As filed with the Securities and Exchange Commission on May 14, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MACATAWA BANK CORPORATION
Michigan 6712 38-3391345
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
348 South Waverly Road
Holland, Michigan 49423
(616) 820-1444
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Benj. A. Smith, III
Chairman and Chief Executive Officer
106 E. 8th Street
Holland, Michigan 49423
(616) 396-0119
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copy to:
Donald L. Johnson John E. Freechack
Varnum, Riddering, Schmidt & Howlett Barack Ferrazzano Kirschbaum
llp Perlman & Nagelberg
Suite 1700 Suite 2700
333 Bridge Street, N.W. 333 W. Wacker Drive
Grand Rapids, Michigan 49504 Chicago, Illinois 60606
(616) 336-6000 (312) 984-3100
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class of Maximum Maximum Amount of
Securities Being Amount to be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
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Common stock (no par
value)................ 1,610,000 shares $17.40 $28,014,000 $7,004
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We hereby amend this registration statement on this date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on the date as the
Securities and Exchange Commission, acting pursuant to Section 8(a) of the
Securities Act of 1933, may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the Securities and Exchange Commission +
+declares our registration statement effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion, dated , 2001
PROSPECTUS
1,400,000 Shares
MACATAWA BANK CORPORATION [logo]
Common Stock
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Macatawa Bank Corporation is offering 1,400,000 shares of common stock.
Macatawa Bank Corporation common stock is listed on the Nasdaq SmallCap Market
under the symbol "MCBC." On May , 2001, the last reported sale price of our
shares as reported on the Nasdaq SmallCap Market was $ per share. We have
applied for listing on the Nasdaq National Market System.
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Investing in our common stock involves risks that are described in the "Risk
Factors" section beginning on page of this prospectus.
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PRICE $ PER SHARE
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Per Share Total
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Public offering price...................... $ $
Underwriting discount...................... $ $
Proceeds, before expenses, to Macatawa Bank
Corporation............................... $ $
The underwriters may also purchase up to an additional 210,000 shares from
Macatawa Bank Corporation at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery on or about , 2001.
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Dain Rauscher Wessels
Stifel, Nicolaus & Company
Incorporated
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, 2001
ABOUT THIS PROSPECTUS
You should rely only on the information provided or incorporated by
reference in this prospectus. We are not making an offer to sell our common
stock in any state where an offer to sell our common stock is not permitted.
The information in this prospectus is accurate only as of the date of this
prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary.................. 1
Selected Consolidated Financial
Data............................... 6
Risk Factors........................ 7
Use of Proceeds..................... 12
Capitalization...................... 13
Dilution............................ 14
Market for Common Stock............. 15
Dividend Policy..................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................ 36
Management.......................... 43
Page
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Principal Shareholders........... 47
Certain Transactions............. 48
Supervision and Regulation....... 49
Description of Capital Stock..... 57
Shares Eligible for Future Sale.. 64
Underwriting..................... 65
Legal Proceedings................ 66
Legal Matters.................... 66
Experts.......................... 66
Available Information............ 67
Incorporation of Information We
File with the SEC............... 67
Financial Statements............. F-1
FORWARD-LOOKING STATEMENTS
This prospectus 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. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, and
have based these expectations on our beliefs as well as assumptions we have
made, these expectations may prove to be incorrect. Important factors that
could cause actual results to differ materially from our expectations include,
without limitation, factors like the failure of a significant number of
borrowers to repay their loans, general changes in economic conditions and
interest rates, and restrictions imposed on us by regulations or regulators of
the banking industry. For information about factors that could cause our actual
results to differ from the expectations stated in the forward-looking
statements, see the text under the captions "Risk Factors," "Business," and
"Management Discussion and Analysis of Financial Conditions and Results of
Operations." We urge you to consider these factors carefully in evaluating the
forward-looking statements contained in this prospectus. All subsequent written
or oral forward-looking statements attributable to us or persons acting in our
behalf are expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this prospectus are made
only as of the date of this prospectus. We do not intend, and undertake no
obligation, to update these forward-looking 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.
i
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements appearing elsewhere in this
prospectus. Unless otherwise noted, all information in this prospectus assumes
that the underwriters do not exercise the option to purchase additional shares
from us in the offering. All information in this prospectus reflects the 3%
stock dividend distributed to our shareholders on May 4, 2001. In addition,
unless the text clearly suggests otherwise, references in this prospectus to
"us," "we," "our," or "the company" include Macatawa Bank Corporation and its
wholly-owned subsidiary Macatawa Bank.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" contain a discussion of some of the factors that
could contribute to those differences.
Macatawa Bank Corporation
We are a bank holding company headquartered in Holland, Michigan and own
Macatawa Bank. Our bank provides a wide range of commercial and consumer
banking services through 13 full service branches located in Ottawa County,
northern Allegan County and southwestern Kent County, Michigan. We offer
commercial and personal banking services, including checking and savings
accounts, certificates of deposit, safe deposit boxes, travelers' checks, money
orders, trust services and commercial, mortgage and consumer loans. Since our
formation in November 1997, we have grown very rapidly while maintaining
excellent asset quality and attaining and improving profitability. We became
profitable in 1999 with net income of $693 thousand. Our net income increased
to $3.3 million in 2000. In the first quarter of 2001, we earned $1.1 million
as compared to $527 thousand in the first quarter of 2000. At March 31, 2001,
we had total assets of $528.3 million, total deposits of $418.7 million, total
loans of $438.5 million, and shareholders' equity of $39.3 million.
The following table summarizes our growth from the start of our operations:
At December 31,
At March 31, ----------------------------------
2001 2000 1999 1998 1997
------------ -------- -------- -------- -------
(unaudited) (Dollars in thousands)
Assets.......................... $528,257 $499,813 $344,921 $189,229 $10,722
Loans........................... $438,455 $410,676 $285,374 $137,882 $ 498
Deposits........................ $418,712 $398,617 $279,370 $166,989 $ 2,712
Borrowed Funds.................. $ 66,588 $ 61,200 $ 30,000 $ 2,000 $ 0
Shareholders' equity............ $ 39,335 $ 38,128 $ 34,526 $ 19,611 $ 7,972
Deposit Accounts(1)............. 41,773 38,129 26,622 14,340 471
Branch Locations(1)............. 13 13 13 8 1
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(1) Unaudited
We have achieved this rapid growth by opening de novo branches, hiring
experienced bankers with existing customer relationships in our local market,
providing outstanding customer service and capitalizing on customer
dissatisfaction resulting from bank acquisitions in our markets.
1
Strategy
Our goal is to continue to build a highly profitable, customer-focused
banking organization that generates attractive returns for our shareholders
while also being a positive contributor to the communities in which we operate.
Our strategy for achieving this objective includes:
. Building Our Retail and Commercial Deposit Base Through an Expanding
Branch Network. Through our 13 full-service branches, we actively
solicit retail and commercial customers and compete for deposits by
offering personal attention, professional service and competitive
interest rates. We also emphasize our local management and their strong
ties with, and active commitment to, the community. In the first quarter
of 2001, we opened over 3,600 net new deposit accounts, an increase of
9.6% over the number of deposit accounts at December 31, 2000. To
facilitate the continued growth of our deposit base, we expect to open
at least two new branches per year for the next several years in Grand
Rapids or other areas of western Michigan. This expansion will enable us
to serve adjacent geographic markets, and will make banking with us more
convenient for existing and future customers.
. Focusing on Commercial and Commercial Real Estate Lending. While we
offer a full range of consumer loan products, our primary lending focus
will continue to be commercial loans and commercial real estate loans to
small to medium-sized businesses. We believe that commercial customers
prefer to conduct business with financial institutions like ours which
demonstrate an active interest in their business and personal financial
affairs, offer local decision-making by experienced loan officers, and
offer a sophisticated product portfolio to meet their banking needs. At
March 31, 2001, commercial loans comprised 53.2% of our loan portfolio
and commercial real estate loans accounted for 19.3% of our loan
portfolio.
. Hiring Experienced Employees With a Customer Service Focus. We are a
customer-driven financial institution, and our ability to continue to
attract and retain employees who share our customer service focus is key
to our success. We believe that our ability to deliver products and
services in a highly personalized manner helps differentiate us from
larger, regional banks operating in our market areas. In addition,
throughout our organization we emphasize the recruitment of banking
professionals with significant experience in, and knowledge of, our
markets. We believe this emphasis both facilitates our growth and
partially mitigates the credit risks associated with our rapidly growing
loan portfolio.
. Expanding our Product Offerings to Leverage Customer Relationships. A
key component of our strategy is to continue to add new products and
services in order to expand our customer relationships, diversify our
revenue base and increase our noninterest income. For example, we began
operating a trust department in January 1999, and started to offer
internet banking services in the fourth quarter of 1999. While our trust
department currently operates at a break-even or slightly negative net
income level, we believe that our trust department will contribute to
our net income as our trust business matures. We are also investigating
the possibility of offering our customers additional products in the
future including investment brokerage services, title insurance,
casualty and life insurance, mutual funds and annuities.
. Capitalizing on Opportunities Resulting From Consolidation in our
Markets. At the time of our formation in 1997, the largest bank in
Ottawa County had recently been acquired by an out-of-state regional
banking organization. This transaction and the ensuing employee and
2
customer disruptions resulted in many opportunities for us to attract
experienced personnel and establish relationships with customers wishing
to conduct business with a locally-managed institution with strong ties
to the community. The consolidation and disruption in our markets has
continued. In August 2000, Ottawa Financial, the parent of a thrift
headquartered in Holland with $1.0 billion in assets, and more recently,
Old Kent Financial, a bank holding company with the leading market share
in both the Holland/Zeeland and Grand Rapids markets, were acquired by
an out-of-state bank holding company. We intend to position ourselves to
capitalize on any business opportunities that may result from customer
dislocation associated with these transactions.
. Using Technology Effectively. We strive to use technology to increase
the effectiveness and efficiency of our employees, while also providing
expanded products and services to our customers. For example, we have
entered into agreements with third-party service providers to provide
our customers with credit cards, debit cards, ATM cards, automated
telephone banking and internet banking services. In addition, in the
second quarter of 2001, we expect to implement a new customer
information system, which will enable us to target our marketing
initiatives more effectively and help us cross-sell additional products.
In general, we believe that using third-party service providers allows
us to remain at the forefront of technology while minimizing the costs
of delivery.
A Description of Our Market Area
Our market area includes the cities of Holland and Zeeland and their
surrounding communities, as well as the Interstate I-196 corridor from Holland
to metropolitan Grand Rapids. Most of our market area is located in the
southern half of Ottawa County, Michigan. The Holland/Zeeland metropolitan area
has a population of approximately 150,000, and Ottawa County has a population
of approximately 238,000. The Holland/Zeeland area enjoys a stable and diverse
economy and had an estimated median household income in 1999 of approximately
$51,000. Over 300 manufacturers operate in the Holland/Zeeland area, including
major manufacturers in the office furniture industry as well as significant
Tier 1 automotive parts manufacturers. Major Ottawa County employers include
Donnelly Corporation, Herman Miller, Inc., Haworth, Inc., Gentex, Inc., and
Johnson Controls. We believe that our market area's diverse commercial base
provides significant opportunities for business banking services as well as
personal banking services for the owners and employees of the area's
businesses.
Our future plans for growth include further expansion into the metropolitan
Grand Rapids area. Currently we have two branches operating in the southwestern
portion of metropolitan Grand Rapids, with a third scheduled to open in the
summer of 2001. Grand Rapids, which is located in Kent County, has a population
of approximately 198,000, the metropolitan Grand Rapids area has a population
of approximately 467,000, and Kent County has a population of approximately
550,000. In 1999, Grand Rapids had an estimated median household income of
approximately $50,000. Over 1,200 manufacturers operate in Kent County. Major
Kent County employers include Alticor (formerly known as Amway Corporation),
Steelcase, Wolverine World Wide, and Meijer, Inc.
3
About Us
Macatawa Bank was organized as a Michigan bank and opened for business on
November 25, 1997. We have 13 full service branch offices, a trust office, a
lending administration office, and an operations center. We are presently
constructing an additional branch in the southwestern portion of the Grand
Rapids metropolitan area, and expect it to open in the summer of 2001. We have
also secured a site for the relocation of our Hudsonville branch into a new
full service facility and are planning a new branch in north Holland.
Construction of a new corporate headquarters building to be located between
Holland and Zeeland is also being planned. The proposed new headquarters will
allow us to consolidate our administration, human resources, trust, loan
underwriting and processing, and proof and deposit operations at one location.
Our bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law. Our administrative office is
located at 348 South Waverly Road, Holland, Michigan 49423, and our telephone
number is (616) 820-1444.
4
The Offering
Common stock offered by
Macatawa Bank
Corporation............. 1,400,000 shares
Offering price per
share................... $ per share
Common stock to be
outstanding after this
offering................ 5,096,789 shares(1)
Use of proceeds.......... We will use the net proceeds from this offering to
strengthen our capital position in anticipation of
future growth, to repay $4.0 million of indebtedness
and for other general corporate purposes. After
repaying the $4.0 million of indebtedness, we will
immediately contribute approximately $3.0 million to
Macatawa Bank to strengthen its capital position.
The remaining net proceeds will be available for
general corporate purposes, including additional
contributions to Macatawa Bank's capital.
Risk factors............. See "Risk Factors" beginning on page 7 and other
information included in this prospectus for a
discussion of factors you should consider carefully
before deciding to invest in our common stock.
Nasdaq SmallCap Market MCBC. We have applied for listing on the Nasdaq
Symbol.................. National Market System.
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(1) The number of shares outstanding after this offering excludes 167,787
shares issuable upon the exercise of outstanding options and 78,641 shares
reserved for future issuance under our stock option and purchase plans.
This number also assumes that the underwriters' over-allotment option is
not exercised. If the over-allotment option is exercised in full, we will
issue and sell an additional 210,000 shares.
5
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary presents our selected consolidated financial data for
the years ended December 31, 2000, 1999 and 1998. The balance sheet and income
statement data has been derived from our audited consolidated financial
statements. The following summary also presents our selected consolidated
financial data at or for the three months ended March 31, 2001 and 2000. The
balance sheet and income statement data has been derived from our unaudited
consolidated quarterly financial statements which, in our opinion, include all
adjustments (consisting of only normal, recurring adjustments) considered
necessary for a fair presentation. The selected consolidated financial data
should be read in conjunction with our consolidated financial statements and
the related notes. The selected consolidated financial data at or for the three
months ended March 31, 2001 is not necessarily indicative of our operating
results for the entire year.
At or for the
three months ended At or for the
March 31, Year ended December 31,
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2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Income Statement
Summary:
Net interest income..... $ 4,831 $ 3,537 $ 16,599 $ 10,572 $ 3,614
Provision for loan
losses................. 522 487 1,931 1,967 2,023
---------- ---------- ---------- ---------- ----------
Net interest income
after provision........ 4,309 3,050 14,688 8,605 1,591
Noninterest income...... 828 406 2,052 1,528 683
Noninterest expense..... 3,500 2,929 12,672 9,440 4,763
---------- ---------- ---------- ---------- ----------
Income (loss) before
taxes.................. 1,637 527 4,048 693 (2,489)
Income tax expense...... 546 0 699 0 0
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Net income (loss)....... $ 1,091 $ 527 $ 3,349 $ 693 $ (2,489)
========== ========== ========== ========== ==========
Common Share Summary:
Diluted earnings (loss)
per share.............. $ .29 $ .14 $ .90 $ .22 $ (1.18)
Dividends per share..... .07 0 .07 0 0
Book value per share.... 10.64 9.47 10.31 9.34 7.82
Weighted average diluted
shares outstanding..... 3,720,050 3,717,466 3,711,051 3,216,625 2,103,178
Balance Sheet Summary:
Total assets............ $ 528,257 $ 392,709 $ 499,813 $ 344,921 $ 189,229
Total loans............. 438,455 325,953 410,676 285,374 137,882
Securities.............. 51,818 29,582 48,669 28,281 27,007
Noninterest-bearing
deposits............... 45,498 36,191 50,746 34,385 18,518
Total deposits.......... 418,712 321,585 398,617 279,390 166,989
Borrowed funds.......... 66,588 35,000 61,200 30,000 2,000
Shareholders' equity.... 39,335 35,002 38,128 34,526 19,611
Capital Ratios:
Total risk-based capital
ratio.................. 9.9% 12.2% 10.4% 14.0% 12.4%
Tier 1 risk-based
capital ratio.......... 8.7% 10.9% 9.1% 12.7% 11.3%
Tier 1 leverage ratio... 7.7% 9.8% 8.2% 10.8% 11.8%
Shareholders' equity to
assets................. 7.4% 8.9% 7.6% 10.0% 10.4%
Selected Asset Quality
Data:
Nonperforming loans to
total loans............ .01% .04% .05% .04% .00%
Nonperforming assets to
total assets........... .02% .03% .04% .03% .00%
Allowance for loan
losses as a percentage
of total loans......... 1.42% 1.38% 1.43% 1.40% 1.47%
Net charge-offs to
average loans.......... .03% .00% .02% .00% .00%
Selected Financial
Ratios:
Return on average
assets(1).............. .86% .58% .80% .26% (2.91)%
Return on average
shareholders'
equity(1).............. 10.27% 6.23% 9.31% 2.43% (15.15)%
Efficiency ratio(2)..... 61.85% 74.28% 67.94% 78.02% 110.84%
Net interest margin(1).. 4.03% 4.15% 4.28% 4.37% 4.21%
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(1) Annualized for the three month periods ended March 31, 2001 and 2000.
(2) Noninterest expense divided by the sum of net interest income plus
noninterest income.
6
RISK FACTORS
You should carefully consider the following risk factors before you decide
to buy our common stock. You should also consider other information in this
prospectus, as well as in other documents incorporated by reference.
Changes in economic conditions or interest rates may negatively affect our
earnings, capital and liquidity.
The results of operations for financial institutions, including our bank,
may be materially and adversely affected by changes in prevailing local and
national economic conditions, including declines in real estate market values,
rapid increases or decreases in interest rates and changes in the monetary and
fiscal policies of the federal government. Our profitability is heavily
influenced by the spread between the interest rates we earn on investments and
loans and the interest rates we pay on deposits and other interest-bearing
liabilities. Substantially all our loans are to businesses and individuals in
western Michigan and any decline in the economy of this area could adversely
affect us. Like most banking institutions, our net interest spread and margin
will be affected by general economic conditions and other factors that
influence market interest rates and our ability to respond to changes in these
rates. At any given time, our assets and liabilities will be such that they are
affected differently by a given change in interest rates. We are modestly asset
sensitive at the current time. This means that the recent actions of the Open
Market Committee of the Federal Reserve Board decreasing interbank interest
rates will likely adversely affect our net interest income and earnings over
the near term.
Our credit losses could increase and our allowance for loan losses may not be
adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and
nonpayment, if it occurs, may have a materially adverse effect on our earnings
and overall financial condition as well as the value of our common stock.
Moreover, our focus on commercial lending may result in a larger concentration
of loans to small businesses. As a result, we may assume greater lending risks
than other banks. Additionally, we have made our loans recently, so there is no
significant repayment history against which we can fully assess the adequacy of
the allowance for loan losses. We make various assumptions and judgements about
the collectibility of our loan portfolio and provide an allowance for potential
losses based on a number of factors. If our assumptions are wrong, our
allowance for loan losses may not be sufficient to cover our losses, thereby
having an adverse affect on our operating results. In addition, while we have
not experienced any significant charge-offs or had large numbers of
nonperforming loans, due to the significant increase in loans originated since
we commenced operations, we cannot assure you that we will not experience an
increase in delinquencies and losses as these loans continue to mature. The
actual amount of future provisions for loan losses cannot be determined at this
time and may exceed the amounts of past provisions. Additions to our allowance
for loan losses would decrease our net income.
Our business is subject to various lending risks depending on the nature of the
borrower's business, its cash flow and our collateral.
Repayment of our commercial loans is often dependent on cash flow of the
borrower, which may be unpredictable, and collateral securing these loans may
fluctuate in value. Our commercial loans are primarily made based on the cash
flow of the borrower and secondarily on the underlying collateral provided by
the borrower. Most often, this collateral is accounts receivable, inventory,
equipment or real estate. In the case of loans secured by accounts receivable,
the availability of funds for the repayment of
7
these loans may be substantially dependent on the ability of the borrower to
collect amounts due from its customers. Other collateral securing loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. Commercial loans (excluding agricultural
loans) were $192.7 million, or 43.9% of our total loan portfolio, at March 31,
2001.
Our commercial real estate loans involve higher principal amounts than other
loans, and repayment of these loans may be dependent on factors outside our
control or the control of our borrowers. Commercial real estate lending
typically involves higher loan principal amounts, and the repayment of these
loans generally is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service.
Because payments on loans secured by commercial real estate often depend upon
the successful operating and management of the properties, repayment of these
loans may be affected by factors outside the borrower's control, including
adverse conditions in the real estate market or the economy or changes in
government regulation. If the cash flow from the project is reduced, the
borrower's ability to repay the loan and the value of the security for the loan
may be impaired. At March 31, 2001, commercial real estate loans totaled $84.7
million, or 19.3% of our total loan portfolio.
Our construction loans are based upon estimates of costs to construct and
value associated with the completed project, and these estimates may be
inaccurate. At March 31, 2001, total construction loans, including land
acquisition and development, totaled $37.4 million, or 8.5% of our total loan
portfolio. Residential construction loans were $30.7 million, of which
approximately $26.6 million were pre-sold and $4.1 million were for future sale
to unidentified buyers. Commercial construction loans comprised $6.7 million of
the total portfolio, of which 100% were pre-leased. Because of the
uncertainties inherent in estimating construction costs, as well as the market
value of the completed project, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related loan-
to-value ratio. As a result, construction loans often involve the disbursement
of substantial funds with repayment dependent, in part, on the success of the
ultimate project and the ability of the borrower to sell or lease the property,
rather than the ability of the borrower or guarantor to repay principal and
interest. Delays in completing the project may arise from labor problems,
material shortages and other unpredictable contingencies. If the estimate of
the cost of construction is inaccurate, we may be required to advance
additional funds to complete construction. If our appraisal of the value of the
completed project proves to be overstated, we may have inadequate security for
the repayment of the loan upon completion of the project.
Our consumer loans generally have a higher risk of default than our other
loans. Our consumer loans include personal loans and lines of credit available
to individuals for various purposes including the purchase of automobiles,
boats, other recreational vehicles, home improvements and personal investments.
Consumer loans entail greater risk than our other loans, particularly in the
case of consumer loans that are unsecured or secured by rapidly depreciating
assets. In these cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on these loans. Consumer loans, including
installment, home equity, and unsecured lines of credit, were $58.0 million, or
13.2% of our loan portfolio, at March 31, 2001.
8
Our agricultural loans involve a high degree of risk, and the ability of the
borrower to repay may be affected by many factors outside of the borrower's
control. At March 31, 2001, agricultural loans totaled $40.7 million, or 9.3%
of our total loan portfolio. At that date, the agricultural portfolio was made
up of loans to greenhouse operations totaling $17.3 million, loans to poultry
producers totaling $9.5 million and loans to dairy operations of $4.4 million,
with the balance of $9.5 million diversified over a wide range of agricultural
businesses, including hog, cattle and cash crop production. Payments on
agricultural loans are dependent on the profitable operation or management of
the agribusiness. The success of the business may be affected by many factors
outside the control of the agribusinessperson, including adverse weather
conditions that prevent the planting of a crop or limit crop yields (like hail,
drought, and floods), loss of livestock due to disease or other factors,
declines in market prices for agricultural products (both domestically and
internationally) and the impact of government regulations (including changes in
price supports, subsidies and environmental regulations). An occurrence of any
of these could affect the ability of the borrower to repay their loan
indebtedness or cause a rapid decrease in the value of the collateral securing
that indebtedness, and have an adverse effect on our profitability.
We may experience difficulties in managing our growth.
While our rate of growth, in percentage terms, is expected to decline as
compared to historical levels, we intend to continue to pursue a growth
strategy. To sustain our continued growth, we may require additional funding to
support increased lending activities. Customer deposits are our principal
source of funds. As part of our strategy to increase our deposits and loan
growth, we intend to expand into additional communities and seek to strengthen
our position in our current markets by opening additional branch offices. While
we have achieved operational profitability at a few of our new branches in 6
months, we normally expect to achieve operational profitability at a new
facility in 18 to 24 months. This period of initial unprofitability is due to
the impact of relatively fixed overhead expenses and the lag time associated
with generating loans and deposits. To the extent that we undertake growth
initiatives, we are likely to continue to experience the effects of higher
operating expenses relative to operating income from the new operations, which
may have an adverse affect on our levels of net income, return on average
equity and return on average assets.
In addition, we may acquire banks, related businesses or branches of other
banks that we believe provide a strategic fit with our business. To the extent
that we grow through acquisitions, we cannot assure you that we will be able to
adequately or profitably manage this growth. Acquiring other banks, businesses,
or branches involves risks commonly associated with acquisitions, including:
. potential exposure to unknown or contingent liabilities of banks,
businesses, or branches we acquire;
. exposure to potential asset quality issues of the acquired banks,
businesses, or branches;
. difficulty and expense of integrating the operations and personnel of
banks, businesses, or branches we acquire;
. potential disruption to our business;
. potential diversion of our management's time and attention;
. the possible loss of key employees and customers of the banks,
businesses, or branches we acquire; and
. the need for financial reporting purposes to record and amortize core
deposit premiums and/or goodwill.
9
We rely heavily on our management and other key personnel, and the loss of any
of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our management
team, including our Chairman and Chief Executive Officer, the President and
Chief Executive Officer of Macatawa Bank, and our other senior managers. Losing
one or more key members of the management team could adversely affect our
operations. We do not maintain key man life insurance on any of our officers or
directors.
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for deposits, loans and other financial services with numerous
Michigan-based and out-of-state banks, thrifts, credit unions and other
financial institutions as well as other entities that provide financial
services. Some of the financial institutions and financial service
organizations with which we compete are not subject to the same degree of
regulation as we are. Most of our competitors have been in business for many
years, have established customer bases, are larger, have substantially higher
lending limits than we do and offer other services which we do not, including
brokerage, insurance, mutual funds and international banking services. The
primary competitors in our market area are Fifth Third Bancorp, Huntington
Bancshares, National City Corp., Chemical Financial Corporation, and Bank of
Holland. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. The Gramm-Leach-
Bliley Act may significantly change the competitive environment in which we
conduct business. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide
financial services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
We are subject to significant government regulation, and any regulatory changes
may adversely affect us.
