipline and sound banking principles throughout the entire organization," said Richard L. Postma, chairman of Macatawa Bank Corp. "The second quarter results and our first profitable period in almost two years, coupled with improvements in nearly every key capital and performance metric, certainly are positive steps, but we still have a great deal of work to do to return the Company to financial health."

Postma said that, in addition to its focus on improving asset quality, the company continued to implement strategic initiatives to improve core operating performance.

"Our quarterly net interest margin continues to improve and is currently at its highest level in the past three years, while our quarterly controllable overhead costs are at their lowest level in over two years. In addition, we continue to efficiently manage our balance sheet,” Postma said. “We have reduced out-of-market funding on our balance sheet by nearly $200 million as we continue to scale the organization to the current realities.

 "Even though the operating environment for banking is far from normal, we are confident that we are establishing a well-disciplined banking culture which will help us return to consistent and sustained profitability,” Postma said. “However, it is realistic to expect that as the company strives to return to sustained positive performance, it will experience uneven results on a quarterly basis. No one should assume that the second quarter results mean that the company's problems are fully resolved. It is a very good start, but just that, a start. We have a long road to travel to regain our shareholder and depositor confidence.

Net interest income for the second quarter 2010 totaled $12.8 million, a decrease of $210,000 from the first quarter 2010 and a decrease of $580,000 from the second quarter 2009. However, net interest margin increased to 3.29 percent, up 7 basis points from 3.22 percent on a consecutive quarter basis and up 50 basis points from 2.79 percent in the second quarter 2009.

"Future margin expansion will be dampened by the sale of the company's securities portfolio but margin should be positively impacted by the continued payoff of higher costing wholesale funds," said Postma. "The sale of our securities portfolio was an important step at firming up our capital position during this depressed economic cycle, and despite this impact on margin in the short-term, we expect continued momentum toward margin expansion over the longer term."

Average interest earning assets for the second quarter 2010 declined $93.7 million from the first quarter 2010 and declined $385.0 million from the second quarter 2009, negatively impacting net interest income.

However, the decline in assets continues to reflect the Bank's focus on liquidity improvement, capital ratio maintenance and reduction in credit exposure within certain segments.

Non-interest income of $6.3 million for the second quarter 2010 was up $2.9 million from the first quarter 2010 and up $2.1 million from the second quarter 2009. The increase was primarily driven by the $2.7 million in gains on sales of securities in the quarter, offset by continued reductions in income from mortgage banking activities.

Mortgage loan sales volumes have decreased significantly from levels in the second quarter 2009, when mortgage refinancing activity was strong as a result of low interest rates.

Non-interest expense was $14.3 million for the second quarter 2010, compared to $17.9 million for the first quarter 2010 and $21.3 million for the second quarter 2009. Last year's second quarter total was unusually high as it included $5.5 million in expense associated with the Trade Partners litigation settlement. In the most recent quarter costs associated with the administration and disposition of problem loans and non-performing assets were $2.5 million compared to $5.5 million in the first quarter 2010 and $2.4 million in the second quarter 2009. FDIC insurance assessments remain elevated at $1.2 million in the most recent quarter compared to $1.3 million in the first quarter 2010 and $1.7 million in the second quarter 2009, as a result of higher assessment rates implemented by the FDIC.

"We intend to continue to maintain a prudent and conservative level of loan loss reserves until we see a clear trend of significant reductions in our charge-off and non-performing loan levels,” Postma noted. “That being said, we are seeing signs of stabilization in the valuations of properties securing our assets, allowing us to accelerate sales and reduce non-performing asset expenses. We also are encouraged by our efforts to find workable solutions with our challenging accounts to mitigate the impact on our loan losses and are achieving credit upgrades in some instances. Going forward, our approach to loan loss reserves will be cautious as we remain focused on reflecting the values of these assets at appropriate levels and moving the non-performing assets out of the bank.

"Our goal remains to return to 'well-capitalized' status, and we continue to work closely with our regulators in our efforts to comply with the terms of the Consent Order,” Postma said. “While we are encouraged by the results of the quarter and are cautiously optimistic about the prospects for the rest of 2010, we remain committed to building back profitability and improving our valuation. Although improvements in our operating results may be uneven during 2010, we continue to expect the overall profit trend to be positive.