Bad Loan Stings Macatawa

October 22, 2004
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HOLLAND — A large hit to quarterly earnings stemming from what executives contend was fraud committed by a single commercial borrower prevented Macatawa Bank from posting its best quarter ever.

Had it not had the $2.3 million charge against earnings for a special addition to its loan loss provision, Macatawa Bank would have posted a record profit for the third quarter, which saw the bank score its largest quarterly gains ever in loans and deposits.

“While we are disappointed with this loan loss, we remain confident as we move forward,” President Phil Koning told brokerage analysts last week during a conference call to discuss third quarter results.

The bank remains in the investigation and collection phases in addressing the impaired loans and, repeating a claim made in an Oct. 8 filing to the U.S. Securities and Exchange Commission, contends the borrower committed fraud.

“We do feel there is compelling evidence of fraud and misrepresentation,” Koning said.

Koning would not publicly identify the borrower, although in the regulatory filing Macatawa Bank’s description of the events and the company involved match those of Rycenga Homes Inc., a Spring Lake firm that has come under investigation for improperly using employee retirement funds and has since ceased operations. Rycenga is also now reportedly under investigation by federal authorities on Macatawa Bank’s fraud allegation and the subject of a federal lawsuit brought by 50 former employees that seek to reclaim more than $1 million in 401(k) funds.

The impaired loans with the single commercial borrower overshadow what was otherwise a strong quarter for Macatawa Bank, which last week reported net income of $2.12 million, or 24 cents per share, for the three-month period that ended Sept. 30. The quarter included the charge against earnings of $2.3 million, or 17 cents per share.

Without the charge, Macatawa Bank would have beat Wall Street expectations by 1 cent per share and posted record net income of 41 cents per share, exceeding the previous record of 34 cents per share in the second quarter of 2004.

Through the first nine months of the year, Macatawa Bank reported net income of $8.33 million, or 93 cents per share, which compares with $8.81 million, or 99 cents per share during the same period in 2003.

Macatawa Bank’s core deposits and loans grew by record rates during the quarter.

Core deposits increased $164 million in the July-to-September period.

Loans grew by $72.5 million to $1.36 billion, for an annualized growth rate of 23 percent. Of the increase, $52 million came in commercial lending, Chief Financial Officer Jan Swets said.

Much of the loan growth, an estimated 43 percent to 44 percent, came from existing customers in Macatawa Bank’s base markets of Holland and Zeeland, Senior Vice President for Loan Administration Ray Tooker said. He called the third quarter loan growth “unusually strong” and doubts whether the 23 percent annualized growth rate in sustainable.

“It was just a very exceptionally strong quarter for us,” Tooker said.

The special addition to the loan loss provision pushed Macatawa Bank’s non-performing loans, as a percentage of total loans, to 0.56 percent, which compares to 0.2 percent a year earlier. Executives said that despite the charge, the bank’s asset quality remains good.

The bank wrote off $2.8 million of the $5.9 million in loans to the single borrower and has designated the remaining $3.1 million as non-performing.

“We do believe this is an unusual situation and does not indicate a broad-based systemic issue in our loan portfolio,” Koning said.    

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