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, 2003
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 (State of other jurisdiction of incorporation or organization) | 38-3391345 (I.R.S. Employer Identification No.) |
| 10753 Macatawa Drive, Holland, Michigan 49424 |
| (Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code: (616) 820-1444
_________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,364,151 shares of the Company’s Common Stock (no par value) were outstanding as of July 28, 2003.
INDEX
| Page Number | ||
| Part I. | Financial Information: | |
| Item 1. Consolidated Financial Statements Notes to Consolidated Financial Statements | 3 8 | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 26 | |
| Item 4. Controls and Procedures | 28 | |
| Part II. | Other Information: | |
| Item 1. Legal Proceedings | 29 | |
| Item 2. Changes in Securities and Use of Proceeds | 30 | |
| Item 3. Defaults Upon Senior Securities | 30 | |
| Item 4. Submission of Matters to a Vote of Security Holders | 30 | |
| Item 5. Other Information | 30 | |
| Item 6. Exhibits and Reports on Form 8-K | 30 | |
| Signatures | 32 | |
2
Part I Financial Information
Item 1.
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 (unaudited) and December 31, 2002
June 30, December 31,
(dollars in thousands except share data) 2003 2002
-------- --------
(unaudited)
ASSETS
Cash and due from banks........................................... $ 40,281 $ 47,874
Federal funds sold................................................ --- ---
---------- ---------
Cash and cash equivalents...................................... 40,281 47,874
Securities available for sale..................................... 92,109 86,109
Securities held to maturity....................................... 2,664 4,061
Federal Home Loan Bank stock...................................... 6,968 5,391
Loans held for sale............................................... 20,145 18,726
Total loans....................................................... 1,038,298 961,038
Allowance for loan losses......................................... (14,513) (13,472)
---------- ----------
1,023,785 947,566
Premises and equipment - net...................................... 34,367 25,751
Accrued interest receivable....................................... 4,613 4,411
Goodwill.......................................................... 23,915 23,915
Acquisition intangibles........................................... 3,022 3,271
Other assets...................................................... 5,743 9,508
---------- ----------
Total assets................................................... $1,257,612 $1,176,583
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing............................................ $ 119,028 $ 103,030
Interest-bearing............................................... 853,911 817,843
---------- ----------
Total....................................................... 972,939 920,873
Federal funds purchased............................................ 23,000 20,000
Federal Home Loan Bank advances.................................... 129,353 106,897
Other borrowings................................................... 7,291 4,936
Accrued expenses and other liabilities............................. 6,341 9,903
---------- ----------
Total liabilities.......................................... 1,138,924 1,062,609
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized; no shares issued and outstanding
Common stock, no par value, 20,000,000 shares
authorized; 8,363,838 shares and 7,891,502
issued and outstanding as of June 30, 2003 and
December 31, 2002, respectively.............................. 114,486 105,201
Retained earnings............................................... 1,103 5,931
Accumulated other comprehensive income.......................... 3,099 2,842
---------- ----------
Total shareholders' equity................................... 118,688 113,974
---------- ----------
Total liabilities and shareholders' equity........................ $1,257,612 $1,176,583
========== ==========
See accompanying notes to consolidated financial statements
3
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Month Periods Ended June 30, 2003 and 2002
(unaudited)
(dollars in thousands except
per share data) Three Months Three Months Six Months Six Months
Ended ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Interest income (unaudited) (unaudited) (unaudited) (unaudited)
Loans, including fees.............. $14,766 $13,815 $29,033 $23,376
Securities......................... 1,119 1,185 2,260 2,146
------- ------- ------- -------
Total interest income........... 15,885 15,000 31,293 25,522
Interest expense
Deposits........................... 4,458 4,964 9,024 8,317
Other.............................. 1,140 1,222 2,374 2,234
------- ------- ------- -------
Total interest expense.......... 5,598 6,186 11,398 10,551
Net interest income................... 10,287 8,814 19,895 14,971
Provision for loan losses............. 870 921 1,865 1,626
------- ------- ------- -------
Net interest income after
provision for loan losses........... 9,417 7,893 18,030 13,345
Noninterest income
Service charges on deposit accounts 652 551 1,252 1,007
Mortgage production revenue........ 973 430 1,959 643
Trust fees......................... 603 581 1,186 744
Other.............................. 173 139 310 277
------- ------- ------- -------
Total noninterest income........ 2,401 1,701 4,707 2,671
Noninterest expense
Salaries and benefits.............. 4,109 3,239 7,699 5,399
Occupancy ........................ 516 495 1,074 849
Furniture and equipment ........... 641 544 1,235 980
Legal and professional fees........ 168 153 297 279
Advertising........................ 256 160 459 276
Data processing.................... 186 189 385 325
Supplies........................... 143 130 276 223
Other ............................. 1,404 1189 2,678 1,945
------- ------- ------- -------
Total noninterest expenses...... 7,423 6,099 14,103 10,276
Income before federal income tax...... 4,395 3,495 8,634 5,740
Federal income tax.................... 1,463 1,145 2,891 1,876
------- ------- ------- -------
Net income............................ $2,932 $2,350 $5,743 $3,864
======= ======= ======= =======
Basic earnings per share.............. .35 .28 .69 .54
Diluted earnings per share............ .35 .28 .68 .54
See accompanying notes to consolidated financial statements
4
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six Month Periods Ended June 30, 2003 and 2002
(unaudited)
(dollars in thousands except Accumulated
per share data) Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
------- -------- ------------- -------------
Balance, January 1, 2002................. $ 62,334 $ 3,180 $ 988 $ 66,502
Net income for six months ended
June 30, 2002......................... 3,864 3,864
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 611 611
Unrealized gain on derivative instruments 171 171
-------
Comprehensive income............. 4,646
Issued 2,472,015 shares for acquisition of
GBFC, adjusted for 4% stock dividend..... 39,817 39,817
Conversion of GBFC stock options 987 987
Proceeds from exercise of 11,495 stock options 61 61
Issued 212,355 shares in payment
Of 4% stock dividend 4,270 (4,277) (7)
Cash dividends at $.15 per share......... (1,065) (1,065)
------- --------
Balance, June 30, 2002................... $107,469 $ 1,702 $ 1,770 $110,941
======== ======= ======= ========
Balance, January 1, 2003................. $105,201 $ 5,931 $ 2,842 $113,974
Net income for six months ended
June 30, 2003......................... 5,743 5,743
Other comprehensive income, net of tax:
Unrealized gains/losses on securities. 252 252
Unrealized gain on derivative instruments 5 5
--------
Comprehensive income............. 6,000
Proceeds from exercise of 74,672 stock options 358 358
Issued 397,664 shares in payment
Of 5% stock dividend 8,927 (8,941) (14)
Cash dividends at $.20 per share......... (1,630) (1,630)
------- --------
Balance, June 30, 2003................... $114,486 $ 1,103 $ 3,099 $118,688
======== ======= ======= ========
See accompanying notes to consolidated financial statements
5
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30, 2003 and 2002
(unaudited)
(dollars in thousands) Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income..................................................... $ 5,743 $ 3,864
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization............................ 1,550 1,068
Provision for loan losses................................ 1,865 1,626
Gain on sale of loans.................................... (1,959) (643)
Loans originated for sale................................ (175,573) (65,585)
Proceeds from sales of loans............................. 176,113 66,775
Net change in:
Accrued interest receivable and other assets.......... 3,382 3,760
Accrued expenses and other liabilities................ (3,562) 200
------ ------
Net cash from operating activities................. 7,559 11,065
Cash flows from investing activities
Net increase in loans.......................................... (78,084) (97,322)
Purchase of Federal Home Loan Bank Stock....................... (1,577) (584)
Purchases of securities available for sale..................... (16,290) (18,356)
Proceeds from maturities and calls of securities available for
sale......................................................... 10,069 6,599
Principal paydowns on securities............................... 1,951 761
Cash received from acquisition of GBFC......................... --- 21,390
Additions to premises and equipment............................ (9,812) (4,357)
------ ------
Net cash used in investing activities..................... (93,743) (91,869)
Cash flows from financing activities
Net increase in deposits....................................... 52,066 90,011
Net (decrease) increase in short term borrowings............... 3,000 ---
Proceeds from Federal Home Loan Bank advances.................. 40,000 20,264
Repayments of Federal Home Loan Bank advances.................. (17,544) (8,590)
Proceeds from other borrowings 2,500 ---
Repayments of other borrowings................................. (145) ---
Cash dividends paid............................................ (1,644) (1,072)
Proceeds from exercise of options.............................. 358 61
------ ------
Net cash from financing activities........................ 78,591 100,674
Net change in cash and cash equivalents........................... (7,593) 19,870
Cash and cash equivalents at beginning of period.................. 47,874 34,198
------ ------
Cash and cash equivalents at end of period........................ $ 40,281 $ 54,068
======== ========
See accompanying notes to consolidated financial statements
6
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Six Month Periods Ended June 30, 2003 and 2002
(unaudited)
(dollars in thousands) Six Months Six Months
Ended Ended
June 30, 2003 June 30, 2002
------------- -------------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest..................................................... $11,642 $10,525
Income taxes................................................. 3,500 1,900
Noncash investing and financing activities:
GBFC acquistion:
Securities acquired (including FHLB stock)................ --- 11,864
Loans acquired............................................ --- 246,344
Premises and equipment acquired........................... --- 656
Acquisition intangibles recorded.......................... --- 27,578
Other assets acquired..................................... --- 4,142
Deposits assumed.......................................... --- 246,060
Borrowings assumed........................................ --- 20,170
Other liabilities assumed................................. --- 4,940
Value of common stock issued and converted stock options.. --- 40,804
See accompanying notes to consolidated financial statements
7
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in Macatawa Bank Corporation’s (the “Company”) 2002 Annual Report containing financial statements for the year ended December 31, 2002.
