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, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 000-25927
MACATAWA BANK CORPORATION
(Exact name of issuer as specified in its charter)
Michigan 38-3391345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
348 South Waverly Road, Holland, Michigan 49423
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 820-1444
------------
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes __x__ No ______
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 3,696,789 shares of the Company's
Common Stock (no par value) were outstanding as of May 7, 2001.
INDEX
Page
Number(s)
---------
Part I. Financial Information (unaudited):
Item 1.
------
Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated Financial Statements 7
Item 2.
------
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3.
------
Quantitative and Qualitative Disclosures
About Market Risk 17
Part II. Other Information:
Item 1.
------
Legal Proceedings 20
Item 2.
------
Changes in Securities and Use of Proceeds 20
Item 3.
------
Defaults Upon Senior Securities 20
Item 4.
------
Submission of Matters to a Vote of Security Holders 20
Item 5.
------
Other Information 20
Item 6.
------
Exhibits and Reports on Form 8-K 20
Signatures 20
2
Part I Financial Information
Item 1.
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2001 (unaudited) and December 31, 2000
- -------------------------------------------------------------------------------
March 31, December 31,
2001 2000
------------- --------
(unaudited)
ASSETS
Cash and due from banks $20,504,758 $26,305,310
Federal funds sold 3,000,000 ---
-------------- ------------
Cash and cash equivalents 23,504,758 26,305,310
Securities available for sale 51,818,403 48,668,507
Federal Home Loan Bank stock 3,129,400 2,550,000
Total loans 438,455,278 410,675,682
Allowance for loan losses (6,243,030) (5,853,972)
-------------- ------------
432,212,248 404,821,710
Premises and equipment - net 12,116,893 12,263,903
Accrued interest receivable 3,259,191 3,270,561
Other assets 2,216,527 1,932,509
-------------- ------------
Total assets $528,257,420 $499,812,500
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $45,498,478 $ 50,746,045
Interest-bearing 373,213,612 347,871,072
-------------- ------------
Total 418,712,090 398,617,117
Federal Home Loan Bank advances 62,588,000 51,000,000
Note payable 4,000,000 4,000,000
Federal funds purchased --- 6,200,000
Accrued expenses and other liabilities 3,622,567 1,867,325
-------------- ------------
Total liabilities 488,922,657 461,684,442
Shareholders' equity
Preferred stock, no par value, 500,000 shares
Authorized; no shares issued and outstanding
Common stock, no par value, 9,500,000 shares Authorized; 3,696,789 and
3,589,315 shares issued and outstanding as of March 31, 2001 and
December 31, 2000, respectively 38,652,989 36,890,416
Retained earnings 210,704 1,136,444
Accumulated other comprehensive income 471,070 101,198
-------------- ------------
Total shareholders' equity 39,334,763 38,128,058
-------------- ------------
Total liabilities and shareholders' equity $528,257,420 $499,812,500
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
3
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Month Periods Ended March 31, 2001 and March 31, 2000
(unaudited)
- --------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
Interest income (unaudited) (unaudited)
Loans, including fees $9,481,803 $6,610,646
Securities 798,193 495,285
----------- ----------
Total interest income 10,279,996 7,105,931
Interest expense
Deposits 4,446,148 3,056,181
Other 1,002,463 512,525
----------- ----------
Total interest expense 5,448,611 3,568,706
Net interest income 4,831,385 3,537,225
Provision for loan losses (522,000) (487,000)
----------- ----------
Net interest income after
provision for loan losses 4,309,385 3,050,225
Noninterest income
Service charges on deposit accounts 313,721 200,959
Gain on sale of loans 266,470 39,321
Trust fees 180,016 113,366
Other 67,851 52,004
----------- ----------
Total noninterest income 828,058 405,650
Noninterest expense
Salaries and benefits 1,866,479 1,648,019
Occupancy expense of premises 294,884 255,264
