SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 000-25927
MACATAWA BANK CORPORATION
(Exact name of issuer as specified in its charter)
MICHIGAN 38-3391345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 E. Main Street, Zeeland, Michigan 49464
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 748-9491
-----------
Check whether the issuer: (1) has 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 _____
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 3,589,315 shares of the Company's
Common Stock (no par value) were outstanding as of November 10, 2000.
Transitional Small Business Disclosure Format (check one): Yes _____ No __X__
1
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3.
Quantitative and Qualitative Disclosures 15
About Market Risk
Part II. Other Information
Item 1.
Legal Proceedings 16
Item 2.
Changes in Securities and Use of Proceeds 16
Item 3.
Defaults Upon Senior Securities 16
Item 4.
Submission of Matters to a Vote of Security Holders 16
Item 5.
Other Information 16
Item 6.
Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
Part I Financial Information
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2000 (unaudited) and December 31, 1999
--------------------------------------------------------------------------------
<TABLE>
September 30, December 31,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,040,630 $ 20,554,039
Securities available for sale 43,542,099 28,281,375
Federal Home Loan Bank Stock 2,312,000 2,312,000
Total loans 373,222,569 285,374,451
Allowance for loan losses (5,481,473) (3,995,165)
------------ ------------
367,741,096 281,379,286
Premises and equipment - net 12,397,527 9,997,566
Accrued interest receivable 2,825,912 1,904,126
Other assets 1,453,673 492,743
------------ ------------
Total Assets $451,312,937 $344,921,135
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 45,137,748 $ 34,542,493
Interest-bearing 321,479,519 244,847,389
------------ ------------
Total 366,617,267 279,389,882
Fed funds purchased 5,000,000 --
Federal Home Loan Bank borrowings 40,000,000 30,000,000
Other borrowings 1,000,000 --
Accrued expenses and other liabilities 1,704,960 1,005,100
------------ ------------
Total liabilities 414,322,227 310,394,982
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; 3,588,565 shares
issued and outstanding as of September 30, 2000 and
December 31, 1999. 36,882,916 36,882,916
Retained earnings (deficit) 336,243 (1,960,810)
Accumulated other comprehensive loss (228,449) (395,953)
------------ ------------
Total shareholders' equity 36,990,710 34,526,153
------------ ------------
Total liabilities and shareholders' equity $451,312,937 $344,921,135
============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME Three and Nine Month
Periods Ended September 30, 2000 and 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $8,309,660 $5,020,299 $22,728,502 $12,588,440
Investments 716,415 455,142 1,771,095 1,185,375
------------ ----------- ----------- ------------
Total interest income 9,026,075 5,475,441 24,499,597 13,773,815
Interest expense
Deposits 4,119,262 2,325,063 10,818,454 6,084,420
Other 588,422 224,727 1,746,502 408,963
------------ ----------- ----------- ------------
Total interest expense 4,707,684 2,549,790 12,564,956 6,493,383
Net Interest Income 4,318,391 2,925,651 11,934,641 7,280,432
Provision for loan losses (434,000) (505,000) (1,516,000) (1,500,000)
------------ ----------- ----------- ------------
Net Interest Income After
Provision for loan losses 3,884,391 2,420,651 10,418,641 5,780,432
Noninterest income
Service charges on deposit accounts 249,786 155,676 688,941 363,415
Gain on sale of loans 95,246 89,157 230,427 513,551
Trust revenue 132,803 83,626 380,990 141,836
Other 50,006 39,373 150,865 100,755
------------ ----------- ----------- ------------
Total noninterest income 527,841 367,832 1,451,223 1,119,557
Noninterest expense
Salaries and benefits 1,810,283 1,450,136 5,163,534 3,797,591
Occupancy expense of premises 271,398 232,483 835,362 574,663
Furniture and equipment expense 325,332 232,391 883,290 531,672
Legal and professional fees 57,568 33,405 210,924 101,894
