SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 small business 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 November 8, 1999.
Transitional Small Business Disclosure Format (check one): Yes _____ No __X__
1
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 11
Part II. Other Information
Item 1.
Legal Proceedings 15
Item 2.
Changes in Securities and Use of Proceeds 15
Item 3.
Defaults Upon Senior Securities 15
Item 4.
Submission of Matters to a Vote of Security Holders 15
Item 5.
Other Information 15
Item 6.
Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I Financial Information
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 (unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
ASSETS
Cash and due from banks $ 16,236,405 $ 11,453,177
Federal funds sold -- --
Short-term investments -- 6,500,000
------------- -------------
Cash and cash equivalents 16,236,405 17,953,177
Securities available for sale, at fair value 23,799,160 27,007,300
Other securities 2,312,000 --
Total loans 252,075,971 137,882,260
Allowance for loan losses (3,525,779) (2,030,000)
------------- -------------
248,550,192 135,852,260
Premises and equipment - net 9,160,016 7,125,755
Accrued interest receivable 1,594,683 1,226,199
Other assets 422,475 63,982
------------- -------------
Total Assets $302,074,931 $189,228,673
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 27,584,998 $18,517,550
Interest-bearing 215,670,159 148,471,125
----------- -------------
Total 243,255,157 166,988,675
Federal funds purchased 3,500,000 2,000,000
Federal Home Loan Bank Borrowings 20,000,000 --
Accrued expenses and other liabilities 1,086,700 628,610
------------- -------------
Total liabilities 267,841,857 169,617,285
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 and
2,435,125 shares issued and outstanding as of September 30, 1999 and
December 31, 1998, respectively 36,882,916 22,260,646
Retained deficit (2,385,898) (2,654,076)
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax (263,944) 4,818
------------ -------------
Total shareholders' equity 34,233,074 19,611,388
---------- -------------
Total liabilities and shareholders' equity $302,074,931 $189,228,673
============ =============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
3
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Month Periods Ended September 30, 1999 and September 30, 1998
Nine Month Periods Ended September 30, 1999 and September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest Income
Loans, including fees $5,020,299 $1,776,575 $12,588,440 2,730,932
Investments 455,142 424,631 1,185,375 987,816
------- ------- --------- -------
Total interest income 5,475,441 2,201,206 13,773,815 3,718,748
Interest expense
Deposits 2,325,063 1,054,017 6,084,420 1,639,124
Other 224,727 0 408,963 1,001
---------- -------- ---------- -------
Total interest expense 2,549,790 1,054,017 6,493,383 1,640,125
Net interest income 2,925,651 1,147,189 7,280,432 2,078,623
Provision for loan losses (505,000) (620,000) (1,500,000) (1,522,500)
Net interest income after
provision for loan losses 2,420,651 527,189 5,780,432 556,123
Noninterest income 367,832 220,537 1,119,557 292,250
Noninterest expense
Salaries and benefits 1,450,136 778,793 3,797,591 1,687,802
Occupancy expense of premises 232,483 93,385 574,663 183,679
Furniture and equipment expense 232,391 76,543 531,672 151,802
Legal and professional fees 33,405 59,654 101,894 133,340
Advertising 68,308 66,535 183,436 131,857
Data Processing 54,981 24,980 141,822 51,267
Shareholder Services 2,889 0 72,668 0
Supplies 93,475 69,306 243,142 145,294
Other expense 319,244 232,358 984,923 463,619
---------- ------- ------- -------
Total noninterest expenses 2,487,312 1,401,554 6,631,811 2,948,660
Income/(Loss) before federal income tax 301,171 (658,828) 268,178 (2,100,287)
Federal income tax 0 0 0 0
--------- --------- -------- -------
Net income/(loss) $ 301,171 $ (658,828) $ 268,178 $ (2,100,287)
========= =========== ========== =============
Basic and diluted income/(loss)
per share .08 (.27) .09 (1.10)
Average shares outstanding 3,588,565 2,435,125 2,937,907 1,909,411
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Month Periods Ended September 30, 1999 and September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
Nine Months Nine Months