The banking industry is heavily regulated under both federal and state law.
These regulations are primarily intended to protect customers, not our
creditors or shareholders. As a bank holding company, we are also subject to
extensive regulation by the Federal Reserve Board, in addition to other
regulatory and self-regulatory organizations. Our ability to establish new
facilities or make acquisitions is conditioned upon the receipt of the required
regulatory approvals from these organizations. Regulations affecting banks and
financial services companies undergo continuous change, and we cannot predict
the ultimate effect of these changes, which could have a material adverse
effect on our profitability or financial condition.
We continually encounter technological change, and we may have fewer resources
than our competitors to continue to invest in technological improvements.
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as creating additional
10
efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. There can be no
assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services
to our customers.
Our articles of incorporation and by-laws and the laws of Michigan contain
provisions that could make a takeover more difficult.
Our articles of incorporation and by-laws, and the laws of Michigan, include
provisions which are designed to provide our board of directors with time to
consider whether a hostile takeover offer is in our company's best interest and
the best interests of our shareholders. These provisions, however, could
discourage potential acquisition proposals and could delay or prevent a change
in control. The provisions also could diminish the opportunities for a holder
of our common stock to participate in tender offers, including tender offers at
a price above the then-current price for our common stock. These provisions
could also prevent transactions in which our shareholders might otherwise
receive a premium for their shares over then-current market prices, and may
limit the ability of our shareholders to approve transactions that they may
deem to be in their best interests.
The Michigan Business Corporation Act contains provisions intended to
protect shareholders and prohibit or discourage various types of hostile
takeover activities. In addition to these provisions and the provisions of our
articles of incorporation and by-laws, federal law requires the Federal Reserve
Board's approval prior to acquisition of "control" of a bank holding company.
All of these provisions may have the effect of delaying or preventing a change
in control at the company level without action by our shareholders, and could
adversely affect the price of our common stock.
We may not be able to continue to pay dividends on our common stock.
We are a holding company and substantially all of our assets are held by our
bank. Our ability to continue to make dividend payments to our shareholders
will depend primarily on available cash resources at the holding company level
and dividends from our bank. Dividend payments or extensions of credit from our
bank are subject to regulatory limitations, generally based on capital levels
and current and retained earnings, imposed by regulatory agencies with
authority over our bank. The ability of our bank to pay dividends is also
subject to its profitability, financial condition, capital expenditures and
other cash flow requirements. We cannot assure you that our bank will be able
to pay dividends to us in the future.
There is a limited trading market for our common stock.
The price of our shares of common stock subject to this offering may be
greater than the market price for our common stock following the offering. Our
common stock is reported on the Nasdaq SmallCap Market under the symbol "MCBC."
We have filed an application with Nasdaq for listing on the Nasdaq National
Market System. The development and maintenance of an active public trading
market depends, however, upon the existence of willing buyers and sellers, the
presence of which is beyond our control or the control of any market maker.
While we are a publicly-traded company, the volume of trading activity in our
stock is still relatively limited. Even if a more active market develops, there
can be no assurance that such a market will continue, or that our shareholders
will be able to sell their shares at or above the offering price.
11
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $ million
from the sale of 1,400,000 shares of our common stock in this offering, at an
assumed public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters' over-allotment option is exercised
in full, we estimate that our net proceeds will be approximately $ million.
We will use the net proceeds from this offering to strengthen our capital
position in anticipation of future growth, to repay $4.0 million of
indebtedness, and for other general corporate purposes. After repaying $4.0
million of indebtedness, we will immediately contribute approximately $3.0
million of the net proceeds to Macatawa Bank to strengthen Macatawa Bank's
capital position. The remainder of the net proceeds will be deposited in our
account at Macatawa Bank, and will be available for contribution to our bank's
capital from time to time as needed and for general corporate purposes.
We have an $8.0 million credit facility with a correspondent commercial bank
that will expire on September 26, 2001. At March 31, 2001, we had $4.0 million
outstanding under this credit facility. The weighted average cost of the
outstanding balance drawn on this credit facility was 6.9% at March 31, 2001.
We intend to pay off our outstanding balance under this credit facility out of
the net proceeds of this offering.
12
CAPITALIZATION
The following table sets forth our unaudited total deposits, indebtedness
and capitalization at March 31, 2001, and as adjusted to reflect the issuance
and sale of 1,400,000 shares at an assumed offering price of $ per share and
the application of the net proceeds. The following table has also been adjusted
for the 3% stock dividend distributed May 4, 2001. This information should be
read in conjunction with our consolidated financial statements and the related
notes.
March 31, 2001
------------------
As
Actual Adjusted
-------- --------
(Dollars in
thousands)
Deposits:
Noninterest-bearing deposits.............................. $ 45,498 $ 45,498
Interest-bearing deposits................................. 373,214 373,214
-------- --------
Total deposits.......................................... $418,712 $418,712
======== ========
Indebtedness:
Long-term and short-term debt............................. $ 4,000 $ -0-
Advances from the Federal Home Loan Bank.................. 62,588 62,588
-------- --------
Total indebtedness...................................... $ 66,588 $ 62,588
======== ========
Shareholders' equity:
Preferred stock, no par value, 500,000 shares authorized,
no shares issued and outstanding......................... $ -0- $ -0-
Common stock, no par value, 9,500,000 shares authorized,
3,696,789 shares issued and outstanding, 5,096,789 shares
as adjusted(1)........................................... 38,653
Retained earnings......................................... 211 211
Accumulated other comprehensive income, net of income
tax...................................................... 471 471
-------- --------
Total shareholders' equity.............................. $ 39,335 $
======== ========
Total deposits, indebtedness and shareholders' equity..... $524,635 $
======== ========
Company regulatory capital ratios:
Total capital to risk-weighted assets..................... 9.9% %
Tier 1 capital to risk-weighted assets.................... 8.7% %
Tier 1 leverage ratio..................................... 7.7% %
Bank regulatory capital ratios:(2)
Total capital to risk-weighted assets..................... 10.7% 11.4%
Tier 1 capital to risk-weighted assets.................... 9.5% 10.1%
Tier 1 leverage ratio..................................... 8.3% 8.9%
-----------------
(1) The number of shares outstanding after the offering excludes 167,787
shares issuable upon the exercise of outstanding options and 78,641 shares
reserved for future issuance under our stock option and purchase plans.
See "Management--Executive Compensation." This number also assumes that
the underwriters' over-allotment option is not exercised. If the over-
allotment is exercised in full, we will issue and sell an additional
210,000 shares.
(2) The as adjusted column assumes the contribution of $3.0 million of the net
proceeds of the offering to the bank.
13
DILUTION
The net tangible book value of our common stock at March 31, 2001 was $39.3
million, or $10.64 per share. After giving effect to this offering at an
assumed price of $ per share, the net tangible book value of our common
stock at March 31, 2001 would have been $ million, or $ per share. This
represents an immediate dilution to investors of $ per share, as illustrated
by the following table:
Offering price per share............................................... $
Net tangible book value per share of common stock at March 31, 2001.... $
Increase per share of common stock attributable to new investors.......
Pro forma net tangible book value per share of common stock after the
offering(1)...........................................................
Dilution per share of common stock to new investors(1)................. $
-----------------
(1) The number of shares outstanding after the offering excludes 167,787 shares
issuable upon the exercise of outstanding options and 78,641 shares
reserved for future issuance under our stock option and purchase plans. See
"Management--Executive Compensation." This number also assumes that the
underwriters' over-allotment option is not exercised. If the over-allotment
is exercised in full, we will issue and sell an additional 210,000 shares.
14
MARKET FOR COMMON STOCK
Our common stock has been quoted on the Nasdaq SmallCap Market since
December 27, 1999. From the completion of our initial public offering in April
1998 through December 27, 1999, our common stock was quoted on the OTC Bulletin
Board. High and low bid prices (as reported on the OTC Bulletin Board) and high
and low sales prices (as reported on the Nasdaq SmallCap Market) for each
quarter are included in the following table. The following table reflects an
adjustment to our historical share data for the 3% stock dividend we
distributed on May 4, 2001.
High Low
------ ------
1998
Second quarter................................................ $14.81 $14.08
Third quarter................................................. 16.02 13.59
Fourth quarter................................................ 16.99 14.56
1999
First quarter................................................. $16.50 $14.32
Second quarter................................................ 15.05 13.11
Third quarter................................................. 15.05 13.59
Fourth quarter................................................ 15.53 12.62
2000
First quarter................................................. $15.05 $12.75
Second quarter................................................ 13.47 11.17
Third quarter................................................. 12.86 10.32
Fourth quarter................................................ 13.59 10.68
2001
First quarter................................................. $14.56 $12.99
Second quarter (through May , 2001)..........................
These quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual transactions. The quotations do
not include intra-day highs or lows. At May , 2001, the closing sales price
of our common stock was $ .
At March 31, 2001, we had approximately 2,600 shareholders, consisting of
approximately 650 owners of record and approximately 1,950 beneficial owners of
our common stock.
DIVIDEND POLICY
We declared our first cash dividend during the fourth quarter of 2000. The
dividend amount was $.07 per share and was paid December 29, 2000. We paid a
second cash dividend of $.07 per share on March 29, 2001. On May 4, 2001, we
distributed a 3% stock dividend to our shareholders.
We intend to continue to declare quarterly cash dividends in the future. We
may also consider declaring stock dividends on an annual basis. We are
expecting to obtain the funds for the payment of future cash dividends from the
dividends we receive from Macatawa Bank out of its earnings. However, there can
be no assurance that we will have the financial resources to continue to pay
dividends in the future.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Michigan corporation and are the bank holding company for Macatawa
Bank. Macatawa Bank commenced operations on November 25, 1997. We provide a
full range of commercial and consumer banking services, as well as trust
services through a network of 13 full service branches located in communities
in Ottawa County, northern Allegan County and southwestern Kent County,
Michigan.
While maintaining asset quality and improving profitability, we have
experienced rapid and substantial growth since opening in November 1997. Assets
have grown from $189.2 million at year end 1998, to $528.3 million at March 31,
2001. We first became profitable in 1999 with net income for that year of $693
thousand. Net income increased to $3.3 million for 2000 and our net income for
the first quarter of 2001 was $1.1 million as compared with $527 thousand for
the first quarter of 2000. We became fully taxable for federal and state taxes
in August 2000. At December 31, 2000, we had 13 branch banking offices and 3
service facilities. We completed an underwritten initial public offering of our
common stock in April 1998, resulting in net proceeds of $14.1 million. Prior
to that offering, we raised $8.2 million in a private offering for the initial
capitalization of our bank. In June 1999, we completed an offering of common
stock to our shareholders resulting in net proceeds of $14.6 million.
Financial Condition
Summary. Our total assets increased to $528.3 million at March 31, 2001 from
$499.8 million at December 31, 2000 and $344.9 million at December 31, 1999.
This was an increase of $154.9 million or 44.9% for the year 2000 and an
increase of $28.5 million or 5.7% for the first quarter of 2001. We believe the
strong asset growth reflects the acceptance of our community banking philosophy
in the growing communities we serve. Our asset growth consists primarily of
growth in our loan portfolio as we continue to attract new loan customers
despite the strong competition from other locally based community banks and
larger regional banks. We anticipate continued growth in total assets, due to
our ability to capture additional market share, continued economic growth in
our market area and, in part, due to the consolidation of our local competitors
into large out-of-state regional banks.
Strong deposit growth principally funded our increased total assets. Our
total deposits grew to $418.7 million at March 31, 2001 from $398.6 million at
December 31, 2000 and $279.4 million at December 31, 1999. This was an increase
of $119.2 million or 42.7% for the year 2000 and an increase of $20.1 million
or 5.0% for the first quarter of 2001. We attribute the strong deposit growth
to our quality customer service, the desire of our customers to bank with a
local bank, and convenient accessibility through the expansion of our branch
network. As we continue to grow, we expect our percentage rate of growth to
decline.
Cash and Cash Equivalents. Our cash and cash equivalents, which include
federal funds sold and short-term investments, were $23.5 million at March 31,
2001, $26.3 million at December 31, 2000 and $20.6 million at December 31,
1999. The increase during 2000, as compared to 1999, was due to higher levels
of customer deposit activity at year end. The decrease during the first quarter
of 2001 reflected our return to more normal levels of cash and cash
equivalents.
Securities. All of the securities we purchase are classified as "available
for sale" and may be sold to meet our liquidity needs. The primary objective of
our investing activities is to provide for the safety of the principal
invested. Our secondary considerations include increased earnings, increased
liquidity and
16
decreased overall exposure to changes in interest rates. Our securities
available for sale increased to $51.8 million at March 31, 2001 from $48.7
million at December 31, 2000 and from $28.3 million at December 31, 1999. This
was an increase of $20.4 million or 72.1% during the year 2000 and an increase
of $3.1 million or 6.4% during the first quarter of 2001. The increase was the
result of purchasing additional securities as a means of strengthening our
liquidity ratio. We expect continued growth of our securities portfolio
generally consistent with the growth of our company in order to maintain
appropriate levels of liquidity. Additionally, we expect securities to
increase in the upcoming quarters as we invest the proceeds of this offering,
pending their deployment in loans and other earning assets.
The following table sets forth the amount of securities available for sale
at the end of each period.
At December 31,
At March 31, ---------------
2001 2000 1999
------------ ------- -------
(In thousands)
U. S. Treasury and U.S. Government Agencies... $45,197 $45,991 $27,337
Michigan municipal bonds...................... 6,621 2,678 944
------- ------- -------
$51,818 $48,669 $28,281
======= ======= =======
Excluding our holdings in the investment portfolio of U.S. Treasury and
U.S. Government Agency Securities, we had no investments in securities of any
one issuer which exceeded 10% of our shareholders' equity.
The following is a schedule of maturities and the weighted average yield of
each category of securities we held at March 31, 2001.
Maturing
-----------------------------------------------------------------------------------
Investments
With No
Due Within One One to Five Five to Ten Contractual
Year Years Years After Ten Years Maturity
--------------- --------------- --------------- --------------- ---------------
Estimated Estimated Estimated Estimated Estimated
Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(Dollars in thousands)
Available for sale:
U.S. Treasury And U.S.
Government Agencies... $13,109 6.51% $28,431 6.11% $3,657 5.40% $ 0 0% $ 0 0%
Tax-Exempt MI municipal
bonds................. 0 0% 0 0% 1,886 4.52% 4,735 4.91% 0 0%
------- ---- ------- ---- ------ ---- ------ ---- --- ---
Total.................. $13,109 6.51% $28,431 6.11% $5,543 5.09% $4,735 4.91% $ 0 0%
======= ==== ======= ==== ====== ==== ====== ==== === ===
Loan Portfolio. Our total loan portfolio increased to $438.5 million at
March 31, 2001 as compared to $410.7 million at December 31, 2000 and $285.4
million at December 31, 1999. The majority of loans we make are to small and
mid-sized businesses in the form of commercial and commercial real estate
loans. Our combined commercial loans totaled $318.1 million at March 31, 2001,
up from $293.5 million at December 31, 2000 and from $201.4 million at
December 31, 1999. That was an increase of $92.1 million or 45.7% for 2000 and
$24.6 million or 8.4% for the first quarter of 2001. Our total combined
commercial loans accounted for 72.6% of our total loans at March 31, 2001 and
for 71.4% of our total loan portfolio at year-end for both 2000 and 1999.
Our commercial loan portfolio comprised 53.2% of our total loan portfolio
at March 31, 2001. Our commercial loans totaled $233.4 million at March 31,
2001, $214.1 million at December 31, 2000, and $147.2 million at December 31,
1999.
17
Our commercial real estate portfolio comprises approximately 19.3% of our
total loan portfolio and includes both loans to businesses for real estate and
loans to residential home developers as well. Our commercial real estate loans
totaled $84.7 million at March 31, 2001, $79.4 million at December 31, 2000,
and $54.2 million at December 31, 1999. Most of the commercial real estate
loans we make are on owner-occupied real estate.
Our residential real estate loan portfolio, which also includes residential
construction loans made to the individual home owner, comprises 14.2% of our
total loans. However, our residential loan origination volume is significantly
higher, with only a small portion of the residential home loans retained for
our own portfolio. We originated $46.6 million in residential mortgages in the
first quarter of 2001, $91.5 million for 2000, and $105.0 million for 1999. The
higher overall interest rate levels we experienced during most of 2000 resulted
in lower levels of residential refinancing and, as a result, lowered our
overall loan originations as compared to 1999. Due to lower interest rates in
the first quarter of 2001, residential loan origination volume increased
significantly, and we are expecting it to remain higher as long as interest
rates remain favorable for mortgage originations.
Our consumer loan portfolio includes both loans secured by personal
property, as well as home equity fixed term and line of credit loans. Our home
equity loans totaled $34.0 million at March 31, 2001, $33.5 million at December
31, 2000, and $22.1 million at December 31, 1999. Approximately 89.0% of our
home equity loans are underwritten with a loan to value ratio of less than
90.0%, and are considered by us to be well collateralized.
The following table reflects the composition of our loan portfolio and the
corresponding percentage of our total loans represented by each class of loans
as of the dates indicated.
At December 31,
At March 31, ----------------------------
2001 2000 1999
------------- ------------- -------------
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
(Dollars in thousands)
Commercial................ $233,381 53% $214,098 52% $147,232 52%
Commercial real estate.... 84,723 19 79,444 19 54,160 19
Residential real estate... 62,366 14 60,822 15 44,734 15
Consumer.................. 57,985 14 56,312 14 39,248 14
-------- --- -------- --- -------- ---
Total loans............. 438,455 100% 410,676 100% 285,374 100%
=== === ===
Less:
Allowance for loan
losses................... (6,243) (5,854) (3,995)
-------- -------- --------
Total loans receivable,
net.................... $432,212 $404,822 $281,379
======== ======== ========
18
The following table shows our total loans outstanding at March 31, 2001
which, based on remaining scheduled repayments of principal, are due in the
periods indicated.
Maturing
---------------------------------------------
1 -5
Within 1 Year Years After 5 years Total
------------- -------- ------------- --------
(In thousands)
Commercial.................. $124,991 $102,654 $ 5,736 $233,381
Commercial real estate...... 14,320 68,322 2,081 84,723
Residential real estate..... 7,362 12,033 42,971 62,366
Consumer.................... 7,133 33,334 17,518 57,985
-------- -------- ------- --------
Totals.................... $153,806 $216,343 $68,306 438,455
======== ======== =======
Allowance for loan losses... (6,243)
--------
Total loans receivable,
net...................... $432,212
========
Below is a schedule of our loan amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates at March
31, 2001.
Interest Sensitivity
-------------------------------
Fixed
Rate Variable Rate Total
-------- ------------- --------
(In thousands)
Due within three months.................... $ 21,243 $176,073 $197,316
Due after three months within one year..... 38,536 737 39,273
Due after one but within five years........ 154,477 21,229 175,706
Due after five years....................... 23,897 2,263 26,160
-------- -------- --------
Total.................................... $238,153 $200,302 438,455
======== ========
Allowance for loan losses.................. (6,243)
--------
Total loans receivable, net.............. $432,212
========
Nonperforming Assets. Our nonperforming loans include loans on nonaccrual,
restructured loans, as well as loans delinquent by more than 90 days, but that
are still accruing. Our total nonperforming loans at March 31, 2001 totaled $60
thousand, as compared to $196 thousand at December 31, 2000 and $101 thousand
at December 31, 1999. Our loan performance is reviewed regularly by an external
loan review team, our own loan officers, and our senior management. When
reasonable doubt exists concerning collectibility of the interest or principal
of one of our loans, that loan will be placed on nonaccrual status. Any
interest previously accrued but not collected at that time will be reversed and
charged against current earnings. At March 31, 2001, we had no other interest
bearing assets which required classification. We are not aware of any
recommendations by regulatory agencies, which, if implemented, would have a
material impact on our liquidity, capital or operations.
19
The following table shows the composition and amount of our nonperforming
assets.
At December 31,
At March 31, -------------------
2001 2000 1999 1998
------------ ----- ----- -----
(Dollars in thousands)
Nonaccrual loans......................... $60 $ 155 $ 101 $ --
Loans 90 days or more delinquent and
still accruing interest................. -- 41 -- --
Restructured loans....................... -- -- -- --
--- ----- ----- -----
Total nonperforming loans................ 60 196 101 --
Other real estate owned.................. 29 -- -- --
--- ----- ----- -----
Total nonperforming assets............... $89 $ 196 $ 101 $ --
=== ===== ===== =====
Nonperforming loans to total loans....... .01% .04% .04% .00%
Nonperforming assets to total assets..... .02% .04% .03% .00%
The following is a summary of our loan balances at the end of each period
and the daily average balances of those loans. It also includes changes in the
allowance for possible loan losses arising from loans we may have had to charge
off, recoveries on loans we have previously charged off, and additions to the
allowance we have expensed.
At or for At or for the years
the three months ended December 31,
ended March 31, ----------------------------
2001 2000 1999 1998
---------------- -------- -------- --------
(Dollars in thousands)
Loans:
Average daily balance of loans
for the period............... $425,631 $347,351 $213,472 $ 60,299
Amount of loans outstanding at
end of period................ 438,455 410,676 285,374 137,882
Allowance for loan losses:
Balance at beginning of
period....................... $ 5,854 $ 3,995 $ 2,030 $ 7
Addition to allowance charged
to operations................ 522 1,931 1,967 2,023
Loans charged-off............ (144) (87) (6) --
Recoveries................... 11 15 4 --
-------- -------- -------- --------
Balance at end of period........ $ 6,243 $ 5,854 $ 3,995 $ 2,030
======== ======== ======== ========
Ratios:
Net charge-offs to average
loans outstanding............ 0.03% .02% .00% .00%
Allowance for loan losses to
loans outstanding at period
end.......................... 1.42% 1.43% 1.40% 1.47%
Allowance for Loan Losses. Our allowance for loan losses at March 31, 2001
was $6.2 million, an increase from $5.9 million at December 31, 2000 and $4.0
million at December 31, 1999. In each of these periods, our allowance for loan
losses ranged from 1.40% to 1.50% of our total loans outstanding. We have not
experienced any material credit losses in our three plus years of operations.
First quarter net charge-offs totaled $133 thousand, which was the largest
quarter of losses since our inception. However, this represented only .03% of
average loans for the quarter and is still considered by management to be an
exceptional level within the banking industry. Although our level of
delinquencies has been historically low, due to the short history of our loan
portfolio and the significant increases in loans we have originated since we
began operations, we cannot assure you that we will not experience an increase
in delinquencies and losses as our loans continue to mature. Our allowance for
loan losses is maintained at a level our
20
management considers appropriate based upon their assessment of relevant
circumstances. Our management prepares a quarterly evaluation of the allowance
for loan losses. The analysis is based upon a number of factors, including a
continuous review of our loan portfolio, our own loan loss experience, the
banking industry's historical loan loss experience, known and inherent risks
included in our loan portfolio, the composition of our loans, growth of our
portfolio, and current economic conditions.
As part of the analysis, our management assigns a portion of the loan loss
allowance to our entire portfolio by loan type and loan grade, and to specific
credits that have been identified as problem loans, and also reviews our past
loss experience. Our local economy and particular concentrations are
considered, as well as a number of other factors. While the commercial loan
portfolio has performed very well during our first three plus years of
existence, the allowance does reflect a higher percentage allocation against
that portfolio due to management's assessment of inherently higher risks in
commercial lending. By their very nature, commercial loans generally have a
high degree of risk due to:
. their high dollar amounts;
. the great discrepancy between the business activities of each customer;
. the collateral for each loan is extremely varied;
. the need to have more information and detail and in-depth underwriting;
and
. each customer's ability to repay their obligation may be dramatically
affected by overall economic conditions.
The following table shows the allocation of the allowance for loan loss at
the dates indicated to the extent specific allocations have been determined
relative to particular loans.
At December 31,
--------------------------------------------------------
At March 31, 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------
% of % of % of % of
each each each each
category category category category
Allowance to total Allowance to total Allowance to total Allowance to total
Amount loans Amount loans Amount loans Amount loans
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands)
Commercial and
commercial real
estate................. $4,241 72.6% $3,902 71.5% $2,784 70.6% $1,422 69.4%
Residential real
estate................. 168 14.2 176 14.8 112 15.7 57 16.3
Consumer................ 468 13.2 435 13.7 297 13.7 165 14.3
Unallocated............. 1,366 0.0 1,341 0.0 802 0.0 386 0.0
------ ----- ------ ----- ------ ----- ------ -----
Total.................. $6,243 100.0% $5,854 100.0% $3,995 100.0% $2,030 100.0%
====== ===== ====== ===== ====== ===== ====== =====
The above allocations are not intended to imply limitations on usage of our
loan loss allowance. The entire allowance is available for any loan losses
without regard to loan type.
Premises and Equipment. Our premises and equipment totaled $12.1 million at
March 31, 2001 and $12.3 million at December 31, 2000 as compared to $10.0
million at December 31, 1999. The increase in 2000 resulted primarily from our
purchase of a previously leased branch facility, as well as the construction of
a full service branch to replace a temporary storefront branch. Additionally,
we invested in a proof processing imaging system that efficiently captures
check images as items are processed. This allows electronic retrieval of check
images by our staff, and in the future it will enable us to provide images to
our customers through on-line inquiries.
21
For the first quarter of 2001, our investment in additional premises and
equipment was relatively small. However, we expect significant increases in the
latter part of 2001 and through 2002. Presently we are completing the build out
of a new leased branch in Grandville, have secured a site to relocate our
Hudsonville branch in a new full service facility and have preliminary plans to
construct a new company headquarters and a new branch in the City of Holland.
We have entered into a buy-sell agreement on a parcel of land between Holland
and Zeeland where we plan to construct a 25,000 to 30,000 square foot facility
that will house our administration, human resources, trust, loan underwriting
and processing, and proof and deposit operations. The estimated cost to
purchase the land and complete the construction is $6.2 million. We presently
intend to fund the cost of the new headquarters building with long-term debt
financing. Our current intention for the next several years is to open at least
two additional branches each year, subject to economic conditions, our
continued success in penetrating new markets, our ability to find appropriate
branch sites and hire qualified employees, our evaluation of costs and other
factors.
Deposits. Deposits are gathered from the communities we serve through our
network of 13 branches. We offer business and consumer checking accounts,
regular and money market savings accounts, and certificates of deposit having
many options in their terms.
