FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 333-45755
MACATAWA BANK CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3391345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 E. 8th Street, Holland, Michigan 49423
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 820-1444
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
-----------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ____
Check here if there is no disclosure by delinquent filers in response to Item
405 of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. |X|
The registrant's revenues for 1998 were $7,487,487. The aggregate market value
of the voting and non-voting common equity held by non-affiliates of the
Registrant, based on a per share price of $15.00 as of March 26, 1999, was
$30,607,875 (common stock, no par value). As of March 26, 1999, there were
outstanding 2,435,125 shares of the Company's common stock (no par value).
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 15, 1999 are incorporated by reference into Part II and Part
III of this Report.
<PAGE>
PART I
ITEM 1: Business
General
Macatawa Bank Corporation (the "Company") is a bank holding company
organized in 1997 under Michigan law. The Company owns all of the common stock
of Macatawa Bank (the "Bank"). The Bank was organized and commenced operations
in November, 1997 as a Michigan chartered bank with depository accounts insured
by the FDIC to the extent permitted by law. The Bank 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 principally
located in Ottawa County. The Bank's services include checking and savings
accounts (including certificates of deposit), safe deposit boxes, travelers
checks, money orders, trust services and commercial, mortgage and consumer
loans. As of December 31, 1998, the Company had total assets of $189.2 million,
total deposits of $167.0 million, 14,809 deposit accounts and shareholders'
equity of $19.6 million.
Significant events in 1998 included the Company's establishment as the
parent of the Bank and the Company's underwritten initial public offering in
April 1998. The Company issued 1,495,000 shares of common stock in the initial
public offering, resulting in net proceeds to the Company of $14.1 million.
The Company's main office is located at 250 E. 8th Street, Holland,
Michigan 49423, and its telephone number is (616) 820-1444. Unless the context
clearly suggests otherwise, financial information and other references to the
Company include the Bank.
Products and Services
Deposit Services. The Bank offers a broad range of deposit services,
including checking 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,
churches, nonprofit organizations, financial institutions and government
authorities. The Bank may also use alternative funding sources as needed,
including advances from Federal Home Loan Banks, 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 all fixed
rate loans in the secondary market. The Bank also offers home equity loans.
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 and lines of
credit 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.
<PAGE>
Although the Bank takes a progressive and competitive approach to lending,
it stresses high quality in its loans. On a regular basis, the Board of
Directors reviews selected loans. 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 lending officers. The Bank also
maintains a loan review process designed to promote early identification of
credit quality problems. Any past due loans and identified problem loans will be
reviewed with the Board of Directors on a regular 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.
Trust Services. The Bank began offering trust services in January, 1999, to
further provide for the financial needs of its customers. As of February 23,
1999, the Trust Department had assets of approximately $31 million.
Competition
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, and competitive
interest rates.
Environmental Matters
The Company does not believe that existing environmental regulations will
have any material effect upon the capital expenditures, earnings, and
competitive position of the Company.
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. None of the Company's employees are represented by collective
bargaining agents.
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<PAGE>
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)
Basic loss per share........................ (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:
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<PAGE>
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Year ended December 31,
1998
Average Yield/
Balance Interest Cost
Assets:
<S> <C> <C> <C>
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>
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<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
As a percent of average interest bearing
liabilities
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 fee income .......................... 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.
-5-
<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 1.17%
estate mortgage loan sales...............
</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.
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<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>
-7-
<PAGE>
Below is a schedule of the loan 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.
-8-
<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
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
loan type and to 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.
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<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>
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<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 for 4% 4% 8%
capital adequacy..........................
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>
-11-
<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>
The savings and NOW accounts are categorized in the above table based upon
the Bank's historical experience.
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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
-13-
<PAGE>
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.
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
-14-
<PAGE>
"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 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.
-15-
<PAGE>
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 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>
As of December 31, 1998, the Company was "well capitalized."
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
-16-
<PAGE>
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 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.
-17-
<PAGE>
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).
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.
-18-
<PAGE>
ITEM 2: Description of Property.
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.
The Company owns or leases facilities located in Ottawa County, Michigan.
The Company's facilities as of February 1, 1999, were as follows:
<TABLE>
Location of Facility Use
<S> <C>
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
</TABLE>
The Company believes its facilities are well-maintained, adequately insured
and primarily utilized. Because of the Company's growth, the Company is
continually evaluating the need for additional space and branches.
