As filed with the Securities and Exchange Commission on April 29, 1999
Registration No. 333-75621
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MACATAWA BANK CORPORATION
(Name of Small Business Issuer in its Charter)
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Michigan 6712 38-3391345
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
51 E. Main Street
Zeeland, Michigan 49464
(616) 748-9491
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Benj. A. Smith, III
51 E. Main Street
Zeeland, Michigan 49464
(616) 748-9491
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Donald L. Johnson
Varnum, Riddering, Schmidt & Howlett LLP
Suite 1700
333 Bridge Street, N.W.
Grand Rapids, Michigan 49504
(616) 336-6000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount to be Offering Price Aggregate Offering Amount of
Being Registered Registered Per Share Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock (no par
value) 1,200,000 $12.75 $15,300,000 $4,514*
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</TABLE>
*Fee previously paid with initial filing
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
Up to 1,200,000 Shares
MACATAWA BANK CORPORATION [logo]
Common Stock
Macatawa Bank Corporation is offering up to 1,200,000 shares to its
shareholders.
Macatawa Bank Corporation's Common Stock is reported on the OTC Bulletin
Board under the symbol "MCBC." Macatawa Bank Corporation owns Macatawa Bank, a
full service commercial and retail bank serving Holland and Zeeland, Michigan
and the surrounding area.
The Common Stock is offered exclusively to shareholders of Macatawa as of
April 9, 1999. Shareholders are entitled to purchase one share for each two
shares of Common Stock they owned on April 9, 1999. In addition, subject to
availability, shareholders owning fewer than 10,000 shares, including shares
purchased in this offering, may purchase additional shares to increase their
holdings to no more than 10,000 shares. Shareholders must exercise their right
to purchase by June 4, 1999.
Investing in Common Stock involves risks.
See "Risk Factors" beginning on page 7.
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Per Share Total
<S> <C> <C>
Public offering price.................................................... $12.75 $15,300,000
Underwriting discount.................................................... $ 0 $ 0
Proceeds, before expenses, to Macatawa Bank Corporation.................. $12.75 $15,300,000
</TABLE>
Neither the Securities and Exchange Commission nor any other regulatory
body has approved of disapproved of these securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Macatawa Bank Corporation has not hired an underwriter or broker dealer to
conduct this offering.
April 30, 1999
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements appearing elsewhere in this
prospectus. Except as otherwise specified, financial information and other
references in this prospectus to Macatawa Bank Corporation include Macatawa
Bank.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward- looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" contain a discussion of some of the factors that
could contribute to those differences.
Macatawa Bank Corporation
We own Macatawa Bank which provides a full range of commercial and consumer
banking services, primarily in the communities of Holland and Zeeland, Michigan,
as well as the surrounding market area. We have eight full service branch
offices, a trust office, a lending office, and an operations center. As of
December 31, 1998, we had total assets of $189.2 million, total deposits of
$167.0 million, 14,809 deposit accounts, and shareholders' equity of $19.6
million.
Products and Services
We are a full service bank offering a wide range of commercial and personal
banking services. Our services include checking and savings accounts,
certificates of deposit, safe deposit boxes, travelers checks, money orders,
trust services and commercial, mortgage and consumer loans. Our Trust Department
was established in January, 1999.
Reason for Starting Macatawa Bank
We believe that many customers want to conduct business with a locally
owned and managed bank. Although the banking industry is competitive, we have
been and believe we will continue to be successful in attracting as customers
individuals and small to medium sized businesses. We attract these customers by
demonstrating an active interest in their business and personal financial
affairs. We also emphasize our local management and their strong ties and active
commitment to the community. We are currently one of only two locally managed
independent commercial banks with a main office in the Holland-Zeeland area. We
are the only local bank with a branch network which underscores our desire to be
close to all of our customers.
Market Area
Our market area includes the cities of Holland and Zeeland, and the
Interstate I-196 corridor from Holland to metropolitan Grand Rapids. Most of our
market area is located in the southern half of Ottawa County, Michigan. This
area includes several growing communities and has a stable and diverse economic
base. The Holland-Zeeland area has a population of approximately 93,000, and
Ottawa County has a population of approximately 200,000. The Holland- Zeeland
area had an estimated median household income in 1997 of approximately $43,600.
Over 300 manufacturers have operations in the Holland-Zeeland area, including
several manufacturers in the office furniture and automotive supply industries.
Major Ottawa County employers include Donnelly Corporation, Herman Miller, Inc.,
Haworth, Inc. and Johnson Controls. We believe that our market area's diverse
commercial base provides significant opportunities for business banking services
as well as personal banking services for the owners and employees of the area's
businesses.
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Management
Our officers and directors are recognized and established individuals in
their local communities. Our board of directors and management team represent a
wide range of business, banking and investment knowledge and experience. Our
management team has established and maintains significant customer relationships
in the Bank's market area which they expect to draw upon for the benefit of the
Bank. Many of our management team have at least 10 years of banking experience,
and several key people have more than 20 years of banking experience. We believe
that their years of banking experience and their existing customer contacts in
this market offer a substantial opportunity to continue to attract new customer
relationships.
Our officers and directors have a shared vision of focused community
banking and a commitment to the future growth and success of Macatawa Bank. Our
vision is to be a quality, full-service community bank that offers competitive
financial products and superior customer service. We value long-term
relationships with customers. We also seek to maintain our community focus by
hiring local people and placing strong emphasis on local presence and local
community support.
Strategy
We are a customer-driven financial institution focused on providing high
value to clients by delivering products and services in a highly personalized
manner. We have attracted and believe we can continue to attract clients who
prefer to conduct business with a locally-managed bank with multiple convenient
locations that demonstrates an active interest in their business and personal
financial affairs.
We believe that our personal service philosophy enhances our ability to
successfully compete in attracting individuals and small businesses. We actively
solicit retail customers and compete for deposits by offering customers personal
attention, professional service and competitive interest rates. Our experienced
staff provides a superior level of personalized service, which enables us to
generate competitively priced loans and deposits.
We have entered into agreements with third-party service providers to
provide customers with products and services such as credit cards, debit cards,
ATM cards and banking by personal computer. Using third-party service providers
allows us to remain at the forefront of technology while minimizing the costs of
delivery.
We also established a Trust Department in January, 1999, to further provide
for the financial needs of our customers. Earning fee income from non-banking
services, including trust services, is an important part of our strategy.
About Us
We incorporated in Michigan in 1997 and own Macatawa Bank. Macatawa Bank
was organized as a Michigan bank and opened for business on November 25, 1997.
We have eight full service branch offices, a trust office, a lending office, and
an operations center. Macatawa Bank's deposit accounts are insured by the
Federal Deposit Insurance Corporation to the extent permitted by law. Our main
officers are located at 51 E. Main Street in the City of Zeeland, Michigan
49464, and our telephone number is (616) 748-9491.
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The Offering
Shares offered....................... 1,200,000 shares of Common Stock.
Offering price....................... $12.75 per share of Common Stock.
Common Stock to be outstanding
after this Offering............... 3,635,125 shares (assuming all
1,200,000 shares are sold). We may
sell fewer than 1,200,000 shares in
this offering.
OTC Bulletin Board Symbol............ MCBC
Use of proceeds...................... To strengthen our capital position in
anticipation of future growth and for
other general corporate purposes. We
expect to contribute substantially
all of the net proceeds to Macatawa
Bank to strengthen its capital position,
to allow it to open or acquire
additional branches, or for other general
corporate purposes. Until we use the
proceeds for any or all of such purposes,
we will invest the net proceeds in United
States government securities and
investment grade financial instruments.
Plan of Distribution................. We are offering the shares of Common
Stock at a price of $12.75 per share to
shareholders of record on the April 9,
1999, Record Date. Our shareholders as
of the Record Date may purchase up to one
share of Common Stock for each two
shares owned on the Record Date. No
fractional shares may be purchased. For
example, a shareholder who owned 95
shares on the Record Date would be
entitled to purchase up to 47 shares. To
the extent our shareholders do not choose
to purchase some or all of the shares
they are entitled to purchase, such
shares will be offered to the other
shareholders (a) who purchased all the
shares that they were entitled to
purchase in the initial phase of the
offering and (b) who after such purchase
still own fewer than 10,000 shares,
provided that any such shareholder will
be permitted to purchase only a
sufficient number of shares to bring his
or her total share ownership to no more
than 10,000 shares. To subscribe, you
must complete and return to us the
Subscription Agreement together with
payment for the shares.
Risk factors......................... Investing in the Common Stock involves
risks. You should invest only if you can
afford to lose your entire investment.
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Summary of Financial Data
The following selected consolidated financial and other data are derived
from the Company's financial statements and should be read with the Consolidated
Financial Statements and Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Consolidated
Balance Sheet as of December 31, 1998, and the Consolidated Statement of Income
for the year ended December 31, 1998, are included elsewhere in this prospectus.
<TABLE>
At or For the
(Dollars in Thousands, Except Per Share Data) Year Ended
December 31, 1998
<S> <C>
Financial Condition
Total assets....................................................................... $189,229
Loans.............................................................................. 137,882
Deposits........................................................................... 166,989
Securities......................................................................... 27,007
Shareholders' equity............................................................... 19,611
Share Information
Basic loss per common share........................................................ $ (1.22)
Book value per common share........................................................ 8.05
Weighted average shares outstanding................................................ 2,041,920
Shares outstanding at end of period................................................ 2,435,125
Operations
Interest income.................................................................... $ 6,804
Interest expense................................................................... 3,190
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Net interest income................................................................ 3,614
Provision for loan losses(1)....................................................... 2,023
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Net interest income after provision for loan losses................................ 1,591
Total noninterest income........................................................... 683
Total noninterest expense.......................................................... 4,763
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Net loss........................................................................... $( 2,489)
=========
</TABLE>
(1) Management has established the allowance for loan losses based on past
industry loan loss experience, known and inherent risks in similar
portfolios, and economic conditions.
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RISK FACTORS
The offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our Common Stock. If
any of the following risks actually occur, our business, financial condition and
results of operations could be materially adversely affected. This could cause
the trading price of our Common Stock to decline, and you may lose all or part
of your investment.
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "may," "will," "should,"
"seeks," "pro forma," or "anticipates," and similar expressions. Our actual
results could differ materially from those discussed in these statements.
Factors that could contribute to these differences include those discussed below
and elsewhere in this prospectus.
We Have a Limited Operating History and Have Incurred Significant Initial Losses
We began operations on November 25, 1997, a limited operating history of
less than eighteen months. We are subject to the risks inherent in starting a
new business. Our profitability will depend primarily upon our operations and we
might never become profitable. We had a net loss of $2,488,551 during 1998, our
first full year of operation. This loss primarily resulted from provision for
loan losses of $2,022,500 during 1998. Initial expenses to form Macatawa Bank
and to open branches also added to our losses. As of December 31, 1998, we had a
retained deficit of $2,654,076.
Our Failure to Manage Future Growth Could Have Adverse Effects
Our strategy includes increasing deposits, loans and other assets, adding
additional branches and developing our Trust Department. Our ability to achieve
and manage our growth and expansion, as well as our ability to manage our
operations and internal controls, will depend in part on our ability to continue
to attract and retain capable management and operations personnel.
We May Need Additional Capital
If we sell all 1,200,000 shares in this offering, we do not anticipate the
need for additional capital in the foreseeable future to conduct business
activities. Additional capital beyond our present capital and the capital which
will be provided by this offering and any amounts likely to be generated by our
operations over the next several years may be necessary if we do not sell all
1,200,000 shares in this offering or if we want to undertake any significant
acquisitions or other expansion of our operations. Funds necessary to finance
such acquisitions or expansion might not be available. Regulatory capital
requirements and borrowing restrictions that apply to us may also have the
effect of constraining future growth. If we sell additional equity securities to
finance future expansion, such sale could result in significant dilution to the
interests of persons purchasing shares in this offering.
We Might Not Sell All the 1,200,000 Shares Offered
We may sell all or less than all of the 1,2000,000 shares of Common Stock
being offered. Our shareholders might not purchase all the shares offered. If
the shareholders do not purchase all of the shares, we do not plan to offer the
shares to non-shareholders. If we fail to sell all 1,200,000 shares, we may need
to seek additional capital in the future or limit our growth.
Government Regulation and Monetary Policy Affect Us and the Banking Industry
We are subject to extensive state and federal governmental supervision and
regulation. Existing state and federal banking laws subject Macatawa Bank to
substantial limitations with respect to loans, purchase of securities, payment
of dividends and many other aspects of our banking business. These limitations
include a requirement that we maintain a ratio of Tier 1 leverage capital to
total assets for the first three years of at least 8% and maintain an adequate
loan loss reserve. We currently maintain a ratio of Tier 1 leverage capital to
total assets in excess of the 8% requirement. Future legislation or government
policy might adversely affect the banking industry or our operations.
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Federal economic and monetary policy may affect our ability to attract deposits,
make loans and achieve satisfactory interest spreads.
We Do Not Currently Pay Any Dividends
We have never paid a dividend, and do not anticipate paying dividends for
the immediately foreseeable future. Our future earnings may not be sufficient to
permit the legal payment of dividends to our shareholders at any time in the
future. Even if we may legally declare dividends, the amount and timing of such
dividends will be at the discretion of our Board of Directors. The Board of
Directors intends to consider paying dividends when legally permitted to do so.
Competition
We face strong competition for deposits, loans and other financial services
from numerous Michigan and out-of-state banks, thrifts, credit unions and other
financial institutions as well as other entities which provide financial
services. Some of the financial institutions and financial services
organizations with which we compete are not subject to the same degree of
regulation as we are. Many of these financial institutions aggressively compete
for business in our market area. Most of our competitors have been in business
for many years, have established customer bases, are larger, have substantially
higher lending limits than we do and offer certain services, including numerous
branches and international banking services. The dominant competitor in the
Company's market area is Huntington Bancshares Incorporated, headquartered in
Columbus, Ohio, which acquired FMB in September 1997. Old Kent Bank, Banc One
and National City Bank are also significant competitors. In addition, federal
and Michigan legislation regarding interstate branching and banking may act to
increase competition in the future from larger out-of-state banks.
We Must Retain Key Executives and Personnel
We are and will continue to be dependent upon the services of our
management team, including the Chief Executive Officer of the Company and the
President of Macatawa Bank, and our other senior managers. Losing one or more
key members of the management team could adversely affect our operations. We do
not maintain key man life insurance on any of our officers or directors.
Management Will Have Discretion to Allocate the Offering Proceeds
We are conducting this offering to raise funds to generally strengthen our
capital position in anticipation of future growth and for other general
corporate purposes. While we currently have no such plans, if opportunities
arise, some of the proceeds of the offering could also be used to finance
acquisitions of other financial institutions or branches of other institutions,
or expansion into other lines of business closely related to banking. However,
we will have broad discretion to allocate the offering proceeds.
Lending Risks and Lending Limits
We are in the business of making loans, and there is an inherent risk that
loans might not be repaid. If our customers fail to repay their loans, this
could materially adversely affect our earnings and overall financial condition,
as well as the price of our Common Stock. We also focus on loans to
small-to-medium sized businesses that may be riskier than loans to larger
companies. We attempt to manage our credit exposure by monitoring the
concentration of loans within specific industries and through prudent loan
application and approval procedures. However, we can not guarantee that our
monitoring and procedures will reduce our lending risks sufficiently to avoid
material losses.
Our legal lending limit prior to this offering is approximately $4.7
million. The Board of Directors has established an "in-house" limit of $4.5
million. To the extent the net proceeds of this Offering are contributed to the
Bank, the legal lending limit and "in-house" limit may increase. If we
contribute $15.0 million of the net proceeds of this Offering to the Bank, the
legal lending limit is expected to be at least $8.5 million, and the Board of
Directors of the Bank anticipates increasing the "in-house" lending limit to
$6.0 million. In addition, the Board may from time to time raise or lower the
"in-house" limit as it deems appropriate to comply with safe and sound banking
practices and to respond to overall economic conditions. Accordingly, the size
of the loans which the Bank can offer to potential
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customers is less than the size of loans that many of our competitors are able
to offer. These limits affect to some degree our ability to seek relationships
with the area's larger businesses. We can accommodate loan volumes in excess of
our lending limit through the sale of participations in such loans to other
banks. However, we might not be successful in attracting or maintaining
customers seeking larger loans. In addition, we might not be able to sell
participations in such loans on terms favorable to us.
Impact of Interest Rates and Economic Conditions
The results of operations for financial institutions, including our Bank,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate market values, rapid changes in
interest rates and the monetary and fiscal policies of the federal government.
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. In the early 1990s, many banking
organizations experienced historically high interest rate spreads. More
recently, interest rate spreads have generally narrowed due to changing market
conditions and competitive pricing pressure, and there can be no assurance that
such factors will not continue to exert such pressure or that such high interest
rate spreads will return. Substantially all our loans are to businesses and
individuals in western Michigan and any decline in the economy of this area
could adversely affect us. Like most banking institutions, our net interest
spread and margin will be affected by general economic conditions and other
factors that influence market interest rates and our ability to respond to
changes in such rates. At any given time, our assets and liabilities will be
such that they are affected differently by a given change in interest rates. As
a result, an increase or decrease in rates, the length of loan terms or the mix
of adjustable and fixed rate loans in our portfolio could have a positive or
negative effect on our net income or loss, capital and liquidity. The positive
trends or developments discussed in this prospectus might not continue. Negative
trends or developments might have a material adverse effect on us.