Our total deposits increased to $418.7 million at March 31, 2001, an
increase from $398.6 million at December 31, 2000 and from $279.4 million at
December 31, 1999. We believe these increases were substantially a result of
deposits from new customers. Noninterest bearing demand accounts comprised
10.9% of our total deposits at March 31, 2001, compared to 12.7% at year end
2000 and 1999. Savings accounts and NOW accounts comprised 45.8% of our total
deposits at March 31, 2001, a decrease from 48.3% at the end of 2000 and 54.2%
at the end of 1999. Time accounts increased as a percent of our total deposits
to 43.3% at March 31, 2001, compared to 38.9% at the end of 2000 and 33.5% at
the end of 1999. We attribute the growth in time accounts to our competitive
pricing which allows us to maintain current customer accounts while attracting
new customers and new funds. We set our deposit pricing to be competitive with
other banks in our market area, without being the price leader. This has
enabled us to increase deposits from new, as well as existing customers, while
maintaining a strong net interest margin. We periodically purchase brokered
deposits to supplement our funding sources. These are time accounts originated
outside of our local market area. These brokered deposits comprised 5.7% of
total deposits at March 31, 2001, as compared to 4.1% at the end of 2000 and
2.3% at the end of 1999. Our present policy is to limit brokered deposits to a
maximum of 10% of our total deposits.
The following table sets forth the average deposit balances and the weighted
average rates paid thereon.
Average for the
three months Average for the years ended December 31,
ended March 31, -------------------------------------------------
2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------- -------- ------- -------- ------- ------- -------
(Dollars in thousands)
Noninterest bearing
demand................. $ 43,411 0% $ 39,946 0% $ 27,186 0% $ 8,991 0%
NOW accounts............ 50,585 2.3% 45,246 2.6% 29,721 2.6% 10,420 3.0%
MMDA/Savings............ 137,960 4.2% 131,069 4.7% 97,849 4.2% 35,743 4.7%
Time.................... 168,042 6.4% 123,756 6.4% 68,629 5.5% 20,899 5.7%
-------- --- -------- --- -------- --- ------- ---
Total Deposits......... $399,998 4.4% $340,017 4.5% $223,385 3.9% $76,053 4.2%
======== === ======== === ======== === ======= ===
22
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity at March 31, 2001:
At March 31, 2000
-----------------
Amount
(In thousands)
Three months or less..................................... $36,220
Over 3 months through 6 months........................... 13,808
Over 6 months through 1 year............................. 32,398
Over 1 year.............................................. 16,644
-------
$99,070
=======
Borrowed Funds. Borrowed funds totaled $66.6 million at March 31, 2001 as
compared to $61.2 million at December 31, 2000 and $30.0 million at December
31, 1999. Borrowed funds increased $31.2 million or 104.0% for 2000 and
increased $5.4 million or 8.8% during the three months ended March 31, 2001.
Borrowed funds consist principally of advances from the Federal Home Loan Bank.
Borrowed funds also include Federal Funds we purchase, which we use to settle
our daily cash letter position with our correspondent banks. Additionally, we
secured a $5.0 million credit facility in September 2000, which was
subsequently increased to $8.0 million in March 2001. At March 31, 2001, $4.0
million had been advanced on the credit facility and contributed to the capital
of Macatawa Bank to enable the bank to maintain its regulatory capital at the
well-capitalized level. The total outstanding balance we have on this credit
facility will be repaid out of the proceeds of this offering.
Retained Earnings. In May 2001 we distributed a 3% stock dividend resulting
in the transfer of $1.8 million from our retained earnings to our common stock.
After adjusting for the stock dividend, we had retained earnings of $211
thousand at March 31, 2001 as compared to $1.1 million at year end 2000 and a
retained deficit of $2.0 million at year end 1999. The retained deficit at the
end of 1999 was primarily the result of our start-up losses for two months of
1997, and full year 1998. Our losses in our initial year included normal
operating expenses, loan loss provision on our new and rapidly growing loan
portfolio, and costs associated with expanding our branch network. Our
management believes that the expenditures made in 1997 and 1998 created the
infrastructure and laid the foundation for our future growth and profitability
in subsequent years. We had net income of $3.3 million in 2000, an increase
from $693 thousand in 1999. Our quarterly net income was $1.1 million for the
three months ended March 31, 2001 as compared to $527 thousand for the three
months ended March 31, 2000. We also paid out cash dividends totaling $251
thousand during the year ended December 31, 2000 and again in the first quarter
of 2001. There were no dividends paid out during either 1999 or 1998.
23
Results of Operations -- Comparison of our operating results for the three
months ended March 31, 2001 and 2000.
Summary of Results. Our net income for the quarter ended March 31, 2001, was
$1.1 million, an increase of $564 thousand over the same period for 2000. The
primary reason for the 107.2% increase in net income was our continued earning
asset growth resulting in an increase of net interest income. This increase was
partially offset by additional income tax as we became fully taxable in August
2000. The following table summarizes net income and key performance measures
for the two periods presented.
For the
three months
ended March
31,
-------------
2001 2000
------ -----
(Dollars in
thousands,
except per
share
amounts)
Net Income.................................................... $1,091 $ 527
Basic earnings per share.................................... $ .30 $ .14
Diluted earnings per share.................................. $ .29 $ .14
Earnings ratios:
Return on average assets(1)................................. .86% .58%
Return on average equity(1)................................. 10.27% 6.23%
Average equity to average assets............................ 8.36% 9.35%
Dividend payout ratio....................................... 24.14% 0.00%
Efficiency ratio............................................ 61.85% 74.28%
Net interest margin(1)...................................... 4.03% 4.15%
-----------------
(1) The ratio has been annualized and is not necessarily indicative of the
results for the entire year.
Our net income for the three months ended March 31, 2001 improved
dramatically over net income for the three months ended March 31, 2000 as a
result of improved net interest income. Continued strong growth in loans and
deposits were primarily responsible for the increases in our net interest
income. Net interest income for the quarter ended March 31, 2001 was $4.8
million compared to $3.5 million for the quarter ended March 31, 2000, an
increase of 37.1%.
Our noninterest income totaled $828 thousand for the quarter ended March 31,
2001, as compared to $406 thousand for the quarter ended March 31, 2000.
Noninterest expense totaled $3.5 million for the quarter ended March 31, 2001,
as compared to $2.9 million for the quarter ended March 31, 2000.
Analysis of Net Interest Income. The following schedule presents, for the
periods indicated, information regarding:
. our total dollar amount of interest income from average earning assets
and the resultant average yields;
. our total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost;
. our net interest income;
. our interest rate spread; and
. our net yield on average earning assets.
24
For the three months ended March 31,
-----------------------------------------------------
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........ $ 44,005 $ 687 6.16% $ 28,048 $ 414 5.84%
Tax-exempt securities
(1)...................... 3,339 41 7.60% 1,014 13 7.99%
Loans (2)................. 425,631 9,482 8.93% 301,922 6,611 8.69%
Federal funds sold........ 689 9 5.50% 1,308 19 5.70%
Short-term investments.... 144 2 5.45% 299 2 2.40%
Federal Home Loan Bank
stock.................... 3,003 59 7.87% 2,312 47 8.00%
-------- ------- -------- ------
Total interest earning
assets................. 476,811 10,280 8.65% 334,903 7,106 8.43%
Noninterest earning
assets:
Cash and due from banks.. 20,546 17,513
Other.................... 11,237 8,848
-------- --------
Total assets............ $508,594 $361,264
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
Now and money market
accounts................ $177,432 1,701 3.89% $146,523 1,466 4.06%
Savings.................. 10,979 50 1.85% 7,859 37 1.96%
IRAs..................... 10,294 161 6.33% 6,247 89 5.67%
Time deposits............ 157,748 2,534 6.51% 100,135 1,465 5.93%
Short-term borrowings:
Federal funds borrowed... 3,459 51 5.86% 1,702 25 6.00%
Other borrowings......... 64,060 952 5.94% 31,318 487 6.15%
-------- ------- -------- ------
Total interest bearing
liabilities............ 423,972 5,449 5.20% 293,784 3,569 4.87%
Noninterest bearing
liabilities:
Noninterest bearing
demand accounts......... 43,411 31,920
Other noninterest bearing
liabilities............. 2,394 1,762
Shareholders' equity...... 38,817 33,798
-------- --------
Total liabilities and
shareholders' equity... $508,594 $361,264
======== ========
Net interest income....... $ 4,831 $3,537
======= ======
Net interest spread....... 3.45% 3.56%
Net interest margin....... 4.03% 4.15%
Ratio of average interest-
bearing assets to average
interest-bearing
liabilities.............. 112.46% 114.00%
-----------------
(1) Yields are adjusted for tax-exempt interest.
(2) Loan fees included in interest income are not material. Nonaccrual loans
are included in average loans outstanding.
Our net interest margin was 4.03% for the quarter ended March 31, 2001, a
decrease from net interest margin of 4.15% for the quarter ended March 31,
2000. Our interest spread, which is the difference between our yield from
interest earning assets and our cost of interest bearing liabilities, was 3.45%
for the first quarter of 2001, as compared to 3.56% for the same quarter in
2000. The decrease in our net interest spread reflected the cost of our
interest-bearing liabilities increasing slightly faster than the yield of our
interest earning assets during the first quarter of 2001. Our higher cost
reflected the impact of our portfolio shifting to a larger mix of time
accounts. Time accounts, with a weighted average cost of 6.51% during the
quarter ended March 31, 2001, comprised 37.2% of our interest-bearing
liabilities for the quarter ended March 31, 2001, as compared to 34.1% for the
same period in 2000. Our average cost of time accounts was 6.51% during the
first quarter of 2001, while the cost was 5.93% over the same period in 2000.
We expect that our net interest margin will continue to contract modestly as
assets reprice faster than liabilities in response to a decrease in interest
rates. However, this trend will be at least partially mitigated by the impact
of the proceeds of this offering.
25
Rate/Volume Analysis of Net Interest Income. The following schedule presents
the dollar amount of changes in interest income and interest expense for major
components of our earning assets and interest-bearing liabilities,
distinguishing between changes related to our outstanding balances and changes
due to interest rates.
For the three months
ended March 31,
--------------------------
2001 vs 2000
--------------------------
Increase (Decrease) Due
to
--------------------------
Volume Rate Days Total
------ ---- ---- ------
(In thousands)
Interest Income
Taxable securities............................... $ 233 $ 35 $ 0 $ 268
Tax-exempt securities............................ 30 (2) 0 28
Loans............................................ 2,715 217 (61) 2,871
Federal funds sold............................... (9) 0 0 (9)
Short term investments........................... (1) 1 0 0
Federal Home Loan Bank stock..................... 14 (1) (1) 12
------ ---- ---- ------
Total interest income............................ 2,982 250 (62) 3,170
------ ---- ---- ------
Interest Expense
NOWs and money market deposit accounts........... 290 (40) (12) 238
Savings.......................................... 15 (3) 0 12
IRAs............................................. 57 16 (1) 72
Time deposits.................................... 836 244 (12) 1,068
Federal funds borrowed........................... 26 (1) 0 25
Other borrowings................................. 518 (47) (6) 465
------ ---- ---- ------
Total interest expense........................... 1,742 169 (31) 1,880
------ ---- ---- ------
Net interest income.............................. $1,240 $ 81 $(31) $1,290
====== ==== ==== ======
Provision for Loan Losses. Our provision for loan losses is the amount added
to our allowance for loan losses to absorb probable loan losses. The amount of
the provision is determined by our management, in their judgment, after
reviewing the risk characteristics of our loan portfolio, the industry's and
our own historical loan loss experience, known and inherent risks included in
our loan portfolio, and current economic conditions. Our provision for loan
losses for the quarter ended March 31, 2001 was $522 thousand, an increase from
$487 thousand at March 31, 2000. This amount was provided as a result of the
increase in the total loan portfolio. Our management considers it prudent
during the first 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 performance 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
nonperforming loans, charge-offs, and delinquencies could rise and require
further increases in the provision.
Noninterest Income. Noninterest income for the quarter ended March 31, 2001
was $828 thousand, an increase of $422 thousand, or 103.9%, over the same
period last year. Service charges on deposit accounts was the single largest
component of noninterest income and increased to $314 thousand for the quarter
ended March 31, 2001, compared to $201 thousand for the quarter ended March 31,
2000. The increased service charge income was reflective of increased customer
accounts. The largest increase in
26
noninterest income was in gain on sale of mortgage loans, which increased by
$227 thousand over first quarter 2000. The increased gains were from higher
volumes of residential mortgage financing activity as a result of the lower
interest rate market during the first quarter of 2001. Higher mortgage
refinancing activity is expected to continue as long as interest rates remain
favorable for mortgage originations. The trust department began business on
January 3, 1999. Trust revenues for the quarter ended March 31, 2001 were $180
thousand compared to $114 thousand for the quarter ended March 31, 2000. Trust
revenues continue to improve each quarter, commensurate with the growth of
trust assets. We believe trust fee income will continue to increase as the
amount of trust assets under our management increases. The following table
details the major components of noninterest income for the periods indicated.
For the
three months ended
March 31,
-------------------
2001 2000
--------- ---------
(In thousands)
Deposit service charges................................. $ 313 $ 201
Net gains on asset sales:
Loans................................................. 266 39
Securities............................................ 0 0
Trust Fees.............................................. 180 114
Other................................................... 68 52
--------- ---------
Total noninterest income............................ $ 828 $ 406
========= =========
The following schedule shows our net gains on the sale of our residential
real estate mortgage loans for the periods indicated.
For the
three months ended
March 31,
--------------------
2001 2000
--------- ---------
(Dollars in
thousands)
Real estate mortgage loans originated for sale........ $ 35,579 $ 8,036
Real estate mortgage loan sales....................... 35,845 8,075
Net gains on the sale of real estate mortgage loans... 266 39
Net gains as a percent of real estate mortgage loan
sales................................................ .74% .48%
We sell the majority of our fixed-rate residential loan originations. We do
not retain the servicing rights on mortgages that we sell.
Noninterest Expense. Noninterest expense totaled $3.5 million, an increase
of $571 thousand compared to the same quarter for 2000. Salary and benefits,
and occupancy and equipment expense increased a combined $362 thousand for the
quarter. The growth in expense levels reflected the growth in branch 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.
27
The following table details the major components of noninterest expense for
the quarters ended March 31, 2001 and 2000.
For the
three months ended
March 31,
-------------------
2001 2000
--------- ---------
(In thousands)
Salaries and employee benefits.......................... $ 1,866 $ 1,648
Occupancy and equipment................................. 295 255
Furniture and equipment expense......................... 367 263
Legal and professional fees............................. 66 51
Advertising............................................. 124 70
Supplies................................................ 85 104
Data processing fees.................................... 102 74
Other operating expenses................................ 595 464
--------- ---------
Total noninterest expense............................... $ 3,500 $ 2,929
========= =========
Results of Operations -- Comparison of our operating results for the years
ended December 31, 2000, 1999 and 1998.
Summary of Results. Our net income for 2000 totaled $3.3 million compared to
1999 net income of $693 thousand and a 1998 net loss of $2.5 million. Our
increase in income was due to the continued growth of our customer base and
respective loan and deposit portfolios, driving increased net interest income.
The following table summarizes net income and key performance measures for the
three years presented.
For the years ended
December 31,
----------------------
2000 1999 1998
------ ----- -------
(Dollars in
thousands, except
per share data)
Net income (loss)................................... $3,349 $ 693 $(2,489)
Basic earnings (loss) per share................... .91 .22 (1.18)
Earnings (loss) ratios:
Return on average assets.......................... .80% .26% (2.91%)
Return on average equity.......................... 9.31% 2.43% (15.15%)
Average equity to average assets.................. 8.63% 10.86% 19.59%
Efficiency ratio.................................. 67.94% 78.02% 110.84%
Net interest margin............................... 4.27% 4.37% 4.21%
Our net income for the year 2000 improved dramatically over 1999 net income
primarily as a result of improved net interest income. Continued strong growth
in our loans made possible by the increase in deposits received is primarily
responsible for the increases in our net interest income. Our net interest
income increased by $6.0 million or 56.6% to $16.6 million in 2000 compared to
$10.6 million in 1999.
Our noninterest income totaled $2.1 million for 2000, as compared to $1.5
million for 1999, and $683 thousand for 1998. Noninterest expense totaled $12.7
million for 2000, as compared to $9.4 million for 1999, and $4.8 million for
1998. We became fully taxable during 2000, after utilizing all tax loss carry
forwards from 1998. Our federal income tax expense totaled $699 thousand for
2000, whereas in both 1999 and 1998 we did not include a provision for tax
expense. We expect our effective tax rate for future years will be 34.0%, with
a marginal rate of approximately 33.5% due to tax-free investments.
28
Analysis of Net Interest Income. The following schedule presents, for the
periods indicated, information regarding:
. our total dollar amount of interest income from average earning assets
and the resultant average yields;
. our total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost;
. our net interest income;
. our interest rate spread; and
. our net yield on average earning assets.
For the years ended December 31,
------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- ------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Average Earned Yield Average Earned Yield
Balance or Paid or Cost Balance or Paid or Cost Balance or Paid or Cost
-------- -------- ------- -------- -------- ------- ------- -------- -------
(Dollars in Thousands)
ASSETS:
Taxable securities...... $ 35,459 $ 2,166 6.11% $ 21,444 $ 1,226 5.71% $16,471 $ 986 5.99%
Tax-exempt
securities(1).......... 1,639 86 7.56% 172 9 5.23% 0 0 0.00%
Loans(2)................ 347,351 31,788 9.15% 213,472 18,379 8.61% 60,299 5,340 8.85%
Federal funds sold...... 1,616 99 6.13% 4,166 204 4.90% 8,421 446 5.30%
Short-term investments.. 169 6 3.55% 1,132 56 4.95% 605 32 5.29%
Federal Home Loan Bank
stock.................. 2,332 193 8.28% 1,593 127 7.97% 0 0 0.00%
-------- ------- -------- ------- ------- ------
Total interest earning
assets............... 388,566 34,338 8.85% 241,979 20,001 8.27% 85,796 6,804 7.93%
Noninterest earning
assets:
Cash and due from
banks................. 18,624 12,828 4,054
Other.................. 9,707 6,694 2,220
-------- -------- -------
Total assets.......... $416,897 $261,501 $92,070
======== ======== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits:
NOW and money market
accounts.............. $159,419 6,655 4.17% $116,914 4,548 3.89% $43,336 1,915 4.42%
Savings................ 9,222 177 1.92% 6,123 117 1.91% 2,153 43 2.00%
IRAs................... 7,674 465 6.06% 4,533 247 5.45% 1,096 64 5.84%
Time deposits.......... 123,756 7,916 6.40% 68,629 3,787 5.52% 20,304 1,164 5.73%
Short-term borrowings:
Federal funds
borrowed.............. 2,022 131 6.48% 695 37 5.32% 78 4 5.13%
Other borrowings....... 38,850 2,394 6.16% 12,126 692 5.71% 0 0 0.00%
-------- ------- -------- ------- ------- ------
Total interest bearing
liabilities.......... 340,943 17,738 5.20% 209,020 9,428 4.51% 66,967 3,190 4.77%
Noninterest bearing
liabilities
Noninterest bearing
demand accounts....... 38,679 23,690 8,407
Other noninterest
bearing liabilities... 1,315 3,305 271
Shareholders' equity.... 35,960 25,486 16,425
-------- -------- -------
Total liabilities and
shareholders'
equity............... $416,897 $261,501 $92,070
======== ======== =======
Net interest income..... $16,600 $10,573 $3,614
======= ======= ======
Net interest spread..... 3.65% 3.76% 3.16%
Net interest margin..... 4.28% 4.37% 4.21%
Ratio of average
interest bearing assets
to average interest
bearing liabilities.... 113.97% 115.77% 128.12%
-----------------
(1) Yields are adjusted for tax-exempt interest.
(2) Loan fees included in interest income are not material. Nonaccrual loans
are included in average loans outstanding.
29
Our net interest margin was 4.28% for full year 2000, a decrease from 1999
net interest margin of 4.37%. Net interest margin for 1998 was 4.21%. Our
interest spread, which is the difference between our yield from interest
earning assets and our cost of interest bearing liabilities, was 3.65% for
2000, as compared to 3.76% for 1999, and 3.16% for 1998. The decrease in our
net interest spread reflected the cost of our interest-bearing liabilities
rising slightly faster than the yield of our interest earning assets during
2000. Our increasing cost reflects the impact of our portfolio shifting to a
higher mix of time accounts. Time accounts, with a weighted average cost of
6.40% during 2000, comprised 36.3% of our interest-bearing liabilities at
December 31, 2000, as compared to 32.8% at the end of 1999, and 31.1% at the
end of 1998. Our average cost of time accounts was 5.52% during 1999, while the
1998 cost was 5.73%.
Rate/Volume Analysis of Net Interest Income. The following schedule presents
the dollar amount of changes in interest income and interest expense for major
components of our earning assets and interest-bearing liabilities,
distinguishing between changes related to our outstanding balances and changes
due to interest rates.
For the years ended December 31,
-------------------------------------------------------------
2000 vs 1999 1999 vs 1998
------------------------------ -----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ -----------------------------
Volume Rate Total Volume Rate Total
--------- -------- --------- --------- ------- ---------
(In thousands)
Interest income
Taxable securities...... $ 851 $ 89 $ 940 $ 286 $ (47) $ 239
Tax-exempt securities... 77 -- 77 9 -- 9
Loans................... 12,186 1,223 13,409 13,192 (152) 13,040
Federal funds sold...... (147) 42 (105) (211) (31) (242)
Short term investments.. (38) (12) (50) 26 (2) 24
Federal Home Loan Bank
stock.................. 61 5 66 127 -- 127
--------- -------- --------- --------- ------- ---------
Total interest income.. 12,990 1,347 14,337 13,429 (232) 13,197
--------- -------- --------- --------- ------- ---------
Interest expenses
NOWs and money market
accounts............... $ 1,754 $ 353 $ 2,107 $ 2,888 $ (255) $ 2,633
Savings................. 59 1 60 76 (2) 74
IRAs.................... 188 30 218 188 (5) 183
Time deposits........... 3,446 683 4,129 2,668 (45) 2,623
Federal funds borrowed.. 84 10 94 33 -- 33
Other borrowings........ 1,643 59 1,702 692 -- 692
--------- -------- --------- --------- ------- ---------
Total interest
expense............... 7,174 1,136 8,310 6,545 (307) 6,238
--------- -------- --------- --------- ------- ---------
Net interest income.... $ 5,816 $ 211 $ 6,027 $ 6,884 $ 75 $ 6,959
========= ======== ========= ========= ======= =========
Provision for Loan Losses. Our provision for loan losses is the amount added
to our allowance for loan losses to absorb probable loan losses. The amount of
the provision is determined by our management, in their judgment, after
reviewing the risk characteristics of our loan portfolio, the industry's and
our own historical loan loss experience, known and inherent risks included in
originated loans and our loan portfolio, and current economic conditions. Our
provision for loan losses for 2000 totaled $1.9 million, approximately the same
as the 1999 provision of $2.0 million. The loan loss provision for 1998 totaled
$2.0 million. While we have not sustained any significant losses in our loan
portfolio, our management considers it prudent during the first years of our
operations to provide for loan losses at a level which is consistent with
levels maintained by banks with similar size loan portfolios to ours. Our
management will continue to monitor our loan loss performance and increase our
loan loss reserve if needed to more closely align it with our own loss
experience history.
30
Noninterest Income. Noninterest income totaled $2.1 million in 2000, an
increase of 40% over 1999 noninterest income of $1.5 million. Noninterest
income for 1998 totaled $683 thousand. Deposit service charges increased by
$483 thousand, or 73.1% during 2000 compared to 1999. The growth in our service
charge income reflected the significant growth in our customer base. Trust
revenues totaled $531 thousand for 2000, an increase of $302 thousand or 131.9%
over 1999 trust revenue of $229 thousand. 1999 was the first year of operations
for our trust department. We believe trust fee income will continue to increase
as the amount of trust assets under our management increases. Our gain on sale
of loans declined $262 thousand for the year 2000 to $362 thousand. The higher
overall level of interest rates reduced the mortgage loans we originated during
2000 compared to 1999, and resulted in fewer loans sold to secondary markets.
The following table details major components of noninterest income for the
years of 2000, 1999, and 1998.
For the years
ended December 31,
------------------
2000 1999 1998
------ ------ ----
(In thousands)
Service fee income....................................... $1,144 $ 661 $157
Net gains on asset sales:
Loans.................................................. 361 624 520
Securities............................................. 0 0 0
Trust fees............................................... 531 228 0
Other.................................................... 16 15 6
------ ------ ----
Total noninterest income............................. $2,052 $1,528 $683
====== ====== ====
The following table shows our net gains on the sale of residential real
estate mortgage loans.
For the years ended
December 31,
-------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Real estate mortgage loans originated for sale.. $47,007 $54,715 $44,146
Real estate mortgage loan sales................. 47,368 55,339 44,667
------- ------- -------
Net gains on the sale of real estate mortgage
loans.......................................... $ 361 $ 624 $ 521
======= ======= =======
Net gains as a percent of real estate mortgage
loan sales..................................... 0.76% 1.13% 1.17%
We sell the majority of our fixed-rate obligations. We do not retain the
servicing rights for real estate mortgages that we sell.
Noninterest Expense. Noninterest expense for 2000 was $12.7 million,
compared to $9.4 million for 1999, and $4.8 million for 1998. The main
components of our noninterest expense were salaries and benefits, and occupancy
and equipment expense. These two items comprised approximately 73% of our
noninterest expense for 2000, down slightly from approximately 74% for 1999
noninterest expense. Increases in both salary/benefit and occupancy/equipment
expenses are primarily due to the full year impact of five new branches we
added in the last half of 1999. During 2000 and 1999 we experienced increases
in expenses related to our larger branch structure including courier, data
processing, advertising, professional service fees, postage, and telephone. We
also became fully taxable for the Michigan Single Business Tax during 2000,
causing other operating expenses to increase by $231 thousand compared to 1999
which did not include Single Business Tax expense. Our total noninterest
expense for 1999 increased $4.7 million as compared to 1998, reflecting the
full year impact of six branches which we opened throughout 1998.
31
The following table details major components of noninterest expense for the
years of 2000, 1999, and 1998.