All per share amounts and average shares outstanding have been adjusted for all periods presented to reflect the 5% stock dividend distributed on May 30, 2003, and the 4% stock dividend distributed on May 8, 2002.
Employee compensation expense under stock option plans is reported using the intrinsic value method. No compensation cost related to stock options was recognized during the six month periods ended June 30, 2003 and 2002, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. Had compensation cost for stock options been measured using the fair value method, net income and basic and diluted earnings per share would have been the pro forma amounts indicated below (dollars in thousands except per share data). The pro forma effect may increase in the future if more options are granted.
Three months Three months Six months Six months
ended ended ended ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income as reported $2,932 $2,350 $5,743 $3,864
Stock-based compensation cost, net of tax (47) (53) (83) (106)
----- ----- ----- -----
Pro forma net income 2,885 2,297 5,660 3,758
Basic earnings per share as reported .35 .28 .69 .54
Pro forma basic earnings per share .34 .27 .68 .53
Diluted earnings per share as reported .35 .28 .68 .54
Pro forma diluted earnings per share .34 .27 .67 .52
NOTE 2 — PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Macatawa Bank and Grand Bank (the “Banks”) and Macatawa Investment Services. All significant intercompany accounts and transactions have been eliminated in consolidation.
Grand Bank became a wholly-owned subsidiary effective April 1, 2002 upon the completion of the acquisition of Grand Bank Financial Corporation (“GBFC”), and its results are included in the consolidated statement of income since this date. Effective January 1, 2003, Grand Bank was merged into Macatawa Bank with the combined bank named Macatawa Bank.
8
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted a new accounting standard dealing with asset retirement obligations. The effect of this standard on the financial position and results of operations of the Company was not material.
The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,both of which generally become effective in the quarter beginning July 1, 2003.
Because the Company does not have these instruments or is only nominally involved in these instruments, the new accounting standards will not materially affect the Company’s operating results or financial condition.
Under the new standard for certain liabilities and equity instruments, mandatorily redeemable instruments such as trust preferred securities are considered liabilities and not part of mezzanine (or temporary) equity. Accordingly, the trust preferred securities issued by the Company on July 15, 2003 will be classified as liabilities for Generally Accepted Accounting Principles, and a component of capital for regulatory purposes, see Note 11.
NOTE 4 — ACQUISITION
On April 1, 2002, the Company completed the acquisition of Grand Bank Financial Corporation (“GBFC”), a commercial bank headquartered in Grand Rapids, Michigan. Under the terms of this transaction, the Company acquired all of the outstanding stock of GBFC in exchange for approximately 2.5 million common shares, adjusted for the 4% stock dividend paid in May 2002. The value of the common shares issued was determined using the Company’s quoted market price per share at the time the terms of the acquisition agreement were agreed to and announced. Further, options to acquire GBFC stock were converted to options to acquire Company stock. The value of these options for purposes of determining the total cost to the Company for the acquisition was approximately $1.0 million. Accordingly, the total cost of the transaction considering common stock and converted options was approximately $40.8 million.
The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase accounting fair value adjustments are being amortized under various methods and over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $23.9 million and is not being amortized. Intangible assets recorded for the acquisition that are subject to amortization are as follows in thousands of dollars as of June 30, 2003:
| Gross Amount | Accumulated Amortization | |
| Core deposit intangible............. | $3,185 | $475 |
| Trust relationships................... | 478 | 166 |
9
The amount of goodwill recorded in this transaction relative to the smaller amounts of identified intangible assets reflects that the value of GBFC related primarily to the foundation it provides to further build our presence in the Grand Rapids market. The value of this foundation lies with the GBFC workforce, their customer service orientation and their relationships within the community. The amount of the core deposits intangible asset recorded is small relative to the total purchase price and reflects that the GBFC deposit portfolio was weighted towards higher interest rate account types.
Both the core deposits and trust relationships intangibles are being amortized on an accelerated basis over a period of ten years. Amortization expense for the six months ended June 30, 2003 was $248,500. Estimated amortization expense for the next five years is as follows in thousands of dollars:
| 2003.............. | $484 |
| 2004.............. | 440 |
| 2005.............. | 406 |
| 2006.............. | 378 |
| 2007.............. | 340 |
10
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In conjunction with the acquisition, the fair values of significant assets acquired and liabilities assumed were as follows, stated in thousands of dollars:
| Cash and cash equivalents | $21,390 | |
| Securities | 11,070 | |
| Loans | 246,344 | |
| Acquisition intangibles | 27,578 | |
| Deposits | (246,060) | |
| Other borrowings | (20,170) |
The consolidated statements of income reflect the operating results of GBFC since the effective date of the acquisition. The following table presents pro forma information for the six months ended June 30, 2002 as if the acquisition of GBFC had occurred at the beginning of 2002. The pro forma information includes adjustments for the amortization of intangibles arising from the transaction, the elimination of acquisition related expenses, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date.