ITEM 3: Legal Proceedings.
As the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking to which the
Company or any of its subsidiaries is a party of or which any of its properties
is the subject.
ITEM 4: Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 1998 to a vote of
the Registrant's stockholders.
-19-
<PAGE>
PART II
ITEM 5: Market for Common Equity and Related Stockholder Matters.
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, for each since the
Company's April 1998 initial public offering 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
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. Fiscal 1998
quotations do not include intra-day highs and lows. On February 26, 1999, there
were approximately 800 owners of record and, in addition, approximately 1,300
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.
ITEM 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information set forth in Appendix A, under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
the Registrant's definitive Proxy Statement dated March 5, 1999, is hereby
incorporated by reference and is filed as Exhibit 13 to this Form 10-KSB Annual
Report.
ITEM 7: Financial Statements.
The information set forth in Appendix A, under the captions "Report of
Independent Auditors," "Consolidated Financial Statements" and "Notes to
Consolidated Financial Statements" of the Registrant's definitive Proxy
Statement dated March 5, 1999, is hereby incorporated by reference and is filed
as Exhibit 13 to this Form 10-KSB Annual Report.
ITEM 8: Changes in and Disagreements With Accountants and Financial Disclosure.
There have been no disagreements with the Company's independent public
accountants.
-20-
<PAGE>
PART III
ITEM 9: Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information set forth on pages 3-5, under the caption "Information
About Directors" of the Registrant's definitive Proxy Statement dated March 5,
1999, is hereby incorporated by reference and is filed as Exhibit 13 to this
Form 10-KSB Annual Report.
The Company's common stock is not registered under the Securities Exchange
Act of 1934, and therefore the Company's officers and directors are not required
to and do not file beneficial ownership reports pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
ITEM 10: Executive Compensation.
Information relating to compensation of the Registrant's executive officers
and directors is contained on Exhibit 13, under the captions "Director
Compensation" and "Executive Compensation," in the Registrant's definitive Proxy
Statement dated March 5, 1999, and is incorporated herein by reference and is
filed as Exhibit 13 to this Form 10-KSB Annual Report.
ITEM 11: Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners and
management is contained on page 8, under the caption "Security Ownership of
Management" in the Registrant's definitive Proxy Statement dated March 5, 1999,
and is incorporated herein by reference and is filed as Exhibit 13 to this Form
10-KSB Annual Report.
ITEM 12: Certain Relationships and Related Transactions.
Information relating to certain relationships and related transactions is
contained on page 12, under the caption "Transactions Involving Management" in
the Registrant's definitive Proxy Statement dated March 5, 1999, and is
incorporated herein by reference and is filed as Exhibit 13 to this Form 10-KSB
Annual Report.
-21-
<PAGE>
ITEM 13: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) Financial Statements.
1. The following documents are filed as part of Item 7 of this
report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December
31, 1998 and 1997
Consolidated Statements of Changes in Shareholders Equity for
the years ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997
Notes to Consolidated Financial Statements
2. Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
3. The following exhibits are filed as part of this report:
Reference is made to the exhibit index which follows the
signature page of this report.
The Registrant will furnish a copy of any exhibits listed on
the Exhibit Index to any shareholder of the Registrant
without charge upon written request of Philip J. Koning,
Macatawa Bank Corporation, 51 E. Main Street, Zeeland,
Michigan 49464.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the
Registrant filed no Current Reports on Form 8-K.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 18, 1999.
MACATAWA BANK CORPORATION
/s/ Benj. S. Smith, III
Benj. A. Smith, III
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Philip J. Koning
Philip J. Koning
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated. Each director of the
Registrant, whose signature appears below, hereby appoints Benj. A. Smith, III
and Philip J. Koning, and each of them severally, as his attorney-in-fact, to
sign in his name and on his behalf, as a director of the Registrant, and to file
with the Commission any and all Amendments to this Report on Form 10-KSB.
Signature
/s/ Benj. A. Smith, III March 18, 1999
Benj. A. Smith, III, Principal Executive Officer and a Director
/s/ Philip J. Koning March 18, 1999
Philip J. Koning, Principal Financial and Accounting Officer
and a Director
/s/ James L. Batts March 18, 1999
James L. Batts, Director
/s/ G. Thomas Boylan March 18, 1999
G. Thomas Boylan, Director
-23-
<PAGE>
________________________________________________
Jessie F. Dalman, Director
/s/ Robert E. DenHerder March 18, 1999
Robert E. DenHerder, Director
________________________________________________
Wayne J. Elhart, Director
________________________________________________
Brian J. Hansen, Director
/s/ James L. Jurries March 18, 1999
James L. Jurries, Director
/s/ John F. Koetje March 18, 1999
John F. Koetje, Director
-24-
<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).
