SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission file number: 000-25927 MACATAWA BANK CORPORATION (Exact name of issuer as specified in its charter) MICHIGAN 38-3391345 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 51 E. Main Street, Zeeland, Michigan 49464 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 748-9491 ----------- Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No ________ The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,588,565 shares of the Company's Common Stock (no par value) were outstanding as of May 10, 2000. Transitional Small Business Disclosure Format (check one): Yes _____ No __X__ INDEX Page Number(s) Part I. Financial Information (unaudited): Item 1. Condensed Consolidated Financial Statements 3 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures 15 About Market Risk Part II. Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 Part I Financial Information MACATAWA BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS As of March 31, 2000 (unaudited) and December 31, 1999 - -------------------------------------------------------------------------------- March 31, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS Cash and due from banks $ 23,344,536 $ 20,554,039 Federal funds sold 1,500,000 -- ---------- ------------ Cash and cash equivalents 24,844,536 20,554,039 Securities available for sale, at fair value 29,581,543 28,281,375 Federal Home Loan Bank Stock 2,312,000 2,312,000 Total loans 325,952,756 285,374,451 Allowance for loan losses (4,482,165) (3,995,165) ------------ --------------- 321,470,591 281,379,286 Premises and equipment - net 11,666,705 9,997,566 Accrued interest receivable 2,097,691 1,904,126 Other assets 736,185 492,743 ------------ -------------- Total Assets $392,709,251 $344,921,135 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 36,191,301 $34,542,493 Interest-bearing 285,393,853 244,847,389 ----------- ----------- Total 321,585,154 279,389,882 Federal Home Loan Bank Borrowings 35,000,000 30,000,000 Accrued expenses and other liabilities 1,122,006 1,005,100 ------------ ------------ Total liabilities 357,707,160 310,394,982 Shareholders' equity Preferred stock, no par value, 500,000 shares authorized; no shares issued and outstanding Common stock, no par value, 9,500,000 shares authorized; 3,588,565 shares issued and outstanding as of March 31, 2000 and December 31, 1999. 36,882,916 36,822,916 Retained deficit (1,434,197) (1,960,810) Accumulated other comprehensive income (446,628) (395,953) ----------- ----------- Total shareholders' equity 35,002,091 34,526,153 ---------- ----------- Total liabilities and shareholders' equity $392,709,251 $344,921,135 ============ ============
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements 3 MACATAWA BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Month Periods Ended March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- Three Months Three Months ended ended March 31, 2000 March 31, 1999 -------------- -------------- (Unaudited) (Unaudited) Interest Income Loans, including fees $6,610,646 $3,278,369 Investments 495,285 356,783 ----------- --------- Total interest income 7,105,931 3,635,152 Interest expense Deposits 3,056,181 1,749,202 Other 512,525 2,485 ----------- ----------- Total interest expense 3,568,706 1,751,687 Net interest income 3,537,225 1,883,465 Provision for loan losses (487,000) (450,000) Net interest income after provision for loan losses 3,050,225 1,433,465 Noninterest income Service charges on deposit accounts 200,959 89,514 Gain (loss) on sale of loans 39,321 255,988 Trust revenue 113,366 -- Other 52,004 43,643 --------- --------- Total noninterest income 405,650 389,145 Noninterest expense Salaries and benefits 1,648,019 1,101,157 Occupancy expense of premises 255,264 158,390 Furniture and equipment expense 262,996 138,957 Legal and professional fees 51,044 32,865 Advertising 69,753 40,424 Data Processing 73,807 42,386 Shareholder Services 18,174 6,380 Supplies 104,157 67,671 Other expense 446,048 311,490 -------- ---------- Total noninterest expenses 2,929,262 1,899,720 Income/(Loss) before federal income tax 526,613 (77,110) Federal income tax 0 0 --- --- Net income/(loss) $ 526,613 $ (77,110) ========= ========== Basic and diluted income/(loss) per share .15 (.03) Average shares outstanding 3,558,565 2,435,125
