FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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.)
51 E. Main Street, Zeeland, Michigan 49464
(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:
Common Stock.
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Indicate by check mark 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant 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-K
or any amendments to this Form 10-K. [ ]
The registrant's revenues for 1999 were $21,528,697. 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 $14.125 as of March 17, 2000, was
$40,518,961 (common stock, no par value). As of March 17, 2000, there were
outstanding 3,588,565 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 27, 2000 are incorporated by reference into Part II and Part
III of this Report.
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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, 1999, the Company had total assets of $334.9 million,
total deposits of $279.4 million, approximately 27,000 deposit accounts and
shareholders' equity of $34.5 million.
The Company's main office is located at 51 E. Main Street, Zeeland,
Michigan 49464, 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, financia 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.
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
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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 December 31,
1999, the Trust Department had assets of approximately $183 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, 1999, the Bank had 117 full-time and 59 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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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.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"),
represents a pivotal point in the history of the financial services industry.
The GLB Act modifies many of the principal federal laws which regulate financial
institutions and sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities will be available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers a more complete array of financial products and
services. Specifically, the GLB Act provides two new vehicles through which a
banking organization can engage in a variety of activities which, prior to the
Act, they were not allowed to engage in. First, a bank holding company meeting
certain requirements may elect to become a financial holding company ("FHC").
FHCs are generally authorized to engage in all "financial activities" and, under
certain circumstances, to make equity investments in other companies (i.e.,
merchant banking). In order to be eligible to elect to become a FHC, a bank
holding company and all of its depositary financial institutions must: (1) be
"well capitalized"; (2) be "well managed"; and (3) have a rating of
"satisfactory" or better in their most recent Community Reinvestment Act
examination. Both the bank holding company and all of its depositary financial
institutions must also continue to satisfy these requirements after the bank
holding company elects to become a FHC or else the FHC will be subject to
various restrictions. The Federal Reserve Board will be the umbrella regulator
of FHCs, but functional regulation of a FHC's separately regulated subsidiaries
will be conducted by their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
The GLB Act also imposes several rules that are designed to protect the
privacy of the customers of financial institutions. For example, the GLB Act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Company and the Bank are also
subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a FHC. The Company believes that it is qualified to elect FHC status but
has not yet decided to do so.
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
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so absent such policy. In addition, if the Commissioner deems the Bank's capital
to be impaired, the Commissioner may require the Bank to restore its capital by
a special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
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-
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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 securitie trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues will be received by it in the form of
dividends, if any, paid by the Bank. Thus, the Company's ability to pay
dividends to its shareholders will indirectly be limited by statutory
restrictions on its ability to pay dividends. See "Supervision and Regulation -
the Bank - Dividends." Further, the Federal Reserve Board has issued a policy
statement on the payment of cash dividends by ban 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 o 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
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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 durin the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay FICO assessments at a rate equal to
approximately 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
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<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>
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As of December 31, 1999, 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 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 unti 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 Arelated
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
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one or more of the standards is of such severity that it could threaten the safe
and sound operation of the institution. Failure to submit an acceptable
compliance plan, or failure to adhere to a compliance plan that has been
accepted by the appropriate regulator, would constitute grounds for further
enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
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 th
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
-9-
<PAGE>
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.
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)
748-9491. 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 mai 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, Allegan and Kent
County, Michigan. The Company's facilities as of February 1, 2000, 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* Loan Center
41 N. State Street, Zeeland Branch Office
2020 Baldwin Street, Jenison Branch Office
6299 Lake Michigan Dr., Allendale Branch Office
102 South Washington, Douglas Branch Office
4758 - 136th Street, Hamilton* Branch Office
5215 Cherry Avenue, Hudsonville* Branch Office
1760 - 44th Street, Wyoming* Branch Office
20 E. Lakewood Blvd., Holland Branch Office
</TABLE>
*Leased facility
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 1999 to a vote of
the Registrant's stockholders.
-10-
<PAGE>
PART II
ITEM 5: Market for Common Equity and Related Stockholder Matters.
The Company's common stock has been quoted on the Nasdaq SmallCap Market
since December 27, 1999. From the completion of the Company's initial public
offering in April 1998 through December 31, 1999, the Company's common stock was
quoted on the OTC Bulletin Board. High and low bid prices (as reported on the
OTC Bulletin Board) and high and low sales prices (as reported on the Nasdaq
SmallCap Market) for each quarter since the Company's April 1998 initial public
offering through December 31, 1999, are as follows:
<TABLE>
1999 1998
--------------------------------------------------------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $17.00 $14.75 N/A N/A
Second Quarter $15.50 $13.50 $15.25 $14.50
Third Quarter $15.50 $14.00 $16.50 $14.00
Fourth Quarter $16.00 $13.00 $16.75 $15.75
</TABLE>
For the period during which the common stock was quoted on the OTC Bulletin
Board, the quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions and do not
include intra-day highs and lows. On February 28, 2000, there were approximately
727 owners of record and, in addition, approximately 2,001 beneficial owners of
the Company's common stock.
No cash dividends have been declared to date on the Company's common stock.
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 20, 2000, is hereby
incorporated by reference and is filed as Exhibit 13 to this Form 10-K Annual
Report.
-11-
<PAGE>
ITEM 7: Financial Statements and Supplementary Data.
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 20, 2000, 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.
PART III
ITEM 9: Directors and Executive Officers of the Registrant.
The information set forth on pages 4-5, under the caption "Information
About Directors" and on page 10 under the Registrant's definitive Proxy
Statement dated March 20, 2000, is hereby incorporated by reference and is filed
as Exhibit 13 to this Form 10-K Annual Report.
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 20, 2000, 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 9, under the caption "Security Ownership of
Management" in the Registrant's definitive Proxy Statement dated March 20, 2000,
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 10, under the caption "Transactions Involving Management" in
the Registrant's definitive Proxy Statement dated March 20, 2000, and is
incorporated herein by reference and is filed as Exhibit 13 to this Form 10-KSB
Annual Report.
-12-
<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, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the year ended December 31,
1999, 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.
-13-
<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 9, 2000.
MACATAWA BANK CORPORATION
/s/ Benj. A. 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 9, 2000, 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 9, 2000
Benj. A. Smith, III, Principal Executive
Officer and a Director
/s/ Philip J. Koning March 9, 2000
Philip J. Koning, Principal Financial and
Accounting Officer and a Director
/s/ James L. Batts March 9, 2000
James L. Batts, Director
/s/ G. Thomas Boylan March 9, 2000
G. Thomas Boylan, Director
-14-
<PAGE>
/s/ Jessie F. Dalman March 9, 2000
Jessie F. Dalman, Director
/s/ Robert E. DenHerder March 9, 2000
Robert E. DenHerder, Director
/s/ Wayne J. Elhart March 9, 2000
Wayne J. Elhart, Director
/s/ Brian J. Hansen March 9, 2000
Brian J. Hansen, Director
/s/ James L. Jurries March 9, 2000
James L. Jurries, Director
/s/ John F. Koetje March 9, 2000
John F. Koetje, Director
::ODMA\PCDOCS\GRR\390199\2
-15-
<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).
-16-
<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
-17-
<PAGE>
EXHIBIT 13
MACATAWA BANK CORPORATION
March 20, 2000
Dear Shareholder:
We invite you to attend the 2000 Annual Meeting of Shareholders. This year's
meeting will be held on Thursday, April 27, 2000, 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 1999.
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. If you plan on attending the Annual
Meeting please return the postage paid RSVP card at the bottom of the
invitation.
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 27, 2000
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 27, 2000 at 10:00 A.M., local time, for the following
purposes:
1. To elect two directors, each to hold office for a three year term.
2. 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 28, 2000, 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 20, 2000
Holland, Michigan /s/ Philip J. Koning
Philip J. Koning
Secretary
<PAGE>
Dated: March 13, 2000
MACATAWA BANK CORPORATION
51 E. Main Street
Zeeland, Michigan 49464
------------------
PROXY STATEMENT
For the Annual Meeting of Shareholders
to be held April 27, 2000
------------------
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 27, 2000, at 10:00 A.M., local time.
