FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 333-45755
MACATAWA BANK CORPORATION
(Exact name of registrant as specified in its charter)
|
MICHIGAN
(State of other jurisdiction of incorporation or organization) |
38-3391345 (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock.
Indicate by check mark whether the issuer: (1) 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ]
The registrant’s revenues for 2001 were $46,368,000. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on a per share price of $20.98 as of March 6, 2002, was $96,826,413 (common stock, no par value). As of March 6, 2002, there were outstanding 5,308,881 shares of the Company’s common stock (no par value). Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held April 18, 2002 are incorporated by reference into Part II and Part III of this Report.
PART I
ITEM 1: Business
As used in this Annual Report, the terms “we,” “us,” “our” and “Macatawa” mean Macatawa Bank Corporation and its subsidiaries, unless the context indicates another meaning.
We are a bank holding company organized in 1997 under Michigan law, and own all of the common stock of Macatawa Bank. Macatawa Bank has two wholly-owned subsidiaries: Macatawa Bank Mortgage Company and Macatawa Bank Brokerage Services, Inc. Macatawa Bank was organized and commenced operations in November, 1997 as a Michigan chartered bank with depository accounts insured by the FDIC to the extent permitted by law. Our bank provides a full range of commercial and consumer banking services, through 14 full service branches located in Ottawa county, northern Allegan county, and southwestern Kent county. We offer commercial and personal banking services, including checking and savings accounts (including certificates of deposit), safe deposit boxes, travelers checks, money orders, trust services and commercial, mortgage and consumer loans. As of December 31, 2001, we had total assets of $670.2 million, total deposits of $526.2 million, approximately 51,000 deposit accounts and shareholders’ equity of $66.5 million.
Our administrative office is located at 348 South Waverly Road, Holland, Michigan 49423, and our telephone number is (616) 820-1444. Unless the context clearly suggests otherwise, financial information and other references to us include Macatawa Bank.
Deposit Services. We offer a broad range of deposit services, including checking accounts, savings accounts and time deposits of various types. Transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area. All deposit accounts are insured by the FDIC up to the maximum amount permitted by law. We solicit these accounts from individuals, businesses, associations, churches, nonprofit organizations, financial institutions and government authorities. We may also use alternative funding sources as needed, including advances from Federal Home Loan Banks, conduit financing and the packaging of loans for securitization and sale.
Real Estate Loans. We originate residential mortgage loans, which are generally long-term with either fixed or variable interest rates. Our general policy, which is subject to review by our management as a result of changing market and economic conditions and other factors, is to retain all variable interest rate mortgage loans in our loan portfolio and to sell all fixed rate loans in the secondary market. We also offer home equity loans.
The retention of variable rate loans in our loan portfolio helps to reduce our exposure to fluctuations in interest rates. However, these loans generally pose credit risks different from the risks inherent in fixed rate loans, primarily because as interest rates rise, the underlying payments from the borrowers rise, thereby increasing the potential for default.
Personal Loans and Lines of Credit. We make personal loans and lines of credit available to our customers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, home improvements and personal investments. Our current policy is to retain substantially all of these loans in our loan portfolio.
Commercial Loans. Commercial loans are made primarily to small and mid-sized businesses. These loans are and will be both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, purchases of equipment and machinery, financing of inventory and accounts receivable, as well as any other purposes considered appropriate. We generally look to a borrower’s business operations as the principal source of repayment, but will also receive, when appropriate, mortgages on real estate, security interests in inventory, accounts receivable and other personal property and/or personal guarantees.
2
Although we take a progressive and competitive approach to lending, we stress high quality in our loans. On a regular basis, our board of directors reviews selected loans. In addition, the loan committee of our board of directors also reviews larger loans for prior approval when the loan request exceeds the established limits for the lending officer. We also maintain a loan review process designed to promote early identification of credit quality problems. Any past due loans and identified problem loans will be reviewed with our board of directors on a regular basis.
Regulatory and supervisory loan-to-value limits are established by Section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Our internal limitations follow those limits and in some cases are more restrictive than those required by the regulators.
We have established relationships with correspondent banks and other independent financial institutions to provide other services requested by our customers, including loan participations where the requested loan amounts exceed our policies or legal lending limits.
Trust Services. We began offering trust services in January, 1999, to further provide for the financial needs of our customers. As of December 31, 2001, the Trust Department had assets of approximately $261 million.
Our primary market area includes Ottawa County, northern Allegan County and southwestern Kent County, all located in Western Michigan. There are many bank, thrift and credit union offices located within our market area. Most are branches of larger financial institutions. We also face competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds and other providers of financial services. Many of our competitors have been in business a number of years, have established customer bases, are larger and have higher lending limits than we do. We compete for loans principally through our ability to communicate effectively with our customers and to understand and meet their needs. Our management believes that our personal service philosophy enhances our ability to compete favorably in attracting individuals and small businesses. We actively solicit customers and compete for deposits by offering our customers personal attention, professional service, and competitive interest rates.
We do not believe that existing environmental regulations will have any material effect upon our capital expenditures, our earnings or our competitive position.
As of December 31, 2001, we had 154 full-time and 75 part-time employees. We have assembled a staff of experienced, dedicated and highly qualified professionals whose goal is to provide outstanding service. The majority of our management team has at least 10 years of banking experience, and several key personnel have more than 20 years of banking experience. None of our employees is represented by collective bargaining agreements with us.
On November 20, 2001, Macatawa Bank Corporation and Grand Bank Financial Corporation entered into a definitive Agreement and Plan of Merger. Upon completion of the merger, Grand Bank Financial Corporation will be merged into Macatawa Bank Corporation, which will result in us becoming the holding company for Grand Bank. The transaction has been approved by the boards of directors of both companies and is subject to approval by the shareholders of both companies and other customary conditions. Additional information is included in the Prospectus and Joint Proxy Statement included in our Registration Statement on Form S-4, which has been filed with the Securities and Exchange Commission. The transaction is expected to be completed early in the second quarter of 2002.