Advertising 93,300 68,308 238,054 183,436
Data processing 79,230 54,981 224,811 141,822
Shareholder services 28,142 2,889 79,641 72,668
Supplies 87,285 93,475 262,843 243,142
Other expense 540,411 319,244 1,502,185 984,923
------------ ----------- ----------- ------------
Total noninterest expenses 3,292,949 2,487,312 9,400,644 6,631,811
Income before federal income tax 1,119,283 301,171 2,469,220 268,178
Federal income tax 172,167 0 172,167 0
------------ ----------- ----------- ----------
Net income $ 947,116 $ 301,171 $ 2,297,053 $ 268,178
=========== ========= =========== ==========
Comprehensive Income (Loss) $ 1,154,454 $ 272,312 $ 2,464,557 $ (584)
============ ========== =========== ==========
Basic and diluted income per share $ .26 $ .08 $ .64 $ .09
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Month Periods Ended September 30, 2000 and September 30, 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,297,053 $ 268,178
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 903,179 511,376
Provision for loan losses 1,516,000 1,500,000
Net change in
Accrued interest receivable and other assets (1,882,716) (726,977)
Accrued expenses and other liabilities 613,570 596,534
------------ ------------
Net cash from operating activities 3,447,086 2,149,111
Cash flows from investing activities
Net increase in loans (87,877,810) (114,197,932)
Purchase of Federal Home Loan Bank Stock -- (2,312,000)
Purchases of securities available for sale (14,985,279) (12,199,066)
Proceeds from maturities and calls of securities available for sale -- 15,000,000
Purchases of premises and equipment (3,324,791) (2,545,637)
------------ ------------
Net cash from investing activities (106,187,880) (116,254,635)
Cash flows from financing activities
Net increase in deposits 87,227,385 76,266,482
Net increase in short term borrowings 6,000,000 1,500,000
Advances of Federal Home Loan Bank Borrowings 45,000,000 20,000,000
Repayments of Federal Home Loan Bank Borrowings (35,000,000) 0
Proceeds from sale of stock 0 14,622,270
------------ ------------
Net cash from financing activities 103,227,385 112,388,752
Net change in cash and cash equivalents 486,591 (1,716,772)
Cash and cash equivalents at beginning of period 20,554,039 17,953,177
------------ ------------
Cash and cash equivalents at end of period $21,040,630 $16,236,405
=========== ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest $11,922,712 $ 6,015,062
Cash paid during the period for federal income tax $ 1,250,000 $ 0
--------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY Nine Month Periods Ended
September 30, 2000 and September 30, 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income(Loss) Equity
--------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 31, 1999 $22,260,646 $(2,654,076) $ 4,818 $19,611,388
Proceeds from sale of stock $14,622,270 14,622,270
Net income for nine months ended
September 30, 1999 (unaudited) 268,178 268,178
Other comprehensive income (loss), Net of tax:
Unrealized gains/losses on securities (268,762) (268,762)
--------- -----------
Comprehensive loss (584)
----------- ----------- --------- -----------
Balance, September 30, 1999 $36,882,916 $(2,385,898) $(263,944) $34,233,074
=========== =========== ========= ===========
Accumulated
Retained Other Total
Common Earnings Comprehensive Shareholders'
Stock (Deficit) Income(Loss) Equity
--------- ----------- -------------- ------------
Balance, January 31, 2000 $36,882,916 $(1,960,810) $(395,953) $34,526,153
Net income for nine months ended
September 30, 2000 (unaudited) 2,297,053 2,297,053
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities 167,504 167,504
-----------
Comprehensive income 2,464,557
----------- ----------- --------- -----------
Balance, September 30, 2000 $36,882,916 $ 336,243 $(228,449) $36,990,710
=========== =========== ========= ===========
--------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended September
30, 2000, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Proxy Statement dated March 20, 2000, containing financial statements
for the year ended December 31, 1999.