The Annual Meeting is being held for the following purposes:
1. To elect two directors, each to hold office for a three year term.
2. 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. 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 28, 2000, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were outstanding 3,588,565 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 28, 2000, only one person or entity is known to management
who may be deemed to be the beneficial owner of more than 5.0% of the Company's
common stock. Smith & Associates Investment Management Services has reported to
the Company that is has sole voting and investment power with respect to
1,082,454 shares of common stock and shared voting and investment power with
respect to an additional 4,250 shares of common stock, which in the aggregate
represent 30.28% of the issued and outstanding common stock of the Company.
Benj. A. Smith, the chief executive officer of the Company, is also the chief
executive officer of Smith & Associates Investment Management Services.
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.
The Company's Board of Directors has determined that it is in the best
interests of the Company and its shareholders to restructure the board of
directors by reducing the number of directors of the Company. In order to effect
this restructuring, James L. Jurries, James L. Batts, Wayne J. Elhart, Jessie F.
Dalman and Brian J. Hansen will resign from the Board of Directors of the
Company prior to the Annual Meeting. Each of these directors and all of the
Company's remaining directors will continue as directors of Macatawa Bank, a
subsidiary of the Company. The Company anticipates forming a second subsidiary
which will provide financial and other services excluding banking services
("Financial Services Company"). Once the Financial Services Company is
organized, certain Macatawa Bank directors will be named to the Financial
Services Company Board. All services provided by the Company other than banking
will be provided through the Financial Services Company and all banking services
will be provided through Macatawa Bank. For the foreseeable future, the Company
will function purely as a holding company. The Board restructuring will relieve
the directors who are leaving the Company's Board from any holding company
responsibilities and permit them to focus their attention and efforts on the
Company's subsidiary operations.
Two persons have been nominated for election to the Board, each to serve a
three-year term expiring at the 2003 Annual Meeting of Shareholders. The Board
has nominated G. Thomas Boylan and Benj. A. Smith, III, 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 is presently serving as directors. The following pages of this
Proxy Statement contain more information about the nominees and other directors
of the Company.
2
<PAGE>
A plurality of the votes cast at the Annual Meeting is required to elect
the nominees as directors of the Company. As such, the two 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 2000 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.
3
<PAGE>
INFORMATION ABOUT DIRECTORS
The content of the following table is based upon information as of February
1, 2000, 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 2003
G. Thomas Boylan (a)(b) 77 1997 117,925 3.2%
Benj. A. Smith, III (b) 56 1997 154,567(2) 4.2%
Directors Whose Terms Expire in 2001
John F. Koetje (a) 64 1998 71,450 2.0%
Directors Whose Terms Expire in 2002
Robert E. Den Herder (a)(b) 45 1997 127,200 3.5%
Philip J. Koning 45 1997 36,750 1.0%
- ------------------
</TABLE>
(a) Member of the Audit Committee
(b) Member of the Compensation Committee
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 that are
exercisable or will become exercisable within sixty (60) days. The share
ownership of the following directors includes shares subject to options
that are currently exercisable: Mr. DenHerder (6,00 shares), Mr. Koning
(12,000 shares), Mr. Boylan (6,000 shares), Mr. Smith (31,000 shares), and
Mr. Koetje (2,000 shares).
(2) Includes 31,000 shares owned by Mr. Smith's spouse; also includes 30,000
shares held in a trust for the benefit of Mr. Smith's spouse.
-------------------------
4
<PAGE>
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 First Michigan Bank Corporation 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 1992 to 1997
with First of America Bank in Holland, where he served as a Community Bank
President.
G. Thomas Boylan is a director of the Company and the Bank. Mr. Boylan
serves as the President of Light Metals Corporation, a manufacturing company
located in Wyoming, Michigan, where he has been employed since 1947.
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.
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 1999. 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. 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.
During 1999, the directors of the Company and the Bank received an annual
retainer of $4,000 and were paid $500 per board meeting attended and $250 per
committee meeting attended. Directors are reimbursed for their out-of-pocket
expenses for each meeting attended.
5
<PAGE>
EXECUTIVE COMPENSATION
Committee Report on Executive Compensation
Decisions on the compensation of the Corporation's executive officers are
made by the Board's Compensation Committee. The Compensation Committee met two
times during 1999.
Base Salary - In general, the Board intends to maintain the base salaries
of the Company's executive officers and senior managers within peer group
levels, with the ability to make appropriate adjustment to reflect other
relevant factors, which may include individual performance, experience,
expertise and tenure. Annually, the Committee establishes a base wage for the
Chief Executive Officer, Mr. Smith, and for the President, Mr. Koning. The
Committee's determination is based upon the performance of the individual and
compensation levels established by the Company's peers and evaluations by
consultants.
The base salaries of all other officers and senior managers are established
by the Corporation's President and Chief Executive Officer.
Long-Term Incentives - The Company provides long-term incentives in the
form of stock options. Each year the Committee recommends to the Board a list of
stock options to be granted. These options are intended to recognize individual
contributions and to incentivize employees to contribute to the long-term
objectives of the Company. To align the interests of its executive officers and
senior managers with the Company's shareholders, the Board's compensation
strategy provides for a 401(k) matching contribution.
G. Thomas Boylan, Robert E. Den Herder and Benj. A. Smith III
6
<PAGE>
Summary Compensation Table
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 1999 and 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 $100,000 during 1998 or 1999.
<TABLE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
--------------------------- ------------
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary sation($) Options(#) sation(1)
--------------------------- ---- ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Benj. A. Smith, III........................ 1999 $ 75,000 $0 0 $ 0
Chairman of the Board and 1998 $ 32,500 $0 31,000 $ 0
Chief Executive Officer
Philip J. Koning........................... 1999 $150,000 $0 4,000 $3,181
President of the Bank 1998 $144,184 $0 12,000 $3,020
Treasurer and Secretary
</TABLE>
(1) Includes an automobile allowance ($2,521 in 1999 and $2,637 in 1998) and
life insurance premiums paid by the Company for the benefit of Mr. Koning.
7
<PAGE>
Option Grants in 1999. 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) 1999 (per share)(2) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip J. Koning.......... 3,000 14.3% $ 14.50 November 18, 2009 $27,357 $69,328
</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, 1999. 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.
8
<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,
1999. None of the Named Executives exercised any stock options during 1999.
<TABLE>
Number of Shares Subject to Value of Unexercised
Unexercised Options Held In-the-Money Options at
at December 31, 1999 December 31, 1999(1)
---------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benj. A. Smith III..................... 31,000 0 $27,000 $ 0
Philip J. Koning....................... 12,000 3,000 $40,500 $ 0
- -----------------------------------------------------------------------------------------------------------------
</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, 1999
(when the closing price of the Company's Common Stock was $14.50 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, 2000, 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..................................... 154,567 4.2%
Philip J. Koning........................................ 36,750 1.0%
All Executive Officers and Directors as a Group 507,892 14.1%
(5 persons) ............................................
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) See Footnotes 1 and 2 to the Information About Directors table appearing on
page 4 of this Proxy Statement.
9
<PAGE>
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 1999. 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 Bank leases its Wyoming, Michigan
branch facility from a limited liability company co-owned by John F. Koetje, a
director of the Company. The terms of these leases were negotiated on an
arm's-length basis, and the Company believes that the rent and other terms
reflect fair market value.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers to file reports of ownership and changes in ownership of
shares of common stock with the Securities and Exchange Commission. Based upon
written representations by each director and officer, all the reports were filed
by such persons during the last fiscal year, except for one late report with
respect to one transaction by each of Messrs. Benj. A. Smith, James L. Batts and
James L. Jurries.
10
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph shows the cumulative total shareholder return on an
investment in the Company's common stock compared to the Russell 2000 Index and
the Media General Group Index of Regional-Midwest Banks. The comparison assumes
a $100 investment on April 1, 1998, the date of the Company's initial public
offering, at the Company's initial public offering price of $10.00 per share.
[GRAPHIC OMITTED]
<TABLE>
4/1/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Macatawa Bank Corporation 100.00 147.50 160.00 152.50 151.25 142.50 143.75 145.00
- -----------------------------------------------------------------------------------------------------------------------------------
MG Group Index 100.00 99.52 90.49 103.97 98.78 101.20 90.21 86.34
- -----------------------------------------------------------------------------------------------------------------------------------
Russell 2000 Index 100.00 95.34 76.13 88.31 83.23 95.86 89.49 105.62
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Media General Financial Services, Richmond, Virginia
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.
11
<PAGE>
SHAREHOLDER PROPOSALS-2001 ANNUAL MEETING
Any proposal of a shareholder intended to be presented for action at
the 2001 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, 1999, 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 "SEC"). The SEC maintains an Internet web site that contains reports and
other information regarding companies including the Company, that file
electronically. The SEC's web site address is http:\\www.sec.gov.