We Must Keep Up with Technological Change
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology- driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part on our ability to address the needs of customers by
using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in our
operations. Many of the our competitors have substantially greater resources to
invest in technological improvements. We might not be able to effectively
implement new technology-driven products and services or be successful in
marketing such products and services to our customers.
Our Business Could be Adversely Impacted by Year 2000 Compliance Issues
During the next year, many software programs may not recognize calendar
dates beginning in the Year 2000. This problem could force computers or machines
which use date dependent software to either shut down or provide incorrect
information. This problem could adversely affect our operations or the
operations of companies to which we have lent money. To address this problem, we
have examined our computer and information systems, contacted our supplier of
information processing services and also contacted our software and hardware
providers. We have an internal task force to assess Year 2000 compliance by
ourselves and our vendors. In addition, we ask commercial borrowers about Year
2000 compliance as part of the loan application and review process. Although we
believe our operations are Year 2000 compliant, undetected problems may remain.
If we, or any of our key suppliers or customers, fail to mitigate internal and
external Year 2000 risks, we may temporarily be unable to process transactions
or service our customers, which could have a material adverse effect on our
business, financial condition or results of operations.
Anti-Takeover Provisions
Our Articles of Incorporation and Bylaws include provisions which are
designed to provide our board of directors with time to consider whether a
hostile takeover offer is in our best interest and the best interests of our
shareholders. These provisions, however, could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions also could diminish the opportunities for a holder of our Common
Stock to participate in tender offers, including tender offers at a price above
the then-current price for our Common Stock. Such provisions could also prevent
transactions in which our shareholders might otherwise receive a premium
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for their shares over then current market prices, and may limit the ability of
our shareholders to approve transactions that they may deem to be in their best
interests.
The Michigan Business Corporation Act contains a Control Share Act intended
to protect shareholders and prohibit or discourage certain types of hostile
takeover activities. Federal law requires the approval of the Federal Reserve
Board prior to acquisition of "control" of a bank holding company. These
provisions may have the effect of delaying or preventing a change in control of
Macatawa Bank Corporation without action by our shareholders, and therefore
could adversely affect the price of the Common Stock.
Indemnification of Directors and Officers
Our Articles of Incorporation provide for the indemnification of our
officers and directors and insulate our officers and directors from liability
for certain breaches of the duty of care. It is possible that the
indemnification obligations imposed under these provisions could reduce our
earnings and adversely affect our ability to pay dividends. The Articles of
Incorporation of Macatawa Bank contain similar provisions.
Determination of Offering Price
Our Board of Directors determined the offering price of $12.75 per share
for this offering. The present or future value of the Common Stock could be more
or less. When determining the offering price, we considered the recent market
price of the Common Stock, the impact of this offering on the price of the
Common Stock and the Board's desire that shareholders be permitted to buy
additional shares at a price below the market price at the end of March, 1999.
The Common Stock is traded in the OTC Bulletin Board market. The market price of
the Common Stock following the offering may be greater or less than the offering
price.
Dilution
If you purchase Common Stock in this offering, with respect to those shars
purchased in the offering you will suffer an immediate dilution of $3.18 in net
tangible book value per share of the Common Stock from the offering price on a
pro forma basis as of December 31, 1998, assuming 1,200,000 shares are sold. The
Company has issued stock options to purchase 123,500 shares of Common Stock, and
the exercise of these options may further dilute the net tangible book value per
share of the Common Stock.
Control by Management
Although the combined ownership and control of our Common Stock by our
officers and directors is likely to be less than 25% after this offering, such
individuals will be able to exert a significant measure of control over our
affairs and policies. Such control could be used, for example, to help prevent
an acquisition of Macatawa Bank Corporation, precluding shareholders from
possibly realizing any premium which may be offered for the Common Stock by a
potential acquirer. The intention of the Board of Directors is to remain an
independent community bank.
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There is a Limited Trading Market for Our Common Stock
The offering price may be greater than the market price for the Common
Stock following this offering. Our Common Stock is reported on the OTC Bulletin
Board under the symbol "MCBC." The development and maintenance of a public
trading market depends, however, upon the existence of willing buyers and
sellers, the presence of which is beyond our control or the control of any
market maker. Even with a market maker, factors such as the limited number of
shares outstanding, the lack of earnings history and the absence of a reasonable
expectation of dividends within the near future mean that there might not be an
active and liquid market for the Common Stock. Even if an active market
develops, there can be no assurance that a market will continue, or that
shareholders will be able to sell their shares at or above the offering price.
Purchasers of Common Stock should carefully consider the potentially illiquid
and long-term nature of their investment in the shares being offered.
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USE OF PROCEEDS
The net proceeds to Macatawa Bank Corporation (the "Company"), assuming the
sale of all of the 1,200,000 shares of Common Stock offered hereby, are
estimated to be $15,190,000 after deduction of the estimated offering expenses.
If 600,000 shares of Common Stock are sold in this offering, the net proceeds to
the Company are estimated to be $7,540,000, after deduction of estimated
offering expenses. The offering expenses are estimated to be $110,000.
The net proceeds from this Offering will generally be used to strengthen
the Company's capital position in anticipation of future growth and for other
general corporate purposes. The Company expects that substantially all of the
net proceeds will be contributed to the Bank in the near future to strengthen
the Bank's capital position, to open or acquire additional branches, or for
other general corporate purposes. Pending their application for any or all of
such purposes, the net proceeds may be invested in United States government
securities and other investment grade financial instruments.
DIVIDEND POLICY
The Company initially expects that all Company and Bank earnings, if any,
will be retained to finance the growth of the Company and the Bank and that no
cash dividends will be paid for the foreseeable future. If and when dividends
are declared, the Company will be primarily dependent upon dividends paid by the
Bank for funds to pay dividends on the Common Stock. It is also possible,
however, that the Company will pay dividends in the future generated from
investment income and other activities, if any, of the Company.
Under Michigan law, the Bank is restricted as to the maximum amount of
dividends it may pay on its common stock. The Bank may not pay dividends except
out of net profits after deducting its losses and bad debts. A Michigan state
bank may not declare or pay a dividend unless the bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. If
the Bank has a surplus less than the amount of its capital, it may not declare
or pay any dividend until an amount equal to at least 10% of net profits for the
preceding one-half year (in the case of quarterly or semi-annual dividends) or
full-year (in the case of annual dividends) has been transferred to surplus. The
ability of the Company and the Bank to pay dividends is also affected by various
regulatory requirements and policies, such as the requirement to maintain
adequate capital above regulatory guidelines. See "Supervision and Regulation."
Such requirements and policies may limit the Company's ability to obtain
dividends from the Bank for its cash needs, including funds for acquisitions,
payment of dividends by the Company and the payment of operating expenses.
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<PAGE>
MARKET FOR COMMON STOCK
The Company's common stock has traded in the over-the-counter market since
the completion of the Company's initial public offering in April 1998. High and
low bid prices, as reported on the OTC Bulletin Board, since the Company's April
1998 initial public offering at $10.00 per share are as follows:
<TABLE>
1998 High Low
-----------
<S> <C> <C>
2nd Quarter $15.25 $14.50
3rd Quarter $16.50 $14.00
4th Quarter $16.75 $15.75
1999
-----------
1st Quarter $16.50 $14.75
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. The
quotations do not include intra-day highs and lows. As of March 31, 1999, the
Company had a total of approximately 2,900 shareholders, consisting of
approximately 800 owners of record and approximately 2,100 beneficial owners of
the Company's common stock.
No cash dividends have been declared to date on the Company's common stock.
The Company expects that all earnings, if any, will be retained to finance the
growth of the Company and the Bank and that no cash dividends will be paid for
the foreseeable future. If and when dividends are declared, the Company will be
dependent upon dividends paid to it by the Bank for funds to pay dividends on
the common stock.
RECENT DEVELOPMENTS
The Company has plans to open several additional branches and has applied
or is preparing to apply for regulatory approval to open the following branches:
o Douglas, Michigan: The Company has purchased land near the Weathervane
Mall and intends to build a facility within the next 6-18 months. The
Company intends to open a temporary branch in the Weathervane Mall
until its branch office is complete.
o Hamilton, Michigan: The Company has agreed to lease a branch office
that is presently under construction.
o Wyoming, Michigan: The Company has agreed to lease a branch office
facility near the corner of 44th Street and Burlingame Avenue in the
City of Wyoming, which is part of metropolitan Grand Rapids, in Kent
County. The Company expects to open this branch in June.
o Holland, Michigan: The Company has purchased land on Lakewood Boulevard
near Bee Line Road in Holland, Michigan, and intends to build an
independent, free-standing branch.
The Bank began offering trust services in January, 1999, to further provide
for the financial needs of its customers. As of March 31, 1999, the Trust
Department had assets of approximately $40.0 million.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998, and as adjusted to reflect the sale of the shares of Common
Stock offered hereby:
<TABLE>
December 31, 1998
As Adjusted As Adjusted
if 600,000 if 1,200,000
Shares are Shares are
Actual Sold (1) Sold (2)
(unaudited) (unaudited)
<S> <C> <C> <C>
Long-term and short-term debt.................................... $ 2,000,000 $ 2,000,000 $ 2,000,000
============ =========== ============
Shareholders' equity:
Preferred stock, no par value, 500,000 shares
authorized, no shares issued and outstanding................ -- -- --
Common stock, no par value, 9,500,000 shares
authorized; 2,435,125 shares issued and
outstanding; 3,035,125 shares as adjusted
if 600,000 shares are sold; 3,635,125 shares
as adjusted if 1,200,000 shares are sold(3)................. 22,260,646 29,800,646 37,450,646
Retained deficit(4)........................................... (2,654,076) (2,654,076) (2,654,076)
Accumulated other comprehensive income,
net of income tax of $2,482................................. 4,818 4,818 4,818
----------- ----------- -----------
Total shareholders' equity.............................. $19,611,388 $27,151,388 $34,801,388
=========== =========== ===========
- --------------------------
</TABLE>
(1) Adjusted to reflect the estimated net proceeds if 600,000 shares are sold.
See "Use of Proceeds."
(2) Adjusted to reflect the estimated net proceeds if 1,200,000 shares are
sold. See "Use of Proceeds."
(3) Does not include an aggregate of 38,000 shares issuable pursuant to options
granted under the Company's Directors Stock Option Plan or an aggregate of
85,500 shares issuable pursuant to options granted under the Company's
Employee Stock Compensation Plan. See "Management -- Executive
Compensation."
(4) The retained deficit includes pre-opening expenses related principally to
fees and expenses incurred in the regulatory application process and
salaries, office occupancy costs and supplies, together with operating
losses following the commencement of operations by the Bank.
14
<PAGE>
DILUTION
Net Tangible Book Value. The net tangible book value (total tangible assets
minus total liabilities) of the Company as of December 31, 1998, was
$19,611,388, or $8.05 per share of Common Stock outstanding on such date.
If 600,000 Shares are Sold. Assuming the sale of 600,000 of the shares of
Common Stock offered hereby (at the public offering price of $12.75 per share)
and the application of the net proceeds therefrom (after deducting estimated
offering expenses), the pro forma net tangible book value of the Company as of
December 31, 1998, would have been $27,151,388, or $8.95 per share of Common
Stock outstanding on such date. This represents an immediate increase in pro
forma net tangible book value per share of $0.90 for all shares outstanding
prior to this offering.
If 1,200,000 Shares are Sold. Assuming the sale of all of the 1,200,000
shares of Common Stock offered hereby (at the public offering price of $12.75
per share) and the application of the net proceeds therefrom (after deducting
estimated offering expenses), the pro forma net tangible book value of the
Company as of December 31, 1998, would have been $34,801,388, or $9.57 per share
of Common Stock outstanding on such date. This represents an immediate increase
in pro forma net tangible book value per share of $1.52 for all shares
outstanding prior to this offering.
The following table illustrates the per share dilution:
<TABLE>
If 600,000 If 1,200,000
Shares are Sold(1) Shares are Sold(1)
<S> <C> <C> <C> <C>
Offering price per share............................ $12.75 $12.75
Net tangible book value per share before
the Offering(1)............................... $8.05 $8.05
Increase per share attributable to new
shares........................................ 0.90 1.52
---- -----
Pro forma net tangible book value per share
after the Offering(1)............................ 8.95 9.57
----- -----
Dilution per share to shareholders purchasing
shares........................................... $3.80 $3.18
===== =====
</TABLE>
- -------------------------
(1) Does not include 123,500 shares of Common Stock reserved for issuance
upon the exercise of stock options outstanding as of April 1, 1999,
which have exercise prices ranging from $10.00 to $16.50, nor does it
include shares of Common Stock available for the future grant of stock
options under the Company's Stock Compensation Plan (114,500 shares) or
Directors Stock Option Plan (2,000 shares). See "Management --
Executive Compensation."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's initial plan of operation in November 1997 was to establish
its management team within the first few months of its operations. Management
believes that it has been successful in establishing a very experienced and
capable management team which can administer the Company's growth.
The Company has experienced rapid and substantial growth as total assets
increased from $10,722,193 at December 31, 1997, to $189,228,673 at December 31,
1998. At December 31, 1998, the Bank had a total of eight branch banking offices
and two service facilities. The Company also completed an underwritten initial
public offering of common stock on April 7, 1998. Although management believes
the Company will continue to grow in 1999, the rate of increase is not expected
to be as rapid as it was in 1998.
The Bank established a Trust Department in the fourth quarter of 1998 to
further provide for customers' financial needs. The Trust Department began
business on January 3, 1999 and as of March 31, 1999, had assets of
approximately $40 million.
Financial Condition
Total assets of the Company increased by $178,506,480 to $189,228,673 at
December 31, 1998, from $10,722,193 at December 31, 1997. The increase in assets
is primarily attributable to the Bank continuing to attract customer deposits
and then lending and otherwise investing these funds. The fourth quarter of 1998
was the Company's fourth full quarter of operations, and the number of deposit
accounts increased from 465 at December 31, 1997, to more than 14,000 deposit
accounts at December 31, 1998. Management attributes the strong growth in
deposits to quality customer service, the desire of customers to deal with a
local bank, and convenient accessibility through the expansion of branches. In
addition, the Company's public offering of common stock in April 1998 resulted
in net proceeds to the Company, and an increase in total assets, of $14,123,378.
The Company anticipates that the Bank's assets will continue to increase during
1999, which will be the Bank's second full year of operations. However,
management does not believe that the rate of increase will be as rapid as it was
during 1998.
Cash and cash equivalents, which include federal funds sold and short-term
investments, increased $10,538,057 to $17,953,177 at December 31,1998, from
$7,415,120 at December 31, 1997. The increase is primarily the result of deposit
growth since December 31, 1997, and the initial public offering.
Securities available for sale increased $25,006,900 to $27,007,300 at
December 31, 1998 from $2,000,400 at December 31, 1997. The increase is the
result of the investment of customer deposits that have been obtained since
December 31, 1997.
Total loans increased $137,384,556 to $137,882,260 at December 31, 1998
from $497,704 at December 31, 1997. While management believes that total loans
will continue to increase, the rate of increase in the future will be
substantially less than the rate of increase during the Company's first full
year of operations.
The allowance for loan losses as of December 31, 1998 was $2,030,000
representing approximately 1.5% of gross loans outstanding, compared to $7,500
at December 31, 1997. Macatawa Bank has not experienced any material credit
losses as of December 31, 1998.
Bank premises and equipment increased to $7,125,755 at December 31, 1998
from $681,807 at December 31, 1997. The increase resulted from the purchase of
the Butternut Drive and Maple Avenue branch offices in Holland, the purchase of
the real estate and construction of the facilities for the Zeeland, Allendale
and Jenison branch offices, as well as additional furniture, fixtures and
equipment necessary to operate the Bank branches.
Deposits increased to $166,988,675 at December 31, 1998, from $2,712,223 at
December 31, 1997. This was primarily as a result of deposits being obtained
from new customers of the Bank.
16
<PAGE>
Results of Operations
Comparative information on results of operations between 1997 and 1998 is
not provided because the Bank commenced operations on November 25, 1997, and,
therefore, had only six weeks of operations during 1997.
The net loss for the year ended December 31, 1998, was $2,488,551. As of
December 31, 1997, the Company had a retained deficit of $165,525, and as of
December 31, 1998, the Company had a retained deficit of $2,654,076. The
retained deficit and net losses are primarily the result of provisions for loan
losses which totaled $2,022,500. Wages paid to employees and fees and expenses
incurred in forming the Company and applying for regulatory approval for the
Bank's existing and proposed branches also contributed to the retained deficit
and net losses. Management believes that the Company will realize a modest
profit for 1999. Earnings will continue to be curtailed for much of 1999 as a
result of additional loan loss reserves, together with the time needed to more
effectively utilize its capital and generate loan interest and fee income by
making additional loans. Management believes that the expenditures made in 1997
and 1998 will create the infrastructure and lay the foundation for future growth
and profitability in subsequent years.
Interest income for the year ended December 31, 1998 was $6,804,105,
related to interest income on securities, loans, and interest earning deposits.