ended ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net Income $ 268,178 $ (2,100,287)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 511,376 161,226
Provision for loan losses 1,500,000 1,522,500
Net change in
Accrued interest receivable and other assets (726,977) (897,882)
Accrued expenses and other liabilities 596,534 674,980
---------- -----------
Net cash from operating activities 2,149,111 639,463
Purchase of Cash flows from investing activities
Net increase in loans (114,197,932) (101,601,481)
Purchase of Federal Home Loan Bank Stock (2,312,000) -
Purchases of Securities available for sale (12,199,066) (21,000,000)
Proceeds from Maturities and calls of securities available for sale 15,000,000 4,000,000
Purchases of Premises and equipment (2,545,637) (4,603,184)
-------------- -------------
Net cash from investing activities (116,254,635) (123,204,665)
Cash flows from financing activities
Net increase in deposits 76,266,482 118,210,029
Net increase in short term borrowings 1,500,000 -
Proceeds from Federal Home Loan Bank borrowings 20,000,000 -
Net proceeds from sale of stock 14,622,270 14,123,378
---------- ----------
Net cash from financing activities 112,388,752 132,333,407
Net change in cash and cash equivalents (1,716,772) 8,489,279
Cash and cash equivalents at beginning of period 17,953,177 7,415,120
---------- -----------
Cash and cash equivalents at end of period $16,236,405 $15,904,399
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 6,015,062 $ 1,264,719
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
MACATAWA BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Month Periods Ended September 30, 1999 (Unaudited) and September 30, 1998
- --------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Deficit Income Equity
Balance, December 31, 1997 $ 8,137,268 $ (165,525) $ 264 $ 7,972,007
Net proceeds from sale of stock 14,123,378 14,123,378
Net loss for nine months ended
September 30, 1998 (unaudited) (2,100,287) (2,100,287)
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 82,170 82,170
----------
Other comprehensive income
Comprehensive loss (2,018,117)
------------ ------------- ----------- ------------
Balance, September 30, 1998 $ 22,260,646 $ (2,265,812) $ 82,434 $ 20,077,268
============ ============= =========== ============
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 proceeds from sale of Stock 14,622,270 14,622,270
Net income for nine months ended
September 30, 1999 (unaudited) 268,178 268,178
Other comprehensive income, net of tax:
Unrealized gains/losses on securities
Other comprehensive income (268,762) (268,762)
--------
Comprehensive loss (584)
------------ ------------- ----------- ------------
Balance, September 30, 1999 $ 36,882,916 $ (2,385,898) $ (263,944) $ 34,233,074
============ ============= =========== ============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Proxy Statement dated March 5, 1999, containing financial statements
for the year ended December 31, 1998.
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.
NOTE 4 INITIAL PUBLIC OFFERING AND SUBSEQUENT OFFERING
The Company completed its initial public offering on April 7, 1998. The
Company issued 1,495,000 shares of common stock in the initial public offering,
resulting in net proceeds to the Company of $14,123,378. Pursuant to a
prospectus dated April 30, 1999, the Company offered for sale up to 1,200,000
shares to it's existing shareholders at a purchase price of $12.75 per share.
The purpose of the offering was to strengthen the Company's capital position in
anticipation of future growth. The Company issued 1,153,440 shares in the
offering, resulting in net proceeds of $14,622,270. Invoices related to the
offering paid in the third quarter totaled $14,161.
NOTE 5 COMPARATIVE DATA
The Company became the bank holding company for Macatawa Bank on February
23, 1998, when all of the Bank's outstanding common stock was converted into all
of the outstanding stock of the Company and all of the Bank's shareholders
became all of the Company's shareholders. The Bank had commenced its application
process for regulatory approval on May 21, 1997, completed its initial sale of
common stock on November 7, 1997, and opened for operations on November 25,
1997. The Company's first full year of operation was 1998 and therefore the
financial results for the period ended September 30, 1998 differs substantially
from the financial results for the period ended September 30, 1999.