Six Months
Ended
June 30, 2002
-------------
(proforma)
Interest income $29,050
Interest expense 12,145
-------
Net interest income 16,905
Provision for loan losses 1,999
-------
Net interest income after provision 14,906
Noninterest income 3,684
Noninterest expense 12,196
-------
Income before federal income tax 6,394
Federal income tax expense 2,089
-------
Net income $ 4,305
========
Basic earnings per share $.51
Diluted earnings per share $.51
11
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six months ended June 30, 2003 and June 30, 2002 are as follows (dollars in thousands except per share data):
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Basic earnings per share
Net income............................. $ 2,932 $ 2,350 $5,743 $ 3,864
-------- -------- ------ --------
Weighted average common
shares outstanding.................. 8,363,838 8,400,373 8,341,254 7,105,748
--------- --------- --------- ---------
Basic earnings per share............... $0.35 $0.28 $0.69 $0.54
===== ===== ===== =====
Diluted earnings per share
Net income............................. $2,932 $2,350 $5,743 $3,864
------ ------ ------ ------
Weighted average common
shares outstanding.................. 8,363,838 8,400,373 8,341,254 7,105,748
Add: Dilutive effects of assumed
exercise of stock options........... 121,394 139,277 121,082 103,488
------- ------- ------- -------
Weighted average common and
dilutive potential common
shares outstanding.................. 8,485,232 8,539,650 8,462,336 7,209,236
--------- --------- --------- ---------
Diluted earnings per share............... $0.35 $0.28 $0.68 $0.54
===== ===== ===== =====
There were no antidilutive options for the quarter and six months ended June 30, 2003 and 2002.
12
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 — SECURITIES
The amortized cost and fair values of securities were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- ---------- ---------- -----------
June 30, 2003
- -------------
Available for sale:
U.S. Treasury securities and obligations
of U. S. Government agencies......... $65,164 $ 2,422 $ --- $67,586
State and municipal bonds................ 23,195 1,332 (4) 24,523
-------- ------- ----- -------
$88,359 $ 3,754 $ (4) $92,109
======== ======= ===== =======
Held to maturity:
U.S. Treasury securities and obligations
of U. S. Government agencies......... $ 36 1 $ --- $ 37
State and municipal bonds................ 2,628 99 --- 2,727
-------- ------- ----- -------
$ 2,664 $ 100 $ --- $ 2,764
======== ======= ===== =======
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- ---------- ---------- -----------
December 31, 2002
- -----------------
Available for sale:
U. S. Treasury securities and obligations
of U. S. Government agencies......... $67,747 $ 2,752 $ (1) $70,498
State and municipal bonds................ 15,050 611 (50) 15,611
------- ------- ----- -------
$82,797 $ 3,363 $ (51) $86,109
======= ======= ====== =======
Held to maturity:
U.S. Treasury securities and obligations
of U. S. Government agencies......... $ 1,369 $ 12 $ --- $ 1,381
State and municipal bonds................ 2,692 79 (12) 2,759
------- ------- ------ -------
$ 4,061 $ 91 $ (12) $ 4,140
======= ======= ====== =======
Contractual maturities of debt securities at June 30, 2003 were as follows (in thousands). 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.
Held to Maturity Securities Available for Sale Securities
Amortized Cost Fair Values Amortized Cost Fair Values
-------------- ----------- -------------- -----------
Due less than one year........ $ .36 $ .37 $ 8,035 $ 8,238
Due one year to five years.... --- --- 54,243 56,448
Due five years to ten years... --- --- 10,030 10,712
Due after ten years........... $2,628 $2,727 16,051 16,711
------- ------- ------- -------
Total $2,664 $2,764 $88,359 $92,109
======= ======= ======= =======
13
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 – LOANS
Loans were as follows (in thousands):
June 30, December 31,
2003 2002
------------- --------------
Commercial................................. $ 378,347 $341,370
Commercial mortgage........................ 375,503 356,310
Residential mortgage....................... 150,620 133,843
Consumer................................... 133,828 129,515
----------- ---------
1,038,298 961,038
Allowance for loan losses.................. (14,513) (13,472)
----------- ---------
$1,023,785 $947,566
=========== =========
Activity in the allowance for loan losses was as follows (in thousands):
Three months Three months Six months Six months
ended ended ended ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Balance at beginning of period. $14,163 $ 8,174 $13,472 $ 7,699
Balances from GBFC aquisition --- 3,464 --- 3,464
Provision for loan losses.. 870 921 1,865 1,626
Charge-offs.................. (548) (138) (856) (515)
Recoveries................... 28 9 32 156
-------- ------- ------- -------
Balance at end of period....... $14,513 $12,430 $14,513 $12,430
======== ======= ======= =======
NOTE 8 – DEPOSITS.
Deposits are summarized as follows (in thousands):
June 30, December 31,
2003 2002
---------- ------------
Noninterest-bearing demand deposit accounts............... $119,028 $103,030
Money market accounts..................................... 257,293 237,636
NOW and Super NOW accounts................................ 130,746 140,822
Savings accounts.......................................... 33,220 28,730
Certificates of deposit................................... 432,652 410,655
---------- ---------
$972,939 $920,873
========== =========
(Continued)
14
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank were as follows (in thousands):
June 30, December 31,
2003 2002
-------- ------------
Maturities from July 2003 through
July 2018, rates from 1.36% to
6.95%, averaging 3.89% $129,353
========
Maturities from March 2003 through December 2010,
rates from 1.80% to 6.95%, averaging
5.19% $106,897
========
Each advance is payable at its maturity date and contains a prepayment penalty. These advances were collateralized by securities totaling $66,565,000 and $70,768,000 at June 30, 2003 and December 31, 2002, and first mortgage loans totaling $107,707,000 and $95,530,000 under a blanket lien arrangement at June 30, 2003 and December 31, 2002, respectively.
Maturities as of June 30, 2003 were as follows (in thousands):
| 2003 | $24,454 |
| 2004 | 44,576 |
| 2005 | 17,500 |
| 2006 | --- |
| 2007 | --- |
| Thereafter | 42,823 |
| $129,353 |
(Continued)
15
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 – HEDGING ACTIVITIES
The Company has asset/liability management policies that include guidelines for measuring and monitoring interest rate risk. Within these guidelines, parameters have been established for maximum fluctuations in net interest income. Possible fluctuations are measured and monitored using simulation modeling. The policies provide for the use of derivative instruments and hedging activities to aid in managing interest rate risk to within the policy parameters.
The Company’s assets are comprised of a large portion of loans on which the interest rates are variable. As such, the Company may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates. Interest rate swap arrangements may be utilized to hedge against these fluctuations in cash flows.
In May 2002 the Company entered into a three-year interest rate swap arrangement that converts the variable rate cash inflows on certain of its loans to fixed rates of interest. This interest rate swap bears a notional amount of $20 million, pays interest to the Company at a fixed rate, and requires interest payments from the Company at a variable rate. It is anticipated that approximately $353,000 net of tax, of unrealized gains on this cash flow hedge at June 30, 2003 will be reclassified to earnings over the next twelve months.
NOTE 11 — REGULATORY MATTERS
The Company and the Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measurements 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 a bank is only adequately capitalized, regulatory approval is required before it is able to accept brokered deposits. If a bank is undercapitalized, capital distributions are limited, as well as its asset growth and expansion, and the bank is required to implement plans for necessary capital restoration.
16
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2003 and December 31, 2002, actual capital levels and minimum required levels for the Company and the Banks were (in thousands):
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 2003
- -------------
Total capital (to risk weighted assets)
Consolidated............................. $103,066 9.7% $84,700 8.0% $105,875 10.0%
Macatawa Bank............................ 109,203 10.3 84,655 8.0 105,819 10.0
Tier 1 capital (to risk weighted assets)
Consolidated............................. 89,832 8.5 42,350 4.0 63,525 6.0
Macatawa Bank............................ 91,476 8.6 42,328 4.0 63,491 6.0
Tier 1 capital (to average assets)
Consolidated............................. 89,832 7.5 47,834 4.0 59,793 5.0
Macatawa Bank............................ 91,476 7.7 47,682 4.0 59,602 5.0
December 31, 2002
- -----------------
Total capital (to risk weighted assets)
Consolidated............................. $97,449 9.9% $78,860 8.0% $98,576 10.0%
Macatawa Bank............................ 71,618 10.0 57,197 8.0 71,496 10.0
Grand Bank............................... 28,879 10.7 21,628 8.0 27,035 10.0
Tier 1 capital (to risk weighted assets)
Consolidated............................. 85,127 8.6 39,430 4.0 59,145 6.0
Macatawa Bank............................ 62,681 8.8 28,599 4.0 42,898 6.0
Grand Bank............................... 21,000 7.8 10,814 4.0 16,221 6.0
Tier 1 capital (to average assets)
Consolidated............................. 85,127 7.6 44,657 4.0 55,821 5.0
Macatawa Bank............................ 62,681 7.7 32,628 4.0 40,785 5.0
Grand Bank............................... 21,000 7.1 11,879 4.0 14,849 5.0
The Bank and Banks were categorized as well capitalized at June 30, 2003 and year-end 2002, respectively.
