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, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 000-25927
MACATAWA BANK CORPORATION
(Exact name of issuer as specified in its charter)
Michigan 38-3391345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
348 South Waverly Road, Holland, Michigan 49423
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 820-1444
------------
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes __X__ No ______
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 5,307,201 shares of the Company's
Common Stock (no par value) were outstanding as of August 10, 2001.
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. Other Information:
Item 1.
Legal Proceedings 21
Item 2.
Changes in Securities and Use of Proceeds 21
Item 3.
Defaults Upon Senior Securities 21
Item 4.
Submission of Matters to a Vote of Security Holders 21
Item 5.
Other Information 21
Item 6.
Exhibits and Reports on Form 8-K 21
Signatures 22
-2-
Part I Financial Information
Item 1.
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2001 (unaudited) and December 31, 2000
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
-------- --------
(unaudited)
ASSETS
Cash and due from banks $24,945,227 $26,305,310
Federal funds sold 14,500,000 ---
------------- ------------
Cash and cash equivalents 39,445,227 26,305,310
Securities available for sale 62,490,545 48,668,507
Federal Home Loan Bank stock 3,129,400 2,550,000
Total loans 468,586,863 410,675,682
Allowance for loan losses (6,652,723) (5,853,972)
------------- ------------
461,934,140 404,821,710
Premises and equipment - net 13,944,191 12,263,903
Accrued interest receivable 3,372,202 3,270,561
Other assets 2,062,584 1,932,509
------------- ------------
Total assets $586,378,289 $499,812,500
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $55,459,181 $ 50,746,045
Interest-bearing 403,970,860 347,871,072
------------- ------------
Total 459,430,041 398,617,117
Federal Home Loan Bank advances 62,588,000 51,000,000
Note payable --- 4,000,000
Federal funds purchased --- 6,200,000
Accrued expenses and other liabilities 3,422,711 1,867,325
------------- ------------
Total liabilities 525,440,752 461,684,442
Shareholders' equity
Preferred stock, no par value, 500,000 shares
Authorized; no shares issued and outstanding
Common stock, no par value, 9,500,000 shares Authorized;
5,096,995 shares and 3,696,789 issued and outstanding
as of June 30, 2001 and December 31, 2000, respectively 59,219,989 36,890,416
Retained earnings 1,154,077 1,136,444
Accumulated other comprehensive income 563,471 101,198
------------- ------------
Total shareholders' equity 60,937,537 38,128,058
------------- ------------
Total liabilities and shareholders' equity $586,378,289 $499,812,500
============= ============
See accompanying notes to condensed consolidated financial statements
-3-
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Six Month Periods Ended June 30, 2001 and June 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Interest income (unaudited) (unaudited) (unaudited) (unaudited)
Loans, including fees $9,735,470 $7,808,196 $19,217,273 $14,418,842
Securities 903,477 559,395 1,701,670 1,054,680
------------- ------------- ------------- -------------
Total interest income 10,638,947 8,367,591 20,918,943 15,473,522
Interest expense
Deposits 4,446,406 3,643,011 8,892,554 6,699,192
Other 997,323 645,555 1,999,786 1,158,080
------------- ------------- ------------- -------------
Total interest expense 5,443,729 4,288,566 10,892,340 7,857,272
Net interest income 5,195,218 4,079,025 10,026,603 7,616,250
Provision for loan losses (502,000) (595,000) (1,024,000) (1,082,000)
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 4,693,218 3,484,025 9,002,603 6,534,250
Noninterest income
Service charges on deposit accounts 388,357 238,196 702,078 439,155
Gain on sale of loans 220,433 95,860 486,903 135,181
Trust fees 156,952 134,821 336,968 248,187
Other 71,667 48,855 139,518 100,859
------------- ------------- ------------- -------------
Total noninterest income 837,409 517,732 1,665,467 923,382
Noninterest expense
Salaries and benefits 2,040,861 1,705,232 3,907,340 3,353,251
Occupancy expense of premises 275,451 308,700 570,335 563,964
Furniture and equipment expense 360,436 294,962 727,319 557,958
Legal and professional fees 71,900 102,312 137,955 153,356
Advertising 122,216 75,001 246,271 144,754
Data processing 99,019 71,774 201,287 145,581
Shareholder services 51,121 33,325 81,252 51,499
Supplies 92,238 71,401 177,096 175,558
