SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 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 September 30, 2001 (unaudited) and December 31, 2000
- --------------------------------------------------------------------------------
September 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash and due from banks $ 30,995,790 $ 26,305,310
Federal funds sold 7,500,000 ---
Short-term investments 8,000,000
------------ ------------
Cash and cash equivalents 46,495,790 26,305,310
Securities available for sale 64,920,591 48,668,507
Federal Home Loan Bank stock 3,129,400 2,550,000
Total loans 506,668,911 410,675,682
Allowance for loan losses (7,177,399) (5,853,972)
------------ ------------
499,491,512 404,821,710
Premises and equipment - net 14,232,534 12,263,903
Accrued interest receivable 3,567,024 3,270,561
Other assets 1,961,651 1,932,509
------------ ------------
Total assets $633,798,502 $499,812,500
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 58,950,469 $ 50,746,045
Interest-bearing 443,537,756 347,871,072
------------ ------------
Total 502,488,225 398,617,117
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 2,893,997 1,867,325
------------ ------------
Total liabilities 567,970,222 461,684,442
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; 5,307,201 shares and 3,696,789
issued and outstanding as of September 30, 2001
and December 31, 2000, respectively 62,334,202 36,890,416
Retained earnings 2,133,163 1,136,444
Accumulated other comprehensive income 1,360,915 101,198
------------ ------------
Total shareholders' equity 65,828,280 38,128,058
------------ ------------
Total liabilities and shareholders' equity $633,798,502 $499,812,500
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
3
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Month Periods Ended September 30, 2001 and September 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Loans, including fees $9,997,771 $8,309,660 $29,215,044 $22,728,502
Securities 1,110,667 716,415 2,812,337 1,771,095
---------- ---------- ----------- -----------
Total interest income 11,108,438 9,026,075 32,027,381 24,499,597
Interest expense
Deposits 4,503,229 4,119,262 13,395,783 10,818,454
Other 930,153 588,422 2,929,939 1,746,502
---------- ---------- ----------- -----------
Total interest expense 5,433,382 4,707,684 16,325,722 12,564,956
Net interest income 5,675,056 4,318,391 15,701,659 11,934,641
Provision for loan losses (565,000) (434,000) (1,589,000) (1,516,000)
---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 5,110,056 3,884,391 14,112,659 10,418,641
Noninterest income
Service charges on deposit accounts 447,242 249,786 1,149,320 688,941
Gain on sale of loans 221,743 95,246 708,646 230,427
Trust fees 169,723 132,803 506,691 380,990
Other 84,944 50,006 224,462 150,865
---------- ---------- ----------- -----------
Total noninterest income 923,652 527,841 2,589,119 1,451,223
Noninterest expense
Salaries and benefits 2,230,710 1,810,283 6,138,050 5,163,534
Occupancy expense of premises 308,257 271,398 878,592 835,362
Furniture and equipment expense 388,839 325,332 1,116,158 883,290
Legal and professional fees 98,480 57,568 236,435 210,924
Advertising 97,493 93,300 343,764 238,054
Data processing 107,376 79,230 308,663 224,811
Shareholder services 38,422 28,142 119,674 79,641
Supplies 109,591 87,285 286,687 262,843
Other expense 651,452 540,411 1,849,256 1,502,185
---------- ---------- ----------- -----------
Total noninterest expenses 4,030,620 3,292,949 11,277,279 9,400,644
---------- ---------- ----------- -----------
Income before federal income tax 2,003,088 1,119,283 5,424,499 2,469,220
Federal income tax 652,500 172,167 1,780,350 172,167
---------- ---------- ----------- -----------
Net income $1,350,588 $947,116 $3,644,149 $2,297,053
========== ========== =========== -----------
Basic income per share $.26 $.26 $.84 $.62
Diluted income per share $.25 $.26 $.84 $.62
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
4
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Month Periods Ended September 30, 2001 and September 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
Sept. 30, 2001 Sept. 30, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $3,644,149 $2,297,053
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 1,011,631 903,179
Provision for loan losses 1,589,000 1,516,000
Net change in:
