VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
ATTORNEYS AT LAW
BRIDGEWATER PLACE
POST OFFICE BOX 352 GRAND RAPIDS, MICHIGAN 49501-0352
TELEPHONE 616/336-6000 FAX 616/336-7000
Donald L. Johnson DIRECT DIAL 616/336-6828
July 22, 1997
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W., Mail Stop 3-11
Washington, D.C. 20549
Re: O.A.K. Financial Corporation (the "Company")
Amendment No. 1 to Form 10
File No. 0-22461
Ladies and Gentlemen:
Enclosed for filing is Amendment No. 1 to the above-referenced Form 10.
This Amendment revises the Form 10 in response to the staff's comments. The Form
10 has been updated to include financial results for the quarters ended March
31, 1997 and 1996.
The Company's response to the staff's comments is set forth below. The
staff's comments are in bold face type.
The Loan Portfolio - Page 26 (formerly Page 17)
1. Please revise the filing to provide the information for 1993 and 1992 for
Table 7 - Loan Portfolio Composition, Table 9 - Nonperforming Assets, Table
10 Loan Loss Experience and Table 11 - Allocation of the Allowance for Loan
Losses. The staff makes reference to General Instruction No. 3(b) to
Industry Guide 3 which requires such disclosure.
The filing has been revised to provide the information for 1993 and 1992
for the tables requested. As a result of the inclusion of a new Table 6 on
page 24, the relevant subsequent tables were renumbered as follows: Table 8
- Loan Portfolio Composition, Table 10 - Nonperforming Assets, Table 11 -
Loan Loss Experience and Table 12 - Allocation of the Allowance for Loan
Losses. These tables are found on pages 26, 28 and 29.
<PAGE>
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
ATTORNEYS AT LAW
United States Securities and Exchange Commission
Page 2
July 22, 1997
2. The staff notes the disclosure that "the Bank's consumer mortgage activity
is substantial, however, only a small portion is retained for the bank's
own portfolio." Please expand the discussion to provide the volume of loan
originations by type compared to volume of loan sales. In addition, please
discuss the Company's loan servicing activities including originations,
purchases, repayments, sales, and outstanding balances of the loan
servicing portfolio as well as mortgage servicing rights recorded on the
Company's balance sheet. The applicability of SFAS 122 should be addressed.
Finally, if the Company holds loans designated as held for sale, such
amounts should be presented separately on the Company's balance sheet in
accordance with SFAS 65 paragraph 28.
The changes requested have been made. Please refer to Table 6 on page 24
and the discussion on pages 24 through 26. Also see pages 51 and 55.
3. Please revise the filing to address the Company's management of its credit
risk including, but not limited to, the policies and procedures employed,
the officers of the Company responsible for such functions (e.g., chief
credit officer, credit policy committee, etc., if any) and levels of
acceptable risk pertaining to the segments of the portfolio. In this
regard, please more clearly identify and indicate the role in this process
of the "independent person" referred to on page 17.
The changes requested have been made. See the discussion below Table 8 on
page 26.
4. The loan balances presented in Table 7 do not all agree to the information
presented in Note 3. Please reconcile and revise the filing to disclose the
correct amounts.
Table 7 has been renumbered Table 8 (page 26) and the requested
reconciliation and revision has been made.
<PAGE>
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
ATTORNEYS AT LAW
United States Securities and Exchange Commission
Page 3
July 22, 1997
5. Please revise the filing to resubmit Table 8 prepared in accordance with
Industry Guide 3 Item III-B. The maturity information provided should
include both fixed and variable rate loans and, in accordance with
Instruction (3) to Item III- B, maturities should be based upon contract
terms subject to any roll over policies.
Table 8 has been renumbered Table 9 (pages 27-28) and the requested
revisions have been made.
Consolidated Balance Sheet - Page 46 (formerly Page 37)
6. Please amend the filing to correctly rename the balance sheet caption
"Investment Securities at Fair value. . . ." to "Available-for-Sale
Securities" as required by SFAS 115 and a term the staff notes is used
elsewhere in the document (e.g., in the statement of income). Please review
the document to ensure consistent use of the term.
The changes requested have been made. See page 46.
Statement of Changes in Stockholders' Equity - Page 48 (formerly Page 39)
7. Please include a column setting forth the activity in the number of common
shares outstanding.
Columns setting forth the activity in the number of common shares
outstanding have been added as requested. See page 48.
Note 1 - Page 51 (formerly Page 41)
8. Please expand the discussion on "Loans and Related Income" to include the
Company's policies on the sales of loans. The staff would expect the
discussion to address the type of loans which are normally sold, whether
loans are sold with or without recourse, and how related gains and losses
are accounted for and reported in the financial statements.
<PAGE>
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
ATTORNEYS AT LAW
United States Securities and Exchange Commission
Page 4
July 22, 1997
A discussion with respect to loans held for sale and related information
has been added. See page 51 and the revisions made in response to the
staff's comment #2.
9. As a related matter, cash receipts and cash payments resulting from
acquisitions and sales of loans should be separately presented and
classified in accordance with paragraph 9 of SFAS 102 in the cash flow
statement.
The changes to the cash flow statement have been made as requested. See
page 49.
Note 3 - Page 54 (formerly Page 45)
10. The staff makes reference to Regulation S-X 9-03.7 which requires that
unearned income be disclosed either on the face of the balance sheet or
within the financial statements. To the extent that the Company has
unearned income, such amounts should be disclosed, if significant. In this
regard, the staff has noted the disclosure made in Note 9 (Federal Income
Taxes) of a deferred tax asset called deferred loan fees in both 1996 and
1995.
Note 3 has been expanded pursuant to the staff's comments. See page 54.
11. Please expand this disclosure to fully comply with the disclosure
requirements of paragraph 6i of SFAS 118 and to clearly explain the
difference between impaired loans and nonaccrual loans (if not readily
apparent). The narrative disclosure on page 42 is noted, but is unclear to
the staff.
Note 4 (page 56) has been expanded to include the disclosure requirements
of paragraph 6i of SFAS 118. The difference between impaired and nonaccrual
loans is considered apparent when these disclosures are read in conjunction
with the information in the last paragraph of page 51 and with Table 10 on
page 28.
General
Please provide updated financial statements as required by Rule 3-12 of
Regulation S-X.
<PAGE>
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
ATTORNEYS AT LAW
United States Securities and Exchange Commission
Page 5
July 22, 1997
As noted, financial information for the quarters ended March 31, 1997 and
1996 has been included in the filing, together with updated disclosures in
the text including Management's Discussion and Analysis for the interim
period.
It is believed that where changes were made in response to the staff's
comments under a particular caption, changes required elsewhere in the filing
have also been made.
If the staff should have further questions, we would appreciate a prompt
response. We would like to request effectiveness before the end of this month.
Thank you for your attention and cooperation.
Very truly yours,
/s/ Donald L. Johnson
Donald L. Johnson
jjf
cc: Mr. John A. Van Singel w/Enclosure
<PAGE>
Marked Draft July 10, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of
Incorporation or organization)
2445 84th Street, S.W.
Byron Center, Michigan
(Address of principal executive offices)
38-2817345
(I.R.S. Employer Identification No.)
49315
(Zip Code)
616-878-1591
(616) 878-4407 (FAX)
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b)
of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
1
<PAGE>
Item 1. Business.
BUSINESS
O.A.K. Financial Corporation (the "Company"), a Michigan business
corporation, is a one bank holding company, which owns all of the outstanding
capital stock of Byron Center State Bank (the "Bank"), a Michigan banking
corporation. The Company was formed in 1988 for the purpose of acquiring all of
the common stock of the Bank in a shareholder approved reorganization, which
became effective October 13 of 1988.
The Bank was originally organized in 1921 as a Michigan banking
corporation. As of April 1, 1997, the Bank had approximately 98 full-time and
part-time employees. None of the Bank's employees are subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
principal executive offices of the Company and the Bank are located at 2445 84th
Street, S.W., Byron Center, Michigan 49315. The Bank's main office is located in
Byron Center and it serves other communities with branch offices in Dorr, Grand
Rapids, Grandville, Hudsonville, Jamestown and Moline. The Bank's offices are
located in the southwestern portion of Kent County, the southeastern portion of
Ottawa County and the northern portion of Allegan County.
The area in which the Bank's offices are located, which is basically south
and west of the city of Grand Rapids, has historically been rural in character
but now has a growing urban population as the Grand Rapids Metropolitan Area
expands south and west. The populations of the cities in which the Bank's
offices are located are approximately as follows: Byron Center - 1,000; Dorr -
1,450; Grand Rapids - 189,125; Grandville - 15,620; Hudsonville - 6,170;
Jamestown - 300; Moline - 800.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These traditional consumer services include checking
accounts, savings accounts, certificates of deposit, commercial loans, real
estate loans, installment loans, collections, traveler's checks, night
depository, safe deposit box and U.S. Savings Bonds. Currently, the Bank does
not offer trust services. The Bank maintains correspondent relationships with
major banks in Detroit and Grand Rapids, pursuant to which the Bank engages in
federal funds sale and purchase transactions, the clearance of checks and
certain foreign currency transactions. In addition, the Bank participates with
other financial institutions to fund certain large commercial loans which would
exceed the Bank's legal lending limit if made solely by the Bank.
The Bank's deposits are generated in the normal course of business, and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. No material portion of the Bank's loans is concentrated
within a single industry or group of related industries. As of December 31,
1996, the Bank's certificates of deposits of $100,000 or more constituted
approximately 4.0% of total deposit liabilities. The Bank's deposits originate
primarily from its service area, and the Bank does, on a very limited basis,
obtain large deposits from outside this area.
The Bank's principal sources of revenue are interest and fees on loans and
interest on investment securities. Interest and fees on loans constituted
approximately 74.8% and 76.6% of total revenues for the periods ended December
31, 1996, and December 31, 1995, respectively. Interest on investment
securities, including short-term investments and federal funds sold, constituted
approximately 19.6% and 18.1% of total revenues in 1996 and 1995. Revenues were
also generated from deposit service charges and other financial service fees.
The Bank provides real estate, consumer and commercial loans to
customers in its market. 66.2 percent of the Bank's loan portfolio is in fixed
rate loans as of December 31, 1996. Most of these loans, approximately 92.1%,
mature within five years of issuance. Approximately $7,589,928 in loans (or
roughly 5.2% of the Bank's total loan portfolio) have fixed rates with
maturities exceeding five years. 43.8 percent of the Bank's interest-bearing
deposits are held in savings, NOW and MMDAs, all of which are variable rate
products. Of the $82,345,117 in certificates, approximately $51,646,000 mature
within a year, with the balance maturing within a five year period.
1
<PAGE>
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved within the limits of each lending officer's authority. Loan requests in
excess of $500,000 are required to be presented to the Board of Directors or the
Executive Committee of the Board for its review and approval.
As described in more detail in Table 15 on page 32, the Bank's ratio of
rate sensitive assets to rate sensitive liabilities as of December 31, 1996, was
a 4% negative gap, compared to a 6% negative gap at December 31, 1995. As
indicated on page 32, the entire balance of savings, NOW, and MMDAs are not
categorized as 0 to 3 months, although they are variable rate products. Some of
these balances are core deposits which are not considered rate sensitive based
on the Bank's historical experiences.
