SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 000-25927
MACATAWA BANK CORPORATION
(Exact name of issuer as specified in its charter)
MICHIGAN 38-3391345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 E. Main Street, Zeeland, Michigan 49464
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 748-9491
-----------
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __X__ No _____
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 3,588,565 shares of the Company's
Common Stock (no par value) were outstanding as of August 4, 2000.
Transitional Small Business Disclosure Format (check one): Yes_____ No___X___
1
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3.
Quantitative and Qualitative Disclosures 16
About Market Risk
Part II. Other Information
Item 1.
Legal Proceedings 17
Item 2.
Changes in Securities and Use of Proceeds 17
Item 3.
Defaults Upon Senior Securities 17
Item 4.
Submission of Matters to a Vote of Security Holders 17
Item 5.
Other Information 17
Item 6.
Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
Part I Financial Information
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 (unaudited) and December 31, 1999
--------------------------------------------------------------------------------
<TABLE>
June 30, December 31,
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,353,486 $ 20,554,039
Securities available for sale, at fair value 36,059,497 28,281,375
Federal Home Loan Bank Stock 2,312,000 2,312,000
Total loans 346,954,741 285,374,451
Allowance for loan losses (5,044,595) (3,995,165)
-------------- --------------
341,910,146 281,379,286
Premises and equipment - net 11,905,819 9,997,566
Accrued interest receivable 2,431,465 1,904,126
Other assets 1,361,642 492,743
-------------- --------------
Total Assets $418,334,055 $344,921,135
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 39,421,962 $ 34,542,493
Interest-bearing 295,589,030 244,847,389
-------------- --------------
Total 335,010,992 279,389,882
Fed funds purchased 6,000,000 --
Federal Home Loan Bank borrowings 40,000,000 30,000,000
Accrued expenses and other liabilities 1,486,807 1,005,100
-------------- --------------
Total liabilities 382,497,799 310,394,982
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized; no shares issued and outstanding
Common stock, no par value, 9,500,000 shares authorized;
3,588,565 shares issued and outstanding as of
June 30, 2000 and December 31, 1999. 36,882,916 36,882,916
Retained deficit ( 610,873) (1,960,810)
Accumulated other comprehensive income (loss) ( 435,787) (395,953)
-------------- --------------
Total shareholders' equity 35,836,256 34,526,153
-------------- --------------
Total liabilities and shareholders' equity $418,334,055 $344,921,135
============== ==============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Six Month Periods Ended June 30, 2000 and June 30, 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees $7,808,196 $4,289,772 $14,418,842 $7,568,141
Investments 559,395 373,450 1,054,680 730,233
----------- ----------- ------------ -----------
Total interest income 8,367,591 4,663,222 15,473,522 8,298,374
Interest expense
Deposits 3,643,011 2,010,155 6,699,192 3,759,357
Other 645,555 181,751 1,158,080 184,236
----------- ----------- ------------ -----------
Total interest expense 4,288,566 2,191,906 7,857,272 3,943,593
Net interest income 4,079,025 2,471,316 7,616,250 4,354,781
Provision for loan losses (595,000) (545,000) (1,082,000) (995,000)
----------- ----------- ------------ -----------
Net interest income after provision
for loan losses 3,484,025 1,926,316 6,534,250 3,359,781
Noninterest income
Service charges on deposit accounts 238,196 118,225 439,155 207,739
Gain on sale of loans 95,860 168,406 135,181 424,394
Trust revenue 134,821 45,232 248,187 58,210
Other 48,855 30,717 100,859 61,382
----------- ----------- ------------ -----------
Total noninterest income 517,732 362,580 923,382 751,725
Noninterest expense
Salaries and benefits 1,705,232 1,246,298 3,353,251 2,347,455