For the years ended
December 31,
---------------------
2000 1999 1998
------- ------ ------
(In thousands)
Salaries and employee benefits........................ $ 6,865 $5,408 $2,726
Occupancy and equipment............................... 1,094 841 305
Furniture and equipment expense....................... 1,244 777 253
Legal and professional fees........................... 248 135 199
Advertising........................................... 366 267 199
Supplies.............................................. 348 343 233
Data processing fees.................................. 561 401 197
Other operating expenses.............................. 1,946 1,268 651
------- ------ ------
Total noninterest expense........................... $12,672 $9,440 $4,763
======= ====== ======
Liquidity and Capital Resources
Equity Capital. We obtained initial equity capital, in the amount of $8.2
million, as a result of a private placement on behalf of Macatawa Bank in
November 1997. We raised additional equity capital of $14.1 million in our
initial public offering completed in April 1998. Due to our rapid growth,
additional equity capital was required. In June 1999, we raised $14.6 million
of equity capital net proceeds in an offering made to our shareholders.
Substantially all of the proceeds of this offering were subsequently
contributed to Macatawa Bank's capital to support required regulatory capital
levels. Our continuing asset growth required us to contribute an additional
$8.0 million of capital to Macatawa Bank during 2000. The contributed capital
came from our cash reserves, as well as from borrowings arranged to provide
capital flexibility. At December 31, 2000, Macatawa Bank's Tier 1 capital was
8.9%. Its Tier 1 capital decreased to 8.3% at March 31, 2001 due to our
increased lending activities.
We secured a $5.0 million credit facility during September 2000, to provide
additional capital required to maintain Macatawa Bank at or above required
regulatory capital levels. We increased the total limit of our credit under
this facility to $8.0 million in March 2001. The balance outstanding on this
line of credit was $4.0 million at December 31, 2000 and at March 31, 2001. We
intend to use a portion of the proceeds of this offering to pay off this line
of credit.
The following table shows various capital ratios at March 31, 2001:
At March 31, 2001
------------------------------------------
Total
Tier 1 Tier 1 Risk-Based
Leverage Ratio Capital Ratio Capital Ratio
-------------- ------------- -------------
Minimum regulatory requirement
for capital adequacy.......... 4.0% 4.0% 8.0%
Well capitalized regulatory
level......................... 5.0% 6.0% 10.0%
Consolidated................... 7.7% 8.7% 9.9%
Bank........................... 8.3% 9.5% 10.7%
32
The following table shows the dollar amounts by which our capital (on a
consolidated basis) exceeded current regulatory minimum requirements on a
dollar amount basis at March 31, 2001:
At March 31, 2001
----------------------------------------------
Total
Tier 1 Tier 1 Capital Risk-Based
Leverage to to Risk Capital to Risk
Average Assets Weighted Assets Weighted Assets
-------------- --------------- ---------------
(In thousands)
Capital balances:
Required regulatory
capital.................. $20,327 $17,938 $35,877
Capital in excess of
regulatory minimums...... 18,540 20,929 8,596
------- ------- -------
Actual capital balances..... $38,867 $38,867 $44,473
======= ======= =======
The liquidity of a financial institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows of deposits and
to take advantage of interest rate market opportunities. Our sources of
liquidity include loan payments by our borrowers, maturity and sales of our
securities available for sale, growth of our deposits and deposit equivalents,
federal funds sold, our borrowings from the Federal Home Loan Bank, and our
issuance of common stock. Liquidity management involves the ability to meet the
cash flow requirements of our customers. Our customers may be either borrowers
with credit needs or depositors wanting to withdraw funds.
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 Bank has only
limited agricultural-related loan assets, and therefore has no significant
exposure to changes in commodity prices. Therefore, our market risk exposure is
mainly comprised of our sensitivity to interest rate risk. Our balance sheet
has sensitivity, in various categories of assets and liabilities to changes in
prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury
rates and various money market indexes. Our asset/liability management process
aids us in providing liquidity while maintaining a balance between interest
earning assets and interest bearing liabilities.
33
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 for selected maturity periods as of
March 31, 2001.
Estimated Maturity or Repricing At March 31, 2001
---------------------------------------------------------
<3 Months 3-12 Months 1-5 Years Over 5 Years Total
--------- ----------- --------- ------------ --------
(Dollars in thousands)
ASSETS:
Fixed rate loans........ $ 21,243 $ 38,536 $154,477 $23,897 $238,153
Variable rate loans..... 176,073 737 21,229 2,263 200,302
Taxable securities...... 2,013 11,097 28,431 3,656 45,197
Tax-exempt securities... -- -- -- 6,621 6,621
Other securities........ -- -- -- 3,129 3,129
Federal funds sold...... 3,000 -- -- -- 3,000
Loan loss reserve....... -- -- -- -- (6,243)
Cash & due from banks... -- -- -- -- 20,505
Fixed assets............ -- -- -- -- 12,117
Other assets............ -- -- -- -- 5,476
-------- -------- -------- ------- --------
Total.................. $202,329 $ 50,370 $204,137 $39,566 $528,257
======== ======== ======== ======= ========
LIABILITIES:
Time deposits $100,000
and over............... $ 36,585 $ 45,338 $ 16,558 $ 589 $ 99,070
Time deposits under
$100,000............... 10,585 41,355 21,200 -- 73,140
Repo's & borrowed
money.................. 4,000 10,528 21,060 31,000 66,588
Savings & IRA's......... 13,408 3,242 4,547 604 21,801
NOW & money market
accounts............... 179,203 -- -- -- 179,203
Noninterest bearing
deposits............... -- -- -- -- 45,498
Other liabilities &
equity................. -- -- -- -- 42,957
-------- -------- -------- ------- --------
Total.................. $243,781 $100,463 $ 63,365 $32,193 $528,257
======== ======== ======== ======= ========
Period interest rate
gap.................... (41,452) (50,093) 140,772 7,373
Cumulative interest rate
gap.................... (41,452) (91,545) 49,227 56,600
Cumulative interest rate
gap to total assets.... (7.85)% (17.33)% 9.32% 10.71%
Rate sensitive assets to
rate sensitive
liabilities............ .83 0.50 3.22 1.23
Cumulative rate
sensitive assets to
rate sensitive
liabilities............ .83 .73 1.12 1.13
The above table shows that total liabilities maturing or repricing within
one year exceed assets maturing within one year by $92 million. However, the
repricing and cash flows of various categories of assets and liabilities are
subject to competitive and other influences that are beyond our control. As a
result, various assets and liabilities indicated above 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
34
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 March 31, 2001.
Percent Change in
Net Interest Income
-------------------
Interest Rate Scenario:
Interest rates down 200 basis points................... (8.07)%
Interest rates down 100 basis points................... (4.04)%
No change in interest rates............................ 0
Interest rates up 100 basis points..................... 4.04%
Interest rates up 200 basis points..................... 8.07%
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; and client preferences.
35
BUSINESS
We are a bank holding company headquartered in Holland, Michigan and own
Macatawa Bank. Our bank provides a wide range of commercial and consumer
banking services through 13 full service branches located in Ottawa County,
northern Allegan County and southwestern Kent County, Michigan. We offer
commercial and personal banking services, including checking and savings
accounts, certificates of deposit, safe deposit boxes, travelers' checks, money
orders, trust services and commercial, mortgage and consumer loans. Since our
formation in November 1997, we have grown very rapidly while maintaining
excellent asset quality and attaining and improving profitability. We became
profitable in 1999 with net income of $693 thousand. Our net income increased
to $3.3 million in 2000. In the first quarter of 2001, we earned $1.1 million
as compared with $527 thousand in the first quarter of 2000. At March 31, 2001,
we had total assets of $528.3 million, total deposits of $418.7 million, 41,773
deposit accounts, and shareholders' equity of $39.3 million.
We attribute much of our success and rapid growth to our ability to fill a
void in the Holland/Zeeland communities that resulted from the acquisition of
First Michigan Bank Corporation in early 1997. First Michigan, which was
headquartered in Holland, was the dominant bank in the Holland/Zeeland
communities and was managed and substantially owned by individuals who lived in
the area. When Macatawa Bank was formed, it was the only locally owned and
managed commercial bank in the Holland/Zeeland area. We were able to quickly
establish a branch network in the area and hire many highly motivated and
customer service focused employees who were previously employed by First
Michigan or other area banking offices. Most of our employees, including our
senior management, have lived in the Holland/Zeeland area for many years and
are well-known to and respected by customers and prospective customers in the
area.
Strategy
Our goal is to continue to build a highly profitable, customer-focused
banking organization that generates attractive returns for our shareholders
while also being a positive contributor to the communities in which we operate.
Our strategy for achieving this objective includes:
. Building Our Retail and Commercial Deposit Base Through an Expanding
Branch Network. Through our 13 full-service branches, we actively
solicit retail and commercial customers and compete for deposits by
offering personal attention, professional service and competitive
interest rates. We also emphasize our local management and their strong
ties with and active commitment to the community. In the first quarter
of 2001, we opened over 3,600 net new deposit accounts, an increase of
9.6% over the number of deposit accounts at December 31, 2000. To
facilitate the continued growth of our deposit base, we expect to open
at least two new branches per year for the next several years in Grand
Rapids or other areas in western Michigan. This expansion will enable
us to serve adjacent geographic markets, and will make banking with us
more convenient for existing and future customers.
. Focusing on Commercial and Commercial Real Estate Lending. While we
offer a full range of consumer loan products, our primary lending focus
will continue to be commercial real estate loans and commercial loans
to small to medium-sized businesses. We believe that commercial
customers prefer to conduct business with financial institutions like
ours which demonstrate an active interest in their business and
personal financial affairs, offer local decision-making by experienced
loan officers, and offer a sophisticated product portfolio to meet
their banking needs. At March 31, 2001, commercial loans comprised
53.2% of our loan portfolio and commercial real estate loans accounted
for 19.3% of our loan portfolio.
36
. Hiring Experienced Employees With a Customer Service Focus. We are a
customer-driven financial institution, and our ability to continue to
attract and retain employees who share our customer service focus is
key to our success. We believe that our ability to deliver products and
services in a highly personalized manner helps differentiate us from
larger, regional banks operating in our market areas. In addition,
throughout our organization we emphasize the recruitment of banking
professionals with significant experience and knowledge of our markets.
This emphasis both facilitates our growth and mitigates the credit
risks associated with our rapidly growing loan portfolio.
. Expanding our Product Offerings to Leverage Customer Relationships. A
key component of our strategy is to continue to add new products and
services in order to expand our customer relationships, diversify our
revenue base and increase our noninterest income. For example, we began
operating a trust department in January 1999, and started to offer
internet banking services in the fourth quarter of 1999. While our
trust department currently operates at a break even or slightly
negative net income level, we believe that our trust department will
contribute to our net income as our trust business matures. We are
investigating the possibility of offering our customers additional
products in the future including investment brokerage services, title
insurance, life and casualty insurance, mutual funds and annuities.
. Capitalizing on Opportunities Resulting From Consolidation in our
Markets. At the time of our formation in 1997, the largest bank in
Ottawa County had recently been acquired by an out-of-state regional
banking organization. This transaction and the resulting employee and
customer disruption resulted in many opportunities for us to attract
experienced personnel and establish relationships with customers
wishing to conduct business with a locally-managed institution with
strong ties to the community. The consolidation and disruption in our
markets has continued. In August 2000, Ottawa Financial, the parent of
a thrift headquartered in Holland with $1.0 billion in assets and more
recently, Old Kent Financial, a bank holding company with the leading
market share in both the Holland/Zeeland and Grand Rapids markets were
acquired by an out-of-state regional bank holding company. We intend to
position ourselves to capitalize on any business opportunities that may
result from customer dislocation and general market disruption
associated with these transactions.
. Using Technology Effectively. We strive to use technology to increase
the effectiveness and efficiency of our employees, while also providing
expanded products and services to our customers. For example, we have
entered into agreements with third-party service providers to provide
our customers with credit cards, debit cards, ATM cards, automated
telephone banking and internet banking services. In addition, in the
second quarter of 2001, we expect to implement a new customer
information system, which will enable us to target our marketing
initiatives more effectively and help us cross-sell additional
products. In general, we believe that using third-party service
providers allows us to remain at the forefront of technology while
minimizing the costs of delivery.
A Description of Our Market Area
Our market area includes the cities of Holland and Zeeland and their
surrounding communities, as well as the Interstate I-196 corridor from Holland
to metropolitan Grand Rapids and portions of northern Allegan County. Most of
our branches are located in the southern half of Ottawa County, Michigan. We
believe that the economic and demographic climate in our region of Michigan
creates significant opportunity for the expansion and growth of our banking and
business services in the future.
37
Ottawa County. The Holland/Zeeland metropolitan area has a population of
approximately 150,000, and Ottawa County has a population of approximately
238,000. Ottawa County enjoys a stable and diverse economy and had an estimated
median household income in 1999 of approximately $51,000. Over 300
manufacturers have operations in the Holland/Zeeland area.
Ottawa County is home to several large manufacturers including:
. Prince Corporation, a division of Johnson Controls -- A producer of
automotive interior parts.
. Bill Mar Foods -- A producer of food products and processed dinners.
. Gentex Corporation -- A tier 1 supplier and manufacturer of electronic
auto mirrors.
. Herman Miller, Inc. -- A worldwide leader in the production of modular
office systems and furniture.
. Lifesavers Co. -- A producer of candy, mints and chewing gum.
. Thermotron Industries Inc. -- A producer of environmental test
equipment.
. Haworth, Inc. -- A worldwide leader in the production of modular office
systems and furniture.
. Donnelly Corporation -- A tier 1 supplier and manufacturer of auto
mirrors, modular windows and other auto parts.
According to available industry data, at June 30, 2000, deposits in Ottawa
County banks, thrifts, and credit unions totaled approximately $2.6 billion.
Kent County. Most of the metropolitan Grand Rapids area is contained within
Kent County, Michigan. Metropolitan Grand Rapids is comprised of the cities of
Grand Rapids, East Grand Rapids, Grandville, Kentwood, Walker, Wyoming,
Cutlerville, Jenison and Byron Center plus the townships of Ada, Cascade, Grand
Rapids, Byron and Plainfield. Kent County's total population in 1999 numbered
574,000 with 467,000 residents located within the metropolitan Grand Rapids
area. The largest centers of population are the cities of Grand Rapids with
198,000 residents, Wyoming with 69,000 residents and Kentwood with 45,000
residents, respectively, for the year 1999. The metropolitan Grand Rapids area
had a median household income of $50,000 in 1999, and is the economic and
business center of western Michigan. The metropolitan Grand Rapids area is
located almost equi-distant from Chicago and Detroit.
Kent County is home to several large employers including:
. Meijer Inc. -- A regional retailer of groceries and general goods.
. Spectrum Health -- A regional hospital.
. Steelcase -- A worldwide leader in the manufacture of office furniture.
. Alticor (formerly Amway Corporation) -- A manufacturer and distributor
of home, personal and nutritional products.
. Wolverine Worldwide -- A producer of footwear and leather goods.
According to available industry data, at June 30, 2000, deposits in Kent
County banks, thrifts, and credit unions totaled approximately $8.5 billion.
Grand Rapids Metropolitan Statistical Area. Ottawa and Allegan Counties (our
primary market area) and Kent County (the portion of our market area targeted
for expansion), along with Muskegon
38
County, comprise the Grand Rapids Metropolitan Statistical Area as defined by
U.S. Census Bureau. The Grand Rapids Metropolitan Statistical Area, as a whole,
has a dynamic, yet stable, economy and is home to over 25,000 businesses,
including more than 2,200 manufacturers. Manufacturing employment in this area
expanded 20% from 1989 to 1999 as compared to a 1% decrease in Michigan and a
4% decrease for the United States in manufacturing employment over the same
time interval.
The positive economic climate in the Grand Rapids Metropolitan Statistical
Area has also been attracting the attention of business analysts and the
national business media. In its December 7, 2000 issue, Inc. magazine ranked
Grand Rapids 13th in its list of "Best Cities to Start and Grow a Company in
Now". In 1998, Fortune magazine listed Grand Rapids as one of its "Top 10
Cities for Business in the U.S.," and the Anderson Economic Group ranked the
Grand Rapids Metropolitan Statistical Area first in the nation for overall
business climate in a recent survey.
Products and Services
Deposit Services. We offer a broad range of deposit services, including
checking accounts, savings accounts and time deposits of various types.
Transaction accounts and time certificates are tailored to our principal market
area at rates competitive with those offered in our area. All deposit accounts
are insured by the FDIC up to the maximum amount permitted by law. We solicit
these accounts from individuals, businesses, associations, churches, nonprofit
organizations, financial institutions and government authorities. We may also
use alternative funding sources as needed, including advances from Federal Home
Loan Banks, brokered certificates of deposit, conduit financing and the
packaging of loans for securitization and sale.
Lending Services. We provide a wide spectrum of lending services, including
commercial (including agricultural), commercial real estate, residential real
estate, and consumer loans. Our primary focus is on general commercial and
commercial real estate loans to our local business clientele. At March 31,
2001, our combined total commercial loans accounted for almost 73% of our loan
portfolio. We have a very experienced staff of lending officers who know our
communities and customers well. They actively market our lending services to
current and prospective customers. Certain risks attendant to our lending
activities are described under "Risk Factors."
The interest rates we charge and the security we require for each loan made
are dependent upon the specific situations of each customer and details of each
transaction. The rate structure and security requirements of each loan vary
with the degree of risk, maturity, underwriting, servicing costs, principal
amount, the customer's past and present financial condition, the relationship
between us and the customer, the use of the loan proceeds and other factors
that are specific to that customer and transaction.
Although we take a progressive and competitive approach to lending, we
stress high quality in our loans. On a regular basis, our board of directors
reviews selected loans to monitor the implementation of our lending policies
and procedures. In addition, the loan committee of our board of directors also
reviews our larger loans for prior approval when the loan request exceeds
established limits for our lending officers. Our lending officers are given
great latitude and support from our management and staff to work with our
customers to meet their various needs and demands, while maintaining the
quality of our loan portfolio.
We also maintain a loan review process designed to promote early
identification of credit quality problems. Our board of directors on a regular
basis reviews any past due loans and identified problem loans. Additionally,
our loan officers are held directly responsible for any problem loans. This
helps us maintain our high loan quality standards by aligning the desires of
our management and our loan staff to keep problem loans to a minimum.
39
Regulatory and supervisory loan-to-value limits are established by Section
304 of the Federal Deposit Insurance Corporation Improvement Act of 1991. Our
internal limitations follow those limits and in some cases are more restrictive
than those required by the regulators. Banking laws and regulations also limit
the amount that we can lend to any single customer. Generally, we apply an in-
house lending limit that is less than our legal lending limit. Our legal
lending limit at March 31, 2001 was $9.9 million and following the offering
will increase to approximately $ .
We have established relationships with correspondent banks and other
independent financial institutions to provide other services requested by our
customers, including loan participations where the requested loan amounts
exceed our policies or legal lending limits.
Commercial Loans. Commercial loans are made primarily to small and mid-sized
businesses. Our areas of emphasis in commercial lending include, but are not
limited to, manufacturing and business service companies. We also lend to
agricultural businesses for greenhouse operations, poultry and livestock
production, dairy operations and cash cropping. These loans are and will be
both secured and unsecured and are made available for general operating
purposes, acquisition of fixed assets, purchases of equipment and machinery,
financing of inventory and accounts receivable, as well as any other purposes
we consider appropriate. We generally look to a borrower's business operations
as the principal source of repayment but will also receive, when appropriate,
mortgages on real estate, security interests in inventory, accounts receivable
and other personal property and/or personal guarantees. Terms of our commercial
loans generally range from one to five years, and the majority of these loans
have interest rates that vary in relation to the prime rate or U.S. Treasury
Index.
Many of our commercial loan customers have either had past lending
transactions with us or our loans officers. This allows us to personalize the
lending process and become intimately familiar with our customers. This
knowledge enhances our customer service, but more importantly provides
extensive knowledge of our customers' businesses. This allows us to better
understand the needs of our business customers and recognize current or
potential problems that will affect the ability of the customer to repay the
loan. Conversely this intimate knowledge of our customers also lets us
recognize opportunities for both our borrowers and us.
Commercial Real Estate Loans. Our commercial real estate loans, like our
commercial loans, are made primarily to small and mid-sized businesses. While
we look to the borrower's business to generate sufficient funds to repay the
debt, we secure the loan with a mortgage on the real estate. The vast majority
of commercial real estate loans we make are on owner-occupied properties as
opposed to properties held for purely investment purposes. We feel that owner
occupied properties will be less susceptible to neglect and deterioration
causing a decline in property value and likelihood of repayment of the loan
upon default. These loans are usually written with a five year maturity and
amortized on the basis of a 15 year period.
Residential Real Estate Loans. We originate residential mortgage loans,
which are generally long-term with either fixed or variable interest rates. We
are vulnerable to changes in interest rates generally, but particularly with
respect to our residential real estate loans. When interest rates drop, we are
susceptible to refinancing, and when interest rates and unemployment rises due
to economic factors, we may experience an increase in the default rate on our
mortgage portfolio. Our general policy, which is subject to review by our
management as a result of changing market and economic conditions and other
factors, is to retain all variable interest rate mortgage loans in our loan
portfolio and to sell all fixed rate loans in the secondary market, without
retaining any of the servicing rights.
The retention of variable rate loans in our loan portfolio helps to reduce
our exposure to fluctuations in interest rates. However, variable rate loans
generally pose credit risks different from the risks inherent
40
in fixed rate loans, primarily because as interest rates rise, the underlying
payments from the borrowers rise, thereby increasing the potential for default.
Consumer Loans and Lines of Credit. We make personal loans and lines of
credit available to our consumers for various purposes, like the purchase of
automobiles, boats and other recreational vehicles, home improvements and
personal investments. The majority of our consumer loans are home equity loans
secured by secondary residential mortgages. The consumer loans we make
generally have shorter terms and higher interest rates than residential
mortgages. In making these loans, we emphasize the amount of the down payment,
credit status, employment stability, and monthly income of the consumer. Our
current policy is to retain substantially all of these loans.
Trust Services. We provide trust services to individuals, businesses and
estates. These services include custodial and agency accounts, investment
services, employee benefit plans and IRAs and personal trust and estate
administration services. Of the $247.1 million in assets held by our trust
department at March 31, 2001, $146.0 million were held in custodial or agency
accounts without investment authority and $101.1 million were held in other
accounts as to which our trust department had investment authority. When trust
documents grant our trust department investment authority, our trust department
may manage the investment of the trust assets internally or outsource these
services depending on the amount and nature of the trust assets. While smaller
accounts are generally managed internally, investment management of larger,
more complex asset portfolios is outsourced. At March 31, 2001, investment
management of approximately 30% of the trust assets we held with investment
authority was outsourced. Unless our trust customers have a preferred
investment advisory firm, our trust department will retain one of two
preapproved firms to provide the outside investment advisory services needed by
our customers. The investment advisory firm generally retained is Smith &
Associates Investment Management Services, which is owned by Benj. A. Smith
III, our Chairman and Chief Executive Officer. See "Certain Transactions."
Competition
Our primary market area includes Ottawa County, northern Allegan County and
southwestern Kent County, all located in western Michigan. There are many bank,
thrift and credit union offices located within our market area as well as other
providers of financial services. Most of our competitors are branches of larger
financial institutions like Fifth Third, National City, Huntington Bank,
Chemical Financial and Bank of Holland . Most of our competitors have been in
business many years, have established customer bases, are larger and have
higher lending limits than we do. We compete for loans principally through our
ability to communicate effectively with our customers and to understand and
meet their needs. Our management believes that our personal service philosophy
enhances our ability to compete favorably in attracting individuals and small
businesses. We actively solicit customers and compete for deposits by offering
our customers personal attention, professional service, and competitive
interest rates.
Employees
As of March 31, 2001, we had 124 full-time and 73 part-time employees. We
have assembled a staff of experienced, dedicated and highly qualified
professionals whose goal is to provide outstanding service. The majority of our
management team has at least 10 years of banking experience, and several key
personnel have more than 20 years of banking experience. None of our employees
is represented by a collective bargaining agreement with us.
41
Property and Locations
Our administrative offices are located at 348 South Waverly Road, Holland,
Michigan 49423, and the telephone number is (616) 820-1444. Our main banking
office is located at 51 E. Main Street, Zeeland, Michigan 49464, and the
telephone number is (616) 748-9491.
We currently have 13 branch offices and three other administrative
locations. Our facilities are located in Ottawa County, Allegan County and Kent
County, Michigan. Our branch locations and deposits as of March 31, 2001 were
as follows:
Location of Facility Use Opening Date Deposits
-------------------- --- ------------ -------------
(In millions)
51 E. Main Street,
Zeeland* Main Office 11-25-97 $75
139 E. 8th Street,
Holland* Branch Office 01-19-98 58
701 Maple Avenue,
Holland Branch Office 04-13-98 41
2020 Baldwin Street,
Jenison Branch Office 07-01-98 53
6299 Lake Michigan Dr.,
Allendale Branch Office 07-15-98 34
489 Butternut Dr.,
Holland Branch Office 10-01-98 26
699 E. 16th Street,
Holland Branch Office 11-02-98 21
41 N. State Street,
Zeeland Branch Office 12-11-98 --(/1/)
102 South Washington,
Douglas Branch Office 05-24-99 17
1760 -- 44th Street,
Wyoming* Branch Office 06-21-99 15
4758 -- 136th Street,
Hamilton* Branch Office 09-01-99 12
5215 Cherry Avenue,
Hudsonville* Branch Office 11-22-99 30
20 E. Lakewood Blvd.,
Holland Branch Office 12-20-99 7
250 E. 8th Street,
Holland* Operations Center
106 E. 8th Street,
Holland* Trust Department
348 South Waverly Road,
Holland* Loan Center & Admin. Offices
-----------------
(1) Included with 51 E. Main, Zeeland Branch
* Leased facility
We believe our facilities are well-maintained and adequately insured.
Because of our growth, we are continually evaluating the need for additional
space and branches. At the present time, we are completing the build out at a
new leased branch in the city of Grandville. We will begin operations in this
Grandville branch in the summer of 2001. We have also secured a site for the
relocation of our Hudsonville branch to a full service facility which we plan
to own, with construction to commence in the summer of 2001. We also have
reserved a parcel of land in the north section of the City of Holland for a new
branch. At this time we are not obligated to make any payments on the land. We
are planning to start the construction of this branch in late 2001 or early
2002.
We also are in the early stages of planning our new Macatawa Bank
Corporation headquarters. We presently have a buy-sell agreement to purchase
approximately 17 acres of land located between Holland and Zeeland. We expect
construction to begin in late 2001 and completion in 2002. We will retain
approximately 10 acres for our new headquarters and will sell the remaining
land at the completion of the construction. The proposed three story building
will contain 25,000 to 30,000 square feet and will be designed to be expandable
to 100,000 square feet. We will own the building and be its sole tenant. Upon
completion, we will consolidate our administration, human resources, trust,
loan underwriting and processing, and proof and deposit operations in the new
facility. We estimate the cost to purchase the land to be approximately $1.2
million and approximate construction costs to be $5.0 million. We plan to fund
the construction of this new facility with long term debt financing.
