Macatawa Takes Big Hit On Bad Loan

October 18, 2004
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HOLLAND — A single commercial loan that’s gone bad and involves a borrower that has ceased operations will cost Macatawa Bank Corp. nearly half of its anticipated quarterly earnings.

In response to $5.9 million in loans to a commercial borrower that have become impaired, Macatawa Bank was forced to add $2.3 million to its loan loss-provision, according to an Oct. 8 filing with the U.S. Securities and Exchange Commission. The bank claims the bad loan stems from “misrepresentations” made by the borrower and stated in the securities filing that it would take the added provision for loan losses in the third quarter that ended Sept. 30.

The after-tax impairment charge is expected to affect Macatawa Bank’s quarterly net income by about $1.5 million, or 17 cents per share.

Brokerage analysts had expected Macatawa Bank to report net income of 40 cents per share when it releases third quarter financial data after the market closes today, according to consensus estimates from First Call/Thomson Financial.

The bad loans represent a sizeable earnings hit for the small Holland-based bank that has enjoyed rapid growth in the West Michigan market since its formation in late 1997.

One brokerage firm that follows Macatawa Bank considers the situation an “isolated incident” that is not indicative of how well the corporation is managed.

“Despite this charge, we do not believe there are any systemic credit issues at Macatawa,” Stifel, Nicolaus & Co. stated in an Oct. 12 report to clients.

The brokerage firm retained its “market outperform” rating on Macatawa Bank’s shares, citing the corporation’s history of strong growth and a “continued confidence in management.”

“While you don’t like to see these things happen, banks and bankers do take risks,” said Joe Stieven, director of research for financial institutions at the St. Louis-based Stifel, Nicolaus & Co.

“It does not diminish our opinion of this management team,” Stieven said. “They’re good people and, if anything, it will make them even more diligent.”

As a result of the loan impairment charge, Stifel, Nicolaus & Co. has lowered its third-quarter earnings estimates for Macatawa Bank from 39 cents per share to 22 cents per share and reduced its annual earnings estimate from $1.50 to $1.33 per share. The brokerage firm retained a 2005 earnings outlook of $1.70 per share for Macatawa Bank.

Macatawa Bank President Phil Koning declined to comment on the securities filing, nor would he identify the commercial borrower that, according to the SECF filing, has come under investigation on allegations of misusing employee 401(k) retirement funds, has ceased operations and appears unable to repay the loan. The bank became aware of the problem via local news media reports, the SEC filing stated.

The Muskegon Chronicle, in a Sept. 30 story, reported that Rycenga Homes Inc. of SpringLake acknowledged in a Sept. 29 letter to employees that the company was under scrutiny for improperly borrowing from the employee retirement fund.

Rycenga Homes “from time to time” borrowed from the retirement fund and has since repaid some of the money with interest, company President Ron Retsema wrote in a Sept. 29 letter to employees. The company is working with its legal counsel and the U.S. Department of Labor to address the issue, the letter stated.

“The attorneys are exploring methods by which the account may be made whole, but we do not yet have any definitive answers,” Retsema wrote.

The attorney representing Rycenga Homes, Robert DeJong of Grand Rapids, said the company is cooperating fully with inquiries. Rycenga Homes, which offers home design services and supplies homebuilders with wood roofing and floor trusses and wall panels, borrowed the money from the retirement fund because it needed cash to stay in business, DeJong said.

Rycenga Homes is working with Macatawa Bank to try to minimize the bank’s loss, he said. The company, hurt by a tough economy and spiking raw materials costs for wood and steel that it was unable to offset, would “probably not” continue operations, DeJong said.

“They’re working cooperatively on this whole matter the best they possibly can,” he said.

That would include going through liquidation, if pushed in that direction by creditors, DeJong said.

“If people force them into that situation, they will,” he said. “It depends on what happens to the creditors.”

In its Securities and Exchange Commission filing, Macatawa Bank reported that the Michigan State Police and the local sheriff’s department are both looking into the matter. Macatawa Bank is also conducting its own probe, alleging “that the borrower made misrepresentations to the bank regarding its financial condition both in the original loan application process and in its financial reports provided since then,” the bank’s SEC filing stated.

Ottawa County Sheriff’s Department Lt. Steve Crumb said the inquiry into the use of the retirement funds is ongoing.

Macatawa Bank stated that the bad loan is covered by liens on the borrower’s commercial real estate, equipment, accounts receivables and inventory, although the collateral does not completely cover outstanding principal balances.

“Since these impairments were recently discovered, bank management is continuing to evaluate the financial condition of the borrower and the value of the collateral. The impairment charge is based on the information currently available and may change as new information is received,” Macatawa’s SEC filing stated.

Even with the addition to the loan loss provision, Macatawa Bank said it would remain well capitalized under regulatory requirements.

Macatawa Bank, which has 21 banking offices in West Michigan, had total loans of $1.28 billion with a loan loss provision of $17.9 million as of June 30. The corporation reported net income for the second quarter of $3.35 million.    

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