Furniture and equipment expense 366,883 262,996
Legal and professional fees 66,055 51,044
Advertising 124,055 69,753
Data processing 102,268 73,807
Shareholder services 30,131 18,174
Supplies 84,858 104,157
Other expense 564,583 446,048
----------- ----------
Total noninterest expenses 3,500,196 2,929,262
----------- ----------
Income before federal income tax 1,637,247 526,613
Federal income tax 545,850 0
----------- ----------
Net income $1,091,397 $ 526,613
=========== ==========
Basic income per share $.30 $.14
Diluted income per share $.29 $.14
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
4
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Month Periods Ended March 31, 2001 and March 31, 2000
(unaudited)
- --------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $1,091,397 $ 526,613
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 312,543 249,464
Provision for loan losses 522,000 487,000
Net change in:
Accrued interest receivables and other assets (272,649) (437,007)
Accrued expenses and other liabilities 1,561,392
-------------- ------------
143,011
Net cash from operating activities 3,214,683 969,081
Cash flows from investing activities
Net increase in loans (27,912,538) (40,578,305)
Purchase of Federal Home Loan Bank Stock (579,400) --
Purchases of securities available for sale (17,580,113) (1,371,656)
Proceeds from maturities and calls of securities available for sale 15,000,000 --
Additions to premises and equipment (174,905) (1,923,895)
-------------- ------------
Net cash from investing activities (31,246,956) (43,873,856)
Cash flows from financing activities
Net increase in deposits 20,094,973 42,195,272
Net decrease in Federal funds purchased (6,200,000) --
Proceeds from Federal Home Loan Bank advances 16,852,000 25,000,000
Repayments of Federal Home Loan Bank advances (5,264,000) (20,000,000)
Cash dividends paid (251,252) ---
-------------- ------------
Net cash from financing activities 25,231,721 47,195,272
Net change in cash and cash equivalents (2,800,552) 4,290,497
Cash and cash equivalents at beginning of period 26,305,310 20,554,039
-------------- ------------
Cash and cash equivalents at end of period $23,504,758 $24,844,536
============== ============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $5,078,412 $2,844,098
Income taxes 392,000 --
- --------------------------------------------------------------------------------
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, 2001 and March 31, 2000
(unaudited)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income (Loss) Equity
------- --------- ------------- -------------
Balance, December 31, 1999 $36,882,916 $(1,960,810) $(395,953) $34,526,153
Net income for three months ended
March 31, 2000 526,613 526,613
Other comprehensive income, net of tax:
Unrealized gains/losses on securities (50,675) (50,675)
------------
Comprehensive income 475,938
------------- -------------- ----------- ------------
Balance, March 31, 2000 $36,882,916 $(1,434,197) $(446,628) $35,002,091
=========== ============ ========== ===========
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
Balance, December 31, 2000 $36,890,416 $1,136,444 $101,198 $38,128,058
Net income for three months ended
March 31, 2001 1,091,397 1,091,397
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 369,872 369,872
-----------
Comprehensive income 1,461,269
Issued 107,474 shares in payment
of 3% stock dividend 1,762,573 (1,765,885) (3,312)
Cash dividends at $.07 per share (251,252) (251,252)
------------- -------------- ----------- ------------
Balance, March 31, 2001 $38,652,989 $210,704 $471,070 $39,334,763
============ ============== ============ =============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
6
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in Macatawa
Bank Corporation's (the "Company") 2000 Annual Report containing financial
statements for the year ended December 31, 2000.
All per share amounts and average shares outstanding have been adjusted for all
periods presented to reflect the 3% stock dividend distributed on May 4, 2001.
The Statement of Changes in Shareholders' Equity reflects the change in retained
earnings and common stock for the value of the dividend paid.