3
The following is a summary of certain statutes and regulations affecting Macatawa Bank Corporation and Macatawa Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on us and our business.
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, our growth and earnings performance can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the FDIC, the Commissioner of the Michigan Office of Financial and Insurance Services (“Commissioner”), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to us and our bank establishes a comprehensive framework for our respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, our depositors, and the public, rather than our shareholders.
Federal law and regulations establish supervisory standards applicable to the lending activities of our bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
Macatawa Bank Mortgage Company, a subsidiary of Macatawa Bank, is subject to various state and federal regulations. Macatawa Bank Brokerage Services, Inc. will also be subject to state and federal regulations when it begins operations.
General. On January 9, 2002, Macatawa Bank Corporation became a financial holding company, within the meaning of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”), and is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, we are subject to periodic examination by the Federal Reserve Board, and are required to file with the Federal Reserve Board periodic reports of our operations and such additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to Macatawa Bank and to commit resources to support Macatawa Bank in circumstances where we might not do so absent such policy. In addition, if the Commissioner deems Macatawa Bank’s capital to be impaired, the Commissioner may require Macatawa Bank to restore its capital by a special assessment upon us as the bank’s sole shareholder. If we were to fail to pay any such assessment, the directors of Macatawa Bank would be required, under Michigan law, to sell the shares of the bank’s stock owned by us to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the bank’s capital.
Investments and Activities. In general, any direct or indirect acquisition by us of any voting shares of any bank which would result in our direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation between us and another financial holding company or bank holding company, will require the prior written approval of the Federal Reserve Board under the BHCA. No Federal Reserve Board approval is required for us to acquire a company, other than a bank holding company or bank, engaged in activities that are financial in nature as determined by the Federal Reserve Board.
The merger or consolidation of an existing bank subsidiary of ours with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.
4
Financial holding companies, like us, may engage in various lending, advisory, insurance and insurance underwriting, securities underwriting, dealing and market making, and merchant banking activities (as well as those activities previously approved for bank holding companies by the Federal Reserve Board) together with such other activities as may be determined by the Federal Reserve Board (in coordination with other regulatory authorities) to be financial in nature, incidental to any such financial activity, or complimentary to any such financial activity, and which do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. In order to maintain the benefits and flexibility of being a financial holding company, each of our subsidiary depository institutions must continue to be “well-capitalized” and “well-managed” under applicable regulatory standards and each subsidiary depository institution must maintain at least a satisfactory or above Community Reinvestment Act rating.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
Dividends. Macatawa Bank Corporation is a corporation separate and distinct from Macatawa Bank. Most of our revenues are received by it in the form of dividends paid by our bank. Thus, our ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on our bank’s ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over our bank are possessed by the FDIC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by us for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, like us, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution.
5
General. Macatawa Bank is a Michigan banking corporation, and its deposit accounts are insured by the Bank Insurance Fund (the “BIF”) of the FDIC. As a BIF insured Michigan chartered bank, Macatawa Bank is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of BIF. These agencies and the federal and state laws applicable to our bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, we are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act (“FDIA”) requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. For several years, the BIF reserve ratio has been at or above the mandated ratio and assessments have ranged from 0% of deposits for institutions in the lowest risk category to .27% of deposits in the highest risk category. However, there is speculation that the reserve may fall below the mandated ratio resulting in increased assessments in 2003.
FICO Assessments. Our bank, as a member of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”) which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank’s total assets, as reported to the Commissioner.
Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC insured non-member banks, such as Macatawa Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.
6
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:
|
Total Risk-Based Capital Ratio |
Tier 1 Risk-Based Capital Ratio |
Leverage Ratio | |
| Well capitalized | 10% or above | 6% or above | 5% or above |
| Adequately capitalized | 8% or above | 4% or above | 4% or above |
| Undercapitalized | Less than 8% | Less than 4% | Less than 4% |
| Significantly undercapitalized | Less than 6% | Less than 3% | Less than 3% |
| Critically undercapitalized | -- | -- |
A ratio of tangible equity to total assets of 2% or less |
As of December 31, 2001, each of Macatawa Bank’s ratios exceeded minimum requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends. Under Michigan law, our bank is restricted as to the maximum amount of dividends it may pay on its common stock. Our bank may not pay dividends except out of net income after deducting its losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have surplus amounting to at least 20% of its capital after the payment of the dividend.
Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by our bank, if such payment is determined, by reason of the financial condition of our bank, to be an unsafe and unsound banking practice.
Insider Transactions. Our bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to us or our subsidiaries, on investments in the stock or other securities of our or our subsidiaries and the acceptance of the stock or other securities of us or our subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by our bank to its directors and officers, to our directors and officers, the directors and officers of our bank, to our principal shareholders and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of our company or one of its subsidiaries or a principal shareholder in our company may obtain credit from banks with which our bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
7
Investments and Other Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of our bank.
Consumer Protection Laws. Our bank’s business includes making a variety of types of loans to individuals. In making these loans, we are is subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, our bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon our bank and its directors and officers.
Branching Authority. Michigan banks have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals. Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.
Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan Office of Financial and Insurance Services, Division of Financial Institutions, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
8
ITEM 2: Description of Property.
Our administrative offices are located at 348 South Waverly Road, Holland, Michigan 49423.