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).
-25-
<PAGE>
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).
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).
13 Proxy Statement to shareholders. This exhibit, except for
those portions expressly incorporated by reference in this
filing, is furnished for the information of the Securities
and Exchange Commission and is not deemed "filed" as part of
this filing.
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company LLP, independent public
accountants
24 Power of Attorney (included on the signature page on page 15
of the Annual Report on Form 10-KSB)
27 Financial Data Schedule
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<PAGE>
EXHIBIT 13
[LOGO]
MACATAWA BANK
CORPORATION
March 5, 1999
Dear Shareholder:
We invite you to attend the 1999
Annual Meeting of Shareholders.
This year's meeting will be held
on Thursday, April 15, 1999, at
10:00 a.m., at Ridgepoint Community
Church, 340 - 104th Avenue,
Holland, Michigan 49423.
Our audited financial statements
are included in an appendix to this
Proxy Statement and provide
important information about our
accomplishments in 1998.
It is important that your shares
are represented at the Annual
Meeting. Please carefully read the
Notice of Annual Meeting and
Proxy Statement. Whether or not you
expect to attend the Annual Meeting,
please sign, date and
return the enclosed proxy in the
envelope provided at your
earliest convenience.
Sincerely,
/s/ Benj. A. Smith, III
Benj. A. Smith, III
Chairman of the Board and
Chief Executive Officer
<PAGE>
MACATAWA BANK CORPORATION
51 E. Main Street
Zeeland, Michigan 49464
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 15, 1999
To Our Shareholders:
The Annual Meeting of Shareholders of Macatawa Bank Corporation will be
held at Ridgepoint Community Church, 340 104th Avenue, Holland, Michigan 49423,
on Thursday, April 15, 1999 at 10:00 A.M., local time, for the following
purposes:
1. To elect three directors, each to hold office for a three year term.
2. To consider and vote upon a proposal to approve the First Amendment to
the Stock Compensation Plan.
3. To transact such other business as may properly come before the meeting
or at any adjournment thereof.
Shareholders of record at the close of business February 26, 1999, will be
entitled to vote at the meeting or any adjournment thereof. Whether or not you
expect to be present in person at this meeting, you are urged to sign the
enclosed Proxy and return it promptly in the enclosed envelope. If you do attend
the meeting and wish to vote in person, you may do so even though you have
submitted a Proxy.
By order of the Board of Directors
Dated: March 5, 1999
Holland, Michigan /s/ Philip J. Koning
Philip J. Koning
Secretary
<PAGE>
Dated: March 5, 1999
MACATAWA BANK CORPORATION
51 E. Main Street
Zeeland, Michigan 49464
------------------
PROXY STATEMENT
For the Annual Meeting of Shareholders
to be held April 15, 1999
------------------
SOLICITATION OF PROXIES FOR ANNUAL MEETING
This Proxy Statement is furnished to the Shareholders of Macatawa Bank
Corporation (the "Company") in connection with the solicitation by the Board of
Directors of proxies to be used at the Annual Meeting of Shareholders which will
be held at Ridgepoint Community Church, 340 104th Avenue, Holland, Michigan
49423, April 15, 1999, at 10:00 A.M., local time.
The Annual Meeting is being held for the following purposes:
1. To elect three directors, each to hold office for a three year term.
2. To consider and vote upon a proposal to approve the First Amendment to
the Stock Compensation Plan.
3. To transact such other business as may properly come before the meeting
or at any adjournment thereof.
If a proxy in the form distributed by the Company's Board of Directors is
properly executed and returned to the Company, the shares represented by the
proxy will be voted at the Annual Meeting of Shareholders and at any adjournment
of that meeting. Where shareholders specify a choice, the proxy will be voted as
specified. If no choice is specified, the shares represented by the proxy will
be voted FOR the nominees named by the Board of Directors in the proxy and FOR
the proposal described in this Proxy Statement. Shares not voted at the meeting,
whether by abstention, broker non-vote, or otherwise, will not be treated as
votes cast at the meeting. Votes cast at the meeting and submitted by proxy will
be tabulated by the Company's transfer agent, Macatawa Bank.