Other expense 633,223 515,726 1,197,804 961,774
------------- ------------- ------------- -------------
Total noninterest expenses 3,746,465 3,178,433 7,246,659 6,107,695
------------- ------------- ------------- -------------
Income before federal income tax 1,784,162 823,324 3,421,411 1,349,937
Federal income tax 582,000 0 1,127,850 0
------------- ------------- ------------- -------------
Net income $1,202,162 $823,324 $ 2,293,561 $ 1,349,937
============= ============= ============= =============
Basic income per share $.30 $.22 $.60 $.36
Diluted income per share $.30 $.22 $.59 $.36
See accompanying notes to condensed consolidated financial statements
-4-
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Month Periods Ended June 30, 2001 and June 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, 2001 June 30, 2000
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $2,293,561 $1,349,937
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 642,267 584,381
Provision for loan losses 1,024,000 1,082,000
Net change in:
Accrued interest receivables and other assets (231,717) (1,396,238)
Accrued expenses and other liabilities 1,317,247 502,227
------------ ------------
Net cash from operating activities 5,045,358 2,122,307
Cash flows from investing activities
Net increase in loans (58,136,430) (61,612,860)
Purchase of Federal Home Loan Bank Stock (579,400) ---
Purchases of securities available for sale (38,120,060) (7,826,998)
Proceeds from maturities and calls of securities available for sale 25,000,000 ---
Additions to premises and equipment (2,324,121) (2,504,112)
------------ ------------
Net cash from investing activities (74,160,011) (71,943,970)
Cash flows from financing activities
Net increase in deposits 60,812,924 55,621,110
Net (decrease)increase in short term borrowings (6,200,000) 6,000,000
Proceeds from Federal Home Loan Bank advances 16,852,000 40,000,000
Repayments of Federal Home Loan Bank advances (5,264,000) (30,000,000)
Repayments of notes payable (4,000,000) ---
Cash dividends paid (513,354) ---
Proceeds from sale of stock 20,567,000 ---
------------ ------------
Net cash from financing activities 82,254,570 71,621,110
Net change in cash and cash equivalents 13,139,917 1,799,447
Cash and cash equivalents at beginning of period 26,305,310 20,554,039
------------ ------------
Cash and cash equivalents at end of period $39,445,227 $22,353,486
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $10,488,177 $7,372,615
Income taxes 1,071,000 ---
See accompanying notes to condensed consolidated financial statements
-5-
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six Month Periods Ended June 30, 2001 and June 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income (Loss) Equity
----------- ----------- ------------- -------------
Balance, December 31, 1999 $36,882,916 $(1,960,810) $(395,953) $34,526,153
Net income for six months ended
June 30, 2000 1,349,937 1,349,937
Other comprehensive income, net of tax:
Unrealized gains/losses on securities (39,834) (39,834)
---------- -----------
Comprehensive income 1,310,103
----------- ----------- --------- -----------
Balance, June 30, 2000 $36,882,916 $ (610,873) $(435,787) $35,836,256
=========== =========== ========== ===========
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
----------- ---------- ------------- -------------
Balance, December 31, 2000 $36,890,416 $1,136,444 $101,198 $38,128,058
Net income for six months ended
June 30, 2001 2,293,560 2,293,560
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 462,273 462,273
------------
Comprehensive income 1,831,287
Net proceeds from sale of stock 20,565,000 20,565,000
Proceeds from exercise of stock options 2,000 2,000
Issued 107,474 shares in payment
of 3% stock dividend 1,762,573 (1,765,885) (3,312)
Cash dividends at $.07 per share (510,042) (510,042)
----------- ---------- -------- -----------
Balance, June 30, 2001 $59,219,989 $1,154,077 $563,471 $60,937,537
=========== ========== ======== ===========
See accompanying notes to condensed consolidated financial statements
-6-
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in Macatawa
Bank Corporation's (the "Company") 2000 Annual Report containing financial
statements for the year ended December 31, 2000.
All per share amounts and average shares outstanding have been adjusted for all
periods presented to reflect the 3% stock dividend distributed on May 4, 2001.
The Statement of Changes in Shareholders' Equity reflects the change in retained
earnings and common stock for the value of the dividend paid .