NOTE 2 PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company, and its wholly-owned subsidiary, Macatawa Bank (the
"Bank"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
[THIS SPACE INTENTIONALLY LEFT BLANK]
7
MACATAWA BANK CORORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 3 EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the quarters ended March 31, 2001 and March 31, 2000 are
as follows:
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Basic earnings per share
Net income $1,091,397 $ 526,613
---------- ---------
Weighted average common
shares outstanding 3,696,994 3,696,222
--------- ---------
Basic earnings per share $0.30 $0.14
========== =========
Diluted earnings per share
Net income $1,091,397 $ 526,613
---------- ---------
Weighted average common
shares outstanding 3,696,994 3,696,222
Add: Dilutive effects of assumed
exercise of stock options 23,056 21,244
---------- ---------
Weighted average common and
dilutive potential common
shares outstanding 3,720,050 3,717,466
--------- ---------
Diluted earnings per share
$0.29 $0.14
=========== ==========
Stock options for 66,950 shares of common stock were not considered in computing
diluted earnings per share for the quarters ended March 31, 2001 and 2000
because they were antidilutive.
- --------------------------------------------------------------------------------
(Continued)
8
MACATAWA BANK CORORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 4 SECURITIES
The amortized cost and fair values of securities available for sale were as
follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- ---------- ----------- -----------
March 31, 2001 (Unaudited)
- --------------------------
U.S. Treasury securities and obligations
of U. S. government agencies $44,651,182 $546,169 $ 0 $45,197,351
State and municipal bonds 6,453,479 167,573 0 6,621,052
----------- -------- ---------- ------------
$51,104,661 $713,742 $ 0 $51,818,403
=========== ======== ========== ============
December 31, 2000
- -----------------
U. S. Treasury securities and obligations
of U. S. government agencies $45,927,221 $191,469 $(128,090) $45,990,600
State and municipal bonds 2,587,955 89,952 0 2,677,907
----------- -------- ---------- -----------
$48,515,176 $281,421 $(128,090) $48,668,507
=========== ======== ========== ===========
Contractual maturities of debt securities at March 31, 2001(unaudited) were as
follows. No held-to-maturity securities existed at March 31, 2001. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Available-for-Sale Securities
Amortized Cost Fair Values
-------------- -----------
Due from one to five years $41,012,820 $41,540,015
Due from five to ten years 5,497,626 5,543,255
Due after ten years 4,594,215 4,735,133
----------- -----------
Total $51,104,661 $51,818,403
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
9
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans were as follows:
March 31, December 31,
2001 2000
------------ ---------
(unaudited)
Commercial $318,103,429 $293,541,257
Mortgage 62,366,375 60,822,360
Consumer 57,985,474 56,312,065
------------ ------------
438,455,278 410,675,682
Allowance for loan losses (6,243,030) (5,853,972)
------------ ------------
$432,212,248 $404,821,710
============ ============
Activity in the allowance for loan losses was as follows:
Three months ended Three months ended
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Balance at beginning of period $5,853,972 $3,995,165
Provision charged to operating expense 522,000 487,000
Charge-offs (143,736) 0
Recoveries 10,794 0
------------ ------------
Balance at end of period $6,243,030 $4,482,165
============ ============
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
March 31, December 31,
2001 2000
------------ ---------
(unaudited)
Noninterest-bearing demand deposit accounts $45,498,478 $50,746,045
Money market accounts 128,657,817 125,427,738
NOW and Super NOW accounts 50,718,641 56,973,193
Savings accounts 12,547,287 10,548,694
Certificates of deposit 181,289,867 154,921,447
----------- -----------
$418,712,090 $398,617,117
============ ============
- --------------------------------------------------------------------------------
(Continued)
10
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS
Advances from the Federal Home Loan Bank were as follows:
March 31, December 31,
2001 2000
-------------- ------------
Maturities from October 2001 through (unaudited)
December 2010, fixed rates from 5.08% to
6.68%, averaging 5.82%. $62,588,000 $51,000,000
============ ===========
Each advance is payable at its respective maturity date with a prepayment
penalty. These advances were required to be collateralized by securities
totaling $45,000,000 at March 31, 2001 and December 31, 2000, and first mortgage
loans totaling $49,000,000 and $50,000,000 under a blanket lien arrangement at
March 31, 2001 and December 31, 2000, respectively.