42
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers and those of Macatawa Bank are as
follows:
Positions with
Macatawa Bank Positions with
Name Age Corporation Macatawa Bank
---- --- -------------- --------------
Benj. A. Smith, III............ 57 Chairman, Chief Chairman and Director
Executive Officer and
Director
Philip J. Koning............... 46 Secretary and President, Chief
Director Executive Officer and
Director
Steven L. Germond.............. 48 Chief Financial Chief Financial
Officer Officer
Ray D. Tooker.................. 58 Senior Vice
President --Loan
Administration
G. Thomas Boylan............... 78 Director Director
Robert E. DenHerder............ 46 Director Director
John F. Koetje................. 65 Director Director
James L. Batts................. 42 Director
Jessie F. Dalman............... 67 Director
Wayne J. Elhart................ 46 Director
James L. Jurries............... 59 Director
We have a classified board of directors, with directors serving staggered
three-year terms, which expire at the relevant annual shareholders meeting. The
terms of Messrs. Koning and DenHerder expire in 2002, the terms of Messrs.
Smith and Boylan expire in 2003 and the term of Mr. Koetje expires in 2004.
There are no family relationships between any of our directors or executive
officers named above.
Experience of Directors and Executive Officers
The experience and backgrounds of our directors and executive officers and
those of Macatawa Bank are summarized as follows:
Benj. A. Smith, III is the Chairman, Chief Executive Officer and a director
of Macatawa Bank Corporation, and is also Chairman and a director of Macatawa
Bank. Mr. Smith is an investment advisor and has served from 1992 to the
present as the President of Smith & Associates Investment Management Services,
an investment management firm located in Holland, Michigan. Prior to 1992, Mr.
Smith gained 21 years of banking experience at FMB and its subsidiary FMB-First
Michigan Bank of Zeeland, Michigan. During his employment at FMB, he was
primarily responsible for the consolidation of the trust department and its
investment function, the development and introduction of mutual funds at FMB,
the establishment of a broker-dealer operation and the implementation of
various employee compensation and stock ownership plans. From 1991 to 1992, Mr.
Smith served as Chief Executive Officer of FMB-Financial Group, a wholly owned
subsidiary of FMB, which was comprised of a life insurance subsidiary, a trust
services bank, a registered broker-dealer and an investment advisory company.
Philip J. Koning has served as President and a director for Macatawa Bank
since its inception in November 1997 and currently serves as its Chief
Executive Officer as well. Mr. Koning also serves as the
43
Secretary and a director for Macatawa Bank Corporation. Mr. Koning was employed
by Smith & Associates Investment Management Services from May 1997 to February
1998. Mr. Koning has over 25 years of commercial banking experience, including
from 1984 to 1997 with First of America Bank in Holland, where he served as a
Community Bank President.
Steven L. Germond, C.P.A. is the Chief Financial Officer and Treasurer of
Macatawa Bank Corporation as well as the Chief Financial Officer of Macatawa
Bank. Mr. Germond started with us in June 2000. From January 1999 until June
2000, Mr. Germond was the Vice President of Retail Finance with Old Kent Bank,
and prior to that time, he was with National City Bank and its Michigan
predecessors, where he started in 1984.
Ray D. Tooker is the Senior Vice President of Loan Administration with
Macatawa Bank. Mr. Tooker started with Macatawa Bank in May 1999. Before
joining us, Mr. Tooker was a Senior Vice President and Regional Credit Officer
with Huntington Bank from September 1997 until April 1998. Prior to that, Mr.
Tooker was employed by FMB-First Michigan Bank for over 30 years, where he most
recently served as Senior Vice President of Loan Administration.
G. Thomas Boylan is a director of Macatawa Bank Corporation as well as being
on the board of directors of Macatawa Bank. Mr. Boylan is the President of
Light Metals Corporation, a manufacturing company located in Wyoming, Michigan,
where he has been employed since 1947.
John F. Koetje is a director of Macatawa Bank Corporation as well as being
on the board of directors of Macatawa Bank. Mr. Koetje is a partner in John F.
Koetje and Associates, a West Michigan builder of residential and light
commercial real estate and apartment complexes where he has been employed for
35 years.
Robert E. DenHerder is a director of Macatawa Bank Corporation as well as
being on the board of directors of Macatawa Bank. Mr. DenHerder is a business
consultant and investor based in Holland, Michigan. From January 1980 to
December 1999, Mr. DenHerder served as the President of Uniform Color Co., a
company located in Holland, Michigan, which manufactures color concentrate for
the plastics industry, primarily for automotive suppliers.
James L. Batts is a director of Macatawa Bank. Mr. Batts is the Vice-
Chairman of Belfry Development Corporation, a real estate development company.
From 1993 until 2000, Batts Inc., a manufacturer of coat hangers, employed Mr.
Batts, most recently as Vice President, International.
Jessie F. Dalman is a director of Macatawa Bank. Ms. Dalman previously
served in the Michigan House of Representatives representing the 90th District
(Holland) from 1990 to 1998. Ms. Dalman served as Minority Vice Chair of the
Education Committee and as a member of the Judiciary Committee and the Colleges
and Universities Committee. Prior to her election to the Michigan legislature,
Ms. Dalman served for twelve years as an Ottawa County Commissioner
representing Holland City and Park Township.
Wayne J. Elhart is a director of Macatawa Bank. Mr. Elhart has served since
1990 as the President of Elhart Pontiac GMC Jeep in Holland, Michigan. Mr.
Elhart serves as the President of both the West Michigan Pontiac Dealers
Advertising Association and the Out of State Jeep Dealers Advertising
Association.
James L. Jurries is a director of Macatawa Bank. Mr. Jurries has served
since 1992 as President of Jurries Capital Management, Inc., a real estate,
venture capital and investment company located in
44
Holland, Michigan. From 1989 to 1992, Mr. Jurries owned and developed a ten-
store Blockbuster Video franchise which he sold to Blockbuster Video in 1992.
Mr. Jurries also worked as a commercial loan officer for seven years.
Director Compensation
Directors of Macatawa Bank Corporation are not separately compensated for
their service as directors of the holding company. All the directors of
Macatawa Bank, including those who also serve as directors of Macatawa Bank
Corporation, during 1999 and 2000, received an annual retainer of $4,000, and
were paid $500 per board meeting attended and $250 per committee meeting
attended. For 2001, the annual retainer has been increased to $5,000 and
meeting fees remain the same as in prior years. All directors are reimbursed
for their out-of-pocket expenses for each meeting attended. Additionally, all
directors were granted options to purchase shares of our common stock in 1998
before they began to receive cash compensation.
Executive Compensation
We do not separately compensate any of the executive officers at Macatawa
Bank Corporation, all of whom are also, executive officers of Macatawa Bank and
are paid for their services by Macatawa Bank. The following table sets forth
the annual and long-term compensation paid by us to our Chief Executive
Officer, and our other most highly compensated executive officers who had
annual compensation or annual rates of compensation in excess of $100,000 for
2000.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------ --------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Compensation($) Options(#) Compensation(1)
------------------ ---- -------- --------------- ---------- ---------------
Benj. A. Smith, III..... 2000 $150,000 $ 0 0 $ 0
Chairman of the Board 1999 75,000 0 0 0
and Chief Executive
Officer of
Macatawa Bank 1998 32,500 0 31,930 0
Corporation
Philip J. Koning........ 2000 $161,000 $15,000 3,090 $3,003
Chief Executive Officer 1999 155,000 6,000 3,090 3,829
and President of
Macatawa Bank
1998 144,184 0 12,360 3,020
Steven L. Germond (2)... 2000 $ 61,346 $ 7,500 2,884 $ 131
Chief Financial Officer 1999 0 0 0 0
of Macatawa Bank
Corporation and
Macatawa Bank 1998 0 0 0 0
Ray D. Tooker (3)....... 2000 $120,002 $10,000 1,030 $ 251
Senior Vice 1999 78,462 5,000 4,120 642
President -- Loan
Administration of
Macatawa Bank 1998 0 0 0 0
-----------------
(1) Includes an automobile allowance ($2,644 in 2000, $2,521 in 1999 and
$2,637 in 1998) paid by us for the benefit of Mr. Koning, as well as term
life insurance premiums paid for the benefit of executive officers listed
above.
(2) Mr. Germond was hired effective June 5, 2000, at an annual salary of
$110,000. The Summary Compensation Table discloses compensation from his
hire date through December 31, 2000.
(3) Mr. Tooker was hired effective May 3, 1999, at an annual salary of
$120,000. The Summary Compensation Table discloses his 1999 compensation
from his date of hire through December 31, 1999.
45
Option Grants in 2000. Shown below is information on grants of stock options
pursuant to our stock compensation plan.
Potential Realizable
Value at Assumed
Annual Rates Of
Stock Price
Appreciation For
Individual Grants Option Term(3)
-------------------------------------------------- ---------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(1) 2000 (per share)(2) Date 5% 10%
---- ---------- ------------- -------------- ---------- ---------- ----------
Philip J. Koning........ 3,090 12.7% $12.38 12-21-10 $ 24,055 $ 60,960
Steven L. Germond....... 824 3.4% 12.38 12-21-10 6,414 16,256
2,060 8.5% 11.65 06-15-10 15,093 38,250
Ray D. Tooker........... 1,030 4.2% 12.38 12-21-10 8,018 20,320
-----------------
(1) Indicates number of shares which may be purchased pursuant to options
granted in 2000 under the stock compensation plan as of December 31, 2000.
During 2000, we granted to eligible employees options to purchase an
aggregate of 24,308 of our shares. These options may not be exercised in
full or in part prior to the expiration of one year from the date of
grant.
(2) The exercise price equals the prevailing market price of our common stock
on the date of grant. The exercise price may be paid in cash, by the
delivery of previously owned shares of our common stock, or through the
withholding of shares of our common stock otherwise issuable upon exercise
or a combination thereof.
(3) These amounts are based on assumed rates of appreciation over the entire
option period without any discount to present value. Actual gains, if any,
on stock option exercises will be dependent on overall market conditions
and on the future performance of our common stock. There can be no
assurance that the amounts reflected in this table will be realized.
Year-End Options Values. Shown below is information with respect to
unexercised options to purchase shares of our common stock granted under our
stock option plans to our senior executives and held by them at December 31,
2000. None of the our senior executives exercised any stock options during
2000.
Number of Shares Subject to Value of Unexercised
Unexercised Options Held At In-the-Money Options at
December 31, 2000 December 31, 2000
-------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- -------------- -------------- ----------- -------------
Benj. A. Smith, III..... 31,930 0 $22,500 $ 0
Philip J. Koning........ 15,450 3,090 33,750 3,000
Steven L. Germond....... 0 2,884 0 4,300
Ray D. Tooker........... 4,120 1,030 0 1,000
Benefits. We provide group health and life insurance benefits and
supplemental unemployment benefits to our regular employees, including our
executive officers. In January 1999, we implemented a 401(k) plan.
Employee Stock Purchase Plan. We have adopted an employee stock purchase
plan which provides our employees with a convenient means to purchase shares of
our common stock through payroll deductions. Purchases of our shares are made
on behalf of participating employees on the open market. At March 31, 2001,
6,077 shares had been purchased under the plan.
46
PRINCIPAL SHAREHOLDERS
The table below sets forth, as of April 25, 2001, information regarding the
beneficial ownership of our common stock by each person who is known to us to
be the beneficial owner of more than 5% of our common stock, each of our
directors, each of our executive officers named in the summary compensation
table, and all of our directors and executive officers as a group, both before
and after giving effect to this offering. The table has been adjusted to
reflect the 3.0% stock dividend distributed May 4, 2001.
Number of Shares Percent of Outstanding Common Stock
------------------ -----------------------------------------
Name of Beneficial
Owner(1) Beneficially Owned Before the Offering After the Offering(2)
------------------ ------------------ ------------------- ---------------------
Benj. A. Smith, III(3).. 276,495 7.5% 5.4%
Philip J. Koning(4)..... 53,303 1.4% 1.1%
Steven L. Germond....... 2,266 * *
G. Thomas Boylan(5)..... 134,853 3.6% 2.7%
Robert E. DenHerder(5).. 137,093 3.7% 2.7%
John F. Koetje(6)....... 86,469 2.3% 1.7%
Ray D. Tooker(7)........ 7,210 * *
All executive officers
and directors as a
group (7 persons)(8)... 697,689 18.9% 13.7%
-----------------
* Represents less than 1% of ownership.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of stock options that are currently exercisable or become exercisable
within 60 days from April 25, 2001 are considered outstanding for the
purpose of calculating the common stock beneficially owned by that person.
(2) The number of shares of common stock deemed outstanding after this
offering includes the 1,400,000 shares of common stock offered for sale by
us in this offering, but does not include any of the up to 210,000
additional shares of common stock to be purchased from us if the
underwriters' over-allotment option is exercised in full.
(3) Includes options to purchase 31,930 shares, 3,090 shares owned by Mr.
Smith's spouse, and 30,900 shares held in trust for the benefit of Mr.
Smith's spouse. Also includes 103,129 shares with respect to which Smith &
Associates, an investment advisory firm controlled by Mr. Smith, has
voting power, but with respect to which Mr. Smith disclaims beneficial
ownership.
(4) Includes options to purchase 15,450 shares of common stock exercisable
within 60 days.
(5) Includes options to purchase 6,180 shares of common stock exercisable
within 60 days.
(6) Includes options to purchase 2,060 shares of common stock exercisable
within 60 days.
(7) Includes options to purchase 4,120 shares of common stock exercisable
within 60 days.
(8) Includes options to purchase 45,320 shares of common stock exercisable
within 60 days.
47
CERTAIN TRANSACTIONS
Our directors and officers have had and are expected to have banking and
other transactions with us in the ordinary course of our business. Related
party loans totaled approximately $12.7 million at March 31, 2001. All
transactions between us and affiliated persons, including our 5% shareholders,
are and will be on terms no less favorable to us than could be obtained from
independent third parties. Any loans and commitments to lend we make to
affiliated persons are and will be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions we make with unaffiliated parties of similar
creditworthiness. Any of these transactions will be approved by a majority of
our independent directors who do not have an interest in the transaction and
who will have access, at our expense, to our legal counsel.
Mr. Benj. A. Smith, III, our Chairman and Chief Executive Officer, is also
the sole owner and President of Smith & Associates Investment Management
Services, an investment advisory firm. Approximately $126 million of the $247
million in assets held by our trust department at March 31, 2001, represent
accounts referred by Smith & Associates to our trust department. These assets
were previously held in custodial accounts with other financial institutions.
Smith & Associates received no compensation for these referrals. Smith &
Associates may continue to refer additional accounts to our trust department,
although we do not expect the dollar amount of future referrals to be as large
as the initial referrals to our trust department. Most of the accounts referred
by Smith & Associates to our trust department are custodial accounts as to
which our trust department has no investment responsibility or authority. Our
trust department is compensated from these accounts for its custodial services.
Payments to Smith & Associates for investment services are made from these
custodial accounts to Smith & Associates based on arrangements made directly
between Smith & Associates and the trust grantors.
When trust documents give our trust department investment authority,
depending on the size and nature of the trust, the trust asset investment
services may be handled internally or outsourced. Our trust department handles
the investment of smaller accounts internally. However, our trust department is
not yet internally staffed to perform active investment management services for
larger, more complex trusts. For these trusts, our trust department outsources
investment management services to Smith & Associates or other unaffiliated
investment advisory firms based on the trust customer's preference. Our trust
department receives no compensation for these referrals just as it pays no
compensation for accounts referred to it. All investment management services
provided to our trust department by Smith & Associates have been and will be
entered into on terms that are no less favorable to us or our customers than
those which can be obtained from unaffiliated third parties. In 2000, total
payments to Smith & Associates for investment management services performed on
behalf of our trust department were less than $110,000. The total of these fees
was less than the custodial fee revenue received by our trust department from
custodial accounts referred by Smith & Associates to our trust department.
In addition, we lease our trust administration office located at 106 E. 8th
Street in Holland from a corporation wholly-owned by Mr. Smith. The 2001
monthly rent under this lease is $2,200. This lease arrangement will terminate
when our new headquarters is completed. Presently, we also rent our temporary
Wyoming branch location, on a short-term lease, from John F. Koetje, a member
of our board of directors. The monthly rent under the lease is $2,770 and the
lease terminates on April 30, 2002. The terms of both leases were negotiated on
an arm's-length basis. We believe that the rents and other terms reflect fair
market value. See "Business -- Properties."
48
SUPERVISION AND REGULATION
The following is a summary of various statutes and regulations affecting
Macatawa Bank Corporation and Macatawa Bank. This summary is qualified in its
entirety by these statutes and regulations. A change in applicable laws or
regulations may have a material effect on us and our profitability and growth.
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. Consequently, our growth and earnings performance
can be affected not only by management decisions and general economic
conditions, but also by the statutes administered by, and the regulations and
policies of, various governmental regulatory authorities. Those authorities
include, but are not limited to, the Board of Governors of the Federal Reserve
System, the FDIC, the Commissioner of the Michigan Office of Financial and
Insurance Services, Division of Financial Institutions, the Internal Revenue
Service, state taxing authorities, and the Securities and Exchange Commission.
The effect of all of the statutes, regulations and policies can be significant,
and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the
scope of business, investments, reserves against deposits, capital levels
relative to operations, lending activities and practices, the nature and amount
of collateral for loans, the establishment of branches, mergers, consolidations
and the payment of dividends. The system of supervision and regulation
applicable to us establishes a comprehensive framework for our operations and
is intended primarily for the protection of the FDIC's deposit insurance funds,
our depositors, and the public, rather than our shareholders.
Federal law and regulations establish supervisory standards applicable to
the lending activities of our bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
The Company
General. Macatawa Bank Corporation is a bank holding company, and is
registered with, and subject to regulation by, the Federal Reserve Board under
the Bank Holding Company Act, as amended. Under the Bank Holding Company Act,
we are subject to periodic examination by the Federal Reserve Board, and are
required to file with the Federal Reserve Board periodic reports of our
operations and any additional information as the Federal Reserve Board may
require.
In accordance with Federal Reserve Board policy, we are expected to act as a
source of financial strength to Macatawa Bank and to commit resources to
support Macatawa Bank in circumstances where we might not do so absent this
policy. In addition, if the Michigan Office of Financial and Insurance Services
deems our capital to be impaired, it may require us to restore our capital by a
special assessment upon us as Macatawa Bank's sole shareholder. If we were to
fail to pay any special assessment, the directors of Macatawa Bank would be
required, under Michigan law, to sell our shares to the highest bidder at
either a public or private auction and use the proceeds of the sale to restore
Macatawa Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by us of any voting shares of any bank which would result in our direct or
indirect ownership or control of more than 5% of any
49
class of voting shares of that bank, and any merger or consolidation between us
and another bank holding company, will require the prior written approval of
the Federal Reserve Board under the Bank Holding Company Act. In acting on any
of these applications, the Federal Reserve Board must consider various
statutory factors, including among others, the effect of the proposed
transaction on competition in relevant geographic and product markets, and each
party's financial condition, managerial resources, and record of performance
under the Community Reinvestment Act. Effective September 29, 1995, bank
holding companies may acquire banks located in any state in the United States
without regard to geographic restrictions or reciprocity requirements imposed
by state law, but subject to certain conditions, including limitations on the
aggregate amount of deposits that may be held by the acquiring company and all
of its insured depository institution affiliates.
The merger or consolidation of an existing bank subsidiary of ours with
another bank, or the acquisition by a bank subsidiary of ours of assets of
another bank, or the assumption of liability by a bank subsidiary of ours to
pay any deposits in another bank, will require the prior written approval of
the responsible federal depository institution regulatory agency under the Bank
Merger Act, based upon a consideration of statutory factors similar to those
outlined above with respect to the Bank Holding Company Act. In addition, in
these cases an application to, and the prior approval of, the Federal Reserve
Board under the Bank Holding Company Act and/or the Michigan Office of
Financial and Insurance Services under the Michigan Banking Code, may be
required.
With certain limited exceptions, the Bank Holding Company Act prohibits any
bank holding company from engaging, either directly or indirectly through a
subsidiary, in any activity other than managing or controlling banks unless the
proposed non-banking activity is one that the Federal Reserve Board has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Under current Federal Reserve Board
regulations, permissible non-banking activities including mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. Well-capitalized and well-managed bank holding companies
may engage de novo in certain types of non-banking activities without prior
notice to, or approval of, the Federal Reserve Board, provided that written
notice of the new activity is given to the Federal Reserve Board within 10
business days after the activity is commenced. If a bank holding company wishes
to engage in a non-banking activity by acquiring a going concern, prior notice
and/or prior approval will be required, depending upon the activities in which
the company to be acquired is engaged, the size of the company to be acquired
and the financial and managerial condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including the financial and managerial
resources of the bank holding company and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank holding company. The Federal Reserve Board
may apply different standards to activities proposed to be commenced de novo
and activities commenced by acquisition, in whole or in part, of a going
concern.
Eligible bank holding companies that elect to operate as financial holding
companies may engage in, or own shares in companies engaged in, a wider range
of nonbanking activities, including securities and insurance activities and any
other activity that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Bank Holding Company Act generally does not place territorial restrictions on
the domestic activities of non-bank subsidiaries of bank or financial holding
companies. While we believe we are eligible to elect to operate
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as a financial holding company, as of the date of this filing, we have not
applied for approval to operate as a financial holding company.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among other
things, be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies:
. a leverage capital requirement expressed as a percentage of total
assets, and
. a risk-based requirement expressed as a percentage of total risk-
weighted assets.
The leverage capital requirement consists of a minimum ratio of Tier 1
capital (which consists principally of shareholders' equity) to total assets of
3% for the most highly rated companies, with minimum requirements of 4% for all
others. The risk-based requirement consists of a minimum ratio of total capital
to total risk-weighted assets of 8%, of which at least one-half must be Tier 1
capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
banking organizations. For example, Federal Reserve Board regulations provide
that additional capital may be required to take adequate account of, among
other things, interest rate risk and the risks posed by concentrations of
credit, nontraditional activities or securities trading activities. Further,
any banking organization experiencing or anticipating significant growth would
be expected to maintain capital ratios, including tangible capital positions
(i.e., Tier 1 capital less all intangible assets), well above the minimum
levels. The Federal Reserve Board has not advised us of any specific minimum
Tier 1 Capital leverage ratio that is applicable to us.
Dividends. Macatawa Bank Corporation is a corporation separate and distinct
from Macatawa Bank. Most of our revenues will be received in the form of
dividends, if any, paid by our bank. Thus, our ability to pay dividends to our
shareholders will indirectly be limited by statutory restrictions on our bank's
ability to pay dividends. See "Supervision and Regulation -- Macatawa Bank --
Dividends." Further, the Federal Reserve Board has issued a policy statement
on the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank holding
company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income or which can only be funded in ways that weaken the
bank holding company's financial health, such as by borrowing. Additionally,
the Federal Reserve Board possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Similar enforcement powers over
our bank are possessed by the FDIC. The "prompt corrective action" provisions
of federal law and regulation authorizes the Federal Reserve Board to restrict
the payment of dividends by us if our insured bank fails to meet specified
capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, like us,
can pay its debts as they come due in the usual course of business and its
total assets equal or exceed the sum of its liabilities plus the amount that
would be needed to satisfy
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the preferential rights upon dissolution of any holders of preferred stock
whose preferential rights are superior to those receiving the distribution. We
are authorized to issue preferred stock but we have no current plans to issue
any preferred stock.
The Bank
General. Macatawa Bank is a Michigan banking corporation and our deposit
accounts are insured by the Bank Insurance Fund of the FDIC. As a Bank
Insurance Fund-insured Michigan chartered bank, we are subject to the
examination, supervision, reporting and enforcement requirements of the
Michigan Office of Financial and Insurance Services, Division of Financial
Institutions, as the chartering authority for Michigan banks, and the FDIC, as
administrator of the Bank Insurance Fund. These agencies and the federal and
state laws applicable to our bank and its operations, extensively regulate
various aspects of the banking business including, among other things,
permissible types and amounts of loans, investments and other activities,
capital adequacy, branching, interest rates on loans and on deposits, the
maintenance of noninterest bearing reserves on deposit accounts, and the safety
and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, we are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-
based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act requires the FDIC to establish assessment
rates at levels which will maintain the Deposit Insurance Fund at a mandated
reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of Bank Insurance Fund insurance
assessments for the first semi-annual assessment period of 2001, ranging from
0% of deposits for institutions in the lowest risk category to .27% of deposits
for institutions in the highest risk category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or
its directors have engaged or are engaging in unsafe or unsound practices, or
have violated any applicable law, regulation, order, or any condition imposed
in writing by, or written agreement with, the FDIC, or if the institution is in
an unsafe or unsound condition to continue operations. The FDIC may also
suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Michigan Office of Financial and Insurance Services to fund its
operations. The amount of supervisory fees paid by a bank is based upon total
assets, as reported to the Michigan Office of Financial and Insurance Services.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, our bank, as a member of the Bank Insurance Fund, is subject to
assessments to cover the payments on outstanding obligations of the Financing
Corporation. The Financing Corporation was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
predecessor to the FDIC's Savings Association Insurance Fund which insures the
deposits of thrift institutions. Until January 1, 2000, the Financing
Corporation assessments made against Bank Insurance Fund members could not
exceed 20% of the amount of Financing Corporation assessments made against
Savings Association
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Insurance Fund members. Currently, Savings Association Insurance Fund members
pay the Financing Corporation assessments at a rate equal to approximately
0.063% of deposits while Bank Insurance Fund members pay Financing Corporation
assessments at a rate equal to approximately 0.013% of deposits. Between
January 1, 2000 and the maturity of the outstanding Financing Corporation
obligations in 2019, Bank Insurance Fund members and Savings Association
Insurance Fund members will share the cost of the interest on the Financing
Corporation bonds on a pro rata basis. It is estimated that Financing
Corporation assessments during this period will be less than 0.025% of
deposits.