NOTE 2 PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company, and its wholly-owned subsidiary, Macatawa Bank (the
"Bank"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-7-
MACATAWA BANK CORORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the quarters and six months ended June 30, 2001 and June
30, 2000 are as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Basic earnings per share
Net income $1,202,162 $823,324 $2,293,560 $1,349,937
------------- ------------ ------------- -------------
Weighted average common
shares outstanding 3,989,196 3,696,222 3,843,800 3,696,222
------------- ------------ ------------- -------------
Basic earnings per share $0.30 $0.22 $0.60 $0.36
============= ============ ============= =============
Diluted earnings per share
Net income $1,202,163 $823,324 $2,293,560 $1,349,937
------------- ------------ ------------- -------------
Weighted average common
shares outstanding 3,989,196 3,696,222 3,843,800 3,696,222
Add: Dilutive effects of assumed
exercise of stock options 37,989 13,100 30,202 16,617
------------- ------------ ------------- -------------
Weighted average common and
dilutive potential common
shares outstanding 4,027,185 3,709,322 3,874,002 3,712,839
------------- ------------ ------------- -------------
Diluted earnings per share $0.30 $0.22 $0.59 $0.36
============= ============ ============= =============
Stock options for 2,000 and 51,440 shares of stock were not considered in
computing diluted earnings per share for the quarter and six-months ended June
30, 2001 because they were antidilutive. Stock options for 78,280 shares of
common stock were not considered in computing diluted earnings per share for the
quarter and six-months ended June 30, 2000 because they were antidilutive.
- --------------------------------------------------------------------------------
(Continued)
-8-
MACATAWA BANK CORORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 4 SECURITIES
The amortized cost and fair values of securities available for sale were as
follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- ---------- ----------- -----------
June 30, 2001 (Unaudited)
- -------------------------
U.S. Treasury securities and obligations
of U. S. Government agencies $53,901,185 $686,670 $(2,500) $54,585,355
State and municipal bonds 7,735,616 171,112 (1,538) 7,905,190
----------- ---------- --------- ------------
$61,636,801 $857,782 $(4,038) $62,490,545
=========== ========== ========= ============
December 31, 2000
- -----------------
U. S. Treasury securities and obligations
of U. S. Government agencies $45,927,221 $191,469 $(128,090) $45,990,600
State and municipal bonds 2,587,955 89,952 --- 2,677,907
----------- ---------- --------- ------------
$48,515,176 $281,421 $(128,090) $48,668,507
=========== ========== ========= ============
Contractual maturities of debt securities at June 30, 2001(unaudited) were as
follows. 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.
Available-for-Sale Securities
Amortized Cost Fair Values
-------------- ------------
Due from one to five years $49,228,764 $49,868,340
Due from five to ten years 6,929,646 7,021,684
Due after ten years 5,478,391 5,600,521
----------- -----------
Total $61,636,801 $62,490,545
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
-9-
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans were as follows:
June 30, December 31,
2001 2000
-------- ----------
(unaudited)
Commercial $339,620,283 $293,541,257
Mortgage 65,849,794 60,822,360
Consumer 63,116,786 56,312,065
------------ ------------
468,586,863 410,675,682
Allowance for loan losses (6,652,723) (5,853,972)
------------ ------------
$461,934,140 $404,821,710
============ ============
Activity in the allowance for loan losses was as follows:
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Balance at beginning of period $6,243,030 $4,482,165 $5,853,972 $3,995,165
Provision charged to
operating expense 502,000 595,000 1,024,000 1,082,000
Charge-offs (114,026) (32,570) (257,762) (32,570)
Recoveries 21,719 --- 32,513 ---
---------- ---------- ---------- ----------
Balance at end of period $6,652,723 $5,044,595 $6,652,723 $5,044,595
========== ========== ========== ==========
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
June 30, December 31,
2001 2000
-------- ---------
(unaudited)
Noninterest-bearing demand deposit accounts $55,459,181 $50,746,045
Money market accounts 144,637,749 125,427,738
NOW and Super NOW accounts 53,295,147 56,973,193
Savings accounts 14,434,548 10,548,694
Certificates of deposit 191,603,416 154,921,447
------------ ------------
$459,430,041 $398,617,117
============ ============
(Continued)
-10-
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank were as follows:
June 30, December 31,
2001 2000
--------- -----------
Maturities from October 2001 through (unaudited)
December 2010, fixed rates from 5.08% to
6.68%, averaging 5.82%. $62,588,000 $51,000,000
=========== ===========
Each advance is payable at its respective maturity date with a prepayment
penalty. These advances were required to be collateralized by securities
totaling $45,000,000 at June 30, 2001 and December 31, 2000, and first mortgage
loans totaling $49,000,000 and $50,000,000 under a blanket lien arrangement at
June 30, 2001 and December 31, 2000, respectively.