Accrued interest receivables and other assets (325,605) (1,882,716)
Accrued expenses and other liabilities 377,729 613,570
----------- -----------
Net cash from operating activities 6,296,904 3,447,086
Cash flows from investing activities
Net increase in loans (96,258,802) (87,877,810)
Purchase of Federal Home Loan Bank Stock (579,400) --
Purchases of securities available for sale (45,371,176) (14,985,279)
Proceeds from maturities and calls of securities available for sale 31,000,000 --
Additions to premises and equipment (2,952,509) (3,324,791)
----------- -----------
Net cash from investing activities (114,161,887) (106,187,880)
Cash flows from financing activities
Net increase in deposits 103,871,108 87,227,385
Net (decrease)increase in short term borrowings (6,200,000) 6,000,000
Proceeds from Federal Home Loan Bank advances 16,852,000 45,000,000
Repayments of Federal Home Loan Bank advances (5,264,000) (35,000,000)
Repayments of notes payable (4,000,000) ---
Cash dividends paid (884,858) ---
Proceeds from sale of stock 23,681,213 ---
------------ -----------
Net cash from financing activities 128,055,463 103,227,385
Net change in cash and cash equivalents 20,190,480 486,591
Cash and cash equivalents at beginning of period 26,305,310 20,554,039
------------ -----------
Cash and cash equivalents at end of period $46,495,790 $21,040,630
============ ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $16,148,116 $11,922,712
Income taxes 2,494,000 1,250,000
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
5
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Month Periods Ended September 30, 2001 and September 30, 2000
(unaudited)
- --------------------------------------------------------------------------------
Accumulated
Retained Other Total
Common Earnings 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 nine months ended
September 30, 2000 2,297,053 2,297,053
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 167,504 167,504
----------
Comprehensive income 2,464,557
---------- ---------- -------- ----------
Balance, September 30, 2000 $36,882,916 $ 336,243 $(228,449) $36,990,710
========== ========== ======== ==========
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 nine months ended
September 30, 2001 3,644,149 3,644,149
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 1,259,717 1,259,717
----------
Comprehensive income 4,903,866
Net proceeds from sale of stock 23,679,213 23,679,213
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 (881,545) (881,545)
---------- ---------- -------- ----------
Balance, September 30, 2001 $62,334,202 $ 2,133,163 $1,360,915 $65,828,280
========== ========== ======== ==========
- --------------------------------------------------------------------------------
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 nine month period ended September
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 nine months ended September 30, 2001 and
September 30, 2000 are as follows:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Basic earnings per share
Net income $1,350,588 $947,116 $3,644,149 $2,297,053
---------- --------- ---------- ----------
Weighted average common
Shares outstanding 5,279,743 3,696,222 4,327,708 3,696,222
---------- --------- ---------- ----------
Basic earnings per share $0.26 $0.26 $0.84 $0.62
========== ========= ========== ==========
Diluted earnings per share
Net income $1,350,588 $947,116 $3,644,149 $2,297,053
---------- --------- ---------- ----------
Weighted average common
Shares outstanding 5,279,743 3,696,222 4,327,708 3,696,222
Add: Dilutive effects of assumed
Exercise of stock options 45,740 11,730 35,357 15,497
---------- --------- ---------- ----------
Weighted average common and
Dilutive potential common
Shares outstanding 5,325,483 3,707,952 4,363,065 3,711,719
---------- --------- ---------- ----------
Diluted earnings per share $0.25 $0.26 $0.84 $0.62
========== ========= ========== ==========
Stock options for 2,000 shares of stock were not considered in computing diluted
earnings per share for the nine months ended September 30, 2001 because they
were antidilutive. There were no antidilutive shares for the quarter ended
September 30, 2001. Stock options for 78,280 shares of common stock were not
considered in computing diluted earnings per share for the quarter and nine
months ended September 30, 2000 because they were antidilutive.