A proxy may be revoked prior to its exercise by delivering a written notice
of revocation to the secretary of the Company, executing and delivering a proxy
of a later date or attending the meeting and voting in person. Attendance at the
meeting does not automatically act to revoke a proxy.
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On February 26, 1999, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were outstanding 2,435,125 shares
of common stock of the Company. Shares cannot be voted unless the shareholder is
present at the meeting or is represented by proxy.
As of February 26, 1999, no person was known to management to be the
beneficial owner of more than 5% of the Company's common stock.
ELECTION OF DIRECTORS
The Company's Articles of Incorporation provide for the division of the
Board of Directors into three classes of nearly equal size with staggered
three-year terms of office. The number of directors constituting the Board of
Directors is determined from time to time by the Board of Directors. The Board
is currently composed of ten members. Three persons have been nominated for
election to the Board, each to serve a three-year term expiring at the 2002
Annual Meeting of Shareholders. The Board has nominated Robert E. Den Herder,
James L. Jurries, and Philip J. Koning, each of whom is an incumbent director.
Holders of common stock should complete the accompanying proxy. Unless
otherwise directed by a shareholder's proxy, it is intended that the votes cast
upon exercise of proxies in the form accompanying this statement will be in
favor of electing the nominees as directors for the terms indicated above. Each
of the nominees are presently serving as directors. The following pages of this
Proxy Statement contain more information about the nominees and other directors
of the Company.
A plurality of the votes cast at the Annual Meeting is required to elect
the nominees as directors of the Company. As such, the three individuals who
receive this number of votes cast by the holders of the Company's common stock
will be elected as directors. Shares not voted at the meeting, whether by
abstention, broker non-vote, or otherwise, will not be treated as votes cast at
the meeting. Votes cast at the meeting and submitted by proxy will be tabulated
by the Company.
Except those persons nominated by the Board of Directors, no other persons
may be nominated for election at the 1999 Annual Meeting. The Company's Articles
of Incorporation require at least 60 days prior written notice of any other
proposed nomination and no such notice has been received.
If any nominee becomes unavailable for election due to circumstances not
now known, the accompanying proxy will be voted for such other person to become
a director as the Board of Directors selects.
The Board of Directors recommends a vote FOR the election of each of the
persons nominated by the Board.
2
<PAGE>
INFORMATION ABOUT DIRECTORS
The content of the following table is based upon information as of February
1, 1999, furnished to the Company by the directors. Except as described in the
notes following the table, the following directors have sole voting and
dispositive power as to all of the shares set forth in the following table.
<TABLE>
Amount and Percent
Year First Nature of of
Became a Beneficial Common
Name Age Director Ownership(1) Stock
---------------------------------------- ----- ------------ -------------- --------
<S> <C> <C> <C> <C>
Nominees for Election as Directors for
Terms Expiring in 2002
Robert E. Den Herder (c) (d) (e) 44 1997 57,750 2.3%
James L. Jurries (a) 57 1998 38,000(2) 1.5%
Philip J. Koning (b) (c) (d) 44 1997 25,500 1.0%
Directors Whose Terms Expire in 2000
James L. Batts (e) 40 1998 13,500 *
G. Thomas Boylan (b) (c) (e) 76 1997 73,750 3.0%
Wayne J. Elhart (a) 44 1998 24,250(3) *
Benj. A. Smith, III (b) (c) (d) (e) 55 1997 86,350(4) 3.5%
Directors Whose Terms Expire in 2001
Jessie F. Dalman (a) 65 1998 2,000 *
John F. Koetje (a) 63 1998 38,500 1.6%
Brian J. Hansen (c) (d) 50 1997 35,000 1.4%
*Denotes ownership of less than one percent.
</TABLE>
- ------------------------------------
(a) Member of the Audit Committee
(b) Member of the Investment Committee
(c) Member of the Loan Committee
(d) Member of the Trust Committee
(e) Member of the Compensation Committee
3
<PAGE>
NOTES
(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 become exercisable on March 19,
1999: 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) 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.
(3) Includes 5,000 shares owned by Mr. Elhart's spouse.
(4) 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.
- -------------------------
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.
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.
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.
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. In 1998 Ms.
Dalman completed her fourth term in the Michigan House of Representatives
representing the 90th District (Holland).
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.
4
<PAGE>
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.