Maturities as of June 30, 2001 were as follows:
2001 $ 5,264,000
2002 8,264,000
2003 3,000,000
2004 5,060,000
2005 10,000,000
2009 5,000,000
2010 26,000,000
----------
$62,588,000
===========
(Continued)
-11-
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - REGULATORY MATTERS
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative 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.
At June 30, 2001 and December 31, 2000, actual capital levels (in thousands) and
minimum required levels for the Company and the Bank were:
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
June 30, 2001 (unaudited) ------ ----- ------ ----- ------ -----
- -------------
Total capital (to risk weighted assets)
Consolidated $66,448 13.7% $38,876 8.0% $48,596 10.0%
Bank 52,360 10.8 38,859 8.0 48,574 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 60,374 12.4 19,438 4.0 29,157 6.0
Bank 46,288 9.5 19,430 4.0 29,144 6.0
Tier 1 capital (to average assets)
Consolidated 60,374 10.9 22,208 4.0 27,761 5.0
Bank 46,288 8.3 22,192 4.0 27,741 5.0
December 31, 2000
- -----------------
Total capital (to risk weighted assets)
Consolidated $43,644 10.4% $33,698 8.0% $42,123 10.0%
Bank 46,820 11.1 33,648 8.0 42,059 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 38,379 9.1 16,849 4.0 25,274 6.0
Bank 41,563 9.9 16,824 4.0 25,236 6.0
Tier 1 capital (to average assets)
Consolidated 38,379 8.2 18,630 4.0 23,288 5.0
Bank 41,563 8.9 18,624 4.0 23,280 5.0
The Company and the Bank were categorized as well capitalized at June 30, 2001
and year-end 2000.
During June of 2001, the Company completed an underwritten common stock
offering. This resulted in 1,400,000 shares of common stock sold at $16.00 per
share. Net proceeds, after underwriters' discount and offering expense, were
$20.6 million. Subsequently, in July 2001, the underwriter exercised its
overallotment option resulting in an additional 210,000 shares of stock issued.
Net proceeds from the overallotment sale totaled $3.1 million.
-12-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OFOPERATIONS
Macatawa Bank Corporation is a Michigan corporation and is the bank holding
company for Macatawa Bank. Macatawa Bank commenced operations on November 25,
1997. Macatawa Bank is a Michigan chartered bank with depository accounts
insured by the Federal Deposit Insurance Corporation. We provide a full range of
commercial and consumer banking, and Trust services through our network of 14
full service branches located in communities in Ottawa County, northern Allegan
County and southwestern Kent County, Michigan.
We have experienced rapid and substantial growth since opening in November 1997.
At June 30, 2001, we had fourteen branch banking offices and three service
facilities. We completed an underwritten initial public offering of common stock
on April 7, 1998, resulting in net proceeds of $14.1 million. In June 1999, we
completed an offering of common stock to our shareholders resulting in net
proceeds of $14.6 million. An additional follow-on offering was completed in
June of 2001. This resulted in the sale of an additional 1,400,000 shares of
common stock, at an offering price of $16.00 per share. During July 2001, the
underwriters exercised the overallotment option granted, issuing an additional
210,000 shares at the $16.00 offering price. Net proceeds, including the
exercise of the underwriters' overallotment option exercised in July 2001,
totaled $23.6 million after underwriting discounts, commissions, and expenses.
We established a Trust Department in the fourth quarter of 1998 to further
provide for customers' financial needs. The Trust Department began business on
January 3, 1999 and as of June 30, 2001, had assets of approximately $262
million.
Financial Condition
Our total assets were $586.4 million at June 30, 2001, an increase of $86.6
million, or 17%, as compared to $499.8 million at December 31, 2000. The
increase in assets was, we believe, attributable primarily to the Bank
continuing to attract new deposit and loan customers as a result of its strong
customer service focus and community presence. The asset growth was primarily in
earning assets of loans and securities, but also included increased cash,
premises, and equipment.