Interest expense was $3,190,237 for the year ended 1998, related to interest
incurred on interest bearing deposits.
The Company had an allowance for loan losses of approximately 1.5% of total
loans at December 31, 1998. The provision for loan losses for the year ended
December 31, 1998 was $2,022,500. This amount was provided as a result of the
increase in the total loan portfolio. Management considered it prudent during
the first year of operations to provide for loan losses at a relatively high
percentage of total loans to be consistent with the loss inherent in similar
loan portfolios. Management will continue to monitor its loan loss performance
and adjust its loan loss reserve to more closely align itself to its own history
of loss experience. This may reduce its loan loss reserve as a percentage of
total loans in the future.
Non-interest income for the year ended December 31, 1998, was $683,382,
consisting primarily of gain on sales of loans. These loans consisted primarily
of conforming mortgage loans which were sold to the secondary market. Management
believes this activity will continue to be a significant source of non-interest
income in 1999. At the present time, the Bank is not servicing the loans it
sells, but may consider doing so in the future.
The main components of non-interest expense were primarily salaries and
benefits. Non-interest expense for the year ended December 31, 1998, was
$4,763,301. Other significant components of non-interest expense consisted of
occupancy and equipment expenses, legal and accounting fees, marketing expenses,
insurance and supplies.
Liquidity and Capital Resources
The Company obtained its initial equity capital as a result of a private
placement on behalf of the Bank to investors in November, 1997. The Company
raised additional equity capital in its initial public offering completed April
7, 1998, which resulted in net proceeds of $14,123,378. Given the rapid growth
of the Bank, it is expected that additional equity capital will be required
during 1999. The purpose of this offering is to raise such additional equity
capital.
As a condition to regulatory approval of the Bank's formation, the Bank is
required to maintain capitalization sufficient to provide a ratio of Tier 1
Capital to total assets of at least 8% at the end of the third year of its
operations. At December 31, 1998, the Bank's Tier 1 Capital as a percent of
total assets was 10.7%. The Company has approximately $1 million in additional
capital which it could contribute to the Bank's capital if necessary.
The Company's sources of liquidity include loan payments by borrowers,
maturity and sales of securities available for sale, growth of deposits and
deposit equivalents, federal funds sold, borrowings from the Federal Home Loan
Bank, and the issuance of common stock.
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. Liquidity management involves the ability to meet the cash flow
17
<PAGE>
requirements of the Company's customers. These customers may be either borrowers
with credit needs or depositors wanting to withdraw funds. Management of
interest rate sensitivity attempts to avoid widely varying net interest margins
and to achieve consistent net interest income through periods of changing
interest rates.
Year 2000 Compliance
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements. The Company and the Bank were organized in 1997
and the Company acquired its computer equipment within the past eighteen months
and has contracted with a leading supplier of information processing services.
This equipment and these services were purchased with manufacturer assurances of
Year 2000 compliance.
Company management has developed and the Board of Directors has approved a
comprehensive Year 2000 Compliance Plan. The plan consists of five phases:
awareness, assessment, renovation, validation and implementation. The Company
has an internal task force to assess Year 2000 compliance by the Company, its
vendors, and major deposit customers. In addition, the Bank asks commercial
borrowers about Year 2000 compliance as part of the loan application and review
process.
To date, the Company has spent approximately $28,000 on Year 2000
compliance. Management believes that the additional costs to complete the
Company's Year 2000 compliance will be minimal.
The Company presently anticipates that it will complete its Year 2000
assessment and any necessary remediation by June 30, 1999. However, there can be
no assurance that the Company will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the Company
may be adversely affected by the inability of other companies whose systems
interact with the Company to become Year 2000 compliant.
The Bank's core processing applications are provided by a third party
vendor, Rurbanc Data Services, Inc. (RDSI). The Company receives regular
correspondence from RDSI which documents the status of their Year 2000
compliance. The Company has been advised that RDSI's software has been
successfully tested for Year 2000 compliance.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company is in the process of preparing a contingency
plan that will specify what it plans to do if important internal or external
systems are not Year 2000 compliant in a timely manner.
Management does not anticipate that the Company will incur material
operating expenses or be required to invest heavily in computer system
improvements to be Year 2000 compliant. Nevertheless, the inability of the
Company to successfully address Year 2000 issues could result in interruptions
in the Company's business and have a material adverse effect on the Company's
results of operations.
Recent Regulatory Developments
Various bills have been introduced in the Congress that would allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. While the
scope of permissible nonbanking activities and the conditions under which the
new powers could be exercised varies among the bills, the expanded powers
generally would be available to a bank holding company only if the bank holding
company and its bank subsidiaries remain well-capitalized and well-managed. The
bills also impose various restrictions on transactions between the depository
institution subsidiaries of bank holding companies and their non-bank
affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new nonbanking activities permitted to such
affiliates. At this time, the Company is unable to predict whether any of the
pending bills will be enacted and, therefore, is unable to predict the impact
such legislation may have on the operations of the Company and the Bank.
18
<PAGE>
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
19
<PAGE>
BUSINESS
General
We own Macatawa Bank which provides a full range of commercial and consumer
banking services, primarily in the communities of Holland and Zeeland, Michigan,
as well as the surrounding market area. Our services include checking and
savings accounts, certificates of deposit, safe deposit boxes, travelers checks,
money orders, trust services and commercial, mortgage and consumer loans.
Macatawa Bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law. We opened our Trust Department in
January, 1999. We have eight full service branch offices, a trust office, a
lending office, and an operations center. As of December 31, 1998, we had total
assets of $189.2 million, total deposits of $167.0 million, 14,809 deposit
accounts, and shareholders' equity of $19.6 million.
We incorporated in Michigan in 1997 and own Macatawa Bank. Macatawa Bank
was organized as a Michigan bank and opened for business on November 25,
1997.Our main officers are located at 51 E. Main Street in the City of Zeeland,
Michigan 49464, and our telephone number is (616) 748-9491.
Reason for Starting Macatawa Bank
We believe that many customers want to conduct business with a locally
owned and managed bank. Although the banking industry is competitive, we have
been and believe we will continue to be successful in attracting as customers
individuals and small to medium sized businesses. We attract these customers by
demonstrating an active interest in their business and personal financial
affairs. We also emphasize our local management and their strong ties and active
commitment to the community. We are currently one of only two locally managed
independent commercial banks with a main office in the Holland-Zeeland area. We
are the only local bank with a branch network which underscores our desire to be
close to all of our customers.
Market Area
Our market area includes the cities of Holland and Zeeland, and the
Interstate I-196 corridor from Holland to metropolitan Grand Rapids. Most of our
market area is located in the southern half of Ottawa County, Michigan. This
area includes several growing communities and has a stable and diverse economic
base. The Holland-Zeeland area has a population of approximately 93,000, and
Ottawa County has a population of approximately 200,000. The Holland- Zeeland
area had an estimated median household income in 1997 of approximately $43,600.
Over 300 manufacturers have operations in the Holland-Zeeland area, including
several manufacturers in the office furniture and automotive supply industries.
Major Ottawa County employers include Donnelly Corporation, Herman Miller, Inc.,
Haworth, Inc. and Johnson Controls. We believe that our market area's diverse
commercial base provides significant opportunities for business banking services
as well as personal banking services for the owners and employees of the area's
businesses.
Strategy
We are a customer-driven financial institution focused on providing high
value to clients by delivering products and services in a highly personalized
manner. We have attracted and believe we can continue to attract clients who
prefer to conduct business with a locally-managed bank with multiple convenient
locations that demonstrates an active interest in their business and personal
financial affairs.
We believe that our personal service philosophy enhances our ability to
successfully compete in attracting individuals and small businesses. We actively
solicit retail customers and compete for deposits by offering customers personal
attention, professional service, competitive interest rates and multiple
convenient locations. Our experienced staff provides a superior level of
personalized service, which enables us to generate competitively priced loans
and deposits.
20
<PAGE>
We have entered into agreements with third-party service providers to
provide customers with products and services such as credit cards, debit cards,
ATM cards and banking by personal computer. Using third-party service providers
allows us to remain at the forefront of technology while minimizing the costs of
delivery.
Products and Services
Deposit Services. The Bank offers a broad range of deposit services,
including checking accounts, NOW accounts, savings accounts and time deposits of
various types. Transaction accounts and time certificates are tailored to the
principal market area at rates competitive with those offered in the area. All
deposit accounts are insured by the FDIC up to the maximum amount permitted by
law. The Bank solicits these accounts from individuals, businesses,
associations, financial institutions and government authorities. The Bank does
not intend to accept brokered deposits. The Bank may also use alternative
funding sources as needed, including advances from the Federal Home Loan Bank,
conduit financing and the packaging of loans for securitization and sale.
Real Estate Loans. The Bank originates residential mortgage loans, which
are generally long-term with either fixed or variable interest rates. The Bank's
general policy, which is subject to review by management as a result of changing
market and economic conditions and other factors, is to retain all variable
interest rate mortgage loans in the Bank's loan portfolio and to sell most fixed
rate loans in the secondary market. The Bank also offers home equity loans. The
Bank's current policy is to sell the servicing rights with respect to most
residential mortgage loans that it originates.
The retention of variable rate loans on the Bank's loan portfolio helps to
reduce the Bank's exposure to fluctuations in interest rates. However, such
loans generally pose credit risks different from the risks inherent in fixed
rate loans, primarily because as interest rates rise, the underlying payments
from the borrowers rise, thereby increasing the potential for default.
Personal Loans and Credit. The Bank makes personal loans, lines of credit
and credit cards available to consumers for various purposes, such as the
purchase of automobiles, boats and other recreational vehicles, home
improvements and personal investments. The Bank's current policy is to retain
substantially all of such loans.
Commercial Loans. Commercial loans are made primarily to small and
mid-sized businesses. These loans are and will be both secured and unsecured and
are made available for general operating purposes, acquisition of fixed assets
including real estate, purchases of equipment and machinery, financing of
inventory and accounts receivable, as well as any other purposes considered
appropriate. The Bank generally looks to a borrower's business operations as the
principal source of repayment, but will also receive, when appropriate,
mortgages on real estate, security interests in inventory, accounts receivable
and other personal property and/or personal guarantees.
Although the Bank takes a progressive and competitive approach to lending,
it stresses high quality in its loans. Because of the Bank's local nature,
management believes that quality control should be achievable while still
providing prompt and personal service. On a monthly basis, the Board of
Directors reviews selected loans made in the preceding month. In addition, a
loan committee of the Board of Directors of the Bank also reviews larger loans
for prior approval when the loan request exceeds the established limits for the
senior officers. The Bank also maintains a continuous loan review process
designed to promote early identification of credit quality problems. The Bank's
credit review administrator will be responsible for conducting a continuous
internal review which tests compliance with the Bank's loan policy and adequate
documentation of all loans. Any past due loans and identified problem loans will
be reviewed with the Board of Directors on a monthly basis.
Regulatory and supervisory loan-to-value limits are established by Section
304 of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The Bank's internal limitations follow those limits and in certain
cases are more restrictive than those required by the regulators.
The Bank has established relationships with correspondent banks and other
independent financial institutions to provide other services requested by its
customers, including loan participations where the requested loan amounts exceed
the Bank's policies or legal lending limits.
21
<PAGE>
Trust Services. The Bank began offering trust services in January, 1999, to
further provide for the financial needs of its customers. As of March 31, 1999,
the Trust Department had assets of approximately $40.0 million.
Competition
The banking industry in the Bank's market area has experienced substantial
consolidation in recent years. Many of the area's locally owned or managed
financial institutions have either been acquired by large regional bank holding
companies or have been consolidated into branches of other financial
institutions. This consolidation has been accompanied by numerous pricing
changes, the dissolution of local boards of directors, management and personnel
changes and, in the perception of the Company's management, a decline in the
level of customer service. With recent changes in interstate banking regulation,
this type of consolidation is expected to continue.
Management believes that this competitive situation, when coupled with the
area's growing and diversified economy, creates a favorable opportunity for a
new commercial bank managed by experienced local business people. Management's
experience indicates that a locally managed community bank can attract customers
by providing highly professional personalized attention, responding in a timely
manner to product and service requests and exhibiting an active interest in
customers' business and personal financial needs. The Bank is currently one of
only two locally managed independent commercial banks with its main office in
the Holland-Zeeland area. However, the Bank is the only local commercial bank
which has a branch network. Management is aware of one savings and loan
headquartered in the Holland-Zeeland area.
The Company's primary market area is Ottawa County, Michigan. There are
many bank, thrift and credit union offices located within the Company's market
area. Most are branches of larger financial institutions. The Company also faces
competition from finance companies, insurance companies, mortgage companies,
securities brokerage firms, money market funds and other providers of financial
services. Most of the Company's competitors have been in business a number of
years, have established customer bases, are larger and have higher lending
limits than the Company. The Company competes for loans principally through its
ability to communicate effectively with its customers and to understand and meet
their needs. Management believes that the Company's personal service philosophy
enhances its ability to compete favorably in attracting individuals and small
businesses. The Company actively solicits customers and competes for deposits by
offering customers personal attention, professional service, competitive
interest rates and multiple conveniently located offices.
Employees
As of December 31, 1998, the Bank had 88 full-time and 24 part-time
employees. The Company has assembled a staff of experienced, dedicated and
highly qualified professionals whose goal is to provide outstanding service. The
majority of the Company's management team have at least 10 years of banking
experience, and several key personnel have more than 20 years of banking
experience.
Properties
The Company's headquarters and the Bank's main office is located at 51 E.
Main Street, Zeeland, Michigan 49464, and the telephone number is (616)
741-1491. The main office consists of approximately 1,700 square feet located on
the first floor of an office building and approximately 1,500 square feet in the
basement. This location is in the heart of the City of Zeeland on Main Street,
which management believes provides recognition and a visible presence in the
Holland-Zeeland community. The main office includes three teller stations, two
customer service offices, two administrative offices, and a vault and safe
deposit boxes. The Bank has entered into a three year lease with respect to its
main office, with renewal options for up to four successive three year terms.
The initial rental rate is $800.00 per month, which increases by 7.5% for each
three year renewal period. The Bank is also obligated to pay all costs
associated with taxes, assessments, maintenance, utilities and insurance.
22
<PAGE>
The Company owns or leases facilities located in Ottawa County and Kent
County, Michigan. The Company's facilities as of March 31, 1999, were as
follows:
Location of Facility Use
-------------------- ---
51 E. Main Street, Zeeland* Main Branch
250 E. 8th Street, Holland* Operations Center
139 E. 8th Street, Holland* Branch Office
489 Butternut Dr., Holland Branch Office
701 Maple Avenue, Holland Branch Office
699 E. 16th Street, Holland* Branch Office
106 E. 8th Street, Holland* Trust Department
348 Waverly Road, Holland* Retail Loan Center
41 N. State Street, Zeeland Branch Office
2020 Baldwin Street, Jenison Branch Office
6299 Lake Michigan Dr., Allendale Branch Office
*Leased facility
The Company believes its facilities are well-maintained and adequately
insured. Because of the Company's growth, the Company is continually evaluating
the need for additional space and branches. The Bank currently has branch
applications pending for two new offices in the northwest portion of Allegan
County and one new office in the City of Wyoming on the southwest side of
Metropolitan Grand Rapids.
Selected Statistical Data
Selected Statistical Data for Macatawa Bank Corporation is presented for
1998. Macatawa Bank commenced operations on November 25, 1997, and therefore the
Guide 3 Statistical Disclosure by Bank Holding Companies would not be meaningful
for 1997 and is not included.
Table 1 Performance Ratios (in thousands, except per share data).
<TABLE>
Year Ended
December 31, 1998
-----------------
<S> <C>
Net Loss...................................... $(2,489)
Per share of common stock................... (1.22)
Earnings (Loss) ratios:
Return on average assets.................... (2.91%)
Return on average equity.................... (15.15%)
Average equity to average assets............ 19.59%
Dividend payout ratio....................... N/A
</TABLE>
Net Interest Income
The following schedule presents the average daily balances, interest income
and interest expense and average rates earned and paid for the Company's major
categories of assets, liabilities, and stockholders' equity for the periods
indicated:
23
<PAGE>
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Year ended December 31, 1998
Average Yield/
Balance Interest Cost
<S> <C> <C> <C>
Assets:
Short term investments $ 9,027 $ 479 5.31%
Securities:
Taxable 16,471 980 5.99
Tax-exempt ------- ------- -----
Loans(1) 60,299 5,339 8.85
Total earning assets/total interest 85,797 6,804 7.93
income
Cash and due from banks 4,523
Unrealized Gain(Loss) 3
All other assets 3,845
Allowance for loan loss (829)
Total assets 93,339
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts 46,163 1,990 4.31
Time 20,899 1,196 5.72
Fed Funds Purchased 78 4 5.13
Other Borrowed Money ------- ------- -----
Total interest bearing liabilities/ 67,140 3,190 4.75
total interest expense
Noninterest bearing deposits 8,991
All other liabilities 313
Stockholders' Equity:
Unrealized Holding Gain(Loss) 2
Common Stock, Surplus, Retained 16,893
Earnings
Total liabilities and 93,339
stockholders' equity
Interest spread 3,614
Net interest income-FTE 3.18
Net Interest Margin as a Percentage 4.21
of Average Earning Assets - FTE
</TABLE>
24
<PAGE>
(1) Nonaccruing loans are not significant during the periods indicated, and
for purposes of the computations above, are included in the average
daily loan balances.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. Cost of funds are influenced by economic conditions and activities of the
Federal Reserve. The Bank's asset/liability committee seeks to manage sources
and uses of funds, and to monitor the gap in maturities of these funds to
maintain a steady net interest margin in varying market conditions.