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank has also sold
student loans and regularly sells fixed rate and conforming adjustable rate
residential mortgages to the Federal Home Loan Mortgage Corporation ("Freddie
Mac"). Those residential real estate mortgage loan requests that do not meet
Freddie Mac criteria are reviewed by the Bank for approval and, if approved, are
retained in the Bank's loan portfolio. The Bank has the ability to purchase
loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government bonds, with the maximum
size of a single purchase limited to $3,000,000 and a maximum maturity of
fifteen years. Municipal bonds with an A rating or better may be purchased to
provide nontaxable income, with the maximum life of municipal bonds limited to
ten years. Nonrated bonds may be purchased from local communities that are
familiar to the Bank, with a maximum block size of a single purchase limited to
$250,000. Investments in states other than Michigan may not exceed 10% of the
municipal portfolio, and investments in a single issuer may not exceed 5% of
equity capital. Mortgage backed securities, which are fully collateralized by
securities issued by government sponsored agencies, may be purchased in block
sizes of up to $3,000,000, provided the average life expectancy does not exceed
ten years.
In addition, certain collateralized mortgage obligations may be purchased
if their average life does not exceed five years. In addition to these
referenced thresholds affecting the acquisition of investment securities,
holdings of approved "non high-risk mortgage securities" are required to be
"stress tested" at least annually. The acquisition of "high-risk mortgage
securities" is prohibited. In no case may the Bank participate in such
activities as gains trading, "when-issued" trading, "pair offs," corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Bank's Board of
Directors.
Bank Competition
The Bank has seven offices, one within each of the communities it serves.
See "Properties" below for more detail on these facilities. Within these
communities, its principal competitors are Comerica Bank, NBD Bank, Old Kent
Bank, First of America Bank, FMB-First Michigan Bank, Michigan National Bank and
United Bank of Michigan. Each of these financial institutions, which are
headquartered in larger metropolitan areas, with the exception of United Bank of
Michigan, have significantly greater assets and financial resources than the
Company. Based on deposit information as of June 30, 1996, the Bank holds
approximately 1.8% of deposits in the Kent County market, 1.3% of deposits in
the Ottawa County market, and 4.0% of the deposits in the Allegan County market.
Information as to asset size of competitor financial institutions is derived
from publicly available reports filed by and with regulatory agencies.
The financial services industry continues to become increasingly
competitive. Principal methods of competition include loan and deposit pricing,
advertising and marketing programs and the types and quality of services
provided. The deregulation of the financial service industry has led to
increased competition among banks and other financial institutions for a
significant portion of funds which have traditionally been deposited with
2
<PAGE>
commercial banks. Competition within the Bank's markets has been relatively
stable within the past several years. Management continues to evaluate the
opportunities for the expansion of products and services, such as trust
services, and additional branching opportunities.
Growth of Bank
The following table sets forth certain financial information regarding the
growth of the Bank (and accordingly, excludes holding company data):
<TABLE>
Balance as of
March 31,
(in thousands) Balance as of December 31,
Unaudited (in thousands)
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Total Assets $222,094 $216,755 $210,307 $187,079 $176,858 $160,932
Loans, Net of Unearned Income 149,489 145,069 142,813 127,286 115,176 104,813
Securities 56,759 57,302 56,702 45,598 47,383 43,028
Noninterest-Bearing Deposits 23,422 23,807 19,211 16,478 16,088 13,796
Interest-Bearing Deposits 151,245 146,442 150,807 134,603 128,128 118,791
Total Deposits 174,667 170,249 170,018 151,081 144,216 132,587
Stockholders' Equity 33,526 34,744 31,979 27,728 25,772 22,898
</TABLE>
The Main Office in Byron Center began in a small 600 square foot building
in 1921. It was expanded to 1,100 square feet in 1954. In 1965 the Bank moved
next door to a new 10,000 square foot building. In 1987 construction of another
new building of 30,000 square feet was begun. The Main Office moved to this
facility in 1988 and currently occupies this space. The Bank's first branch was
opened in 1963 when the bank refitted an old bank building in Jamestown. The
building was once a bank which closed during the Great Depression. The Bank's
next branch was opened in Cutlerville in 1972. The original 2,500 square foot
building was expanded with a 1,000 square foot addition in 1987. The Bank's Dorr
office was opened in 1986 at the site of the Hillcrest Mall. It is a 2,500
square foot facility with a 2,500 square foot storage basement. In 1991, the
Bank opened its branch in Hudsonville. The Bank maximized this site for future
expansion with a 10,000 square foot building. The Bank occupies 2,500 square
feet while the remainder is rented to various office use tenants. During 1995,
the Bank purchased and remodeled a former bank branch in Grandville. Also, the
same year, the Bank purchased from First of America a building and the deposits
of its Moline branch. Currently, the Bank operates three more off-site ATMs. It
also has a future branch site in Wyoming with tentative plans to build in 1999.
This site is just off a future interchange of the proposed Southbelt Expressway.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. A change in applicable laws or
regulations may have a material effect on the Company, the Bank and the
businesses of the Company and the Bank.
3
<PAGE>
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general and local 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 ("Federal Reserve"), the
Federal Deposit Insurance Corporation ("FDIC"), the Commissioner of the Michigan
Financial Institutions Bureau ("Commissioner"), the Internal Revenue Service,
and state taxing authorities. The effect of such statutes, regulations and
policies can be significant and cannot be predicted.
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 the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Company.
Federal law and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations
promulgated thereunder, establish supervisory standards applicable to the
lending activities of the Bank, including internal controls, credit
underwriting, loan documentation, and loan-to-value ratios for loans secured by
real property.
The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve, and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require.
In accordance with Federal Reserve policy, the Company is expected to act
as a source of financial strength to the Bank and to commit resources to support
the Bank in circumstances where the Company might not do so absent such policy.
In addition, in certain circumstances a Michigan state bank having impaired
capital may be required by the Commissioner either to restore the bank's capital
by a special assessment upon its shareholders, or to initiate the liquidation of
the bank.
Any capital loans by a bank holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apply to
guarantees of capital plans under FDICIA.
Investments and Activities. Under the BHCA, bank holding companies are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares or assets of
any company which is not a bank or bank holding company, other than subsidiary
companies furnishing services to or performing services for its subsidiaries,
and other subsidiaries engaged in activities which, by the Federal Reserve's
determination, is closely related to banking or managing or controlling banks.
Since September 29, 1995, the BHCA has permitted the Federal Reserve under
specified circumstances to approve the acquisition by a bank holding company
located in one state, of a bank or bank holding company located in another
state, without regard to any prohibition contained in state law. See "Recent
Regulatory Developments."
4
<PAGE>
In general, any direct or indirect acquisition by the Company of any voting
shares of any bank which would result in the Company's direct or indirect
ownership or control of more than 5% of any class of voting shares of such bank,
and any merger or consolidation of the Company with another bank holding
company, will require the prior written approval of the Federal Reserve under
the BHCA. In acting on such applications, the Federal Reserve must consider
various statutory factors, including among others, the effect of the proposed
transaction on competition in relevant geographic and product markets, and each
party's financial condition, managerial resources, and record of performance
under the Community Reinvestment Act.
In addition and subject to certain exceptions, the change in the Bank
Control Act ("Control Act") and regulations promulgated thereunder by the
Federal Reserve, require any person acting directly or indirectly, or through or
in concert with one or more persons, to give the Federal Reserve 60 days'
written notice before acquiring control of a bank holding company. Transactions
which are presumed to constitute the acquisition of control include the
acquisition of any voting securities of a bank holding company having securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
if, after the transaction, the acquiring person (or persons acting in concert)
owns, controls or holds with power to vote 25% or more of any class of voting
securities of the institution. The acquisition may not be consummated subsequent
to such notice if the Federal Reserve issues a notice within 60 days, or within
certain extensions of such period, disapproving the same.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of the assets of
another bank, or the assumption of the liabilities by such a subsidiary to pay
any deposits in another bank, requires the prior written approval of the
responsible Federal depository institution regulatory agency under the Bank
Merger Act, based upon a consideration of statutory factors similar to those
outlined above with respect to the BHCA. In addition, in certain such cases an
application to, and the prior approval of, the Federal Reserve under the BHCA
and/or the Commissioner under Michigan banking laws, may be required.
With certain limited exceptions, the BHCA prohibits bank holding companies
from acquiring direct or indirect ownership or control of voting shares or
assets of any company other than a bank, unless the company involved is engaged
solely in one or more activities which the Federal Reserve has determined to be
closely related to banking or managing or controlling banks. In making this
determination, the Federal Reserve considers various factors, including among
others the financial and managerial resources of the notifying bank holding
company, and the relative public benefits and adverse effects which may be
expected to result from the performance of the activity by an affiliate of such
company. The Federal Reserve may apply different standards to activities
proposed to be commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern.
The recent enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA") streamlines the nonbanking activities
application process for well capitalized and well managed bank holding
companies. See "Recent Regulatory Developments." Under EGRPRA, qualified bank
holding companies may commence a regulatory approved nonbanking activity without
prior notice to the Federal Reserve; written notice is merely required within
ten days after commencing the activity. Also, under EGRPRA, the prior notice
period is reduced to 12 days in the event of any nonbanking acquisition or share
purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the consideration
does not exceed 15% in Tier 1 capital. This prior notice requirement also
applies to commencing a nonbanking activity de novo which have been approved by
the Federal Reserve only.
Capital Requirements. The Federal Reserve 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's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a capital
leverage requirement expressed as a percentage of total assets, (ii) a risk-
based requirement expressed as a percentage of total risk-weighted assets, and
(iii) a Tier 1 leverage requirement expressed as a percentage of total assets.
The capital leverage requirement consists of a minimum ratio of total capital to
total assets of 6%, with an expressed expectation that banking organizations
generally should operate
5
<PAGE>
above such minimum level. 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 (which consists principally of shareholders' equity). The
Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to
total assets, less goodwill ("Tier 1 capital leverage ratio") of 3% for the most
highly rated companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels. The Federal Reserve has not advised the Company
of any specific minimum Tier 1 capital leverage ratio applicable to it.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities and, since adoption of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act"), to do so taking into
account the size and activities of depository institutions and the avoidance of
undue reporting burdens. See "Recent Regulatory Developments." In 1995, the
federal bank regulatory agencies adopted regulations requiring as part of the
assessment of an institution's capital adequacy the consideration of: (i)
identified concentrations of credit risks, (ii) the exposure of the institution
to a decline in the value of its capital due to changes in interest rates, and
(iii) the application of revised conversion factors and netting rules on the
institution's potential future exposure from derivative transactions. In
addition, the agencies proposed: (i) additional required data submissions on
periodic Reports of Condition and Income ("Call Reports") regarding interest
rate exposure, to furnish a basis for future regulations imposing explicit
minimum capital charges for interest rate risk, and (ii) incorporation in the
capital adequacy regulations of a measure for market risk in, among other
things, the trading of debt instruments.
Dividends. The Company is a corporation separate and distinct from the
Bank. All of the Company's revenues are received by it in the form of dividends
paid by the Bank. The Bank is subject to statutory restrictions on their ability
to pay dividends to the Company. See "The Bank - Dividends." The Federal Reserve
has issued a policy statement on the payment of cash dividends by bank holding
companies. In the policy statement, the Federal Reserve expressed its view that
a bank holding company experiencing earnings weaknesses should not pay cash
dividends exceeding its net income or which could only be funded in ways that
weakened the bank holding company's financial health, such as by borrowing.