Cash and cash equivalents, which include federal funds sold and short-term
investments, increased $13.1 million to $39.4 million at June 30, 2001, from
$26.3 million at December 31, 2000. The increase was attributable to an increase
in federal funds sold of $14.5 million as a result of the recently completed
capital offering proceeds not being fully invested in loans or other investments
at quarter end. The offering was completed in mid June as discussed above.
Securities available for sale totaled $62.5 million at June 30, 2001, an
increase of $13.8 million as compared to December 31, 2000. The increase in
securities was consistent with maintaining the Bank's liquidity ratio in
conjunction with deposit growth.
Total loans at June 30, 2001 were $468.6 million, an increase of $57.9 million,
or 14%, as compared to December 31, 2000. Commercial and commercial real estate
loans increased $46.1 million to $339.6 million at June 30, 2001, from $293.5
million at December 31, 2000, an increase of 15%. Commercial and commercial real
estate loans accounted for approximately 72% of the Bank's total loan portfolio
at June 30, 2001, as compared to 71% at December 31, 2000. Consumer loans and
residential mortgage loans comprised 13% and 14% of total loans, respectively,
at June 30, 2001.
The allowance for loan losses as of June 30, 2001 was $6.7 million, or 1.42% of
total loans, compared to $5.9 million, or 1.43% of total loans at December 31,
2000. We provide a loan loss provision on a regular basis consistent with our
loan growth and loss experience. Net charge-offs for the first six months
totaled $225 thousand, as compared to $32 thousand for the same period last
year. While our net charge-off experience was higher during the current year,
this represented only .10%, on an annualized basis, of average loans. Our credit
losses on loans continue to be low 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, the effects of increasing
interest rates on borrowers, and potential economic weakness, in our judgment,
we have provided adequate reserves for loan losses. However, there can be no
assurance that the allowance for losses on loans will be adequate to cover all
losses. In lieu of an established loan loss trend for determining an adequate
allowance for loan loss, the Bank has built an allowance based on industry peer
ratios.
-13-
Premises and equipment totaled $13.9 million at June 30, 2001, an increase of
$1.7 million from Dece mber 31, 2000. The increase resulted from the purchase of
land for construction of a new headquarters building, as well as a new branch
location. The new headquarters location will allow us to consolidate our
administration, human resources, trust, loan underwriting and processing, and
proof and deposit operations at one location. The new branch site will allow us
to construct a full service branch, with drive-up capability, in Hudsonville.
The branch will replace an existing small leased storefront location.
Total deposits increased $60.8 million, or 15%, to $459.4 million at June 30,
2001, as compared to $398.6 million at December 31, 2000. We believe the
increase was primarily a result of deposits being obtained from new customers.
The number of deposit accounts increased from approximately 38,000 at December
31, 2000, to approximately 45,000 at June 30, 2001. We continue to anticipate
strong deposit growth given the ongoing consolidation of banks in our market by
larger out-of-market regional banks. We feel we have the ability to attract new
customers based on our focus on quality customer service, the desire of
customers to deal with a local bank, and convenient accessibility through the
expansion of our branch network.
Results of Operations
Net income for the quarter ended June 30, 2001, was $1.2 million, an increase of
$379 thousand over the same period last year. Diluted earnings per share were
$.30 compared to $.22 for the prior year period. Six months year-to-date net
income was $2.3 million, an increase of $944 thousand as compared to the
comparable period last year. Net income for the quarter and six months
year-to-date 2001 included a federal income tax expense provision of $582
thousand and $1.1 million, respectively. The comparable periods in 2000 did not
include any tax provision due to our prior year operating loss carry forward
position for federal tax purposes.
Net interest income for the second quarter of 2001 totaled $5.2 million, a 27%
increase as compared to $4.1 million for the comparable period in 2000. The
improvement is reflective of the overall growth of the earning assets for the
Company. Average earning assets during the second quarter of 2001 totaled $519.6
million, versus $379.7 million during the same quarter in 2000. Net interest
margin on earning assets was 3.98% for the 2001 quarter, down from 4.23% in the
second quarter of 2000. Net interest income for the six months year-to-date was
$10.0 million, as compared to $7.6 million for the same period in 2000. Net
interest margin was 4.00% for the six month period in 2001, as compared to the
same period last year net interest margin of 4.19%. The contraction in the net
interest margin for both the quarter and year-to-date reflects the decrease in
yield on earning assets resulting from the six prime rate reductions totaling
2.75% in the first six months of this year. Liability costs have not moved as
quickly due to contractual maturities on certificate of deposit portfolios, as
well as fixed rate borrowings. Anticipated growth in earning assets is expected
to continue to increase levels of net interest income. This will be slightly
mitigated by the compression in the net interest margin as a result of any
additional interest rate reductions by the Federal Reserve Board. Based on
maturities in our fixed term certificate of deposit portfolio, we anticipate
several months before re-pricing of the portfolio results in lower costs that
will fully offset reductions in our asset yields following any interest rate
reduction.
