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Macatawa Bank Corporation Reports Third Quarter 2017 Results

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HOLLAND, Mich. , Oct. 26, 2017 (GLOBE NEWSWIRE) -- Macatawa Bank Corporation (NASDAQ:MCBC) today announced its results for the third quarter of 2017, reflecting continued strong financial performance.

•  Net income of $4.9 million in third quarter 2017, up 6% from $4.6 million in the third quarter 2016 which included a one-time adjustment to federal income tax expense that increased the prior period earnings by $512,000 
•  Year-to-date earnings through third quarter of 2017 were up 19% over the prior year 
•  Continued trend of increased overall revenue with reduction in expenses 
•  Core deposit balances up by $147 million, nearly 11%, from a year ago
•  Asset quality metrics remained strong: 

  • Past due loans remained at low levels - only 0.07% of total loans at end of third quarter 2017
  • Favorable loan collection results – eleven consecutive quarters of net recoveries

Macatawa reported net income of $4.9 million, or $0.14 per diluted share, in the third quarter 2017 compared to $4.6 million, or $0.14 per diluted share, in the third quarter 2016.  For the first nine months of 2017, Macatawa reported net income of $14.1 million, or $0.42 per diluted share, compared to $11.8 million, or $0.35 per diluted share, for the same period in 2016.

"We are pleased to report strong operating performance for the third quarter of 2017," said Ronald L. Haan, President and CEO of the Company.  "Our long term strategy of driving profitable growth remains the same, and we remain committed to building a well-disciplined company that will deliver superior financial services to the communities of Western Michigan, while also providing strong and consistent financial performance for our shareholders."

Mr. Haan concluded, "Earnings improvement continues to be driven primarily by improvement in net interest income resulting from growth in average balances of business loans and investment securities, and continued strong growth in core deposit funding. Overall, our financial condition is strong, and we are well positioned to support future growth and benefit from future interest rate increases." 

Operating Results
Net interest income for the third quarter 2017 totaled $13.1 million, an increase of $433,000 from the second quarter 2017 and an increase of $1.2 million from the third quarter 2016.  Net interest margin was 3.21 percent, down 3 basis points from the second quarter 2017, and up 13 basis points from the third quarter 2016. Increased levels of short-term low-yielding investments in the third quarter caused 7 basis points of downward pressure on net interest margin compared to the second quarter of 2017. 

Average interest earning assets for the third quarter 2017 increased $57.2 million from the second quarter 2017 and were up $96.5 million from the third quarter 2016 primarily due to growth on the funding side of the balance sheet in core deposits.    

Non-interest income decreased $178,000 in the third quarter 2017 compared to the second quarter 2017 and decreased $775,000 from the third quarter 2016.  These fluctuations were primarily driven by gains on sales of mortgage loans.  Gains on sales of mortgage loans in the third quarter 2017 were down $107,000 compared to the second quarter 2017 and down $806,000 from the third quarter 2016.  The Bank originated $11.3 million in loans for sale in the third quarter 2017 compared to $16.7 million in loans for sale in the second quarter 2017 and $38.2 million in loans for sale in the third quarter 2016.

Non-interest expense was $10.8 million for the third quarter 2017, compared to $10.8 million for the second quarter 2017 and $11.3 million for the third quarter 2016.  The largest component of non-interest expense was salaries and benefit expenses.  Salaries and benefit expenses were up $58,000 compared to the second quarter 2017 and were down $158,000 for the nine months ended September 30, 2017 compared to the same period in the prior year. Total salaries and benefits expense has remained at a consistent level over the past several quarters due to efforts to prudently manage overall cost levels.   The largest fluctuation between periods in non-interest expense was in nonperforming asset expenses.  Nonperforming asset expenses increased $81,000 compared to the second quarter 2017 and decreased $402,000 compared to the third quarter 2016 due to continued reductions in the level of foreclosed properties and net gains realized on sales of such properties in 2017.  Total net realized gains were $190,000 for the third quarter 2017 compared to $321,000 for the second quarter 2017 and $105,000 for the third quarter 2016.  Other categories of non-interest expense were relatively flat compared to the second quarter 2017 and the third quarter 2016. 

Federal income tax expense was $2.2 million for the third quarter 2017 compared to $2.1 million for the second quarter 2017 and $1.4 million for the third quarter 2016.  The effective tax rate was 30.7% for the third quarter 2017, compared to 30.9% for the second quarter 2017 and 22.7% for the third quarter 2016.  The effective tax rate for the third quarter 2016 was lower due to tax credits and other adjustments recognized during that quarter amounting to $512,000.