NOTE 2 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the quarters and nine-months ended September 30, 2000 and
September 30, 1999 are as follows:
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic earnings per share
Net income $ 947,116 $ 301,171 $2,297,053 $ 268,178
---------- ----------- ---------- -----------
Weighted average common
shares outstanding 3,588,565 3,588,565 3,588,565 2,937,907
---------- ---------- ---------- ----------
Basic earnings per share $ 0.26 $ 0.08 $ 0.64 $ 0.09
======= ======= ======= =======
Diluted earnings per share
Net income $ 947,116 $ 301,171 $2,297,053 $ 268,178
---------- ---------- ---------- -----------
Weighted average common
shares outstanding 3,588,565 3,588,565 3,588,565 2,937,907
Add: Dilutive effects of assumed
exercise of stock options 11,388 20,784 15,045 21,119
---------- ---------- ---------- -----------
Weighted average common and
dilutive potential common
shares outstanding 3,599,953 3,609,349 3,603,610 2,959,026
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.26 $ 0.08 $ 0.64 $ 0.09
======= ======= ======= =======
</TABLE>
Stock options for 76,000 shares of common stock were not considered in computing
diluted earnings per share for the quarter and nine-months ended September 30,
2000 because they were antidilutive. Stock options for 57,000 shares of common
stock were not considered in computing diluted earnings (loss) per share for the
quarter and nine-months ended September 30, 1999 because they were antidilutive.
NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Macatawa Bank Corporation (the "Company), and its wholly-owned
subsidiary, Macatawa Bank (the "Bank"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
7
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 4 - SECURITIES
The amortized cost and fair values of securities were as follows:
<TABLE>
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
September 30, 2000 (Unaudited)
U.S. Treasury securities and
obligations of U.S. Government
corporation and agencies $41,900,059 $ 27,516 $ (414,634) $41,512,941
Tax Exempt Municipal Bonds 1,988,175 40,983 0 2,029,158
----------- ---------- ----------- -----------
Total Securities $43,888,234 $ 68,499 $ (414,634) $43,542,099
=========== ========== ============ ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
December 31, 1999
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $27,925,926 $ 0 $ (589,036) $27,336,890
State and municipal bonds 955,377 852 (11,744) 944,485
----------- ---------- ------------ -----------
$28,881,303 $ 852 $ (600,780) $28,281,375
=========== ========== ============ ===========
</TABLE>
Contractual maturities of debt securities at September 30, 2000, were as
follows. No held-to-maturity securities existed at September 30, 2000. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
Available-for-Sale Securities
-----------------------------
Amortized Fair
Cost Values
-------- --------
<S> <C> <C>
Due from one to five years $41,900,059 $41,512,941
Due from five to ten years 415,218 420,796
Due after ten years 1,572,957 1,608,362
----------- -----------
Total $43,888,234 $43,542,099
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
8
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans are as follows:
<TABLE>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Commercial $262,403,110 $201,391,721
Mortgage 57,080,317 44,734,529
Consumer 53,739,142 39,248,201
------------ ------------
373,222,569 285,374,451
Allowance for loan losses (5,481,473) (3,995,165)
------------ ------------
$367,741,096 $281,379,286
============ ============
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
Nine months Nine months
ended ended
September 30, September 30,
2000 1999
------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance at beginning of period $3,995,165 $2,030,000
Provision charged to operating expense 1,516,000 1,500,000
Charge-offs (41,292) (4,221)
Recoveries 11,600 0
------------ ----------
Balance at end of period $5,481,473 $3,525,779
============ ==========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
9
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT - NET
Premises and equipment are as follows:
<TABLE>
September 30 December 31
2000 1999
------------- ------------
<S> <C> <C>
Land $ 1,859,218 $1,574,218