- --------------------------------------------------------------------------------
(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
-------- --------- ---------- -----------
September 30, 2001 (Unaudited)
- ------------------------------
U.S. Treasury securities and obligations
of U. S. Government agencies $53,916,525 $1,700,519 $ 0 $55,617,044
State and municipal bonds 8,942,073 361,474 0 9,303,547
----------- ---------- --------- -----------
$62,858,598 $2,061,993 $ 0 $64,920,591
=========== ========== ========= ===========
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 September 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 $45,259,026 $47,163,555
Due from five to ten years 11,878,095 12,273,600
Due after ten years 5,721,477 5,483,436
----------- -----------
Total $62,858,598 $64,920,591
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
9
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans were as follows:
September 30, December 31,
2001 2000
------------ ----------
(unaudited)
Commercial $365,840,041 $293,541,257
Mortgage 71,700,674 60,822,360
Consumer 69,128,196 56,312,065
------------ ------------
506,668,911 410,675,682
Allowance for loan losses (7,177,399) (5,853,972)
------------ ------------
$499,491,512 $404,821,710
============ ============
Activity in the allowance for loan losses was as follows:
Three months ended Three months ended Nine months ended Nine months ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
Balance at beginning of period $6,652,723 $5,044,595 $5,853,972 $3,995,165
Provision charged to
operating expense 565,000 434,000 1,589,000 1,516,000
Charge-offs (78,977) (8,722) (336,739) (41,292)
Recoveries 38,653 11,600 71,166 11,600
---------- ---------- ---------- ----------
Balance at end of period $7,177,399 $5,481,473 $7,177,399 $5,481,473
========== ========== ========== ==========
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
September 30, December 31,
2001 2000
------------ -----------
(unaudited)
Noninterest-bearing demand deposit accounts $58,950,469 $50,746,045
Money market accounts 160,087,635 125,427,738
NOW and Super NOW accounts 60,267,587 56,973,193
Savings accounts 15,919,186 10,548,694
Certificates of deposit 207,263,348 154,921,447
------------ ------------
$502,488,225 $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:
September 30, December 31,
2001 2000
----------- ----------
(unaudited)
Maturities from October 2001 through
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 and has a prepayment
penalty. These advances were collateralized by securities totaling $54,000,000
and $45,000,000 at September 30, 2001 and December 31, 2000, and first mortgage
loans totaling $59,000,000 and $50,000,000 under a blanket lien arrangement at
September 30, 2001 and December 31, 2000, respectively.
Maturities as of September 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 September 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
------ ----- ------ ----- ------ -----
September 30, 2001 (unaudited)
- ------------------
Total capital (to risk weighted assets)
Consolidated $70,992 13.6% $41,760 8.0% $52,200 10.0%
Bank 54,207 10.4 41,746 8.0 52,183 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 64,467 12.4 20,880 4.0 31,320 6.0
Bank 47,684 9.1 20,873 4.0 31,310 6.0
Tier 1 capital (to average assets)
Consolidated 64,467 10.4 24,783 4.0 30,979 5.0
Bank 47,684 7.7 24,786 4.0 30,982 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 September 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 OF OPERATIONS
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 September 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 over allotment option granted, issuing an additional
210,000 shares at the $16.00 offering price. Net proceeds, including the
exercise of the underwriters' over allotment 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 September 30, 2001, had assets of approximately $248
million.
Financial Condition
Our total assets were $633.8 million at September 30, 2001, an increase of $134
million, or 27%, 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 $20.2 million to $46.5 million at September 30, 2001,
from $26.3 million at December 31, 2000. The increase was primarily attributable
to an increase in federal funds sold of $15.5 million. The growth in federal
funds sold is attributed to the combined results of the second quarter capital
offering proceeds, as well as strong deposit growth in excess of loan growth
during the third quarter. As a result, the Bank was in a relatively strong
liquidity position both during, and at the end of the third quarter.