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.
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.
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.
The Board of Directors had 12 meetings in 1998. The Company has no
nominating committee. All directors attended at least three-fourths of the
aggregate number of meetings of the Board and Board committees which they were
eligible to attend.
COMPENSATION OF DIRECTORS
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.
5
<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.
6
<PAGE>
Option Grants in 1998. Shown below is information on grants of stock
options pursuant to the Company's Stock Compensation Plan and the Company's 1998
Directors' Stock Option Plan.
<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 2.37% $ 10.00 March 19, 2008 $12,578 $31,875
Benj. A. Smith, III 4,000 4.67% $ 10.00 March 19, 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 March 19, 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.
7
<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 of this proxy statement 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
Name of 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 (10 394,600 15.9%
persons)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Footnotes 1 and 4 to the Information About Directors table appearing on
page 4 of this Proxy Statement.
8
<PAGE>
APPROVAL OF THE FIRST AMENDMENT TO THE
MACATAWA BANK CORPORATION
STOCK COMPENSATION PLAN
On January 21, 1999, the Board of Directors adopted the First Amendment
(the "Amendment") to the Macatawa Bank Corporation Stock Compensation Plan (the
"Plan"), subject to approval by the Company's shareholders. The following
summary of the Plan is subject to the specific provisions contained in the
complete text of the Plan and in the Amendment set forth in Appendix B to this
Proxy Statement.
Amendment. The Amendment increases the maximum number of shares available
under the Plan from 100,000 to 200,000 shares of common stock.
Purpose. The purpose of the Plan is to promote the long-term success of the
Company for the benefit of the Company's shareholders through stock-based
compensation by aligning the personal interests of the Company's key employees
with those of its shareholders.
Eligibility. Employees of the Company and its subsidiaries are eligible to
participate in the Plan. The number of persons eligible to participate in the
Plan as of February 1, 1999, was approximately 100.
Administration. The Plan is administered by a committee of the Board of
Directors (the "Committee"). The Committee will be composed of at least three
directors, each of whom is not an employee of the Company. Each member of the
Committee is required to be a "disinterested person" within the meaning of Rule
16b-3 of the General Rules and Regulations under the Securities and Exchange Act
of 1934, as amended, and no member of the Committee is eligible to participate
in the Plan. Subject to the Company's Articles, Bylaws, and the provisions of
the Plan, the Committee has the authority to select key employees to whom Awards
(as defined below) may be awarded; the type of Awards (or combination thereof)
to be granted; the number of shares of Common Stock to be covered by each Award;
and the terms and conditions of any Award, such as conditions of forfeiture,
transfer restrictions and vesting requirements.
The Plan provides for the granting of a variety of stock-based Awards,
described in more detail below, such as stock options, including incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), restricted stock, performance shares, and other
stock-based awards. These Awards are granted at no cost to the recipients. The
term of the Plan is ten years, and no Awards may be granted under the Plan after
January 25, 2008.
Types of Awards. The following types of awards ("Awards") may be granted
under the Plan:
An "Option" is a contractual right to purchase a number of shares at a
price determined at the date the Option is granted. Options include incentive
stock options, as defined in Section 422 of the Code, as well as nonqualified
stock options. The exercise price included in both incentive stock options and
nonqualified stock options must equal at least 100% of the fair market value of
the Common Stock at the date of grant. Options are granted at no cost to the
recipients.
"Restricted Stock" are shares of Common Stock granted to an employee for no
or nominal consideration. Title to the shares passes to the employee at the time
of the grant; however, the ability to sell or otherwise dispose of the shares is
subject to restrictions and conditions determined by the Committee.
9
<PAGE>
"Performance Shares" are an Award of the right to receive stock or cash of
an equivalent value at the end of the specified performance period upon the
attainment of specified performance goals.
An "Other Stock-Based Award" is any other Award that may be granted under
the Plan that is valued in whole or in part by reference to or is payable in or
otherwise based on Common Stock.
Shares Subject to Plan. A total of 100,000 shares of the Company's Common
Stock are reserved for use under the Plan, and a total of 200,000 shares of
common stock will be reserved for issuance under the Plan if the Company's
shareholders approve the First Amendment. The shares to be issued under the Plan
will be authorized and unissued shares, including shares reacquired by the
Company which have that status. The number of shares that may be issued under
the Plan and the number of shares subject to Options are subject to adjustments
in the event of a merger, reorganization, consolidation, recapitalization, stock
dividend, stock split or other change in corporate structure affecting the
Common Stock. Subject to certain restrictions, unexercised Options, lapsed
shares of Restricted Stock, and shares surrendered in payment for exercised
Options may be reissued under the Plan.