Additionally, the Federal Reserve 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
the Bank is possessed by the FDIC. The "prompt corrective action" provisions of
FDICIA impose further restrictions on the payment of dividends by insured banks
which fail to meet specified capital levels and, in some cases, their parent
bank holding companies.
In addition to the restrictions on dividends imposed by the Federal
Reserve, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, 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.
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund ("BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the 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 the
BIF. The Bank is a member of the Federal Reserve System and as such is regularly
examined by the Federal Reserve. These agencies and federal and state law
6
<PAGE>
extensively regulate various aspects of the banking business including, among
other things, permissible types and amounts of loans, investments and other
activities, capital adequacy, branching, interest rates on loans and on
deposits, the maintenance of noninterest-bearing reserves on deposit accounts,
and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. Pursuant to FDICIA, the
FDIC 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 level of capital and 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.
FDICIA required the FDIC to establish assessment rates at levels which
would restore the BIF to a mandated reserve ratio of 1.25% of insured deposits
over a period not to exceed 15 years. In 1995, the FDIC determined that the BIF
had reached the required ratio. Accordingly, the FDIC has established the
schedule of BIF insurance assessments for the first semi-annual assessment
period of 1996, ranging from 0% of deposits for institutions in the highest
category to .27% of deposits for institutions in the lowest category. For 1996,
the Bank paid $17,096 in BIF insurance assessments, representing a premium of
.01%.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Capital Requirements. Consistent with the Federal Reserve's guidelines for
bank holding companies, the FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, such as the Bank:
a leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with minimum requirements of 4% 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 (which 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.
FDICIA establishes five capital categories, and the federal depository
institution regulators, as directed by FDICIA, have adopted, subject to certain
exceptions, the following minimum requirements for each of such categories:
<TABLE>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
<S> <C> <C> <C>
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
</TABLE>
At March 31, 1997, each of the Bank's ratios exceeded minimum requirements
for the well-capitalized category.
7
<PAGE>
Among other things, FDICIA requires the federal depository institution
regulators to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. The scope and degree
of regulatory intervention is linked to the capital category to which a
depository institution is assigned.
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 position 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, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. A Michigan state bank may
not declare or pay a dividend unless the bank will have a surplus amounting to
at least 20% of its capital after the payment of the dividend. A Michigan state
bank may, with the approval of the Commissioner, by vote of shareholders owning
2/3 of the stock eligible to vote, increase its capital stock by a declaration
of a stock dividend, provided that after the increase the bank's surplus equals
at least 20% of its capital stock, as increased. The Bank may not declare or pay
any dividend until the cumulative dividends on preferred stock (should any such
stock be issued and outstanding) have been paid in full. The Bank has no present
plans to issue preferred stock.
FDICIA 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 also prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve has issued a policy statement providing that bank
holding companies and insured banks should generally pay dividends only out of
current operating earnings.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Company or its
subsidiary, on investments in the stock or other securities of the Company or
its subsidiary and the acceptance of the stock or other securities of the
Company or its subsidiary as collateral for loans. The "covered transactions"
that an insured bank is permitted to engage in with nonbank affiliates are
limited to the following amounts: (i) in the case of any one such affiliate, the
aggregate amount of "covered transactions" of the insured bank and its
subsidiaries cannot exceed 10% of the capital stock and surplus of the insured
bank; and (ii) in the case of all affiliates, the aggregate amount of all
"covered transactions" of the insured bank and its subsidiaries cannot exceed
20% of the capital stock and surplus of the insured bank. "Covered transactions"
are defined by statute to include a loan or extension of credit to the
affiliate, a purchase of securities issued by an affiliate, a purchase of assets
from the affiliate (unless otherwise exempted by the Federal Reserve), the
acceptance of securities issued by the affiliate as collateral for a loan, and
the issuance of a guaranty, acceptance, or letter of credit for the benefit of
an affiliate. Covered transactions must also be collateralized. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Bank to its directors and officers, to directors and officers of the
Company and its subsidiaries, to principal shareholders of the Company, and to
"related interests" of such directors, officers and principal shareholders. In
addition, such legislation and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its subsidiaries
or a principal shareholder of the Company may obtain credit from banks with
which the Bank maintains a correspondent relationship.
8
<PAGE>
Safety and Soundness Standards. On July 10, 1995, the FDIC, the Office of
Thrift Supervision, the Federal Reserve and the Office of the Comptroller of the
Currency published final guidelines implementing the FDICIA requirement that the
federal banking agencies establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines, which took effect on August 9, 1995, establish standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. In general, the guidelines prescribe the goals
to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action. The federal banking agencies have also published
for comment proposed asset quality and earnings standards which, if adopted,
would be added to the safety and soundness guidelines. This proposal, like the
final guidelines, would make each depository institution responsible for
establishing its own procedures to meet such goals.
State Bank Activities. Under FDICIA, as implemented by final regulations
adopted by the FDIC, 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. FDICIA, as implemented
by FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as a 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
FDICIA.
Consumer Banking. The Bank's business includes making a variety of types of
loans to individual consumers. In making these loans, the Bank is subject to
State usury and regulatory laws and to various Federal statutes, such as the
Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act,
Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the
regulations promulgated thereunder, which prohibit discrimination based on race,
color, religion, national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance programs, or good faith
exercise of any rights under the Consumer Credit Protection Act, specify
disclosures to be made to borrowers regarding credit and settlement costs, and
regulate the mortgage loan servicing activities of the Bank, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing. The Riegle Act imposed new escrow requirements on mortgage lenders
and services under the National Flood Insurance Program. See "Recent Regulatory
Developments." In receiving deposits, the 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 the Bank and its respective directors and officers.
Recent Regulatory Developments
In 1994, the Congress enacted two major pieces of banking legislation, the
Riegle Act and the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"). The Riegle Act addressed such varied issues as
the promotion of economic revitalization of defined urban and rural "qualified
distressed communities" through special purpose "Community Development Financial
Institutions," the expansion of consumer protection with respect to certain
loans secured by a consumer's home and reverse mortgages, and reductions in
compliance burdens regarding Currency Transaction Reports, reform of the
National Flood Insurance Program, the promotion of a secondary market for small
business loans and leases, and mandating specific changes to reduce regulatory
impositions on depository institutions and holding companies.
9
<PAGE>
The Riegle-Neal Act substantially changed the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
Riegle-Neal Act allows bank holding companies to acquire banks located in any
state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates. Effective June 1, 1997 (or earlier if expressly
authorized by applicable state law), the Riegle-Neal Act allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions that include limitations on the aggregate amount
of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allows individual states to "opt-out" of certain provisions of the
Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997.
In November, 1995, the state of Michigan exercised its right to opt-in
early to the Riegle-Neal Act, and permitted non-U.S. banks to establish branch
offices in Michigan. Effective November 29, 1995, the Michigan Banking Code was
amended to permit, in appropriate circumstances and with the approval of the
Commissioner, (i) the acquisition of Michigan-chartered banks by FDIC-insured
banks, savings banks, or savings and loan associations located in other states,
(ii) the sale by a Michigan-chartered bank of one or more of its branches (not
comprising all or substantially all of its assets) to an FDIC insured bank,
savings bank or savings and loan association located in a state in which a
Michigan-chartered bank could purchase one or more branches of the purchasing
entity, (iii) the acquisition by a Michigan-chartered bank of an FDIC-insured
bank, savings bank or savings and loan association located in another state,
(iv) the acquisition by a Michigan-chartered bank of one or more branches (not
comprising all or substantially all of the assets) of an FDIC-insured bank,
savings bank or savings and loan association located in another state, (v) the
consolidation of one or more Michigan-chartered banks and FDIC-insured banks,
savings banks or savings and loan associations located in other states having
laws permitting such consolidation, with the resulting organization chartered
either by Michigan or one of such other states, (vi) the establishment by
Michigan-chartered banks of branches located in other states, the District of
Columbia, or U.S. territories or protectorates, and (vii) the establishment by
foreign banks of branches located in Michigan. The amending legislation also
expanded the regulatory authority of the Commissioner and made certain other
changes.
The Michigan Legislature adopted, effective March 28, 1996, the Credit
Reform Act. This statute, together with amendments to other related laws,
permits regulated lenders, indirectly including Michigan-chartered banks, to
charge and collect higher rates of interest and increased fees on certain types
of loans to individuals and businesses. The laws prohibit "excessive fees and
charges," and authorize governmental authorities and borrowers to bring actions
for injunctive relief and statutory and actual damages for violations by
lenders. The statutes specifically authorize class actions, and also civil money
penalties for knowing and willful, or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations
(and in certain cases, prohibitions) on (1) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees, or principal shareholders of the institution), and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Bank to its
respective directors or officers otherwise permitted under the Michigan Business
Corporation Act ("MBCA") or the Michigan Banking Code, respectively.
In October 1996, Congress enacted EGRPRA, which provides for the
recapitalization of the Safe Deposit Insurance Fund and includes approximately
40 regulatory release initiatives. Among other matters, this legislation
provides for expedited application procedures for nonbanking activities by
capitalized and well managed bank holding companies, provides reforms to the
Fair Credit Reporting Act, and provides for a variety of other regulatory relief
to the banking industry.
10
<PAGE>
Item 2. Financial Information.
<TABLE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Quarter Ended
March 31, Year Ended December 31,
(unaudited)
1997 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 4,328 $ 4,311 $ 17,502 $ 16,268 $ 14,082 $ 12,773 $ 12,891
Interest expense 1,768 1,816 7,181 6,637 5,371 5,118 5,597
Net interest income 2,560 2,495 10,321 9,631 8,711 7,655 7,295
Provision for loan losses 0 0 0 275 170 510 750
Noninterest income 319 261 1,075 919 665 1,523 1,402
Noninterest expenses 1,274 1,141 5,169 4,511 4,097 3,761 3,445
Income before Federal income taxes 1,605 1,615 6,227 5,764 5,109 4,907 4,501
Net income 1,139 1,084 4,375 4,004 3,680 3,396 3,130
Per Share Data(1):
Net income 1.13 1.08 4.35 3.98 3.66 3.38 3.11
Cash dividends declared 2.00 .00 .94 .82 .67 .67 .56
Book Value 34.11 33.21 35.32 32.24 27.51 25.55 22.69
Weighted average shares
outstanding (1) 1,006 1,007 1,007 1,010 1,014 1,015 1,015
Balance Sheet Data (2):
Total assets 222,888 212,201 217,527 210,880 187,244 176,914 160,964
Loans, net of unearned income 149,489 143,167 145,069 142,813 127,286 115,176 104,813
Allowance for loan losses 2,381 2,434 2,376 2,305 2,056 2,049 1,820
Deposits 174,661 167,058 170,221 170,012 151,074 144,111 132,486
Stockholders' equity 34,321 33,438 35,544 32,559 27,900 25,932 23,030
Ratios:
Tax equivalent net interest
income to average earning
assets 5.22 5.22 5.23 5.42 5.24 5.09 5.23
Return on average equity 13.48 13.56 12.89 13.20 13.64 13.84 14.32
Return on average assets 2.12 2.07 2.03 2.07 2.02 2.02 2.04
Nonperforming loans to
total loans .52 .72 0.81 0.66 0.24 0.62 0.98
Tier 1 leverage ratio 15.56 15.26 15.97 15.42 15.36 15.45 14.98
Dividend payout ratio 176.73 .00 21.54 18.75 16.77 14.56 13.21
Equity to asset ratio 15.40 15.76 16.34 15.44 14.90 14.66 14.31
</TABLE>
(1) Per share data for the three months ended March 31, 1996 and for years
prior to 1996 have been restated to give effect to a 10% stock dividend
paid in July 1996.