Occupancy expense of premises 308,700 183,790 563,964 342,180
Furniture and equipment expense 294,962 160,324 557,958 299,281
Legal and professional fees 102,312 35,624 153,356 68,489
Advertising 75,001 74,704 144,754 115,128
Data processing 71,774 44,455 145,581 86,841
Shareholder services 33,325 63,399 51,499 69,779
Supplies 71,401 81,996 175,558 149,667
Other expense 515,726 354,190 961,774 665,680
----------- ----------- ------------ -----------
Total noninterest expenses 3,178,433 2,244,780 6,107,695 4,144,500
Income/(loss) before federal income tax 823,324 44,116 1,349,937 (32,994)
Federal income tax 0 0 0 0
----------- ----------- ------------ -----------
Net income/(loss) $ 823,324 $ 44,116 $ 1,349,937 $ (32,994)
=========== =========== ============ ===========
Comprehensive Income (Loss) $ 834,165 $ (142,339) $ 1,310,103 $ (272,897)
=========== =========== ============ ===========
Basic income/(loss) per share $ .23 $ .02 $ .38 $ (.01)
Diluted income/(loss) per share $ .23 $ .02 $ .37 $ (.01)
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Month Periods Ended June 30, 2000 and June 30, 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,349,937 $ (32,994)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 584,381 314,042
Provision for loan losses 1,082,000 995,000
Net change in
Accrued interest receivable and other assets (1,396,238) (305,771)
Accrued expenses and other liabilities 502,227 208,712
------------ ------------
Net cash from operating activities 2,122,307 1,178,989
Cash flows from investing activities
Net increase in loans (61,612,860) (79,657,109)
Purchase of Federal Home Loan Bank Stock --- (2,312,000)
Purchases of securities available for sale (7,826,998) (8,000,000)
Proceeds from maturities and calls of securities available for sale --- 15,000,000
Purchases of premises and equipment (2,504,112) (1,667,584)
------------ ------------
Net cash from investing activities (71,943,970) (76,636,693)
Cash flows from financing activities
Net increase in deposits 55,621,110 50,554,158
Net increase (decrease) in short term borrowings 6,000,000 (2,000,000)
Advances of Federal Home Loan Bank Borrowings 40,000,000 16,000,000
Repayments of Federal Home Loan Bank Borrowings (30,000,000) 14,636,431
------------ ------------
Net cash from financing activities 71,621,110 79,190,589
Net change in cash and cash equivalents 1,799,447 3,732,885
Cash and cash equivalents at beginning of period 20,554,039 17,953,177
------------ ------------
Cash and cash equivalents at end of period $22,353,486 $21,686,062
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 7,372,615 $ 3,843,524
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six Month Periods Ended June 30, 2000 and June 30, 1999
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income(Loss) Equity
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $22,260,646 $(2,654,076) $ 4,818 $19,611,388
Proceeds from sale of stock $14,636,431 14,636,431
Net loss for six months ended
June 30, 1999 (unaudited) (32,994) (32,994)
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities (239,903) (239,903)
-----------
Comprehensive loss (272,897)
----------- ----------- ------------ -----------
Balance, June 30, 1999 $36,897,077 $(2,687,070) $ (235,085) $33,974,922
=========== =========== ============ ===========
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income(Loss) Equity
--------- --------- ------------- ------------
Balance, December 31, 1999 $36,882,916 $(1,960,810) $ (395,953) $34,526,153
Net income for six months ended
June 30, 2000 (unaudited) 1,349,937 1,349,937
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities (39,834) (39,834)
-----------
Comprehensive income 1,310,103
----------- ----------- ------------ -----------
Balance, June 30, 2000 $36,882,916 $ (610,873) $ (435,787) $35,836,256
=========== =========== ============ ===========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Proxy Statement dated March 20, 2000, containing financial statements
for the year ended December 31, 1999.