Maturities as of March 31, 2001 were as follows:
2001 $ 5,264,000
2002 8,264,000
2003 3,000,000
2004 5,060,000
2005 10,000,000
2009 5,000,000
2010 26,000,000
----------
$62,588,000
===========
- --------------------------------------------------------------------------------
(Continued)
11
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - REGULATORY MATTERS
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measurements of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weighting, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If a bank is only adequately
capitalized, regulatory approval is required before it is able to accept
brokered deposits. If a bank is undercapitalized, capital distributions are
limited, as well as its asset growth and expansion, and the bank is required to
implement plans for necessary capital restoration.
At March 31, 2001 and December 31, 2000, actual capital levels (in thousands)
and minimum required levels for the Company and the Bank were:
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2001 (unaudited)
- --------------
Total capital (to risk weighted assets)
Consolidated $44,473 9.9% $35,877 8.0% $44,846 10.0%
Bank 48,181 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
The Company and the Bank were categorized as well capitalized at December 31,
2000. The Bank was categorized as well capitalized at March 31, 2001, while the
Company was categorized as adequately capitalized.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Macatawa Bank Corporation is a Michigan corporation and is the bank holding
company for Macatawa Bank. Macatawa Bank commenced operations on November 25,
1997. Macatawa Bank is a Michigan chartered bank with depository accounts
insured by the Federal Deposit Insurance Corporation. We provide a full range of
commercial and consumer banking services through our network of 13 full service
branches located in communities in Ottawa County, northern Allegan County and
southwestern Kent County, Michigan.
We have experienced rapid and substantial growth since opening in November 1997.
At March 31, 2001, we had thirteen branch banking offices and three service
facilities. We completed an underwritten initial public offering of common stock
on April 7, 1998, resulting in net proceeds of $14.1 million. In June 1999, we
completed an offering of common stock to our shareholders resulting in net
proceeds of $14.6 million.
We established a Trust Department in the fourth quarter of 1998 to further
provide for customers' financial needs. The Trust Department began business on
January 3, 1999 and as of March 31, 2001, had assets of approximately $246
million.
Financial Condition
- -------------------
Our total assets increased by $28.5 million, or 5.7%, to $528.3 million at March
31, 2001 from $499.8 million at December 31, 2000. The increase in assets was
primarily attributable to the Bank continuing to attract customer deposits and
then lending or otherwise investing these funds. The number of deposit accounts
increased from approximately 38,000 at December 31, 2000, to approximately
42,000 deposit accounts at March 31, 2001. 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 our
branch network.
Cash and cash equivalents, which include federal funds sold and short-term
investments, decreased $2.8 million to $23.5 million at March 31, 2001, from
$26.3 million at December 31, 2000. The December 2000 cash balance was at a peak
level at year-end due to customer deposit activity, and the decrease reflected
more normal levels.
Securities available for sale increased $3.1 million to $51.8 million at March
31, 2001 from $48.7 million at December 31, 2000. The increase was the result of
purchasing additional securities as a means of strengthening our liquidity
ratio.
Total loans increased $27.8 million, or 6.8%, to $438.5 million at March 31,
2001 from $410.7 million at December 31, 2000. Commercial and commercial real
estate loans increased $24.6 million to $318.1 million at March 31, 2001, from
$293.5 million at December 31, 2000, an increase of 8.4%. Commercial and
commercial real estate loans accounted for approximately 73% of the Bank's total
loan portfolio at March 31, 2001.
The allowance for loan losses as of March 31, 2001 was $6.2 million, or 1.42% of
total loans, compared to $5.9 million, or 1.43% of total loans at December 31,
2000. We provide a loan loss provision on a regular basis consistent with our
loan growth and loss experience. First quarter net charge-offs totaled $133
thousand, which was the largest quarter of losses experienced since the Bank's
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. While our credit losses on loans continue to be low, we
recognize that our loan portfolios remain relatively unseasoned, and no material
trend of losses has been established. Given the newness of the portfolios, the
effects of increasing interest rates on borrowers, and potential economic
weakness, in our judgment, we have provided adequate reserves for loan losses.
However, there can be no assurance that the allowance for losses on loans will
be adequate to cover all losses. In lieu of an established
13
loan loss trend for determining an adequate allowance for loan loss, the Bank
has built an allowance based on industry peer ratios.