Asset Quality
As a result of the consistent improvements in nonperforming loans and past due loans over the past several quarters, the reduction in historical loan loss ratios, and net loan recoveries experienced in the third quarter 2017, a negative provision for loan losses of $350,000 was recorded in the third quarter 2017.  Net loan recoveries for the third quarter 2017 were $214,000, compared to second quarter 2017 net loan recoveries of $374,000 and third quarter 2016 net loan recoveries of $138,000.  The Company has experienced net loan recoveries in each of the past eleven quarters. Total loans past due on payments by 30 days or more were negligible and amounted to $872,000 at September 30, 2017, down 40 percent from $1.4 million at December 31, 2016 and up $527,000 from $345,000 at September 30, 2016.  Delinquency as a percentage of total loans was 0.07 percent at September 30, 2017.

The allowance for loan losses of $16.4 million was 1.30 percent of total loans at September 30, 2017, compared to 1.32 percent of total loans at December 31, 2016, and 1.36 percent at September 30, 2016.  The coverage ratio of allowance for loan losses to nonperforming loans continued to be strong and significantly exceeded 1-to-1 coverage at 31.5-to-1 as of September 30, 2017. 

At September 30, 2017, the Company's nonperforming loans were $521,000, representing 0.04 percent of total loans.  This compares to $300,000 (0.02 percent of total loans) at December 31, 2016 and $233,000 (0.02 percent of total loans) at September 30, 2016.  Other real estate owned and repossessed assets were $6.7 million at September 30, 2017, compared to $12.3 million at December 31, 2016 and $13.1 million at September 30, 2016. Total nonperforming assets, including other real estate owned and nonperforming loans, have decreased by $6.2 million, or 46 percent, from September 30, 2016 to September 30, 2017.

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


Dollars in 000s
  Sept 30,
2017
    Jun 30,
2017
    Mar 31,
2017
    Dec 31,
2016
    Sept 30,
2016
 
                               
Commercial Real Estate   $ 440   $ 436   $ 252   $ 183   $ 192  
Commercial and Industrial     4     6     127     36     9  
Total Commercial Loans     444     442     379     219     201  
Residential Mortgage Loans     58     206     2     58     2  
Consumer Loans     19     22     20     23     30  
Total Non-Performing Loans                        $ 521   $ 670   $ 401   $ 300   $ 233  

Total non-performing assets were $7.2 million, or 0.40 percent of total assets, at September 30, 2017.  A break-down of non-performing assets is shown in the table below.

Dollars in 000s   Sept 30,
2017
  Jun 30,
2017
  Mar 31,
2017
  Dec 31,
2016
  Sept 30,
2016
 
                               
Non-Performing Loans   $ 521   $ 670   $ 401   $ 300   $ 233  
Other Repossessed Assets     ---     ---     ---     ---     ---  
Other Real Estate Owned     6,661     7,097     12,074     12,253     13,110  
Total Non-Performing Assets                          $ 7,182   $ 7,767   $ 12,475   $ 12,553   $ 13,343  


Balance Sheet, Liquidity and Capital

Total assets were $1.80 billion at September 30, 2017, an increase of $44.0 million from $1.76 billion at June 30, 2017 and an increase of $149.4 million from $1.65 billion at September 30, 2016.  Total loans were $1.26 billion at September 30, 2017, an increase of $8.7 million from $1.25 billion at June 30, 2017 and an increase of $23.6 million from $1.24 billion at September 30, 2016.

Commercial loans increased by $26.0 million from September 30, 2016 to September 30, 2017, partially offset by a decrease of $2.4 million in our residential mortgage and consumer loan portfolios.  Commercial real estate loans increased by $30.3 million while commercial and industrial loans decreased by $4.3 million during the same period. 

Commercial loan production volume was up compared to the second quarter of 2017, as well as compared to the third quarter of 2016.  The following table shows a breakout of the Bank's commercial loan activity:

Dollars in 000s   3rd Qtr
2017
  2nd Qtr
2017
  1st Qtr
2017
  4th Qtr
2016
  3rd Qtr
2016
                             
Commercial loans originated   $ 68,282      $ 33,435      $ 60,356      $ 78,398      $ 61,112   
Repayments of commercial loans     (37,138 )     (30,090 )     (58,600 )     (40,768 )     (35,869 )
Change in undist.–available credit     (31,702 )     (15,706 )     (6,960 )     6,523        3,494   
Net change in commercial loans     
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