Securities available for sale totaled $64.9 million at September 30, 2001, an
increase of $16.2 million as compared to December 31, 2000. The increase in
securities was consistent with maintaining the Bank's liquidity ratio in
conjunction with overall asset and deposit growth.
Total loans at September 30, 2001 were $506.7 million, an increase of $96.0
million, or 23%, as compared to December 31, 2000. Commercial and commercial
real estate loans increased $72.3 million to $365.8 million at September 30,
2001, from $293.5 million at December 31, 2000, an increase of 25%. Commercial
and commercial real estate loans accounted for approximately 72% of the Bank's
total loan portfolio at September 30, 2001, as compared to 71% at December 31,
2000. Consumer loans and residential mortgage loans each comprised 14% of total
loans at September 30, 2001.
The allowance for loan losses as of September 30, 2001 was $7.2 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 nine months totaled $266 thousand, as compared to $30 thousand for the
same period last year. While our net charge-off experience was higher during the
current year, this represented only 0.08%, 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 and potential
economic weakness, in our judgment, we have provided adequate reserves for loan
losses. However, there can be no assurance that the
13
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.
Premises and equipment totaled $14.2 million at September 30, 2001, an increase
of $1.9 million from December 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 new Hudsonville branch facility is expected to begin operations in early
November 2001. This new branch facility will replace an existing small leased
storefront location.
Total deposits increased $103.9 million, or 26%, to $502.5 million at September
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 49,000 at September 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.
Other borrowed funds, consisting of Federal Home Loan Bank Advances, Notes
Payable, and Federal Funds Purchased totaled $62.6 million at September 30,
2001, as compared to $61.2 million at December 31, 2000. The note payable of
$4.0 million outstanding at December 31, 2000, was retired following the stock
offering completed during June 2001.
Results of Operations
Net income for the quarter ended September 30, 2001, was $1.4 million, an
increase of $404 thousand over the same period last year. Diluted earnings per
share were $.25 compared to $.26 for the prior year period. The reduction in
earnings per share reflects the dilution impact from the issuance of an
additional 1.6 million shares in conjunction with the stock offering completed
in the second quarter. Nine months year-to-date net income was $3.6 million, an
increase of $1.3 million as compared to the comparable period last year. 2001
net income for the nine months year-to-date included a federal income tax
expense provision of $1.8 million, while the 2000 year-to-date period included
only $172 thousand. The 2000 period included only minimal tax expense as we just
became taxable during the third quarter 2000 after all operating loss carry
forward positions had been utilized.
Net interest income for the third quarter of 2001 totaled $5.7 million, a 33%
increase as compared to $4.3 million for the comparable period in 2000. The
improvement is reflective of the overall growth of our earning assets. Average
earning assets during the third quarter of 2001 totaled $576.7 million, versus
$403.0 million during the same quarter in 2000. Net interest margin on earning
assets was 3.91% for the 2001 quarter, down from 4.18% in the second quarter of
2000.
Net interest income for the nine months year-to-date was $15.7 million, as
compared to $11.9 million for the same period in 2000. Net interest margin was
3.97% for the nine 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 eight prime rate reductions totaling 3.50% in the
first nine 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 September 30, 2001 and 2000.