-14-
The following table shows an analysis of net interest margin for the three month
periods ending June 30, 2001 and 2000.
For the three months ended June 30,
---------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------
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 $47,291 $ 703 6.02% $31,764 $ 479 5.95%
Tax-exempt securities (1) 6,703 78 7.14% 1,579 21 8.08%
Loans 456,433 9,735 8.46% 342,989 7,808 9.04%
Fed funds sold 5,923 61 4.09% 885 12 5.40%
Short term investments 103 1 2.30% 164 2 5.99%
Federal Home Loan Bank stock 3,129 60 7.64% 2,312 45 7.74%
-------- ------- ----- -------- ------ -----
Total interest earning assets 519,582 10,638 8.65% 379,693 8,367 8.76%
Noninterest earning assets
Cash and due from banks 24,017 18,543
Other 12,241 9,805
------- -----
Total assets $555,840 $408,041
======== ========
Liabilities
NOWs and MMDAs $188,623 1,538 3.31% $154,442 1,580 4.12%
Savings 13,400 55 1.64% 9,164 44 1.91%
IRAs 11,384 172 6.07% 7,207 107 5.95%
Time deposits 178,482 2,681 6.03% 121,860 1,912 6.31%
Fed funds borrowed 1,582 18 4.53% 2,852 45 6.25%
Other borrowings 66,039 979 5.93% 39,611 600 6.00%
-------- ------- ----- -------- ------ -----
Total interest bearing liabilities 459,510 5,443 335,136 4,288
Noninterest bearing liabilities
Noninterest bearing demand accounts 48,598 35,896
Other noninterest bearing liabilities 4,212 1,232
Shareholders' equity 43,520 35,777
------- ------
Total liabilities and shareholders'
equity $555,840 $408,041
======== ========
Net interest income $5,195 $4,079
====== ======
Net interest spread 3.43% 3.63%
Net interest margin 3.98% 4.23%
Ratio of average interest bearing assets to
Average interest bearing liabilities 113.07% 113.30%
(1) Yield adjusted to fully tax equivalent.
-15-
The following table shows an analysis of net interest margin for the six month
periods ending June 30, 2001 and 2000.
For the six months ended June 30,
---------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------
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 $45,657 $ 1,389 6.06% $29,906 $ 893 5.90%
Tax-exempt securities (1) 5,030 120 7.28% 1,297 34 8.04%
Loans 441,117 19,217 8.69% 322,456 14,419 8.88%
Fed funds sold 3,320 71 4.24% 1,096 31 5.58%
Short term investments 123 2 4.12% 231 4 3.67%
Federal Home Loan Bank stock 3,067 120 7.78% 2,312 92 7.87%
--------- -------- --------- -------
Total interest earning assets 498,314 20,919 8.40% 357,298 15,473 8.61%
Noninterest earning assets
Cash and due from banks 22,291 18,028
Other 11,731 9,419
------- -----
Total assets $532,336 $384,745
======== ========
Liabilities
NOWs and MMDAs $183,059 3,239 3.57% $150,482 3,044 4.07%
Savings 12,196 105 1.73% 8,511 82 1.93%
IRAs 10,842 333 6.19% 6,727 195 5.82%
Time deposits 168,172 5,215 6.25% 110,998 3,378 6.12%
Fed funds borrowed 2,515 69 5.44% 2,277 71 6.15%
Other borrowings 65,055 1,931 5.94% 35,465 1,087 6.06%
--------- -------- --------- -------
Total interest bearing liabilities 441,839 10,892 314,460 7,857
Noninterest bearing liabilities
Noninterest bearing demand accounts 46,084 33,769
Other noninterest bearing liabilities 3,289 1,243
Shareholders' equity 41,124 35,273
--------- ---------
Total liabilities and shareholders'
equity $532,336 $384,745
========= =========
Net interest income $10,027 $7,618
======== =======
Net interest spread 3.44% 3.59%
Net interest margin 4.00% 4.19%
Ratio of average interest bearing assets to
Average interest bearing liabilities 112.78% 113.62%
(1) Yield adjusted to fully tax equivalent.