(2) At quarter and year end, respectively.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The following is management's discussion and analysis of consolidated
financial condition and results of operations during the three month period
ended March 31, 1997, as compared with the same period ended March 31, 1996. The
discussion should be read in conjunction with the Company's 1996 annual report
and the unaudited financial statements for the three months ended March 31, 1997
and 1996, and the related notes, and other financial data appearing elsewhere in
this Registration Statement.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Results of Operations
Net income equaled $1,139,000 for the three months ending March 31, 1997,
compared to $1,084,000 for the same period in 1996. This is a 5.07% increase
over the same period in 1996. Return on average equity was 13.48% for the three
months ending March 31, 1997 and 13.56% for the same period in the prior year.
Return on average assets was 2.12% for the three months ended March 31, 1997 and
2.07% for 1996.
Table 1 Earnings performance(in thousands, except per share data)
<TABLE>
Three Months Ending March 31
1997 1996
<S> <C> <C>
Net Income.................................. $1,139 $1,084
Per share................................. $1.13 $1.08
Earnings ratios:
Return on average assets.................. 2.12 2.07
Return on average equity.................. 13.48 13.56
</TABLE>
Net Interest Income
The following schedule presents the average daily balances, interest
income (on a fully taxable equivalent basis) and interest expense and average
rates earned and paid for the Bank's major categories of assets, liabilities,
and stockholders' equity for the periods indicated:
12
<PAGE>
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Three months Ended March 31,
1997 1996
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 1,489 $ 20 5.45% $ 1,766 $ 24 5.51%
Securities:
Taxable 41,989 681 6.58% 40,107 615 6.21%
Tax-exempt 16,036 339 8.57% 15,246 329 8.75%
Loans(1)(2) 147,095 3,390 9.35% 144,257 3,443 9.68%
Total earning assets/total
interest income 206,609 $ 4,430 8.70% 201,376 $ 4,411 8.88%
Cash and due from banks 4,665 4,210
Unrealized Gain/Loss 297 1,044
All other assets 8,178 7,733
Allowance for loan loss (2,375) (2,397)
Total assets $217,374 $211,966
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $ 63,835 $ 469 2.98% $59,527 $ 447 3.05%
Time 84,545 1,169 5.61% 91,223 1,275 5.67%
Fed Funds Purchased 8,641 82 3.85% 7,029 67 3.87%
Other Borrowed Money 3,174 47 6.00% 1,900 28 5.98%
Total interest bearing liabilities/
total interest expense 160,195 $ 1,767 4.47% 159,679 $1,817 4.61%
Noninterest bearing deposits 21,120 17,781
All other liabilities 1,617 1,389
Stockholders' Equity:
Unrealized Holding Gain/Loss 196 689
Common Stock, Surplus, Retained
Earnings 34,246 32,428
Total liabilities and
stockholders' equity $217,374 $211,966
Interest spread 2,560 4.23% 2,495 4.27%
Net interest income-FTE $ 2,663 $2,594
Net Interest Margin as a Percentage
of Average Earning Assets 5.22% 5.22%
</TABLE>
13
<PAGE>
(1) Nonaccruing loans are not significant during the periods indicated, and for
purposes of the computations above, are included in the average daily loan
balances.
(2) Interest on loans includes net origination fees totaling $66,457 in 1997
and $69,875 in 1996.
Net interest income is the principal source of income for the Company. Tax
equivalent net interest income increased $70,000 to $2,663,000, a 2.7% increase
from the same period in 1996. The major factors for the increase in net interest
income was noninterest bearing deposits averaged $3,339,000 higher in 1997 than
in the same period in 1996 and time deposit balances, which are a higher cost of
funds, averaged $6,678,000 less in 1997 than in the same period in 1996. Earning
assets averaged $5,233,000, 2.6% higher, for the three month period ending March
31, 1997, compared to 1996. This volume change resulted in an additional
$110,000 in fully tax equivalent ("FTE") interest income. The asset growth was
primarily funded by a 18.78%, $3,339,000, increase in noninterest bearing
deposits. The average FTE interest rate earned on assets decreased .19%,
reducing FTE interest income by $89,000 and average rate paid on deposits
decreased .13%, decreasing interest expense by $23,000. The net difference
between interest rates earned and paid was a $66,000 decrease in FTE net
interest income.
The net interest yield remained the same in 1997 versus the same period in
1996. Management expects the major deposit growth for the remainder of 1997 will
be from time deposits which are a higher cost of funds than savings and NOW
accounts; as a result the FTE net interest yield may decrease slightly.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
14
<PAGE>
Table 3 - Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
Three Months Ended March 31,
1997 Compared to 1996
Amount of
Increase/(Decrease)
due to change in
Total
Amount
of
Average Increase/
Volume Rate (Decrease)
Interest Income
<S> <C> <C> <C>
Federal funds sold........................ $ (4) $ 0 $ (4)
Securities:
Taxable................................ 28 38 66
Tax Exempt............................. 17 (7) 10
Loans..................................... 67 (120) (53)
Total interest income................... 108 (89) 19
Interest Expense
Interest bearing deposits:
Savings/NOW accounts.................... 32 (10) 22
Time.................................... (93) (13) (106)
Fed Funds Purchased..................... 15 0 15
Other Borrowed Money 19 0 19
Total interest expense (27) (23) (50)
Net interest income (FTE) $ 135 $ (66) $ (69)
</TABLE>
Table 4 - Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Three Months Ended March 31
1997 1996
<S> <C> <C>
As a percent of average earning assets
Loans................................................ 71% 72%
Other earning assets................................. 29% 28%
Average earning assets............................ 100% 100%
Savings and NOW accounts............................. 40% 37%
Time deposits........................................ 53% 57%
Other borrowings..................................... 7% 6%
Average interest bearing liabilities.............. 100% 100%
Earning asset ratio.................................... 95% 95%
</TABLE>
15
<PAGE>
Table 5 - Nonperforming Assets (in thousands)
<TABLE>
Three Months Ended March 31,
1997 1996
<S> <C> <C>
Nonaccrual loans................................................ $ 269 $ 831
90 days or more past due & still accruing....................... 513 209
Total nonperforming loans..................................... 782 1,040
Other real estate............................................... 811 0
Total nonperforming assets.................................... $1,593 $1,040
Nonperforming loans as a percent of total loans................. .52% 0.73%
Nonperforming assets as a percent of total loans 1.07% 0.73%
Nonperforming loans as a percent of the loan loss reserve....... 33% 43%
</TABLE>
Nonperforming loans as a percent of total loans was 0.52% in 1997 versus
0.72% in 1996 a decrease of 0.20%. Nonperforming loans as a percent of the loan
loss reserve was 33% in 1997 versus 43% in 1996. The changes in both of these
percentages are attributable to past due construction and land development loans
secured by real estate and the transfer of one loan to Other Real Estate during
the quarter ended March 31, 1997.
Table 6 - Loan Loss Experience (in thousands)
<TABLE>
Three Months Ended March 31,
1997 1996
Loans:
<S> <C> <C>
Average daily balance of loans for the quarter.................... $147,095 $144,257
Amount of loans (gross) outstanding at end of period.............. $149,489 $143,167
Allowance for loan losses:
Balance at beginning of period.................................... $ 2,376 $ 2,305
Loans charged off:
Real estate..................................................... 0 0
Commercial...................................................... 0 0
Consumer........................................................ 13 20
Total charge-offs........................................... 13 20
Recoveries of loans previously charged
Real estate 0 1
Commercial...................................................... 6 143
Consumer........................................................ 12 5
Total recoveries............................................ 18 149
Net loans charged off (recoveries)................................ (5) (129)
Additions to allowance charged to operations...................... 0 0
Balance at end of period.................................... $ 2,381 $ 2,434
Ratios:
Net loans charged off to avg loans outstanding.................... .00% -.09%
Allowance for loan losses to loans outstanding.................... 1.59% 1.70%
</TABLE>
The allowance for loan losses is analyzed periodically by management.
Management assigns a portion of the allowance to specific loans that have been
identified as problem loans, reviews past loss experience, reviews financial
condition of borrowers and other factors that may cause a potential loss.
16
<PAGE>
The allowance for loan losses to loans outstanding for the period ending
March 31, 1997 was 1.58% versus 1.68% in 1996. The decrease was the result of
growth in the loan portfolio. A provision for loan losses was not necessary for
the period ending March 31, 1997 and 1996. Management's opinion is that the
allowance for loan losses is adequate as of March 31, 1997.
Noninterest Income
Noninterest income consists of service charges on deposit accounts, service
fees, gains on investment securities available for sale and gains from sales of
Federal Home Loan Mortgage Corporation (Freddie Mac) loans. The Bank retains the
servicing rights of these loans. Noninterest income increased $57,557, 22% for
the three month period ending March 31, 1997 versus 1996. The increase was due
to a $33,000 increase in gain on investment securities and a $25,000 increase in
brokerage commissions.
Table 7 - Noninterest Income (in thousands)
<TABLE>
Three Months Ending March 31,
1997 1996
<S> <C> <C>
Service charges on deposit accounts ............... $ 122 $123
Net gains (losses) on asset sales:
Loans............................................ 15 21
Securities....................................... 45 11
Other.............................................. 137 106
Total noninterest income...................... $ 319 $261
</TABLE>
Table 8 - Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
<TABLE>
Three Months Ended March 31,
1997 1996
<S> <C> <C>
Real estate mortgage loan originations............. $ 5,710 $ 8,246
Real estate mortgage loan sales.................... 3,872 4,746
Real estate mortgage loan servicing rights sold 0 0
Net gains on the sale of real estate mortgage
loans.............................................. 15 21
Net gains as a percent of real estate mortgage
loan sales......................................... .39% .44%
</TABLE>
Noninterest Expense
Noninterest expense increased $133,000, 11.67% for the three month period
ending March 31, 1997 versus 1996. Salaries and employee benefits increased
$127,000 to $685,000, a 22.80% increase, which was the major factor of the
increase in noninterest expense. The increase was related to a $52,000 decrease
in loan origination salary expense, $42,000 staffing and annual pay adjustments,
and a $24,000 increase of medical insurance expenses. In addition, the
Corporation has a self insured medical insurance plan which experienced
unusually large claims for the three month period ending March 31, 1997 versus
1996. Management expects that the stop loss limits in the plan should level out
future expenses for the remainder of 1997. The other noninterest expenses were
relatively the same for the three month period ending March 31, 1997 versus
1996.
17
<PAGE>
Table 9 - Noninterest Expense (in thousands)
<TABLE>
Three Months Ending March 31,
1997 1996
<S> <C> <C>
Salaries and employee benefits..................... $ 685 $ 558
Occupancy and equipment............................ 210 193
FDIC assessment.................................... 7 1
Postage............................................ 3 6
Printing and supplies.............................. 25 40
Marketing.......................................... 38 67
Michigan Single Business Tax....................... 51 50
Other.............................................. 255 225
Total noninterest expense........................ $1,274 $1,141
</TABLE>
Analysis of Changes in Financial Condition
Total assets increased $5,361,000 or 2.46% to $222,888,000 during the first
quarter of 1997 as compared to December 31, 1996. The significant changes were
$4,420,000 or a 3.05% increase in loans, a decrease in cash and cash equivalents
of $1,257,000, 18.49% and other assets increased $987,000, 51.34% which was a
result of transferring a $811,000 non-accrual loan to other real estate.