For the three months ended September 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 $54,646 $ 782 5.95% $38,098 $ 589 6.08%
Tax-exempt securities (1) 8,075 94 7.13% 1,801 23 8.06%
Loans 490,208 9,998 8.02% 357,448 8,310 9.14%
Fed funds sold 20,103 173 3.36% 3,234 53 6.42%
Short term investments 348 4 2.99% 156 2 5.09%
Federal Home Loan Bank stock 3,129 57 7.15% 2,312 49 8.36%
------- ------ ------- -----
Total interest earning assets 576,509 11,108 7.64% 403,049 9,026 8.82%
Noninterest earning assets
Cash and due from banks 31,448 19,381
Other 13,679 10,338
-------- --------
Total assets $621,636 $432,768
======== ========
Liabilities
NOWs and MMDAs $217,470 1,590 2.89% $165,997 1,773 4.25%
Savings 15,281 52 1.35% 9,843 47 1.90%
IRAs 12,354 183 5.90% 8,147 126 6.17%
Time deposits 189,648 2,678 5.60% 132,150 2,174 6.54%
Fed funds borrowed -- -- -- 571 11 7.50%
Other borrowings 62,588 930 5.82% 37,120 577 6.11%
-------- ------ ----- -------- -----
Total interest bearing liabilities 497,341 5,433 4.32% 353,828 4,708 5.28%
Noninterest bearing liabilities
Noninterest bearing demand accounts 54,900 40,635
Other noninterest bearing liabilities 4,578 1,740
Shareholders' equity 64,817 36,565
-------- --------
Total liabilities and shareholders'
equity $621,636 $432,768
======== ========
Net interest income $5,675 $4,318
====== ======
Net interest spread 3.32% 3.54%
Net interest margin 3.91% 4.18%
Ratio of average interest bearing assets to
Average interest bearing liabilities 115.92% 113.91%
(1) Yield adjusted to fully tax equivalent.
15
The following table shows an analysis of net interest margin for the nine month
periods ending September 30, 2001 and 2000.
For the nine months ended September 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 $48,686 $ 2,172 6.03% $32,657 $1,482 5.97%
Tax-exempt securities (1) 6,056 214 7.20% 1,466 58 8.05%
Loans 457,661 29,215 8.44% 334,205 22,729 8.97%
Fed funds sold 8,976 243 3.58% 1,814 84 6.08%
Short term investments 251 6 3.36% 188 6 3.93%
Federal Home Loan Bank stock 3,088 177 7.55% 2,312 141 8.03%
-------- ------- -------- ------
Total interest earning assets 524,718 32,027 8.12% 372,642 24,500 8.68%
Noninterest earning assets
Cash and due from banks 25,377 18,482
Other 12,334 9,746
-------- --------
Total assets $562,429 $400,870
======== ========
Liabilities
NOWs and MMDAs $194,819 4,829 3.31% $155,706 4,817 4.13%
Savings 13,236 157 1.59% 8,958 129 1.92%
IRAs 11,352 516 6.08% 7,204 321 5.96%
Time deposits 175,409 7,893 6.02% 118,100 5,551 6.28%
Fed funds borrowed 1,668 69 5.44% 1,704 82 6.31%
Other borrowings 64,237 2,861 5.87% 36,132 1,665 6.07%
-------- ------- -------- ------
Total interest bearing liabilities 460,721 16,325 327,804 12,565
Noninterest bearing liabilities
Noninterest bearing demand accounts 49,111 36,164
Other noninterest bearing liabilities 3,574 1,396
Shareholders' equity 49,023 35,506
-------- --------
Total liabilities and shareholders'
equity $562,429 $400,870
======== ========
Net interest income $15,702 $11,935
======= =======
Net interest spread 3.39% 3.57%
Net interest margin 3.97% 4.19%
Ratio of average interest bearing assets to
Average interest bearing liabilities 113.89% 113.68%
(1) Yield adjusted to fully tax equivalent.
16
The provision for loan losses for the quarter ended September 30, 2001 was $565
thousand. The loan loss provision for the nine month period in 2001 was $1.6
million, as compared to $1.5 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.