Capital Requirements. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks: a leverage
requirement consisting of a minimum ratio of Tier 1 capital to total assets of
3% for the most highly-rated banks with minimum requirements of 4% for all
others, and a risk-based capital requirement consisting of a minimum ratio of
total capital to total risk-weighted assets of 8%, at least one-half of which
must be Tier 1 capital. Tier 1 capital consists principally of shareholders'
equity. These capital requirements are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk
profiles of individual institutions. For example, FDIC regulations provide that
higher capital may be required to take adequate account of, among other things,
interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
Total Risk- Tier 1
Based Risk-Based
Capital Capital
Ratio Ratio Leverage Ratio
----------- ---------- --------------
Well capitalized........ 10% or above 6% or above 5% or above
Adequately capitalized.. 8% or above 4% or above 4% or above
Undercapitalized........ Less than 8% Less than 4% Less than 4%
Significantly
undercapitalized....... Less than 6% Less than 3% Less than 3%
Critically -- -- A ratio of tangible equity to
undercapitalized....... total assets of 2% or less
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of
principal or interest on subordinated debt; and ultimately, appointing a
receiver for the institution.
In general, a depository institution may be reclassified to a lower category
than is indicated by its capital levels if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a less-
than-satisfactory rating on its most recent examination report, to correct the
deficiency.
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Dividends. Under Michigan law, our bank is restricted as to the maximum
amount of dividends it may pay on its common stock owned by us. Our bank may
not pay dividends except out of net profits after deducting losses and bad
debts. A Michigan state bank may not declare or pay a dividend unless the bank
will have a surplus amounting to at least 20% of its capital after the payment
of the dividend. If our bank has a surplus less than the amount of its capital,
it may not declare or pay any dividend to us until an amount equal to at least
10% of net profits for the preceding one-half year (in the case of quarterly or
semi-annual dividends) or full-year (in the case of annual dividends) has been
transferred to surplus. A Michigan state bank may, with the approval of the
Michigan Office of Financial and Insurance Services, Division of Financial
Institutions, by vote of shareholders owning 2/3 of the stock eligible to vote
increase its capital stock by a declaration of a stock dividend, provided that
after the increase the bank's surplus equals at least 20% of its capital stock,
as increased. Our bank may not declare or pay any dividend to us until the
cumulative dividends on preferred stock (should any preferred stock be issued
and outstanding) have been paid in full. Macatawa Bank's articles of
incorporation do not authorize the issuance of preferred stock and there are no
current plans to seek authorization to do so.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee if the depository institution would thereafter be undercapitalized. The
FDIC may prevent an insured bank from paying dividends if the bank is in
default of payment of any assessment due to the FDIC. In addition, the FDIC may
prohibit the payment of dividends by the bank, if the dividend payment is
determined, by reason of the financial condition of the bank, to be an unsafe
and unsound banking practice.
Insider Transactions. Our bank is subject to certain restrictions imposed by
the Federal Reserve Act on any extensions of credit to us or our subsidiaries,
on investments in our securities or securities of our subsidiaries, and the
acceptance of our securities or securities of our subsidiaries as collateral
for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by our bank to our directors and officers, the directors
and officers of our bank, to our principal shareholders, and to "related
interests" of our directors and officers and principal shareholders. In
addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of our company or one of our subsidiaries
or a principal shareholder in our company may obtain credit from banks with
which our bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an
institution whose failure to meet one or more of the standards is so severe
that it could threaten the safe and sound operation of the institution. Failure
to submit an acceptable compliance plan or failure to adhere to a compliance
plan that has been accepted by the appropriate regulator would constitute
grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from
54
engaging as principal in any activity that is not permitted for a national bank
or its subsidiary, respectively, unless the bank meets, and continues to meet,
its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. Impermissible investments and activities must be
divested or discontinued within certain time frames set by the FDIC in
accordance with federal law. These restrictions are not currently expected to
have a material impact on our operations.
Eligible state banks are also authorized to engage, through "financial
subsidiaries," in numerous activities that are permissible for financial
holding companies (as described above) and any activities that the Secretary of
the Treasury, in consultation with the Board, determines is financial in nature
or incidental to the financial activity. As of the date of this filing, we have
not applied for approval to establish any financial subsidiaries.
Consumer Protection Laws. Our business includes making a variety of types of
loans to individuals. In making these loans, we are subject to Michigan usury
and regulatory laws and to various federal statutes, including the privacy of
consumer financial information provisions of the Gramm-Leach-Bliley Act and
regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement
Procedures Act, and the Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination, specify disclosures to
be made to borrowers regarding credit and settlement costs, and regulate the
mortgage loan servicing activities of our bank, including the maintenance and
operation of escrow accounts and the transfer of mortgage loan servicing. Our
bank is subject to extensive deposit-related guidelines under Michigan and
federal law and regulations, including the Truth in Savings Act, the Expedited
Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer
Act, and the Federal Deposit Insurance Act. Violation of these laws could
result in the imposition of significant damages and fines upon us and our
directors and officers.
Branching Authority. Michigan banks have the authority under Michigan law to
establish branches anywhere in the State of Michigan, subject to receipt of all
required regulatory approvals (including the approval of the Michigan Office of
Financial and Insurance Services and the FDIC).
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allows banks to establish interstate branch networks through acquisitions of
other banks, subject to various conditions, including various limitations on
the aggregate amount of deposits that may be held by the surviving bank and all
of its insured depository institution affiliates. The establishment of de novo
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of interstate branching
authority by enacting appropriate legislation prior to June 1, 1997.
Michigan did not opt out of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, and now permits both U.S. and non-U.S. banks to
establish branch offices in Michigan. The Michigan Banking Code permits, in
appropriate circumstances and with the approval of the Michigan Office of
Financial and Insurance Services the following activities:
. the acquisition of all or substantially all of the assets of a Michigan-
chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state;
. the acquisition by a Michigan-chartered bank of all or substantially all
of the assets of an FDIC-insured bank, savings bank or savings and loan
association located in another state;
55
. the consolidation of one or more Michigan-chartered banks and FDIC-
insured banks, savings banks or savings and loan associations located in
other states having laws permitting the consolidation, with the
resulting organization chartered by Michigan;
. the establishment by a foreign bank, which has not previously designated
any other state as its home state under the International Banking Act of
1978, of branches located in Michigan; and
. the establishment or acquisition of branches in Michigan by FDIC-insured
banks located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting Michigan-chartered
banks to establish branches in that jurisdiction.
Further, the Michigan Banking Code permits, upon written notice to the
Michigan Office of Financial and Insurance Services:
. the acquisition by a Michigan-chartered bank of one or more branches
(not comprising all or substantially all of the assets) of an FDIC-
insured bank, savings bank or savings and loan association located in
another state, the District of Columbia, or a U.S. territory or
protectorate
. the establishment by Michigan-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates, and
. the consolidation of one or more Michigan-chartered banks and FDIC-
insured banks, savings banks or savings and loan associations located in
other states, with the resulting organization chartered by one of these
other states.
Federal Reserve System. Federal Reserve Board regulations, as presently in
effect, require depository institutions to maintain noninterest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $42.8 million or
less, the reserve requirement is 3% of total transaction accounts, and for
transaction accounts aggregating in excess of $42.8 million, the reserve
requirement is $1.284 million plus 10% of the aggregate amount of total
transaction accounts in excess of $42.8 million. The first $5.5 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve
Board. Macatawa Bank is in compliance with the foregoing requirements.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 9,500,000 shares of common stock
and 500,000 shares of preferred stock, no par value. As of the date of this
prospectus, there were 3,696,789 shares of our common stock issued and
outstanding. We have not issued any shares of preferred stock.
Michigan law allows our board of directors to issue additional shares of
stock up to the total amount of common stock and preferred stock authorized
without obtaining the prior approval of our shareholders. Registrar and
Transfer Company is the transfer agent for our common stock.
Common Stock
Dividend Rights. Subject to any prior rights of holders of our preferred
stock then outstanding, the holders of our common stock will be entitled to
dividends when, as and if declared by our board of directors out of funds
legally available therefor. Under Michigan law, dividends may be legally
declared or paid only if after the distribution the corporation can pay its
debts as they come due in the usual course of business and the corporation's
total assets equal or exceed the sum of its liabilities plus the amount that
would be needed to satisfy the preferential rights upon dissolution of any
holders of our preferred stock then outstanding whose preferential rights are
superior to those receiving the distribution. See "Supervision and
Regulation -- The Company -- Dividends."
Funds for the payment of dividends by us are expected to be obtained
primarily from dividends paid to us by our bank. There can be no assurance that
we will have funds available for dividends, or that if the funds are available,
that dividends will be declared by our board of directors.
Voting Rights. Subject to the rights, if any, of holders of shares of our
preferred stock then outstanding, all voting rights are vested in the holders
of shares of our common stock. Each share of our common stock entitles the
holder thereof to one vote on all matters, including the election of directors.
Our shareholders do not have cumulative voting rights.
Outstanding Options. As of March 31, 2001, we had issued options to
approximately 80 employees and directors to purchase an aggregate of 167,787
shares of our common stock at exercise prices ranging from $9.71 to $16.02 per
share pursuant to our stock compensation plan and directors stock option plan.
These options have expiration dates ranging from March 19, 2008 to December 10,
2010. We have reserved for issuance under these option plans 246,428 shares of
common stock, including 128,647 shares already subject to outstanding options.
As of March 31, 2001, no options granted under either the stock compensation
plan or the directors stock option plan had been exercised.
Preemptive Rights. Holders of our common stock do not have preemptive
rights.
Liquidation Rights. Subject to any prior rights of any holders of our
preferred stock then outstanding, holders of our common stock are entitled to
share on a pro rata basis in our net assets which remain after satisfaction of
all liabilities.
Reports to Shareholders. We will furnish our shareholders with annual
reports containing audited financial information and, for the first three
quarters of each fiscal year, quarterly reports containing unaudited financial
information. See "Available Information."
Shares Available for Issuance. The availability for issuance of a
substantial number of shares of our common and preferred stock at the
discretion of our board of directors will provide us with the
57
flexibility to take advantage of opportunities to issue stock in order to
obtain capital, as consideration for possible acquisitions and for other
purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements
concerning the issuance of additional shares of our capital stock, except for
an aggregate of 246,428 shares of our common stock reserved for issuance under
our stock option plans.
Uncommitted authorized but unissued shares of our common stock may be issued
from time to time to any persons and for any consideration as our board of
directors may determine and holders of the then outstanding shares of our
common stock may or may not be given the opportunity to vote thereon, depending
upon the nature of the transactions, applicable law and the judgment of our
board of directors regarding the submission of any issuance to our
shareholders. As noted, our shareholders will have no preemptive rights to
subscribe to newly issued shares.
Moreover, it will be possible that additional shares of our common stock
would be issued for the purpose of making an acquisition by an unwanted suitor
of a controlling interest in our company more difficult, time consuming or
costly or would otherwise discourage an attempt to acquire control of our
company. Under these circumstances, the availability of authorized and unissued
shares of our common stock may make it more difficult for our shareholders to
obtain a premium for their shares. The authorized and unissued shares could be
used to create voting or other impediments or to frustrate a person seeking to
obtain control of our company by means of a merger, tender offer, proxy contest
or other means. These shares could be privately placed with purchasers who
might cooperate with our board of directors in opposing any attempt by a third
party to gain control of us. The issuance of new shares of our common stock
could also be used to dilute ownership of a person or entity seeking to obtain
control of our company. Although we do not currently contemplate taking any of
these actions, shares of our capital stock could be issued for the purposes and
effects described above, and our board of directors reserves its rights (if
consistent with its fiduciary responsibilities) to issue stock for these
purposes.
Preferred Stock
Our board of directors is authorized to issue preferred stock in one or more
series, from time to time, with full or limited voting powers, or without
voting powers, and with all designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions upon the preferred stock, as may be provided in the
resolution or resolutions adopted by our board of directors. The authority of
our board of directors includes, but is not limited to, the determination or
fixing of the following with respect to shares of any class or series of
preferred stock:
. the number of shares and designation of any series of preferred stock;
. the dividend rate and whether dividends are to be cumulative;
. whether shares are to be redeemable, and, if so, whether redeemable for
cash, property or rights;
. the rights to which the holders of shares shall be entitled, and the
preferences, if any, over any other series;
. whether the shares shall be subject to the operation of a purchase,
retirement or sinking fund, and, if so, upon what conditions;
. whether the shares will be convertible into or exchangeable for shares
of any other class or of any other series of any class of capital stock
and the terms and conditions of the conversion or exchange;
58
. the voting powers, full or limited, if any, of the shares;
. whether the issuance of any additional shares, or of any shares of any
other series, will be subject to restrictions as to issuance, or as to
the powers, preferences or rights of any of these other series; and
. any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions.
Our board of directors, without shareholder approval, can issue preferred
stock with voting and conversion rights which could adversely affect the voting
power of our common stock.
Anti-Takeover Provisions
In addition to the utilization of authorized but unissued shares as
described above, our articles of incorporation and the Michigan Business
Corporation Act contain other provisions which could be utilized by us to
impede certain efforts to acquire control of our company. Those provisions
include the following:
Control Share Provisions. The Michigan Business Corporation Act contains
provisions intended to protect shareholders and prohibit or discourage certain
types of hostile takeover activities. The control share provisions regulate the
acquisition of "control shares" of large public Michigan corporations.
The control share provisions establish procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquirer which, when combined with other shares held by that
person or entity, would give the acquirer voting power at or above any of the
following thresholds: 20%, 33 1/3% or 50%. Under the control share provisions,
an acquirer may not vote "control shares" unless the corporation's
disinterested shareholders vote to confer voting rights on the control shares.
The acquiring person, officers of the target corporation, and directors of the
target corporation who are also employees of the corporation are precluded from
voting on the issue of whether the control shares shall be accorded voting
rights. The Control Share Provisions do not affect the voting rights of shares
owned by an acquiring person prior to the control share acquisition.
The control share provisions entitle corporations to redeem control shares
from the acquiring person under certain circumstances. In other cases, the
control share provisions confer dissenters' rights upon all of a corporation's
shareholders except the acquiring person.
The control share provisions apply only to an "issuing public corporation."
We fall within the statutory definition of an "issuing public corporation." The
control share provisions automatically apply to any "issuing public
corporation" unless the corporation "opts out" of the statute by so providing
in its articles of incorporation or bylaws. We have not "opted out" of the
control share provisions.
Fair Price Provisions. Provisions of the Michigan Business Corporation Act
create the fair price provisions which establish a statutory scheme similar to
the supermajority and fair total price provisions found in many corporate
charters. The fair price provisions provide that a supermajority vote of 90% of
the total shareholders and no less than two-thirds of the votes of
noninterested shareholders must approve a "business combination." The fair
price provisions define a "business combination" to encompass any merger,
consolidation, share exchange, sale of assets, stock issue, liquidation, or
reclassification of securities involving an "interested shareholder" or certain
"affiliates." An "interested shareholder" is generally any person who owns 10%
or more of the outstanding voting shares of the company. An "affiliate" is a
person who directly or indirectly controls, is controlled by, or is under
common control with a specified person.
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The supermajority vote required by the fair price provisions do not apply to
business combinations that satisfy certain conditions. These conditions include
that the purchase price to be paid for the shares of the company is at least
equal to the greater of (a) the market value of the shares or (b) the highest
per share price paid by the interested shareholder within the preceding two-
year period or in the transaction in which the shareholder became an interested
shareholder, whichever is higher; and once a person has become an interested
shareholder, the person must not become the beneficial owner of any additional
shares of the company except as part of the transaction which resulted in the
interested shareholder becoming an interested shareholder or by virtue of
proportionate stock splits or stock dividends.
The requirements of the fair price provisions do not apply to business
combinations with an interested shareholder that a company's board of directors
has approved or exempted from the requirements of the fair price provisions by
resolution at any time prior to the time that the interested shareholder first
became an interested shareholder.
Classified Board. Our board of directors is classified into three classes,
with each class serving a staggered, three-year term. This classification could
have the effect of extending the time during which our board of directors could
control our operating policies even though opposed by the holders of a majority
of the outstanding shares of common stock.
Under our articles of incorporation, all nominations for directors by one of
our shareholders must be delivered to us in writing at least 60, but not more
than 90, days prior to the annual meeting of our shareholders. A nomination
that is not received within this period will not be placed on the ballot. Our
board of directors believes that advance notice of nominations by our
shareholders will afford a meaningful opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by our board of directors, will provide an opportunity to inform our
shareholders about these qualifications. Although this nomination procedure
does not give our board of directors any power to approve or disapprove our
shareholders' nominations for the election of directors, this nomination
procedure may have the effect of precluding a nomination for the election of
directors at a particular annual meeting if the proper procedures are not
followed.
Our articles of incorporation provide that any one or more or our directors
may be removed at any time, with or without cause, but only by either: the
affirmative vote of a majority of our "Continuing Directors" and at least 80%
of our directors or the affirmative vote, at a meeting of our shareholders
called for that purpose, of the holders of at least 80% of the voting power of
the then-outstanding shares of our capital stock entitled to vote generally in
the election of directors, voting together as a single class. A "Continuing
Director" is generally defined in our articles of incorporation as any member
of our board of directors who is unaffiliated with any "interested shareholder"
(generally, an owner of 10% or more of our outstanding voting shares) and was a
member of our board of directors prior to the time an interested shareholder
became an interested shareholder, and any successor of a Continuing Director
who is unaffiliated with an interested shareholder and is recommended to
succeed a Continuing Director by a majority of the Continuing Directors then on
our board of directors.
Any vacancies on our board of directors for any reason, and any newly
created directorships resulting from any increase in the number of directors,
may be filled only by our board of directors, acting by an affirmative vote of
a majority of the continuing directors and an 80% majority of all of the
directors then in office, although less than a quorum. Any directors so chosen
hold office until the next annual meeting of our shareholders at which
directors are elected to the class to which this director was named and until
their respective successors are duly elected and qualified or their resignation
or removal. No decrease in the number of directors may shorten the term of any
incumbent director.
60
Notice of Shareholder Proposals. Under our articles of incorporation, the
only business that may be conducted at an annual or special meeting of our
shareholders is business that has been brought before the meeting by or at the
direction of the majority of our directors or by a shareholder who provides
timely notice of the proposal in writing to the secretary of our company and
the proposal is a proper subject for action by our shareholders under Michigan
law or whose proposal is included in our proxy materials in compliance with all
the requirements set forth in the applicable rules and regulations of the
Securities and Exchange Commission. To be timely, a shareholder's notice of
proposal must be delivered to, or mailed to and received at the principal
executive offices of our company not less than 60 days prior to the date of the
originally scheduled annual meeting regardless of any postponements, deferrals
or adjournments of that meeting to a later date. With respect to special
meetings, notice must be received by us no more than 10 days after we mail
notice of the special meeting. Our shareholder's notice of proposal must set
forth in writing each matter the shareholder proposes to bring before the
meeting including:
. the name and address of the shareholder submitting the proposal, as it
appears on our books and records;
. a representation that the shareholder: (a) is a holder of record of our
stock entitled to vote at the meeting, (b) will continue to hold our
stock through the date on which the meeting is held, and (c) intends to
vote in person or by proxy at the meeting and to submit the proposal for
shareholder vote;
. a brief description of the proposal desired to be submitted to the
meeting for shareholder vote and the reasons for conducting this
business at the meeting; and
. the description of any financial or other interest of the shareholder in
the proposal.
This procedure may limit to some degree the ability of our shareholders to
initiate discussions at our annual shareholder meetings. It may also preclude
the conducting of business at a particular meeting if the proposed notice
procedures have not been followed.
Certain Shareholder Action. Our articles of incorporation require that any
shareholder action must be taken at an annual or special meeting of our
shareholders, that any meeting of shareholders must be called by our board of
directors or our Chairman of the Board, and prohibits shareholder action by
written consent. Our shareholders are not permitted to call a special meeting
of shareholders or require that our board of directors call a special meeting.
The Michigan Business Corporation Act permits shareholders holding in the
aggregate 10% or more of all of the shares entitled to vote at a meeting to
request the circuit court of the county in which our principal place of
business or registered office is located to order a special meeting of
shareholders for good cause shown.
Amendment or Repeal of Certain Provisions of the Articles. Under Michigan
law, our board of directors need not adopt a resolution setting forth an
amendment to our articles of incorporation before our shareholders may vote on
it. Unless our articles of incorporation provide otherwise, amendments of our
articles of incorporation generally require the approval of the holders of a
majority of our outstanding stock entitled to vote, and if the amendment would
increase or decrease the number of authorized shares of any class or series of
our capital stock, or the par value of these shares, or would adversely affect
the rights, powers, or preferences of any class or series of our capital stock,
a majority of the outstanding stock of this class or series also would be
required to approve the amendment.
Our articles of incorporation require that in order to amend, repeal or
adopt any provision inconsistent with Article VIII relating to our board of
directors, Article IX relating to shareholder proposals or Article X with
respect to shareholder actions, the affirmative vote of at least 80% of the
61
issued and outstanding shares of our common stock entitled to vote in the
election of directors, voting as a single class must be received; provided,
however, that this amendment or repeal or inconsistent provision may be made by
a majority vote of our shareholders at any meeting of the shareholders duly
called and held where the amendment has been recommended for approval by at
least 80% of all directors then holding office and by a majority of the
"continuing directors." These amendment provisions could render it more
difficult to remove management or for a person seeking to effect a merger or
otherwise gain control of our company. These amendment requirements could
therefore adversely affect the potential realizable value of our shareholders'
investments.
Board Evaluation of Certain Offers. Article XII of our articles of
incorporation provides that our board of directors shall not approve, adopt or
recommend any offer of any person or entity (other than by us) to make a tender
or exchange offer for any of our common stock, to merge or consolidate us with
any other entity, or to purchase or acquire all or substantially all of the our
assets, unless and until our board of directors has evaluated the offer and
determined that the offer would be in compliance with all applicable laws and
that the offer is in our best interests and that of our shareholders. In doing
so, our board of directors may rely on an opinion of legal counsel who is
independent from the offeror, and/or it may test the legal compliance in front
of any court or agency that may have appropriate jurisdiction over the matter.
In making its determination, our board of directors must consider all
factors it deems relevant, including but not limited to:
. the adequacy and fairness of the consideration to be received by us
and/or our shareholders, considering historical trading prices of our
capital stock, the price that could be achieved in a negotiated sale of
our company as a whole, past offers, and our future prospects;
. the potential social and economic impact of the proposed transaction on
us, our subsidiaries, our employees, customers and vendors;
. the potential social and economic impact of the proposed transaction on
the communities in which we operate or are located;
. the business and financial condition and earnings prospects of the
proposed acquiring person or entity; and
. the competence, experience and integrity of the proposed acquiring
person or entity and its or their management.
In order to amend, repeal, or adopt any provision that is inconsistent with
Article XII of our articles of incorporation, at least 80% of our shareholders,
voting together as a single class, must approve the change, unless the change
has been recommended for approval by at least 80% of our directors, in which
case a majority of our voting stock could approve the action.
Indemnification of Directors and Officers
Our articles of incorporation provide that we shall indemnify our present
and past directors, officers, and other persons as our board of directors may
authorize, to the fullest extent permitted by law.
Our articles of incorporation contain indemnification provisions concerning
third party actions as well as actions brought on our company's behalf by our
shareholders. Our articles of incorporation provide that we shall indemnify any
person who was or is a party or is threatened to be made a party to any actual
or threatened civil, criminal, or administrative or investigative action, suit
or proceeding (whether brought by
62
or in the name of our company, a subsidiary or otherwise) in which a director
or executive officer is a witness or which is brought against a director of
executive officer in his or her capacity as a director, officer, employee,
agent or fiduciary of our company or of any corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise which the director or
executive officer was serving at our request.
FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by us or our bank to our directors
or officers otherwise permitted under the Michigan Business Corporation Act or
the Michigan Banking Code, respectively.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of our company
pursuant to the provisions discussed above or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act and
is unenforceable.
We have purchased directors' and officers' liability insurance for our
directors and officers and those of Macatawa Bank.
The Michigan Business Corporation Act permits corporations to limit the
personal liability of their directors in certain circumstances. Our articles of
incorporation provide that a director of our company shall not be personally
liable to us or our shareholders for monetary damages for breach of the
director's fiduciary duty. However, they do not eliminate or limit the
liability of a director for any breach of a duty, act or omission for which the
elimination or limitation of liability is not permitted by the Michigan
Business Corporation Act, currently including, without limitation, the
following:
. the breach of the director's duty of loyalty to Macatawa Bank
Corporation or our shareholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. illegal loans, distributions of dividends or assets, or stock purchases
as described in Section 551(1) of the Michigan Business Corporation Act;
and
. transactions from which the director derived an improper personal
benefit.
63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the sale of all shares offered, we expect to have
approximately 5,096,789 shares of our common stock outstanding. The 1,400,000
shares of our common stock offered in this Offering have been registered with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and may generally be resold without registration under the Securities
Act of 1933 unless they were acquired by our directors, executive officers, or
other affiliates or those of our bank. These affiliates of our company may
generally only sell shares of our common stock pursuant to Rule 144 of the
Securities Act of 1933.
In general, under Rule 144 as currently in effect, an affiliate (as defined
in Rule 144) of our company may sell shares of our common stock within any
three-month period in an amount limited to the greater of 1% of the outstanding
shares of our company's common stock (50,970 shares immediately following this
offering) or the average weekly trading volume in our company's common stock
during the four calendar weeks preceding any affiliate sale. Sales under Rule
144 are also subject to certain manner-of-sale provisions, notice requirements
and the availability of current public information about us.
As of March 31, 2001, we had issued options to approximately 80 employees
and directors to purchase an aggregate of 167,787 shares of our common stock at
exercise prices ranging from $9.71 to $16.02 per share pursuant to our stock
compensation plan and directors stock option plan. These options have
expiration dates ranging from March 19, 2008 to December 10, 2010. We have
reserved for issuance under these option plans 246,428 shares of common stock.
At March 31, 2001, no options granted under either the stock compensation plan
or the directors stock option plan had been exercised.
We and our executive officers and directors have agreed that for a period of
120 days after the date of this prospectus, we and they will not, without the
prior written consent of Dain Rauscher Wessels, directly or indirectly offer,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer (subject to certain exceptions) any shares
of our common stock or securities convertible into or exchangeable or
exercisable for shares of our common stock.
No predictions can be made as to the effect, if any, that sales of shares or
the availability of shares for sale will have on the prevailing market price of
our common stock after completion of this offering. Nevertheless, sales of
substantial amounts of our common stock in the public market could have an
adverse effect on prevailing market prices.
64
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
the underwriters named below have severally agreed to purchase from us an
aggregate of 1,400,000 shares of common stock in the amount set forth opposite
their respective names.