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 20, 2000
/s/ Philip J. Koning
Philip J. Koning
Secretary
12
<PAGE>
APPENDIX A
TABLE OF CONTENTS
Selected Consolidated Financial Data........................................ A-2
Quarterly Financial Data.................................................... A-3
Quarterly Stock Price Information........................................... A-4
Management's Discussion and Analysis........................................ A-5
Report of Independent Auditors............................................. A-20
Consolidated Financial Statements.......................................... A-21
Notes to Consolidated Financial Statements................................. A-25
A-1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial and other data are derived
from the Company's financial statements and should be read with the Consolidated
Financial Statements and Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Consolidated
Balance Sheet as of December 31, 1999 and 1998, and the Consolidated Statement
of Income for the years ended December 31, 1999 and 1998, are included elsewhere
in this proxy statement.
<TABLE>
At or For the
Year Ended
December 31
(Dollars in Thousands, Except of Per Share Data) 1999 1998
---- ----
<S> <C> <C>
Financial Condition
Total assets.................................................... $ 344,921 $189,229
Loans........................................................... 285,374 137,882
Deposits........................................................ 275,390 166,989
Securities...................................................... 28,281 27,007
Shareholder's equity............................................ 34,526 19,611
Share Information
Basic earnings/(loss) per common share.......................... .22 $ (1.22)
Book value per common share..................................... 9.62 8.05
Weighted average shares outstanding............................. 3,101,908 2,041,920
Shares outstanding at end of period............................. 3,588,565 2,435,125
Operations
Interest income................................................. 20,000 $ 6,804
Interest expense................................................ 9,428 3,190
Net interest income............................................. 10,572 3,614
Provision for loan losses(1).................................... 1,967 2,023
Net interest income after provision for loan losses............. 8,605 1,591
Total noninterest income........................................ 1,528 683
Total noninterest Expense....................................... 9,440 4,763
Net income/(loss)............................................... 693 $ (2,489)
</TABLE>
(1) Management has established the allowance for loan losses based on past
industry loan loss experience, known and inherent risks in similar
portfolios, and economic conditions.
A-2
<PAGE>
QUARTERLY FINANCIAL DATA
(unaudited)
A summary of selected quarterly results of operations for the years ended
December 31 follows:
<TABLE>
THREE MONTHS ENDED
March 31, June 30, September 30, December 31,
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Interest income......................... $3,635,152 $4,663,222 $5,475,441 $6,226,884
Net interest income..................... 1,883,465 2,471,316 2,925,651 3,292,131
Provision for loan losses............... 450,000 545,000 505,000 467,000
Income (loss) before income tax expense. (77,110) 44,116 301,171 425,089
Net income (loss)....................... (77,110) 44,116 301,171 425,089
Net income per share
Basic................................ (.03) .02 .08 .12
Diluted.............................. (.03) .02 .08 .12
1998
Interest income......................... $ 343,472 $1,174,070 $2,201,206 $3,085,357
Net interest income..................... 205,089 726,345 1,147,189 1,535,245
Provision for loan losses............... 200,500 702,000 620,000 500,000
Income (loss) before income tax expense (525,208) (921,251) (653,828) (388,264)
Net income (loss)....................... (525,208) (921,251) (653,828) (388,264)
Net income per share
Basic................................ (.56) (.39) (.27) (.16)
Diluted.............................. (.56) (.39) (.27) (.16)
</TABLE>
A-3
<PAGE>
QUARTERLY STOCK PRICE INFORMATION
The Company's common stock has been quoted on the Nasdaq SmallCap Market
since December 27, 1999. From the completion of the Company's initial public
offering in April 1998 through December 31, 1999, the Company's common stock was
quoted on the OTC Bulletin Board. High and low bid prices (as reported on the
OTC Bulletin Board) and high and low sales prices (as reported on the Nasdaq
SmallCap Market) for each quarter since the Company's April 1998 initial public
offering through December 31, 1999, are as follows:
<TABLE>
1999 1998
-----------------------------------------------------------
Quarter High Low High Low
-------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $17.00 $14.75 N/A N/A
Second Quarter $15.50 $13.50 $15.25 $14.50
Third Quarter $15.50 $14.00 $16.50 $14.00
Fourth Quarter $16.00 $13.00 $16.75 $15.75
</TABLE>
For the period during which the common stock was quoted on the OTC Bulletin
Board, the quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions and do not
include intra-day highs and lows. On February 28, 2000, there were approximately
727 owners of record and, in addition, approximately 2,001 beneficial owners of
the Company's common stock.
No cash dividends have been declared to date on the Company's common stock.
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.
A-4
<PAGE>
APPENDIX A
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Company and the Bank. This
section should be read in conjunction with the consolidated financial statements
and the supplemental financial data contained elsewhere in this Appendix.
Overview
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 December 31, 1999, 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 December 31, 1999, had assets of
approximately $183 million.
The Company's Board of Directors has determined that it is in the best
interests of the Company and its shareholders to restructure the board of
directors by reducing the number of directors of the Company. In order to effect
this restructuring, James L. Jurries, James L. Batts, Wayne J. Elhart, Jessie F.
Dalman and Brian J. Hansen will resign from the Board of Directors of the
Company prior to the Annual Meeting. Each of these directors and all of the
Company's remaining directors will continu as directors of Macatawa Bank, a
subsidiary of the Company. The Company anticipates forming a second subsidiary
which will provide financial and other services excluding banking services
("Financial Services Company"). Once the Financial Services Company Board is
organized, certain Macatawa Bank directors will be named to the Financial
Services Company Board. All services provided by the Company other than banking
will be provided through the Financial Services Company and all banking services
will be provided through Macatawa Bank. For the foreseeable future, the Company
will function purely as a holding company. The Board restructuring will relieve
the directors who are leaving the Company's Board from any holding company
responsibilities and permit them to focus their attention and efforts on the
Company's subsidiary operations.
A-5
<PAGE>
Financial Condition
Summary. Total assets of the Company increased by $155,692,000 to
$344,921,000 at December 31, 1999, from $189,229,000 at December 31, 1998. 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 1999 was the Company's eighth full quarter of operations, and
the number of deposit accounts increased from approximately 14,000 at December
31, 1998, to approximately 27,000 accounts at December 31, 1999. 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. The Company anticipates that the Bank's assets will
continue to increase during 2000, which will be the Bank's third full year of
operations. However, management does not believe that the rate of increase will
be as rapid as it was during the first two years of operation.
Cash and Cash Equivalents. Cash and cash equivalents, which include federal
funds sold and short-term investments, increased $2,600,862 to $20,554,039 at
December 31, 1999, from $17,953,177 at December 31, 1998. The increase is a
result of cash reserves needed for additional branches. The Bank also increased
cash reserves in order to be prepared for any large cash withdrawals by
customers concerned about Y2K. Balances required to cover account services at
correspondent banks were increased due to volumes.
Securities. Securities are purchased and classified as "available for
sale." The securities may be sold to meet the Bank's liquidity needs. The
primary objective of the Company's investing activities is to provide for the
safety of the principal invested. Secondary considerations include earnings,
liquidity and overall exposure to changes in interest rates. Securities
available for sale increased $1,274,075 to $28,281,375 at December 31, 1999 from
$27,007,300 at December 31, 1998, or 4.72%.
Securities Available for Sale Portfolio (in thousands)
<TABLE>
Year Ended December 31
----------------------
1999 1998
---- ----
<S> <C> <C>
U. S. Treasury and U.S. Government Agencies.................. $27,337 $27,007
Michigan municipal bonds..................................... 944 0
------- -------
$28,281 $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.
A-6
<PAGE>
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, 1999.
<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
Market Market Estimated Estimated Estimated
Estimated Avg. Value Avg. Market Avg. Market Avg. Market Avg.
Value Yield 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% 25,416 5.85% 1,921 6.70% 0 0% 0 0%
Tax-Exempt
MI municipal bonds 0 0% 0 0% 0 0% 944 5.24% 0 0%
- -- ------ ----- ----- ----- --- ----- - --
Total 0 0% 25,416 5.85% 1,921 6.70% 944 5.24% 0 0%
</TABLE>
The Loan Portfolio. The majority of loans are made to businesses in the
form of commercial loans and real estate mortgages. Commercial loans increased
$105,722,570 from $95,669,151 at December 31, 1998, to $201,391,721 at December
31, 1999, an increase of 110.51%. Commercial loans account for approximately 71%
of the Bank's total loan portfolio. In addition, the Bank's consumer mortgage
loan volume is significant; however, only a small portion of these loans are
retained for the Bank's own portfolio. The Bank originated $141 million (3,760
loans) in 1999 and $102 million (2,658 loans) in 1998.