Deposits increased $4,440,000, 2.61% to $174,661,000 which was substantially all
the growth in interest bearing accounts.
Liquidity
Management evaluates the Corporation's liquidity position on a regular
basis to assure that funds are available to meet borrower and depositor needs,
fund operations, pay cash dividends and to invest excess funds to maximize
income. The Corporation's sources of liquidity include cash and cash
equivalents, investment securities available for sale, principal payments
received on loans, Federal Funds purchased, FHLB borrowings, deposits and the
issuance of common stock.
Cash and cash equivalents equaled 3.61% of total assets as of March 31,
1997 versus 3.13% as of December 31, 1996. For the three month period ending
March 31, 1997, $667,000 in net cash was provided from operations, investing
activities used $3,450,000, and financing activities provided $4,040,000. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $1,257,000 increase in cash and cash equivalents during the
three month period ending March 31, 1997.
Capital
The capital of the Corporation consists of common stock, paid in capital,
and retained earnings reduced by unrealized net loss on investment securities
available for sale. For the three month period ending March 31, 1997 capital
decreased $1,222,000, which includes a $106,000 unrealized loss on investment
securities available for sale. A $2.00 per share cash dividend was paid during
the quarter which resulted in the decrease.
There are minimum risk based capital regulatory guidelines placed on the
Corporation's capital by the Federal Reserve Board. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of March 31, 1997:
18
<PAGE>
Table 10 - Capital Resources (in thousands)
<TABLE>
Regulatory Requirements As of March 31,
Adequately Well
Capitalized Capitalized 1997 1996
<S> <C> <C> <C> <C>
Tier 1 capital........................... $33,705 $32,227
Tier 2 capital........................... 2,041 1,946
Total qualifying capital............... $35,746 $34,173
Tier 1 leverage ratio.................... 4% 5% 15.56% 15.26%
Tier 1 risk-based capital................ 4% 6% 20.68% 20.79%
Total risk-based capital................. 8% 10% 21.94% 22.02%
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following financial review presents management's discussion and
analysis of consolidated financial condition and results of operations during
the period of 1994 through 1996. The discussion should be read in conjunction
with the Company's consolidated financial statements and accompanying notes.
Summary
The Company and its subsidiary bank Byron Center State Bank consistently
have been ranked as a high performance community bank by the various bank rating
companies. The Company has had eleven consecutive years of returns on average
assets of over 2%. Its capital ratio of 15.97% makes it one of the strongest
capitalized community banks in the State of Michigan.
To achieve this status, the Company has relied on years of continuous
improvements in a business culture that emphasizes quality assets, managed in an
efficient manner so as to minimize the cost of overhead. Technology has also
been a key component to the Company's success. Technology has and will remain an
important tool that will help management deliver more services and manage more
assets at a lower cost to support these functions.
The Company has a surplus of capital. The Board of Directors has made it a
priority to make more efficient use of capital. The primary emphasis is
releveraging capital through aggressive yet careful growth. This is expected to
be accomplished through competitive, cost effective products and services,
efficiently delivered without compromising the Bank's risk and underwriting
standards. The Company has also had limited success in redeeming shares of
common stock. The Company also has increased its dividend payout ratio over the
years from 13.21% in 1992 to 21.54% in 1996. It is expected that the Company may
continue to increase its dividend payout ratio until the Company reaches an
equilibrium between growth, capital needs and earnings. Effective January 15,
1997, the Board of Directors declared a $2.00 per share special dividend
resulting in the return of $2,012,348 in excess capital to the stockholders.
Results of Operations
Table 1 Earnings performance(in thousands, except per share data)
<TABLE>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Net Income............................ $4,375 $4,004 $3,680
Per share........................... $4.35 $3.98 $3.66
Earnings ratios:
Return on average assets............ 2.03 2.07 2.02
Return on average equity............ 12.87 13.21 13.64
</TABLE>
Net Interest Income
The following schedule presents the average daily balances, interest income
(on a fully taxable equivalent basis) and interest expense and average rates
earned and paid for the Bank's major categories of assets, liabilities, and
shareholders' equity for each of the years indicated:
20
<PAGE>
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Year ended December 31,
1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $2,483 $133 5.36% $1,850 $108 5.81% $4,045 $185 4.56%
Securities:
Taxable 39,831 2,524 6.34% 32,540 1,982 6.09% 31,965 1,501 4.70%
Tax-exempt 14,875 1,283 8.63% 15,174 1,355 8.93% 15,603 1,457 9.34%
Loans(1)(2) 147,529 13,952 9.46% 135,557 13,232 9.76% 123,469 11,406 9.24%
Total earning assets/total
interest income 204,718 $17,888 8.74% 185,121 $16,673 9.01% 175,082 $14,547 8.31%
Cash and due from banks 4,474 3,917 3,681
Unrealized Gain/Loss 420 (293) (640)
All other assets 7,999 7,048 6,568
Allowance for loan loss (2,462) (2,187) (2,103)
Total assets $215,149 $193,606 $182,588
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $62,076 $1,854 2.99% $57,751 $1,892 3.28% $63,679 $1,893 2.97%
Time 87,885 4,916 5.59% 80,319 4,419 5.50% 69,743 3,224 4.62%
Fed Funds Purchased 8,004 301 3.76% 4,304 166 3.86% 2,459 70 2.85%
Other Borrowed Money 1,893 110 5.81% 2,843 159 5.59% 3,455 187 5.41%
Total interest bearing liabilities/
total interest expense 159,858 $7,181 4.49% 145,217 $6,637 4.57% 139,336 $5,374 3.86%
Noninterest bearing deposits 19,762 16,744 15,200
All other liabilities 1,543 1,328 1,063
Stockholders' Equity:
Unrealized Holding Gain/Loss 277 (192) (480)
Common Stock, Surplus, Retained
Earnings 33,709 30,509 27,469
Total liabilities and
stockholders' equity $215,149 $193,606 $182,588
Interest spread 10,321 4.25% 9,631 4.44% 8,711 4.45%
Net interest income-FTE $10,707 $10,036 $9,173
Net Interest Margin as a Percentage
of Average Earning Assets 5.04% 5.20% 4.98%
</TABLE>
21
<PAGE>
(1) Nonaccruing loans are not significant during the three year period and, for
purposes of the computations above, are included in the average daily loan
balances.
(2) Interest on loans includes net origination fees totaling $263,376 in 1996,
$265,562 in 1995 and $335,257 in 1994.
Net interest income is the principal source of income for the Bank. Tax
equivalent net interest income increased to $10,707,480 or by 6.7% in 1996. In
the prior year tax equivalent net interest income increased by 9.4% to
$10,035,973 from $9,172,574 in 1994.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
Table 3 - Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
1996 Compared to 1995 1995 Compared to 1994
Amount of Amount of
Increase/(Decrease) Increase/(Decrease)
due to change in due to change in
Total Total
Amount Amount
of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold.............. $ 34 $ (8) $ 26 $ (128) $ 51 $ (77)
Securities:
Taxable...................... 462 80 542 35 446 481
Tax Exempt................... (26) (46) (72) (38) (64) (102)
Loans........................... 1,133 (413) 720 1,180 646 1,826
Total interest income......... 1,603 (387) 1,216 1,049 1,079 2,128
Interest Expense
Interest bearing deposits:
Savings/NOW accounts.......... 129 (167) (38) (194) 193 (1)
Time.......................... 423 74 497 582 613 1,195
Fed Funds Purchased........... 139 (4) 135 71 25 96
Other Borrowed Money (55) 6 (49) (34) 6 (28)
Total interest expense 636 (91) 545 425 837 1,262
Net interest income (FTE) $ 967 $(294) $ 671 $ 624 $ 242 $ 866
</TABLE>
The Company's commitment to reinvesting in its communities is evident in
its ratios of loans to assets and loans to deposits, which ratios are generally
greater than the comparable ratios of the Company's peers. This in turn
translates into above peer net interest margin. (Based on FFIEC uniform bank
performance report.)
22
<PAGE>
Net interest income as a percent of total interest income was 59.9%, 60.2%,
and 63.1% for 1996, 1995, and 1994 respectively. Net interest spread was 5.23%,
5.42%, and 5.24% for the same periods.
Interest from loans represents 78.0%, 79.4%, and 78.4% of total interest
income for 1996, 1995, and 1994 respectively. Net interest income is strongly
influenced by results of the Bank's lending activities.
Total interest expense increased 33.6% from 1994 to 1996. Cost of funds are
influenced by economic conditions and activities of the Federal Reserve. The
Bank's asset/liability committee seeks to manage sources and uses of funds, and
to monitor the gap in maturities of these funds to maintain a steady net
interest margin in varying market conditions.
Table 4 - Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Year ended December 31
1996 1995 1994
<S> <C> <C> <C>
As a percent of average earning assets
Loans...................................... 72% 73% 71%
Other earning assets....................... 28% 27% 29%
Average earning assets.................. 100% 100% 100%
Savings and NOW accounts................... 39% 40% 46%
Time deposits.............................. 55% 55% 50%
Other borrowings........................... 6% 5% 4%
Average interest bearing liabilities.... 100% 100% 100%
Earning asset ratio.......................... 95% 96% 96%
</TABLE>
Noninterest Income
The major component of the Bank's noninterest income is service charges on
deposits and service fees and gains from sale of Freddie Mac loans.
Deposit account service charges have remained static due to a very
competitive market. The Bank's service charge structures have not been increased
since 1994.
A large component of other noninterest income is origination fees for
mortgages. A small but growing component of other noninterest income is from
commissions earned on sales of non-deposit products and gains on sales of loans.
23
<PAGE>
Table 5 - Noninterest Income (in thousands)
<TABLE>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Service charges on deposit accounts ......... $ 529 $492 $537
Net gains (losses) on asset sales:
Loans...................................... 133 105 (118)
Securities................................. 13 (4) (48)
Other........................................ 400 326 294
Total noninterest income................ $1,075 $919 $665
</TABLE>
The following table sets forth certain information with respect to the
origination and sale of real estate mortgage loans, including the net gains
recognized on the sale of such loans.
Table 6 - Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
<TABLE>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Real estate mortgage loan originations........... $ 40,934 $ 34,585 $ 29,741
Real estate mortgage loan sales.................. 21,784 16,655 14,163
Real estate mortgage loan servicing rights
sold............................................. 0 0 0
Net gains (losses) on the sale of real estate
mortgage loans................................... 133 105 (118)
Net gains (losses) as a percent of real estate
mortgage loan sales.............................. 0.61% 0.63% (0.83%)
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $133,000 and
$105,000 in 1996 and 1995. A net loss of $118,000 occurred in 1994. The increase
from 1995 to 1996 of $28,000 was the result of a stable economic environment.
The increase from 1994 to 1995 of $223,000 was a result of increased loan
originations and a more favorable interest rate environment.