Number of
Underwriters Shares
------------ ---------
Dain Rauscher Incorporated.........................................
Stifel, Nicolaus & Company, Incorporated...........................
---------
Total............................................................ 1,400,000
=========
The underwriting agreement provides that the underwriters' obligations are
subject to specified conditions precedent and that the underwriters are
committed to purchase all of the shares of our common stock offered hereby if
the underwriters purchase any of such shares of common stock.
The underwriters have advised us that they propose to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus and to selected dealers at such price less a concession
not in excess of $ per share. The underwriters may allow and such dealers
may reallow a discount not in excess of $ per share to certain other brokers
and dealers. After the offering, the public offering price, concession,
discount and other selling terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to 210,000 additional shares of our
common stock solely to cover overallotments, if any, at the same price per
share to be paid by the underwriters for the other shares of common stock
offered hereby.
The underwriters' commissions are shown in the following table. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
No Exercise Full Exercise
----------- -------------
Per Share.......................................... $ $
---- ----
Total............................................ $ $
==== ====
In connection with the offering of the shares of our common stock, the
underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the shares of our common stock. Such
transactions may include over-allotment transactions in which an underwriter
creates a short position for its own account by selling more shares of our
common stock than it is committed to purchase from us. In such a case, to cover
all or part of the short position, the underwriters may purchase shares of our
common stock in the open market following completion of the initial offering of
the shares of our common stock. The underwriters also may engage in stabilizing
transactions in which they bid for, and purchase, shares of our common stock at
a level above that which might otherwise prevail in the open market for the
purpose of preventing or retarding a decline in the market price of the shares
of our common stock. The underwriters also may reclaim any selling concession
allowed to a dealer if the underwriters repurchase shares distributed by that
dealer. Any of the foregoing transactions may result in the maintenance of a
price for the shares of our
65
common stock at a level above that which might otherwise prevail in the open
market. Neither Macatawa Bank Corporation nor the underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the shares of
our common stock. The underwriters are not required to engage in any of the
foregoing transactions and, if commenced, such transactions may be discontinued
at any time without notice.
We agreed to indemnify the underwriters and their controlling persons
against specified liabilities, including liabilities under the Securities Act
of 1933, as amended, or to contribute to payments the underwriters may be
required to make in respect thereof.
We and our executive officers and directors have agreed that for a period of
120 days after the date of this prospectus, we and they will not, without the
prior written consent of Dain Rauscher Wessels, directly or indirectly offer,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of
or otherwise dispose of or transfer (subject to certain exceptions) any shares
of our common stock or securities convertible into or exchangeable or
exercisable for shares of our common stock.
LEGAL PROCEEDINGS
Neither Macatawa Bank Corporation nor Macatawa Bank is a party to any
material pending legal proceeding. Our management believes there is no
litigation threatened in which we face potential loss or exposure or which will
materially affect our shareholders' equity or our business or financial
condition upon completion of this offering.
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Varnum, Riddering, Schmidt & Howlett llp, Grand
Rapids, Michigan. Members of Varnum, Riddering, Schmidt & Howlett llp own in
the aggregate approximately 23,125 shares of our common stock. Certain legal
matters relating to this offering will be passed upon for the underwriters by
Barack Ferrazzano Kirschbaum Perlman & Nagelberg, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Macatawa Bank Corporation as of
December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and
1998, included in this prospectus have been audited by Crowe, Chizek and
Company LLP, independent public accountants, as indicated in their report
accompanying the financial statements. These financial statements are included
in reliance upon this report given upon the authority of Crowe Chizek as
experts in auditing and accounting.
66
AVAILABLE INFORMATION
We are subject to the informational requirements of Section 15(d) of the
Securities Exchange Act of 1934, as amended, and in accordance therewith file
reports with the SEC. Copies of these reports can be inspected at and copied at
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's regional offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Room
1400, 75 Park Place, New York, New York 10007. Copies of these materials can
also be obtained at prescribed rates by writing to the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, we
are required to file electronic versions of these documents with the SEC
through its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The SEC maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC.
We have filed a registration statement with the SEC in accordance with the
provisions of the Securities Act. This prospectus does not contain all of the
information set forth in the registration statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information pertaining to the shares of our common stock offered hereby
and us, reference is made to the registration statement, including the exhibits
filed as a part of this registration statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of our
company pursuant to the provisions discussed above under "Description of
Capital Stock -- Indemnification of Directors and Officers" or otherwise, we
have been advised that in the opinion of the SEC, this indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
INCORPORATION OF INFORMATION
WE FILE WITH THE SEC
The following documents, which we have filed with the SEC, are incorporated
by reference in this prospectus:
(1) Our annual report on Form 10-K for the fiscal year ended December
31, 2000; and
(2) Our report on Form 10-Q for the quarter ended March 31, 2001.
All documents that we file with the SEC pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the termination of this offering of the shares of our
common stock shall be deemed incorporated by reference in this prospectus and
to be a part of this prospectus from the respective dates of filing these
documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon the person's written or oral request, a copy of
any and all of the information incorporated by reference in this prospectus,
other than exhibits to these documents, unless the exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates. Requests should be directed to Macatawa Bank Corporation,
Attention: Steven L. Germond, 348 South Waverly Road, Holland, Michigan 49423,
telephone number (616) 820-1444.
67
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces that statement. Any statement that is
modified, superseded or replaced shall not be deemed, except as so modified,
superseded or replaced, to constitute a part of this prospectus.
68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT AUDITORS............................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Changes in Shareholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Macatawa Bank Corporation
Zeeland, Michigan
We have audited the accompanying consolidated balance sheets of Macatawa
Bank Corporation as of December 31, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Macatawa
Bank Corporation at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 24, 2001, except Note 18, which
is dated April 11, 2001
F-2
MACATAWA BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31, December 31,
2001 2000 1999
----------- ------------ ------------
(Unaudited)
ASSETS
Cash and due from banks.................. $ 20,505 $ 26,305 $ 20,554
Federal funds sold....................... 3,000 0 0
-------- -------- --------
23,505 26,305 20,554
Securities available for sale, at fair
value................................... 51,818 48,669 28,281
Federal Home Loan Bank stock............. 3,129 2,550 2,312
Total loans.......................... 438,455 410,676 285,374
Allowance for loan losses................ (6,243) (5,854) (3,995)
-------- -------- --------
432,212 404,822 281,379
Premises and equipment--net.............. 12,117 12,264 9,998
Accrued interest receivable.............. 3,259 3,271 1,904
Other assets............................. 2,217 1,932 493
-------- -------- --------
Total assets......................... $528,257 $499,813 $344,921
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing.................... $ 45,498 $ 50,746 $ 34,385
Interest-bearing....................... 373,214 347,871 245,005
-------- -------- --------
Total................................ 418,712 398,617 279,390
Federal Home Loan Bank advances.......... 62,588 51,000 30,000
Note payable............................. 4,000 4,000 0
Federal funds purchased.................. 0 6,200 0
Accrued expenses and other liabilities... 3,622 1,868 1,005
-------- -------- --------
Total liabilities.................... 488,922 461,685 310,395
Shareholders' equity
Preferred stock, no par value, 500,000
shares authorized; no shares issued
and outstanding....................... -- -- --
Common stock, no par value, 9,500,000
shares authorized; 3,696,789,
3,589,315 and 3,588,565 shares issued
and outstanding at March 31, 2001,
December 31, 2000 and 1999,
respectively.......................... 38,653 36,890 36,883
Retained earnings (deficit)............ 211 1,137 (1,961)
Accumulated other comprehensive income
(loss)................................ 471 101 (396)
-------- -------- --------
Total shareholders' equity........... 39,335 38,128 34,526
-------- -------- --------
Total liabilities and shareholders'
equity.............................. $528,257 $499,813 $344,921
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Three months ended Years ended December
March 31, 31,
---------------------- -------------------------
2001 2000 2000 1999 1998
----------- ---------- ------- ------- -------
(Unaudited) (Unaudited)
Interest income
Loans, including fees...... $ 9,482 $6,611 $31,787 $18,379 $ 5,339
Investments................ 798 495 2,551 1,621 1,465
------- ------ ------- ------- -------
Total interest income...... 10,280 7,106 34,338 20,000 6,804
Interest expense
Deposits................... 4,446 3,056 15,213 8,699 3,186
Other...................... 1,003 513 2,526 729 4
------- ------ ------- ------- -------
Total interest expense..... 5,449 3,569 17,739 9,428 3,190
------- ------ ------- ------- -------
Net interest income......... 4,831 3,537 16,599 10,572 3,614
Provision for loan losses... (522) (487) (1,931) (1,967) (2,023)
------- ------ ------- ------- -------
Net interest income after
provision for loan losses.. 4,309 3,050 14,668 8,605 1,591
Noninterest income
Service charges and fees... 314 201 1,144 661 157
Gain on sales of loans..... 266 39 361 623 520
Trust fees................. 180 114 531 229 0
Other...................... 68 52 16 15 6
------- ------ ------- ------- -------
Total noninterest income... 828 406 2,052 1,528 683
Noninterest expense
Salaries and benefits...... 1,866 1,648 6,865 5,408 2,727
Occupancy expense of
premises.................. 295 255 1,094 841 305
Furniture and equipment
expense................... 367 263 1,244 777 253
Legal and professional
fees...................... 66 51 248 135 199
Advertising................ 124 70 366 267 199
Supplies................... 85 104 348 343 233
Data processing fees....... 102 74 561 401 196
Other expense.............. 595 464 1,946 1,268 651
------- ------ ------- ------- -------
Total noninterest
expenses.................. 3,500 2,929 12,672 9,440 4,763
------- ------ ------- ------- -------
Income (loss) before income
tax expense................ 1,637 527 4,048 693 (2,489)
Income tax expense.......... 546 0 699 0 0
------- ------ ------- ------- -------
Net income (loss)........... $ 1,091 $ 527 $ 3,349 $ 693 $(2,489)
======= ====== ======= ======= =======
Comprehensive income
(loss)..................... $ 1,461 $ 476 $ 3,846 $ 292 $(2,484)
======= ====== ======= ======= =======
Basic earnings (loss) per
share...................... $ 0.30 $ 0.14 $ 0.91 $ 0.22 $ (1.18)
======= ====== ======= ======= =======
Diluted earnings (loss) per
share...................... $ 0.29 $ 0.14 $ 0.90 $ 0.22 $ (1.18)
======= ====== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Other
Retained Comprehensive Total
Common Earnings Income Shareholders'
Stock (Deficit) (Loss) Equity
------- --------- ------------- -------------
Balance, January 1, 1998......... $ 8,138 $ (165) $ 0 $ 7,973
Net loss......................... (2,489) (2,489)
Other comprehensive income
(loss):
Net change in unrealized gain
(loss) on securities available
for sale, net of tax of
$2,346......................... 5 5
-------
Comprehensive loss............ (2,484)
Proceeds from sale of 1,495,000
shares of common stock on April
7, 1998......................... 14,123 14,123
------- ------ ----- -------
Balance, December 31, 1998....... 22,261 (2,654) 5 19,612
Net income....................... 693 693
Other comprehensive income
(loss):
Net change in unrealized gain
(loss) on securities available
for sale, net of tax of
($206,457)..................... (401) (401)
-------
Comprehensive income.......... 292
Proceeds from sale of 1,153,440
shares of common stock on June
4, 1999......................... 14,622 14,622
------- ------ ----- -------
Balance, December 31, 1999....... 36,883 (1,961) (396) 34,526
Net income....................... 3,349 3,349
Other comprehensive income
(loss):
Net change in unrealized gain
(loss) on securities available
for sale, net of tax of $256... 497 497
-------
Comprehensive income.......... 3,846
Common stock issued upon exercise
of stock options (750 shares)... 7 7
Cash dividends at $.07 per
share........................... (251) (251)
------- ------ ----- -------
Balance, December 31, 2000....... 36,890 1,137 101 38,128
Net income (unaudited)........... 1,091 1,091
Other comprehensive income (loss)
(unaudited):
Net change in unrealized gain
(loss) on securities available
for sale, net of tax of $191... 370 370
-------
Comprehensive income.......... 1,461
Issued 107,474 shares in payment
of 3% stock dividend
(unaudited)..................... 1,763 (1,766) (3)
Cash dividends at $.07 per share
(unaudited)..................... (251) (251)
------- ------ ----- -------
Balance, March 31, 2001
(unaudited)..................... $38,653 $ 211 $ 471 $39,335
======= ====== ===== =======
See accompanying notes to consolidated financial statements.
F-5
MACATAWA BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three months ended
March 31, Years ended December 31,
---------------------- ---------------------------------
2001 2000 2000 1999 1998
----------- ---------- ---------- ---------- ---------
(Unaudited) (Unaudited)
Cash flows from
operating activities:
Net income (loss)...... $ 1,091 $ 527 $ 3,349 $ 693 $ (2,489)
Adjustments to
reconcile net income
(loss) to net cash
from operating
activities
Depreciation and
amortization........ 313 249 1,232 737 271
Provision for loan
losses.............. 522 487 1,931 1,967 2,022
Origination of loans
for sale............ (35,579) (8,036) (47,007) (54,715) (44,146)
Proceeds from sales
of loans originated
for sale............ 35,845 8,075 47,368 55,338 44,667
Gain on sales of
loans............... (266) (39) (362) (623) (520)
Net change in
Organizational
costs............. 0 0 0 0 66
Accrued interest
receivable and
other assets...... (273) (437) (3,010) (1,107) (1,221)
Accrued expenses
and other
liabilities....... 1,562 143 810 583 588
-------- --------- ---------- ---------- ---------
Net cash from
operating
activities...... 3,215 969 4,311 2,873 (762)
Cash flows from
investing activities:
Loan originations and
payments, net......... (27,913) (40,578) (125,373) (147,494) (137,384)
Purchase of FHLB
stock................. (579) 0 (238) (2,312) 0
Activity in securities
available for sale
Purchases............ (17,580) (1,372) (19,598) (16,879) (29,000)
Maturities........... 15,000 0 0 15,000 4,000
Additions to premises
and equipment......... (175) (1,924) (3,534) (3,610) (6,715)
-------- --------- ---------- ---------- ---------
Net cash from
investing
activities...... (31,247) (43,874) (148,743) (155,295) (169,099)
Cash flows from
financing activities:
Net increase (decrease)
in short-term
borrowings............ (6,200) 0 6,200 (2,000) 2,000
Proceeds from note
payable............... 0 0 4,000 0 0
Proceeds from FHLB
advances.............. 16,852 25,000 56,000 51,000 0
Repayments on FHLB
advances.............. (5,264) (20,000) (35,000) (21,000) 0
Net increase in
deposits.............. 20,095 42,195 119,227 112,401 164,276
Cash dividends paid.... (251) 0 (251) 0 0
Proceeds from the
issuance of common
stock................. 0 0 7 14,622 14,123
-------- --------- ---------- ---------- ---------
Net cash from
financing
activities...... 25,232 47,195 150,183 155,023 180,399
Net change in cash and
cash equivalents...... (2,800) 4,290 5,751 2,601 10,538
Beginning cash and cash
equivalents........... 26,305 20,554 20,554 17,953 7,415
-------- --------- ---------- ---------- ---------
Ending cash and cash
equivalents........... $ 23,505 $ 24,844 $ 26,305 $ 20,554 $ 17,953
======== ========= ========== ========== =========
Supplemental
disclosures of cash
flow information
Cash paid during the
period for
Interest........... $ 5,078 $ 2,844 $ 17,100 $ 9,213 $ 2,726
Income taxes....... 392 0 1,975 0 0
See accompanying notes to consolidated financial statements.
F-6
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2001 (Unaudited),
and years ended December 31, 2000 and 1999
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Macatawa Bank Corporation (the "Company") became the bank holding company
for Macatawa Bank (the "Bank") on February 23, 1998, when all of the Bank's
outstanding common stock (842,025 shares) was converted into all of the
outstanding common stock of the Company (968,329 shares) and all of the Bank's
shareholders became all of the Company's shareholders. The exchange ratio in
the conversion was 1.15 shares of Company common stock for each share of Bank
common stock. The Bank's common stock had been issued to its shareholders as of
November 7, 1997 as a result of a private offering of the Bank's common stock
at a price of $10 per share or a total of $8,175,000. As this was essentially
an internal reorganization, the consolidated financial statements are presented
by including operations of the Company and Bank for all periods presented.
Further share and per share data has been adjusted for the conversion ratio of
1.15 shares of Company stock for one share of Bank stock.
Macatawa Bank Corporation is a regional, community-based financial
institution, located in Zeeland, Michigan. The Bank's primary services include
accepting deposits and making commercial, mortgage and installment loans in the
Michigan counties of Allegan, Ottawa and Kent. The Bank also operates a trust
department, which provides fiduciary, investment and other related services.
The Bank commenced its application process on May 21, 1997, completed its
common stock sale on November 7, 1997 and opened for operations on November 25,
1997 after several months of work by incorporators and employees in preparing
applications with the various regulatory agencies and obtaining insurance and
building space. The costs associated with the organization of the Company are
included in the 1998 income statement.
The Company completed an underwritten initial public offering of common
stock on April 7, 1998, which resulted in net proceeds to the Company of
$14,123,378. On April 30, 1999, the Company had another common stock offering
and sold 1,188,043 shares, raising $14,622,270.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Macatawa Bank, after elimination of
intercompany accounts and transactions.
Use of Estimates
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses and the fair values of
financial instruments are particularly subject to change.
Concentration of Credit Risk
Loans are granted to, and deposits are obtained from, customers primarily in
the western Michigan area as described above. Substantially all loans are
secured by specific items of collateral, including residential real estate,
commercial real estate, commercial assets and consumer assets. Other financial
instruments, which potentially subject the Company to concentrations of credit
risk, include deposit accounts in other financial institutions.
F-7
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Flow Reporting
Cash and cash equivalents include cash on hand, demand deposits with other
financial institutions and short-term securities (securities with maturities of
equal to or less than 90 days and federal funds sold). Cash flows are reported
net for customer loan and deposit transactions, interest-bearing time deposits
with other financial institutions and short-term borrowings with maturities of
90 days or less.
Securities
Securities available for sale consist of those securities which might be
sold prior to maturity due to changes in interest rates, prepayment risks,
yield and availability of alternative investments, liquidity needs or other
factors. Securities classified as available for sale are reported at their fair
value and the related unrealized holding gain or loss is reported in other
comprehensive income.
Interest income includes amortization of purchase premium or discount. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary.
Loans
Loans are reported at the principal balance outstanding, net of the
allowance for loan losses, and charge-offs. Loans held for sale are reported at
the lower of cost or market, on an aggregate basis. While the Company does sell
loans on the secondary market, there were no loans held for sale at March 31,
2001 (unaudited), December 31, 2000 or 1999. Loans are sold servicing released,
therefore no mortgage servicing right assets are established.
Interest income is reported on the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days (180 days for residential
mortgages). Payments received on such loans are reported as principal
reductions.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and recoveries, and decreased by charge-offs.
Management estimates the allowance balance required based on known and inherent
risks in the portfolio, economic conditions and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in aggregate for smaller-balance loans of
similar nature such as residential mortgage and consumer loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when the internal grading system indicates a doubtful classification.
F-8
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If fair
value declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed. The Bank held $29,000 in foreclosed assets at March
31, 2001 (unaudited), and no foreclosed assets at December 31, 2000 or 1999.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both straight-line and
accelerated methods over the estimated useful lives of the respective assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. These assets are
reviewed for impairment under SFAS No. 121 when events indicate the carrying
amount may not be recoverable.
Stock Compensation
Employee compensation expense under stock option plans is reported if
options are granted below market price at grant date. Pro forma disclosures of
net income and earnings per share are shown using the fair value method of SFAS
No. 123 to measure expense for options granted, using an option pricing model
to estimate fair value.
Income Taxes
Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on-and off-balance sheet financial
instruments do not include the value of anticipated future business or the
values of assets and liabilities not considered financial instruments.
Earnings (Loss) Per Share
Basic earnings (loss) per share is net income (loss) divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share include the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for stock dividends, including the 3% stock dividend paid on May 4,
2001.
F-9
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, net of tax.
Segment Reporting
The Company, through the branch network of the Bank, provides a broad range
of financial services to individuals and companies in western Michigan. These
services include demand, time and savings deposits; lending; ATM processing;
cash management; and trust services. While the Company's management team
monitors the revenue streams of the various Company products and services,
operations are managed and financial performance is evaluated on a Company-wide
basis. Accordingly, all of the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard required all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values are recorded in the income statement. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedges item, even if the fair value of the hedged item is
not otherwise recorded. Adoption of this standard on January 1, 2001 did not
have a material effect.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will have a
material effect on the financial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit
the dividends paid by the Bank to the Company or by the Company to
shareholders.
Reclassifications
Certain amounts on the 2000, 1999 and 1998 consolidated financial statements
have been reclassified to conform with the 2001 presentation.
Note 2. Cash and Due from Banks
The Company was required to have $4,642,000, $5,120,000 and $2,597,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at March 31, 2001 (unaudited), and year end
2000 and 1999. These balances do not earn interest.
F-10
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Securities
As of the dates indicated, the Company classified all of its securities as
available for sale. The amortized cost and fair values of securities at the end
of the period were as follows (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- -------
March 31, 2001 (Unaudited)
U.S. Treasury securities and
obligations of U.S. Government
agencies.......................... $44,651 $546 $ 0 $45,197
State and municipal bonds.......... 6,453 168 0 6,621
------- ---- ----- -------
$51,104 $714 $ 0 $51,818
======= ==== ===== =======
December 31, 2000
U.S. Treasury securities and
obligations of U.S. Government
agencies.......................... $45,927 $192 $(128) $45,991
State and municipal bonds.......... 2,588 90 0 2,678
------- ---- ----- -------
$48,515 $282 $(128) $48,669
======= ==== ===== =======
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- -------
December 31, 1999
U.S. Treasury securities and
obligations of U.S. Government
agencies.......................... $27,926 $ 0 $(589) $27,337
State and municipal bonds.......... 955 1 (12) 944
------- ---- ----- -------
$28,881 $ 1 $(601) $28,281
======= ==== ===== =======
Contractual maturities of debt securities at March 31, 2001 and December 31,
2000 were as follows (dollars in thousands):
Amortized Fair
Cost Value
--------- -------
March 31, 2001 (Unaudited)
Due in one year or less................................... $ 0 $ 0
Due from one to five years................................ 41,013 41,540
Due from five to ten years................................ 5,497 5,543
Due after ten years....................................... 4,594 4,735
------- -------
$51,104 $51,818
December 31, 2000
Due in one year or less................................... $13,976 $13,974
Due from one to five years................................ 31,951 32,017
Due from five to ten years................................ 415 430
Due after ten years....................................... 2,173 2,248
------- -------
$48,515 $48,669
======= =======
F-11
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At periods ending March 31, 2001 (unaudited), December 31, 2000 and 1999,
securities with a book value of approximately $1,000,000, $1,000,000 and
$1,500,000, respectively, were pledged as security for public deposits and for
other purposes required or permitted by law.
There were no sales of securities for the periods ended March 31, 2001
(unaudited), December 31, 2000, 1999 and 1998.
In addition, $45,000,000, $45,000,000 and $26,000,000 of the securities at
periods ending March 31, 2001 (unaudited), December 31, 2000 and 1999 were used
as collateral for advances from the Federal Home Loan Bank.
Note 4. Loans
Loans were as follows (dollars in thousands):
December 31,
March 31, -----------------
2001 2000 1999
----------- -------- --------
(Unaudited)
Commercial..................................... $318,103 $293,541 $201,392
Mortgage....................................... 62,366 60,823 44,734
Consumer....................................... 57,986 56,312 39,248
-------- -------- --------
$438,455 $410,676 $285,374
======== ======== ========
Activity in the allowance for loan losses is as follows (dollars in
thousands):
Three months ended Years ended December
March 31, 31,
---------------------- ----------------------
2001 2000 2000 1999 1998
----------- ---------- ------ ------ ------
(Unaudited) (Unaudited)
Beginning balance........... $5,854 $3,995 $3,995 $2,030 $ 7
Provision charged to
operating expense........ 522 487 1,931 1,967 2,023
Loans charged-off......... (144) 0 (87) (6) 0
Recoveries................ 11 0 15 4 0
------ ------ ------ ------ ------
Ending balance.............. $6,243 $4,482 $5,854 $3,995 $2,030
====== ====== ====== ====== ======
Impaired loans were as follows (dollars in thousands):
December 31,
March 31, ------------
2001 2000 1999
----------- ------ ----
(Unaudited)
Loans with no allocated allowance for loan
losses.......................................... $1,389 $1,393 $ 0
Loans with allocated allowance for loan losses... 125 231 0
------ ------ ----
$1,514 $1,624 $ 0
====== ====== ====
Amount of the allowance for loan losses
allocated....................................... $ 31 $ 93 $ 0
F-12
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended
December 31,
Three months ended --------------
March 31, 2001 2000 1999 1998
------------------ ---- ---- ----
(Unaudited)
Average of impaired loans during the
period.................................. $1,534 $472 $ 0 $ 0
Interest income recognized during
impairment.............................. 31 33 0 0
Cash-basis interest income recognized.... 31 27 0 0
Note 5. Premises and Equipment-Net
Premises and equipment were as follows (dollars in thousands):
December 31,
March 31, ---------------
2001 2000 1999
----------- ------- ------
(Unaudited)
Land............................................ $ 1,859 $ 1,859 $1,574
Building........................................ 5,925 5,886 3,825
Leasehold improvements.......................... 1,049 1,049 1,090
Furniture and equipment......................... 5,842 5,707 4,517
------- ------- ------
14,675 14,501 11,006
Less accumulated depreciation................... (2,558) (2,237) (1,008)
------- ------- ------
$12,117 $12,264 $9,998
======= ======= ======
Depreciation expense was $329,626, $254,754, $1,267,801, $738,616, and
$271,458 for each of the periods ending March 31, 2001 (unaudited), March 31,
2000 (unaudited), December 31, 2000, 1999 and 1998.