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 4 MACATAWA BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Month Periods Ended March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- Three Months Three Months ended ended March 31, 2000 March 31, 1999 -------------- -------------- (Unaudited) (Unaudited) Cash flows from operating activities Net Income $ 526,613 $ (77,110) Adjustments to reconcile net loss to net cash from operating activities Depreciation and amortization 249,464 137,209 Provision for loan losses 487,000 450,000 Net change in Accrued interest receivable and other assets (437,007) (75,524) Accrued expenses and other liabilities 143,011 143,520 --------- ----------- Net cash from operating activities 969,081 578,095 Purchase of Cash flows from investing activities Net increase in loans (40,578,305) (39,238,031) Purchase of Federal Home Loan Bank Stock -- (1,216,900) Purchases of securities available for sale (1,371,656) (4,000,000) Proceeds from maturities and calls of securities available for sale -- 15,000,000 Purchases of premises and equipment (1,923,895) (703,479) ------------ ---------- Net cash from investing activities (43,873,856) (30,158,410) Cash flows from financing activities Net increase in deposits 42,195,272 23,234,652 Net increase (decrease) in short term borrowings -- (2,000,000) Advances of Federal Home Loan Bank Borrowings 25,000,000 10,000,000 Repayments of Federal Home Loan Bank Borrowings (20,000,000) -- ----------- ----------- Net cash from financing activities 47,195,272 31,234,652 Net change in cash and cash equivalents 4,290,497 1,654,337 Cash and cash equivalents at beginning of period 20,554,039 17,953,177 ---------- ----------- Cash and cash equivalents at end of period $24,844,536 $19,607,514 =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for interest $ 2,844,098 $ 1,775,073
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 5 MACATAWA BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Three Month Periods Ended March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- Accumulated Other Total Common Retained Comprehensive Shareholders' Stock Deficit Income Equity -------- --------- ------------- ------------- Balance, December 31, 1998 $22,260,646 $(2,654,076) $ 4,818 $ 19,611,388 Net loss for three months ended March 31, 1999 (unaudited) (77,110) (77,110) Other comprehensive income, net of tax: Unrealized gains/losses on securities (53,448) (53,448) ------------ Other comprehensive income (53,448) ------------ Comprehensive loss (130,558) ----------- ------------ ---------- ------------- Balance, March 31, 1999 $22,260,646 $ (2,731,186) $ (48,630) $ 19,480,830 =========== ============ ========== ============= Accumulated Other Total Common Retained Comprehensive Shareholders' Stock Deficit Income Equity --------- ---------- ----------- ---------- Balance, December 31, 1999 $ 36,882,916 $ (1,960,810) $ (395,953) 34,526,153 Net income for three months ended March 31, 2000 (unaudited) 526,613 526,613 Other comprehensive income, net of tax: Unrealized gains/losses on securities (50,675) (50,675) ---------- -------- Other comprehensive income (50,675) (50,675) ---------- -------- Comprehensive income 475,938 ------------ ------------ ---------- ------------ Balance, March 31, 2000 $ 36,882,916 $ (1,434,197) $ (446,628) $ 35,002,091 ============ ============ ========== ============
- -------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. 6 MACATAWA BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Proxy Statement dated March 20, 2000, containing financial statements for the year ended December 31, 1999. NOTE 2 COMPUTATION OF EARNINGS PER SHARE Basic and diluted earnings (loss) per share is based on net income (loss) divided by the weighted average number of shares outstanding during the period. NOTE 3 PRINCIPLES OF CONSOLIDATION The accompanying condensed consolidated financial statements include the accounts of Macatawa Bank Corporation (the "Company), and its wholly-owned subsidiary, Macatawa Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. 7 MACATAWA BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- NOTE 4 - SECURITIES The amortized cost and fair values of securities were as follows: Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Values --------- ---------- ---------- -------- March 31, 2000 (Unaudited) U.S. Treasury securities and $28,928,489 $ 590 $ (675,389) $28,253,690 obligations of U.S. Government corporation and agencies Tax Exempt Municipal Bonds 1,329,763 3,127 (5,037) 1,327,853 ----------- -------- ---------- ----------- Total Securities $30,258,252 $ 3,717 $ (680,426) $29,581,543 =========== ======== ========== =========== December 31, 1999 U.S. Treasury securities and obligations of U.S. Government corporations and agencies $27,925,926 $ (589,036) $27,336,890 State and municipal bonds 955,377 $ 852 (11,744) 944,485 ----------- -------- ---------- ----------- $28,881,303 $ 852 $ (600,780) $28,281,375 ========== ======== ========== ===========