Loan Portfolio Composition (in thousands)
<TABLE>
Year Ended December 31
----------------------
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Commercial Real Estate................. $ 54,160 19% $ 14,058 10%
Residential Real Estate................ 44,734 15 22,529 16
Other Commercial....................... 147,232 52 81,611 60
Consumer............................... 39,248 14 19,684 14
--------- --------- ----
Total Loans....................... 285,374 100% 137,882 100%
====== ====
Less:
Allowance for Loan Losses........... (3,995) (2,030)
---------- --------
Total Loans Receivable, Net............ $281,379 $135,852
========== ========
</TABLE>
A-7
<PAGE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of
December 31, 1999 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 ........... $ 19,504 $ 31,186 $ 3,470 $ 54,160
Residential Real Estate........... 10,840 18,392 15,502 44,734
Other Commercial.................. 84,773 55,901 6,558 147,232
Consumer ......................... 10,380 22,298 6,570 39,248
---------- --------- --------- ---------
Totals...................... $ 125,493 $127,777 $32,100 285,374
========== ========= =========
Allowance for Loan Losses......... (3,995)
---------
Total Loans Receivable, Net....... $ 281,379
=========
</TABLE>
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................................. $ 5,213 $100,809 $106,022
Due after 3 months within 1 year.................... 19,451 103 19,554
Due after one but within five years................. 113,025 14,692 127,717
Due after five years................................ 29,000 3,081 32,081
---------- -------- ---------
Total............................................. $ 166,609 $118,519 285,374
========== ========
Allowance for Loan Losses........................... (3,995)
---------
Total Loans Receivable, Net......................... $ 281,379
=========
</TABLE>
Nonperforming Assets. Nonperforming loans as of December 31, 1999 totaled
$101,000. 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, 1999 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.
A-8
<PAGE>
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>
December 31
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Loans:
Average daily balance of loans for the year....................... $213,472 $ 60,299
Amount of loans outstanding at end of period...................... 285,374 137,882
Allowance for loan losses:
Balance at beginning of year...................................... 2,030 7
Addition to allowance charged to operations....................... 1,967 2,023
Loans charged-off............................................ (6)
Recoveries................................................... 4
Balance at end of year............................................... 3,995 2,030
Ratios:
Net (recoveries) charge offs to average loans outstanding......... 0 0
Allowance for loan losses to loans outstanding at year end........ 1.40% 1.47%
</TABLE>
Allocation of the Allowance for Loan Losses
The allowance for loan losses as of December 31, 1999, was $3,995,165
representing approximately 1.40% of gross loans outstanding, compared to
$2,030,000 at December 31, 1998, or 1.47% of gross loans outstanding. The Bank
has not experienced any material credit losses as of December 31, 1999. The
allowance for loan losses is maintained at a level management feels is adequate
to absorb losses inherent in the loan portfolio. Management prepares an
evaluation which is based upon a continuous review of the Bank's loan portfolio,
the Bank's and industry's historical loan loss experience, known and inherent
risks included in the loan portfolio, composition of loans, growth of the
portfolio and current economic conditions. 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.
A-9
<PAGE>
<TABLE>
Year ended December 31
-----------------------
1999 1998
----------------------------- -------------------------
% of each % of each
category category
Allowance to total Allowance to total
Amount loans Amount loans
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial........................................... $2,784 70.6% $1,422 69.4%
Real estate mortgages................................ 112 15.7 57 16.3
Consumer ............................................ 297 13.7 165 14.3
Unallocated.......................................... 802 0.0 386 0.0
------ ------ ------ -------
Total........................................... $3,995 100.00% $2,030 100.00%
====== ======= ====== =======
</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.
Deposits. Deposits are gathered from the communities the Bank serves.
Deposits increased to $279,389,882 at December 31, 1999, from $166,988,675 at
December 31, 1998. This was primarily as a result of deposits being obtained
from new customers of the Bank. Noninterest bearing demand deposit accounts
increased by $16,024,943 to $34,542,493 at December 31, 1999 from $18,517,550 at
December 31, 1998. These accounts are comprised primarily of business checking
accounts and represent 12.36% of total deposits at December 31, 1999.
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
--------------------
1999 1998
---- ----
Amount Average Rate Amount Average Rate
------ ------------ ------ -------------
<S> <C> <C> <C> <C>
Noninterest bearing demand............... $ 27,186 0% $ 8,991 0%
NOW accounts............................. 29,721 2.6% 10,420 3.0
MMDA/Savings............................. 97,849 4.2% 35,743 4.7
Time..................................... 68,629 5.5% 20,899 5.7
--------- ---------
Total Deposits........................ $223,385 3.9% $ 76,053 4.2%
========= =========
</TABLE>
A-10
<PAGE>
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, 1999:
<TABLE>
Amount
------
<S> <C>
Three months or less.......................... $18,232,009
Over 3 months through 6 months................ 12,168,988
Over 6 months through 1 year.................. 10,014,660
Over 1 year................................... 9,762,878
-------------
$50,178,535
=============
</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.
Premises and Equipment. Bank premises and equipment increased to $9,997,566
at December 31, 1999 from $7,125,755 at December 31, 1998. The increase resulted
primarily from the purchase of furniture and equipment, which increased from
$2,553,229 at December 31, 1998 to $4,516,473 at December 31, 1999.
Retained Deficit. As of December 31, 1998, the Company had a retained
deficit of $2,654,076, and as of December 31, 1999, the Company had a retained
deficit of $1,960,810. The retained deficit is primarily the result of prior
year losses, including the impact of provisions for loan losses which totaled
$2,022,500 in 1998. Also contributing to the retained deficit were wages paid to
employees and costs associated with expanding the branch network. Management
believes that the expenditures made in 1997 and 1998 created the infrastructure
and laid the foundation for future growth and profitability in subsequent years.
A-11
<PAGE>
Results of Operations
Summary of Results. The Company earned a net profit in 1999, the Company's
second full year of operations. Net income for the year ended December 31, 1999,
was $693,266 compared to a net loss for the year ended December 31, 1998 of
$2,488,551. The primary reason for the increase in income is due to the
continued growth of the Company resulting in an increase of net interest income.
Performance Ratios (in thousands, except per share data).
<TABLE>
Year Ended December 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Income (Loss).......................... $693 $(2,489)
Basic earnings (loss) per share.......... .22 (1.22)
Earnings (Loss) ratios:
Return on average assets................. .26 (2.91%)
Return on average equity................. 2.43 (15.15%)
Average equity to average assets......... 10.86 19.59%
Dividend payout ratio.................... N/A N/A
</TABLE>
Net income for the year ended December 31, 1999, was $693,266 an increase
of $3,181,827 over net loss for the year ended December 31, 1998 of $2,488,551.
The primary reason for the increase in income is due to the continued growth of
the company resulting in an increase of net interest income. Net interest income
for the year ended December 31, 1999 was $10,572,563 and $3,613,868 for the year
ended December 31, 1998, an increase of $6,958,695. Interest income for the year
ended December 31, 1999 was $20,000,699, related to interest income on
securities, loans and interest earning deposits. Interest income for the year
ended December 31, 1998 was $6,804,105. Interest expense was $9,428,136 for the
year ended 1999, related to interest incurred on interest bearing deposits, fed
funds purchased and Federal Home Loan Bank advances. For the year ended December
31, 1998, interest expense was $3,190,237, related to interest incurred on
interest bearing deposits and fed funds purchased. The increase in net income
can also be attributed to the Bank's growing into its infrastructure.