Table 3 - Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Year Ended
December 31, 1998
<S> <C>
As a percent of average earning assets
Loans........................................ 70.28%
Other earning assets......................... 29.72%
Average earning assets.................... $85,797,230
Savings and NOW accounts..................... 68.76%
Time deposits................................ 31.13%
Other borrowings............................. 0.11%
Average interest bearing liabilities...... $67,140,576
Earning asset ratio............................ 1.28%
</TABLE>
Table 4 - Noninterest Income (in thousands)
<TABLE>
Year Ended
December 31, 1998
<S> <C>
Service charges on deposit accounts ......... $ 157
Net gains (losses) on asset sales:
Loans...................................... 521
Securities................................. 0
Other........................................ 5
Total noninterest income................ $ 683
</TABLE>
Non-interest Income
Non-interest income consists of service charges on deposit accounts,
service fees and gains from sales of residential mortgage loans.
25
<PAGE>
Table 5 Net Gains on the Sale of Residential Real Estate Mortgage Loans
(in thousands)
<TABLE>
Year Ended
December 31, 1998
<S> <C>
Real estate mortgage loan originations....... $44,146
Real estate mortgage loan sales.............. 44,667
Net gains on the sale of real 521
estate mortgage loans....................
Net gains as a percent of real
estate mortgage loan sales............... 1.17%
</TABLE>
The Bank sells the majority of its fixed-rate obligations. Such loans are
sold without recourse.
Noninterest Expense
Table 6 - Noninterest Expense (in thousands)
<TABLE>
Year Ended
December 31, 1998
<S> <C>
Salaries and employee benefits............... $2,726
Occupancy and equipment...................... 305
Furniture and equipment expense.............. 253
Legal and professional fees.................. 157
Advertising.................................. 199
Supplies..................................... 233
Data processing fees......................... 197
Check printing fees.......................... 89
Other outside services....................... 76
Organizational expenses...................... 66
Other expenses............................... 462
------
Total noninterest expense.................. $4,763
</TABLE>
Table 6 lists the Bank's most significant noninterest expenses.
26
<PAGE>
Table 7 - Loan Portfolio Composition (in thousands)
<TABLE>
Year Ended
December 31, 1998
Balance %
<S> <C> <C>
Commercial Real Estate....................... $ 14,058 10%
Residential Real Estate...................... 22,529 16
Other Commercial............................. 81,611 60
Consumer..................................... 19,684 14
-------- ----
Total loans............................... $137,882 100%
Less:
Allowance for Loan Losses................... (2,030)
--------
Total Loans Receivable, Net.................. $135,852
========
</TABLE>
Table 8 Maturities and Sensitivities of Loans in Interest Rates
The following table shows the amount of total loans outstanding as of
December 31, 1998 which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
<TABLE>
Maturing
(in thousands of dollars)
After one but
Within one Year within five years After five years Total
<S> <C> <C> <C> <C>
Commercial Real Estate............... $ 2,639 $8,785 $2,634 $14,058
Residential Real Estate.............. 6,411 906 15,212 22,529
Other Commercial..................... 31,439 44,885 5,287 81,611
Consumer............................. 1,282 15,060 3,342 19,684
-------- ------ ------- --------
Totals......................... $41,771 $69,636 $26,475 $137,882
Allowance for Loan Losses............ (2,030)
--------
Total Loans Receivable, Net.......... $135,852
========
</TABLE>
27
<PAGE>
Below is a schedule of the amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate Total
<S> <C> <C> <C>
Due within 3 months.................................... $ 6,447 $40,861 $47,308
Due after 3 months within 1 year....................... 19,145 47 19,192
Due after one but within five years.................... 53,331 2,612 55,943
Due after five years................................... 13,928 1,511 15,439
------ ------- ---------
Total.................................................. $92,851 $45,031 $137,882
Allowance for Loan Losses.............................. (2,030)
---------
Total Loans Receivable, Net............................ $135,852
========
</TABLE>
Table 9 - Nonperforming Assets (in thousands)
There are no nonperforming loans as of December 31, 1998. Management
believes that the allowance for loan losses is adequate for the lending
portfolio. Loan performance is reviewed regularly by external loan review
specialists, loan officers, and senior management. When reasonable doubt exists
concerning collectibility of interest or principal, the loan will be placed in
nonaccrual status. Any interest previously accrued but not collected at that
time will be reversed and charged against current earnings. As of December 31,
1998 there were no other interest bearing assets which required classification.
Management is not aware of any recommendations by regulatory agencies, which, if
implemented, would have a material impact on the Company's liquidity, capital or
operations.
28
<PAGE>
Table 10 - Loan Loss Experience(in thousands)
The following is a summary of loan balances at the end of each period and
their daily average balances, changes in the allowance for possible loan losses
arising from loans charged off and recoveries on loans previously charged off,
and additions to the allowance which have been expensed.
<TABLE>
Year Ended
December 31, 1998
<S> <C>
Loans:
Average daily balance of loans for the year.................... $60,299
Amount of loans outstanding at end of period................... 137,882
Allowance for loan losses:
Balance at beginning of year................................... 7.5
Additions to allowance charged to operations................... 2,023
Balance at end of year................................... 2,030.5
Ratios:
Net (recoveries) charge offs................................... 0
Allowance for loan losses to loans outstanding at year end..... 1.47%
</TABLE>
Table 11 - Allocation of the Allowance for Loan Losses (in thousands)
The allowance for loan losses is analyzed quarterly by management. In so
doing, management assigns a portion of the allowance to the entire portfolio by
type, and specific credits that have been identified as problem loans and
reviews past loss experience. The local economy and particular concentrations
are considered, as well as a number of other factors.
<TABLE>
Year ended December 31, 1998
% of each
category
Allowance to total
Amount loans
<S> <C> <C>
Commercial.................... $ 871 42.9%
Real estate mortgages......... 57 2.8
Consumer...................... 165 8.1
Unallocated................... 937 46.2
------ ------
Total....................... $2,030 100.0%
====== ======
</TABLE>
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type.
29
<PAGE>
Table 12 - Securities Available for Sale Portfolio (in thousands)
<TABLE>
Year Ended
December 31, 1998
<S> <C>
U. S. Treasury and U.S. Government Agencies..................... $27,007
</TABLE>
Excluding those holdings of the investment portfolio in U.S. Treasury and
U.S. Government Agency Securities, there were no investments in securities of
any one issuer which exceeded 10% of shareholders' equity.
Table 13 - Schedule of Maturities of Investment Securities and Weighted Average
Yields
The following is a schedule of maturities and their weighted average yield
of each category of investment securities as of December 31, 1998.
<TABLE>
Maturing
(Dollars in Thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
Estimated Estimated Estimated Estimated Estimated
Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury
and U.S.
Government
Agencies 0 0% 26,002 5.85 1,005 6.00 0 0% 0 0%
</TABLE>
Table 14 - Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the
weighted average rates paid thereon.
<TABLE>
Average for the Year 1998
Amount Average Rate
<S> <C> <C>
Noninterest bearing demand........... $ 8,991 0%
NOW accounts......................... 10,420 3.0
MMDA/Savings ........................ 35,743 4.7
Time................................. 20,899 5.7
------ ---
Total Deposits.................... $76,053 4.2%
</TABLE>
30
<PAGE>
Table 15 - Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1998:
<TABLE>
Amount
<S> <C>
Three months or less............................. $ 7,700,408
Over 3 months through 6 months................... 3,858,566
Over 6 months through 1 year.................... 3,675,228
Over 1 year...................................... 11,855,896
------------
$27,090,098
============
</TABLE>
The Bank operates in a very competitive environment. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive with the market. Management also attempts to offer a wide
variety of products to meets the needs of its customers. The Bank offers
business and consumer checking accounts, regular and money market savings
accounts, and certificates having many options in their terms.
Table 16 - Capital Resources (in thousands)
<TABLE>
Tier 1
Leverage Tier 1 Total Risk-Based
Ratio Capital Ratio Capital Ratio
<S> <C> <C> <C>
Minimum regulatory requirement............ 4% 4% 8%
Well capitalized regulatory level......... 5% 6% 10%
Consolidated.............................. 11.8% 11.3% 12.4%
Bank...................................... 11.2% 10.7% 11.9%
</TABLE>
The following table shows the amounts by which the Corporation's capital
(on a consolidated basis) exceeds current regulatory requirements on a dollar
amount basis:
<TABLE>
Total
Tier 1 Tier 1 Risk-based
Leverage Capital Capital
(In Thousands of Dollars)
<S> <C> <C> <C>
Capital balances at December 31, 1998
Required regulatory capital.................. $ 6,676 $ 6,961 $ 13,923
Capital in excess of regulatory minimums
for capital adequacy....................... $12,931 $12,646 $ 7,714
------- ------- -------
Actual capital balances......................... $19,607 $19,607 $21,637
======= ======= =======
</TABLE>
31
<PAGE>
Table 17 - Asset/Liability Gap Position (in thousands)
<TABLE>
December 31, 1998
0-3 4-12 1-5 5+
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Short-term investments.................. $ 4,500 $ 2,000 $ 0 $ 0 $ 6,500
Securities.............................. 0 0 26,002 1,005 27,007
Loans................................... 47,308 19,192 55,943 15,439 137,882
Total interest earning assets........... 51,808 21,192 81,945 16,444 171,389
Interest bearing liabilities:
Savings & NOW........................... 99,329 0 0 0 99,329
Time.................................... 10,177 15,486 23,448 31 49,142
Total deposits.......................... 109,506 15,486 23,448 31 148,471
Other borrowings........................ 2,000 0 0 0 2,000
Total interest bearing liabilities..... 111,506 15,486 23,448 31 150,471
Rate sensitivity gap and ratios:
Gap for period.......................... (59,698) 5,706 58,497 16,413 20,918
Cumulative gap.......................... (59,698) (53,992) 4,505 20,918
Percent of cumulative gap to
total assets............................ (32%) (29%) 2% 11%
</TABLE>
32
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and the Bank are as
follows:
<TABLE>
Positions with Positions with
Name Age the Company the Bank
<S> <C> <C> <C>
Benj. A. Smith, III............................ 55 Chairman, Chief Chairman and Director
Executive Officer and
Director
Philip J. Koning............................... 44 Secretary, Treasurer President and Director
and Director
James L. Batts................................. 40 Director Director
G. Thomas Boylan............................... 76 Director Director
Jessie F. Dalman............................... 65 Director Director
Robert E. DenHerder............................ 44 Director Director
Wayne J. Elhart................................ 44 Director Director
Brian J. Hansen................................ 50 Director Director
James L. Jurries............................... 57 Director Director
John F. Koetje................................. 63 Director Director
</TABLE>
The Company has a classified board of directors, with directors serving
staggered three-year terms which expire at the relevant annual shareholders
meeting. The terms of Messrs. Smith, Batts, Boylan and Elhart expire in 2000,
the terms of Ms. Dalman and Messrs. Hansen and Koetje expire in 2001 and the
terms of Messrs. Koning, DenHerder and Jurries expire in 2002. There are no
family relationships between or among any of the directors or executive officers
named above. The Company will maintain at least two independent directors on its
board.
Committees of the Bank
The Board of Directors of the Bank had six meetings in 1998. During 1998,
each of the directors attended more than 75% of the combined aggregate number of
Board meetings and meetings of Board committees on which each served. The Bank
also has several committees, composed as follows: Loan Committee (Messrs. Smith,
Koning, Boylan, DenHerder and Hansen); Investment Committee (Messrs. Smith,
Koning and Boylan); and Audit Committee (Messrs. Elhart and Jurries and Ms.
Dalman).
33
<PAGE>
Experience of Directors and Executive Officers
The experience and backgrounds of the directors and executive officers of
the Company and the Bank are summarized below:
Benj. A. Smith, III is the Chairman, Chief Executive Officer and a director
of the Company and is also Chairman and a director of the Bank. Mr. Smith is an
investment advisor and has served from 1992 to the present as the President of
Smith & Associates Investment Management Services, an investment management firm
located in Holland, Michigan. Prior to 1992, Mr. Smith gained 21 years of
banking experience at FMB and its subsidiary FMB- First Michigan Bank of
Zeeland, Michigan. During his employment at FMB he was responsible for the
consolidation of the trust department and investment function under a registered
investment advisor, the development and introduction of mutual funds at FMB, the
establishment of a broker-dealer operation and the implementation of various
employee compensation and stock ownership plans. From 1991 to 1992, Mr. Smith
served as Chief Executive Officer of FMB- Financial Group, a wholly owned
subsidiary of FMB, which was comprised of a life insurance subsidiary, a trust
services bank, a registered broker-dealer and an investment advisory company.
Mr. Smith earned a Bachelor of Science degree from Purdue University and a
Master of Business Administration, Finance, from Indiana State University. Mr.
Smith is a member of the Holland Chamber of Commerce, the Holland Better
Business Bureau and the Holland Country Club.
Philip J. Koning has served as President of the Bank since its inception in
November, 1997, and serves as the Secretary and Treasurer of the Company and as
a director of both the Company and the Bank. Mr. Koning was employed by Smith &
Associates Investment Management Services prior to February 1998. Mr. Koning has
over 23 years of commercial banking experience, most recently from 1984 to 1997
with First of America Bank in Holland, where he served as a Community Bank
President. Mr. Koning earned a Bachelor of Science in Accounting from Grand
Valley State University and a Masters of Business Administration, Finance, from
the Seidman Graduate College at Grand Valley State University. Mr. Koning is
Chairman of the Zeeland Board of Public Works and a member of the Rotary Club of
Holland, the Zeeland Christian School Endowment Committee, HOMECOR (an agency
enhancing neighborhoods through private initiative), the Evergreen Common Board
of Directors, the Holland Economic Development Corporation Board of Directors,
and the Windmill Advisory Committee.
James L. Batts is a director of the Company and the Bank. Mr. Batts has
been employed by Batts Inc., a manufacturer of coat hangers, since 1993, most
recently as Vice President, International. Mr. Batts is a director of the West
Ottawa Public Schools Foundation in Holland, Michigan. Mr. Batts was a director
of the Zeeland Chamber of Commerce from 1991 to 1996, and served as President in
1996. Mr. Batts earned a Bachelor of Business Administration degree in Finance
and a Masters in Business Administration from Western Michigan University.
G. Thomas Boylan is a director of the Company and the Bank. Mr. Boylan is
the President of Light Metals Corporation, a manufacturing company located in
Wyoming, Michigan, where he has been employed since 1947.
Jessie F. Dalman is a director of the Company and the Bank. Ms. Dalman
previously served in the Michigan House of Representatives representing the 90th
District (Holland). Ms. Dalman served as Minority Vice Chair of the Education
Committee and as a member of the Judiciary Committee and the Colleges and
Universities Committee. Prior to her election to the Michigan legislature, Ms.
Dalman served for twelve years as an Ottawa County Commissioner representing
Holland City and Park Township. Ms. Dalman earned a Bachelor of Arts degree in
Business Administration from Michigan State University and a Master of Arts
degree in Economics from the University of Michigan.
Robert E. DenHerder is a director of the Company and the Bank. Mr.
DenHerder is the President of Uniform Color Co., a company located in Holland,
Michigan, which manufactures color concentrate for the plastics industry
focusing on automotive suppliers. Mr. DenHerder has been employed at Uniform
Color Co. since 1981. Mr. DenHerder is a member of the Society of Plastics
Engineers, Ducks Unlimited and the Macatawa Area Coordinating Council.
Wayne J. Elhart is a director of the Company and the Bank. Mr. Elhart has
served since 1990 as the President of Elhart Pontiac GMC Jeep in Holland,
Michigan. Mr. Elhart serves as the President of both the West Michigan
34
<PAGE>
Pontiac Dealers Advertising Association and the Out of State Jeep Dealers
Advertising Association. Mr. Elhart is a graduate of Northwood University where
he earned a Bachelor of Business Administration Degree.
Brian J. Hansen is a director of the Company and the Bank. Mr. Hansen is
the President of Dew-El Portables, Inc., a company located in Holland, Michigan,
which sells and leases modular buildings primarily to the school market, where
he has been employed since 1992. From 1985 to the time he sold the Company in
1994, Mr. Hansen was the president for Dew-El Corporation, a company which sold
products to the school market. Mr. Hansen is a former member of the Board of
Directors of FMB-First Michigan Bank, Zeeland, Michigan. Mr. Hansen is a member
of the Holland Jaycees, the past President of the Holland Chapter of Michigan
Steelheaders and past President and an organizing member of Wildlife Unlimited,
where he is currently chairman of its long range planning development committee
for its outdoor learning center. Mr. Hansen has served on various committees at
Our Lady of the Lake Church and is presently serving as the owner's
representative to the architect/general contractor for the church's building
program. Mr. Hansen is a member, and has served on the Board, of the Holland
Country Club.
James L. Jurries is a director of the Company and the Bank. Mr. Jurries has
served since 1992 as President of Jurries Capital Management, Inc., a real
estate, venture capital and investment company located in Holland, Michigan.