The provision for loan losses for the quarter ended June 30, 2001 was $502
thousand. The loan loss provision for the six month period in 2001 was $1.0
million, as compared to $1.1 million for the same period in 2000. These amounts
were provided as a result of the increase in the total loan portfolio, as well
as providing additional allowance for loans charged-off during the periods.
Management considers it prudent during the early years of operations to provide
for loan losses at similar levels maintained by banks with similar loan
portfolios. We will continue to monitor our loan loss experience, and increase
our loan loss reserve if needed, to more closely align it with our own history
of loss experience. Along with other financial institutions, management shares a
concern for the possible continued softening of the economy in 2001. Should the
economic climate continue to deteriorate, borrowers may experience difficulty,
and the level of non-performing loans, charge-offs, and delinquencies could rise
and require further increases in the provision.
-16-
Noninterest income for the quarter ended June 30, 2001 was $837 thousand, an
increase of $319 thousand, or 62%, over the same period last year. On a
year-to-date basis, noninterest income totaled $1.7 million for the 2001 period,
as compared to $923 thousand in the first six months of 2000. Service charges on
deposit accounts was the single largest component of noninterest income and
increased to $388 thousand for the second quarter of 2001, compared to $238
thousand for the second quarter in 2000. Deposit service charges totaled $702
thousand for the six month period in 2001, as compared to $439 thousand for the
2000 period. The increased service charge income was reflective of increased
customer accounts. Gain on sale of mortgage loans totaled $220 thousand for the
second quarter of 2001, and was $487 thousand for the six month period, as
compared to $96 thousand and $135 thousand for the comparable periods in 2000.
The increased gains were from higher volumes of residential mortgage financing
activity as a result of the lower interest rate market during the 2001 periods.
Higher mortgage refinancing activity is expected to continue as long as interest
rates remain favorable for mortgage originations.
Noninterest expense totaled $3.7 million for the quarter, and $7.2 million for
the six month period in 2001, as compared to $3.2 million and $6.1 million,
respectively, for the comparable periods in 2000. Salary and benefits were the
primary increases in both the quarter and six month periods, as a result of
additional staff, as well as annual staff merit increases. The growth in salary
expense levels reflects the expansion of staff required to handle the growing
lending portfolios and operational support infrastructure necessary to support
increased customer activity. Other increases included advertising and promotion
costs, data processing, and other expense, which includes courier, telephone,
postage, and outside services. All of these costs are customer activity and
branch infrastructure related, and increase as a result of new customer activity
being generated.
Liquidity and Capital Resources
We obtained our initial equity capital, in the amount of approximately $8.2
million, as a result of a private placement by Macatawa Bank to investors in
November 1997. Additional equity capital of $14.1 million was raised during our
initial public offering completed in April 1998. Due to our continued rapid
growth, additional equity capital was required in 1999. Through an offering made
to our shareholders in June 1999, $14.6 million of net proceeds from an equity
offering was raised. We have just completed a follow-on stock offering on June
15, 2001, with the issuance of an additional 1,400,000 shares of common stock.
The net proceeds from this offering totaled $21.5 million, after underwriters
discount and offering expenses. In early July, 2001, the underwriters exercised
their overallotment option that we had granted in conjunction with the stock
offering. This allowed them to sell an additional 210,000 shares (15% of the
base offering) due to demand in excess of the base offering. This generated an
additional $3.1 of capital after the underwriters discount. The proceeds of this
offering were used to pay down $4 million of indebtedness, while the balance
will be used to strengthen our capital position in anticipation of future
growth, and for other general corporate purposes. At June 30, 2001, the Bank's
Tier I Capital as a percent of average assets was 10.9%.
We declared our first cash dividend during the fourth quarter of 2000 in the
amount of 7 cents per share. We have paid a quarterly cash dividend of 7 cents
per share for the first and second quarters of this year as well. It is
anticipated that we will continue to pay quarterly cash dividends in the future.
On May 4, 2001, we distributed a 3% stock dividend to our shareholders.
We secured a $5 million credit facility during September of 2000, to provide
additional capital to maintain the Bank at required regulatory capital levels.