Total deposits increased $20.1 million, or 5.0%, to $418.7 million at March 31,
2001, as compared to $398.6 million at December 31, 2000. We believe the
increase was primarily a result of deposits being obtained from new customers.
Certificates of deposit increased by $26.4 million over year-end 2000 primarily
as a result of new account activity. Noninterest bearing demand deposit accounts
decreased by $5.2 million during the quarter. The December 2000 balances were
unusually high due to customer year-end deposit activity.
Results of Operations
- ---------------------
Net income for the quarter ended March 31, 2001, was $1.1 million, an increase
of $527 thousand over the same period last year. Diluted earnings per share were
$.29, compared to $.14 for the prior year period. First quarter net income
included a federal income tax expense provision of $546 thousand. The first
quarter of 2000 did not include any tax provision due to our prior year
operating loss carryforward position for federal tax purposes.
Net interest income for the first quarter of 2001 totaled $4.8 million, a 45%
increase as compared to $3.5 million from the comparable period in 2000. The
improvement is reflective of the overall growth of the Company. Average earning
assets during the first quarter of 2001 totaled $476.8 million, versus $334.9
million during the same quarter in 2000. Net interest margin on earning assets
was 4.03% for the 2001 quarter, down from 4.15% in the first quarter of 2000.
The contraction in the net interest margin reflects the decrease in yield on
earning assets resulting from a reduction of 1.50% in our prime rate during the
first quarter. The prime rate reductions followed Federal Reserve Board rate
reductions. Liability costs have not moved as quickly due to contractual
maturities on certificate of deposit portfolios. Anticipated growth in earning
assets is expected to continue to increase levels of net interest income. This
will be slightly mitigated by the compression in the net interest margin as a
result of any additional interest rate reductions by the Federal Reserve Board.
The margin compression is a result of our asset sensitivity to changing interest
rates. Because of the fixed terms on our certificate of deposit portfolio, we
anticipate several months before re-pricing of the certificate of deposit
portfolio costs will fully offset reductions in our asset yields.
[THIS SPACE INTENTIONALLY LEFT BLANK]
14
The following table shows an analysis of net interest margin for the three month
periods ending March 31, 2001 and 2000.
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 425,631 9,482 8.93% 301,922 6,611 8.69%
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
- -----------
NOWs and MMDAs $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%
Fed 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) Yield adjusted to fully tax equivalent.
The provision for loan losses for the quarter ended March 31, 2001 was $522
thousand. This amount was provided as a result of the increase in the total loan
portfolio, as well as providing additional allowance for loans charged-off
during the quarter. Management considers it prudent during the early years of
operations to provide for loan losses at similar levels maintained by banks with
similar loan portfolios. We will continue to monitor our loan loss 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 non-performing loans, charge-offs, and
delinquencies could rise and require further increases in the provision.
15
Noninterest income for the quarter ended March 31, 2001 was $828 thousand, an
increase of $422 thousand, or 104%, 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 noninterest revenue 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. Higher mortgage
refinancing activity is expected to continue as long as interest rates remain
favorable for mortgage originations.
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.
Liquidity and Capital Resources
-------------------------------
We obtained our initial equity capital, in the amount of approximately $8.2
million, as a result of a private placement by Macatawa Bank to investors in
November 1997. Additional equity capital of $14.1 million was raised during our
initial public offering completed in April 1998. Due to our continued rapid
growth, additional equity capital was required in 1999. Through an offering made
to our shareholders in June 1999, $14.6 million of net proceeds from an equity
offering was raised. Substantially all of the proceeds of this offering were
subsequently contributed to Macatawa Bank's capital to support required
regulatory capital levels. At March 31, 2001, the Bank's Tier 1 Capital as a
percent of average assets was 8.3%.
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. It is anticipated that
we will continue to pay quarterly cash dividends in the future. On May 4, 2001,
we distributed a 3% stock dividend to our shareholders.
We secured a $5 million credit facility during September of 2000, to provide
additional capital to maintain the Bank at required regulatory capital levels.