Termination or Amendment of the Plan. The Board may at any time amend,
discontinue, or terminate the Plan or any part thereof; however, unless
otherwise required by law, the rights of a participant may not be impaired
without the consent of such participant. In addition, without the approval of
the Company's shareholders, no amendment may be made which would increase the
aggregate number of shares of Common Stock that may be issued under the Plan,
change the definition of employees eligible to receive Awards under the Plan,
extend the maximum option period under the Plan, decrease the Option price of
any Option to less than 100% of the fair market value on the date of grant,
otherwise materially increase the benefits to participants in the Plan or cause
the Plan not to comply with certain applicable securities and tax law
requirements.
Participation and Assignability. Neither the Plan nor any Award agreement
granted under the Plan entitles any participant or other employee to any right
to continued employment by the Company or any subsidiary. Generally, no Award,
Option, or other benefit payable under the Plan may, except as otherwise
specifically provided by law, be subject in any manner to assignment, transfer,
or encumbrance. However, Nonqualified Stock Options may be transferred without
consideration to: (i) an immediate family member of the optionee, (ii) a trust
for the benefit of the immediate family members of the optionee, or (iii) a
partnership or limited liability Company whose only partners or members are
immediate family members of the optionee, if the optionee satisfies such
conditions to the transfer as may be required by the Committee. Upon termination
of employment, any portion of unexercised Options which are exercisable on the
termination date must generally be exercised within three months of the
termination date for any termination other than as a result of the death,
disability, or retirement of the employee, in which case the Plan provides for
longer exercise periods.
Federal Tax Consequences. The following summarizes the consequences of the
grant and acquisition of Awards under the Plan for federal income tax purposes,
based on management's understanding of existing federal income tax laws. This
summary is necessarily general in nature and does not purport to be complete.
Also, state and local income tax consequences are not discussed and may vary
from locality to locality.
10
<PAGE>
Options. Plan participants will not recognize taxable income at the time an
Option is granted under the Plan unless the Option has a readily ascertainable
market value at the time of grant. Management understands that Options to be
granted under the Plan will not have a readily ascertainable market value;
therefore, income will not be recognized by participants before the time of
exercise of an Option. For nonqualified stock options, the difference between
the fair market value of the shares at the time an Option is exercised and the
Option price generally will be treated as ordinary income to the optionee, in
which case the Company will be entitled to a deduction equal to the amount of
the optionee's ordinary income. With respect to incentive stock options,
participants will not realize income for federal income tax purposes as a result
of the exercise of such Options. In addition, if common stock acquired as a
result of the exercise of an incentive stock option is disposed of more than two
years after the date the Option is granted and more than one year after the date
the Option was exercised, the entire gain, if any, realized upon disposition of
such common stock will be treated for federal income tax purposes as capital
gain. Under these circumstances, no deduction will be allowable to the Company
in connection with either the grant or exercise of an incentive stock option.
Exceptions to the general rules apply in the case of a "disqualifying
disposition." If a participant disposes of shares of common stock acquired
pursuant to the exercise of an incentive stock option before the expiration of
one year after the date of exercise or two years after the date of grant, the
sale of such stock will be treated as a "disqualifying disposition." As a
result, such a participant would recognize ordinary income and the Company would
be entitled to a deduction in the year in which such disposition occurred.
The amount of the deduction and the ordinary income recognized upon a
disqualifying disposition would generally be equal to the lesser of: (a) the
sale price of the shares sold minus the Option price, or (b) the fair market
value of the shares at the time of exercise and minus the Option price. If the
disposition is to a related party (such as a spouse, brother, sister, lineal
descendant, or certain trusts for business entities in which the seller holds a
direct or indirect interest), the ordinary income recognized generally is equal
to the excess of the fair market value of the shares at the time of exercise
over the exercise price. Any additional gain recognized upon disposition, in
excess of the ordinary income, will be taxable as capital gain. In addition, the
exercise of incentive stock options may result in an alternative minimum tax
liability.
