Michigan bank aims to shift to high gear

Benj Gallander and Ben Stadelmann
Friday, April 12, 2013

In the depths of the US housing market collapse, it was Arizona, Florida and Nevada that got most of the attention. Michigan was featured less, though it was also hit very hard. That might be because the Great Lakes State’s economic problems go back to the decline of manufacturing in the American heartland, highlighted in the late 1980s with movies like Oliver Stone’s Wall Street and Michael Moore’s Roger and Me.

In this weakened condition, Michigan’s small regional banks had limited ability to cope. Thirteen of them failed and others were put on life support with TARP funds. One that teetered on the edge was Macatawa Bank, located in the small city of Holland on the shores of Lake Michigan. Macatawa applied for TARP relief, but withdrew its request due to the effect of severe shareholder dilution. Instead, the bank raised $30.6 million with the sale of preferred shares.

As it turned out, Macatawa barely scraped through. A deep loss of $47.2 million in 2008 was followed by a deeper $60 million hit in 2009, which attracted the attention of the FDIC and a consent order. But this financial institution managed to pull up its socks and eke out a profit of $5.8 million in 2011, and really got back on track in 2012 with earnings of $35.5 million. Both Benj and Ben bought positions in December at about $2.85.

This is mainly a play on the dual recovery of housing prices and the auto sector. Other positives include a decent net interest margin and capitalization ratios that are well above regulatory minimums. Insiders are well vested, and have been recent buyers.

The main negative is that the balance sheet still includes a large portfolio of foreclosed and repossessed property totalling $51.5 million at the end of 2012. Some progress has been made with shrinking this, but the administrative costs of looking after these properties are a serious drag on the bottom line. Improving market conditions will help with dispositions, but management is cautious, stating that the level of sales activity is expected to be about the same as the past couple of years.

Determining an Initial Sell Target can be a tricky issue. There has been some dilution, but because the bank was able to avoid TARP, the outstanding share count is a reasonable 27 million. Equity is rising robustly, and improved profitability suggests a dividend could be reintroduced later this year or next.

Though a return to the $20-plus level enjoyed in the 2005–06 period is unlikely, something in the $12–$14 range looks achievable. Though the stock has moved up sharply this year to $5.85, there remains plenty of upside for investors who prefer an entry point with momentum on their side.