Noninterest income for the quarter ended September 30, 2001 was $924 thousand,
an increase of $396 thousand, or 75%, over the same period last year. On a
year-to-date basis, noninterest income totaled $2.6 million for the 2001 period,
as compared to $1.5 million in the first nine months of 2000. Service charges on
deposit accounts was the single largest component of noninterest income and
increased to $447 thousand for the third quarter of 2001, compared to $250
thousand for the third quarter in 2000. Deposit service charges totaled $1.1
million for the nine month period in 2001, as compared to $689 thousand for the
2000 period. The increased service charge income was reflective of the expanded
customer account base. Gain on sale of mortgage loans totaled $222 thousand for
the third quarter of 2001, and was $709 thousand for the nine month period, as
compared to $95 thousand and $230 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 $4.0 million for the quarter, and $11.3 million for
the nine month period in 2001, as compared to $3.3 million and $9.4 million,
respectively, for the comparable periods in 2000. Salary and benefits were the
primary increases in both the quarter and nine 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 completed a follow-on stock offering on June 15, 2001,
and along with the underwriters exercise of the over allotment option in July,
we issued of an additional 1,610,000 shares of common stock. The net proceeds
from this offering totaled $23.6 million, after underwriters discount and
offering expenses. 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 September 30, 2001, the Company's Tier I Capital as a
percent of average assets was 10.40%.
We declared our first cash dividend during the fourth quarter of 2000 in the
amount of $.07 per share. We have paid a quarterly cash dividend of $.07 per
share each quarter 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 second quarter 2001, using a portion of the proceeds from the
capital offering completed during that quarter.
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
17
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.
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. We have 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 September
30, 2001.
<3 Months 3-12 Months 1-5 Years Over 5 Years Total
Assets:
Fixed rate loans $ 21,254 $ 41,767 $158,237 $25,531 $246,789
Variable rate loans 231,346 1,177 24,468 2,889 259,880
Taxable Securities 2,010 5,117 39,525 8,965 55,617
Tax-Exempt Securities -- -- -- 9,304 9,304
Other Securities -- 3,129 3,129
Short Term Investments 8,000 8,000
Federal Funds Sold 7,500 -- 7,500
Loan Loss Reserve -- -- -- -- (7,177)
Cash & Due From Banks -- -- -- 30,996
Fixed Assets -- -- -- -- 14,233
Other Assets -- -- 5,527
-------- -------- -------- ------- --------
TOTAL $270,110 $ 48,061 $222,230 $49,818 $633,798
======== ======== ======== ======= ========
Liabilities:
Time deposits $100,000 and over 51,672 47,559 7,558 -- 106,789
Time deposits under $100,000 26,042 45,200 16,497 -- 87,739
Repo's & Borrowed Money 5,264 8,264 18,060 31,000 62,588
Savings & IRAs 18,138 5,507 4,825 368 28,838
NOW & money market accounts 220,172 -- -- -- 220,172
Non-Interest Bearing Deposits -- -- -- -- 58,950
Other Liabilities & Equity -- 68,722
-------- -------- -------- ------- --------
TOTAL $321,288 $106,530 $ 46,940 $31,368 $633,798
======== ======== ======== ======= ========
Period interest rate gap: (51,178) (58,469) 175,290 18,450
Cumulative interest rate gap: (51,178) (109,647) 65,643 84,093
Cumulative interest rate gap
to total assets (8.07%) (17.30%) 10.36% 13.27%
Rate sensitive assets to rate
Sensitive liabilities .84 0.45 4.73 1.59
Cumulative rate sensitive assets to
Rate sensitive liabilities .84 .74 1.14 1.17
The above table shows that total liabilities maturing or repricing within one
year exceeded assets maturing within one year by $110 million. However,
repricing and cash flows of certain categories of assets and liabilities do not
necessarily have the same magnitude of change. We are also 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.
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
19
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 September 30, 2001.
Percent Change in Net
Interest Rate Scenario Interest Income
Interest rates down 200 basis points (11.12)%
Interest rates down 100 basis points ( 3.73)%
No change in interest rates --
Interest rates up 100 basis points 1.37%
Interest rates up 200 basis points 2.97%
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. While the gap model presents a more liability sensitive position, the
simulation analysis is more indicative of expected results due to its time
horizon measurement. 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.
None.
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 September 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: November 12, 2001
22