From 1989 to 1992, Mr. Jurries owned and developed a ten-store Blockbuster Video
franchise which he sold to Blockbuster Video in 1992. Mr. Jurries also worked as
a commercial loan officer for seven years. Mr. Jurries earned a Bachelor of Arts
in Economics from Hope College in Holland and a Master of Business
Administration from the University of Michigan. Mr. Jurries is a former member
of the Board of Advisors of First of America-West Michigan. Mr. Jurries is a
past charter board member of Wildlife Unlimited. Currently, Mr. Jurries is a
member of the National Board of Ruffed Grouse Society, the Holland Country Club,
the Chamber of Commerce, and several ad hoc committees of religious, charitable,
and municipal organizations in Holland, Michigan.
John F. Koetje is a director of the Company and the Bank. Mr. Koetje is a
partner in John F. Koetje and Associates, a West Michigan builder of residential
and light commercial real estate and apartment complexes where he has been
employed for 35 years. Mr. Koetje is Vice President of the Georgetown Township
EDC Board and is a member of the Grand Rapids Home Builders Association and a
member of the Hudsonville Christian School Society.
Director Compensation
During 1998, directors of the Company and the Bank were not paid any cash
compensation for Board of Directors meetings attended. Directors of the Company
and the Bank were paid $150 per committee meeting attended. Directors are
reimbursed for their out-of-pocket expenses for each meeting attended. During
1999, the directors of the Company and the Bank will receive an annual retainer
of $4,000 and will be paid $500 per board meeting attended and $250 per
committee meeting attended.
Effective March 19, 1998, the Company awarded stock options to purchase
2,000 shares of common stock to each of Messrs. Smith, Batts, Boylan, Den
Herder, Elhart, Hansen, Jurries and Koetje and Ms. Dalman. These stock options
were granted pursuant to the 1998 Directors' Stock Option Plan, have an exercise
price of $10.00 per share, are exercisable beginning March 19, 1999, and expire
on March 19, 2008.
35
<PAGE>
Executive Compensation
The following table sets forth the annual and long-term compensation paid
by the Company to its Chief Executive Officer and the President of the Bank.
(collectively referred to as the "Named Executives") for services rendered to
the Company during 1998, the Company's first full year of operations. No other
executive officers of the Company or the Bank received annual compensation in
excess of $100,000 during 1998.
<TABLE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary sation ($) Options(#) sation
<S> <C> <C> <C> <C> <C>
Benj. A. Smith, III..................... 1998 $32,500 0 31,000 $ 0
Chairman of the Board and
Chief Executive Officer
Philip J. Koning........................ 1998 $144,184 0 12,000 $ 3,020(1)
President of the Bank
Treasurer and Secretary
</TABLE>
(1) Includes a $2,637 automobile allowance and life insurance premiums of $383
paid by the Company.
36
<PAGE>
Option Grants in 1998. Shown below is information on grants of stock
options to the Named Executives pursuant to the Company's Stock Compensation
Plan and the Company's 1998 Directors' Stock Option Plan (the "Option Plans").
<TABLE>
Individual Grants
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock Price
Number of Percent of Appreciation
Securities Total Options For Option
Underlying Granted to Exercise or Term (3)
Options Employees in Base Price Expiration
Name Granted(1) 1998 (per share)(2) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Benj. A. Smith, III 2,000 2.34% $ 10.00 March 19, 2008 $12,578 $31,875
Benj. A. Smith, III 4,000 4.67% $ 10.00 January 25, 2008 25,156 63,750
Benj. A. Smith, III 25,000 29.20% $ 16.50 Nov. 19, 2008 259,419 657,419
Philip J. Koning 4,000 4.67% $ 10.00 January 25, 2008 25,156 63,750
Philip J. Koning 5,000 5.84% $ 10.00 March 19, 2008 31,445 79,687
Philip J. Koning 3,000 3.50% $ 16.50 Nov. 19, 2008 31,130 78,890
</TABLE>
(1) Indicates number of shares which may be purchased pursuant to options
granted under the Company's Stock Compensation Plan and 1998 Directors'
Stock Option Plan as of December 31, 1998. Options may not be exercised
in full or in part prior to the expiration of one year from the date of
grant.
(2) The exercise price equals the prevailing market price of the Common
Stock on the date of grant. The exercise price may be paid in cash, by
the delivery of previously owned shares, through the withholding of
shares otherwise issuable upon exercise or a combination thereof.
(3) These amounts are based on assumed rates of appreciation over the
entire option period without any discount to present value. Actual
gains, if any, on stock option exercises will be dependent on overall
market conditions and on the future performance of the Company's Common
Stock. There can be no assurance that the amounts reflected in this
table will be realized.
37
<PAGE>
Year-End Options Values. Shown below is information with respect to
unexercised options to purchase shares of the Company's Common Stock granted
under the Option Plans to the Named Executives and held by them at December 31,
1998. None of the Named Executives exercised any stock options during 1998.
<TABLE>
Number of Shares Subject to Value of Unexercised
Unexercised Options Held In-the-Money Options at
at December 31, 1998 December 31, 1998(1)
---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benj. A. Smith III........................ 0 31,000 $0 $ 31,500
Philip J. Koning.......................... 0 12,000 $0 $ 47,250
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of unexercised options reflects the increase in market value
of the Company's Common Stock from the date of grant through December
31, 1998 (when the closing price of the Company's Common Stock was
$15.25 per share). Value actually realized upon exercise by the Named
Executives will depend on the value of the Company's Common Stock at
the time of exercise.
Benefits. The Company provides group health and life insurance benefits and
supplemental unemployment benefits to its regular employees, including executive
officers. In January 1999, the Company implemented a 401(k) plan.
Security Ownership of Management. The following table shows, as of February
1, 1999, the number of shares beneficially owned by each of the Named Executives
identified in the executive compensation tables in this prospectus and by all
Directors and Executive Officers as a group. Except as described in the notes
following the table, the following persons have sole voting and dispositive
power as to all of their respective shares.
<TABLE>
Amount and Nature of
Name Beneficial Percent of
Ownership(1) Common Stock
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benj. A. Smith, III............................................... 86,350 3.5%
Philip J. Koning.................................................. 25,500 1.0%
All Executive Officers and Directors as a Group (10 persons) 394,600 15.9%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Footnotes 1 and 3 under "Principal Shareholders."
38
<PAGE>
CERTAIN TRANSACTIONS
Lease of Real Property
The Bank leases its Holland office located at 106 E. 8th Street, Holland,
Michigan 49423, from a corporation wholly owned by Benj. A. Smith, III, the
Chairman and a director of the Company and the Bank. The terms of the lease were
negotiated on an arm's-length basis. The Company believes that the rent and
other terms reflect fair market value. See "Business -- Properties."
Banking Transactions
The directors and officers of the Company and the Bank have had and are
expected to have banking and other transactions with the Company and the Bank in
the ordinary course of business. Related party loans totaled approximately
$4,396,895 at December 31, 1998. All transactions between the Company and
affiliated persons, including 5% shareholders, are and will be on terms no less
favorable to the Company than could be obtained from independent third parties.
Any loans and commitments to lend to such affiliated persons are and will be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unaffiliated
parties of similar creditworthiness.
Indemnification
The Articles and Bylaws of the Company provide for the indemnification of
directors and officers of the Company and the Bank, including reasonable legal
fees, incurred by such directors and officers while acting for or on behalf of
the Company or the Bank as a director or officer, subject to certain
limitations. See "Description of Capital Stock -- Indemnification of Directors
and Officers." The Company has purchased directors' and officers' liability
insurance for directors and officers of the Company and the Bank.
Formation of Bank Holding Company
On February 23, 1998, the Bank became a wholly owned subsidiary of the
Company pursuant to a Consolidation Agreement filed with and approved by the
Federal Reserve Board and the State of Michigan Financial Institutions Bureau.
Pursuant to the Consolidation Agreement, each issued and outstanding share of
common stock of the Bank was converted into 1.15 shares of Common Stock of the
Company. Directors and executive officers of the Company and the Bank held an
aggregate of 135,000 shares of common stock of the Bank and received in exchange
for such shares an aggregate of 155,250 shares of Common Stock of the Company.
Subsequent Transactions
All future material transactions between the Company and its affiliates
will be entered into on terms that are no less favorable to the Company than
those which can be obtained from unaffiliated third parties. Any such
transactions, including any issuance of preferred stock, will be approved by a
majority of the Company's independent directors who do not have an interest in
the transaction and who have had access, at the Company's expense, to the
Company's legal counsel.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth, as of February 1, 1999, certain information
regarding the beneficial ownership of the Common Stock by: (i) each person who
is known to the Company to be the beneficial owner of more than 5% of the Common
Stock, (ii) each of the directors of the Company and (iii) all directors and
executive officers of the Company as a group, both before and after giving
effect to this Offering.
<TABLE>
Shares Percent After Percent After
Common expected to the Offering the Offering
Stock Percent of Class be Purchased if 600,000 if 1,200,000
Beneficially Prior to the in the Shares are Shares are
Name and Address Owned(1) Offering(1) Offering(2) Sold(1) Sold(1)
<S> <C> <C> <C> <C> <C>
Benj. A. Smith, III (3)
167 West 11th Street
Holland, MI 49423........ 86,350 3.5% 40,175 4.2% 3.5%
Philip J. Koning(4)
227 101st Avenue
Zeeland, MI 49464........ 25,500 1.0% 8,250 1.1% 1.0%
James L. Batts
9097 Lake Shore Dr.
West Olive, MI 49460..... 13,500 * 5,750 * *
G. Thomas Boylan
458 Maple Lane
Saugatuck, MI 49453...... 73,750 3.0% 33,875 3.5% 3.0%
Jessie F. Dalman
450 Brecado Court
Holland, MI 49423........ 7,000 * 2,500 * *
Robert E. DenHerder
10836 Riley Street
Holland, MI 49424........ 86,800 3.5% 40,400 4.2% 3.5%
Wayne J. Elhart(5)
2007 Lakeway Dr.
Holland, MI 49423........ 24,250 1.0% 11,125 1.2% 1.0%
Brian J. Hansen
356 Cottage Lane
Holland, MI 49424........ 35,000 1.4% 16,500 1.7% 1.4%
James L. Jurries(6)
444 Brecado Court
Holland, MI 49423........ 38,000 1.5% 13,375 1.8% 1.5%
John F. Koetje
6724 36th Avenue
Hudsonville, MI 49426.... 44,300 1.8% 21,150 2.2% 1.8%
All executive officers
and directors as a group
(10 people).............. 434,450 17.6% 193,100 20.4% 17.0%
- ----------------------
*Less than 1.0%
</TABLE>
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<PAGE>
(1) Except as described in the following notes, each nominee and director
owns the shares directly and has sole voting and investment power or
shares voting and investment power with his or her spouse under joint
ownership. Includes shares of common stock that are issuable under
options exercisable within sixty (60) days. The share ownership of the
following directors includes shares subject to options that are
presently exercisable: Mr. DenHerder (6,000 shares), Mr. Jurries (2,000
shares), Mr. Koning (9,000 shares), Mr. Batts (2,000 shares), Mr.
Boylan (6,000 shares), Mr. Elhart (2,000 shares), Mr. Smith (6,000
shares), Ms. Dalman (2,000 shares), Mr. Koetje (2,000 shares) and Mr.
Hansen (2,000 shares).
(2) Based upon the number of shares of Common Stock that the persons
indicated have informed the Company that they intend to purchase in
this Offering.
(3) Includes 15,900 shares owned by Mr. Smith's spouse. Includes 43,250
shares held in a trust for the benefit of Mr. Smith's spouse. Does not
include 25,000 shares subject to options which are not exercisable
within 60 days.
(4) Does not include 3,000 shares subject to options which are not
exercisable within 60 days.
(5) Includes 5,000 shares owned by Mr. Elhart's spouse.
(6) Includes 27,750 shares held in trusts for the benefit of Mr. Jurries'
children and parents for which Mr. Jurries shares investment and voting
power.
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<PAGE>
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on the Company, the Bank and the business of the Company and the
Bank.
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"),
the Internal Revenue Service, and state taxing authorities. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, if the Commissioner deems the Bank's capital to be
impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
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<PAGE>
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment
leasing, securities brokerage, and consumer and commercial finance company
operations. As a result of recent amendments to the BHCA, well- capitalized and
well-managed bank holding companies may engage de novo in certain types of
non-banking activities without prior notice to, or approval of, the Federal
Reserve Board, provided that written notice of the new activity is given to the
Federal Reserve Board within 10 business days after the activity is commenced.
If a bank company wishes to engage in a non-banking activity by acquiring a
going concern, prior notice and/or prior approval will be required, depending
upon the activities in which the company to be acquired is engaged, the size of
the company to be acquired and the financial and managerial condition of the
acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total assets, and (ii)
a risk-based requirement expressed as a percentage of total risk-weighted
assets. The leverage capital requirement consists of a minimum ratio of Tier 1
capital (which consists principally of shareholders' equity) to total assets of
3% for the most highly rated companies, with minimum requirements of 4% to 5%
for all others. The risk- based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues will be received by it in the form of
dividends, if any, paid by the Bank. Thus, the Company's ability to pay
dividends to its shareholders will indirectly be limited by statutory
restrictions on its ability to pay dividends. See "Supervision and Regulation -
the Bank - Dividends." Further, the Federal Reserve Board has issued a policy
statement on the payment of cash dividends by bank holding companies. In the
policy statement, the Federal Reserve Board expressed its view that a bank
company experiencing earnings weaknesses should not pay cash dividends exceeding
its net income or which can only be funded in ways that weakened the bank
company's financial health, such as by borrowing. Additionally, the Federal
Reserve Board possesses enforcement powers over bank holding companies and
43
<PAGE>
their non-bank subsidiaries to prevent or remedy actions that represent unsafe
or unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks and
bank holding companies. Similar enforcement powers over the Bank are possessed
by the FDIC. The "prompt corrective action" provisions of federal law and
regulation authorizes the Federal Reserve Board to restrict the payment of
dividends by the Company for an insured bank which fails to meet specified
capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution. The Company is authorized to issue preferred stock
but it has no current plans to issue any such preferred stock.
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF. These agencies and the federal and state laws applicable to the Bank and
its operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 1998, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay FICO assessments at a rate equal to
approximately
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<PAGE>
0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding
FICO obligations in 2019, BIF members and SAIF members will share the cost of
the interest on the FICO bonds on a pro rata basis. It is estimated that FICO
assessments during this period will be less than 0.025% of deposits
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly-rated banks with minimum requirements
of 4% to 5% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. Tier 1 capital consists principally of
shareholders' equity. These capital requirements are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, FDIC
regulations provide that higher capital may be required to take adequate account
of, among other things, interest rate risk and the risks posed by concentrations
of credit, nontraditional activities or securities trading activities. As a
condition to regulatory approval of the Bank's formation, the Bank was required
to have an initial capitalization sufficient to provide a ratio of Tier 1
capital to total estimated assets of at least 8% at the end of the third year of
operation.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<TABLE>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the
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<PAGE>
cumulative dividends on preferred stock (should any such stock be issued and
outstanding) have been paid in full. The Bank's Articles of Incorporation do not
authorize the issuance of preferred stock and there are no current plans to seek
such authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by the Bank, if such
payment is determined, by reason of the financial condition of the Bank, to be
an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal shareholders of the Company, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan , or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
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<PAGE>
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "IBBEA") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by IBBEA only if specifically
authorized by state law. The legislation allowed individual states to "opt-out"
of interstate branching authority by enacting appropriate legislation prior to
June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC- insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a Michigan-
chartered bank of all or substantially all of the assets of an FDIC-insured
bank, savings bank or savings and loan association located in another state,
(iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other states
having laws permitting such consolidation, with the resulting organization
chartered by Michigan, (iv) the establishment by a foreign bank, which has not
previously designated any other state as its home state under the International
Banking Act of 1978, of branches located in Michigan, and (v) the establishment
or acquisition of branches in Michigan by FDIC-insured banks located in other
states, the District of Columbia or U.S. territories or protectorates having
laws permitting Michigan-chartered banks to establish branches in such
jurisdiction. Further, the Michigan Banking Code permits, upon written notice to
the Commissioner, (i) the acquisition by a Michigan-chartered bank of one or
more branches (not comprising all or substantially all of the assets) of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, the District of Columbia, or a U.S. territory or protectorate,
(ii) the establishment by Michigan-chartered banks of branches located in other
states, the District of Columbia, or U.S. territories or protectorates, and
(iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured
banks, savings banks or savings and loan associations located in other states,
with the resulting organization chartered by one of such other states.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 9,500,000 shares of
Common Stock and 500,000 shares of preferred stock, no par value (the "Preferred
Stock"). As of the date of this Prospectus, there were 2,435,125 shares of
Common Stock issued and outstanding. No shares of Preferred Stock have been
issued by the Company.
Michigan law allows the Company's Board of Directors to issue additional
shares of stock up to the total amount of Common Stock and Preferred Stock
authorized without obtaining the prior approval of the shareholders. Macatawa
Bank is the transfer agent for the Common Stock.