NOTE 2 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the quarters and six-months ended June 30, 2000 and June
30, 1999 are as follows:
<TABLE>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share
Net income (loss) $ 823,324 $ 44,116 $1,349,937 $ (32,994)
---------- ----------- ---------- -----------
Weighted average common
shares outstanding 3,588,565 2,777,354 3,588,565 2,607,185
---------- ----------- ---------- -----------
Basic earnings (loss) per share $ 0.23 $ 0.02 $ 0.38 $ (0.01)
========== =========== ========== ===========
Diluted earnings (loss) per share
Net income (loss) $ 823,324 $ 44,116 $1,349,937 $ (32,994)
---------- ----------- ---------- -----------
Weighted average common
shares outstanding 3,588,565 2,777,354 3,588,565 2,607,185
Add: Dilutive effects of assumed
exercise of stock options 13,100 19,055 16,617
---------- ----------- ---------- -----------
Weighted average common and
dilutive potential common
shares outstanding 3,601,665 2,796,409 3,605,182 2,607,185
---------- ----------- ---------- -----------
Diluted earnings (loss) per share $ 0.23 $ 0.02 $ 0.37 $ (0.01)
========== =========== ========== ===========
</TABLE>
Stock options for 76,000 shares of common stock were not considered in computing
diluted earnings per share for the quarter and six-months ended June 30, 2000
because they were antidilutive. Stock options for 56,000 shares of common stock
were not considered in computing diluted earnings (loss) per share for the
quarter and six-months ended June 30, 1999 because they were antidilutive.
NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Macatawa Bank Corporation (the "Company), and its wholly-owned
subsidiary, Macatawa Bank (the "Bank"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
7
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 4 - SECURITIES
The amortized cost and fair values of securities were as follows:
<TABLE>
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
<S> <C> <C> <C> <C>
June 30, 2000 (Unaudited)
U.S. Treasury securities and
obligations of U.S. Government
corporation and agencies $34,931,932 $ --- $ (679,922) $34,252,010
Tax Exempt Municipal Bonds 1,787,847 20,197 (557) 1,807,487
----------- --------- ----------- -----------
Total Securities $36,719,779 $ 20,197 $ (680,479) $36,059,497
=========== ========= =========== ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
December 31, 1999
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $27,925,926 $ (589,036) $27,336,890
State and municipal bonds 955,377 $ 852 (11,744) 944,485
----------- --------- ----------- -----------
$28,881,303 $ 852 $ (600,780) $28,281,375
=========== ========= =========== ===========
</TABLE>
Contractual maturities of debt securities at June 30, 2000, were as follows. No
held-to-maturity securities existed at June 30, 2000. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
Available-for-Sale Securities
-----------------------------
Amortized Fair
Cost Values
--------- --------
<S> <C> <C>
Due from one to five $34,931,932 $34,252,010
Due from five to ten 215,109 217,420
Due after ten years 1,572,738 1,590,067
----------- -----------
Total $36,719,779 $36,059,497
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
8
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans are as follows:
<TABLE>
June 30, December 31,
2000 1999
---------- -----------
(Unaudited)
<S> <C> <C>
Commercial $243,590,858 $201,391,721
Mortgage 52,755,782 44,734,529
Consumer 50,608,101 39,248,201
------------ ------------
346,954,741 285,374,451
Allowance for loan losses (5,044,595) (3,995,165)
------------ ------------
$341,910,146 $281,379,286
============ ============
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
Six Six
months months
ended ended
June 30, June 30,
2000 1999
------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance at beginning of period $3,995,165 $2,030,000
Provision charged to operating expense 1,082,000 995,000
Charge-offs (32,570) (507)
----------- -----------
Balance at end of period $5,044,595 $3,024,493
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
9
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT - NET
Premises and equipment are as follows:
<TABLE>
June 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Land $ 1,869,218 $1,574,218
Building and improvements 6,482,629 4,915,252
Furniture and equipment 5,158,208 4,516,473
------------ -----------
13,510,055 11,005,943
Less accumulated depreciation (1,604,236) (1,008,377)
------------ -----------
$11,905,819 $9,997,566
============ ===========
</TABLE>
NOTE 7 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
June 30 December 31
2000 1999