On July 15, 2003 the Company issued $20.0 million of pooled trust preferred securities (“Preferred Securities”) through one issuance by a wholly-owned subsidiary grantor trust, Macatawa Statutory Trust I (the “Trust”). The Preferred Securities accrue and pay distributions quarterly at a specified rate as provided in the indenture, three-month LIBOR plus 3.05%. The Trust used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the Trust and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust. The Preferred Securities are mandatorily redeemable upon the maturity of the Debentures which is July 15, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the Debentures in whole or in part on or after July 15, 2008, at a redemption price specified in the indenture plus any accrued but unpaid interest to the redemption date. The initial interest rate on the Preferred Securities was 4.16%. It is expected that the entire $20.0 million issuance will qualify as Tier 1 capital for regulatory capital purposes.
NOTE 12 – CONTINGENCIES
The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. Currently, there are no matters which are expected to have a material adverse effect on the consolidated financial position or results of operations.
17
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On July 8, 2003 the Company filed a Form 8-K (dated July 1, 2003) with the Securities and Exchange Commission reporting events related to a former trust customer, Trade Partners, Inc. (“Trade Partners”), of the former Grand Bank. Trade Partners was involved in purchasing and selling interests in viaticals which are interests in life insurance policies of the terminally ill or elderly. Beginning in 1996, Grand Bank served as a custodian and escrow agent with respect to viaticals purchased by Trade Partners and sold to investors. Two lawsuits were filed, one in December 2002 and another in March 2003, against Trade Partners and Grand Bank alleging that Grand Bank breached certain escrow agreements related to viatical settlement contracts. Both of these lawsuits have been dismissed although the plaintiffs reserved the right to pursue the claims in the future. In addition, in May 2003 a purported class action complaint was filed against the Company alleging that Grand Bank breached escrow agreements and its fiduciary duties with respect to the plaintiff’s investments secured by viaticals. The Company has answered the complaint denying the material allegations and raising certain affirmative defenses. Management believes the Company has strong defenses and will vigorously defend the case.
Trade Partners is now in receivership. The receiver has been authorized to borrow money from Macatawa Bank to pay premiums, if needed. Macatawa Bank has agreed to extend a $4 million line of credit to the receiver, conditioned upon obtaining a security interest in the viaticals. As of August 4, 2003 no draws had yet been made on the line of credit.
It is possible that one or more additional legal actions may be initiated involving the custodial and escrow agent services provided by Grand Bank in connection with Trade Partners. If any such legal actions are commenced, the Company intends to defend them vigorously. To the extent any pending or future claims allege errors or omissions on the part of Grand Bank or Macatawa Bank, Management believes that some or all liability, if any is proven or established, will be covered by errors and omissions insurance maintained by Grand Bank and Macatawa Bank.
18
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Macatawa Bank Corporation is a Michigan corporation and is the holding company for two wholly owned subsidiaries, Macatawa Bank and Macatawa Investment Services. Effective January 9, 2002, Macatawa Bank Corporation elected to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank commenced operations on November 25, 1997. On April 1, 2002 Macatawa Bank Corporation acquired Grand Bank Financial Corporation (“GBFC”) and its wholly owned banking subsidiary, Grand Bank. Its results are included in the consolidated statements of income since this effective date. Grand Bank was formed in 1987 and operated from a single location in Grand Rapids, Michigan. To achieve further synergies from the Grand Bank acquisition, the Company merged Grand Bank into Macatawa Bank effective January 1, 2003 with the combined bank named Macatawa Bank. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The bank operates seventeen branch offices and three lending and operational service facilities, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Investment Services was formed in October 2001 and gained approval in June 2002 from NASD to commence operations as a broker/dealer. Macatawa Investment Services provides various services including discount brokerage, personal financial planning and consultation regarding mutual funds. Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, originates and sells residential mortgage loans into the secondary market on a servicing released basis.
While maintaining asset quality and improving profitability, we have experienced rapid and substantial growth since opening Macatawa Bank in November 1997. We first became profitable in 1999 with net income for that year of $693 thousand. Net income for 2000 was $3.3 million, for 2001 was $5.1 million, and for 2002 was $9.5 million. Since our inception in 1997 we have raised approximately $60.6 million in capital through private and public common stock offerings to facilitate our growth and progress over these years. In conjunction with the acquisition of GBFC we issued 2,472,000 shares of stock in exchange for all of the outstanding stock of GBFC.
The West Michigan markets within which we operate are growing markets. Because of their growth and our ability to provide highly personalized service, these markets have provided significant expansion opportunities for us. In addition, acquisitions of banks within our markets by large banking institutions headquartered far away have provided us additional opportunity to gain market share. Grand Rapids is the largest market within West Michigan. It is also where we hold the lowest percent share of the market relative to the other markets within which we operate, and therefore we believe presents great opportunity. In November 2002 we opened a new branch in Grand Rapids, and in Wyoming we opened an expanded branch allowing us to move from a small storefront office. We have continued this expansion focus in 2003 and expect to open at least three new branches in other desirable locations within our market area. During the second quarter, we began construction for a new branch in Grand Rapids at the corner of Knapp Street and East Beltline Avenue. The construction of a new branch in Grandville replacing a store front location was completed in May and opened for business at the end of that month. In Holland, construction began for a branch located on the North side of the city in order to round out our presence in this market.
Financial Condition
The consolidated financial statements include the effect of the acquisition of GBFC which was effective April 1, 2002. A schedule of the significant GBFC assets and liabilities acquired is contained in Note 4 to the Consolidated Financial Statements.
The acquisition was accounted for using the purchase method of accounting. As a result, certain purchase accounting adjustments were required to record the acquired assets and liabilities at market value. The value of the purchase accounting adjustments is being amortized over the respective lives of the varying assets and liabilities.
Based on SFAS 142, “Goodwill and Other Intangible Assets”, we have recorded intangible assets for the estimated value of core deposit accounts and trust customer accounts acquired in the acquisition. The intangible values represent the present value of the estimated net revenue streams attributed to the respective intangibles. The intangible assets acquired are valued using certain assumptions for alternative cost of funds, lives of respective core deposits or trust customers, discount rates and other applicable assumptions. The total of both core deposit intangibles and trust customer intangibles was $3.7 million, and is being amortized on an accelerated basis over 10 years.
19
The balance of the acquisition price in excess of the fair market value of assets and liabilities acquired, including intangible assets, was recorded as goodwill and totaled $23.9 million. Under SFAS 142, goodwill is defined as an intangible asset with an indefinite useful life, and as such, is not amortized, but is required to be tested annually for impairment of the value. If impaired, an impairment loss must be recorded for the value equal to the excess of the asset’s carrying value over its fair value.
The amount of goodwill recorded in this transaction relative to the smaller amounts of identified intangible assets and lack of intangibles related to loan and deposit customer lists reflects that the value of GBFC related primarily to the foundation it provides to further build our presence in the Grand Rapids market. The value of this foundation lies with the GBFC workforce, their customer service orientation and their relationships within the community. The amount of the core deposits intangible asset recorded is small relative to the total purchase price and reflects that the GBFC deposit portfolio was weighted towards higher interest rate account types.