Common Stock
Dividend Rights. Subject to any prior rights of holders of Preferred Stock
then outstanding, the holders of the Common Stock will be entitled to dividends
when, as and if declared by the Company's Board of Directors out of funds
legally available therefor. Under Michigan law, dividends may be legally
declared or paid only if after the distribution the corporation can pay its
debts as they come due in the usual course of business and the corporation's
total assets equal or exceed the sum of its liabilities plus the amount that
would be needed to satisfy the preferential rights upon dissolution of any
holders of Preferred Stock then outstanding whose preferential rights are
superior to those receiving the distribution. See "Supervision and Regulation --
The Bank -- Dividends."
Funds for the payment of dividends by the Company are expected to be
obtained primarily from dividends of the Bank. There can be no assurance that
the Company will have funds available for dividends, or that if they are
available, that dividends will be declared by the Company's Board of Directors.
As the Bank is not expected to be profitable during its start up period, the
Company does not expect to be in a position to declare dividends at any time in
the near future.
Voting Rights. Subject to the rights, if any, of holders of shares of
Preferred Stock then outstanding, all voting rights are vested in the holders of
shares of Common Stock. Each share of Common Stock entitles the holder thereof
to one vote on all matters, including the election of directors. Shareholders of
the Company do not have cumulative voting rights.
Preemptive Rights. Holders of Common Stock do not have preemptive rights.
Liquidation Rights. Subject to any rights of any Preferred Stock then
outstanding, holders of Common Stock are entitled to share on a pro rata basis
in the net assets of the Company which remain after satisfaction of all
liabilities.
Reports to Shareholders. The Company will furnish its shareholders with
annual reports containing audited financial information and, for the first three
quarters of each fiscal year, quarterly reports containing unaudited financial
information. See "Available Information."
Shares Available for Issuance. The availability for issuance of a
substantial number of shares of Common Stock and Preferred Stock at the
discretion of the Board of Directors will provide the Company with the
flexibility to take advantage of opportunities to issue such stock in order to
obtain capital, as consideration for possible acquisitions and for other
purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of the Company capital stock, except for the
shares of Common Stock reserved for issuance under the Company's stock
compensation and stock option plans.
Uncommitted authorized but unissued shares of Common Stock may be issued
from time to time to such persons and for such consideration as the Board of
Directors of the Company may determine and holders of the then outstanding
shares of Common Stock may or may not be given the opportunity to vote thereon,
depending upon the nature of any such transactions, applicable law and the
judgment of the Board of Directors of the Company regarding the submission of
such issuance to the Company's shareholders. As noted, the Company's
shareholders will have no preemptive rights to subscribe to newly issued shares.
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Moreover, it will be possible that additional shares of Common Stock would
be issued for the purpose of making an acquisition by an unwanted suitor of a
controlling interest in the Company more difficult, time consuming or costly or
would otherwise discourage an attempt to acquire control of the Company. Under
such circumstances, the availability of authorized and unissued shares of Common
Stock may make it more difficult for shareholders to obtain a premium for their
shares. Such authorized and unissued shares could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of the
Company by means of a merger, tender offer, proxy contest or other means. Such
shares could be privately placed with purchasers who might cooperate with the
Board of Directors of the Company in opposing such an attempt by a third party
to gain control of the Company. The issuance of new shares of Common Stock could
also be used to dilute ownership of a person or entity seeking to obtain control
of the Company. Although the Company does not currently contemplate taking any
such action, shares of Company capital stock could be issued for the purposes
and effects described above, and the Board of Directors reserves its rights (if
consistent with its fiduciary responsibilities) to issue such stock for such
purposes.
Preferred Stock
The Board of Directors of the Company is authorized to issue Preferred
Stock, in one or more series, from time to time, with such voting powers, full
or limited, or without voting powers, and with such designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as may be provided in the
resolution or resolutions adopted by the Board of Directors. The authority of
the Board of Directors includes, but is not limited to, the determination or
fixing of the following with respect to shares of such class or any series
thereof: (i) the number of shares and designation of such series; (ii) the
dividend rate and whether dividends are to be cumulative; (iii) whether shares
are to be redeemable, and, if so, whether redeemable for cash, property or
rights; (iv) the rights to which the holders of shares shall be entitled, and
the preferences, if any, over any other series; (v) whether the shares shall be
subject to the operation of a purchase, retirement or sinking fund, and, if so,
upon what conditions; (vi) whether the shares shall be convertible into or
exchangeable for shares of any other class or of any other series of any class
of capital stock and the terms and conditions of such conversion or exchange;
(vii) the voting powers, full or limited, if any, of the shares; (viii) whether
the issuance of any additional shares, or of any shares of any other series,
shall be subject to restrictions as to issuance, or as to the powers,
preferences or rights of any such other series; and (ix) any other preferences,
privileges and powers and relative, participating, optional or other special
rights and qualifications, limitations or restrictions. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the Common
Stock.
Anti-Takeover Provisions
In addition to the utilization of authorized but unissued shares as
described above, the Company's Articles and the Michigan Business Corporation
Act (the "MBCA") contain other provisions which could be utilized by Company to
impede certain efforts to acquire control of the Company. Those provisions
include the following:
Control Share Act. The MBCA contains provisions intended to protect
shareholders and prohibit or discourage certain types of hostile takeover
activities. These provisions regulate the acquisition of "control shares" of
large public Michigan corporations (the "Control Share Act").
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquirer which, when combined with other shares held by that person
or entity, would give the acquirer voting power at or above any of the following
thresholds: 20%, 33-1/3% or 50%. Under the Control Share Act, an acquirer may
not vote "control shares" unless the corporation's disinterested shareholders
vote to confer voting rights on the control shares. The acquiring person,
officers of the target corporation, and directors of the target corporation who
are also employees of the corporation are precluded from voting on the issue of
whether the control shares shall be accorded voting rights. The Control Share
Act does not affect the voting rights of shares owned by an acquiring person
prior to the control share acquisition.
The Control Share Act entitles corporations to redeem control shares from
the acquiring person under certain circumstances. In other cases, the Control
Share Act confers dissenters' rights upon all of a corporation's shareholders
except the acquiring person.
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The Control Share Act applies only to an "issuing public corporation." The
Company falls within the statutory definition of an "issuing public
corporation." The Control Share Act automatically applies to any "issuing public
corporation" unless the corporation "opts out" of the statute by so providing in
its articles of incorporation or bylaws. The Company has not "opted out" of the
Control Share Act.
Fair Price Act. Certain provisions of the MBCA (the "Fair Price Act")
establish a statutory scheme similar to the supermajority and fair price
provisions found in many corporate charters. The Fair Price Act provides that a
supermajority vote of 90% of the shareholders and no less than two-thirds of the
votes of non-interested shareholders must approve a "business combination." The
Fair Price Act defines a "business combination" to encompass any merger,
consolidation, share exchange, sale of assets, stock issue, liquidation, or
reclassification of securities involving an "interested shareholder" or certain
"affiliates." An "interested shareholder" is generally any person who owns 10%
or more of the outstanding voting shares of the company. An "affiliate" is a
person who directly or indirectly controls, is controlled by, or is under common
control with a specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others, that: (i) the purchase price to be paid for the shares of the
company is at least equal to the greater of (a) the market value of the shares
or (b) the highest per share price paid by the interested shareholder within the
preceding two-year period or in the transaction in which the shareholder became
an interested shareholder, whichever is higher; and (ii) once a person has
become an interested shareholder, the person must not become the beneficial
owner of any additional shares of the company except as part of the transaction
which resulted in the interested shareholder becoming an interested shareholder
or by virtue of proportionate stock splits or stock dividends.
The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the Board of Directors has
approved or exempted from the requirements of the Fair Price Act by resolution
at any time prior to the time that the interested shareholder first became an
interested shareholder.
Classified Board. The Board of Directors of the Company is classified into
three classes, with each class serving a staggered, three-year term.
Classification of the Board could have the effect of extending the time during
which the existing Board of Directors could control the operating policies of
Company even though opposed by the holders of a majority of the outstanding
shares of Common Stock.
Under the Company's Articles, all nominations for directors by a
shareholder must be delivered to the Company in writing at least 60, but not
more than 90, days prior to the annual meeting of the shareholders. A nomination
that is not received within this period will not be placed on the ballot. The
Board believes that advance notice of nominations by shareholders will afford a
meaningful opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the Board of Directors, will
provide an opportunity to inform shareholders about such qualifications.
Although this nomination procedure does not give the Board of Directors any
power to approve or disapprove of shareholder nominations for the election of
directors, this nomination procedure may have the effect of precluding a
nomination for the election of directors at a particular annual meeting if the
proper procedures are not followed.
The Company's Articles provide that any one or more directors may be
removed at any time, with or without cause, but only by either: (i) the
affirmative vote of a majority of "Continuing Directors" and at least 80% of the
directors; or (ii) the affirmative vote, at a meeting of the shareholders called
for that purpose, of the holders of at least 80% of the voting power of the
then-outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors, voting together as a single class. A
"Continuing Director" is generally defined in the Articles as any member of the
Board who is unaffiliated with any "interested shareholder" (generally, an owner
of 10% or more of the Company's outstanding voting shares) and was a member of
the Board prior to the time an interested shareholder became an interested
shareholder, and any successor of a Continuing Director who is unaffiliated with
an interested shareholder and is recommended to succeed a Continuing Director by
a majority of the Continuing Directors then on the Board.
Any vacancies in the Board of Directors for any reason, and any newly
created directorships resulting from any increase in the number of directors,
may be filled only by the Board of Directors, acting by an affirmative vote of a
majority of the Continuing Directors and an 80% majority of all of the directors
then in office, although less than a
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quorum. Any directors so chosen shall hold office until the next annual meeting
of shareholders at which directors are elected to the class to which such a
director was named and until their respective successors shall be duly elected
and qualified or their resignation or removal. No decrease in the number of
directors may shorten the term of any incumbent director.
Notice of Shareholder Proposals. Under the Company's Articles, the only
business that may be conducted at an annual or special meeting of shareholders
is business that has been brought before the meeting by or at the direction of
the majority of the directors or by a shareholder of the Company: (i) who
provides timely notice of the proposal in writing to the secretary of the
Company and the proposal is a proper subject for action by shareholders under
Michigan law or (ii) whose proposal is included in the Company's proxy materials
in compliance with all the requirements set forth in the applicable rules and
regulations of the Securities and Exchange Commission. To be timely, a
shareholder's notice of proposal must be delivered to, or mailed to and received
at the principal executive offices of the Company not less than 60 days prior to
the date of the originally scheduled annual meeting regardless of any
postponements, deferrals or adjournments of that meeting to a later date. With
respect to special meetings, notice must be received by the Company not more
than 10 days after the Company mails notice of the special meeting. The
shareholder's notice of proposal must set forth in writing each matter the
shareholder proposes to bring before the meeting including: (i) the name and
address of the shareholder submitting the proposal, as it appears on the
Company's books and records; (ii) a representation that the shareholder: (a) is
a holder of record of stock of the Company entitled to vote at the meeting, (b)
will continue to hold such stock through the date on which the meeting is held,
and (c) intends to vote in person or by proxy at the meeting and to submit the
proposal for shareholder vote; (iii) a brief description of the proposal desired
to be submitted to the meeting for shareholder vote and the reasons for
conducting such business at the meeting; and (iv) the description of any
financial or other interest of the shareholder in the proposal. This procedure
may limit to some degree the ability of shareholders to initiate discussions at
annual shareholders meetings. It may also preclude the conducting of business at
a particular meeting if the proposed notice procedures have not been followed.
Certain Shareholder Action. The Company's Articles require that any
shareholder action must be taken at an annual or special meeting of
shareholders, that any meeting of shareholders must be called by the Board of
Directors or the Chairman of the Board, and prohibit shareholder action by
written consent. Shareholders of the Company are not permitted to call a special
meeting of shareholders or require that the Board call such a special meeting.
The MBCA permits shareholders holding in the aggregate 10% or more of all of the
shares entitled to vote at a meeting to request the Circuit Court of the County
in which the Company's principal place of business or registered office is
located to order a special meeting of shareholders for good cause shown.
Amendment or Repeal of Certain Provisions of the Articles. Under Michigan
law, the Board of Directors need not adopt a resolution setting forth an
amendment to the Articles before the shareholders may vote on it. Unless the
Articles provide otherwise, amendments of the Articles generally require the
approval of the holders of a majority of the outstanding stock entitled to vote
thereon, and if the amendment would increase or decrease the number of
authorized shares of any class or series, or the par value of such shares, or
would adversely affect the rights, powers, or preferences of such class or
series, a majority of the outstanding stock of such class or series also would
be required to approve the amendment.
The Company's Articles require that in order to amend, repeal or adopt any
provision inconsistent with Article VIII relating to the Board of Directors,
Article IX relating to shareholder proposals or Article X with respect to
certain shareholder action, the affirmative vote of at least 80% of the issued
and outstanding shares of Common Stock entitled to vote in the election of
directors, voting as a single class must be received; provided, however, that
such amendment or repeal or inconsistent provision may be made by a majority
vote of such shareholders at any meeting of the shareholders duly called and
held where such amendment has been recommended for approval by at least 80% of
all directors then holding office and by a majority of the "continuing
directors." These amendment provisions could render it more difficult to remove
management or for a person seeking to effect a merger or otherwise gain control
of the Company. These amendment requirements could, therefore adversely affect
the potential realizable value of shareholders' investments.
Board Evaluation of Certain Offers. Article XII of the Company's Articles
provides that the Board of Directors shall not approve, adopt or recommend any
offer of any person or entity (other than the Company) to make a tender or
exchange offer for any Common Stock, to merge or consolidate the Company with
any other entity, or to
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purchase or acquire all or substantially all of the Company's assets, unless and
until the Board has evaluated the offer and determined that it would be in
compliance with all applicable laws and that the offer is in the best interests
of the Company and its shareholders. In doing so, the Board may rely on an
opinion of legal counsel who is independent from the offeror, and/or it may test
such legal compliance in front of any court or agency that may have appropriate
jurisdiction over the matter.
In making its determination, the Board must consider all factors it deems
relevant, including but not limited to: (i) the adequacy and fairness of the
consideration to be received by the Company and/or its shareholders, considering
historical trading prices of the capital stock of the Company, the price that
could be achieved in a negotiated sale of the Company as a whole, past offers,
and the future prospects of the Company; (ii) the potential social and economic
impact of the proposed transaction on the Company, its subsidiaries, its
employees, customers and vendors; (iii) the potential social and economic impact
of the proposed transaction on the communities in which the Company and its
subsidiaries operate or are located; (iv) the business and financial condition
and earnings prospects of the proposed acquiring person or entity; and (v) the
competence, experience and integrity of the proposed acquiring person or entity
and its or their management.
In order to amend, repeal, or adopt any provision that is inconsistent with
Article XII, at least 80% of the shareholders, voting together as a single
class, must approve the change, unless the change has been recommended for
approval by at least 80% of the directors, in which case a majority of the
voting stock could approve the action.
Indemnification of Directors and Officers
The Company's Articles of Incorporation provide that the Company shall
indemnify its present and past directors, officers, and such other persons as
the Board of Directors may authorize, to the fullest extent permitted by law.
The Company's Articles of Incorporation contain indemnification provisions
concerning third party actions as well as actions in the right of the Company.
The Articles of Incorporation provide that the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any actual
or threatened civil, criminal, and administrative or investigative action, suit
or proceeding (whether brought by or in the name of the Company, a subsidiary or
otherwise) in which a director or executive officer is a witness or which is
brought against a director of executive officer in his or her capacity as a
director, officer, employee, agent or fiduciary of the Company or of any
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which the director or executive officer was serving at the request of
the Company.
FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to their
respective directors or officers otherwise permitted under the MBCA or the
Michigan Banking Code, respectively.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions discussed above or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission (the
"SEC") such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company has purchased directors' and officers' liability insurance for
directors and officers of the Company and the Bank.
The MBCA permits corporations to limit the personal liability of their
directors in certain circumstances. The Company's Articles of Incorporation
provide that a director of the Company shall not be personally liable to the
Company or its shareholders for monetary damages for breach of the director's
fiduciary duty. However, they do not eliminate or limit the liability of a
director for any breach of a duty, act or omission for which the elimination or
limitation of liability is not permitted by the MBCA, currently including,
without limitation, the following: (1) breach of the director's duty of loyalty
to the Company or its shareholders; (2) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (3) illegal
loans, distributions of dividends or assets, or stock purchases as described in
Section 551(1) of the MBCA; and (4) transactions from which the director derived
an improper personal benefit.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the sale of all shares offered, the Company expects to
have approximately 3,635,125 shares of its Common Stock outstanding assuming all
1,200,000 offered shares are sold. The 1,200,000 shares of the Company's Common
Stock offered in this Offering have been registered with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), and may generally be resold without registration
under the Securities Act unless they were acquired by directors, executive
officers, or other affiliates of the Company or the Bank (collectively,
"Affiliates"). Affiliates of the Company may generally only sell shares of the
Common Stock pursuant to the Commission's Rule 144.
In general, under Rule 144 as currently in effect, an affiliate (as defined
in Rule 144) of the Company may sell shares of the Common Stock within any
three-month period in an amount limited to the greater of 1% of the outstanding
shares of the Company's Common Stock (36,351 shares immediately following this
offering if all 1,200,000 shares offered are sold) or the average weekly trading
volume in the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company.