--------------- ---------------
<S> <C> <C>
Noninterest-bearing demand deposit accounts $ 39,421,962 $ 34,542,493
Money market account 111,350,668 100,642,349
NOW and Super NOW accounts 41,680,129 43,237,004
Savings accounts 9,820,745 7,411,691
Certificates of deposit 132,737,488 93,556,345
------------ -------------
$335,010,992 $279,389,882
============ =============
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK BORROWINGS
The Bank was approved in the first quarter of 1999 to be a member of the Federal
Home Loan Bank of Indianapolis. As a result, the Bank now has the availability
of Federal Home Loan Bank advances as an additional funding resource. Maturity
dates and interest rates on these advances are as follows:
<TABLE>
June 30 December 31
Maturity Date Interest Rate 2000 1999
------------- ------------- ----------- -----------
<S> <C> <C> <C>
March 27, 2000 5.44% (initial rate) 0 $5,000,000
June 19, 2000 5.65% (initial rate) 0 5,000,000
June 26, 2000 3.85% (initial rate) 0 5,000,000
July 27, 2000 6.21% (initial rate) 5,000,000 0
April 1, 2002 5.63% (fixed) 3,000,000 3,000,000
March 31, 2003 5.77% (fixed) 3,000,000 3,000,000
March 30, 2004 5.84% (fixed) 4,000,000 4,000,000
January 7, 2005 6.68% (fixed) 5,000,000 0
January 7, 2005 6.465% (fixed) 5,000,000 0
Sept. 1, 2009 5.80% (fixed) 5,000,000 5,000,000
March 23, 2010 5.99% (fixed) 10,000,000 0
----------- -----------
$40,000,000 $30,000,000
=========== ===========
</TABLE>
Each advance is payable in full at its respective maturity date. These advances
were required to be collateralized by securities totaling $33,000,000 and at
least $31,000,000 of the Bank's first mortgage loans under a blanket loan
arrangement at June 30, 2000.
10
<PAGE>
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - REGULATORY MATTERS
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weighting, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restorations are required.
At June 30, 2000 and December 31, 1999, actual capital levels (in thousands) and
minimum required levels for the Company and the Bank were:
<TABLE>
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
June 30, 2000 Amount Ratio Amount Ratio Amount Ratio
------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $40,616 11.7% $27,803 8.0% $34,754 10.0%
Bank 39,699 11.4 27,799 8.0 34,749 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 36,272 10.4 13,902 4.0 20,852 6.0
Bank 35,355 10.2 13,900 4.0 20,849 6.0
Tier 1 capital (to average assets)
Consolidated 36,272 8.9 16,304 4.0 20,380 5.0
Bank 35,355 8.7 16,304 4.0 20,380 5.0
December 31,1999
Total capital (to risk weighted assets)
Consolidated $38,358 14.0% $21,989 8.0% $27,489 10.0%
Bank 33,463 12.2 21,992 8.0 27,491 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 34,922 12.7 10,994 4.0 16,491 6.0
Bank 30,027 10.9 10,996 4.0 16,494 6.0
Tier 1 capital (to average assets)
Consolidated 34,922 10.8 12,940 4.0 16,175 5.0
Bank 30,027 9.4 12,811 4.0 16,014 5.0
</TABLE>
The Company and the Bank were categorized as well capitalized at June 30, 2000
and at year-end 1999.
Additionally, as a condition to regulatory approval of the Bank's formation, the
Bank is required to maintain capitalization sufficient to provide a ratio of
Tier 1 Capital to total assets of at least 8% through the third year of
operations. At June 30, 2000, the Bank's Tier 1 Capital as a percent of total
assets was 8.38%.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Macatawa Bank Corporation (the "Company") is a Michigan corporation and is the
bank holding company for Macatawa Bank (the "Bank"). The Bank commenced
operations on November 25, 1997. The Bank is a Michigan chartered bank with
depository accounts insured by the Federal Deposit Insurance Corporation. The
Bank provides a full range of commercial and consumer banking services,
primarily in the communities of Holland and Zeeland, Michigan, as well as the
surrounding market area primarily located in Ottawa County, Michigan.
The Company has experienced rapid and substantial growth since opening in
November 1997. At June 30, 2000, the Bank had thirteen branch banking offices
and two service facilities. The Company completed an underwritten initial public
offering of common stock on April 7, 1998, resulting in net proceeds of $14.1
million. In June 1999, the Company completed an offering of common stock to its
shareholders resulting in net proceeds of $14.6 million.
The Bank established a Trust Department in the fourth quarter of 1998 to further
provide for customers' financial needs. The Trust Department began business on
January 3, 1999 and as of June 30, 2000, had assets of approximately $206
million.