The Bank sells the majority of its fixed-rate obligations. Such loans are
sold without recourse. The Bank retains servicing rights on real estate mortgage
loans sold. The impact of new accounting standards in 1996 (see Discussion of
SFAS No.s 122 and 125 in Notes to Consolidated Financial Statements) has been
and is expected to continue to be insignificant to the Corporation's
consolidated financial position and results of operations.
24
<PAGE>
Noninterest Expense
Table 7 - Noninterest Expense(in thousands)
<TABLE>
Year ended December 31
1996 1995 1994
<S> <C> <C> <C>
Salaries and employee benefits............... $2,650 $2,170 $1,993
Occupancy and equipment...................... 845 788 722
FDIC assessment.............................. 17 176 327
Postage...................................... 104 93 80
Printing and supplies........................ 132 122 86
Marketing.................................... 161 131 64
Michigan Single Business Tax................. 197 172 148
Other........................................ 1,063 859 677
Total noninterest expense.................. $5,169 $4,511 $4,097
</TABLE>
Table 7 lists the Bank's most significant noninterest expenses.
Total operating expenses grew 26% from 1994 to 1996. The majority of the
increase was in employee salaries and benefits and most of that increase
resulted from the addition of staff. The Bank has made a conscious effort to add
to staff to improve asset quality and regulatory compliance. Additions to the
Bank's staff were also made as a part of an effort to build and improve
marketing and sales support. This is a long term initiative that is expected to
contribute to future growth and earnings.
Expenses were positively impacted by the reduction in FDIC insurance costs.
Under current guidelines, the Bank has achieved the best rating and therefore
enjoys the low assessment. (See "Supervision and Regulation.")
Earnings remained strong in 1996 aided by reduced expenses for FDIC
insurance and reduced loan loss provisions.
Financial Condition--Summary
During 1996, total assets increased 3% to $217,526,530. Deposit growth was
minimal, however, a positive change did take place in the deposit area as a
shift from high priced CDS to core savings and checking deposits took place.
This coincides with an effort to build relationship banking. Loans grew 2.8% in
1996 down from 12.2% in 1995. Strong competition for loans remains a risk factor
for the future.
The Loan Portfolio
The loan personnel of the Bank are committed to making quality loans that
produce a competitive rate of return for the Bank and also serve the community
by providing funds for home purchases, business purposes, and consumer needs. It
is management's intent to maintain a loan to deposit ratio in the 75-85% range,
enabling the Bank to earn the higher interest rates available on loans. Loan
demand in the Bank's service area is expected to remain strong enough to achieve
that goal.
The majority of loans are made to businesses in the form of commercial
loans and real estate mortgages. The Bank's consumer mortgage activity is
substantial; however, only a small portion of these loans are retained for the
Bank's own portfolio. The Bank does retain the servicing rights on substantially
all such sold loans. Over the past five years the Bank has built an eighty-two
million dollar servicing portfolio with the Federal Home Loan Mortgage
Corporation ("FHLMC"). At December 31, 1996 and 1995, the Bank was servicing
loans of $82,000,000 and $72,000,000, respectively, all of which relate to
residential mortgages originated by the Bank. The Bank originated $40,934,000
(485 loans) and $34,585,000 (432 loans) in mortgage loans in 1996 and 1995,
respectively, and sold to FHLMC $21,784,000 (262 loans) in 1996 and $16,655,000
(209 loans) in 1995.
25
<PAGE>
Repayments and early payoffs were $17,484,000 in 1996 and $12,552,000 in 1995.
The impact of adopting SFAS No. 122 was not material to consolidated financial
position as of December 31, 1996 or results of operations for the year then
ended.
The loan portfolio mix consists of 23% residential real estate, 8% consumer
installment, 50% commercial real estate, and 19% commercial. In 1996, the Bank
made a commitment for the future to grow and improve its consumer installment
portfolio.
The growth rate of the lending portfolio was 12.2% from 1994 to 1995 and
1.6% from 1995 to 1996.
Nearly 80% of loans are placed within the area the Bank designates as its
market for purposes of regulatory Community Reinvestment Act ("CRA") compliance.
Nearly all loans are placed within the metropolitan area of Grand Rapids and
surrounding communities.
Table 8 - Loan Portfolio Composition(in thousands)
<TABLE>
Balance as of December 31
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Real Estate.. $ 72,280 50 $ 71,690 50 $ 63,898 50 $ 54,492 47 $ 44,703 43
Residential Real Estate. 33,443 23 33,530 24 28,133 22 25,563 22 25,560 24
Other Commercial........ 27,452 19 26,912 19 25,681 20 26,284 23 26,199 25
Installment............. 11,894 8 10,681 7 9,574 8 8,837 8 8,351 8
Total loans........... $145,069 100% $142,813 100% $127,286 100% $115,176 100% $104,813 100%
Less:
Allowance for Loan Losses (2,376) (2,305) (2,056) (2,049) (1,820)
Total Loans Receivable, Net $142,693 $140,508 $125,429 $113,127 $102,993
</TABLE>
The lending policy of the Bank was written to reduce credit risk, enhance
earnings and guide the lending officers in making credit decisions. There are 8
levels in the loan authorization procedure depending on the dollar amount of the
loan request.
1,600,001 to 4,000,000 Board of Directors
500,001 to 1,600,000 Executive Loan Committee
0 to 500,000 Loan Committee
0 to 150,000 Class 1 Lender
0 to 75,000 Class 2 Lender
0 to 40,000 Class 3 Lender
0 to 20,000 Class 4 Lender
Student Loans Only Class 5 Lender
The class of lender is approved by the Bank's Board of Directors. The Board of
Directors has appointed a Chief Lending Officer who is responsible for the
supervision of the lending activities of the Bank. The Board has also appointed
a loan review officer who monitors the credit quality of the loan portfolio
independent of the loan approval process. Periodic reviews are submitted by the
loan review officers to the Chief Lending Officer and these reviews are
submitted to the Audit/Compliance Committee on a quarterly basis.
The extent of loan quality is demonstrated by the low ratios of
nonperforming loans and charge offs as a percentage of the loan portfolio. As
referenced in more detail in Table 10 below, the Bank's ratio of nonperforming
loans to total loans at December 31, 1996 was only .8%. In 1996,
26
<PAGE>
the Bank had net recoveries of $71,000, while net charge offs were $26,000 and
$163,000 in 1995 and 1994, respectively.
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, collateral for loans which have been in-substance foreclosed, and
other real estate which has been acquired primarily through foreclosure and is
awaiting disposition. Loans are generally placed on a nonaccrual basis when
principal or interest is past due 90 days or more and when, in the opinion of
management, full collection of principal and interest is unlikely.
Table 9 - Maturities and Sensitivities of Loans in Interest Rates
The following table shows the amount of total loans outstanding as of
December 31, 1996 which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
<TABLE>
Maturing
(in thousands of dollars)
After one but
Within one Year within five years After five years Total
<S> <C> <C> <C> <C>
Residential Real Estate.............. $ 7,290 $14,713 $13,355 $35,358
Installment.......................... 870 10,428 213 11,511
Commercial Real Estate............... 16,053 55,600 170 71,823
Other commercial..................... 12,124 14,220 33 26,377
Totals......................... $36,337 $94,961 $13,771 $145,069
Allowance for Loan Losses............ (2,376)
Total Loan Receivable, Net........... $142,693
</TABLE>
27
<PAGE>
Below is a schedule for the amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate Total
<S> <C> <C> <C>
Due within 3 months......................... $ 4,922 $49,078 $54,000
Due after 3 months within 1 year............ 8,208 0 8,208
Due after one but within five years......... 75,271 0 75,271
Due after five years........................ 7,590 0 7,590
Total....................................... $95,991 $49,078 $145,069
Allowance for loan losses................... (2,376)
Total loans receivable, net................. $142,693
</TABLE>
Table 10 - Nonperforming Assets(in thousands)
<TABLE>
December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................................ $1,080 $835 $ 0 $204 $ 30
90 days or more past due & still accruing....................... 114 111 303 516 1,003
Total Nonperforming loans..................................... 1,194 946 303 720 1,033
Other real estate............................................... 0 0 0 190 253
Total Nonperforming assets.................................... $1,194 $946 $303 $910 $1,286
Nonperforming loans as a percent of total loans................. 0.82% 0.66% 0.24% 0.63% 0.99%
Nonperforming assets as a percent of total loans................ 0.82% 0.66% 0.24% 0.79% 1.23%
Nonperforming loans as a percent of the loan loss reserve....... 50% 41% 15% 35% 57%
</TABLE>
While Nonperforming loans make up 50% of the Bank's loan loss reserve as of
December 31, 1996, management is confident that substantial equity exists in the
majority of these credits. The loan loss reserve then, is adequate for these
loans as well as the remainder of the lending portfolio.
It is expected that $811,000 of non-accrual loans will become other real
estate in 1997. Prospects are good that this same real estate will be liquidated
without loss in 1997. This would bring non-performing loans to .26% of loans and
16% of loan loss reserve.
The allowance for loan losses is analyzed periodically by management. In so
doing, management assigns a portion of the allowance to specific credits that
have been identified as problem loans and reviews past loss experience. The
local economy and particular concentrations are considered, as well as a number
of other factors.
28
<PAGE>
Table 11 - Loan Loss Experience(in thousands)
<TABLE>
Year ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans:
Average daily balance of loans for the year............. $146,052 $135,282 $120,108 $109,935 $100,270
Amount of loans outstanding at end of period............ $145,069 $142,813 $127,286 $115,176 $104,813
Allowance for loan losses:
Balance at beginning of year............................ $ 2,305 $ 2,056 $ 2,049 $ 1,820 $ 1,269
Loans charged off:
Real estate........................................... 0 0 0 0 0
Commercial............................................ 108 25 265 426 255
Consumer.............................................. 71 75 33 49 57
Total charge-offs................................. 179 100 298 475 312
Recoveries of loans previously charged
Real estate 56 3 3 2 65
Commercial............................................ 157 57 109 174 21
Consumer.............................................. 37 14 23 18 27
Total recoveries.................................. 250 74 135 194 113
Net loans charged off (recoveries)...................... (71) 26 163 281 199
Additions to allowance charged to operations............ 0 275 170 510 750
Balance at end of year............................ $ 2,376 $ 2,305 $ 2,056 $ 2,049 $ 1,820
Ratios:
Net loans charged off to avg loans outstanding.......... -.05% .02% .13% .25% .19%
Allowance for loan losses to loans outstanding.......... 1.64% 1.62% 1.62% 1.78% 1.74%
</TABLE>
Table 12 - Allocation of the Allowance for Loan Losses
<TABLE>
Year ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial..................................... $1,734 $1,707 $1,730 $1,678 $1,447
Real estate mortgages.......................... 188 177 154 160 142
Consumer....................................... 158 136 122 109 108
Unallocated.................................... 296 285 50 102 123
Total........................................ $2,376 $2,305 $2,056 $2,049 $1,820
</TABLE>
The Securities Portfolio
Securities are purchased and classified as "available-for-sale." The Bank
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on
January 1, 1994. These securities may be sold to meet the Bank's liquidity needs
or to improve the quality of the investment portfolio.
Deposits
Deposits are gathered from the communities the Bank serves. Lately the Bank
has emphasized relationship marketing to reinforce the core nature of its
deposit base.