We have purchased approximately 17 acres of land located between Holland and Zeeland. On December 13, 2001, we broke ground to begin the construction of a three story building that will contain approximately 49,000 square feet. Upon completion, we will consolidate our administration, human resources, trust, loan underwriting and processing, and proof and deposit operations in the new facility. Our main banking office is located at 51 E. Main Street, Zeeland, Michigan 49464, and the telephone number is (616) 748-9491. The main office consists of approximately 1,820 square feet located on the first floor of an office building and approximately 1,500 square feet in the basement. This location is in the heart of the City of Zeeland on Main Street, which our management believes provides recognition and a visible presence in the Holland-Zeeland community. The main office includes three teller stations, two customer service offices, two administrative offices, two commercial lending offices, and a vault and safe deposit boxes. We have entered into a three year lease with respect to our bank’s main office, with renewal options for up to four successive three year terms. The initial rental rate, after amendments for additional office space, is $900.00 per month, which increases by 7.5% for each three year renewal period. We are also obligated to pay all costs associated with taxes, assessments, maintenance, utilities and insurance. During December 2001 we purchased approximately 1.2 acres of land in Wyoming, Michigan. This land will be used to construct a branch and regional lending center during 2002. Upon completion, our branch at 1760-44th Street in Wyoming will be relocated to the new location.
We own or lease facilities located in Ottawa County, Allegan County and Kent County, Michigan. Our facilities as of February 1, 2002, were as follows:
| Location of Facility | Use |
|
51 E. Main Street, Zeeland* 139 E. 8th Street, Holland* 489 Butternut Dr., Holland 701 Maple Avenue, Holland 699 E. 16th Street, Holland 106 E. 8th Street, Holland* 41 N. State Street, Zeeland 2020 Baldwin Street, Jenison 6299 Lake Michigan Dr., Allendale 102 South Washington, Douglas 4758 - 136th Street, Hamilton* 3526 Chicago Drive, Hudsonville 1760 - 44th Street, S.W., Wyoming* 20 E. Lakewood Blvd., Holland 348 South Waverly Road, Holland* 4471 Wilson Avenue, S.W., Grandville* 250 E. 8th Street, Holland* |
Main Branch Branch Office Branch Office Branch Office Branch Office Trust Department Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Branch Office Loan Center and Administrative Offices Branch Office Operations Center |
*Leased facility
We believe our facilities are well-maintained and adequately insured. Because of our growth, we are continually evaluating the need for additional space and branches.
9
As the date hereof, there were no material pending legal proceedings, other than routine litigation incidental to the business of banking to which we or any of our subsidiaries are a party of or which any of our properties are the subject.
No matters were submitted during the fourth quarter of 2001 to a vote of our shareholders.
Certain information relating to Executive Officers of Macatawa Bank Corporation and Macatawa Bank are as follows:
| Name | Age |
Year Elected an Executive Officer |
Positions Held |
|
| Benj. A. Smith, III | 58 | 1997 |
Chairman of the Board and Chief Executive Officer of Macatawa Bank Corporation and a director of Macatawa Bank. |
|
| Philip J. Koning | 47 | 1997 |
President and Chief Executive Officer of Macatawa Bank and Treasurer and Secretary of Macatawa Bank Corporation. |
|
| Steven L. Germond | 48 | 2000 |
Chief Financial Officer of Macatawa Bank Corporation and Macatawa Bank. |
|
| Ray D. Tooker | 58 | 2000 |
Senior Vice President Loan Administration of Macatawa Bank. |
10
PART II
Our common stock has been quoted on the Nasdaq National Market since May 17, 2001. From December 27, 1999 through May 16, 2001, our common stock was quoted on the Nasdaq SmallCap Market. From the completion of our initial public offering in April 1998 through December 27, 1999, our common stock was quoted on the OTC Bulletin Board. High and low sales prices (as reported on the Nasdaq National Market and the Nasdaq SmallCap Market) for each quarter are included in the following table. The following table reflects an adjustment to our historical share data for the 3% stock dividend we distributed on May 4, 2001.
| 2001
|
2000
|
|||||
| Quarter | High | Low |
Dividends Declared |
High | Low |
Dividends Declared |
| First Quarter | $15.00 | $13.50 | $.07 | $15.04 | $12.74 | -- |
| Second Quarter | $18.00 | $14.07 | $.07 | $13.48 | $11.17 | -- |
| Third Quarter | $18.25 | $15.93 | $.07 | $12.86 | $10.32 | -- |
| Fourth Quarter | $19.25 | $15.75 | $.08 | $13.59 | $10.68 | $.07 |
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On February 25, 2002, there were approximately 650 owners of record and, in addition, approximately 3,600 beneficial owners of our common stock.
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. Cash dividends paid are noted in the above table. During the second quarter of 2001, we distributed a 3% stock dividend to our shareholders.
We intend to continue to declare quarterly cash dividends in the future. We may also consider declaring stock dividends on an annual basis. We are expecting to obtain the funds for the payment of future cash dividends from the dividends we receive from Macatawa Bank out of its earnings. However, there can be no assurance that we will have the financial resources to continue to pay dividends in the future.
The information set forth under the caption “Selected Consolidated Financial Data” in our Annual Report to Shareholders for the year ended December 31, 2001, is incorporated by reference and is filed as part of Exhibit 13 to this form 10-K Annual Report.
The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report to Shareholders for the year ended December 31, 2001, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.
11
The information set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset Liability Management and Market Risk Analysis” in our Annual Report to Shareholders for the year ended December 31, 2001, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.
The information set forth under the captions “Quarterly Financial Data,” “Report of Independent Auditors,” “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flow,” and “Notes to Consolidated Financial Statements” in our Annual Report to Shareholders for the year ended December 31, 2001, is hereby incorporated by reference and is filed as part of Exhibit 13 to this Form 10-K Annual Report.
There have been no disagreements with our independent public accountants.