Our total assets were $1.26 billion at June 30, 2003, an increase of $81.0 million as compared to $1.18 billion at December 31, 2002. We believe the continued strong asset growth reflects the acceptance of our community banking philosophy in the growing communities we serve. Our asset growth consists primarily of growth in our loan portfolio as we continue to attract new loan customers despite the strong competition from other locally based community banks and larger regional banks.
Our total portfolio loans at June 30, 2003 were $1,038.3 million, an increase of $77.3 million as compared to $961.0 million at December 31, 2002. Most of the growth was in commercial and commercial real estate loans. Commercial and commercial real estate loans accounted for approximately 73% of the total loan portfolio at June 30, 2003 and at December 31, 2002. Consumer loans comprised 13% of the portfolio, while residential mortgage loans were 14% of total loans at June 30, 2003.
The allowance for loan losses as of June 30, 2003 was $14.5 million, or 1.40% of total portfolio loans, compared to $13.5 million, or 1.40% of total loans at December 31, 2002. Our allowance for loan losses is maintained at a level management considers appropriate based upon our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance relies on several key elements, which include specific allowances for identified problem loans, formula allowance for graded loans, and general allocations based on historical trends for pools of similar loan types.
Specific allowances are established in cases where senior credit management has identified significant conditions or circumstances related to an individually impaired credit that we believe indicates the probability that a loss has been incurred. This amount is determined by methods prescribed by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. As of June 30, 2003 and December 31, 2002 the specific allowance was $1.7 million and $883,000, respectively.
The formula allowance is calculated by applying loss factors to outstanding loans based on the internal risk grade of such loans. We use a loan rating method based upon an eight point system. Loans are assigned a loss allocation factor for each loan classification category. The lower the grading assigned to a loan category, the greater the allocation percentage that is applied. Changes in risk grade of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our loss experience, the banking industry’s historical loan loss experience, and may be adjusted for significant factors that, in management’s judgement, affect the collectibility of the portfolio as of the analysis date. As of June 30, 2003 and December 31, 2002 the formula allowance was $11.0 million and $10.1 million, respectively.
Groups of homogeneous loans, such as residential real estate, open- and closed-end consumer loans, etc., receive an allowance allocation based on loss trends. In lieu of an established loan loss trend for Macatawa Bank, we use historical loss trends based on industry experience and peers in determining an adequate allowance for these pools of loans. General economic and business conditions, credit quality trends, collateral values, seasoning of the portfolios and recent loss experience are conditions considered in connection with allocation factors for these similar pools of loans. Since Grand Bank’s loan portfolio is seasoned, its loan loss trends are used in determining an adequate allowance for these pools of loans in addition to industry experience and peer information. As of June 30, 2003 and December 31, 2002 the general allowance was $1.4 million and $1.5 million respectively.
20
During the six months ended June 30, 2003 the allowance for loan losses increased by $1.0 million due to an increase in the specific allowance and continuing growth in the commercial loan portfolio causing an increase in the formula allowance. The specific allowance increased as two loan relationships were moved from the formula allowance to the specific allowance due to worsening credit conditions of these specific customers. Asset quality was stable during the six months ended June 30, 2003 with the ratio of nonperforming loans to total loans of ..23% compared to .29% at December 31, 2002. The continued increase in the allowance was deemed necessary despite the stability in nonperforming loans to total loans given the growth in loans, the unseasoned nature of our portfolio and current soft economic conditions both on a national basis and locally.
Net charge-offs for the six months ended June 30, 2003 totaled $824,000 as compared to $359,000 for the same period in 2002. Although the amount of net charge-offs was higher, our credit losses on loans continue to be low relative to comparable banks. However, we recognize that our loan portfolios remain relatively unseasoned, and no material trend of losses has been established. Given the newness of the portfolios and potential economic weakness, in our judgment, we have provided adequate reserves for loan losses, although there can be no assurance that the allowance for losses on loans will be adequate to cover all losses.
Premises and equipment totaled $34.4 million at June 30, 2003, an increase of $8.6 million from December 31, 2002. The increase resulted from costs incurred with the completion of the company’s new headquarters building and a new branch location, as well as construction costs for the two branch locations that are currently in process. The new headquarters location has allowed us to consolidate our administration, human resources, trust, loan underwriting and processing, and proof and deposit operations at one location. The new branch site allowed us to replace a leased storefront branch site in Grandville with a full service branch in a more favorable location.
Total deposits increased $52.1 million to $972.9 million at June 30, 2003, as compared to $920.9 million at December 31, 2002. Categories of deposit accounts experiencing growth included noninterest-bearing demand deposits, money markets, savings, and certificates of deposit. This growth in deposits was substantially a result of deposits from new customers. We continue to anticipate strong deposit growth based on our focus on quality customer service, the desire of customers to deal with a local bank, convenient accessibility through our growing branch network and our expanded opportunities in the Grand Rapids market as a result of the GBFC acquisition. Our NOW accounts experienced a seasonal decline during the first six months of the year but are expected to gradually increase during the remainder of the year due to these growth opportunities.
Results of Operations
The effective date of the GBFC acquisition was April 1, 2002 and therefore the results of operations for the first quarter of 2002 did not include the effect of GBFC and Grand Bank. For pro forma information concerning the GBFC acquisition, please refer to Note 4 to the Consolidated Financial Statements.
Net income for the quarter ended June 30, 2003 was $2.9 million, an increase of 25% over the second quarter 2002 net income of $2.4 million. Diluted earnings per share for the second quarter of 2003 was $.35, also a 25% increase over the second quarter of the prior year, reflecting the increase in earnings. Net income for the six months ended June 30, 2003 was up 49% to $5.7 million compared to $3.9 million for the same period in the prior year. Earnings per share on a diluted basis were $.68 for the six months year-to-date, an increase of 26% compared to $.54 for the same period in the prior year. The percent increase in earnings per share for the six months was less than the percent increase in net income due to a 45% increase in shares outstanding for the GBFC acquisition in the second quarter of 2002.
21
Net interest income for the second quarter of 2003 totaled $10.3 million, a 17% increase as compared to $8.8 million for the comparable period in 2002. The net interest income growth was driven primarily by growth in our earning assets, which grew by 16% or $158.5 million from an average of $977.5 million for the second quarter of 2002 to an average of $1.14 billion for the second quarter of 2003. An increase in net interest margin, which was up to 3.64% for the second quarter of 2003 from 3.58% for the same quarter of the prior year, also contributed to the improvement in net interest income. The improvement in net interest margin can be attributed to both strong growth in non-interest bearing deposits and the continued decrease in the cost of interest bearing deposits caused by the currently low interest rate environment. Net interest margin for the six months ended June 30, 2003 was 3.59% compared to 3.68% for the same period in the prior year. The contraction in the net interest margin for the six months relates primarily to the lower net interest margin that GBFC carried compared to Macatawa. Also, we have continued to see strong loan growth, but customer preferences have been for floating rate loans that bear interest rates on average of 175 basis points lower than fixed rate commercial loans. This preference altered our mix of variable versus fixed rate commercial loans and also contributed to the decline in net interest margin for the six months ended June 30, 2003 compared to the same period in the prior year.
Anticipated growth in earning assets is expected to continue to increase levels of net interest income. However, net interest margin is not expected to increase until customer preferences turn back to fixed rate products or short-term interest rates begin to rise. Helping margin, maturities in our certificate of deposit portfolio continue to re-price at lower levels, however, to a lesser extent than during 2002. Derivative instruments as discussed in Note 10 to the consolidated financial statements have also mitigated some of the decline in net interest margin.
22
The following table shows an analysis of net interest margin for the three-month periods ending June 30, 2003 and 2002.
