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Published in Finance

Bracing for more economic fallout, West Michigan banks boost loan-loss reserves

BY Sunday, August 02, 2020 04:20pm

Given how hard the economy fell in the second quarter, earnings for West Michigan-based banks held up relatively well, although they were primarily lower than a year earlier as banks set aside more in reserve to cover potential future loan losses.

Banks significantly boosted their loan-loss reserves amid the economic downturn from the COVID-19 pandemic and the effects of what Independent Bank CEO Brad Kessel told brokerage analysts was the “literal shutdown of the Michigan economy during the second quarter of 2020.”

Independent Bank CEO Brad Kessel COURTESY PHOTO

The Grand Rapids-based Independent Bank (Nasdaq: ICBP) recorded a $5.2 million loan-loss expense for the second quarter. That provision was just $652,000 for the same period a year earlier, reflecting concerns about the economy for the rest of 2020.

“This increase principally reflects the unique challenges and economic uncertainty (that) resulted from the COVID-19 pandemic and the potential impact on our loan portfolio,” Independent CFO Bob Shuster said in a conference call to discuss quarterly results.

Independent Bank reported quarterly net income of $14.7 million, or 67 cents per diluted share. That compares with $10.7 million, or 46 cents per diluted share, in net income for the second quarter of 2019.

Likewise, Grand Rapids-based Mercantile Bank Corp.’s significantly higher quarterly loan-loss provision reflects the pandemic and “its impact on the economic environment,” CFO Chuck Christmas said. 

Results for Mercantile Bank (Nasdaq: MBWM) in the second quarter included a $7.6 million quarterly loan-loss provision expense, which compares to $900,000 in the second quarter of 2019. The higher expense consists primarily of allocations for a new “COVID-19 pandemic environmental factor” and existing economic conditions, Christmas said.

“The COVID-19 factor was added to address the unique challenges and economic uncertainties resulting from the pandemic and its potential impact on the collectability of the loan portfolio,” he said.

Mercantile Bank reported second quarter net income of $8.6 million, or 54 cents per diluted share. That compares to $11.7 million in net income, or 71 cents per diluted share, in the same period a year earlier. The previous year’s results included a $1.3 million gain, or 8 cents per share, from the sale of a bank-owned life insurance claim.

Monitoring continues

Other West Michigan-based banks also reported higher reserves cut into quarterly earnings.

Holland-based Macatawa Bank Corp. (Nasdaq: MCBC) attributed its year-to-year earnings decline to adding more than $1 million to a loan-loss provision in the second quarter. Macatawa Bank reported quarterly net income of $7.6 million, or 22 cents per diluted share. That’s down 5 percent from the $8 million, or 24 cents per diluted share, in the second quarter of 2019.

Sparta-based ChoiceOne Financial Services Inc. (Nasdaq: COFS) tripled earnings after making two acquisitions in the last year. The bank also significantly increased its quarterly loan-loss provision, which grew to $1 million. Much of the loan-loss provision increase “was related to the impact of COVID-19,” according to bank executives. 

“Although ChoiceOne has not seen significant increases in charge-offs or delinquencies, we are continuing to monitor deferrals and economic indicators which may signify the need for increased provision for loan losses expense,” the bank said in an earnings release.

ChoiceOne reported second quarter net income of $4.4 million, or 61 cents per diluted share. That compares to $1.4 million in quarterly net income in the same period in 2019, or 45 cents per diluted share.

Last October, ChoiceOne closed on the $89 million acquisition of Lapeer-based County Bank Corp., the parent company of Lakestone Bank & Trust. ChoiceOne subsequently acquired Muskegon-based Community Shores Bank Corp. in a $20.8 million deal that closed in July. Community Shores’ three offices in Muskegon County and one in Grand Haven in neighboring Ottawa County will integrate into ChoiceOne Bank later this year.

Loan deferrals

In reporting results for the second quarter, the banks listed the thousands of loans they processed for businesses under the U.S. Small Business Administration’s Payroll Protection Program. Bankers said they are now awaiting final guidance from the federal government on assisting PPP borrowers to secure forgiveness from the SBA on the loans.

Bankers also spoke of the forbearance and payment deferrals on loans they provided retail and commercial borrowers. Those deferral periods have recently expired or will soon expire this summer.

As the economy begins to recover, bankers said they are getting few requests from borrowers to extend deferrals.

Mercantile Bank provided 705 payment deferrals during the quarter, which represented $718 million in loan exposure and $23 million in deferred payments. As of mid July, Mercantile Bank had just 33 deferrals outstanding with $130 million of exposure and $4 million of deferred payments, President Ray Reitsma said.

The bank expects more requests in the near future to extend deferral periods, although “these relatively modest numbers, combined with our expectations for future requests and our past due performance are (a) positive indicator,” Reitsma said.

Independent Bank had 259 loans and $210 million of deferrals, mostly on loan principals, said Jim Mack, the bank’s head of commercial lending. Many of those deferrals were approved in late April or May, “so August will be the first period where those payments will resume to the normal schedule,” Mack said.

“We’ve seen very few for second round additional requests. There have been five so far to ask us for another three months,” he said. “And that remains to be seen how many more (requests the bank will get), but it’s been low activity at the moment.”

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EDITOR’S NOTE: This story has been updated to correct a typo in Independent Bank CEO Brad Kessel’s name. 

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