Financial Condition
At June 30, 2000, total assets of the Company were $418.3 million, an increase
of $73.4 million, or 21.3% from December 31, 1999. The continued trend of strong
asset growth reflects the Banks' continuing acceptance in its community markets.
Management expects the growth trend in assets to continue at a fairly rapid
double-digit pace, but at a lesser rate than the six month year-to-date
annualized growth rate of 42%. The asset growth was primarily in loans and
securities, but also included increases in premises and equipment and cash and
due from banks.
Total loans, which were $346.9 million at June 30, 2000, increased by $61.6
million, or 21.6% from year-end. The growth included commercial loans of $42.2
million, consumer loans of $11.4 million, and mortgage loans of $8.0 million.
Commercial loans comprise 70% of total loans at June 30, 2000, down 1% from
year-end. Consumer loans increased to 15% from 14%, while mortgages remained at
15% of total loans. It is anticipated that strong commercial loan demand in the
Bank's market will continue to lead the overall loan growth.
Securities available for sale of $36.1 million represent an increase of $7.8
million, or 27.5%. The growth in securities is consistent with maintaining the
Banks' liquidity ratio in conjunction with deposit growth.
Premises and equipment totaled $11.9 million at quarter-end, an increase of $1.9
million from December 31, 1999. The increase reflects expansion of the Banks'
investment in facilities and equipment required to support the customer growth.
The investment in branch premises includes the purchase of a previously leased
branch facility operated by the Bank at 699 E. 16th Street in Holland, as well
as the construction-in-process of a full service branch in Douglas to replace a
leased, startup storefront facility.
Cash and due from banks of $22.4 million at quarter end was an increase of $1.8
million, or 8.7% from year-end. The increase was a result of increased cash held
in correspondent banks necessary to meet the Federal Reserve required reserve
limits. Reserve limits are determined by periodic review of the Banks' deposit
levels and appropriate reserve amounts as defined by the Federal Reserve
regulations.
The allowance for loan losses totaled $5.0 million at June 30, 2000, an increase
of $1.0 million from December 31, 1999. The Bank provides a loan loss provision
on a regular basis consistent with its' loan growth. The allowance for loan
losses as a ratio of total loans was 1.45% at June 30, 2000, as compared to
1.40% at December 31, 1999. While the Bank has not experienced any material
credit losses in its portfolios as of June 30, 2000, management recognizes that
the Bank's loan portfolios are relatively unseasoned, and no trend of losses has
been established. Given additional time, the effects of increasing interest
rates on borrowers, and potential economic weakness, the Bank, in its judgment,
has provided adequate reserves for loan losses. In lieu of an established loan
loss trend for determining an adequate allowance for loan loss, the Bank has
built an allowance based on industry peer ratios.
Total deposits at June 30, 2000 were $335.0 million, an increase of $55.6
million, or 19.9%. Growth from new customers as a result of both new branches in
new markets, as well as increased customer
12
<PAGE>
activity in existing branches continues to drive this favorable growth trend.
Deposit growth, while at a slightly lesser rate than loan growth, is anticipated
to continue based on further penetration of the markets where branch offices
already have been established. Additionally, growth will occur in contiguous
markets as new branches are established where market demographics will support a
new branch facility. New deposit growth continues to mirror the Banks' existing
deposit base, with non-interest demand accounts accounting for approximately 12%
of total deposits, and interest bearing savings and certificates of deposit
accounting for the balance.
Results of Operations
Net income for the quarter ended June 30, 2000 was $823,324, as compared to
$44,116 for the same period last year. Diluted earnings per share were $.23,
compared to $.02 for prior year period. Net income for the six months ended June
30, 2000 totaled $1,349,937, up from the same period in 1999 when the Company
reported a net loss of $32,994. Diluted earnings per share for the period were
$.37 for 2000, and a loss of ($.01) for 1999.