As of March 31, 1999, the Company had issued options to approximately 60
employees to purchase an aggregate of 85,500 shares of Common Stock at exercise
prices ranging from $10.00 to $16.50 per share pursuant to the Company's Stock
Compensation Plan. These options have expiration dates ranging from March 19,
2008 to February 18, 2009. The Company has reserved for issuance under the Stock
Compensation Plan 200,000 shares of Common Stock, including 85,500 shares
already subject to outstanding options. As of March 31, 1999, no options granted
under the Stock Compensation Plan had been exercised.
No predictions can be made as to the effect, if any, that sales of shares
or the availability of shares for sale will have on the prevailing market price
of the Common Stock after completion of this Offering. Nevertheless, sales of
substantial amounts of Common Stock in the public market could have an adverse
effect on prevailing market prices.
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PLAN OF DISTRIBUTION
The shares of Common Stock offered pursuant to this Offering will be
offered at a price of $12.75 per share to holders of record as of April 9, 1999
(the "Record Date"). Each shareholder as of the Record Date will be entitled to
purchase up to one share of Common Stock for each two shares owned by such
shareholder as of the Record Date. No factional shares will be issued. For
example, a shareholder who owned 95 shares on the Record Date would be entitled
to purchase up to 47 shares, subject to the right to purchase additional shares
described below.
Shareholders may subscribe for all or part of the shares to which they are
entitled to subscribe. To the extent that shareholders do not choose to
subscribe for some or all of the shares they are entitled to purchase,
shareholders who would own fewer than 10,000 shares after purchasing all shares
which they were entitled to subscribe for may, subject to share availability,
subscribe for additional shares ("Additional Shares") to reach a total share
ownership of 10,000. If there are insufficient shares available to honor all
subscriptions for Additional Shares, the shares available will be prorated based
on the ratio of the total Additional Shares available to the total subscriptions
for Additional Shares, rounded down to the nearest whole share. For example, if
only 400,000 Additional Shares were available but 500,000 Additional Shares were
subscribed for, all subscribers for Additional Shares would receive 80% of the
Additional Shares for which they subscribed. Refunds for oversubscriptions,
without interest, will be mailed no later than 10 days after the Termination
Date.
Although not required by Michigan law or by the Company's Articles of
Incorporation, the Board of Directors of the Company has authorized this
offering in order to permit existing shareholders to maintain their
proportionate interest in the Company's outstanding Common Stock.
Shareholders who own shares directly of record can subscribe for Common
Stock, including subscriptions for any Additional Shares, by completing and
signing the accompanying Subscription Agreement and delivering it, with payment
for the shares subscribed for, to:
Macatawa Bank Corporation
Attn: Ms. Sheila Woodke
250 E. 8th Street
Holland, Michigan 49423
Shareholders who own shares through a broker, bank, trust company or other
third-party can subscribe only through, and by following instructions provided
by, the broker, bank, trust company or other third-party.
Shareholders who have questions as to how to subscribe should contact Ms.
Sheila Woodke, the Company's information agent, at telephone number
616-820-1435.
Shareholders must subscribe on or before June 4, 1999 (the "Termination
Date"). All subscriptions must be received by the Company before 5:00 p.m.,
Michigan time, on the Termination Date.
The full subscription price for shares of Common Stock must be included
with the Subscription Agreement. The purchase price must be paid in United
States currency by check, bank draft, or money order, payable to Macatawa Bank
Corporation - Subscription Account. Failure to include the full subscription
price with the Subscription Agreement shall give the Company the right to
disregard it.
The offering price was established by a pricing committee of the Board of
Directors based on the recent market price of the Common Stock, the impact of
this offering on the price of the Common Stock and the Board's desire that
shareholders be permitted to buy Additional Shares at a price below the market
price at the end of March, 1999. The offering price is a 17% discount from the
OTC Bulletin Board closing price on March 31, 1999.
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LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material pending legal
proceeding. Management believes there is no litigation threatened in which the
Company or the Bank faces potential loss or exposure or which will materially
affect shareholders' equity or the Company's business or financial condition
upon completion of this Offering.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Varnum, Riddering, Schmidt & Howlett LLP, Grand Rapids,
Michigan. Members of Varnum, Riddering, Schmidt & Howlett LLP own in the
aggregate approximately 19,650 shares of Common Stock.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Crowe, Chizek and Company LLP, independent public accountants,
as indicated in their report with respect thereto. Such financial statements are
included herein and in the Registration Statement in reliance upon such reports
given upon the authority of such firm as experts in auditing and accounting.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 15(d)
of the Securities Exchange Act of 1934, as amended, and in accordance therewith
files reports with the SEC. Copies of such reports can be inspected at and
copied at the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 606661, and Room 1400, 75 Park Place, New York, New York 10007. Copies
of such materials can also be obtained at prescribed rates by writing to the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
The Company has filed a Registration Statement with the Commission in
accordance with the provisions of the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information pertaining to the shares of Common Stock
offered hereby and to the Company, reference is made to the Registration
Statement, including the Exhibits filed as a part thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions discussed above under "Description of Capital Stock
- -- Indemnification of Directors and Officers" or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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MACATAWA BANK CORPORATION
Zeeland, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................... F-3
CONSOLIDATED STATEMENTS OF INCOME..................................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY............ F-5
CONSOLIDATED STATEMETNS OF CASH FLOWS................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Macatawa Bank Corporation
Zeeland, Michigan
We have audited the accompanying consolidated balance sheets of Macatawa Bank
Corporation as of December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year ended December 31, 1998 and for the period from May 21, 1997 (date of
inception) through December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Macatawa Bank
Corporation at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the year ended December 31, 1998 and for the period from May
21, 1997 (date of inception) through December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 17, 1999
- --------------------------------------------------------------------------------
F-2
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
- -----------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,453,177 $ 415,120
Short-term investments 6,500,000 7,000,000
------------- -------------
Cash and cash equivalents 17,953,177 7,415,120
Securities available for sale, at fair value 27,007,300 2,000,400
Total loans 137,882,260 497,704
Allowance for loan losses (2,030,000) (7,500)
------------- -------------
135,852,260 490,204
Premises and equipment - net 7,125,755 681,807
Accrued interest receivable 1,226,199 38,532
Organizational costs -- 66,139
Other assets 63,982 29,991
------------- -------------
Total assets $ 189,228,673 $ 10,722,193
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 18,517,550 $ 245,812
Interest-bearing 148,471,125 2,466,411
------------- -------------
Total 166,988,675 2,712,223
Federal funds purchased 2,000,000 --
Accrued expenses and other liabilities 628,610 37,963
------------- -------------
Total liabilities 169,617,285 2,750,186
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized; no shares issued and outstanding
Common stock, no par value, 9,500,000 shares
authorized; 2,435,125 and 940,125 shares issued
and outstanding at December 31, 1998 and 1997,
respectively 22,260,646 8,137,268
Retained deficit (2,654,076) (165,525)
Accumulated other comprehensive income, net
of income tax of $2,482 and $136 4,818 264
------------- -------------
Total shareholders' equity 19,611,388 7,972,007
------------- -------------
Total liabilities and shareholders' equity $ 189,228,673 $ 10,722,193
============= =============
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Year
ended December 31, 1998 and period from May 21, 1997
(date of inception) through December 31, 1997
<TABLE>
- --------------------------------------------------------------------------------
1998 1997
---- ----
Interest income
<S> <C> <C>
Loans, including fees $ 5,338,963 $ 3,448
Securities
Taxable 986,372 4,268
Short-term investments 478,770 68,566
---------- ----------
Total interest income 6,804,105 76,282
Interest expense
Deposits 3,186,309 5,339
Other 3,928 213
---------- ----------
Total interest expense 3,190,237 5,552
---------- ----------
Net interest income 3,613,868 70,730
Provision for loan losses (2,022,500) (7,500)
Net interest income after provision for loan losses 1,591,368 63,230
Noninterest income
Service fees 157,109
Gain on sales of loans 520,645
Other 5,628
----------
Total noninterest income 683,382
Noninterest expense
Salaries and benefits 2,726,885 111,341
Occupancy expense of premises 305,214 9,226
Furniture and equipment expense 253,074 5,328
Legal and professional fees 157,077 18,437
Advertising 198,826 27,698
Supplies 232,835 30,729
Data processing fees 196,665 119
Check printing fees 88,596 1,218
Other outside services 75,762 2,765
Organizational expenses 66,139
Other expense 462,228 21,894
---------- ----------
Total noninterest expenses 4,763,301 228,755
---------- ----------
Net loss $(2,488,551) $ (165,525)
=========== ===========
Basic loss per share $ (1.22) $ (.18)
=========== ===========
Weighted average shares outstanding 2,041,920 940,125
=========== ===========
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended December 31, 1998 and period from May 21, 1997
(date of inception) through December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Total
Common Retained Income, Shareholders'
Stock Deficit Net of Tax Equity
<S> <C> <C> <C> <C>
Balance, May 21, 1997 $ 0 $ 0 $ 0 $ 0
Proceeds from sale of stock on
November 7, 1997, 940,125 shares 8,137,268 8,137,268
Net loss for the period from
May 21, 1997 (date of inception)
through December 31, 1997 (165,525) (165,525)
Other comprehensive income:
Net change in unrealized appreciation
on securities available for sale, net
of tax of $136 264 264
-----------
Comprehensive loss (165,261)
----------- ----------- ----------- -----------
Balance, December 31, 1997 8,137,268 (165,525) 264 7,972,007
Proceeds from sale of stock on
April 7, 1998, 1,495,000 shares 14,123,378 14,123,378
Net loss (2,488,551) (2,488,551)
Other comprehensive income:
Net change in unrealized appreciation
on securities available for sale, net
of tax of $2,346 4,554 4,554
-----------
Comprehensive loss (2,483,997)
----------- ----------- ---------- -----------
Balance, December 31, 1998 $22,260,646 $2,654,076) $4,818 $19,611,388
=========== =========== ========== ===========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 and period from May 21, 1997
(date of inception) through December 31, 1997
<TABLE>
- ---------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,488,551) $ (165,525)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 271,458 5,769
Provision for loan losses 2,022,500 7,500
Origination of loans for sale (44,146,300) --
Proceeds from sales of loans originated for sale 44,666,945 --
Gain on sales of loans (520,645) --
Net change in
Organizational costs 66,139 (66,139)
Accrued interest receivable and other assets (1,221,658) (68,523)
Accrued expenses and other liabilities 588,301 37,827
Net cash from operating activities (761,811) (249,091)
Cash flows from investing activities
Net increase in loans (137,384,556) (497,704)
Activity in securities available for sale
Purchase (29,000,000) (2,000,000)
Maturities 4,000,000 --
Additions to premises and equipment (6,715,406) (687,576)
------------- -------------
Net cash from investing activities (169,099,962) (3,185,280)
Cash flows from financing activities
Net increase in federal funds purchased 2,000,000 --
Net increase in deposits 164,276,452 2,712,223
Proceeds from the issuance of common stock 14,123,378 8,137,268
------------- -------------
Net cash from financing activities 180,399,830 10,849,491
------------- -------------
Net change in cash and cash equivalents 10,538,057 7,415,120
Beginning cash and cash equivalents 7,415,120 --
Ending cash and cash equivalents $ 17,953,177 $ 7,415,120
============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 2,725,880 $ 640
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: The Company became the bank holding company for Macatawa
Bank (the "Bank") on February 23, 1998, when all of the Bank's outstanding
common stock (817,500 shares) was converted into all of the outstanding common
stock of the Company (940,125 shares) and all of the Bank's shareholders became
all of the Company's shareholders. The exchange ratio in the conversion was 1.15
shares of Company common stock for each share of Bank common stock. The Bank's
common stock had been issued to its shareholders as of November 7, 1997 as a
result of a private offering of the Bank's common stock at a price of $10 per
share or a total of $8,175,000. As this was essentially an internal
reorganization, the consolidated financial statements are presented by including
operations of the Company and Bank for all periods presented. Further share and
per share data has been adjusted for the conversion ratio of 1.15 shares of
Company stock for one share of Bank stock. Macatawa Bank Corporation is a
regional, community-based financial institution, located in Zeeland, Michigan.
The Bank's primary services include accepting deposits and making commercial,
mortgage and installment loans in the Michigan counties of Allegan, Ottawa and
Kent. The Bank commenced its application process on May 21, 1997, completed its
common stock sale on November 7, 1997 and opened for operations on November 25,
1997 after several months of work by incorporators and employees in preparing
applications with the various regulatory agencies and obtaining insurance and
building space. The costs associated with the organization of the Company are
included in the 1998 income statement.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Macatawa Bank, after
elimination of intercompany accounts and transactions.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, the deferred tax asset
valuation allowance and the fair values of financial instruments are
particularly subject to change.
Concentration of Credit Risk: Loans are granted to, and deposits are obtained
from, customers primarily in the western Michigan area as described above.
Substantially all loans are secured by specific items of collateral, including
residential real estate, commercial real estate and consumer assets. Other
financial instruments which potentially subject the Company to concentrations of
credit risk include deposit accounts in other financial institutions.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions and short-term securities (securities
with maturities of equal to or less than 90 days and federal funds sold). Cash
flows are reported net for customer loan and deposit transactions,
interest-bearing time deposits with other financial institutions and short-term
borrowings with maturities of 90 days or less.
- --------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities available for sale consist of those securities which
might be sold prior to maturity due to changes in interest rates, prepayment
risks, yield and availability of alternative investments, liquidity needs or
other factors. Securities classified as available for sale are reported at their
fair value and the related unrealized holding gain or loss is reported, net of
related income tax effects, as a separate component of shareholders' equity,
until realized.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Loans held
for sale are reported at the lower of cost or market, on an aggregate basis.
While the Company does sell loans on the secondary market, there were no loans
held for sale at December 31, 1998 or 1997. Interest income is reported on the
interest method.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and recoveries, and
decreased by charge-offs. Management estimates the allowance balance required
based on known and inherent risks in the portfolio, economic conditions and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in aggregate for smaller-balance loans of
similar nature such as residential mortgage and consumer loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful classification. There
were no loans classified as impaired as of December 31, 1998 and 1997 or for the
year ended December 31, 1998 and for the period from May 21, 1997 (date of
inception) through December 31, 1997.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed. The Bank held no foreclosed assets at December
31, 1998 or 1997.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense for options granted, using an option
pricing model to estimate fair value.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance has been
established to the extent of net deferred tax assets due to a lack of operating
performance to ensure that it is more likely than not it would be recovered.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on-and off-balance sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
Basic Loss Per Share: Basic loss per share is based on net loss divided by the
weighted average number of shares outstanding during the period. Options
outstanding at December 31, 1998 were not considered in computing diluted loss
per share as the impact was antidilutive.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income
(loss) and unrealized gains and losses on securities available for sale which
are also recognized as separate components of equity. The accounting standard
that requires reporting comprehensive income (loss) first applies for 1998, with
prior information restated to be comparable.
Segment Reporting: Macatawa Bank Corporation, through the branch network of its
subsidiary, Macatawa Bank, provides a broad range of financial services to
individuals and companies in western Michigan. These services include demand,
time and savings deposits; lending; ATM processing and cash management. While
the Company's chief decision makers monitor the revenue streams of the various
Company products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Bank to the holding company or by
the holding company to shareholders.
Reclassifications: Certain amounts on the 1997 consolidated financial statements
have been reclassified to conform with the 1998 presentation.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - CASH AND DUE FROM BANKS
Minimum cash balances, which are based on the deposit levels of the Company, are
required to be maintained by the Federal Reserve as legal reserve requirements.
Cash balances restricted from usage due to these requirements were approximately
$803,000 at year-end 1998.
NOTE 3 - SECURITIES
The amortized cost and fair values of securities at year-end were as follows:
<TABLE>
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
1998
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 27,000,000 $ 35,700 $ (28,400) $ 27,007,300
============ ======== =========== ============
1997
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 2,000,000 $ 400 $ 2,000,400
============ ======== ============
</TABLE>
Contractual maturities of debt securities at year end 1998 were as follows:
<TABLE>
Available for Sale
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due from one to five years $ 26,000,000 $ 26,002,100
Due from five to ten years 1,000,000 1,005,200
------------- -------------
$ 27,000,000 $ 27,007,300
============= =============
</TABLE>
There were no sales of securities for the year ended December 31, 1998 and for
the period from May 21, 1997 (date of inception) through December 31, 1997.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Year-end loans are as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Commercial $ 95,669,151 $ 130,000
Mortgage 22,528,687 207,245
Consumer 19,684,422 160,459
------------- -------------
137,882,260 497,704
Allowance for loan losses (2,030,000) (7,500)
------------- -------------
$ 135,852,260 $ 490,204
============= =============
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 7,500 $ 0
Provision charged to operating expense 2,022,500 7,500
----------- -------
Ending balance $ 2,030,000 $ 7,500
=========== =======
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Land $ 1,177,184 $ 0
Building and improvements 3,661,701 196,761
Furniture and equipment 2,553,229 490,815
----------- --------
7,392,114 687,576
Less accumulated depreciation (266,359) (5,769)
----------- --------
$ 7,125,755 $ 681,807
=========== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing demand $ 18,517,550 $ 245,812
Money market 71,091,206 1,173,742
NOW and Super NOW 22,425,439 628,653
Savings 5,812,028 146,973
Certificates of deposit 49,142,452 517,043
------------ ------------
$166,988,675 $ 2,712,223
============ ============
</TABLE>
At year-end 1998, maturities of certificates of deposits were as follows, for
the next five years:
<TABLE>
<S> <C>
1999 $ 25,663,169
2000 6,847,724
2001 10,068,637
2002 6,531,770
2003 0
2004 and thereafter 31,152
-------------
$ 49,142,452
=============
</TABLE>
The Bank had approximately $27,090,000 and $200,000 in time certificates of
deposit which were in denominations of $100,000 or more at December 31, 1998 and
1997.