In March 2001, the credit facility was increased to $8 million. The balance
outstanding on this line was $4 million at December 31, 2000. This debt was paid
off during the current quarter with proceeds from the capital offering recently
completed.
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. Our sources of liquidity
include loan payments by borrowers, maturity and sales of securities available
for sale, growth of deposits and deposit equivalents, federal funds sold,
borrowings from the Federal Home Loan Bank, and the issuance of common stock.
Liquidity management involves the ability to meet the cash flow requirements of
our customers. These customers may be either borrowers with credit needs or
depositors wanting to withdraw funds.
-17-
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 Macatawa Bank's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Macatawa 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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-18-
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. The following table summarizes our interest
rate repricing gaps (in thousands) for selected maturity periods as of June 30,
2001.
<3 Months 3-12 Months 1-5 Years Over 5 Years Total
Assets:
Fixed rate loans $21,223 $40,183 $152,939 $24,300 $238,645
Variable rate loans 205,172 1,200 21,483 2,087 229,942
Taxable Securities 4,015 5,078 36,777 8,715 54,585
Tax-Exempt Securities -- -- -- 7,905 7,905
Other Securities -- 3,129 3,129
Federal Funds Sold 14,500 -- 14,500
Loan Loss Reserve -- -- -- -- (6,653)
Cash & Due From Banks -- -- -- 24,945
Fixed Assets -- -- -- -- 13,944
Other Assets -- -- -- -- 5,221
-------- -------- -------- ------- --------
TOTAL $244,910 $ 46,461 $211,199 $46,136 $586,163
======== ======== ======== ======= ========
Liabilities:
Time deposits $100,000 and over 38,195 54,297 6,555 -- 99,047
Time deposits under $100,000 12,492 52,377 16,118 -- 80,987
Repo's & Borrowed Money -- 13,528 18,060 31,000 62,588
Savings & IRAs 15,182 5,765 4,748 522 26,217
NOW & money market accounts 197,719 -- -- -- 197,719
Non-Interest Bearing Deposits -- -- -- -- 69,410
Other Liabilities & Equity -- -- 50,195
-------- -------- -------- ------- --------
TOTAL $263,588 $125,967 $ 45,481 $31,522 $586,163
======== ======== ======== ======= ========
Net asset (liability) gap: (18,678) (79,452) 165,718 14,614
Cumulative gap: (18,678) (98,130) 67,588 82,202
Cumulative gap to
total assets (3.19%) (16.74%) 11.53% 14.02%
Rate sensitive assets to rate
Sensitive liabilities .93 0.37 4.64 1.46
Cumulative rate sensitive assets to
Rate sensitive liabilities .93 .75 1.15 1.18
The above table shows that total liabilities maturing or repricing within one
year exceeded assets maturing within one year by $98 million. However, the
repricing and cash flows of certain categories of assets and liabilities are
subject to competitive and other influences that are beyond our control. As a
result, certain 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.
-19-
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 risks to maintain our net interest
income levels.
The following table shows the suggested impact on net interest income over the
next twelve months, based on our balance sheet as of June 30, 2001.
Percent Change in Net
Interest Rate Scenario Interest Income
Interest rates down 200 basis points (11.44)%
Interest rates down 100 basis points ( 5.42)%
No change in interest rates --
Interest rates up 100 basis points 5.10%
Interest rates up 200 basis points 9.64%
The above results indicate that we are interest sensitive on the asset side,
with more asset repricing opportunities in either an up or down interest rate
scenario. 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; client
preferences, and other factors.
-20-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
(a) The annual meeting of shareholders of the Corporation was held on
April 19, 2001 ("Annual Meeting").
(b) the following director was elected at the Annual Meeting for a
term expiring in 2004: John F. Koetje. Other directors whose
terms continued after the meeting are as follows: Robert E.
DenHerder and Philip J. Koning, whose terms expire in 2002; and
G. Thomas Boylan and Benj. A. Smith, III, whose terms expire in
2003.
(c) At the Annual Meeting, one director was elected for a term
expiring in 2004.
Authority Abstain and
Director Nominee: For Withheld Broker Non-votes
--------- --------- ----------------
John F. Koetje 3,201,166 810 387,339
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on 8-K - None.
-21-
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, 2001, 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/ Steven L. Germond
Steven L. Germond
Chief Financial Officer
(Principal Financial and Accounting Officer)
DATE: August 13, 2001
-22-