Net interest income for the second quarter of 2000 totaled $4.08 million, a 65%
increase over 1999's level of $2.47 million. The improvement is reflective of
the overall growth of the Company. Average earning assets during the second
quarter 2000 totaled $379.4 million, versus $225.0 million during the same
quarter in 1999. Net interest margin on earning assets was 4.30% for the 2000
quarter, down from 4.39% in the second quarter of 1999. The modest compression
in the net interest margin during the second quarter of 2000 reflects funding
costs rising at a slightly faster pace than yield on earning assets. Six months
year-to-date, net interest income reached $7.62 million, versus 1999 of $4.35
million. Net interest margin during the period for 2000 was 4.27%, as compared
to 4.29% for the 1999 period. The growth in net interest income for the
six-month period was essentially all driven by increased customer volumes.
Continued growth in earning assets is expected to continue to increase levels of
net interest income. However, some further compression in net interest margin in
the current rising interest rate environment is expected to mitigate some of the
net interest income growth.
Non-interest income for the quarter totaled $518 thousand, an increase of $155
thousand over the same period for 1999. For the six-months ended June 30, 2000,
non-interest income increased $171 thousand over the same period for 1999.
Second quarter trust revenue increased by $90 thousand from the year earlier
period, and increased by $190 thousand for the six-month period. The trust
department began operations during the first quarter of 1999, and included
$205.5 million of assets under management at June 30, 2000, versus $122.7
million for the same time in 1999. The growth in Trust assets under management
is expected to moderate for the balance of the year due to both the impact of
the stock market volatility on asset valuations, as well as slower growth in
employee benefit plan sales. Quarterly service charges on deposit accounts
doubled to $238 thousand versus $118 thousand for the second quarter of 1999.
For the six-month period of 2000, service charges increased by $231 thousand
over the 1999 level. This revenue is dependent on both the number of customer
accounts, as well as customer activity levels. It includes regular monthly and
quarterly service charges, as well as overdraft charges. Gain on sale of loan
revenue decreased substantially from 1999 levels due to the higher level of
mortgage interest rates. Gains decreased by $72 thousand for the quarter, and
$289 thousand for the six-month period of 2000 as compared to the same periods
for 1999. Higher mortgage rates that began in late 1999 have substantially
reduced mortgage financing activity, and the Banks' subsequent sales activity.
Management anticipates the lower levels of loan sale gains to continue in the
current rate environment.
Non-interest expense increased by $933 thousand to $3.2 million for the second
quarter, compared to the same quarter for 1999. For the six-month period in
2000, non-interest expense was $6.1 million, an increase of $1.96 million over
the same period of 1999. Salary and benefits, and occupancy and equipment
expense increased a combined $719 thousand for the quarter, and $1.5 million for
the six-months of 2000, as compared to respective periods for 1999. The growth
in expense levels reflects the growth in branch and operational support
infrastructure. During the last half of 1999, four additional branch locations
were opened and these were fully operational for the first six months of 2000.
Growth in branch offices also increased advertising and promotion costs for the
new locations, data processing, and other expense, which includes courier,
telephone, postage, and outside services. All of theses costs are customer
activity and branch infrastructure related, and increase as a result of new
customer activity being generated.
To date, the Company has not been in a federal tax expense position due to net
operating loss carry forwards from its startup losses. Management anticipates to
be in a taxable position during the latter half
13
<PAGE>
of 2000, impacting net income for the balance of the year.
Liquidity and Capital Resources
The Company obtained its initial equity capital as a result of a private
placement on behalf of the Bank to investors in November, 1997. The Company
raised additional equity capital of $14.1 million in its initial public offering
completed in April, 1998. As a condition to regulatory approval of the Bank's
formation, the Bank is required to maintain capitalization sufficient to provide
a ratio of Tier 1 Capital to total assets of at least 8% through the third year
of operations. The Bank will complete its third year of operations on November
25, 2000. At March 31, 1999, the Bank's Tier 1 Capital to assets ratio was
8.43%. Due to the rapid growth of the Bank, additional equity capital was
required. In June 1999, the Company raised $14.6 million of equity capital net
proceeds in an offering made to the Company's shareholders. The Company
contributed $10 million from the proceeds of this offering to the Bank's
capital. Due to continued growth of the Bank, an additional $4 million was
contributed to the Bank from the Company's cash reserves of approximately $5
million during the first and second quarters of 2000. At June 30, 2000, the
Bank's Tier 1 Capital as a percent of total assets was 8.38%.