NOTE 7 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 1998 were as
follows.
<TABLE>
<S> <C>
Beginning balance $ 0
New loans 5,815,804
Repayments (1,418,909)
------------
Ending balance $ 4,396,895
============
</TABLE>
Deposits from principal officers, directors, and their affiliates at year-end
1998 and 1997 were $16,535,000 and $611,000.
(Continued)
- --------------------------------------------------------------------------------
F-12
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS
Options to buy stock are granted to officers and employees under the Employee
Stock Option Plan (the Employees' Plan), which provides for issue of up to
100,000 options. Options are also granted to directors under the Directors'
Stock Option Plan (the Directors' Plan), which provides for issue of up to
40,000 options. Exercise price is the market price at the date of grant for both
plans. The maximum option term is ten years with options vesting over a
three-year period for the Employees' Plan and over a one-year period for the
Directors' Plan.
A summary of the activity in the plans at year-end 1998 is as follows.
<TABLE>
Weighted
Average
Exercise
Shares Price
------ -----
<S> <C> <C>
Outstanding at beginning of year 0 $ 0
Granted 123,600 12.92
Exercised 0 0
Forfeited 100 10.00
Outstanding at end of year 123,500 12.83
Options exercisable at year-end 0 0
Options available for grant at year-end 16,500
Weighted-average fair value of options
granted during year 3.53
</TABLE>
There were no options granted in 1997 under either plan.
Options outstanding at year-end 1998 were as follows.
<TABLE>
Weighted Average
Remaining
Exercise Contractual
Prices Number Life
------ ------ ----
<S> <C> <C>
$10.00 65,500 9.20
$15.00 9,000 9.42
$16.25 8,500 9.75
$16.50 40,500 9.92
-------- --------
123,500 9.49
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS (Continued)
Had compensation cost for stock options been measured using FASB Statement No.
123, net loss and basic loss per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
1998
----
<S> <C>
Net loss as reported $ (2,488,551)
Pro forma net loss (2,500,958)
Basic loss per share as reported (1.22)
Pro forma basic loss per share (1.22)
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
1998
----
<S> <C>
Risk-free interest rate $ 4.72
Expected option life 7 years
Expected stock price volatility 8.46%
Dividend yield 0.00%
</TABLE>
NOTE 9 - FEDERAL INCOME TAXES
The Company recorded no current or deferred benefit for income taxes as a result
of recording the valuation allowance in the amount of net deferred tax assets.
Year-end deferred tax assets and liabilities consist of:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward (expiration
beginning in 2017) $ 373,787 $ 53,656
Provision for loan losses 573,002 2,550
Other 35,502
Deferred tax liabilities
Depreciation (84,555)
Net unrealized appreciation on
securities available for sale (2,482) (136)
------------ ---------
Net deferred tax asset 895,254 56,070
Valuation allowance for deferred tax assets (897,736) (56,206)
----------- ---------
Net deferred tax liability after
valuation allowance $ (2,482) $ (136)
=========== ==========
</TABLE>
As a result of the valuation allowance, the Bank's effective tax rate was
reduced from the statutory rate of 34% to 0%.
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND OFF-BALANCE-SHEET RISK
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount for commitments to extend credit and standby letters of
credit. Collateral or other security is normally not obtained for these
financial instruments prior to their use, and many of the commitments are
expected to expire without being used.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at year-end follows:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Commitments to make loans $ 17,876,000 $ 2,290,000
Unused lines of credit 65,699,435 131,763
</TABLE>
Approximately 50% of the Bank's commitments to make loans are at fixed rates,
offered at current market rates. The majority of the variable rate commitments
noted above are tied to prime and expire within 30 days. The Bank has no unused
lines of credit at fixed rates.
The Bank conducts substantially all of its business operations in western
Michigan.
The Bank leases certain office and branch premises and equipment under operating
lease agreements. Total rental expense for all operating leases aggregated
$117,886 in 1998. Future minimum rentals under noncancelable operating leases as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 239,277
2000 182,286
2001 130,002
2002 125,502
2003 127,071
2004 and thereafter 2,341,146
--------------
$ 3,145,284
==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
Capital to Risk-
Weighted Assets
--------------- Tier 1 Capital
Total Tier 1 to Average Assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
At year-end, actual capital levels (in thousands) and minimum required levels
for the Bank were:
<TABLE>
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
1998 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $ 21,637 12.4% $ 13,923 8.0% $ 17,403 10.0%
Bank 20,722 11.9 13,923 8.0 17,403 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 19,607 11.3 6,961 4.0 10,442 6.0
Bank 18,692 10.7 6,961 4.0 10,442 6.0
Tier 1 capital (to average assets)
Consolidated 19,607 11.8 6,676 4.0 8,345 5.0
Bank 18,692 11.2 6,676 4.0 8,345 5.0
1997
Total capital (to risk weighted assets) $ 7,980 133.8% $ 477 8.0% $ 596 10.0%
Tier 1 capital (to risk weighted assets) 7,972 133.7 239 4.0 358 6.0
Tier 1 capital (to average assets) 7,972 83.3 383 4.0 478 5.0
</TABLE>
The Company and the Bank were categorized as well capitalized at year-end 1998
and 1997.
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
<TABLE>
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 17,953,177 $ 17,953,177 $ 7,415,120 $ 7,415,120
Securities available for sale 27,007,300 27,007,300 2,000,400 2,000,400
Loans, net 135,852,260 136,086,762 490,204 490,204
Accrued interest receivable 1,226,199 1,226,199 38,532 38,532
Financial liabilities
Deposits (166,988,675) (167,496,412) (2,712,223) (2,712,223)
Federal funds purchased (2,000,000) (2,000,000) (0) (0)
Accrued interest payable (469,264) (469,264) (4,912) (4,912)
</TABLE>
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, accrued interest receivable and payable, demand deposits,
short-term debt, and variable rate loans or deposits that reprice frequently and
fully. Security fair values are based on market prices or dealer quotes, and if
no such information is available, on the rate and term of the security and
information about the issuer. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. The fair value of off-balance-sheet items is
based on the current fees or cost that would be charged to enter into or
terminate such arrangements.
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Following are condensed parent company only financial statements:
<TABLE>
CONDENSED BALANCE SHEET
December 31, 1998
<S> <C>
ASSETS
Cash and cash equivalents $ 914,643
Investment in subsidiary 18,696,745
-------------
Total assets $ 19,611,388
=============
SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock $ 22,260,646
Retained deficit (2,654,076)
Accumulated other comprehensive income,
net of income tax of $2,482 4,818
-------------
Total shareholders' equity $ 19,611,388
=============
</TABLE>
<TABLE>
CONDENSED STATEMENT OF INCOME
Period from February 23, 1998 (date of inception)
through December 31, 1998
<S> <C>
Expenses
Other operating expenses $ 54,840
-------------
Loss before income tax and equity in
undistributed net loss of subsidiaries 54,840
Federal income tax expense 0
Equity in undistributed net loss of subsidiary 2,185,393
-------------
Net loss $ (2,240,233)
=============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13 - CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
(Continued)
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Period from February 23, 1998 (date of inception)
through December 31, 1998
<S> <C>
Cash flows from operating activities
Net loss $ (2,240,233)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Equity in undistributed net loss of
Subsidiary 2,185,393
Net cash from operating activities (54,840)
Cash flows from investing activities
Investment in subsidiary (13,153,895)
Net cash from investing activities (13,153,895)
Cash flows from financing activities
Proceeds from sale of 1,495,000 share of common stock 14,123,378
-------------
Net cash from financing activities 14,123,378
-------------
Net change in cash and cash equivalents 914,643
Cash and cash equivalents at beginning of period 0
-------------
Cash and cash equivalents at end of period $ 914,643
=============
Noncash transaction related to origination of holding company in 1998
Investment in subsidiary $ (7,723,689)
Common stock 8,137,268
Retained deficit (413,843)
Accumulated other comprehensive income 264
</TABLE>
- --------------------------------------------------------------------------------
F-19
<PAGE>
================================================================================
You may relay on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy these shares of the common stock in any circumstances under which
the offer or solicitation is unlawful.
----------------
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................3
Risk Factors...................................................................7
Use of Proceeds...............................................................12
Dividend Policy...............................................................12
Market for Common Stock.......................................................13
Recent Developments...........................................................13
Capitalization................................................................14
Dilution......................................................................15
Management's Discussion and Analysis..........................................16
Business......................................................................20
Management....................................................................33
Certain Transactions..........................................................39
Principal Shareholders........................................................40
Supervision and Regulation....................................................42
Description of Capital Stock..................................................48
Shares Eligible for Future Sale...............................................54
Plan of Distribution..........................................................55
Legal Proceedings.............................................................56
Legal Matters.................................................................56
Experts.......................................................................56
Forward-Looking Statements....................................................56
Available Information.........................................................57
Index to Financial Statements................................................F-1
================================================================================
================================================================================
Up to 1,200,000 Shares
$12.75 per share
MACATAWA BANK
CORPORATION
Common Stock
----------
PROSPECTUS
----------
April 30, 1999
================================================================================
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers.
Sections 561-571 of the Michigan Business Corporation Act, as amended (the
"MBCA"), grant the Registrant broad powers to indemnify any person in connection
with legal proceedings brought against him by reason of his present or past
status as an officer or director of the Registrant, provided that the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The MBCA also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification may be made
if such person is adjudged to be liable to the Registrant unless and only to the
extent the court in which such action was brought determines upon application
that, despite such adjudication, but in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for reasonable
expenses as the court deems proper. In addition, to the extent that any such
person is successful in the defense of any such legal proceeding, the Registrant
is required by the MBCA to indemnify him against expenses, including attorneys'
fees, that are actually and reasonably incurred by him in connection therewith.
The Registrant's Articles of Incorporation contain provisions entitling
directors and executive officers of the Registrant to indemnification against
certain liabilities and expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
Item 25. Other Expenses of Issuance and Distribution.
Expenses in connection with the issuance and distribution of the securities
being registered are estimated as follows, all of which are to be paid by the
Company:
<TABLE>
<S> <C>
SEC Registration Fee....................................... $ 5,000
Printing and Mailing Expenses.............................. 20,000
Accounting Fees............................................ 15,000
Transfer and Registrar's Fees.............................. 4,000
Legal Fees and Expenses.................................... 50,000
Blue Sky Fees and Expenses................................. 10,000
Miscellaneous.............................................. 6,000
---------
$110,000
=========
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The Company issued 940,125 shares of Common Stock on February 23, 1998, in
exchange for the 817,500 outstanding shares of Common Stock of the Bank,
pursuant to a reorganization in which the Bank became a wholly-owned subsidiary
of the Company. The shares of Common Stock were not registered pursuant to the
Securities Act of 1933, as amended (the "1933 Act"), pursuant to an exemption
claimed under Section 3(a)(10) of the 1933 Act. No underwriter was involved in
the reorganization and formation of the holding company.
During the period from January, 1998 through March, 1999, the Company
issued options for 85,500 shares of its Common Stock to approximately 60
employees pursuant to the Company's Stock Compensation Plan. Such option grants
either do not constitute a sale, or if they do, the Company claims an exemption
for such sales pursuant to Rule 504 of Regulation D or Section 4(2).
The shares of stock of the Bank were sold in 1997 and were not required to
be registered under the 1933 Act pursuant to an exemption claimed under Section
3(a)(5) of the 1933 Act. No underwriter was involved in the sale.
Item 27. Exhibits.
Reference is made to the Exhibit Index which appears at page II-4 of the
Registration Statement.
Item 28. Undertakings.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "1933 Act") may be permitted to directors, officers and
controlling persons of the Company pursuant of the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission such indemnification is against the public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Company pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the time it
was declared effective; and (2) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. The
undersigned Company hereby undertakes that it will provide to the underwriter,
Robert W. Baird & Co., Incorporated, at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to such
purchaser.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused Amendment No. 1 to this
registration statement to be signed on its behalf by the undersigned, hereunto
duly authorized, in the city of Holland, State of Michigan, on April 27, 1999.
MACATAWA BANK CORPORATION
By: /s/ Benj. A. Smith, III
Benj. A. Smith, III
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Date
/s/ Benj. A. Smith, III April 27, 1999
Benj. A. Smith, III, Principal Executive Officer and a Director
/s/ Philip J. Koning April 27, 1999
Philip J. Koning, Principal Financial and Accounting Officer
and a Director
________________________________________________
G. Thomas Boylan, Director
/s/ Robert E. DenHerder* April 27, 1999
Robert E. DenHerder, Director
/s/ Brian J. Hansen* April 27, 1999
Brian J. Hansen, Director
/s/ James L. Batts* April 27, 1999
James L. Batts, Director
________________________________________________
Jessie F. Dalman, Director
/s/ Wayne J. Elhart* April 27, 1999
Wayne J. Elhart, Director
II-3
<PAGE>
/s/ James L. Jurries* April 27, 1999
James L. Jurries, Director
__________________________________________________
John F. Koetje, Director
* By: /s/ Benj. A. Smith, III
Benj. A. Smith, III
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Number and Description Page
2 Consolidation Agreement dated December 10, 1997, incorporated by
reference to Exhibit 2 to the Macatawa Bank Corporation
Registration Statement on Form SB-2 (Registration No. 333-45755).
3.1 Articles of Incorporation of Macatawa Bank Corporation,
incorporated by reference to Exhibit 3.1 to the Macatawa Bank
Corporation Registration Statement on Form SB-2 (Registration No.
333-45755).
3.2 Bylaws of Macatawa Bank Corporation, incorporated by reference to
Exhibit 3.2 to the Macatawa Bank Corporation Registration
Statement on Form SB-2 (Registration No. 333-45755).
4 Specimen stock certificate of Macatawa Bank Corporation,
incorporated by reference to Exhibit 4 to the Macatawa Bank
Corporation Registration Statement on Form SB-2 (Registration No.
333-45755).
5* Opinion of Varnum, Riddering, Schmidt & Howlett LLP.
10.1 Macatawa Bank Corporation Stock Compensation Plan, incorporated
by reference to Exhibit 10.1 to the Macatawa Bank Corporation
Registration Statement on Form SB-2 (Registration No. 333-45755).
10.2 Macatawa Bank Corporation 1998 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.2 to the Macatawa Bank
Corporation Registration Statement on Form SB-2 (Registration No.
333-45755).
10.3 Lease Agreement dated July 8, 1997, for the facility located at
51 E. Main, incorporated by reference to Exhibit 10.3 to the
Macatawa Bank Corporation Registration Statement on Form SB-2
(Registration No. 333-45755).
10.4 Lease Agreement dated January 1, 1998, for the facility located
at 139 East 8th Street, Holland, Michigan 49423, incorporated by
reference to Exhibit 10.4 to the Macatawa Bank Corporation
Registration Statement on Form SB-2 (Registration No. 333-45755).
10.5 Lease Agreement dated December 22, 1997, for the facility located
at 106 E.8th Street, Holland, Michigan 49423, incorporated by
reference to Exhibit 10.5 to the Macatawa Bank Corporation
Registration Statement on Form SB-2 (Registration No. 333-45755).
10.6 Data Processing Agreement between Rurbanc Data Services, Inc. and
Macatawa Bank dated October 1, 1997, incorporated by reference to
Exhibit 10.8 to the Macatawa Bank Corporation Registration
Statement on Form SB-2 (Registration No. 333-45755).
II-5
<PAGE>
10.7 MagicLine Product Services Agreement between MagicLine, Inc. and
Macatawa Bank dated October 1, 1997., incorporated by reference
to Exhibit 10.9 to the Macatawa Bank Corporation Registration
Statement on Form SB-2 (Registration No. 333-45755).
10.8 FTB Participating Bank Agreement between First Tennessee Bank
National Association and Macatawa Bank dated October 24, 1997,
incorporated by reference to Exhibit 10.10 to the Macatawa Bank
Corporation Registration Statement on Form SB-2 (Registration No.
333-45755).
21* Subsidiaries of the Registrant
23.1** Consent of Crowe, Chizek and Company LLP, independent public
accountants
23.2* Consent of Varnum, Riddering, Schmidt & Howlett LLP is included
in Exhibit 5 to this Registration Statement.
* Previously filed.
**Filed herewith.
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated February 17, 1999, on the
consolidated financial statements of Macatawa Bank Corporation for the year
ended December 31, 1998, to be included within the Registration Statement on
Form SB-2 and Prospectus of Macatawa Bank Corporation. We also consent to the
use of our name as "Experts" in the Prospectus.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
April 27, 1999
::ODMA\PCDOCS\GRR\271444\4