A-12
<PAGE>
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:
<TABLE>
(in thousands)
1999 1998
-------------------------- --------------------------
Change Change
Average Average Average Average Total Due to Due To
Earning Assets Balance Interest Rate Balance Interest Rate Change Volume Rate
-------------- ------- -------- ---- ------- -------- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable Securities 21,444 1,225 5.71% 16,471 986 5.99% 239 286 (47)
Tax-exempt
Securities 172 9 5.23% --- --- --- 9 9 ---
Loans 213,472 18,379 8.61% 60,299 5,339 8.85% 13,040 13,192 (151)
Fed Funds Sold 4,166 204 4.90% 8,421 446 5.30% (243) (211) (32)
Short Term
Investments 1,132 56 4.95% 605 32 5.29% 24 26 (2)
Federal Home
Loan Bank
Stock 1,593 127 7.97% --- --- --- 127 127 ---
----- -------- ----- --- --------- ------ -------- ---------- -----
Total Earning
Assets 241,979 20,001 8.27% 85,797 6,804 7.93% 13,197 13,429 (232)
Interest Bearing
Liabilities
NOWs and
MMDAs 116,914 4,548 3.89% 43,336 1,915 4.42% 2,633 2,888 (255)
Savings 6,123 117 1.91% 2,153 43 2.00% 74 76 (2)
IRAs 4,533 247 5.45% 1,096 64 5.84% 183 187 (4)
Time Deposits 68,629 3,787 5.52% 20,304 1,164 5.73% 2,623 2,668 (45)
Fed Funds
Borrowed 695 37 5.32% 78 4 5.13% 33 33 ---
Other
Borrowings 12,126 692 5.71% --- --- --- 692 692 ---
-------- ------- ----- --------- ------- ----- ----- ------ ------
Total Interest
Bearing
Liabilities 209,020 9,428 4.51% 66,967 3,190 4.77% 6,238 6,545 (307)
------- ------- ----- ------ ----- ----- ------- ------- -----
Net Interest/Spread 10,573 3.76% 3,614 3.16% 6,959 6,885 74
====== ===== ===== ===== ======= ======= =====
Margin 4.37% 4.21%
===== =====
</TABLE>
A-13
<PAGE>
Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Year Ended December 31
----------------------
1999 1998
---- ----
<S> <C> <C>
As a percent of average earning assets
Loans..................................... 80.22% 70.28%
Other earning assets...................... 11.78% 29.72%
Average earning assets................. $241,978,855 $85,797,230
As a percent of average interest bearing
liabilities
Savings and NOW accounts.................. 61.03% 68.76%
Time deposits............................. 32.83% 31.13%
Other borrowings.......................... 6.14% 0.11%
Average interest bearing liabilities... 209,020,515 67,140,576
Earning asset ratio......................... 1.16% 1.28%
</TABLE>
Allowance for Loan Losses. The Company had an allowance for loan losses of
approximately 1.40% of total loans at December 31, 1999. The provision for loan
losses for the year ended December 31, 1999 was $1,967,000. This amount was
provided as a result of the increase in the total loan portfolio. Management
considers it prudent during the first years of operations to provide for loan
losses at a level which is consistent with levels maintained by banks with
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.
Non-Interest Income. Non-interest income for the year ended December 31,
1999 was $1,527,998, consisting primarily of service charges on deposit accounts
which totaled $660,920 and gain on sales of loans which totaled $623,520. Trust
revenues of $228,588 also contributed to non-interest income. Trust fee income
continues to increase each quarter as the amount of trust assets increases.
Trust revenues recorded in the last two quarters of 1999 represented
approximately 75% of the year to date trust revenues. Non-interest income for
the year ended December 31, 1998 was $683,382 and consisted primarily of gain on
sales of loans of $520,645 and service charges on deposit accounts which totaled
$157,109. No trust revenues were recorded in 1998, since the trust department
did not begin business until January 3, 1999.
Non-interest Income (in thousands)
<TABLE>
Year Ended December 31
----------------------
1999 1998
---- ----
<S> <C> <C>
Service fee income ....................... $ 661 $ 157
Net gains (losses) on asset sales:
Loans................................... 624 521
Securities.............................. 0 0
Trust Fees.............................. 228 0
Other..................................... 15 5
------ -------
Total noninterest income............. $1,528 $ 683
====== =======
</TABLE>
A-14
<PAGE>
Net Gains on the Sale of Residential Real Estate Mortgage Loans (in thousands)
<TABLE>
Year Ended December 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Real estate mortgage loan originations.... $54,715 $44,146
Real estate mortgage loan sales........... $55,339 $44,667
Net gains on the sale of real 624 521
Estate mortgage loans.................
Net gains as a percent of real 1.13% 1.17%
Estate mortgage loan sales............
</TABLE>
The Bank sells the majority of its fixed-rate obligations. Such loans are
sold servicing released.
Non-Interest Expense. Non-interest expense for the year ended December 31,
1999, was $9,440,295 compared to $4,763,301 for the year ended December 31,1998.
The main components of non-interest expense were salaries and benefits which
totaled $5,408,024 for the year ended December 31, 1999, and $2,726,888 for the
year ended December 31, 1998. The increase is primarily due to additions in
staff for the five new branches added in 1999. Other significant components of
non-interest expense consiste of occupancy and equipment expenses, data
processing fees, supplies and marketing expenses.
Non-interest Expense (in thousands)
<TABLE>
Year Ended December 31
-------------------------
1999 1998
---- ----
<S> <C> <C>
Salaries and employee benefits............ $5,408 $2,726
Occupancy and equipment................... 841 305
Furniture and equipment expense........... 777 253
Legal and professional fees............... 135 199
Advertising............................... 267 199
Supplies.................................. 343 233
Data processing fees...................... 401 197
Check printing fees....................... 98 89
Other outside services.................... 142 76
Organizational expenses................... 0 66
Other operating expenses.................. 1,028 462
------ -------
Total noninterest expense............... $9,440 $4,763
====== =======
</TABLE>
A-15
<PAGE>
Liquidity and Capital Resources
Equity Capital. 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 end
of the third year of its operations. At March 31, 1999 the Bank's Tier 1 Capital
as a percent of total assets 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 $10,000,000 from the proceeds of this
offering to the Bank's capital. At June 30, 1999, the Bank's Tier 1 Capital as a
percent of total assets was 10.83%. At December 31, 1999, this ratio decreased
to 8.59%, due to asset growth. The Company has approximately $5 million in
additional funds which it could contribute to the Bank's capital if necessary.
The following table shows various capital ratios as of December 31, 1999.
<TABLE>
Capital Resources (in thousands)
Tier 1
Leverage Tier 1 Total Risk-Based
Ratio Capital Ratio Capital Ratio
----- ------------- ----------------
<S> <C> <C> <C>
Minimum regulatory requirement for
capital adequacy..................... 4.0% 4.0% 8.0%
Well capitalized regulatory level...... 5.0% 6.0% 10.0%
Consolidated........................... 10.8% 12.7% 14.2%
Bank................................... 9.4% 10.9% 12.4%
</TABLE>
The following table shows the dollar amounts by which the Company'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, 1999
Required regulatory capital......................... $12,940 $10,994 $21,989
Capital in excess of regulatory minimums............ 21,982 23,928 16,928
------- ------- -------
Actual capital balances................................ $34,922 $34,922 $38,917
======= ======= =======
</TABLE>
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.
A-16
<PAGE>
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 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 of dollars) at December 31, 1999.
<TABLE>
0 to 3 Months 4 to 12 Months 1 to 5 Years Over 5 Years Total
------------- -------------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
Assets:
Loans-Fixed $ 9,596 $ 31,225 $ 103,082 $ 22,704 $ 166,607
Loans-Variable 101,125 444 14,450 2,748 118,767
Taxable Securities 25,416 2,865 28,281
Other Securities 2,312 2,312
Loan Loss Reserve (3,995)
Cash & Due From Banks 20,554
Fixed Assets 9,998
Other Assets 2,397
----------- ---------- --------- --------- ---------
Total Assets $ 110,721 $ 31,669 $ 142,948 $ 30,629 $ 344,921
Liabilities:
Time Deposits $ 24,039 $ 37,013 $ 26,909 $ 87,961
Savings & IRA's 2,018 539 10,204 $ 557 13,318
Other Interest Bearing Deposits 65,792 77,777 143,569
Other Borrowings 15,000 15,000 30,000
Non-Interest Bearing Deposits 34,542
Other Liabilities & Equity 35,531
----------- ---------- --------- --------- ---------
Total Liabilities & Equity $ 106,846 $ 37,552 $ 129,890 $ 557 $ 344,921
Period Gap $ 3,872 $ (5,883) $ 13,058 $ 30,072
Cumulative Gap $ 3,872 $ (2,011) $ 11,047 $ 41,119
Cumulative Gap/Total Assets 1.12% -0.58% 3.20% 11.97%
Period Rate Sensitive Assets/
Rate Sensitive Liabilities 1.04% 0.84% 1.10% 55.05%
Cumulative Rate Sensitive
Assets/Rate Sensitive
Liabilities 1.04% 0.99% 1.04% 1.15%
</TABLE>
Based on this analysis, management does not believe the Company would be
materially impacted by changes in interest rates.
