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Macatawa Bank Corporation (MCBC) |
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CEOCFO Current
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This is a printer friendly page! Macatawa
Bank is
a customer driven financial institution growing at 15% plus annually BIO: Mr. Smith started his career as a securities broker
for a large New York brokerage firm. In 1971 he accepted the position of Trust
Investment Officer with Zeeland State Bank, which became First Michigan Bank. That
led to eventual positions of Senior Vice President of First Michigan Bank Corporation, and
President & CEO of FMB Financial Group. In 1992, Mr. Smith left FMB and started
Smith & Associates, a registered investment advisory firm that provides highly
personalized and comprehensive investment management services. In November of 1997, Mr. Smith launched Macatawa Bank
Corporation, which offers a full range of banking and trust services. He
orchestrated the merger of Grand Bank in 2001, and on April 12, 2002 helped the
Corporation celebrate achieving $1 billion in assets. During his career in West Michigan, Mr. Smith has
been involved in many business and civic activities including President - Bank Securities
Association, Chairman - Holland Board of Public Works, Director - American Public Power
Association Board, Chairman - Tulip City Airport Board, Founder - Holland Education
Foundation, Macatawa Bay Yacht Club Board Member, and Friend of Hospice. CEOCFOinterviews: Mr.
Smith, tell us about your vision for Macatawa Bank and where you are today. Mr. Smith: “Macatawa Bank was started in 1997; we were the result of a consolidation taking place in our area. Macatawa is headquartered in Holland, Michigan, which is about twenty miles west of Grand Rapids. We had a large community bank in town in the area that was established in the 1800’s. An out-of-town bank acquired it. We felt that the community would be better served if we had at least one bank that was locally owned and operated. The economic activity of a community is stimulated or assisted by the fact that community banks know and understand the people and their businesses. A local bank does this better than an out-of-town bank. So we pulled together a group of business people in the area and started a bank with the idea that it would be an alternative to the large out-of-town banks. Our objective was to just let it grow so in a few years we could reach $500,000,000 and remain a viable alternative to the larger out of area banks. The demand for the bank was much larger than anticipated. Originally we were going to open three branches and then one a year for the next few years. Upon opening Macatawa Bank, we had people lined up outside the bank, so we quickly accelerated our expansion program. We currently have seventeen branches in Allegan, Ottawa and Kent Counties. The bank is about $1.2 billion. That gives you an idea of the kind of acceptance we had in the market area. Phil Koning our President, and I were formerly local bankers and known in the area. We hired a number of the other community bankers from area banks that were being sold. As they came over to Macatawa, they brought along their customer base, which helped accelerate the growth of the bank. A couple of years ago, Old Kent, which was the other big competitor in our area, was surprisingly sold to Fifth Third Bancorp (NASD: FITB). When we started Macatawa Bank, the two big competitors each had about a 33% share of the market. First Michigan Bank was sold to Huntington Bancshares Incorporated (NASD: HBAN) and Old Kent was sold to Fifth Third. Now instead of having 33% of the market available, there is about 66% available in the Grand Rapids market area. All of a sudden, the opportunities Macatawa Bank has in the local areas have improved quite significantly.” CEOCFOinterviews: Has the general economic downturn had much effect on your area? Mr. Smith: “It has been worse than it had in any of the prior recessions. We have an area that is very entrepreneurial. Some of the largest privately held companies in the national are here - Amway, Steelcase (Steelcase Inc. (NYSE: SCS), Haworth, and there are many very successful smaller companies. During the last couple of recessions we went along almost without taking any notice at all; this time it has been different primarily because many office furniture companies are located here. Those companies have been hit extremely hard. The last time we had a recession they shifted over production to remodeling old buildings. This time, because there was a slow-down of the dot.coms and everyone else downsizing, that has not taken place. There has been a lot more evidence of the economy slowing in the area than there ever has been before. We do believe the level of activity here, even though it is slow, is now beginning to improve.” CEOCFOinterviews: What is the breakdown between consumer and commercial customers and do you see that changing? Mr. Smith: “The mix, primarily from a lending standpoint, is driven by the commercial side of the bank. We look at ourselves as a retail bank because when we started to build the bank, the ideal was to build it with core deposits. We went after a retail client base. The lenders are focused in the commercial lending area. And close to 75% of the loans are in the commercial area. CEOCFOinterviews: How do you do in the way of non-performing loans? Mr. Smith: Extremely well! If you look at the national average for non-performing loans has been we are currently running at about half of that. Our non-performing loans were 0.29% at the beginning of the year. CEOCFOinterviews: Macatawa Bank is a “customer driven financial institution.” How do you implement that philosophy and what sets you apart in that realm? Mr. Smith: We are local people. All of our officers and executives know the area and the people; and all the people know us. When customers have a concern, question or request, they know whom to call. The largest banks work altogether differently. We believe the only value we have as a bank is the relationship that we have with customers and we work hard at building good relationships. Other banks seem to be so focused on profitability and try to automate so much that they drive their