For the three months ended June 30,
----------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or paid Or cost Balance Or paid or cost
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Assets
- ------
Taxable securities....................... $ 66,054 $ 815 4.94% $ 67,451 $ 875 5.20%
Tax-exempt securities (1)................ 20,444 230 6.96% 13,439 159 7.33%
Loans.................................... 1,039,370 14,766 5.64% 873,319 13,815 6.26%
Fed funds sold........................... 55 1 1.19% 18,330 77 1.68%
Federal Home Loan Bank stock............. 5,744 73 5.04% 4,979 74 5.91%
--------- ------ --------- ------
Total interest earning assets.......... 1,131,667 15,885 5.62% 977,518 15,000 6.13%
Noninterest earning assets
Cash and due from banks................ 30,324 36,266
Other.................................. 59,699 43,497
--------- ---------
Total assets......................... $1,221,690
========= $1,057,281
=========
Liabilities
- -----------
NOWs and MMDAs........................... $ 381,795 945 0.99% $ 350,885 1,412 1.61%
Savings.................................. 32,104 39 0.49% 24,462 106 1.74%
IRAs..................................... 25,578 237 3.72% 17,811 209 4.69%
Time deposits............................ 416,034 3,176 3.06% 350,886 3,237 3.70%
Fed funds borrowed....................... 16,857 61 1.44% 8,929 44 1.95%
Other borrowings......................... 118,709 1,140 3.80% 103,734 1,178 4.49%
------- ----- ------- -----
Total interest bearing liabilities..... 991,077 5,598 2.26% 856,707 6,186 2.89%
Noninterest bearing liabilities
Noninterest bearing demand accounts.... 106,279 83,459
Other noninterest bearing liabilities.. 6,176 8,632
Shareholders' equity..................... 118,158 108,483
------- -------
Total liabilities and shareholders'
equity.......................... $1,221,690
========= $1,057,281
=========
Net interest income...................... $10,287 $ 8,814
====== =====
Net interest spread...................... 3.36% 3.24%
Net interest margin...................... 3.64% 3.58%
Ratio of average interest earning assets to
Average interest bearing liabilities... 114.19% 114.10%
(1) Yield adjusted to fully tax equivalent.
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The following table shows an analysis of net interest margin for the six-month periods ending June 30, 2003 and 2002.
For the six months ended June 30,
----------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield Average Earned Yield
Balance or paid Or cost Balance Or paid or cost
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Assets
- ------
Taxable securities....................... $ 67,279 $ 1,666 4.95% $ 61,235 $ 1,655 5.41%
Tax-exempt securities (1)................ 19,100 433 7.03% 11,497 267 7.19%
Loans.................................... 1,019,795 29,033 5.68% 724,710 23,376 6.43%
Fed funds sold........................... 1,700 10 1.17% 10,982 91 1.68%
Federal Home Loan Bank stock............. 5,573 151 5.38% 4,384 133 6.05%
--------- ------ ------- ------
Total interest earning assets.......... 1,113,447 31,293 5.65% 812,808 25,522 6.30%
Noninterest earning assets
Cash and due from banks................ 30,556 32,388
Other.................................. 58,198 30,547
--------- -------
Total assets......................... $1,202,201 $875,743
========= =======
Liabilities
- -----------
NOWs and MMDAs........................... $ 381,605 2,014 1.06% $298,672 2,418 1.63%
Savings.................................. 30,611 76 0.50% 21,921 153 1.41%
IRAs..................................... 25,113 476 3.82% 15,962 385 4.86%
Time deposits............................ 411,555 6,457 3.17% 277,346 5,361 3.90%
Fed funds borrowed....................... 12,927 93 1.43% 6,204 61 1.95%
Other borrowings......................... 115,036 2,282 3.94% 89,683 2,173 4.82%
--------- ------ ------- ------
Total interest bearing liabilities..... 976,847 11,398 2.35% 709,788 10,551 2.99%
Noninterest bearing liabilities
Noninterest bearing demand accounts.... 101,866 71,845
Other noninterest bearing liabilities.. 6,464 6,039
Shareholders' equity..................... 117,024 88,071
--------- -------
Total liabilities and shareholders'
equity.......................... $1,202,201 $875,743
========= =======
Net interest income...................... $19,895 $14,971
====== ======
Net interest spread...................... 3.30% 3.31%
Net interest margin...................... 3.59% 3.68%
Ratio of average interest earning assets to
Average interest bearing liabilities... 113.98% 114.51%
(1) Yield adjusted to fully tax equivalent.
The provision for loan losses for the three and six month periods ended June 30, 2003 were $870,000 and $1,865,000 as compared to $921,000 and $1,626,000 for the same periods in the prior year. The amounts of loan loss provision in both the current and prior year periods were a byproduct of establishing our allowance for loan losses at levels deemed necessary in our methodology for determining the adequacy of the allowance. For more information about our allowance for loan losses and our methodology for establishing its level, see the earlier discussion underFinancial Condition. Along with other financial institutions, management shares a concern for the possible continuing weak economic conditions. Should the economic climate remain soft, borrowers may experience more difficulty in making loan payments, and the level of non-performing loans, charge-offs, and delinquencies could rise and require further increases in the provision.
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Noninterest income for the three and six month periods ended June 30, 2003 were $2.4 million and $4.7 million as compared to $1.7 million and $2.7 million for the same periods in the prior year. All components of noninterest income increased compared to the prior year periods. Most of the improvement in second quarter and year to date noninterest income came from gains on sales of mortgage loans. Our mortgage banking function continued to capitalize on the current mortgage interest rate environment and achieved high loan sales volume resulting in gains of $973,000 for the quarter, an increase of $543,000 over the prior year second quarter. As mortgage interest rates begin to rise slightly, it is expected that refinance activity will slow down resulting in a decline in our loan sales volume during the latter half of 2003. Income from deposit service charges for the second quarter also increased, growing by $101,000 or 18% compared to the second quarter of the prior year. This growth in service charge income was a direct result of the growth in non-interest bearing deposit accounts which grew by 43% since June 30, 2002. Trust fee income was higher for the six months ended June 30, 2003 compared to the same period in the prior year primarily due to the addition of Grand Bank’s trust services effective with the GBFC acquisition on April 1, 2002.
Noninterest expense totaled $7.4 million for the three month period ended June 30, 2003 as compared to $6.1 million for the same period in the prior year. Salaries and benefits increased by $870,000 comprising most of the increase in non-interest expenses. Our growth has required additional staff in various areas including new branches, lending departments, and operations which are all necessary to support increased customer activity. The increased costs reflect our attention to properly managing and supporting our growth and our interest in creating a platform for strong future growth. With the increases in net interest income and non-interest income for the second quarter of 2003, revenue growth offset this non-interest expense growth with the result of achieving an efficiency ratio of 58.5%, approximately the same level as in the second quarter of the prior year.
Noninterest expense totaled $14.1 million for the six month period ended June 30, 2003 as compared to $10.3 million for the same period in the prior year. Salaries and benefits increased by $2.3 million for the six months and was the primary category of increase in noninterest expense. Most of the increase related to the addition of the Grand Bank workforce effective with the GBFC acquisition on April 1, 2002, however, our continued growth has required additional staff as addressed above in the quarterly comparison of noninterest expense. Other increases included occupancy and equipment expense, data processing, and other support related expenses, such as courier, telephone, postage, outside services and legal services, all of which increased partially due to the GBFC acquisition. Most of these costs are customer activity and branch infrastructure related, and increase as a result of new customer activity being generated. Others of these costs such as legal and other outside services increase due to the growth in complexity of our business as we continue to expand. It is anticipated that legal expense may increase over the next several quarters as we continue to defend against litigation related to Trade Partners. For further information regarding litigation related to Trade Partners, please refer to Note 12 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
At June 30, 2003, our Tier I Capital as a percent of average assets was 7.5% and our total capital to risk-weighted assets was 9.7%, as compared to 7.6% and 9.9% respectively at December 31, 2002. The decrease in the risk-based regulatory capital ratio reflects our continued internal growth in assets. On July 15, 2003 we raised additional capital in the amount of $20.0 million by participating in a pooled trust preferred security issuance. This issuance provided additional regulatory capital to support future growth in assets. For more information regarding the trust preferred securities, please refer to Note 11 of the Notes to Consolidated Financial Statements.