Building and improvements 6,861,455 4,915,252
Furniture and equipment 5,570,530 4,516,473
------------ -----------
14,291,203 11,005,943
Less accumulated depreciation (1,893,676) (1,008,377)
------------ -----------
$12,397,527 $9,997,566
============ ===========
</TABLE>
NOTE 7 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Noninterest-bearing demand deposit accounts $ 45,137,748 $ 34,542,493
Money market accounts 117,064,328 100,642,349
NOW and Super NOW accounts 51,602,358 43,237,004
Savings accounts 9,893,614 7,411,691
Certificates of deposit 142,919,219 93,556,345
------------ ------------
$366,617,267 $279,389,882
============ ============
</TABLE>
NOTE 8 - OTHER BORROWINGS
The Bank was approved in the first quarter of 1999 to be a member of the Federal
Home Loan Bank of Indianapolis. As a result, the Bank now has available Federal
Home Loan Bank advances as an additional funding resource. Maturity dates and
interest rates on these advances are as follows:
<TABLE>
September 30 December 31
2000 1999
----------- -----------
Maturity Date Interest Rate
------------- -------------
<S> <C> <C> <C>
March 27, 2000 5.44% (initial rate) 0 $5,000,000
June 19, 2000 5.65% (initial rate) 0 5,000,000
June 26, 2000 3.85% (initial rate) 0 5,000,000
April 1, 2002 5.63% (fixed) 3,000,000 3,000,000
March 31, 2003 5.77% (fixed) 3,000,000 3,000,000
March 30, 2004 5.84% (fixed) 4,000,000 4,000,000
January 7, 2005 6.68% (fixed) 5,000,000 0
January 7, 2005 6.465% (fixed) 5,000,000 0
Sept. 1, 2009 5.80% (fixed) 5,000,000 5,000,000
March 23, 2010 5.99% (fixed) 10,000,000 0
September 20, 2010 5.95% (fixed) 5,000,000 0
----------- -----------
$40,000,000 $30,000,000
=========== ===========
</TABLE>
Each advance is payable in full at its respective maturity date. These advances
were required to be collateralized by securities totaling $33,000,000 and at
least $31,000,000 of the Bank's first mortgage loans under a blanket loan
arrangement at September 30, 2000.
The Company secured a $5 million credit facility during September 2000, to
provide additional capital required to maintain the Bank at or above the 8%
regulatory capital required. The Company borrowed $1 million under this facility
on September 29, 2000 with a maturity date of March 29, 2001 and an interest
rate of 8.26%.
10
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - 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 weighting, 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 restorations are required.
At September 30, 2000 and December 31, 1999, actual capital levels (in
thousands) and minimum required levels for the Company and the Bank were:
<TABLE>
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------------------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $41,879 11.2% $29,826 8.0% $37,282 10.0%
Bank 42,024 11.3 29,821 8.0 37,276 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 37,219 10.0 14,913 4.0 22,369 6.0
Bank 37,365 10.0 14,910 4.0 22,366 6.0
Tier 1 capital (to average assets)
Consolidated 37,219 8.6 17,315 4.0 21,643 5.0
Bank 37,365 8.6 17,315 4.0 21,643 5.0
December 31,1999
Total capital (to risk weighted assets)
Consolidated $38,358 14.0% $21,989 8.0% $27,489 10.0%
Bank 33,463 12.2 21,992 8.0 27,491 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 34,922 12.7 10,994 4.0 16,491 6.0
Bank 30,027 10.9 10,996 4.0 16,494 6.0
Tier 1 capital (to average assets)
Consolidated 34,922 10.8 12,940 4.0 16,175 5.0
Bank 30,027 9.4 12,811 4.0 16,014 5.0
</TABLE>
The Company and the Bank were categorized as well capitalized at September 30,
2000 and at year-end 1999.
Additionally, 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% through the third year of
operations. At September 30, 2000, the Bank's Tier 1 Capital as a percent of
total assets was 8.28%.
11
<PAGE>
Item 2. 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 has experienced rapid and substantial growth since opening in
November 1997. At September 30, 2000, the Bank had thirteen branch banking
offices and two service facilities. The Company completed an underwritten
initial public offering of common stock on April 7, 1998, resulting in net
proceeds of $14.1 million. In June 1999, the Company completed an offering of
common stock to its shareholders resulting in net proceeds of $14.6 million.