7
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - 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
--------- ---------- ---------- ------
September 30, 1999 (Unaudited)
U.S. Treasury securities and $24,000,000 $ 1,880 $ (401,789) $23,600,091
obligations of U.S. Government
corporation and agencies
Tax Exempt Municipal Bonds 199,069 0 0 199,069
----------- -------- ---------- -----------
Total Securities $24,199,069 $ 1,880 $ (401,789) $23,799,160
=========== ======== ========== ===========
December 31, 1998
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $27,000,000 $ 35,700 $ (28,400) $27,007,300
=========== ======== ========== ===========
Contractual maturities of debt securities at September 30, 1999, were as
follows. No held-to-maturity securities existed at September 30, 1999. 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 1999 to 2002 $14,000,000 $13,791,720
Due from 2003 to 2007 10,199,069 10,007,440
----------- -----------
Total $24,199,069 $23,799,160
=========== ===========
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(Continued)
8
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 7 - LOANS
Loans are as follows:
September 30, December 31,
1999 1998
------------ -----------
(Unaudited) (Unaudited)
Commercial $173,550,683 $95,669,151
Mortgage 43,026,235 22,528,687
Consumer 35,499,053 19,684,422
---------- ------------
252,075,971 137,882,260
Allowance for loan losses (3,525,779) (2,030,000)
------------ ------------
$248,550,192 $135,852,260
============ ============
Activity in the allowance for loan losses is as follows:
Nine Nine
months months
ended ended
September 30, September 30,
1999 1998
------------- ---------------
(Unaudited) (Unaudited)
Balance at beginning of period $2,030,000 $ 7,500
Provision charged to operating expense 1,500,000 1,522,500
Charge Offs (4,221) -
----------- -----------
Balance at end of period $3,525,779 $1,530,000
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
9
MACATAWA BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 - PREMISES AND EQUIPMENT - NET
Premises and equipment are as follows:
September 30 December 31
1999 1998
---- ----
Land $ 1,574,218 $1,177,184
Building and improvements 4,516,679 3,661,701
Furniture and equipment 3,586,202 2,553,229
------------ -----------
9,947,099 7,392,114
Less accumulated depreciation 787,083 266,359
------------ -----------
$ 9,160,016 $7,125,755
============ ===========
NOTE 9 - DEPOSITS
Deposits are summarized as follows:
September 30 December 31
1999 1998
---- ----
Noninterest-bearing demand deposit accounts $27,584,997 $ 18,517,550
Money market accounts 90,302,974 71,091,206
NOW and Super NOW accounts 32,595,515 22,425,439
Savings accounts 6,864,018 5,812,028
Certificates of deposit 85,907,653 49,142,452
------------ ------------
$243,255,157 $166,988,675
============ ============
NOTE 10 - FEDERAL HOME LOAN BANK BORROWINGS
The Bank was approved in the first quarter 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. On March 30, 1999,
the Bank utilized this resource and borrowed $10,000,000 in fixed rate loans.
Since then the Bank has continued to utilize this resource and has borrowed
additional funds under different terms and conditions. Maturity dates and
interest rates on these advances are as follows:
September 30 December 31
1999 1998
Maturity Date Interest Rate ---- ----
------------- -------------
March 27, 2000 5.44% (initial rate) $ 5,000,000 -
April 1, 2002 5.63% (fixed) 3,000,000 -
March 31, 2003 5.77% (fixed) 3,000,000 -
March 30, 2004 5.84% (fixed) 4,000,000 -
Sept. 1, 2009 5.80% (fixed) 5,000,000 -
------------- ------------
$20,000,000 -
Each advance is payable in full at its respective maturity date. These advances
were required to be collateralized by at least $33,000,000 of the Bank's first
mortgage loans under a blanket loan arrangement at September 30, 1999.