PART III
The information set forth on pages 3-4, under the caption “Information About Directors” and on page 16 under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement dated March 7, 2002, relating to our 2002 Annual Meeting of Shareholders and the information within that section is incorporated by reference. Information relating to our Executive Officers is included in Part I hereof entitled “Executive Officers of the Registrant.” There are no family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer.
Information relating to compensation of our executive officers and directors is contained under the captions “Director Compensation” and “Executive Compensation,” in our definitive Proxy Statement dated March 7, 2002, relating to our 2002 Annual Meeting of Shareholders and the information within those sections is incorporated by reference.
Information relating to security ownership of certain beneficial owners and management is contained on Page 2 under the caption “Voting Securities and Principal Holders Thereof” and on page 9 under the caption “Security Ownership of Management” in our definitive Proxy Statement dated March 7, 2002, relating to our 2002 Annual Meeting of Shareholders and the information within that section is incorporated by reference.
Information relating to certain relationships and related transactions is contained on page 16, under the caption “Transactions Involving Management” in our definitive Proxy Statement dated March 7, 2002, relating to our 2002 Annual Meeting of Shareholders and the information within that section is incorporated by reference.
12
PART IV
| (a) | Financial Statements. | |
| 1. |
The following documents are filed as part of Item 7 of this report: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements |
|
| 2. | Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. | |
| 3. |
The following exhibits are filed as part of this report: Reference is made to the exhibit index which follows the
signature page of this report. The Registrant will furnish a copy of any exhibits listed on the Exhibit Index to any shareholder of the Registrant without charge upon written request of Steven L. Germond, Macatawa Bank Corporation, 348 South Waverly Road, Holland, Michigan 49423. |
|
| (b) | Reports on Form 8-K | |
| During the last quarter of the period covered by this report, the Registrant filed no Current Reports on Form 8-K. | ||
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 6, 2002.
|
MACATAWA BANK CORPORATION /s/ Benj. A. Smith, III Benj. A. Smith, III Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Steven L. Germond Steven L. Germond Chief Financial Officer (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 6, 2002, by the following persons on behalf of the Registrant and in the capacities indicated. Each director of the Registrant, whose signature appears below, hereby appoints Benj. A. Smith, III and Philip J. Koning, and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.
| Signature | |
|
/s/ Benj. A. Smith, III
Benj. A. Smith, III, Principal Executive Officer and a Director |
March 6, 2002 |
|
/s/ Steven L. Germond
Steven L. Germond, Principal Financial and Accounting Officer |
March 6, 2002 |
|
/s/ G. Thomas Boylan
G. Thomas Boylan, Director |
March 6, 2002 |
|
/s/ Robert E. DenHerder
Robert E. DenHerder, Director |
March 6, 2002 |
|
/s/ John F. Koetje
John F. Koetje, Director |
March 6, 2002 |
|
/s/ Philip J. Koning
Philip J. Koning, Director and President |
March 6, 2002 |
14
| Exhibit Number and Description |
Sequentially Numbered Page |
|
| |
||
| 2 | Consolidation Agreement dated December 10, 1997, incorporated by reference to Exhibit 2 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 3.1 | Articles of Incorporation of Macatawa Bank Corporation, incorporated by reference to Exhibit 3.1 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 3.2 | Bylaws of Macatawa Bank Corporation, incorporated by reference to Exhibit 3.2 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 4 | Specimen stock certificate of Macatawa Bank Corporation, incorporated by reference to Exhibit 4 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 10.1 | Macatawa Bank Corporation Stock Compensation Plan, incorporated by reference to Exhibit 10.1 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 10.2 | Macatawa Bank Corporation 1998 Directors' Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 10.3 | Data Processing Agreement between Rurbanc Data Services, Inc. and Macatawa Bank dated July 1, 2000, incorporated by reference to Exhibit 10.6 to the Macatawa Bank Corporation Annual Report on Form 10-K for the year ended December 31, 2000. | |
| |
||
| 10.4 | MagicLine Product Services Agreement between MagicLine, Inc. and Macatawa Bank dated October 1, 1997, incorporated by reference to Exhibit 10.9 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 10.5 | FTB Participating Bank Agreement between First Tennessee Bank National Association and Macatawa Bank dated October 24, 1997, incorporated by reference to Exhibit 10.10 to the Macatawa Bank Corporation Registration Statement on Form SB-2 (Registration No. 333-45755). | |
| |
||
| 10.6 | Agreement and Plan of Merger by and between Macatawa Bank Corporation and Grand Bank Financial Corporation dated November 20, 2001, incorporated by reference to Appendix A to the Prospectus and Joint Proxy Statement included in the Macatawa Bank Corporation Registration Statement on Form S-4 (Registration No. 333-76100). | |
| |
15
| 13 | Annual Report to Shareholders for the year ended December 31, 2001. This exhibit, except for those portions expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not deemed “filed” as part of this filing. This information was delivered to the Company’s shareholders in compliance with Rule 14a-3 of the Securities Exchange Act of 1934, as amended. | |
| |
||
| 21 | Subsidiaries of the Registrant | |
| |
||
| 23 | Consent of Crowe, Chizek and Company LLP, independent public accountants | |
| |
||
| 24 | Power of Attorney (included on the signature page on page 15 of the Annual Report on Form 10-K) |
16
The following selected consolidated financial and other data are derived from the Company’s Financial Statements and should be read with the Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Consolidated Balance Sheets as of December 31, 2001 and 2000, and the Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999, are included elsewhere in this Annual Report.