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 September 30, 2000, had assets of approximately $216
million.
Financial Condition
At September 30, 2000, total assets of the Company were $451.3 million, an
increase of $106.4 million, or 30.8%, from December 31, 1999. The continued
trend of strong asset growth reflects the Bank's continuing acceptance in its
community markets. Management expects the growth trend in assets, driven by
strong loan demand, to continue at a fairly rapid double-digit pace, but at a
lesser rate than the nine month year-to-date annualized growth rate of 41%. The
asset growth was primarily in loans and securities, but also included an
increase in premises and equipment.
Total loans, which were $373.2 million at September 30, 2000, increased by $87.8
million, or 30.8%, from December 31, 1999. The growth included commercial loans
of $61.1 million, consumer loans of $12.3 million, and mortgage loans of $14.4
million. The Bank's loan portfolio composition at September 30, 2000, includes
commercial loans of 70.3%, consumer loans of 15.3%, and mortgages loans of
14.4%. The composition is essentially unchanged from prior year-end, with
mortgage loans increasing .7%. It is anticipated that strong commercial loan
demand in the Bank's market will continue to lead the overall loan growth.
Securities available for sale of $43.5 million represent an increase of $15.3
million, or 53.9%. The Bank invests primarily in U.S. Government agency
securities to provide liquidity. The growth in securities is consistent with
maintaining the Bank's liquidity ratio in conjunction with overall deposit
growth.
Premises and equipment totaled $12.4 million at quarter-end, an increase of $2.4
million from December 31, 1999. The increase reflects expansion of the Bank's
investment in facilities and equipment required to support increasing levels of
customers. The investment in branch premises includes the purchase of a
previously leased branch facility operated by the Bank at 699 E. 16th Street in
Holland, as well as a full service branch in Douglas, Michigan, to replace a
previously leased storefront facility.
The allowance for loan losses totaled $5.5 million at September 30, 2000, an
increase of $1.5 million from December 31, 1999. The Bank provides a loan loss
provision on a regular basis consistent with its loan growth. The allowance for
loan losses as a ratio of total loans was 1.47% at September 30, 2000, as
compared to 1.40% at December 31, 1999. While the Bank has not experienced any
material credit losses in its portfolios as of September 30, 2000, management
recognizes that the Bank's loan portfolios are relatively unseasoned, and no
trend of losses has been established. Given the newness of the portfolios, the
effects of increasing interest rates on borrowers, and potential economic
weakness, the Bank, in its judgment, has provided adequate reserves for loan
losses. In lieu of an established loan loss trend for determining an adequate
allowance for loan loss, the Bank has built an allowance based on industry peer
ratios.
Total deposits at September 30, 2000 were $366.6 million, an increase of $87.2
million, or 31.2% from year-end. Growth from new customers as a result of both
new branches in new markets, as well as increased customer activity in existing
branches continues to drive this favorable growth trend. Deposit growth, while
at a slightly lesser rate than loan growth, is anticipated to continue based on
further penetration of the markets where branch offices already have been
established. Additionally, growth will occur in contiguous markets as new
branches are established where market demographics will support a new branch
facility. New deposit growth continues to mirror the Bank's existing deposit
base, with non-interest demand accounts representing approximately 12% of total
deposits, and
12
<PAGE>
interest bearing savings and certificates of deposit accounting for the balance.
Total borrowed funds, including Federal Home Loan Bank Advances, Federal Funds
Purchased, and other borrowed funds were $46.0 million, an increase of $16
million over year-end levels. The Bank utilizes borrowings to supplement funding
for loans, as well as daily working capital needs. During the quarter, the
Company entered into an additional line of credit arrangement for up to $5
million with one of its correspondent banks. $1 million was drawn and
outstanding on this line as of September 30, 2000.