Restricted Stock. Recipients of shares of Restricted Stock that are not
"transferable" and are subject to "substantial risk of forfeiture" at the time
of grant will not be subject to federal income taxes until the lapse or release
of the restrictions on sale of the shares, unless the recipient files a specific
election under the Code to be taxed at the time of grant. The recipient's income
and the Company's deduction will be equal to the excess of the then fair market
value (or sale price) of the shares less any purchase price.
Performance Shares. Participants are not taxed upon the grant of
Performance Shares. Upon receipt of the underlying shares or cash, a participant
will be taxed at ordinary income tax rates (subject to withholding) on the
amount of cash received and/or the current fair market value of stock received,
and the Company will be entitled to a corresponding deduction. The participant's
basis in any Performance Shares received will be equal to the amount of ordinary
income on which he or she was taxed and, upon subsequent disposition, any gain
or loss will be capital gain or loss.
Required Vote for Approval. On January 21, 1999, the Board of Directors of
the Company approved the Plan, subject to shareholder approval. At the Annual
Meeting, the shareholders are being requested to consider and approve the First
Amendment to the Plan, which would increase the number of shares reserved for
issuance under the Plan from 100,000 to 200,000. The affirmative vote of a
majority of the holders of
11
<PAGE>
the Company's outstanding voting stock represented and voted at the Annual
Meeting is required to approve the Plan.
The Board of Directors recommends a vote FOR approval of the First
Amendment to the Macatawa Bank Corporation Stock Compensation Plan.
TRANSACTIONS INVOLVING MANAGEMENT
Directors and officers of the Company and their associates were customers
of, and had transactions with, subsidiaries of the Company in the ordinary
course of business during 1998. All loans and commitments included in such
transactions were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve an
unusual risk of collectibility or present other unfavorable features.
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, an
officer and director of the Company. The terms of the lease were negotiated on
an arm's-length basis, and the Company believes that the rent and other terms
reflect fair market value.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The combined consolidated financial statements of the Company have been
examined by Crowe, Chizek and Company LLP, independent certified public
accountants. A representative of Crowe, Chizek and Company LLP is expected to be
present at the annual meeting with the opportunity to make a statement, if
desired, and will be available to respond to appropriate questions. It is
anticipated that the Company's Audit Committee will select the Company's
auditors before the end of this calendar year.
SHAREHOLDER PROPOSALS--2000 ANNUAL MEETING
Any proposal of a shareholder intended to be presented for action at the
2000 annual meeting of the Company must be received by the Company at 250 E. 8th
Street, Holland, Michigan 49423, not later than November 15, 2000, if the
shareholder wishes the proposal to be included in the Company's proxy materials
for that meeting.
AVAILABILITY OF 10-KSB ANNUAL REPORT
An annual report on Form 10-KSB to the Securities and Exchange Commission
for the year ended December 31, 1998, will be provided free to shareholders upon
written request. Write to Macatawa Bank Corporation, Attention: Philip J.
Koning, 250 E. 8th Street, Holland, Michigan 49423. The Form 10-KSB and certain
other periodic filings are filed with the Securities and Exchange Commission
(the "Commission"). The Commission maintains an Internet web site that contains
reports and other information regarding companies, including the Company, that
file electronically. The Commission's web site address is http:\\www.sec.gov.
13
<PAGE>
MISCELLANEOUS
The management of the Company is not aware of any other matter to be
presented for action at the meeting. However, if any such other matter is
properly presented for action, it is the intention of the persons named in the
accompanying form of proxy to vote thereon in accordance with their best
judgment.
The cost of soliciting proxies in the accompanying forms will be borne by
the Company. In addition to solicitation by mail, proxies may be solicited in
person, or by telephone or telegraph, by some regular employees of the Company.
By order of the Board of Directors
March 5, 1999. /s/ Philip J. Koning
Philip J. Koning
Secretary
13
<PAGE>
APPENDIX A
TABLE OF CONTENTS
Management's Discussion and Analysis.........................................A-2
Report of Independent Auditors...............................................A-7
Consolidated Financial Statements............................................A-8
Notes to Consolidated Financial Statements..................................A-12
A-1
<PAGE>
APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Macatawa Bank Corporation (the "Company") is a Michigan corporation and is
the bank holding company for Macatawa Bank (the "Bank"). The Bank commenced
operations on November 25, 1997. The Bank is a Michigan chartered bank with
depository accounts insured by the Federal Deposit Insurance Corporation. The
Bank 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 primarily located in Ottawa County, Michigan.