(Dollars in thousands, except share and per share data)
At or For the Year Ended December 31
-----------------------------------------
2001 2000 1999 1998
-----------------------------------------
Financial Condition
Total assets $ 670,203 $ 499,813 $ 344,921 $ 189,229
Securities 64,316 48,669 28,281 27,007
Loans 545,693 410,676 285,374 137,882
Deposits 526,192 398,617 279,390 166,989
Shareholder's equity 66,502 38,128 34,526 19,611
Share Information
Basic earnings/(loss) per common share $ 1.12 .91 .22 $ (1.18)
Diluted earnings/(loss) per common share 1.11 .90 .22 (1.18)
Book value per common share 12.51 10.31 9.34 7.82
Weighted average dilutive
shares outstanding 4,611,531 3,711,051 3,216,625 2,103,178
Shares outstanding at end of period 5,307,201 3,696,789 3,696,039 2,542,599
Operations
Interest income $ 42,685 $ 34,338 $ 20,000 $ 6,804
Interest expense 20,927 17,739 9,428 3,190
Net interest income 21,758 16,599 10,572 3,614
Provision for loan losses 2,285 1,931 1,967 2,023
Net interest income after provision for loan losses $ 19,473 $ 14,668 $ 8,605 $ 1,591
Total noninterest income 3,683 2,051 1,528 683
Total noninterest expense 15,543 12,672 9,440 4,763
Income/(loss) before tax 7,613 4,048 693 (2,489)
Federal income tax 2,497 699 -- --
Net income/(loss) $ 5,116 $ 3,349 $ 693 $ (2,489)
Performance Ratios
Return on average equity 9.58% 9.31% 2.72% (15.15)%
Return on average assets 0.88% 0.80% 0.26% (2.70)%
Yield on average interest-earning assets 7.82% 8.85% 8.27% 7.93%
Cost on average interest-bearing liabilities 4.39% 5.20% 4.51% 4.77%
Average net interest spread 3.43% 3.65% 3.76% 3.16%
Average net interest margin 3.98% 4.18% 4.37% 4.21%
Capital Ratios
Equity to assets 9.92% 7.63% 10.01% 10.36%
Total risk-based capital ratio 12.85% 10.36 14.16% 12.40%
Credit Quality Ratios
Allowance for loan losses to total loans 1.41% 1.43% 1.40% 1.47%
Nonperforming assets to total assets .36% 0.04% 0.03% 0.00%
Net charge-offs to average loans .09 0.02% 0.00% 0.00%
20
A summary of selected quarterly results of operations for the years ended December 31 follows:
(Dollars in thousands, except per share data)
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------
2001
Interest income $ 10,280 $ 10,639 $ 11,108 $ 10,658
Net interest income 4,831 5,195 5,675 6,057
Provision for loan losses 522 502 565 696
Income before income tax expense 1,637 1,784 2,003 2,189
Net income 1,091 1,202 1,351 1,471
Net income per share
Basic .30 .30 .26 .28
Diluted .29 .30 .25 .28
2000
Interest income $ 7,106 $ 8,368 $ 9,026 $ 9,838
Net interest income 3,537 4,079 4,318 4,665
Provision for loan losses 487 595 434 415
Income before income tax expense 527 823 1,119 1,579
Net income 527 823 947 1,051
Net income per share
Basic .14 .22 .26 .28
Diluted .14 .22 .26 .28
21
Management’s discussion and analysis of financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in such forward-looking statements.
The following section presents additional information to assess the financial condition and results of operations of the Company and the Bank. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report.
Macatawa Bank Corporation (the Company) is a Michigan corporation and is the bank holding company for Macatawa Bank (the Bank) and Macatawa Bank Brokerage Services. Effective January 9, 2002, Macatawa Bank Corporation elected to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act. Macatawa Bank commenced operations on November 25, 1997. We provide a wide range of commercial, consumer, and trust banking services, through our network of 14 full service branches located in communities in Ottawa county, northern Allegan county and southwestern Kent County, Michigan.
While maintaining asset quality and improving profitability, we have experienced rapid and substantial growth since opening in November 1997. We first became profitable in 1999 with net income for that year of $693 thousand. Net income increased to $5.1 million for 2001 from $3.3 million for 2000. At December 31, 2001, we had fourteen branch banking offices, and three service facilities. We completed an underwritten initial public offering of common stock on April 7, 1998, resulting in net proceeds of $14.1 million. Prior to that offering, we raised $8.2 million in a private offering for the initial capitalization of Macatawa Bank. In June 1999, we completed an offering of common stock to our shareholders resulting in net proceeds of $14.6 million. In June 2001, we completed an underwritten public offering of 1,610,000 shares of our common stock at an offering price of $16.00 per share, resulting in net proceeds of $23.7 million after underwriting commissions and expenses.
Our total assets increased 34% to $670.2 million at December 31, 2001, from $499.8 million at December 31, 2000. We believe the strong asset growth reflects the acceptance of our community banking philosophy in the growing communities we serve. Our asset growth consists primarily of growth in our loan portfolio as we continue to attract new loan customers despite the strong competition from other locally based community banks and larger regional banks. The asset growth was primarily in earning assets of loans and securities, but also included increased cash, premises, and equipment. The increase in total assets was principally funded by strong deposit growth and the use of borrowed funds. Total deposits grew to $526.2 million at December 31, 2001 from $398.6 million at December 31, 2001. We attribute the strong deposit growth to our quality customer service, the desire of our customers to bank with a local bank, and convenient accessibility through the expansion of our branch network. We anticipate continued growth in total assets, due in part to the consolidation of local competitors into large out-of-state regional banks, as well as continued additional market share penetration. As we continue to grow, we expect our percentage rate of growth to decline.
Our cash and cash equivalents, which include federal funds sold and short-term investments, were $34.2 million at December 31, 2001, as compared to $26.3 million at December 31, 2000. The increase is a result of excess cash being invested in short term investments, as well as higher levels of bank balances maintained. The higher balances were required to cover uncollected funds deposited in Macatawa Bank’s correspondent bank accounts as a result of customer deposit activity.