- --------------------------------------------------------------------------------
10
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's initial plan of operation in November 1997 was to establish
its management team within the first few months of its operations. Management
believes that it has been successful in establishing a very experienced and
capable management team which can administer the Company's growth.
The Company has experienced rapid and substantial growth since opening in
November 1997. At December 31, 1998, the Bank had a total of eight branch
banking offices and two service facilities. By September 30, 1999, the Bank had
added three more branches, with two additional expected to open during the last
quarter. The Company also completed an underwritten initial public offering of
common stock on April 7, 1998. By a prospectus dated April 30, 1999, the Company
offered to its shareholders up to 1,200,000 shares of common stock and sold
1,153,440 shares at a purchase price of $12.75 per share.
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 September 30, 1999, had assets of
approximately $140 million.
Financial Condition
Total assets of the Company increased by $112,846,250 to $302,074,931 at
September 30, 1999, from $189,228,673 at December 31, 1998. The increase in
assets is primarily attributable to the Bank continuing to attract customer
deposits and then lending and otherwise investing these funds. The third quarter
of 1999 was the Company's seventh full quarter of operations, and the number of
deposit accounts increased from approximately 14,000 at December 31, 1998, to
approximately 24,000 deposit accounts at September 30, 1999. 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. The Company anticipates that the Bank's assets will
continue to increase at a comparable rate for the remainder of 1999, which will
be the Bank's second full year of operations.
Cash and cash equivalents, which include federal funds sold and short-term
investments, decreased $1,716,772 to $16,236,405 at September 30,1999, from
$17,953,177 at December 31, 1998. The decrease is due to a reduction in short
term investments, as these funds have been used as a means to fund the strong
loan growth.
Securities available for sale decreased $3,208,140 to $23,799,160 at
September 30, 1999 from $27,007,300 at December 31, 1998. The decrease is the
result of called securities.
Total loans increased $114,193,711 to $252,075,971 at September 30, 1999
from $137,882,260 at December 31, 1998, or 82.8%. Commercial loans increased
$77,881,532 from $95,669,151 at December 31, 1998, to $173,550,683 at September
30, 1999, an increase of 81.4%. Commercial loans account for approximately 68.8%
of the Bank's total loan portfolio.
11
The allowance for loan losses as of September 30, 1999, was $3,525,779
representing approximately 1.40% of gross loans outstanding, compared to
$2,030,000 at December 31, 1998. The Bank has not experienced any material
credit losses as of September 30, 1999.
Bank premises and equipment increased to $9,160,016 at September 30, 1999
from $7,125,755 at December 31, 1998. The increase resulted primarily from the
purchase of furniture and equipment, which increased from $2,553,229 at December
31, 1998 to $3,856,202 at September 30, 1999.
Deposits increased to $243,255,157 at September 30, 1999, from $166,988,675
at December 31, 1998. This was primarily as a result of deposits being obtained
from new customers of the Bank. Noninterest bearing demand deposit accounts
increased by $9,067,447 to $27,584,997 at September 30, 1999 from $18,517,550 at
December 31, 1998. These accounts are comprised primarily of business checking
accounts and represent 11.34% of Total Deposits.
Results of Operations
Management believes that the Company will realize a modest profit for 1999.
Earnings will continue to be curtailed for the balance of 1999 as a result of
additional loan loss reserves, together with the time needed to more effectively
utilize its capital and generate loan interest and fee income by making
additional loans. Management believes that the expenditures made in 1997, 1998
and 1999 will create the infrastructure and lay the foundation for future growth
and profitability in subsequent years.
Interest income for the three months ended September 30, 1999 in the amount
of $5,475,441, related to interest income on securities, loans, and interest
earning deposits. This compares favorably with the same period last year of
$2,201,206. Interest expense was $2,549,790 for the three months ended September
30, 1999, and was related to interest incurred on interest bearing deposits and
FHLB borrowings.