We declared our first cash dividend during the fourth quarter of 2000 in the amount of $.07 per share. We subsequently paid a quarterly cash dividend of $.07 per share during 2001. During the fourth quarter of 2001, the cash dividend was increased to $.08 per share and had continued at this level during 2002. During the fourth quarter of 2002 we increased the cash dividend to $.10 per share and paid this same amount for the first and second quarters of 2003. It is anticipated that we will continue to pay quarterly cash dividends in the future. On May 8, 2002, we distributed a 4% stock dividend to our shareholders which was an increase over the 3% dividend paid in May of 2001. On May 30, 2003 we distributed our third consecutive annual stock dividend and raised the amount to 5%. All per share and average share information in this report has been adjusted to reflect the effect of this dividend.
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The liquidity of a financial institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows of deposits and to take advantage of interest rate market opportunities. Our sources of liquidity include loan payments by our borrowers, maturity and sales of securities available for sale, growth of deposits and deposit equivalents, federal funds sold, our borrowings from the Federal Home Loan Bank, and our issuance of trust preferred securities and common stock. Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds. We feel our liquidity position is sufficient to meet these needs.
Forward Looking Statements
This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan losses and statements concerning future profitability or future growth or increases, are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. Our 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 our operations and our future prospects 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 our 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 us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Analysis
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Macatawa Bank has only limited agricultural-related loan assets, and therefore has no significant exposure to changes in commodity prices. Therefore, our market risk exposure is mainly comprised of our sensitivity to interest rate risk. Our balance sheet has sensitivity, in various categories of assets and liabilities, to changes in prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury rates and various money market indexes. Our asset/liability management process aids us in providing liquidity while maintaining a balance between interest earning assets and interest bearing liabilities.
We use two interest rate risk measurement techniques in our interest rate risk management. The first is static gap analysis. This measures the difference between the dollar amounts of interest sensitive assets and liabilities that may be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates.
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The following table summarizes our interest rate repricing gaps (in thousands) for selected maturity periods as of June 30, 2003.
<3 Months 3-12 Months 1-5 Years Over 5 Years Total
Assets:
Fixed rate loans.................... $ 40,353 $65,580 $202,198 $27,876 $336,007
Variable rate loans................. 667,881 2,450 26,743 5,217 702,291
Taxable securities.................. --- 8,274 56,449 2,899 67,622
Tax-exempt securities............... --- --- --- 27,150 27,150
Other securities.................... --- --- --- 6,968 6,968
Short term investments.............. --- --- --- --- ---
Federal funds sold.................. --- --- --- --- ---
Loan Loss Reserve................... --- --- --- --- (14,513)
Cash & due from banks............... --- --- --- --- 40,281
Acquisition intangibles............. --- --- --- --- 26,937
Loans held for sale................. --- --- --- --- 20,145
Fixed assets........................ --- --- --- --- 34,367
Other assets........................ --- --- --- --- 10,357
-------- -------- -------- -------- -----------
Total $708,234 $ 76,304 $285,390 $70,110 $ 1,257,612
======== ======== ======== ======== ===========
Liabilities:
Time deposits $100,000 and over..... 47,329 128,374 94,902 -- 270,605
Time deposits under $100,000 18,471 67,280 50,924 -- 136,675
Other borrowings.................... 32,746 53,381 31,402 42,115 159,644
Savings & IRAs...................... 35,587 7,884 15,299 -- 58,770
NOW & money market accounts 387,861 --- --- -- 387,861
Non-Interest Bearing Deposits....... --- --- --- -- 119,028
Other Liabilities & Equity.......... --- --- --- -- 125,029
-------- -------- -------- -------- ----------
Total $521,994 $256,919 $192,527 $42,115 $1,257,612
======== ======== ======== ======== ==========
Period interest rate gap:........... 186,240 (180,615) 92,863 27,995
Cumulative interest rate gap:....... 186,240 5,625 98,488 126,483
Cumulative interest rate gap
to total assets..................... 14.81% 0.45% 7.83% 10.06%
Rate sensitive assets to rate
Sensitive liabilities............. 1.36 0.30 1.48 1.66
Cumulative rate sensitive assets to
Rate sensitive liabilities........ 1.36 1.01 1.10 1.12
The above table shows that total assets maturing or repricing within one year exceeded liabilities maturing within the same time period by $5.6 million indicating that we are asset sensitive in this time horizon. However, repricing and cash flows of various categories of assets and liabilities are subject to competitive and other influences that are beyond our control. Gap analysis also does not reflect the magnitude of interest rate changes on net interest income as a result of the various assets and liabilities shown as re-priceable within twelve months. As a result, various assets and liabilities indicated as maturing or repricing within a stated period may, in fact, mature or reprice in other periods or at different volumes.
The second interest rate risk measurement used is simulation analysis. We use a computer-based earnings simulation model to estimate the effects of various interest rate environments on the balance sheet structure and net interest income. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates. Key assumptions in the model include repayment speeds on various loan and investment assets, cash flows and maturities of interest-sensitive assets, cash flows and maturities of interest-sensitive liabilities, and changes in market conditions impacting loan and deposit pricing. We also include pricing caps and floors on discretionary priced liability products which limit both how low various checking and savings products could go under declining interest rates, as well as how high they could go in a rising interest rate environment. These caps and floors reflect our pricing philosophy in response to changing interest rates.
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In running the simulation model, we first forecast the next twelve months of net interest income under an assumed environment of constant market interest rates. Next, immediate and parallel interest rate shocks are constructed in the model. These rate shocks reflect changes of equal magnitude to all market interest rates. The next twelve months of net interest income are then forecast under each of the rate shock scenarios. The resulting change in net interest income is an indication of the sensitivity of our earnings to directional changes in market interest rates. This model is based solely on parallel changes in market rates and does not reflect the levels of interest rate risk that may arise from other factors such as changes in the spreads between key market rates or in the shape of the Treasury yield curve. The net interest income sensitivity is monitored by the Asset/Liability Committee which evaluates the results in conjunction with acceptable interest rate risk parameters. The quarterly rate simulation results are reported to the board of directors. The simulation also measures the change in the Economic Value of Equity. This represents the change in the net present value of our assets and liabilities under the same parallel shifts in interest rates, as calculated by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds of loans and securities.
The following table shows the suggested impact on net interest income over the next twelve months, and the Economic Value of Equity based on our balance sheet as of June 30, 2003 (dollars in thousands).
Economic Value Percent Net Interest Percent
Interest Rate Scenario of Equity Change Income Change
- ---------------------- -------------- ------- ------------ -------
Interest rates up 200 basis points $108,017 8.32% $44,128 12.68%
Interest rates up 100 basis points 106,051 6.35 41,715 6.52
No change in interest rates 99,717 39,162
Interest rates down 100 basis points 93,429 (6.31) 35,806 ( 8.57)
Interest rates down 200 basis points 96,887 (2.84) 30,995 (20.85)
The net interest income fluctuations in the above table reiterate our asset sensitive position identified by the gap table. If interest rates were to increase, this analysis suggests that we are well positioned for improvements in net interest income. Further, our balanced sensitivity in time horizons beyond one year results in little fluctuation in economic value of equity in the various rate shock scenarios.
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences.