Our security portfolio is classified as either “available for sale” or “held to maturity.” All of the securities classified as “available for sale” may be sold to meet our liquidity needs. The primary objective of our investing activities is to provide for the safety of the principal invested. Our secondary considerations include earnings, liquidity and decreased overall exposure to changes in interest rates. Securities increased $15.6 million to $64.3 million at December 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. We expect continued growth of our securities portfolio generally consistent with the growth of our company in order to maintain appropriate levels of liquidity.
22
Securities Portfolio
(Dollars in thousands)
Year Ended December 31
---------------------------
2001 2000 1999
---------------------------
U. S. Treasury and U.S. Government Agencies $55,287 $45,991 $27,337
Michigan municipal bonds 9,029 2,678 944
---------------------------
$64,316 $48,669 $28,281
---------------------------
Excluding our holdings of the investment portfolio in U.S. Treasury and U.S. Government Agency Securities, we had no investments in securities of any one issuer which exceeded 10% of shareholders’ equity.
Schedule of
Maturities of Investment Securities and Weighted Average Yields
The following is a schedule of maturities and their weighted average yield of each category of investment
securities we held at December 31, 2001.
(Dollars in thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
---------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated Estimated
Market Average Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield Value Yield
---------------------------------------------------------------------------------------------------
U.S. Treasury
and U.S.
Government
Agencies $ 6,119 6.85% $42,396 5.52% $6,772 5.27% - - - -
Tax-exempt
MI municipal bonds - - - - $3,448 6.41% $5,581 7.03% - -
---------------------------------------------------------------------------------------------------
Total $ 6,119 6.85% $42,396 5.52% $10,220 5.67% $5,581 7.03% - -
---------------------------------------------------------------------------------------------------
23
Loan Portfolio
Our total loan portfolio increased 33% to $545.7 million at December 31, 2001, as compared to $410.7
million at December 31, 2000. We also had $4.6 million of loans held for sale at
December 31, 2001. There were no loans held for sale at December 31, 2000. The
majority of loans we make are to small and mid-sized businesses in the form of
commercial and commercial real estate loans. Our combined commercial loans
totaled $403.4 million at December 31, 2001, an increase of 37% from December
31, 2000. Commercial loans accounted for approximately 74% of our total
portfolio loans at December 31, 2001, as compared to 71% at the end of 2000. Our
residential real estate loan portfolio, which also includes residential
construction loans made to the individual home owner, comprises approximately
12% of portfolio loans. However, our residential loan origination volume is
significantly higher, with only a small portion of residential home loans
retained for our own portfolio. We sell the majority of fixed-rate obligations
and do not retain servicing. We originated $193 million in residential mortgages
in 2001 and $91.5 million in 2000. The lower overall interest levels experienced
during 2001 resulted in significantly higher levels of residential refinancing
and loan originations during 2001. Our consumer loan portfolio includes both
loans secured by personal property, as well as home equity fixed term and line
of credit loans. Home equity loans totaled $45.9 million at December 31, 2001,
compared to $33.5 million at December 31, 2000. Approximately 89% of our home
equity loans are underwritten at terms of a loan to value ratio of less than
90%, and are considered well collateralized.
The following table reflects the composition of our loan portfolio and the corresponding percentage of our total loans represented by each class of loans as of the dates indicated.
Loan Portfolio Composition
(Dollars in thousands)
Year Ended December 31
----------------------------------------------------------
2001 2000 1999
----------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------
Commercial real estate $ 133,428 25% $ 79,444 19% $ 54,160 19%
Residential real estate 67,655 12% 60,822 15% 44,734 15%
Other commercial 269,993 49% 214,098 52% 147,232 52%
Consumer 74,617 14% 56,312 14% 39,248 14%
----------------------------------------------------------
Total loans 545,693 100% 410,676 100% 285,374 100%
----------------------------------------------------------
Less:
Allowance for loan losses (7,699) (5,854) (3,995)
----------------------------------------------------------
Total loans receivable, net $ 537,994 $ 404,822 $284,379
----------------------------------------------------------
24
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of December 31, 2001 which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
(Dollars in thousands)
Maturing
---------------------------------------------------------------
After One, But
Within One Year Within Five Years After Five Years Total
---------------------------------------------------------------
Commercial real estate $ 19,798 $ 111,451 $ 2,179 $ 133,428
Residential real estate 19,180 905 47,570 67,655
Other commercial 141,592 124,251 4,150 269,993
Consumer 5,368 33,427 35,822 74,617
------------------------------------------------------------
Totals $ 185,938 $ 270,034 $ 89,721 545,693
------------------------------------------------------------
Allowance for loan losses (7,699)
---------
Total loans receivable, net $ 537,994
---------
Below is a schedule of the loan amounts maturing or repricing which are classified according to their sensitivity to changes in interest rates at December 31, 2001.
Interest Sensitivity
(Dollars in thousands)
-----------------------------------------
Fixed Rate Variable Rate Total
-----------------------------------------
Due within 3 months $ 18,791 $ 281,299 $ 300,076
Due after 3 months, but within 1 year 43,370 1,654 45,024
Due after one but within five years 148,481 22,982 171,463
Due after five years 25,422 3,694 29,116
-----------------------------------------
Total $ 236,064 $ 309,629 545,693
-----------------------------------------
Allowance for loan losses (7,699)
---------
Total loans receivable, net $ 537,994
---------
25
Nonperforming Assets.