customers away from them; it is harder for customers to do business with that type of bank. Then, there is the issue of fees and the way the bigger banks charge, as opposed to us. The bigger banks come in and the first thing they want to do is get rid of the small savings accounts, which from a financial standpoint, is a smart move. The small savings accounts cost a lot of money to handle, however we want and recognize the need to service these small accounts. Many of these account holders are the children of our target customers. The other advantage for commercial customers is our prompt turnaround. If we have a loan that comes in, because we are local, we can sit down and turn that loan around in two weeks no matter what kind of loan it is; usually we can do it in a matter of a couple of days. With many other banks it gets sent somewhere out-of-town. People don’t like their information getting sent all over. In addition, those out-of-town bankers that ask questions don’t understand the local business and so it prolongs the whole process. It is a very cumbersome way of doing things.” CEOCFOinterviews: How do you keep that personal touch as you continue to grow? Mr. Smith: “The loss of the personal touch may be a function of growth if you do acquisitions, but if you grow internally, it becomes a growing culture. If you are type of person who relates well to others, and work next to the same type of person, it reinforces those aspects in your daily business career. That is what we have going and I think we can do it whether we’re at $100 billion or $100 million. You have a much harder time keeping the culture if you grow by acquisition. The Grand Rapids area has a little over eight billion dollars in deposits; the Holland Zeeland area has about two-and-a-half billion. Totally we have about a 11 billion dollar market to work in. We are just over a billion and I think realistically we could achieve 30-40% share of the market. We have only been in business for five years and are already the number two bank in market share in Ottawa county, which is comprised of the Holland / Zeeland and surrounding communities. We have been fortunate to have the right type of employees that customers have been attracted to. I can see us growing at a quick rate for four or five years without having to go outside the area or make acquisitions. The money supply grows at five percent a year and the economic activity around here grows another five percent, and if you can take a little bit from your competitor, it is possible to grow fifteen percent for a long time.” CEOCFOinterviews: What is your plan going forward? Mr. Smith: “One of the keys to our type of banking is convenience. We will probably double our total amount of branches. We have most of the branches where we want to in the Holland / Zeeland area. We only have four branches in the Grand Rapids market, so we are planning to add three this year, three next year and probably the following year. Fifth Third has about forty-four branches there; we will probably end up with half that many. What we would like to do is circle the area in strategic locations, because we don’t believe you need a bank on every corner.” CEOCFOinterviews: Are acquisitions part of your strategy going forward? Mr. Smith: “There are a few small banks around the Grand Rapids area, that if the situation was right, it may make sense from a strategic standpoint. We really aren’t interested in acquiring however, for a couple of reasons. We can grow internally more economically and beneficially from a shareholder standpoint. If we located a small bank that wanted to affiliate with us, that was a retail or a community bank, we would look at that but we wouldn’t do it from a premium standpoint. I was with an FMB (First Michigan Bank) for years and it was a very successful bank. However, one of the mistakes that the bank made was being an active acquirer of other banks. Some of the areas in which we purchased banks, Dowagiac and Hart, were very good areas and they had great people. The banks in the area were true community banks, but the areas weren’t growing. After you get that kick for the acquisition, the core bank has to work a lot harder to maintain a fair growth rate for your investors. We are going to stay in areas that we think the market itself is growing fast enough to allow us to give shareholders a 15% compound earnings growth." CEOCFOinterviews: Will you tell us about the mortgage company and the brokerage services? Mr. Smith: “We are just getting into the mortgage area; we don’t really hold mortgages in-house, so we are now looking at setting up a mortgage company so we can have salaried and commission people. This is particularly true as we look at the Grand Rapids market because it is such a large market and there is so much activity going on. It will be part of our core business. With regard to Brokerage Services, we now have a broker dealer set up. We believe, down the road, we are going to need more than just interest income to make an adequate return as a community bank. We think the most logical place is in the investment area where we already have a trust department. We are approaching a billion dollars in assets in the trust department, so we are trying to build on those relationships. We are trying to increase trust, wealth management, investment advisory services, and broker/dealer services, so we can build non-interest income to a fairly significant level. We would like to reach 30% or greater of total income.” CEOCFOinterviews: How do you attract new customers? Mr. Smith: “Most of our new customers come because they know the reputation of the bank and are referred by existing customers. A few of them are leaving from the other banks because they are not happy with the way they are treated. We prefer to attract them because of our reputation. We know that any time there is a merger or acquisition, customers often get upset. There are always opportunities to pick up some disenchanted customers. But our preference is to focus on customer needs. Provide the customer with an unprecedented level of service and provide it cheerfully and professionally. We want to be proactive in inviting new customers to bank with Macatawa – the way banking should be." CEOCFOinterviews: Is cross selling