Results of Operations
Net income for the quarter ended September 30, 2000 was $947,116, as compared to
$301,171 for the same period last year. Diluted earnings per share were $.26,
compared to $.08 for prior year period. Net income for the nine months ended
September 30, 2000 totaled $2,297,053, up from the same period in 1999 when the
Company reported net income of $268,178. Diluted earnings per share for the
period were $.64 for 2000, and $.09 for 1999.
Net interest income for the third quarter of 2000 totaled $4.3 million, a 47%
increase over 1999's level of $2.9 million. The improvement is reflective of the
overall growth of the Company. Average earning assets during the third quarter
2000 totaled $403.0 million, versus $264.6 million during the same quarter in
1999. Net interest margin on earning assets was 4.17% for the 2000 quarter, down
from 4.32% in the third quarter of 1999. The decrease in the third quarter net
interest margin reflects funding costs rising at a slightly faster pace than
yield on earning assets. Nine months year-to-date, net interest income reached
$11.9 million, versus 1999 of $7.3 million. Net interest margin during the
period for 2000 was 4.18%, as compared to 4.27% for the 1999 period. The growth
in net interest income for the nine-month period was essentially all driven by
increased customer volumes. Anticipated growth in earning assets is expected to
continue to increase levels of net interest income. This will be slightly
mitigated by further compression in the net interest margin caused by higher
funding cost in the current interest rate environment.
Non-interest income for the quarter totaled $528 thousand, an increase of $160
thousand over the same period for 1999. For the nine-months ended September 30,
2000, non-interest income increased $331 thousand over the same period for 1999.
Third quarter trust revenue increased by $49 thousand from the year earlier
period, and increased by $239 thousand for the nine-month period. The trust
department began operations during the first quarter of 1999, and included $216
million of assets under management at September 30, 2000, versus $140 million
for the same time in 1999. The growth in Trust assets under management is
expected to moderate for the balance of the year due to both the impact of the
stock market volatility on asset valuations, as well as slower growth in
employee benefit plan services. Service charges on deposit accounts increased by
$94 thousand over the third quarter 1999 level. For the nine-month period of
2000, service charges increased by $326 thousand over the 1999 level. This
change in revenue is reflective of both the increased number of customer
accounts, as well as customer activity levels. Gain on sale of loans for the
third quarter 2000 remained at the same level as the prior year. However, gain
on sale of loan revenue decreased by $283 thousand for the nine months 2000
versus 1999 due to the higher level of mortgage interest rates during the first
half of 2000. Higher mortgage rates that began in late 1999 have substantially
reduced mortgage financing activity, and the Banks' subsequent sales activity.
Management expects the lower levels of loan sale gains to continue in the
current rate environment.
Non-interest expense increased by $806 thousand for the third quarter, compared
to the same quarter for 1999. For the nine-month period in 2000, non-interest
expense totaled $9.4 million, an increase of $2.8 million over the same period
of 1999. Salary and benefits, and occupancy and equipment expense increased a
combined $492 thousand for the quarter, and $2.0 million for the nine-months of
2000, as compared to the respective periods for 1999. The growth in expense
levels reflects the growth in branch and operational support infrastructure.
During the last half of 1999, four additional branch locations were opened and
these were fully operational for the nine months of 2000. Growth in branch
offices also increased advertising and promotion costs for the new locations,
data processing, and other expense, which includes courier, telephone, postage,
and outside services. All of theses costs are customer activity and branch
infrastructure related, and increase as a result of new customer activity being
generated.
During the third quarter 2000, the Company became taxable for Federal income tax
purposes as a result of the full utilization of net operating loss carry
forwards from its startup losses. Management anticipates to be fully taxable for
the balance of 2000, and thereafter at the federal marginal tax rates of 34%.