Contractual maturities of debt securities at March 31, 2000, were as follows. No held-to-maturity securities existed at March 31, 2000. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale Securities ----------------------------- Amortized Fair Cost Values --------- -------- Due from one to five $19,984,497 $19,597,490 Due from five to ten 8,943,992 8,656,200 Due after ten years 1,329,763 1,327,853 ----------- ----------- Total $30,258,252 $29,581,543 ========== ==========
- -------------------------------------------------------------------------------- (Continued) 8 MACATAWA BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- NOTE 5 - LOANS Loans are as follows: March 31, December 31, 2000 1999 ---------- ---------- (Unaudited) Commercial $231,615,620 $201,391,721 Mortgage 49,494,376 44,734,529 Consumer 44,842,760 39,248,201 ------------ ------------- 325,952,756 285,374,451 Allowance for loan losses (4,482,165) (3,995,165) ------------ ------------- $321,470,591 $ 281,379,286 ============ =============
Activity in the allowance for loan losses is as follows: Three Three months months ended ended March 31, March 31, 2000 1999 ---------- --------- (Unaudited) (Unaudited) Balance at beginning of period $3,995,165 $2,030,000 Provision charged to operating expense 487,000 450,000 ---------- ---------- Balance at end of period $4,482,165 $2,480,000 ========== ==========
- -------------------------------------------------------------------------------- (Continued) 9 MACATAWA BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and March 31, 1999 (unaudited) - -------------------------------------------------------------------------------- NOTE 6 - PREMISES AND EQUIPMENT - NET Premises and equipment are as follows: March 31 December 31 2000 1999 ---- ---- Land $ 1,869,218 $1,574,218 Building and improvements 6,053,369 4,915,252 Furniture and equipment 5,007,252 4,516,473 ------------ ----------- 12,929,839 11,005,943 Less accumulated depreciation (1,263,134) (1,008,377) ------------ ----------- $11,666,705 $9,997,566 =========== ==========
NOTE 7 - DEPOSITS Deposits are summarized as follows: March 31 December 31 2000 1999 ---- ---- Noninterest-bearing demand deposit accounts $ 36,191,301 $ 34,542,493 Money market account 110,101,540 100,642,349 NOW and Super NOW accounts 42,393,162 43,237,004 Savings accounts 8,837,950 7,411,691 Certificates of deposit 124,061,201 93,556,345 ----------- ------------ $321,585,154 $279,389,882 ============ ============
NOTE 8 - FEDERAL HOME LOAN BANK BORROWINGS The Bank was approved in the first quarter of 1999 to be a member of the Federal Home Loan Bank of Indianapolis. As a result, the Bank now has availability to Federal Home Loan Bank advances as an additional funding resource. Maturity dates and interest rates on these advances are as follows: March 31 December 31 2000 1999 Maturity Date Interest Rate ---- ---- ------------- ------------- March 27, 2000 5.44% (initial rate) 0 $5,000,000 June 19, 2000 5.65% (initial rate) 0 5,000,000 June 26, 2000 3.85% (initial rate) 0 5,000,000 April 1, 2002 5.63% (fixed) 3,000,000 3,000,000 March 31, 2003 5.77% (fixed) 3,000,000 3,000,000 March 30, 2004 5.84% (fixed) 4,000,000 4,000,000 Sept. 1, 2009 5.80% (fixed) 5,000,000 5,000,000 January 7, 2005 6.68% (fixed) 5,000,000 0 January 7, 2005 6.465% (fixed) 5,000,000 0 March 23, 2010 5.99% (fixed) 10,000,000 0 ----------- ----------- $35,000,000 $30,000,000 =========== ===========