Our nonperforming loans include loans on non-accrual, restructured loans, as well as loans delinquent
more than 90 days, but still accruing. Nonperforming loans as of December 31,
2001 totaled $2.4 million compared to $196,000 at December 31, 2000. The
increase in non-performing loans reflects primarily one credit which, while
still paying, the borrower’s deteriorating financial condition warrants
concern, and therefore the loan has been placed on non-accrual. Our loan
performance is reviewed regularly by an external loan review team, our own loan
officers, and our senior management. When reasonable doubt exists concerning
collectibility of interest or principal of one of our loans, that loan will be
placed in non-accrual status. Any interest previously accrued but not collected
at that time will be reversed and charged against current earnings. As of
December 31, 2001 there were no other interest bearing assets which required
classification. We are not aware of any recommendations by regulatory agencies,
which, if implemented, would have a material impact on our liquidity, capital or
operations.
The following table shows the composition and amount of our nonperforming assets. (Dollars in thousands)
December 31
-------------------------------------
2001 2000 1999
-------------------------------------
Nonaccrual loans $ 2,084 $ 155 $ 101
Loans 90 days or more delinquent and still accruing 298 41 -
Restructured loans - - -
-------------------------------------
Total nonperforming loans 2,382 196 101
-------------------------------------
Other real estate owned - - -
Total nonperforming assets $2,382 $196 $101
-------------------------------------
Nonperforming loans to total loans .43% .05% .04%
Nonperforming assets to total assets .36% .04% .03%
Loan Loss Experience
The following is a summary of our loan balances at the end of each period and the daily average balances of
these loans. It also includes changes in the allowance for loan losses arising
from loans charged-off and recoveries on loans previously charged-off, and
additions to the allowance which we have expensed.
(Dollars in thousands)
December 31
-------------------------------------
2001 2000 1999
-------------------------------------
Loans:
Average daily balance of loans for the year $ 474,318 $ 347,351 $ 213,472
Amount of loans outstanding at end of period 545,693 410,676 285,374
Allowance for loan losses:
Balance at beginning of year $5,854 $3,995 $2,030
Addition to allowance charged to operations 2,285 1,931 1,967
Loans charged-off:
Commercial (485) (67) -
Residential Real Estate (1) - -
Consumer (27) (20) (6)
Recoveries:
Commercial 63 14 -
Residential Real Estate 1 - -
Consumer 9 1 4
-------------------------------------
Balance at end of year $ 7,699 $ 5,854 $ 3,995
-------------------------------------
Ratios:
Net charge-offs to average loans outstanding .09% .02% -
Allowance for loan losses to loans outstanding at year end 1.41% 1.43% 1.40%
26
Allowance for Loan Losses
Our allowance for loan losses as of December 31, 2001, was $7.7 million, representing approximately
1.41% of total portfolio loans outstanding, compared to 1.43% at December 31,
2000. Our allowance for loan losses is maintained at a level management
considers appropriate based upon the assessment of relevant circumstances. We
prepare a quarterly evaluation of the allowance for loan losses. The analysis is
based upon a number of factors, including a continuous review of our loan
portfolio, our own loss experience, the banking industry’s historical loan
loss experience, known and inherent risks included in the loan portfolio, the
composition of our loans, growth of our portfolio, and current economic
conditions.
As part of our analysis, we assign a portion of the loan loss allowance to our entire portfolio by loan type and loan grade through reviews of our past loss experience, and to specific credits that have been identified as problem loans. Our local economy and particular concentrations are considered, as well as a number of other factors. While the commercial loan portfolio has performed very well during our first four years of existence, the allowance does reflect a higher percentage allocation of the reserve against the portfolio due to management’s assessment of inherently higher risks in commercial lending. The allowance allocation to commercial loans in 2001 increased significantly over the 2000 level primarily due to the growth of $109 million in the portfolio size. Also loans subject to specific allocation increased approximately $2 million due to deterioration in several loan credits. By their very nature, commercial loans generally have a high degree of risk due to:
Allocation of the Allowance for Loan Losses
The following table shows the allocation of the allowance for loan loss at the dates indicated to the
extent specific allocations have been determined relative to particular loans.
(Dollars in thousands)
Year Ended December 31
------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------
% of Each % of Each % of Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------------------------------------------------------------------------
Commercial and commercial real estate $6,391 73.9% $3,902 71.5% $2,784 70.6%
Real estate mortgages 196 12.4% 176 14.8% 112 15.7%
Consumer 564 13.7% 435 13.7% 297 13.7%
Unallocated 548 - 1,341 - 802 -
------------------------------------------------------------------------
Total $7,699 100.0% $5,854 100.0% $3,995 100.0%
------------------------------------------------------------------------
The above allocations are not intended to imply limitations on usage of the allowance. The entire allowance is available for any loan losses without regard to loan type.
27
Premises and Equipment.
Our premises and equipment increased by $2.6 million, and totaled $14.8 million at December 31, 2001, as
compared to $12.3 million at December 31, 2000. The increase resulted primarily
from the purchase of land for our new headquarters building, as well as the
purchase of land and construction of a new branch to replace a previously leased
branch facility.
Deposits
Deposits are gathered from the communities we serve through our network of 14 branches. We offer business
and consumer checking accounts, regular and money market savings accounts, and
certificates of deposits having many options in their terms.
Our total deposits were $526.2 million at December 31, 2001, as compared to $398.6 million at December 31, 2000. We believe the increase in deposits was substantially a result of deposits from new customers. Noninterest bearing demand accounts comprised approximately 12% of total deposits at December 31, 2001, as compared to approximately 13% of total deposits at the end of 2000. Interest bearing demand and savings accounts comprised approximately 50% of total deposits at December 31, 2001, as compared to 48% at the end of last year. Time accounts as a percentage of total deposits were approximately 38% at December 31, 2001, and were approximately 39% at December 31, 2000. We set our deposit pricing to be competitive with other banks in our market area. This has enabled us to increase deposits from new, as well as existing customers, while maintaining a strong net interest margin. We periodically purchase brokered deposits to supplement funding needs. These are time accounts originated outside of our local market area. Brokered deposits comprised approximately 2% of total deposits at December 31, 2001, and approximately 4% at December 31, 2000. We operate in a very competitive environment, competing with other local banks similar in size and with significantly larger regional banks. We monitor rates at other financial institutions in the area to ascertain that our rates are competitive with the market. We also attempt to offer a wide variety of products to meet the needs of our customers.