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 February 23, 1999, had assets of
approximately $31 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.
A-2
<PAGE>
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 Drive branch offices in Holland, the purchase of
the real estate and construction of the facilities for the Zeeland, Allendale
and 16th Street 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.
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
A-3
<PAGE>
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. A public offering of additional common stock is being considered to
raise additional 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 10.95%. 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
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
A-4
<PAGE>
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.
A-5
<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.
A-6
<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
- --------------------------------------------------------------------------------
A-7
<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.
A-8
<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.
A-9
<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.
A-10
<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.
A-11
<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)
A-12
<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)
A-13
<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)
A-14
<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)
A-15
<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)
A-16
<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)
- --------------------------------------------------------------------------------
A-17
<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)
A-18
<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)
A-19
<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)
A-20
<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)
A-21
<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)
A-22
<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)
A-23
<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>
- --------------------------------------------------------------------------------
A-24
<PAGE>
APPENDIX B
FIRST AMENDMENT
TO THE
MACATAWA BANK CORPORATION
STOCK COMPENSATION PLAN
This First Amendment to the Macatawa Bank Corporation Stock Compensation
Plan (the "Plan") is adopted by Macatawa Bank Corporation, a Michigan
corporation (the "Company") with respect to the following:
o The Company adopted the Plan in 1998.
o The Company wishes to amend the Plan.
o The Board of Directors of the Company has approved this Amendment to
the Plan.
NOW, THEREFORE, the Plan is amended as follows:
1. The first sentence of Article 4 is amended in its entirety to read as
follows:
Subject to adjustment as provided in Section 12.1, the maximum
aggregate number of shares of Common Stock which may be issued under
this Plan shall not exceed 200,000 shares, which may be either
unauthorized and unissued Common Stock or issued Common Stock
reacquired by the Company ("Plan Shares").
This Amendment will be effective upon approval of the shareholders of the
Company at the annual shareholders meeting to be held April 15, 1999.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
this 1st day of March, 1999.
MACATAWA BANK CORPORATION
By: /s/ Philip J. Koning
Philip J. Koning
Secretary
B-1
::ODMA\PCDOCS\GRR\242952\1
<PAGE>
Exhibit 21 - Subsidiaries of Registrant
Macatawa Bank - 100% owned
Incorporated as a Michigan Banking Corporation
51 E. Main Street
Zeeland, Michigan 49464
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Macatawa Bank Corporation
We consent to the incorporation by reference in the registration statements on
Form S-8 (File No. 333-53593 and File No. 333-53595) of our report dated
February 17, 1999, on our audit of the consolidated financial statements as of
December 31, 1998 and 1997, and for the year ended December 31, 1998, and for
the period from May 21, 1997 (date of inception) through December 31, 1997,
which report is included in this Annual Report on Form 10-KSB.
/s/ CROWE, CHIZEK and COMPANY LLP
March 30, 1999 CROWE, CHIZEK and COMPANY LLP
Grand Rapids, Michigan
::ODMA\PCDOCS\GRR\243029\5
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information from SEC form 10-KSB and is
qualified in its entirety by reference to such financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,453,177
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 6,500,000
<INVESTMENTS-HELD-FOR-SALE> 27,007,300
<INVESTMENTS-CARRYING> 27,007,300
<INVESTMENTS-MARKET> 27,007,300
<LOANS> 137,882,260
<ALLOWANCE> 2,030,000
<TOTAL-ASSETS> 189,228,673
<DEPOSITS> 166,988,675
<SHORT-TERM> 2,000,000
<LIABILITIES-OTHER> 628,610
<LONG-TERM> 0
0
0
<COMMON> 22,260,646
<OTHER-SE> (2,649,258)
<TOTAL-LIABILITIES-AND-EQUITY> 189,228,673
<INTEREST-LOAN> 5,338,963
<INTEREST-INVEST> 1,465,142
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,804,105
<INTEREST-DEPOSIT> 3,186,309
<INTEREST-EXPENSE> 3,190,237
<INTEREST-INCOME-NET> 3,613,868
<LOAN-LOSSES> 2,022,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,763,301
<INCOME-PRETAX> (2,488,551)
<INCOME-PRE-EXTRAORDINARY> (2,488,551)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,488,551)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> (1.22)
<YIELD-ACTUAL> 4.21
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,050
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,030,000
<ALLOWANCE-DOMESTIC> 2,030,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 937,000
</TABLE>