A-17
<PAGE>
Other variables besides interest rate changes may have an impact on the
financial condition of the Bank including, but not limited to, growth of the
company, structure of the balance sheet, and economic and competitive factors.
Year 2000 Compliance
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements. The Company and the Bank were organized in 1997
and the Company acquired its computer equipment within the past eighteen months
and has contracted with a leading supplier of information processing services.
This equipment and these services were purchased with manufacturer assurances of
Year 2000 compliance.
The Company has not experienced any Year 2000 problems. Although considered
unlikely, unanticipated problems, including problems associated with
non-compliant third parties, could still occur. The Company will continue to
manage its business and address any issues that may arise.
Recent Regulatory Developments
Recently enacted federal legislation (the Gramm-Leach-Bliley Act of 1999)
eliminates many Federal and state law barriers to affiliations among banks and
other financial services providers. The legislation, which takes effect March
11, 2000, establishes a statutory framework pursuant to which full affiliations
can occur between banks and securities firms, insurance companies, and other
financial companies. The legislation provides some degree of flexibility in
structuring these new affiliations, although certain activities may only be
conducted through a holding company structure. The legislation preserves the
role of the Board of Governors of the Federal Reserve System as the umbrella
supervisor for holding companies, but incorporates a system of functional
regulation pursuant to which the various Federal and state financial supervisors
will continue to regulate the activities traditionally within their
jurisdictions. The legislation specifies that banks may not participate in the
new , affiliations unless they are well-capitalized, well-managed and maintain a
rating under the Community Reinvestment Act of 1977 of at least "satisfactory"
among all affiliates.
A-17
<PAGE>
At this time, the Company is unable to predict the impact this legislation
may have on the Company.
The Company's Board of Directors has determined that it is in the best
interests of the Company and its shareholders to restructure the board of
directors by reducing the number of directors of the Company. In order to effect
this restructuring, James L. Jurries, James L. Batts, Wayne J. Elhart, Jessie F.
Dalman and Brian J. Hansen will resign from the Board of Directors of the
Company prior to the Annual Meeting. Each of these directors and all of the
Company's remaining directors will continue as directors of Macatawa Bank, a
subsidiary of the Company. The Company anticipates forming a second subsidiary
which will provide financial and other services excluding banking services
("Financial Services Company"). Once the Financial Services Company Board is
organized, certain Macatawa Bank directors will be named to the Financial
Services Company Board. All services provided by the Company other than banking
will be provided through the Financial Services Company and all banking services
will be e provided through Macatawa Bank. For the foreseeable future, the
Company will function purely as a holding company. The Board restructuring will
relieve the directors who are leaving the Company's Board from any holding
company responsibilities and permit them to focus their attention and efforts on
the Company's subsidiary operations.
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,
statements concerning future profitability or future growth or increases, and
the Year 2000 readiness discussion 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 filings with the
Securities and Exchange Commission.
A-19
<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, 1999 and 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1999 and 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, 1999 and 1998, and the results of its operations and
its cash flows for the years ended December 31, 1999 and 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
January 28, 2000
A-20
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,554,039 $ 11,453,177
Short-term investments 6,500,000
--------------- ---------------
Cash and cash equivalents 20,554,039 17,953,177
Securities available for sale, at fair value 28,281,375 27,007,300
Federal Home Loan Bank stock 2,312,000
Total loans 285,374,451 137,882,260
Allowance for loan losses (3,995,165) (2,030,000)
--------------- ---------------
281,379,286 135,852,260
Premises and equipment - net 9,997,566 7,125,755
Accrued interest receivable 1,904,126 1,226,199
Other assets 492,743 63,982
--------------- ---------------
Total assets $ 344,921,135 $ 189,228,673
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 34,542,493 $ 18,517,550
Interest-bearing 244,847,389 148,471,125
--------------- ---------------
Total 279,389,882 166,988,675
Federal funds purchased 2,000,000
Federal Home Loan Bank advances 30,000,000
Accrued expenses and other liabilities 1,005,100 628,610
--------------- ---------------
Total liabilities 310,394,982 169,617,285
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 and
2,435,125 shares issued and outstanding at December 31, 1999 and 1998,
respectively 36,882,916 22,260,646
Retained deficit (1,960,810) (2,654,076)
Accumulated other comprehensive income (loss),
net of income tax of ($203,975) and $2,482 (395,953) 4,818
--------------- ---------------
Total shareholders' equity 34,526,153 19,611,388
--------------- ---------------
Total liabilities and shareholders' equity $ 344,921,135 $ 189,228,673
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
A-21
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Years
ended December 31, 1999 and 1998 and period from
May 21, 1997 (date in inception) through December 31, 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 18,379,300 $ 5,338,963 $ 3,448
Securities
Taxable 1,352,332 986,372 4,268
Tax-exempt 8,910
Other 260,157 478,770 68,566
-------------- -------------- ---------------
Total interest income 20,000,699 6,804,105 76,282
Interest expense
Deposits 8,698,646 3,186,309 5,339
Other 729,490 3,928 213
-------------- -------------- ---------------
Total interest expense 9,428,136 3,190,237 5,552
-------------- -------------- ---------------
Net interest income 10,572,563 3,613,868 70,730
Provision for loan losses (1,967,000) (2,022,500) (7,500)
-------------- -------------- ---------------
Net interest income after provision for loan losses 8,605,563 1,591,368 63,230
Noninterest income
Service fees 660,920 157,109
Gain on sales of loans 623,520 520,645
Trust fees 228,588
Other 14,970 5,628
-------------- --------------
Total noninterest income 1,527,998 683,382
Noninterest expense
Salaries and benefits 5,408,024 2,726,885 111,341
Occupancy expense of premises 841,252 305,214 9,226
Furniture and equipment expense 777,249 253,074 5,328
Legal and professional fees 134,993 198,890 18,437
Advertising 266,917 198,826 27,698
Supplies 342,979 232,835 30,729
Data processing fees 400,591 196,665 119
Check printing fees 98,302 88,596 1,218
Other outside services 141,671 75,762 2,765
Organizational expenses 66,139
Other expense 1,028,317 420,415 21,894
-------------- -------------- ---------------
Total noninterest expenses 9,440,295 4,763,301 228,755
-------------- -------------- ---------------
Net income (loss) $ 693,266 $ (2,488,551) $ (165,525)
============== ============== ===============
Basic and diluted earnings (loss) per share $ .22 $ (1.22) $ (.18)
============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
A-22
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998 and period from
May 21, 1997 (date in inception) through December 31, 1997
<TABLE>
Accumulated
Other
Comprehensive Total
Common Retained Income (Loss), 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 (loss):
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 (loss):
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
Proceeds from sale of stock on June 4, 1999, 1,153,440 shares 14,622,270 14,622,270
Net income 693,266 693,266
Other comprehensive income (loss):
Net change in unrealized depreciation on securities
available for sale, net of tax of ($206,457) (400,771) (400,771)
---------
Comprehensive income 292,495
------------ ------------- ----------- --------
Balance, December 31, 1999 $ 36,882,916 $ (1,960,810) $ (395,953) $34,526,153
============ ============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-23
<PAGE>
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998 and period from
May 21, 1997 (date in inception) through December 31, 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 693,266 $ (2,488,551) $ (165,525)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation and amortization 736,691 271,458 5,769
Provision for loan losses 1,967,000 2,022,500 7,500
Origination of loans for sale (54,714,982) (44,146,300)
Proceeds from sales of loans
originated for sale 55,338,502 44,666,945
Gain on sales of loans (623,520) (520,645)
Net change in
Organizational costs 66,139 (66,139)
Accrued interest receivable and
other assets (1,106,688) (1,221,658) (68,523)
Accrued expenses and other liabilities 582,948 588,301 37,827
--------------- --------------- -------------
Net cash from operating activities 2,873,217 (761,811) (249,091)
Cash flows from investing activities
Loan originations and payments, net (147,494,026) (137,384,556) (497,704)
Purchase of FHLB stock (2,312,000)
Activity in securities available for sale
Purchase (16,879,381) (29,000,000) (2,000,000)
Maturities 15,000,000 4,000,000
Additions to premises and equipment (3,610,425) (6,715,406) (687,576)
--------------- --------------- -------------
Net cash from investing activities (155,295,832) (169,099,962) (3,185,280)
Cash flows from financing activities
Net increase (decrease) in federal funds
purchased (2,000,000) 2,000,000
Proceeds from FHLB 51,000,000
Repayments on FHLB advances (21,000,000)
Net increase in deposits 112,401,207 164,276,452 2,712,223
Proceeds from the issuance of common stock 14,622,270 14,123,378 8,137,268
--------------- --------------- -------------
Net cash from financing activities 155,023,477 180,399,830 10,849,491
--------------- --------------- -------------
Net change in cash and cash equivalents 2,600,862 10,538,057 7,415,120
Beginning cash and cash equivalents 17,953,177 7,415,120
--------------- --------------- -------------
Ending cash and cash equivalents $ 20,554,039 $ 17,953,177 $ 7,415,120
=============== =============== =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 9,212,595 $ 2,725,880 $ 640
</TABLE>
See accompanying notes to consolidated financial statements.