Each advance is payable in full at its respective maturity date. These advances were required to be collateralized by at least $56,000,000 of the Bank's first mortgage loans under a blanket loan arrangement at March 31, 2000. 10 MACATAWA BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (unaudited) and December 31, 1999 - -------------------------------------------------------------------------------- NOTE 9 - REGULATORY MATTERS The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restorations required At March 31, 2000 and December 31, 1999, actual capital levels (in thousands) and minimum required levels for the Company and the Bank were: To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Regulations ------ ----------------- ------------------ March 31, 2000 Amount Ratio Amount Ratio Amount Ratio - -------------- ------ ----- ------ ----- ------ ----- Total capital (to risk weighted assets) Consolidated $39,931 12.2% $26,100 8.0% $32,626 10.0% Bank 38,066 12.2 26,097 8.0 32,622 10.0 Tier 1 capital (to risk weighted assets) Consolidated 35,449 10.9 13,050 4.0 19,575 6.0 Bank 33,584 10.9 13,049 4.0 19,573 6.0 Tier 1 capital (to average assets) Consolidated 35,449 9.8 14,452 4.0 18,065 5.0 Bank 33,584 9.4 14,451 4.0 18,064 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 March 31, 2000 and at year-end 1999. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Macatawa Bank Corporation (the "Company") is a Michigan corporation and is the bank holding company for Macatawa Bank (the "Bank"). The Bank commenced operations on November 25, 1997. The Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides a full range of commercial and consumer banking services, primarily in the communities of Holland and Zeeland, Michigan, as well as the surrounding market area primarily located in Ottawa County, Michigan. The Company has experienced rapid and substantial growth since opening in November 1997. At March 31, 2000, the Bank had thirteen branch banking offices and two service facilities. The Company completed an underwritten initial public offering of common stock on April 7, 1998, resulting in net proceeds of $14.1 million. In June 1999, the Company completed an offering of common stock to its shareholders resulting in net proceeds of $14.6 million. The Bank established a Trust Department in the fourth quarter of 1998 to further provide for customers' financial needs. The Trust Department began business on January 3, 1999 and as of March 31, 2000, had assets of approximately $208 million. Financial Condition Total assets of the Company increased by $47,788,116 to $392,709,251 at March 31, 2000 from $344,921,135 at December 31, 1999. The increase in assets is primarily attributable to the Bank continuing to attract customer deposits and then lending and otherwise investing these funds. The number of deposit accounts increased from approximately 27,000 at December 31, 1999, to approximately 30,000 deposit accounts at March 31, 2000. Management attributes the strong growth in deposits to quality customer service, the desire of customers to deal with a local bank, and convenient accessibility through the expansion of branches. Cash and cash equivalents, which include federal funds sold and short-term investments, increased $4,290,497 to $24,844,536 at March 31, 2000, from $20,554,039 at December 31, 1999. The increase is due to an increase in deposits on the last day of the quarter. These funds will be used as a means to fund future loan growth. Securities available for sale increased $1,300,168 to $29,581,543 at March 31, 2000 from $28,281,375 at December 31, 1999. The increase is the result of purchasing additional securities as a means of strengthening the Bank's liquidity ratio. Total loans increased $40,578,305 to $325,952,756 at March 31, 2000 from $285,374,451 to December 31, 1999, or 11.7%. Commercial loans increased $30,223,899 from $201,391,721 at December 31, 1999 to $231,615,620 at March 31, 2000, an increase of 15%. Commercial loans account for approximately 71% of the Bank's total loan portfolio. The allowance for loan losses as of March 31, 2000 was $4,482,165 representing approximately 1.38% of gross loans outstanding, compared to $3,995,165 at December 31, 1999. The Bank has not experienced any material credit losses as of March 31, 2000. Bank premises and equipment increased to $11,666,705 at March 31, 2000 from $9,997,566 at December 31, 1999. The increase resulted primarily from the purchase of a branch facility operated by the Bank and located at 699 E. 16th Street in Holland. The Bank previously leased this facility. Deposits increased to $321,585,154 at March 31, 2000, from $279,389,882 at December 31, 1999. This was primarily as a result of deposits being obtained from new customers of the Bank. Noninterest bearing demand deposit accounts increased by $1,648,808 to $36,191,301 at March 31, 2000 from $34,542,493 at December 31, 1999. These accounts are comprised primarily of business checking accounts and represented