The Company had an allowance for loan losses of approximately 1.40% of
total loans at September 30, 1999. The provision for loan losses for the three
months ended September 30, 1999 was $505,000. 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 three months ended September 30, 1999, was
$367,832, consisting primarily of service charges on deposit accounts, which
totaled $155,676. This amount, which is nearly 43% of the year to date total of
$363,415, can be attributed to the number of accounts opened in 1999. The Bank's
trust fee income is improving with each quarter, commensurate with the growth of
trust assets. Trust revenue recorded in the second quarter was $45,232 and
$83,626 in the third quarter.
The main components of non-interest expense were primarily salaries and
benefits. Non-interest expense for the three months ended September 30, 1999,
was $2,487,312. Other significant components of non-interest expense consisted
of occupancy and equipment expenses, legal and accounting fees, marketing
expenses, data processing, and supplies.
12
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 in its initial public offering completed April
7, 1998, which resulted in net proceeds of $14,123,378. 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% at the end of the third year of its operations. 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. The Company
filed a Registration Statement with the Securities and Exchange Commission to
register and offer to the Company's shareholders up to 1,200,000 shares of
Common Stock for a purchase price of $12.75 per share. The common stock was
offered exclusively to shareholders of the Company as of April 9, 1999.
Shareholders were entitled to purchase one share for each two shares of Common
Stock they owned on April 9, 1999. The rights offering was completed on June 4,
1999 and resulted in additional equity capital to the company in the amount of
$14,622,270. The Company added $10,000,000 from the proceeds of the offering to
the Bank's capital. At June 30, 1999, the Bank's Tier 1 Capital as a percent of
total assets was 10.83%. At September 30, 1999, this ratio decreased to 9.71%,
due to asset growth. The Company has approximately $5 million in additional
capital which it could contribute to the Bank's capital if necessary.
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.
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. 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. 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.
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.
Company management has developed and the Board of Directors has approved a
comprehensive Year 2000 Compliance Plan. The plan consists of five phases:
awareness, assessment, renovation, validation and implementation. The Company
has an internal task force to assess Year 2000 compliance by the Company, its
vendors, and major deposit customers. In addition, the Bank asks commercial
borrowers about Year 2000 compliance as part of the loan application and review
process.
To date, the Company has spent significant time and approximately $28,000
on Year 2000 compliance. Management believes that the additional costs to
complete the Company's Year 2000 compliance will be minimal.
The Company completed its Year 2000 assessment and made any necessary
remediation by June 30, 1999. In addition, the Company may be adversely affected
by the inability of other companies whose systems interact with the Company to
become Year 2000 compliant.
The Bank's core processing applications are provided by a third party
vendor, Rurbanc Data Services, Inc. (RDSI). The Company meets monthly with, and
receives regular correspondence from, RDSI which documents the status of their
Year 2000 compliance. The Company has been advised that RDSI's software has been
successfully tested for Year 2000 compliance.
13
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company is in the process of preparing a contingency
plan that will specify what it plans to do if important internal or external
systems are not Year 2000 compliant in a timely manner.
Management does not anticipate that the Company will incur material
operating expenses or be required to invest heavily in computer system
improvements to be Year 2000 compliant. Nevertheless, the inability of the
Company to successfully address Year 2000 issues could result in interruptions
in the Company's business and have a material adverse effect on the Company's
results of operations.
Recent Regulatory Developments
Legislation recently enacted by Congress eliminates many Federal and state
law barriers to affiliations among banks and other financial services providers.
The legislation, which takes effect 120 days after the date of enactment,
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation, preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various Federal and state financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless they are well-capitalized, well-managed and maintain a rating under the
Community Reinvestment Act of 1977 of at least "satisfactory" among all
affiliates.
The President is expected to sign the legislation into law in the very near
future.
At this time, the Company is unable to predict the impact this legislation
may have on the Company.
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
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.
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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-QSB
for the quarter ended September 30, 1999, 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
DATE: November 8, 1999
16