A-24
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
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 it 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 also operates a trust department
which provides fiduciary, investment and other related services. 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.
The Company completed an underwritten initial public offering of common stock on
April 7, 1998, which resulted in net proceeds to the Company of $14,123,378. On
April 30, 1999, the Company had another common stock offering and sold 1,153,440
shares, raising $14,622,270.
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, commercial assets and consumer
assets. Other financial instruments which potentially subject the Company to
concentrations of credit risk include deposit accounts in other financial
institutions.
(Continued)
A-25
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of 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,
1999 or 1998. 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, 1999 and 1998 or for the
years ended December 31, 1999 and 1998 or for the period from May 21, 1997 (date
of inception) through December 31, 1997.
(Continued)
A-26
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1999 or 1998.
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.
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. Deferred tax assets are reduced
by a valuation allowance due to a lack of historical operating performance.
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.
Earnings (Loss) Per Share: Basic earnings (loss) per share is net income (loss)
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options.
(Continued)
A-27
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income
(loss) and unrealized gains and losses on securities available for sale, net of
tax, which are also recognized as separate components of equity.
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; cash management; and trust
services. 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: The Company and the Bank are subject to banking
regulations which require the maintenance of certain capital levels and positive
retained earnings, which will prevent payment of dividends until positive
retained earnings are achieved and may limit the amount of dividends thereafter.
Reclassifications: Certain amounts on the 1998 and 1997 consolidated financial
statements have been reclassified to conform with the 1999 presentation.
NOTE 2 - CASH AND DUE FROM BANKS
The Company was required to have $2,597,000 and $803,000 of cash on hand or on
deposit with the Federal Reserve Bank to meet regulatory reserve and clearing
requirements at year end 1999 and 1998. These balances do not earn interest.
(Continued)
A-28
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 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>
1999
- ----
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 27,925,926 $ (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
=============== ============ ============ ================
1998
- ----
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 27,000,000 $ 35,700 $ (28,400) $ 27,007,300
=============== ============ ============ ================
</TABLE>
Contractual maturities of debt securities at year end 1999 were as follows:
<TABLE>
Available for Sale
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due from one to five years $ 25,984,552 $ 25,415,550
Due from five to ten years 1,941,374 1,921,340
Due after ten years 955,377 944,485
--------------- ----------------
$ 28,881,303 $ 28,281,375
=============== ================
</TABLE>
There were no sales of securities for the years ended December 31, 1999 and 1998
and for the period from May 21, 1997 (date of inception) through December 31,
1997.
(Continued)
A-29
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - LOANS
Year-end loans are as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 201,391,721 $ 95,669,151
Mortgage 44,734,529 22,528,687
Consumer 39,248,201 19,684,422
--------------- ----------------
285,374,451 137,882,260
Allowance for loan losses (3,995,165) (2,030,000)
--------------- ----------------
$ 281,379,286 $ 135,852,260
=============== ================
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 2,030,000 $ 7,500
Provision charged to operating expense 1,967,000 2,022,500 $ 7,500
Loans charged-off (5,538)
Recoveries 3,703
--------------- --------------- --------------
Ending balance $ 3,995,165 $ 2,030,000 $ 7,500
=============== =============== ==============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT - NET
Year-end premises and equipment are as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Land $ 1,574,218 $ 1,177,184
Building and improvements 4,915,252 3,661,701
Furniture and equipment 4,516,473 2,553,229
--------------- ----------------
11,005,943 7,392,114
Less accumulated depreciation (1,008,377) (266,359)
--------------- ----------------
$ 9,997,566 $ 7,125,755
=============== ================
</TABLE>
(Continued)
A-30
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 - DEPOSITS
Deposits at year-end are summarized as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing demand $ 34,542,493 $ 18,517,550
Money market 100,642,349 71,091,206
NOW and Super NOW 43,237,004 22,425,439
Savings 7,411,691 5,812,028
Certificates of deposit 93,556,345 49,142,452
--------------- ----------------
$ 279,389,882 $ 166,988,675
=============== ================
</TABLE>
At year-end 1999, maturities of certificates of deposits were as follows, for
the next five years:
<TABLE>
<S> <C>
2000 $ 62,303,040
2001 24,513,974
2002 6,674,262
2003 64,058
2004 0
2005 and thereafter 1,011
---------------
$ 93,556,345
===============
</TABLE>
The Bank had approximately $50,179,000 and $27,090,000 in time certificates of
deposit which were in denominations of $100,000 or more at December 31, 1999 and
1998.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows.
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Maturities from April 2002 through September 2009,
fixed rate from 5.63% to 5.84%, averaging 5.76% $ 15,000,000 $ -
Maturities from March 2000 through June 2000,
variable rates of 4.05% 15,000,000 -
--------------- -------------
$ 30,000,000 $ -
=============== =============
</TABLE>
Each advance is payable at its maturity date, with a prepayment penalty. The
advances were collateralized by securities totaling $27,000,000 and at least
$21,000,000 of first mortgage loans under a blanket lien arrangement at year-end
1999.
(Continued)
A-31
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
Maturities over the next five years are:
<TABLE>
<S> <C>
2000 $ 15,000,000
2001 -
2002 3,000,000
2003 3,000,000
2004 4,000,000
2005 and after 5,000,000
---------------
$ 30,000,000
===============
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 1999 were as
follows.
<TABLE>
<S> <C>
Beginning balance $ 4,396,895
New loans 8,582,752
Repayments (3,512,984)
---------------
Ending balance $ 9,466,663
===============
</TABLE>
Deposits from principal officers, directors, and their affiliates at year-end
1999 and 1998 were $3,183,000 and $2,825,834.
(Continued)
A-32
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - 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
200,000 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 one-year
period for both the Employees' Plan and the Directors' Plan.
A summary of the activity in the plans is as follows.
<TABLE>
Weighted
Average
Options Exercise
Outstanding Price
---------- -----
<S> <C> <C>
Balance at December 31, 1997 0 $ 0.00
Granted 123,600 12.92
Exercised
Forfeited (100) 10.00
------------ --------
Balance at December 31, 1998 123,500 12.83
Granted 21,000 14.16
Exercised
Forfeited (4,200) 14.46
------------ --------
Balance at December 31, 1999 140,300 $ 13.06
============ ========
</TABLE>
For the options outstanding at December 31, 1999, the range of exercise prices
was $10.00 to $16.50 per share with a weighted average remaining contractual
life of 8.7 years. At December 31, 1999, 119,300 options were exercisable at a
weighted average price of $12.87 per share. No options were exercisable at
December 31, 1998.
(Continued)
A-33
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - STOCK OPTIONS (Continued)
No compensation cost was recognized during 1999 or 1998. Had compensation cost
for stock options been measured using FASB Statement No. 123, net income (loss)
and basic income (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>
1999 1998
---- ----
<S> <C> <C>
Net income (loss) as reported $ 693,266 $ (2,488,551)
Pro forma net income (loss) 345,987 (2,752,080)
Basic earnings (loss) per share as reported .22 (1.22)
Pro forma basic earnings (loss) per share .11 (1.35)
Diluted earnings (loss) per share as reported .22 (1.22)
Pro forma diluted earnings (loss) per share .11 (1.35)
Weighted-average fair value of options
granted during the year 5.19 4.74
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
1999 1998
<S> <C> <C>
Risk-free interest rate 6.55% 4.72%
Expected option life 7 years 7 years
Expected stock price volatility 17.29% 8.46%
Dividend yield 0.00% 0.00%
</TABLE>
NOTE 10 - EMPLOYEE BENEFITS
The Company established a 401(k) plan in January 1999 covering substantially all
employees. Employees may elect to contribute to the plan from 1% to 15% of their
salary subject to statutory limitations. The Company makes matching
contributions equal to 100% of the first 3% of employee contributions. The
Company's contribution for the year ended December 31, 1999 was approximately
$114,000.