approximately 10% of total deposits at March 31, 2000. Results of Operations Net income for the quarter ended March 31, 2000, was $526,613, an increase of $603,723 over 12 the same period last year. The primary reason for the increase in income is due to the continued growth of the Company resulting in an increase of net interest income. Net interest income for the quarter ended March 31, 2000 was $3,537,225 and $1,883,465 for the quarter ended March 31, 1999. Interest income for the quarter ended March 31, 2000 was $7,105,931, related to interest income on securities, loans and interest earning deposits. Interest expense was $3,568,706 for the quarter ended 2000, related to interest incurred on interest bearing deposits, fed funds purchased and Federal Home Loan Bank advances. The Company had an allowance for loan losses of approximately 1.38% of total loans at March 31, 2000. The provision for loan losses for the quarter ended March 31, 2000 was $487,000. This amount was provided as a result of the increase in the total loan portfolio. Management considers it prudent during the first years of operations to provide for loan losses at a level which is consistent with levels maintained by banks with similar loan portfolios. Management will continue to monitor its loan loss performance and adjust its loan loss reserve to more closely align itself to its own history of loss experience. Non-interest income for the quarter ended March 31, 2000 was $405,650, an increase of $16,505 over the same period last year. Gains on sales of loans decreased by $216,667 to $39,321 at March 31, 2000, from $255,988 at March 31, 1999. The decrease can be attributed primarily to a decline in refinancing of residential mortgages as a result of recent market rate increases. Another component of non-interest income is service charges on deposit accounts which increased by $111,445 to $200,959 at March 31, 2000 from $89,514 at March 31, 1999. This is the result of an increase in the number of deposit accounts to approximately 30,000 at March 31, 2000 from approximately 17,000 at March 31, 1999. Trust revenues also contributed to non-interest income. The Trust Department began business on January 3, 1999. Trust revenues for the quarter ended March 31, 2000 were $113,366 compared to no revenues for the quarter ended March 31, 1999. Trust revenues continue to improve each quarter, commensurate with the growth of trust assets. Non-interest expense for the quarter ended March 31, 2000 was $2,929,262, compared to $1,899,728 at March 31, 1999, an increase of $1,029,534. The increase in the main components of non-interest expense can be attributed primarily to the growth of the Bank and building the infrastructure for future growth. The main components of non-interest expense were primarily salaries and benefits which totaled $1,648,019, an increase of $546,862 over March 31, 1999 of $1,101,157. Other significant components of non-interest expense consisted of occupancy and equipment expenses, supplies, data processing advertising and legal and accounting fees. These components, in aggregate, totaled to $817,021 at March 31, 2000, an increase of $336,328 from $480,693 at March 31, 1999. Liquidity and Capital Resources The Company obtained its initial equity capital as a result of a private placement on behalf of the Bank to investors in November, 1997. The Company raised additional equity capital of $14.1 million in its initial public offering completed in April, 1998. As a condition to regulatory approval of the Bank's formation, the Bank is required to maintain capitalization sufficient to provide a ratio of Tier 1 Capital to total assets of at least 8% through the end of the third year of operations. The Bank will complete its third year of operations on November 25, 2000. At March 31, 1999, the Bank's Tier 1 Capital as a percent of total assets was 8.43% Due to the rapid growth of the Bank, additional equity capital was required. In June 1999, the Company raised $14.6 million of equity capital net proceeds in an offering made to the Company's shareholders. The Company contributed $10 million from the proceeds of this offering to the Bank's capital. Due to continued growth of the Bank, an additional $3 million was contributed to the Bank from the Company's cash reserves of approximately $5 million. At March 31, 2000, the Bank's Tier 1 Capital as a percent of total assets was 8.44%. The Company's sources of liquidity include loan payments by borrowers, maturity and sales of securities available for sale, growth of deposits and deposit equivalents, federal funds sold, borrowings from the Federal Home Loan Bank, and the issuance of common stock. Liquidity management involves the ability to meet the cash flow requirements of the Company's customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. 