13
<PAGE>
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 of $14.1 million in its initial public offering
completed in April, 1998. 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% through the third year
of operations. The Bank will complete its third year of operations on November
25, 2000. At March 31, 1999, the Bank's Tier 1 Capital to assets ratio was
8.43%. Due to the rapid growth of the Bank, additional equity capital was
required. In June 1999, the Company raised $14.6 million of equity capital net
proceeds in an offering made to the Company's shareholders. The Company
contributed $10 million from the proceeds of this offering to the Bank's
capital. Due to continued growth of the Bank, an additional $4 million was
contributed to the Bank from the Company's cash reserves of approximately $5
million during the first and second quarters of 2000. During the third quarter
2000, asset growth in the Bank required the Company to contribute an additional
$1 million of capital to the Bank to maintain required regulatory capital at or
above the three year limitation of 8%. At September 30, 2000, the Bank's Tier 1
Capital as a percent of total assets was 8.28%.
The Company secured a $5 million credit facility during September 2000, to
provide additional capital required to maintain the Bank at or above the 8%
regulatory capital required. Based on continued projected asset growth,
management anticipates additional capital will be required in early 2001, and
will evaluate alternatives available to effectively increase capital levels such
as the sale of common stock or other securities.
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. 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. 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.
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," "may" or similar expressions. The
presentation and discussion of the provision and allowance for loan losses and
statements concerning future profitability or future growth or increases, are
examples of inherently forward looking statements in that they involve
judgements and statements of belief as to the outcome of future events. 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 Bank
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 other filings with the Securities and Exchange
Commission.
14
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Asset Liability Management and Market Risk Analysis
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. 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. Certain savings accounts and
interest bearing checking accounts are shown as repricing other than
contractually due to the stability of these products in a rate changing
environment. Management monitors the Company's exposure to interest rate changes
using a GAP analysis. The following table illustrates the Company's GAP position
at various intervals (in thousands) at September 30, 2000.
<TABLE>
<3 Months 3 - 12 Months 1 - 5 Years Over 5 Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans-Fixed 15,312 29,329 137,556 25,316 207,513
Loans-Variable 142,971 597 20,526 1,616 165,710
Taxable Securities - 7,980 33,920 - 41,900
Tax-Exempt Securities - - - 1,988 1,988
Other Securities - - - 2,312 2,312
Federal Funds Sold - - - - ---
Loan Loss Reserve - - - - (5,481)
Cash & Due From Banks - - - - 21,041
Fixed Assets - - - - 12,398
Other Assets - - - - 3,932
--------- -------- --------- -------- ---------
TOTAL 158,283 37,906 192,002 31,232 451,313
Liabilities:
CD's 100M and Over 36,931 22,925 17,698 - 77,554
CD's-Less than 100M 6,186 27,062 23,713 - 56,961
Repo's & Borrowed Money 5,000 1,000 20,000 20,000 46,000
Savings & IRA's 2,603 2,954 11,594 1,147 18,298
NOW & MMDA's 91,389 - 77,546 - 168,935
Non-Interest Bearing Deposits - - - - 44,869
Other Liabilities & Equity
- - - - 38,696
--------- -------- --------- -------- ---------
142,109 53,941 150,551 21,147 451,313
TOTAL
Period Gap: 16,174 (16,035) 41,451 10,085
Cumulative Gap: 16,174 139 41,590 51,675
Cumulative Gap/Total Assets 3.58% 0.03% 9.22% 11.45%
RSA/RSL 1.11 0.70 1.28 1.48
Cumulative RSA/RSL 1.11 1.00 1.12 1.14
</TABLE>
Based on this analysis, Management does not believe the Company would be
materially impacted by changes in interest rates.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
27 Financial Data Schedule
(EDGAR version only)
(b) Reports on Form 8-K - None.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, to be signed on its behalf by the
undersigned, thereunto duly authorized.
MACATAWA BANK CORPORATION
/s/ Benj. A. Smith, III
Benj. A. Smith, III
Chairman and Chief Executive Officer
/s/ Philip J. Koning
Philip J. Koning
Treasurer and Secretary
(Principal Accounting Officer)
DATE: November 10, 2000
17