Table 13 indicates a relatively stable base of deposits spread over the
Bank's product lines. Average total deposits grew 4.1% from 1994 to 1995 and
grew 9.6% from 1995 to 1996. The increase from 1995 to 1996 resulted primarily
from the $10,000,000 deposits only acquisition of the Moline Branch from First
of America Bank.
29
<PAGE>
The Bank is continually enhancing its deposit product. In addition to
relationship pricing the Bank has instituted telephone and personal computer
banking as new alternatives to customer access. The Bank operates eight
automated teller machines, three of which are off-site.
Table 13 - Average Daily Deposits (in thousands)
<TABLE>
Average for the Year
1996 1995 1994
Amount % of Assets Amount % of Assets Amount % of Assets
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand............. $ 19,762 9% $ 16,744 9% $ 15,200 8%
MMDA/Savings and NOW accounts.......... 62,076 29% 57,751 30% 63,679 35%
Time................................... 87,885 41% 80,319 41% 69,743 38%
Total Deposits...................... $169,723 79% $154,814 80% $148,622 81%
</TABLE>
The following table sets forth the average deposit balances and the
weighted average rates paid thereon:
<TABLE>
Average for the Year
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.............. $ 19,762 $ 16,744 $ 15,200
MMDA/Savings and NOW accounts........... 62,076 2.99% 57,751 3.28% 63,679 2.97%
Time.................................... 87,885 5.60% 80,319 5.50% 69,743 4.62%
Total Deposits....................... $169,723 3.99% $154,814 4.08% $148,622 3.44%
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1996:
<TABLE>
Amount
<S> <C>
Three months or less . . . . . . . . . . . . . . . . $ 1,515
Over 3 months through 6 months . . . . . . . . . . . 991
Over 6 months through 1 year . . . . . . . . . . . . 1,772
Over 1 year. . . . . . . . . . . . . . . . . . . . . 2,491
$ 6,769
</TABLE>
The Bank operates in a very competitive environment. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive with the market. Management also attempts to offer a wide
variety of products to meet the needs of its customers. The Bank offers business
and consumer checking accounts, regular and money market savings accounts, and
certificates having many options in their terms.
Capital
A financial institution's capital ratio is looked upon by the regulators
and the public as an indication of its soundness. Table 14 summarizes the
Company's regulatory capital and its capital ratios. Also shown are the capital
requirements established by the regulatory agencies for adequately and
well-capitalized institutions. The Bank's strong capital ratio puts it in the
best classification on which the FDIC bases its assessment charge. As capital
ratios continue to increase, management is challenged to find ways to
effectively administer the Bank's resources.
30
<PAGE>
In 1996, the Company paid dividends totaling $942,389 approximately 22% of
earnings. In 1995, dividends of $750,891 were paid, 19% of earnings, while the
previous year $617,246 was paid out equaling 17% of earnings.
On January 13, 1997, the Company paid a special $2.00 per share dividend.
This is in addition to the anticipated regular dividends for 1997. It still
leaves the Company in all the top regulatory categories for adequately and
well-capitalized institutions.
Table 14- Capital Resources (in thousands)
<TABLE>
Regulatory Requirements December 31
Adequately Well
Capitalized Capitalized 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Tier 1 capital..................... $34,566 $31,129 $28,880
Tier 2 capital..................... 1,976 1,923 1,696
Total qualifying capital......... $36,542 $33,052 $30,576
Ratio of equity to total assets....
Tier 1 leverage ratio.............. 4% 5% 15.97% 15.42% 15.36%
Tier 1 risk-based capital.......... 4% 6% 21.92% 20.28% 21.34%
Total risk-based capital........... 8% 10% 23.18% 21.54% 22.76%
</TABLE>
Asset/Liability Management
The Bank's Asset/Liability Management committee ("ALCO") meets regularly to
evaluate the Bank's interest rate sensitivity position, address issues of
liquidity, and review the interest margin, analyzing causes for changes in net
interest income.
The Bank's Asset/Liability Policy provides that the one year gap position
will be plus or minus 25%. During 1996, the Bank's one year gap position
averaged a 5% negative gap.
Management was able to influence the gap by selling fixed rate mortgages,
pricing loans to encourage variable rate financing, and encouraging depositors
to invest in time deposits by pricing them favorably.
The Company's sources of liquidity include principal payments received on
loans, maturing investment securities, sale of securities held in the "available
for sale" designation, customer deposits, borrowing from the Federal Home Loan
Bank of Indianapolis, other bank borrowings, Federal Funds and the issuance of
common stock. The Company has ready access to significant sources of liquidity
on an almost immediate basis. Management anticipates no difficulty in
maintaining liquidity at levels necessary to conduct the Bank's day-to-day
business activity.
31
<PAGE>
Table 15 - Asset/Liability Gap Position (in thousands)
<TABLE>
December 31, 1996
0-3 4-12 1-5 5+
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Assets:
Loans................................... $54,000 $ 8,208 $75,271 $ 9,523 $147,002
Securities.............................. 17,483 3,699 8,376 28,513 58,071
Fed funds............................... 400 0 0 0 400
Earning assets 71,883 11,907 83,647 38,036 205,473
Other assets............................ 0 0 0 12,054 12,054
Total assets.......................... $71,883 $11,907 $83,647 $50,090 $217,527
Liabilities & Shareholders' Equity:
Demand, Savings & NOW................... $22,702 $ 0 $ 0 $ 65,174 $ 87,876
Time.................................... 17,996 36,136 28,213 0 82,345
Total Deposits.......................... 40,698 36,136 28,213 65,174 170,221
Other borrowings........................ 9,038 1,500 0 0 0
Other liabilities and equity............ 0 0 0 36,768 47,306
Total liabilities and equity......... $49,736 $37,636 $28,213 $101,942 $217,527
Rate sensitivity gap and ratios:
Gap for period.......................... $22,147 ($25,729) $55,434 ($51,852)
Cumulative gap.......................... 22,147 ( 3,582) 51,852 0
Ratio for period.......................... 1.45 .32 2.96 .49
Cumulative rate sensitive ratio........... 1.45 .96 1.49 1.00
</TABLE>
The demand, savings and NOW accounts are categorized in the above table
based upon the Bank's historical experience.
Impact of Inflation
The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Bank than inflation. Although influenced by inflation,
changes in rates do not necessarily move in either the same magnitude or
direction as changes in the price of goods and services. Inflation does impact
the growth of total assets, creating a need to increase equity capital at a
higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
Item 3. Properties.
BANK PROPERTIES
The Bank operates from seven facilities, located in seven communities, in
Kent, Ottawa and Allegan Counties, Michigan. The Bank's main office is located
at 2445 84th Street, S.W., Byron Center, Michigan. This facility is a two story
30,000 square foot building constructed in 1988. The Bank's branch offices in
Dorr, Grand Rapids, Grandville, Hudsonville, Jamestown and Moline are all single
story facilities ranging in size from 1,100 square feet to 10,000 square feet.
All of the properties are owned by the Bank.
32
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
OWNERSHIP OF COMPANY STOCK BY MANAGEMENT AND OTHERS
The following table sets forth information as of the date of this
Registration Statement with respect to the beneficial ownership of the Company's
Common Stock by (i) each person known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director and director
nominee of the Company, (iii) each named executive officer, and (iv) all
directors and executive officers as a group.
<TABLE>
Number of Shares(1)
Owned or Controlled Percent of Class
<S> <C> <C>
Charles Andringa (2) 78,190 7.77
Forrest W. Bowling (Officer) 1,381 *
Martin Braun (Officer) 144 *
Norman J. Fifelski (Director) 1,312 *
Dellvan Hoezee (Director) (3) 2,919 *
Bernard Hull (Director) 6,579 *
John A. Peterson (Officer) 84 *
Lois Smalligan (Officer and Director) (4) 21,653 2.15
Jane Van Singel (5) 57,879 5.75
John A. Van Singel (Officer and Director) (6) 21,509 2.14
Willard Van Singel (5) (Director) 76,553 7.61
David G. Van Solkema (Director) 1,046 *
Gerald Williams (Director) 7,000 *
All Executive Officers and Directors as a
Group (11 persons) 137,995 13.71
*Represents less than one percent
</TABLE>
(1) This information is based upon the Company's records as of March 1, 1996,
and information supplied by the persons listed above. The number of shares
stated in this column include shares owned of record by the shareholder and
shares which, under federal securities regulations, are deemed to be
beneficially owned by the shareholder. Unless otherwise indicated below,
the persons named in the table have sole voting and sole investment power
or share voting and investment power with their respective spouses, with
respect to all shares beneficially owned.
(2) Mr. Andringa's mailing address is 2807 Bridgeside Drive, Caledonia, MI
49316.
(3) Includes 1,580 shares owned by Hudsonville Creamery & Ice Cream Co., a
corporation in which Mr. Hoezee owns a 1/3 interest.
(4) Includes 10,388 shares owned by Ms. Smalligan's children.
(5) Willard and Jane Van Singel are husband and wife and their mailing address
is: 8977 Lindsey Lane, S.W., Byron Center, MI 49315.
(6) Includes 4,133 shares owned by Mr. Van Singel's minor children and 9,741
shares owned jointly by Mr. Van Singel with his parents, Willard and Jane
Van Singel.
33
<PAGE>
Item 5. Directors and Executive Officers.
MANAGEMENT
Directors and Executive Officers
The Company's Articles of Incorporation provide for the division of the
Board of Directors into three classes of nearly equal size, with the directors
of each class to hold office for staggered three year terms. The terms of
Willard Van Singel, David Van Solkema and Gerald Williams will expire at the
annual meeting of shareholders in 1997; the terms of Norman Fifelski, Dellvan
Hoezee and Bernard Hall will expire in 1998; and the terms of John Van Singel
and Lois Smalligan will expire in 1999.
The following table sets forth information regarding the directors and
executive officers of the Company:
Name Age Position
John Van Singel 42 President, CEO and Director of the Company
and the Bank
Lois Smalligan 64 Director of the Company and the Bank, Vice
President of the Bank
John Peterson 48 Executive Vice President of the Bank
Forrest Bowling 48 Vice President of the Bank
Martin Braun 41 Vice President of the Bank
David Van Solkema 55 Director and Chairman of the Board of the
Company and the Bank
Norman Fifelski 51 Director of the Company and the Bank
Dellvan Hoezee 62 Director of the Company and the Bank
Bernard Hull 71 Director of the Company and the Bank
Willard J. Van Singel 78 Director of the Company
Gerald Williams 64 Director of the Company and the Bank
John Van Singel, has been the President of the Bank since 1990. He has
served as a director and secretary of the Company since its incorporation and
was elected President of the Company in 1997. Mr. Van Singel joined the Bank in
1976 and has served in various officer capacities. Mr. Van Singel became a
director of the Bank in 1982. He is also a member of the Board of Education of
Byron Center Public Schools.
Lois Smalligan, has served as a Vice President of the Bank since 1975. She
has been a director of the Bank since 1983 and has served as a director of the
Company since its incorporation. Ms. Smalligan has been an employee of the Bank
for over 46 years.
John Peterson, has been the Executive Vice President of the Bank since 1994
and has been employed by the Bank in various officer capacities since 1983.
Forrest Bowling has been a Vice President of the Bank since May 1994 and
has been employed by the Bank in various officer capacities since 1988.
34
<PAGE>
Martin Braun has been a Vice President of the Bank since January 1992 and
has been employed by the Bank in various officer capacities since 1988.