13 Year 2000 Compliance - Because many computerized systems use only two digits to record the year in date fields (for example, the year 1998 is recorded as 98), such systems may not be able to accurately process dates ending in the year 2000 and after. The effects of the issue will vary from system to system and may adversely affect the ability of a financial institution's operations as well as its ability to prepare financial statements. The Company and the Bank were organized in 1997 and the Company acquired its computer equipment within the past eighteen months and has contracted with a leading supplier of information processing services. This equipment and these services were purchased with manufacturer assurances of Year 2000 compliance. The Company has not experienced any Year 2000 problems. Although considered unlikely, unanticipated problems, including problems associated with non-compliant third parties, could still occur. The Company will continue to manage its business and address any issues that may arise. Forward Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "may" or similar expressions. The presentation and discussion of the provision and allowance for loan losses, statements concerning future profitability or future growth or increases, and the Year 2000 readiness discussion are examples of inherently forward looking statements in that they involve judgements and statements of belief as to the outcome of future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the Bank include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. 14 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset Liability Management and Market Risk Analysis Asset liability management aids the Company in maintaining liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and to achieve consistent net interest income through periods of changing interest rates. Certain savings accounts and interest bearing checking accounts are shown as repricing other than contractually due to the stability of these products in a rate changing environment. Management monitors the Company's exposure to interest rate changes using a GAP analysis. The following table illustrates the Company's GAP position at various intervals (in thousands) at March 31, 2000. Less than 3 Months 3 - 12 Months 1 - 5 Years Over 5 Years Total Assets: Loans-Fixed 15,888 26,880 117,114 26,223 186,105 Loans-Variable 119,885 323 17,159 2,479 139,846 Taxable Securities - - 28,254 - 28,254 Tax-Exempt Securities - - - 1,328 1,328 Other Securities - - - 2,312 2,312 Federal Funds Sold 1,500 - - - 1,500 Loan Loss Reserve - - - - (4,482) Cash & Due From Banks - - - - 23,345 Fixed Assets - - - - 11,667 Other Assets - - - - 2,834 ----------- ---------- ---------- --------- --------- TOTAL 137,273 27,203 162,527 32,342 392,709 Liabilities: CD's 100M and Over 35,065 25,887 11,601 - 72,553 CD's-Less than 100M 7,061 19,514 19,033 - 45,608 Repo's & Borrowed Money - - 20,000 15,000 35,000 Savings & IRA's 2,495 1,736 10,344 788 15,363 NOW & MMDA's 78,930 - 72,940 - 151,870 Non-Interest Bearing Deposits - - - - 36,191 Other Liabilities & Equity - - - - 36,124 ----------- ---------- ---------- --------- --------- 123,551 47,137 133,918 15,788 392,709 TOTAL Period Gap: 13,722 (19,934) 28,609 16,554 Cumulative Gap: 13,722 (6,212) 22,397 38,951 Cumulative Gap/Total Assets 3.49% -1.58% 5.70% 9.92% RSA/RSL 1.11 0.58 1.21 2.05 Cumulative RSA/RSL 1.11 0.96 1.07 1.12
Based on this analysis, Management does not believe the Company would be materially impacted by changes in interest rates. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Securities Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - 27 Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K - None. 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, to be signed on its behalf by the undersigned, thereunto duly authorized. MACATAWA BANK CORPORATION /s/ Benj. A. Smith, III Benj. A. Smith, III Chairman and Chief Executive Officer /s/ Philip J. Koning Philip J. Koning Treasurer and Secretary (Principal Accounting Officer) DATE: May 12, 2000 17