Item 4: Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. The company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q Quarterly Report, have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the company would be made known to them by others within the company, particularly during the period in which this Form 10-Q Quarterly Report was being prepared. |
| (b) | Changes in Internal Controls. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. |
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company completed the acquisition of Grand Bank, a bank with approximately $300 million of assets based in Grand Rapids, Michigan, on April 1, 2002. Grand Bank had a trust department and one of its clients was Trade Partners, Inc.
Trade Partners was involved in purchasing and selling interests in viaticals. Viaticals are interests purchased in life insurance policies or death benefits of terminally ill or elderly individuals. Viatical investors purchase the right to receive a share in the policy death benefits at a discount from the face value of the policy. Selling the death benefit allows the insured individual to receive a cash payment before their death which can be used to pay ongoing living or treatment expenses. Sales of viaticals have become increasingly common in recent years. Trade Partners was involved in hundreds of viatical transactions.
Beginning in 1996, Grand Bank served as a custodian and escrow agent with respect to viaticals purchased by Trade Partners and funds received from viatical investors. Grand Bank was merged into Macatawa Bank on January 1, 2003. On February 7, 2003, Macatawa Bank ceased serving as a custodian and escrow agent for Trade Partners. In May 2003 Trade Partners ceased operations.
Certain legal proceedings against the Company have been initiated relating to the services provided by Grand Bank with respect to the Trade Partners’ viaticals.
In December 2002 a suit was filed in Mississippi State Court by 11 Mississippi residents against Trade Partners, certain affiliates of Trade Partners and Grand Bank. The plaintiffs voluntarily dismissed Grand Bank from the suit in return for providing certain information concerning the Trade Partners transactions. The plaintiffs have reserved the right to pursue the claims in the future.
Another suit was filed on March 31, 2003, by Michael Quilling, the receiver for Advanced Financial Services, Inc., a defunct Texas company that was involved in selling interests in viatical settlement contracts procured by Trade Partners. The complaint was filed in the United States District Court for the Northern District of Texas against Trade Partners, certain individuals associated with Trade Partners and the Company. The receiver for Advanced Financial Services also filed a similar complaint in the United States District Court for the Western District of Michigan. The complaints alleged that Grand Bank breached certain escrow agreements related to viatical settlement contracts. The Company and Grand Bank entered into an agreement with the receiver agreeing to provide an accounting of their transactions with Trade Partners. The Company and Grand Bank have been dismissed from these Texas and Michigan proceedings, although the receivers have reserved the right to pursue the claims in the future.
In April 2003 Trade Partners investors John and Kathryn Brand filed a complaint in Oklahoma State District Court. The plaintiffs invested approximately $248,000 and have sued Grand Bank, the Company, Trade Partners and certain individuals and entities associated with Trade Partners. The complaint seeks damages for the asserted breach of certain escrow agreements for which Grand Bank served as custodian and escrow agent. The Company has answered the complaint denying the material allegations and raising certain affirmative defenses. The Company believes it has meritorious defenses and intends to vigorously defend the case.
On May 9, 2003, a purported class action complaint was filed by Forrest W. Jenkins and Russell S. Vail against the Company and against LaSalle Bank Corporation in the United States District Court for the District of Western Michigan. The purported class includes investors who invested in limited liability companies formed by Trade Partners. Grand Bank acted as escrow agent with respect to certain of these limited liability companies. The plaintiffs allege that Grand Bank breached the escrow agreements, breached its fiduciary duties and acted negligently or grossly negligently with respect to the plaintiff’s investments. The complaint seeks certification of the action as a class action, unspecified damages and other relief. The Company has answered the complaint denying the material allegations and raising certain affirmative defenses. The Company believes it has meritorious defenses and intends to vigorously defend the case.
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It is possible that one or more additional legal actions may be initiated involving the custodial and escrow agent services provided by Grand Bank in connection with Trade Partners. If any such legal actions are commenced, the Company intends to defend them vigorously.
On April 15, 2003, the United States District Court for the Western District of Michigan appointed a receiver for Trade Partners. In order to prevent or minimize any loss to investors in the viaticals, the court appointed receiver has been coordinating the payment of premiums on the approximately 1,000 outstanding viaticated insurance policies in the Trade Partners portfolio so that the policies do not lapse. The receiver initially informed the Company that only one policy has lapsed for failure to pay premiums. The receiver has since informed the Company that an additional eight policies have lapsed (each of these eight policies had a face value of less than $100,000).
The receiver has estimated that approximately $13.4 million will be needed to pay premiums on the Trade Partners viaticals for the next two years. The receiver has received court permission to pool the death benefits of any of the Trade Partners viaticated policies that mature and use the benefits to pay premiums on other viaticated policies. The receiver is currently processing death benefit claims in excess of $5 million which will be used for premium payments. As additional viaticated policies mature, death benefits from those policies will provide a source of funding for continued premium payments.
In addition, on July 1, 2003, the United States District Court for the Western District of Michigan authorized the receiver to borrow money from Macatawa Bank to pay premiums, if needed. Macatawa Bank has agreed to extend a $4 million line of credit to the receiver, conditioned upon obtaining a security interest in the viaticals. As of August 4, 2003 no draws had yet been made on the line of credit.
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.
The annual meeting of shareholders of the Corporation was held on April 24, 2003. The shareholders of the Corporation voted on the following matters at the meeting:
(a) Election of two directors with terms expiring in 2006 and one director with term expiring in 2005.
| Director Nominee: | For | Withhold |
| G. Thomas Boylan (2006) Benj. A. Smith, III (2006) Arend D. Lubbers (2005) | 6,439,023 6,292,764 6,476,144 | 83,970 230,229 46,850 |
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits –
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| 10.1 | Consulting Agreement between Benj. A Smith III and Macatawa Bank Corporation dated May 8, 2003. |
| 10.2 | Form of Indemnity Agreement between Macatawa Bank Corporation and each of its directors. |
| 31.1 | Certificate of the Chief Executive Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of the Chief Financial Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of the Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on 8-K
The Company filed a Form 8-K Item 12 disclosure dated April 21, 2003 containing a press release announcing the first quarter 2003 earnings.
The Company filed a Form 8-K Item 9 disclosure dated April 24, 2003 containing a press release announcing a stock dividend.
The Company filed a Form 8-K Item 5 dated July 1, 2003 containing information regarding litigation related to a former trust customer, Trade Partners, Inc., of the former Grand Bank.
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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, 2003, 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/ Jon W. Swets Jon W. Swets Chief Financial Officer (Principal Financial and Accounting Officer) | ||
| DATE: August 12, 2003 |
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EXHIBIT INDEX
| Exhibit | Description |
| 10.1 | Consulting Agreement between Benj. A Smith III and Macatawa Bank Corporation dated May 8, 2003. |
| 10.2 | Form of Indemnity Agreement between Macatawa Bank Corporation and each of its directors. |
| 31.1 | Certificate of the Chief Executive Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of the Chief Financial Officer of Macatawa Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of the Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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EXHIBIT 31.1
I, Benj. A. Smith III, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Macatawa Bank Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 12, 2003
| /s/ Benj. A. Smith, III Benj. A. Smith, III Chief Executive Officer |
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EXHIBIT 31.2
I, Jon W. Swets, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Macatawa Bank Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 12, 2003
| /s/ Jon W. Swets Jon W. Swets Chief Financial Officer |
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EXHIBIT 32.1
Benj. A. Smith III, Chief Executive Officer of Macatawa Bank Corporation and Jon W. Swets, Senior Vice President and Chief Financial Officer of Macatawa Bank Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of Macatawa Bank Corporation. |
Dated: August 12, 2003
| | ||
| /s/ Benj. A. Smith, III Benj. A. Smith, III Chairman of the Board and Chief Executive Officer | ||
| /s/ Jon W. Swets Jon W. Swets Senior Vice President and Chief Financial Officer | ||
36