(Continued)
A-34
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended December 31, 1999 and 1998 and the period
from May 21, 1997 (date in inception) through December 31, 1997 are as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings (loss) per share
Net income (loss) $ 693,266 $ (2,488,551) $ (165,525)
Weighted average common shares - ------- - ----------- - ---------
outstanding 3,101,908 2,041,920 940,125
--------- --------- -------
Basic earnings (loss) per share $ .22 $ (1.22) $ (.18)
= === = ====== = =====
Diluted earnings (loss) per share
Net income (loss) $ 693,266 $ (2,488,551) $ (165,525)
Weighted average common shares - ------- - ----------- - ---------
outstanding 3,101,908 2,041,920 940,125
Add: Dilutive effects of assumed
exercises of stock options 21,029
Weighted average common and dilutive ------ --------- -------
potential common shares outstanding 3,122,937 2,041,920 940,125
--------- --------- -------
Diluted earnings (loss) per share $ .22 $ (1.22) $ (.18)
= === = ====== = =====
</TABLE>
Stock options for 57,000 and 123,500 shares of common stock were not considered
in computing diluted earnings (loss) per common share for 1999 and 1998 because
they were antidilutive.
(Continued)
A-35
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 12 - FEDERAL INCOME TAXES
The consolidated provision for income taxes is as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Current $ 415,439
Deferred benefit (173,533) $ (841,530)
Change in valuation allowance (241,906) 841,530
-------- --------
$ 0 $ 0
= = = =
</TABLE>
The recorded consolidated income tax provision in both 1999 and 1998 differs
from that computed by multiplying pre-tax income by the statutory federal income
tax rates due to the valuation allowance, tax-exempt interest income and
nondeductible expenses.
The net deferred tax asset (liability) recorded includes the following amounts
of deferred tax assets and liabilities as of December 31, 1999 and 1998:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Deferred tax asset
Allowance for loan losses $ 1,241,645 $ 572,865
Net operating loss carryforward 363,822
Unrealized loss on securities available for sale 203,975
Organization costs 34,098 45,604
Other 3,798
----- -------
1,483,516 982,291
Deferred tax liabilities
Depreciation (208,272) (84,555)
Unrealized gain on securities available for sale (2,482)
-------- ------
(208,272) (87,037)
-------- -------
Net deferred tax asset before valuation allowance 1,275,244 895,254
Valuation allowance (655,830) (897,736)
-------- --------
Net deferred tax asset (liability) after valuation allowance $ 619,414 $ (2,482)
= ======= = ======
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefit related to such
assets will not be realized. Management has determined that a valuation
allowance of $655,830 is required for 1999 and that a valuation allowance of
$897,736 is required for 1998.
(Continued)
A-36
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 13 - 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>
1999 1998
---- ----
<S> <C> <C>
Commitments to make loans $ 14,973,000 $ 17,876,000
Unused lines of credit 102,763,000 65,699,000
</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 majority of the
unused lines of credit are at variable rates tied to prime.
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
$305,516 in 1999, $117,886 in 1998 and $1,600 in 1997. Future minimum rentals
under noncancelable operating leases as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 184,102
2001 78,663
2002 57,213
2003 47,750
2004 17,250
2005 and thereafter ------------
$ 384,978
= =======
</TABLE>
(Continued)
A-37
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - 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.
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
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
1998
- ----
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
</TABLE>
The Company and the Bank were categorized as well capitalized at year-end 1999
and 1998.
(Continued)
A-38
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
<TABLE>
1 9 9 9 1 9 9 8
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 20,554,039 $ 20,554,039 $ 17,953,177 $ 17,953,177
Securities available for sale 28,281,375 28,281,375 27,007,300 27,007,300
Federal Home Loan Bank stock 2,312,000 2,312,000
Loans, net 281,379,286 279,901,275 135,852,260 136,086,762
Accrued interest receivable 1,904,126 1,904,126 1,226,199 1,226,199
Financial liabilities
Deposits (279,389,882) (279,506,286) (166,988,675) (167,496,412)
Federal funds purchased (2,000,000) (2,000,000)
Federal Home Loan Bank advances (30,000,000) (29,910,492)
Accrued interest payable (684,803) (684,803) (469,264) (469,264)
</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,
Federal Home Loan Bank stock, 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, deposits, and borrowings and for variable rate loans, deposits, and
borrowings 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-39
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 16 - CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Following are condensed parent company only financial statements:
<TABLE>
CONDENSED BALANCE SHEETS
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,894,668 $ 914,643
Investment in subsidiary 29,631,485 18,696,745
--------------- ----------------
Total assets $ 34,526,153 $ 19,611,388
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock $ 36,882,916 $ 22,260,646
Retained deficit (1,960,810) (2,654,076)
Accumulated other comprehensive income,
net of income tax of ($203,975) and 2,482 (395,953) 4,818
--------------- ----------------
Total shareholders' equity 34,526,153 19,611,388
--------------- ----------------
Total liabilities and shareholders' equity $ 34,526,153 $ 19,611,388
=============== ================
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Period from
February 23, 1998
(date of inception)
Year ended through
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Expenses
Other operating expenses $ 142,245 $ 54,840
--------------- ----------------
Loss before equity in undistributed
net income (loss) of subsidiaries (142,245) (54,840)
Equity in undistributed net income (loss) of subsidiary 835,511 (2,185,393)
--------------- ----------------
Net income (loss) $ 693,266 $ (2,240,233)
=============== ================
</TABLE>
(Continued)
A-40
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 16 - CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
(Continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Period from
February 23, 1998
(date of inception)
Year ended through
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 693,266 $ (2,240,233)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed net (income) loss of
subsidiary (835,511) 2,185,393
-------------- --------------
Net cash from operating activities (142,245) (54,840)
Cash flows from investing activities
Investment in subsidiary (10,500,000) (13,153,895)
-------------- --------------
Net cash from investing activities (10,500,000) (13,153,895)
Cash flows from financing activities
Proceeds from issuance of common stock 14,622,270 14,123,378
-------------- --------------
Net cash from financing activities 14,622,270 14,123,378
-------------- --------------
Net change in cash and cash equivalents 3,980,025 914,643
Cash and cash equivalents at beginning of period 914,643
-------------- --------------
Cash and cash equivalents at end of period $ 4,894,668 $ 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-41
<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
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 January
28, 2000, on our audits of the consolidated financial statements as of December
31, 1999 and 1998, and for the years ended December 31, 1999 and 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
Grand Rapids, Michigan
March 17, 2000
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,554,039
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,281,375
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 285,374,451
<ALLOWANCE> 3,995,165
<TOTAL-ASSETS> 344,921,135
<DEPOSITS> 279,389,882
<SHORT-TERM> 15,000,000
<LIABILITIES-OTHER> 1,005,100
<LONG-TERM> 15,000,000
0
0
<COMMON> 36,882,916
<OTHER-SE> (1,960,810)
<TOTAL-LIABILITIES-AND-EQUITY> 344,921,135
<INTEREST-LOAN> 18,379,300
<INTEREST-INVEST> 1,361,242
<INTEREST-OTHER> 260,157
<INTEREST-TOTAL> 20,000,699
<INTEREST-DEPOSIT> 8,698,646
<INTEREST-EXPENSE> 9,428,136
<INTEREST-INCOME-NET> 10,572,563
<LOAN-LOSSES> 1,967,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,440,295
<INCOME-PRETAX> 693,266
<INCOME-PRE-EXTRAORDINARY> 693,266
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 693,266
<EPS-BASIC> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 3.34
<LOANS-NON> 101,000
<LOANS-PAST> 120,402
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,030,000
<CHARGE-OFFS> 5,538
<RECOVERIES> 3,703
<ALLOWANCE-CLOSE> 3,995,165
<ALLOWANCE-DOMESTIC> 3,193,371
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 801,794
</TABLE>