Based on continued projected asset growth, management anticipates an additional
capital will be required in early 2001.
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. The Company's sources of
liquidity include loan payments by borrowers, maturity and sales of securities
available for sale, growth of deposits and deposit equivalents, federal funds
sold, borrowings from the Federal Home Loan Bank, and the issuance of common
stock. Liquidity management involves the ability to meet the cash flow
requirements of the Company's customers. These customers may be either borrowers
with credit needs or depositors wanting to withdraw funds.
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 four years 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.
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
14
<PAGE>
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.
15
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Asset Liability Management and Market Risk Analysis
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. Management of interest rate sensitivity attempts to avoid widely
varying net interest margins and to achieve consistent net interest income
through periods of changing interest rates. Certain savings accounts and
interest bearing checking accounts are shown as repricing other than
contractually due to the stability of these products in a rate changing
environment. Management monitors the Company's exposure to interest rate changes
using a GAP analysis. The following table illustrates the Company's GAP position
at various intervals (in thousands) at June 30, 2000.
<TABLE>
Less than 3 3 - 12 1 - 5 Over 5
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans-Fixed 12,807 28,272 129,319 24,884 195,282
Loans-Variable 129,738 443 18,837 2,655 151,673
Taxable Securities - 4,000 30,932 - 34,932
Tax-Exempt Securities - - - 1,788 1,788
Other Securities - - - 2,312 2,312
Federal Funds Sold - - - - ---
Loan Loss Reserve - - - - (5,045)
Cash & Due From Banks - - - - 22,353
Fixed Assets - - - - 11,905
Other Assets - - - - 3,134
--------- -------- --------- -------- ---------
TOTAL 142,545 32,715 179,088 31,639 418,334
Liabilities:
CD's 100M and Over 31,998 23,968 19,491 - 75,457
CD's-Less than 100M 6,828 22,471 20,431 - 49,730
Repo's & Borrowed Money 11,000 - 20,000 15,000 46,000
Savings & IRA's 3,028 2,491 11,322 783 17,624
NOW & MMDA's 79,393 - 74,889 - 154,282
Non-Interest Bearing Deposits - - - - 37,918
Other Liabilities & Equity - - - - 37,323
--------- -------- --------- -------- ---------
132,247 48,930 146,133 15,783 418,334
TOTAL
Period Gap: 10,298 (16,215) 32,955 15,856
Cumulative Gap: 10,298 (5,917) 27,038 42,894
Cumulative Gap/Total Assets 2.46% -1.41% 6.46% 10.25%
RSA/RSL 1.08 0.67 1.23 2.00
Cumulative RSA/RSL 1.08 0.97 1.08 1.13
</TABLE>
Based on this analysis, Management does not believe the Company would be
materially impacted by changes in interest rates.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
(a) The annual meeting of shareholders of the Corporation was held on
April 27, 2000 ("Annual Meeting")
(b) The following directors were elected at the Annual Meeting for terms
expiring in 2003: G. Thomas Boylan and Benj. A. Smith, III. Other
directors whose terms continued after the meeting are as follows: John
F. Koetje, whose term expires in 2001; and Robert E. DenHerder and
Philip J. Koning, whose terms expire in 2002.
(c) At the Annual Meeting, two directors were elected for terms expiring
in 2003.
Director Nominees: For Against Abstain
--- ------- -------
G. Thomas Boylan 3,105,507 2,400 32,569
Benj. A. Smith, III 3,064,257 43,650 32,569
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
27 Financial Data Schedule
(EDGAR version only)
(b) Reports on Form 8-K - None.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, to be signed on its behalf by the undersigned,
thereunto duly authorized.
MACATAWA BANK CORPORATION
/s/ Benj. A. Smith, III
Benj. A. Smith, III
Chairman and Chief Executive Officer
/s/ Philip J. Koning
Philip J. Koning
Treasurer and Secretary
(Principal Accounting Officer)
DATE: August 4, 2000
18
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