where you would like it to be? Mr. Smith: “No. We are rolling out the broker/dealer operation. Most of the branches have registered broker dealers and we are adding more. There is more “selling” that could be done to get it to levels that are more consistent with high performing banks. We are only five years old and try to be a needs-based seller, which is different than having a product driven focus where you are expected to sell a certain amount. There are times and places that you need to have those goals. We are struggling with how we continue to focus on our customer and provide services they need that we can make money on. We want to avoid getting into the situation where we don’t allow our personnel to service the customer, instead we force them to sell. We haven’t found the right answer to that yet. Many of the larger banks have sophisticated and successful selling programs, but that is not consistent with our style of banking. On the other hand, you can’t just be a nice guy and not make any money. Being a nice guy is great but if you don’t provide a fair return to the shareholder, it’s not a good business model. We are trying to find a happy medium that leaves both our customers and our shareholders feeling good, and that results in a high level of profitability.” CEOCFOinterviews: Is the state-of the-art infrastructure a function of having started a few years ago, and how actively do you pursue that area? Mr. Smith: “The systems that they have today are so much more advanced than they were a few years ago. In the past everything was built from scratch, there wasn’t much compatibility and it was hard to make changes to them. The systems they have today are more flexible, easily changed and more efficient from a standpoint of cost, reliability and ease to deliver. The one thing that used to be an impediment for someone getting into the banking business was the technology. Today, you can pretty much go out and buy what you need. It is a smaller, more efficient and user friendly. The technology has really worked to our advantage." CEOCFOinterviews: Will you tell us about your community involvement for the bank. Mr. Smith: “Community involvement separates a lot of the community banks from the others. We all live and work in this area, so we should be involved in it. We feel it benefits us to help our communities, it is part of our responsibility. Community involvement allows us to meet a lot of influential people. This not only helps the community from an economic standpoint, but it also helps us make contacts and understand better what people are doing, what their interests are, and how Macatawa can support those interests. We encourage all of our officers to be involved in the community. We actively support them in their involvements such as fundraisers, serving on Boards, clothing drives, etc. The other thing that is different about a community bank is being involved in local leadership. Having your employees actively voice their opinion and move along whatever issues in the community that are important. We live here, and plan to do so for a long time, so we want to be out there and help the community improve itself. When you are out-of-town and have a giant system, many of the areas may not get the time and attention that you would like them to have. By being located here, we are fortunate that we have enough employees that we can take care of those issues.” CEOCFOinterviews: What are you biggest challenges? Mr. Smith: “On the intermediate term, I see both challenges, and opportunities. I think our major challenge is to maintain our culture as we grow. The biggest risk will come after we have completed building the franchise in the Grand Rapids market. Then the question will be are we content to grow 18% a year, or will we decide to expand into other markets. I think that is a realistic possibility. Our deposit growth has been ten million a month in core deposits. In our CD portfolio, we only use about 10% out of the market. Most banks our size pick 20%-30%, so there is a lot of growth we can get in there. Right now, the number of new accounts opened per month is 1,200-1,500 since we have opened. Our lenders average about 10 years experience in this area, so they know many people. It is a lot easier to get new business when you understand peoples business and you have substantial banking experience. That has been a plus, and when that is played out, it will be our biggest risk.” CEOCFOinterviews: Why should potential investors be interested in Macatawa? Mr. Smith: “From an investor standpoint, there are a lot of reasons; The primary reason is we are in a market area that we expect will allow us to grow at least 15% compounded from now until a time yet to be determined. I think that realistically could happen because of the market that we are in, the position that Macatawa is in, and the growth that exists in our market; that is without any new acquisitions outside of the market or any effort to go anywhere where we are just another player. When we started the bank we all felt that community banking was great and good for the community, but we were realistic to realize you can only do that if it provides a good fair return to the shareholder, I’m talking about an 18-20% return on equity, and an increasing cash dividend on a regular basis. When we hadn’t even earned back what we spent getting started, we started paying cash dividends; we increased those three times and we increased our stock dividend, which we also pay annually, two times. Our focus is to provide a fair return on a regular basis to the shareholder. We have a director’s policy of paying out about 30-35% of earnings on a regular basis. If we are able to increase our earnings as we think we will be able to, then it will be logical that they would continue to increase the cash dividend as well. We have been a believer that if we do the right thing from earnings standpoint and the numbers are there, people will look at that and make their own decision and the stock will represent a ‘fair value.’ We want people to know what is going on but we also try not to over hype that so that you get a big story today and then tomorrow you find out that the situation has changed.” disclaimers |
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