In March 2001, the credit facility was increased to $8 million. The balance
outstanding on this line was $4 million at both December 31, 2000 and March 31,
2001. Based on continued projected asset growth, additional capital will be
required in 2001. We are evaluating alternatives available to effectively
increase capital levels such as the sale of common stock or other securities.
The liquidity of a financial institution reflects its ability to provide funds
to meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. Our sources of liquidity
include loan payments by borrowers, maturity and sales of securities available
for sale, growth of deposits and deposit equivalents, federal funds sold,
borrowings from the Federal Home Loan Bank, and the issuance of common stock.
Liquidity management involves the ability to meet the cash flow requirements of
our customers. These customers may be either borrowers with credit needs or
depositors wanting to withdraw funds.
Forward Looking Statements
- --------------------------
This report includes "forward-looking statements" as that term is used in the
securities laws. All statements regarding our expected financial position,
business and strategies are forward-looking statements. In addition, the words
"anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends,"
and similar expressions, as they relate to us or our management, are intended to
identify forward-looking statements. The presentation and discussion of the
provision and allowance for loan losses and statements concerning future
profitability or
16
future growth or increases, are examples of inherently forward looking
statements in that they involve judgments and statements of belief as to the
outcome of future events. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on our operations and our future prospects include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area and accounting principles, policies and guidelines. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Further information
concerning us and our business, including additional factors that could
materially affect our financial results, is included in our filings with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Analysis
Our primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk. All of Macatawa Bank's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. Macatawa has only limited
agricultural-related loan assets, and therefore has no significant exposure to
changes in commodity prices. Therefore, our market risk exposure is mainly
comprised of our sensitivity to interest rate risk. Our balance sheet has
sensitivity, in various categories of assets and liabilities to changes in
prevailing rates in the U.S. for prime rate, mortgage rates, U.S. Treasury rates
and various money market indexes. Our asset/liability management process aids us
in providing liquidity while maintaining a balance between interest earning
assets and interest bearing liabilities.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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We use two interest rate risk measurement techniques in our interest rate risk
management. The first is static gap analysis. This measures the difference
between the dollar amounts of interest sensitive assets and liabilities that
may be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to our net interest margin
during periods of changing market interest rates. The following table summarizes
our interest rate repricing gaps (in thousands) for selected maturity periods as
of March 31, 2001.
< 3 Months 3-12 Months 1-5 Years Over 5 Years Total
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
Non-Interest 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 exceeded assets maturing within one year by $92 million. However, the
repricing and cash flows of certain categories of assets and liabilities are
subject to competitive and other influences that are beyond our control. As a
result, certain assets and liabilities indicated as maturing or repricing within
a stated period may, in fact, mature or reprice in other periods or at different
volumes.
The second interest rate risk measurement used is simulation analysis. We use a
computer-based earnings simulation model to estimate the effects of various
interest rate environments on the balance sheet structure and net interest
income. The simulation model assesses the direction and magnitude of variations
in net interest income resulting from potential changes in market interest
rates. Key assumptions in the model include repayment speeds on various loan and
investment assets, cash flows and maturities of interest-sensitive assets, cash
flows and maturities of interest-sensitive liabilities, and changes in market
conditions impacting loan and deposit pricing.
In running the simulation model, we first forecast the next twelve months of net
interest income under an assumed environment of constant market interest rates.
Next, immediate and parallel interest rate shocks are constructed in the model.
These rate shocks reflect changes of equal magnitude to all market interest
rates.
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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 Rate Scenario Interest Income
- ---------------------- ---------------------
Interest rates down 200 basis points (8.07)%
Interest rates down 100 basis points (4.04)%
No change in interest rates ---
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; client
preferences, and other factors.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on 8-K - None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, to be signed on its behalf by the undersigned,
thereunto duly authorized.
MACATAWA BANK CORPORATION
/s/ Benj. A. Smith, III
Benj. A. Smith, III
Chairman and Chief Executive Officer
/s/ Steven L. Germond
Steven L. Germond
Chief Financial Officer
(Principal Financial and Accounting Officer)
DATE: May 11, 2001
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