Average Daily Deposits
The following table sets forth the average deposit balances and the weighted average rates paid thereon.
(Dollars in thousands)
Average for the Year
------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------
Noninterest bearing demand $ 52,184 - $ 38,525 - $ 23,690 -
NOW accounts 55,951 1.8% 45,246 2.6% 29,721 2.6%
MMDA/savings 174,933 3.3% 131,069 4.7% 97,849 4.2%
Time 176,983 5.8% 123,756 6.4% 68,629 5.5%
------------------------------------------------------------------------
Total deposits $ 460,051 3.7% $338,596 4.5% $219,889 3.9%
------------------------------------------------------------------------
Maturity Distribution of Time Deposits of $100,000 or More
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until
maturity as of December 31, 2001:
(Dollars in thousands)
Amount
------------
Three months or less $ 41,337
Over 3 months through 6 months 25,496
Over 6 months through 1 year 18,500
Over 1 year 15,171
------------
$ 100,504
------------
28
Borrowed Funds.
Borrowed funds totaled $75.6 million at December 31, 2001 as compared to $61.2
million at December 31, 2000. Borrowed funds consist principally of advances
from the Federal Home Loan Bank. Borrowed funds also include federal funds
purchased, which are utilized to settle our daily cash letter position with our
correspondent banks. Additionally, we secured a $5.0 million credit facility in
September of 2000, which was subsequently increased to $8.0 million in March
2001. As of December 31, 2000, $4.0 million had been advanced on the credit
facility and contributed to the capital of Macatawa Bank to enable the bank to
maintain its regulatory capital levels at well-capitalized levels. The total
outstanding balance was subsequently paid off during June of 2001 with proceeds
from the common stock offering.
Retained Earnings.
We had a retained earnings balance of $3.2 million at December 31, 2001 as
compared to $1.1 million at December 31, 2000. Retained earnings is comprised of
net earnings, less dividends paid to shareholders. During 2001, we paid $1.3
million in cash dividends. A 3% stock dividend was also paid from retained
earnings during May of 2001, resulting in the transfer of $1.8 million from
retained earnings to our common stock. We also paid out cash dividends totaling
$251,000 during the three months ended December 31, 2000.
Summary of Results.
Net income totaled $5.1 million for 2001 as compared to $3.4 million in 2000,
and $693,000 during 1999. The increase in net income principally reflects growth
in our net interest income and noninterest income as a result of our growing
customer base.
Total revenues, consisting of net interest income and noninterest income, were $25.4 million during 2001, as compared to $18.6 million during 2000, and $10.1 million for 1999. Noninterest expense totaled $15.5 million for 2001, as compared to $12.7 million for 2000, and $9.4 million for 1999. Our federal income tax expense increased substantially during 2001 reflecting our fully taxable status for all of 2001. We initially became taxable during 2000 after utilizing all tax loss carry forwards from 1998 and 1997. We expect that our effective federal tax rate for future years will be 34%, with a marginal rate of approximately 33.5% due to tax-free investments.
29
Analysis of Net Interest Income. The following schedule presents, for the periods indicated, information regarding:
For the years ended December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- --------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Earned Yield or Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost Balance or Paid Cost
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in Thousands)
Assets:
Taxable securities..................... $ 49,771 $ 2,921 6.01% $ 35,459 $ 2,166 6.11% $ 21,444 $ 1,225 5.71%
Tax-exempt securities (1).............. 6,784 320 7.20% 1,639 86 7.56% 172 9 5.23%
Loans (2).............................. 474,318 38,904 8.12% 347,351 31,789 9.15% 213,472 18,379 8.61%
Federal funds sold..................... 7,864 265 3.33% 1,616 99 6.13% 4,166 204 4.90%
Short-term investments................. 1,575 39 2.44% 169 6 3.55% 1,132 56 4.95%
Federal Home Loan Bank stock........... 3,187 236 7.30% 2,332 192 8.28% 1,593 127 7.97%
-------- ------- -------- ------- -------- -------
Total interest earning assets. 543,499 42,685 7.82% 388,566 34,338 8.85% 241,979 20,000 8.27%
Noninterest earning assets:
Cash and due from banks........... 27,377 18,624 12,828
Other............................. 13,148 9,897 6,694
-------- -------- --------
Total assets.................. $584,024 $417,087 $261,501
======== ======== ========
Liabilities and Shareholders' Equity:
Deposits:..............................
NOW and money market accounts..... $204,863 5,932 2.90% $159,419 6,656 4.17% $116,914 4,548 3.89%
Savings........................... 14,186 200 1.41% 9,222 177 1.92% 6,123 117 1.91%
IRAs.............................. 11,834 700 5.91% 7,674 465 6.06% 4,533 247 5.45%
Time deposits..................... 176,983 10,177 5.75% 123,756 7,916 6.40% 68,629 3,787 5.52%
Short-term borrowings:
Federal funds borrowed............ 1,704 81 4.67% 2,022 131 6.48% 695 37 5.32%
Other borrowings.................. 65,586 3,837 5.77% 38,857 2,394 6.16% 12,126 692 5.71%
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities................ 475,156 20,927 4.39% 340,950 17,739 5.20% 209,020 9,428 4.51%
Noninterest bearing liabilities
Noninterest bearing demand accounts 52,184 38,525 23,690
Other noninterest bearing
liabilities...................... 3,259 1,557 3,305
Shareholders' equity................... 53,425 36,055 25,486
-------- -------- --------