The Bank leases certain office and branch premises and equipment under
operating lease agreements. Total rental expense for all operating leases
aggregated $68,404, $59,805, $243,640, $305,516 and $117,886 for each of the
periods ending March 31, 2001 (unaudited), March 31, 2000 (unaudited), December
31, 2000, 1999 and 1998. Future minimum rentals under noncancelable operating
leases as of March 31, 2001 (unaudited) and December 31, 2000 are as follows
(dollars in thousands):
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
2001................................................ $255 $228
2002................................................ 218 171
2003................................................ 105 58
2004................................................ 22 18
2005................................................ 0 0
---- ----
$600 $475
==== ====
F-13
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Deposits
Deposits are summarized as follows (dollars in thousands):
December 31,
March 31, -----------------
2001 2000 1999
----------- -------- --------
(Unaudited)
Noninterest-bearing demand.................... $ 45,498 $ 50,746 $ 34,385
Money market.................................. 128,658 125,428 100,773
NOW and Super NOW............................. 50,719 56,973 43,237
Savings....................................... 12,547 10,549 7,422
Certificates of deposit....................... 181,290 154,921 93,573
-------- -------- --------
$418,712 $398,617 $279,390
======== ======== ========
The following table depicts the maturity distribution of certificates of
deposits (dollars in thousands):
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
2001................................................ $111,145 $103,503
2002................................................ 61,101 47,772
2003................................................ 6,272 2,438
2004................................................ 762 300
2005................................................ 908 906
The Bank had approximately $99,070,000, $83,855,000 and $50,179,000 in time
certificates of deposit, which were in denominations of $100,000 or more at
March 31, 2001 (unaudited), December 31, 2000 and 1999.
Brokered deposits totaled approximately $24,339,000, $16,338,000 and
$6,365,000 at March 31, 2001 (unaudited), December 31, 2000 and 1999. At March
31, 2001 (unaudited) and December 31, 2000, brokered deposits had interest
rates ranging from 5.15% to 7.30% and 5.65% to 7.30%, respectively, and
maturities ranging from one month to three years.
Note 7. Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank were as follows (dollars in
thousands):
December 31,
March 31, ---------------
2001 2000 1999
----------- ------- -------
(Unaudited)
Maturities from October 2001 through December
2010, fixed rate from 5.08% to 6.68%,
averaging 5.82% at March 31, 2001............. $62,588 $51,000 $15,000
Maturities from March 2000 through June 2000,
variable rates of 4.05%....................... 0 0 15,000
------- ------- -------
$62,588 $51,000 $30,000
======= ======= =======
F-14
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each advance is payable at its maturity date, with a prepayment penalty. The
advances were collateralized by securities totaling $45,000,000, $45,000,000
and $26,000,000 and first mortgage loans totaling $49,000,000, $50,000,000 and
$47,000,000 under a blanket lien arrangement at March 31, 2001 (unaudited),
December 31, 2000 and 1999.
Maturities over the next five years are (dollars in thousands):
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
2001................................................ $ 5,264 $ 0
2002................................................ 8,264 3,000
2003................................................ 3,000 3,000
2004................................................ 5,060 4,000
2005................................................ 10,000 10,000
Note 8. Other Borrowings
The Company secured a $5,000,000 credit facility during September 2000 to
provide additional capital to maintain the Bank at or above the 8% required
regulatory capital. This credit line was increased to $8,000,000 during March
2001. Maturity dates and interest rates on advances of this credit facility are
as follows (dollars in thousands):
March 31, December 31,
Maturity Date Interest Rate 2001 2000
------------- ------------- --------- ------------
(Unaudited)
January 26, 2001 8.15% (fixed) $ 0 $3,000
March 29, 2001 8.26% (fixed) 0 1,000
April 26, 2001 7.11% (fixed) 3,000 0
June 29, 2001 6.36% (fixed) 1,000 0
------ ------
$4,000 $4,000
====== ======
These borrowings are secured with 235,000 shares of common stock of Macatawa
Bank.
Note 9. Related Party Transactions
Loans to principal officers, directors, and their affiliates were as follows
(dollars in thousands).
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
Beginning balance................................... $14,239 $ 9,467
New loans........................................... 727 12,577
Repayments.......................................... (1,328) (7,805)
Other............................................... (881) 0
------- -------
Ending balance.................................... $12,757 $14,239
======= =======
Deposits from principal officers, directors, and their affiliates at March
31, 2001 (unaudited), December 31, 2000 and 1999 were $1,905,000, $5,397,000
and $3,183,000.
F-15
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10. Stock Options
Options to buy stock are granted to officers and employees under the
Employee Stock Option Plan (the Employees' Plan), which provides for issue of
up to 206,000 options. Options are also granted to directors under the
Directors' Stock Option Plan (the Directors' Plan), which provides for issuance
of up to 41,200 options. The exercise price is the market price at the date of
grant for both plans. The maximum option term is ten years with options vesting
over a one-year period for both the Employees' Plan and the Directors' Plan. A
summary of the activity in the plans is as follows.
Weighted
Average
Options Exercise
Outstanding Price
----------- --------
Balance at December 31, 1998............................ 127,205 $12.46
Granted................................................. 21,630 13.75
Exercised............................................... 0 0.00
Forfeited............................................... (4,325) 14.04
------- ------
Balance at December 31, 1999............................ 144,510 12.68
Granted................................................. 24,308 12.28
Exercised............................................... (773) 9.71
Forfeited............................................... 0 0.00
------- ------
Balance at December 31, 2000............................ 168,045 12.64
Granted................................................. 0 0.00
Exercised............................................... 0 0.00
Forfeited............................................... (258) 15.55
------- ------
Balance at March 31, 2001 (unaudited)................... 167,787 $12.64
======= ======
For the options outstanding at March 31, 2001 (unaudited) and December 31,
2000, the range of exercise prices was $9.71 to $16.02 per share with a
weighted average remaining contractual life of 7.74 and 7.99 years,
respectively. At March 31, 2001 (unaudited) and December 31, 2000, 143,737
options were exercisable at a weighted average price of $12.70 per share.
No compensation cost related to stock options was recognized during the
quarter ended March 31, 2001 (unaudited), 2000, 1999 or 1998. Had compensation
cost for stock options been measured using FASB Statement No. 123, net income
(loss) and basic income (loss) per share would have been the pro forma amounts
indicated below (dollars in thousands). The pro forma effect may increase in
the future if more options are granted.
F-16
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended
December 31
Three months ended -------------------
March 31, 2001 2000 1999 1998
------------------ ------ ---- -------
(Unaudited)
Net income (loss) as reported......... $1,091 $3,349 $693 $(2,489)
Pro forma net income (loss)........... 1,044 3,280 346 (2,752)
Basic earnings (loss) per share as
reported............................. .30 .93 .22 (1.22)
Pro forma basic earnings (loss) per
share................................ .28 .91 .11 (1.35)
Diluted earnings (loss) per share as
reported............................. .29 .93 .22 (1.22)
Pro forma diluted earnings (loss) per
share................................ .28 .91 .11 (1.35)
Weighted-average fair value of options
granted during the period............ NA 3.82 5.19 4.74
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
Years ended December
31,
-------------------------
2000 1999 1998
------- ------- -------
Risk-free interest rate........................... 5.26% 6.55% 4.72%
Expected option life.............................. 7 years 7 years 7 years
Expected stock price volatility................... 26.87% 17.29% 8.46%
Dividend yield.................................... 2.00% 0.00% 0.00%
Note 11. Employee Benefits
The Company established a 401(k) plan in January 1999 covering substantially
all employees. Employees may elect to contribute to the plan from 1% to 15% of
their salary subject to statutory limitations. The Company makes matching
contributions equal to 100% of the first 3% of employee contributions. The
Company's contribution for the periods ended March 31, 2001 (unaudited), March
31, 2000 (unaudited), December 31, 2000 and 1999 were approximately $41,000,
$37,000, $142,000 and $114,000.
F-17
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Earnings Per Share
A reconciliation of the numerators and denominators of basic and diluted
earnings per share are as follows (dollars in thousands):
Three months ended
March 31, Years ended December 31,
----------------------- -----------------------------------
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Basic earnings (loss)
per share
Net income (loss)..... $ 1,091 $ 527 $ 3,349 $ 693 $ (2,489)
----------- ----------- ----------- ----------- -----------
Weighted average
common shares
outstanding.......... 3,696,994 3,696,222 3,696,347 3,194,965 2,103,178
----------- ----------- ----------- ----------- -----------
Basic earnings (loss)
per share............ $ 0.30 $ 0.14 $ 0.91 $ 0.22 $ (1.18)
=========== =========== =========== =========== ===========
Diluted earnings
(loss) per share
Net income (loss)..... $ 1,091 $ 527 $ 3,349 $ 693 $ (2,489)
Weighted average
common shares
outstanding.......... 3,696,994 3,696,222 3,696,347 3,194,965 2,103,178
Add: Dilutive effects
of assumed exercises
of stock options..... 23,056 21,244 14,704 21,660 0
----------- ----------- ----------- ----------- -----------
Weighted average
common and dilutive
potential common
shares outstanding... 3,720,050 3,717,466 3,711,051 3,216,625 2,103,178
----------- ----------- ----------- ----------- -----------
Diluted earnings
(loss) per share..... $ 0.29 $ 0.14 $ 0.90 $ 0.22 $ (1.18)
=========== =========== =========== =========== ===========
Stock options for 66,950, 66,950, 78,280, 58,710 and 127,205 shares of
common stock were not considered in computing diluted earnings (loss) per share
for March 31, 2001 (unaudited), March 31, 2000 (unaudited), December 31, 2000,
1999 and 1998 because they were antidilutive.
Note 13. Federal Income Taxes
The consolidated provision for income taxes is as follows (dollars in
thousands):
Three months
ended Years ended December 31,
March 31, ---------------------------
2001 2000 1999 1998
------------ -------- -------- --------
(Unaudited)
Current............................ $ 733 $ 1,889 $ 415 0
Deferred benefit................... (187) (534) (173) $ (842)
Change in valuation allowance...... 0 (656) (242) 842
----- -------- ------- -------
$ 546 $ 699 $ 0 $ 0
===== ======== ======= =======
F-18
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The recorded consolidated income tax provision in 2000, 1999 and 1998
differs from that computed by multiplying pre-tax income by the statutory
federal income tax rates due to the valuation allowance, tax-exempt interest
income and nondeductible expenses.
The net deferred tax asset recorded includes the following amounts of
deferred tax assets and liabilities (dollars in thousands):
December 31,
March 31, --------------
2001 2000 1999
----------- ------ ------
(Unaudited)
Deferred tax asset
Allowance for loan losses.................... $2,000 $1,829 $1,198
Unrealized loss on securities available for
sale........................................ 0 0 204
Organization costs........................... 12 14 34
Other........................................ 19 16 4
------ ------ ------
2,031 1,859 1,440
Deferred tax liabilities
Depreciation................................. (277) (297) (221)
Unrealized gain on securities available for
sale........................................ (243) (52) 0
Accretion.................................... (18) (13) 0
------ ------ ------
(538) (362) (221)
------ ------ ------
Net deferred tax asset before valuation
allowance..................................... 1,493 1,497 1,219
Valuation allowance............................ 0 0 (656)
------ ------ ------
Net deferred tax asset after valuation
allowance..................................... $1,493 $1,497 $ 563
====== ====== ======
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefit related to such
assets will not be realized. Management has determined that no valuation
allowance is required at March 31, 2001 (unaudited) or for 2000 and that a
valuation allowance of $655,830 was required for 1999.
Note 14. Commitments and Off-Balance-Sheet Risk
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are
conditional commitments to guarantee a customer's performance to a third party.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit and standby letters of
credit. Collateral or other security is normally not obtained for these
financial instruments prior to their use, and many of the commitments are
expected to expire without being used.
F-19
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the notional or contractual amounts of financial instruments
with off-balance-sheet risk was as follows (dollars in thousands):
December 31,
March 31, -----------------
2001 2000 1999
----------- -------- --------
(Unaudited)
Commitments to make loans.................... $ 69,474 $ 53,068 $ 14,973
Unused lines of credit and letters of
credit...................................... 127,056 142,817 102,763
Approximately 50% of the Bank's commitments to make loans are at fixed
rates, offered at current market rates. The majority of the variable rate
commitments noted above is tied to prime and expire within 30 days. The
majority of the unused lines of credit are at variable rates tied to prime.
The Bank conducts substantially all of its business operations in western
Michigan.
Note 15. Regulatory Matters
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
F-20
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At March 31, 2001 (unaudited), December 31, 2000 and December 31, 1999,
actual capital levels (dollars in thousands) and minimum required levels were:
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ---------- -------- ---------- --------
March 31, 2001
(unaudited)
Total capital (to risk
weighted assets)
Consolidated........... $44,473 9.9% $ 35,877 8.0% $ 44,846 10.0%
Bank................... 47,961 10.7 35,861 8.0 44,826 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........... 38,867 8.7 17,938 4.0 26,908 6.0
Bank................... 42,358 9.5 17,930 4.0 26,896 6.0
Tier 1 capital (to
average assets)
Consolidated........... 38,867 7.7 20,327 4.0 25,409 5.0
Bank................... 42,358 8.3 20,320 4.0 25,400 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
December 31, 1999
Total capital (to risk
weighted assets)
Consolidated........... $38,358 14.0% $ 21,989 8.0% $ 27,489 10.0%
Bank................... 33,463 12.2 21,992 8.0 27,491 10.0
Tier 1 capital (to risk
weighted assets)
Consolidated........... 34,922 12.7 10,994 4.0 16,491 6.0
Bank................... 30,027 10.9 10,996 4.0 16,494 6.0
Tier 1 capital (to
average assets)
Consolidated........... 34,922 10.8 12,940 4.0 16,175 5.0
Bank................... 30,027 9.4 12,811 4.0 16,014 5.0
The Company and the Bank were categorized as well capitalized at December
31, 2000 and 1999. The Bank was categorized as well capitalized at March 31,
2001 (unaudited), while the Company was categorized as adequately capitalized.
Banking regulations limit capital distributions. Generally, capital
distributions are limited to undistributed net income for the current and prior
two years. At March 31, 2001 (unaudited) and December 31, 2000, approximately
$2,842,000 and $3,434,000 was available to pay dividends to the holding
company.
F-21
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16. Condensed Financial Statements (Parent Company Only)
Following are condensed parent company only financial statements (dollars in
thousands):
CONDENSED BALANCE SHEETS
December 31
March 31, ---------------
2001 2000 1999
----------- ------- -------
(Unaudited)
ASSETS
Cash and cash
equivalents.............. $ 368 $ 423 $ 4,895
Investment in subsidiary.. 42,829 41,563 29,631
Other assets.............. 200 145 0
------- ------- -------
Total assets............ $43,397 $42,131 $34,526
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Other borrowings.......... $ 4,000 $ 4,000 $ 0
Other liabilities......... 62 3 0
------- ------- -------
Total liabilities....... 4,062 4,003 0
Shareholders' equity
Common stock.............. 38,653 36,890 36,883
Retained earnings
(deficit)................ 211 1,137 (1,961)
Accumulated other
comprehensive income
(loss)................... 471 101 (396)
------- ------- -------
Total shareholders'
equity................. 39,335 38,128 34,526
------- ------- -------
Total liabilities and
shareholders' equity... $43,397 $42,131 $34,526
======= ======= =======
CONDENSED STATEMENTS OF INCOME
Years ended Period from
Three months ended December February 23, 1998
March 31, 31, (date of inception)
---------------------- ------------ through December
2001 2000 2000 1999 31, 1998
----------- ---------- ------ ---- ------------------- ---
(Unaudited) (Unaudited)
Expenses
Other operating
expenses............. $ 121 $ 29 $ 231 $142 $ 55
------ ---- ------ ---- -------
Loss before income tax
and equity in
undistributed net
income (loss) of
subsidiary............. (121) (29) (231) (142) (55)
Equity in undistributed
net income (loss) of
subsidiary............. 1,171 556 3,434 835 (2,185)
------ ---- ------ ---- -------
Income (loss) before
income tax............. 1,050 527 3,203 693 (2,240)
Federal income tax
expense (benefit)...... (41) 0 (146) 0 0
------ ---- ------ ---- -------
Net income (loss)....... $1,091 $527 $3,349 $693 $(2,240)
====== ==== ====== ==== =======
F-22
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Period from
February 23,
1998 (date
of
Three months ended Years ended inception)
March 31, December 31, through
---------------------- ----------------- December 31,
2001 2000 2000 1999 1998
----------- ---------- ------- -------- ------------
(Unaudited) (Unaudited)
Cash flows from
operating activities
Net income (loss)...... $ 1,091 $ 527 $ 3,349 $ 693 $ (2,240)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Equity in
undistributed net
(income) loss of
subsidiary........... (1,171) (556) (3,434) (835) 2,185
Increase in other
assets............... (55) (40) (146) 0 0
Increase in other
liabilities.......... 56 0 3 0 0
------- ------- ------- -------- --------
Net cash from
operating
activities......... (79) (69) (228) (142) (55)
Cash flows from
investing activities
Investment in
subsidiary............ 275 (3,000) (8,000) (10,500) (13,154)
------- ------- ------- -------- --------
Net cash from
investing
activities......... 275 (3,000) (8,000) (10,500) (13,154)
Cash flows from
financing activities
Other borrowings....... 0 0 4,000 0 0
Proceeds from issuance
of common stock....... 0 0 7 14,622 14,123
Dividends paid......... (251) 0 (251) 0 0
------- ------- ------- -------- --------
Net cash from
financing
activities......... (251) 0 3,756 14,622 14,123
------- ------- ------- -------- --------
Net change in cash and
cash equivalents...... (55) (3,069) (4,472) 3,980 915
Cash and cash
equivalents at
beginning of period... 423 4,895 4,895 915 0
------- ------- ------- -------- --------
Cash and cash
equivalents at end of
period................ $ 368 $ 1,826 $ 423 $ 4,895 $ 915
======= ======= ======= ======== ========
Noncash transaction
related to origination
of holding company in
1998
Investment in
subsidiary........... $ 0 $ 0 $ 0 $ 0 $ (7,724)
Common stock.......... 0 0 0 0 8,137
Retained deficit...... 0 0 0 0 (414)
F-23
MACATAWA BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17. Quarterly Financial Data (unaudited)
Earnings
(Loss)
Per Share
Net Net --------------
Interest Interest Income Fully
Income Income (Loss) Basic Diluted
-------- -------- ------ ----- -------
(Dollars in thousands)
2001
First quarter.......................... $10,280 $4,831 $1,091 $ .30 $ .29
2000
First quarter.......................... $ 7,106 $3,537 $ 527 $ .14 $ .14
Second quarter......................... 8,368 4,079 823 .23 .23
Third quarter.......................... 9,026 4,318 947 .25 .25
Fourth quarter......................... 9,838 4,665 1,052 .29 .28
1999
First quarter.......................... $ 3,635 $1,883 $ (77) $(.03) $(.03)
Second quarter......................... 4,663 2,471 44 .03 .03
Third quarter.......................... 5,475 2,926 301 .09 .09
Fourth quarter......................... 6,227 3,292 425 .13 .13
Note 18. Subsequent Event
The Company declared a 3% stock dividend on April 11, 2001, payable on May
4, 2001 to shareholders of record on April 24, 2001. All per share data has
been restated to reflect the dividend.
F-24
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,400,000 Shares
MACATAWA BANK CORPORATION
Common Stock
--------------------
PRICE $ PER SHARE
--------------------
Dain Rauscher Wessels
Stifel, Nicolaus & Company
Incorporated
--------------------
, 2001
--------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses in connection with the issuance and distribution of the securities
being registered are estimated as follows, all of which are to be paid by us:
SEC Registration Fee............................................. $ 7,004.00
NASD fee......................................................... 3,301.00
Nasdaq fee....................................................... 24,000.00
Printing and Mailing Expenses.................................... 40,000.00
Accounting Fees.................................................. 30,000.00
Transfer and Registrar's Fees.................................... 2,000.00
Legal Fees and Expenses.......................................... 60,000.00
Blue Sky Fees and Expenses....................................... 5,000.00
Miscellaneous.................................................... 10,000.00
----------
Total.......................................................... $ 181,305
==========
Item 15. Indemnification of Directors and Officers.
Sections 561-571 of the Michigan Business Corporation Act, as amended, grant
us broad powers to indemnify any person in connection with legal proceedings
brought against that person by reason of their present or past status as an
officer or director of our Company, provided that the person acted in good
faith and in a manner he reasonably believed to be in or not opposed to our
best interests, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Michigan Business
Corporation Act also gives us broad powers to indemnify defined persons against
expenses and reasonable settlement payments in connection with any action by or
in the right of our Company, provided the person acted in good faith and in a
manner he reasonably believed to be in or not opposed to our best interests,
except that no indemnification may be made if that person is adjudged to be
liable to us unless and only to the extent the court in which that action was
brought determines upon application that, despite the adjudication, but in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for reasonable expenses as the court deems proper. In
addition, to the extent that any specified person is successful in the defense
of any defined legal proceeding, we are required by the Michigan Business
Corporation Act to indemnify him against expenses, including attorneys' fees,
that are actually and reasonably incurred by him in connection therewith.
Our articles of incorporation contain provisions entitling our directors and
executive officers to indemnification against specified liabilities and
expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by us, our directors and officers are
insured within the limits and subject to the limitations of the policy, against
specified expenses in connection with the defense of specified claims, actions,
suits or proceedings, and specified liabilities which might be imposed as a
result of claims, actions, suits or proceedings, which may be brought against
them by reason of being or having been directors and officers of our Company.
II-1
Item 16. Exhibits.
Reference is made to the Exhibit Index which appears at page II-4 of this
Registration Statement.
Item 17. Undertakings.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended may be permitted to our directors, officers and controlling
persons of the Company pursuant of the foregoing provisions, or otherwise, we
have been advised that, in the opinion of the Securities and Exchange
Commission this indemnification is against the public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable. In the event that
a claim for indemnification against these liabilities (other than the payment
by us of expenses incurred or paid by a director, officer or controlling
person of our Company in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by us is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of the issue.
We hereby undertake that: For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or Rule 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective; and for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of these securities at that time
shall be deemed to be the initial bona fide offering thereof. We hereby
undertake that we will provide to the underwriter, Dain Rauscher Wessels, at
the closing specified in the underwriting agreement, certificates in the
denominations and registered in the names as required by the underwriter to
permit prompt delivery to the purchaser.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Macatawa Bank
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, hereunto
duly authorized, in the City of Holland, State of Michigan, on May 7, 2001.
Macatawa Bank Corporation
/s/ Benj. A. Smith, III
By: ___________________________________
Benj. A. Smith, III
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benj. A. Smith, III and Philip J. Koning, and
each of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Benj. A. Smith, III- Principal Executive May 7, 2001
______________________________________ Officer and a Director
Benj. A. Smith, III
/s/ Steven L. Germond- Principal Financial and May 7, 2001
______________________________________ Accounting Officer
Steven L. Germond
/s/ Philip J. Koning- President and a Director May 7, 2001
______________________________________
Philip J. Koning
/s/ G. Thomas Boylan- Director May 7, 2001
______________________________________
G. Thomas Boylan
/s/ Robert E. DenHerder- Director May 7, 2001
______________________________________
Robert E. DenHerder
/s/ John F. Koetje- Director May 7, 2001
______________________________________
John F. Koetje
II-3
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Number and Description Page
------------------------------ ------------
1 Underwriting Agreement
3.1 Articles of Incorporation of Macatawa Bank Corporation,
incorporated by reference to Exhibit 3.1 to the Macatawa
Bank Corporation Registration Statement on Form SB-2
(Registration No. 333-45755).
3.2 Bylaws of Macatawa Bank Corporation, incorporated by
reference to Exhibit 3.2 to the Macatawa Bank
Corporation Registration Statement on Form SB-2
(Registration No. 333-45755).
4 Specimen stock certificate of Macatawa Bank Corporation,
incorporated by reference to Exhibit 4 to the Macatawa
Bank Corporation Statement on Form SB-2 (Registration
No. 333-45755).
5 Opinion of Varnum, Riddering, Schmidt & Howlett LLP.
10.1 Macatawa Bank Corporation Stock Compensation Plan
incorporated by reference to Exhibit 10.1 to the
Macatawa Bank Corporation Registration Statement on Form
SB-2 (Registration No. 333-45755), and as amended by
incorporating Appendix B from the Macatawa Bank
Corporation Proxy Statement dated March 5, 1999, for the
Macatawa Bank Corporation Annual Meeting of Shareholders
held April 15, 1999.
10.2 Macatawa Bank Corporation 1998 Directors' Stock Option
Plan, incorporated by reference to Exhibit 10.2 to the
Macatawa Bank Corporation Registration Statement on Form
SB-2 (Registration No. 333-45755).
10.3 Macatawa Bank Corporation Employee Stock Purchase Plan,
incorporated by reference to Exhibit 4 to the Macatawa
Bank Corporation Registration Statement on Form S-8
(Registration No. 333-94207).
10.4 Lease Agreement dated March 2, 1999, for the facility
known as the Chateau Centre Suite 2, located at 1760
44th Street, S.W., Wyoming, Michigan 49508.
10.5 Lease Agreement dated December 22, 1997, for the facility
located at 106 E.8th Street, Holland, Michigan 49423,
incorporated by reference to Exhibit 10.5 to the
Macatawa Bank Corporation Registration Statement on Form
SB-2 (Registration No. 333-45755).
10.6 Data Processing Agreement between Rurbanc Data Services,
Inc., and Macatawa Bank dated July 1, 2000, incorporated
by reference to Exhibit 10.6 to the Macatawa Bank
Corporation Statement on Form 10-K for the fiscal year
ended December 31, 2000.
10.7 MagicLine Product Services Agreement between MagicLine,
Inc. and Macatawa Bank dated October 1, 1997,
incorporated by reference to Exhibit 10.7 to the
Macatawa Bank Corporation Registration Statement on Form
SB-2 (Registration No. 333-45755).
10.8 FTB Participating Bank Agreement between First Tennessee
Bank National Association and Macatawa Bank dated
October 24, 1997, incorporated by reference to Exhibit
10.8 to the Macatawa Bank Corporation Registration
Statement on Form SB-2 (Registration No. 333-45755).
Sequentially
Numbered
Exhibit Number and Description Page
------------------------------ ------------
10.9 Line of Credit Agreement between Bank One, Michigan and
Macatawa Bank Corporation dated September 26, 2000.
10.10 Revolving Business Credit Note (LIBOR--Based Interest
Rate) between Bank One, Michigan and Macatawa Bank
Corporation dated September 26, 2000.
10.11 Form Limited Discretionary Investment Advisory Agreement
utilized by the Macatawa Bank trust department to
appoint a third party investment advisor for Macatawa
Bank managed trust accounts.
21 Subsidiaries of the Registrant
23.1 Consent of Crowe, Chizek and Company LLP, independent
public accountants
23.2 Consent of Varnum, Riddering, Schmidt & Howlett LLP is
included in Exhibit 5 to this Registration Statement.