David Van Solkema, has served as a director of the Company since its
incorporation, and has served as a director of the Bank since 1972. He has
served as Chairman of the Board of the Company and the Bank since 1994. Mr. Van
Solkema is President of Jobbers Warehouse, an automotive parts distributor.
Norman Fifelski, has served as director of the Company since its
incorporation, and has served as a director of the Bank since 1987. Mr. Fifelski
is the owner of Hillcrest Food & Fuel, a convenience store and gas station
business.
Dellvan Hoezee, has served as a director of the Company and the Bank since
1991. Mr. Hoezee is President of Hudsonville Creamery.
Bernard Hull, has served as a director of the Company since its
incorporation, and has served as a director of the Bank since 1984. Mr. Hull is
the owner of Bernard Hull Builders, residential builders.
Gerald Williams, has served as a director of the Company since its
incorporation, and has served as a director of the Bank since 1987. Mr. Williams
is President of Dorr Farm Products, a farm equipment retailer.
Director Compensation
Directors of the Company and the Bank are paid an annual retainer fee of
$5,000 for their service on both boards. No compensation is paid for attendance
at Company or Bank Board or committee meetings; although discretionary bonuses
were paid to each director amounting to $7,000, $6,000 and $5,200 for the years
ended December 31, 1996, 1995 and 1994, respectively. During 1996, the Board of
Directors of the Company and the Bank held a total of 24 regular meetings.
Various committees of the Board held meetings as needed. Each director attended
at least 75% of the total number of meetings of the Board of Directors and
meetings of committees on which they served.
In 1988, the Bank adopted a deferred compensation plan for directors that
provides for benefit payments to the participant and his or her family upon
retirement or death. All of the Company's directors are participants in this
plan. This plan allowed for the deferral of director fees in return for the
payment of certain defined benefits payable upon termination of one's service as
a director of the Bank. The cost of this plan was $102,563, $49,179 and $54,494
in 1996, 1995 and 1994, respectively. The projected benefit obligations for this
plan was $549,778 as of December 31, 1996. The Bank has purchased life insurance
policies on the lives of the participating directors with the Bank as the owner
and beneficiary. The life insurance policies will be used to fund the benefits
under the plan. The cash surrender value of the policies was $879,440 as of
December 31, 1996. As of January 1, 1997, no further deferrals of directors fees
may be made under this plan.
35
<PAGE>
The Audit Committee, comprised of Messrs. Fifelski, Hoezee and Van Solkema,
met on three occasions during 1996. Its primary duties and responsibilities
include annually recommending to the Board of Directors an independent public
accounting firm to be appointed auditors of the Company and the Bank, reviewing
the scope and fees for the audit, reviewing all the reports received from the
independent certified public accountants, and coordinating matters with the
internal auditing department.
Item 6. Executive Compensation.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Bank during the
last three years to its Chief Executive Officer. There are no employees of the
Company; all personnel are employed by the Bank. No other executive officers of
the Company or the Bank received annual compensation in excess of $100,000
during this period.
<TABLE>
All Other
Name and Principal Position Year Salary Bonus Compensation(1)
<S> <C> <C> <C> <C>
John Van Singel, President and 1996 $142,000 $40,000 $12,906
Chief Executive Officer 1995 $130,000 $37,500 $12,906
1994 $122,000 $35,000 $12,906
</TABLE>
(1) The amount set forth in this column includes (a) Bank contributions to the
Bank's Profit Sharing Plan of $12,750, $12,750, and $12,750 for 1996, 1995,
and 1994, respectively, and (b) the dollar value of premiums paid by the
Bank for term life insurance on behalf of this executive.
Neither the Company nor the Bank maintain any option or other equity based
compensation plans. The Bank does maintain a profit sharing plan, whereby cash
bonuses are paid to employees if the Bank exceeds certain predetermined levels
of earnings established each year by the Board of Directors.
Item 7. Certain Relationships and Related Transactions.
CERTAIN TRANSACTIONS
Certain directors and officers of the Company have had and are expected to
have in the future, transactions with the Bank, or have been directors or
officers of corporations, or members of partnerships, which have had and are
expected to have in the future, transactions with the Bank. All such
transactions with officers and directors, either directly or indirectly, have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and these transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features. All such future transactions, including transactions with
principal shareholders and other Company affiliates, will be made in the
ordinary course of business, on terms no less favorable to the Company than with
other customers, and will be subject to approval by a majority of the Company's
independent, outside disinterested directors.
36
<PAGE>
Item 8. Legal Proceedings.
LEGAL PROCEEDINGS
Neither the Company nor the Bank are involved in any legal proceedings
other than routine litigation incidental to the ordinary conduct of the business
of the bank, none of which would result in a material impact on the Company or
the Bank, individually or in the aggregate, in the event of an adverse outcome.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Shareholder Matters.
MARKET FOR COMMON STOCK AND DIVIDENDS
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
sales through brokers and direct sales by shareholders of which the Company's
management is aware. It is the understanding of the management of the Company
that over the last two years, the Company's Common Stock has sold at prices in
excess of book value. From January 1, 1995, through December 31, 1996, there
were, so far as the Company's management knows, 75 sales of shares of the
Company's Common Stock, involving a total of 16,886 shares. The price was
reported to management in only a few of these transactions, and management has
no way of confirming the prices which were reported. During this period, the
highest price known by management to be paid was $61.60 per share in the second
quarter of 1996, and the lowest price was $44.00 per share in January 1995. To
the knowledge of management, the last sale of Common Stock occurred on February
10, 1997, involving the sale of 345 shares at a price of $58.00 per share. The
per share information has been adjusted for the July 1, 1996 10% stock dividend.
The following table sets forth the range of high and low sales prices of
the Company's Common Stock during 1995 and 1996 and the first three months of
1997, based on information made available to the Company, as well as per share
cash dividends declared during those periods. Although management is not aware
of any transactions at higher or lower prices, there may have been transactions
at prices outside the ranges listed below:
<TABLE>
Cash
Sales Prices Dividends Declared
1995 High Low
<S> <C> <C> <C>
First Quarter......................... $ 46.20 $ 44.00
Second Quarter........................ 57.20 56.10 $.36
Third Quarter......................... 57.20 55.00
Fourth Quarter........................ 59.40 59.40 $.38
1996 High Low
First Quarter......................... $ 59.40 $ 59.40
Second Quarter........................ 61.60 60.50 $.44
Third Quarter......................... 58.00 52.00
Fourth Quarter........................ 58.00 53.00 $.50
1997 High Low
First Quarter......................... $ 63.00 $ 56.00 $2.00 (1)
Second Quarter ....................... 65.00 63.00 $.53
</TABLE>
37
<PAGE>
(1) A special dividend of $2.00 per share.
There are 2,000,000 shares of the Company's Common Stock authorized, of
which 1,006,174 shares were issued and outstanding as of April 1, 1997. There
were approximately 560 shareholders of record, including trusts and shares
jointly owned, as of that date. No warrants or options exist for the purchase of
additional stock of the Company.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid on a semi-annual basis. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Company and the Bank, along with
other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and the
Bank to pay dividends is subject to regulatory restrictions and requirements.
See the discussion under "Business- Supervision and Regulation" above.
Item 10. Recent Sales of Unregistered Securities.
No securities of the Company have been sold or exchanged by the Company
within the past three years.
Item 11. Description of Registrant's Securities to be Registered.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation, which are filed as an
exhibit to this Registration Statement and are incorporated herein by reference.
Under its Articles of Incorporation, as amended, the Company's authorized
capital stock consists of 2,000,000 shares of Common Stock, par value $1.00 per
share of which 1,006,174 shares are outstanding and held of record by
approximately 560 persons as of the date of this Registration Statement.
All voting rights are vested in the holders of shares of Common Stock, with
each share entitling the holder to one vote. The shares of Common Stock do not
have cumulative voting rights, and holders have no preemptive right to subscribe
for additional securities issuable by the Company.
In the event of the liquidation of the Company, the holders of Common Stock
are entitled to receive, pro rata, any assets distributable to shareholders in
respect of shares held by them after satisfaction of the liquidation preferences
of any outstanding Preferred Stock. Subject to any prior rights of the holders
of Preferred Stock then outstanding, holders of the Company's Common Stock are
entitled to receive such dividends as are declared by the Board of Directors out
of funds legally available for that purpose. The outstanding shares of Common
Stock are fully paid and nonassessable.
The Company serves as its own transfer agent of the Company's Common Stock.
The Board of Directors of the Company believes that the availability for
issuance of a substantial number of shares of the Company's Common Stock at the
discretion of the Board of Directors is advisable to provide the Company with
the flexibility to take advantage of opportunities to issue such stock in order
to obtain capital, as consideration for possible acquisitions and for other
purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of the Company's Common Stock.
38
<PAGE>
Uncommitted authorized but unissued shares of the Company's Common Stock
may be issued from time to time to such persons and for such consideration as
the Board of Directors of the Company may determine and holders of the then
outstanding shares of Company Common Stock may or may not be given the
opportunity to vote thereon, depending upon the nature of any such transactions,
applicable law and the judgment of the Board of Directors of the Company
regarding the submission of such issuance to the Company's stockholders. As
noted, the Company's stockholders have no preemptive rights to subscribe to
newly issued shares.
Moreover, it is possible that additional shares of the Company's Common
Stock would be issued for the purpose of making an acquisition by an unwanted
suitor of a controlling interest in the Company more difficult, time consuming
or costly or would otherwise discourage an attempt to acquire control of the
Company. Under such circumstances, the availability of authorized and unissued
shares of the Company's capital stock may make it more difficult for
stockholders to obtain a premium for their shares. Such authorized and unissued
shares could be used to create voting or other impediments or to frustrate a
person seeking to obtain control of the Company by means of a merger, tender
offer, proxy contest or other means. Such shares could be privately placed with
purchasers who might cooperate with the Board of Directors of the Company in
opposing such an attempt by a third party to gain control of the Company. The
issuance of new shares of the Company's capital stock could also be used to
dilute ownership of a person or entity seeking to obtain control of the Company.
Although the Company does not currently contemplate taking any such action,
shares of the Company's capital stock could be issued for the purposes and
effects described above and the Board of Directors reserves its rights (if
consistent with its fiduciary responsibilities) to issue such stock for such
purposes.
Anti-Takeover Provisions
In addition to the utilization of authorized but unissued shares as
described above, the Company's Articles of Incorporation and the Michigan
Business Corporation Act ("MBCA") contain other provisions which could be
utilized by the Company to impede certain efforts to acquire control of the
Company. Those provisions include the following:
Anti-Takeover Legislation. The MBCA contains provisions intended to protect
shareholders and prohibit or discourage certain types of hostile takeover
activities. These provisions regulate the acquisition of "control shares" of
large public Michigan corporations (the "Control Share Act").
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquiror which, when combined with other shares held by that person
or entity, would give the acquiror voting power at or above any of the following
thresholds: 20%, 33- 1/3% or 50%. Under the Control Share Act, an acquiror may
not vote "control shares" unless the corporation's disinterested shareholders
vote to confer voting rights on the control shares. The acquiring person,
officers of the target corporation, and directors of the target corporation who
are also employees of the corporation are precluded from voting on the issue of
whether the control shares shall be accorded voting rights. The Control Share
Act does not affect the voting rights of shares owned by an acquiring person
prior to the control share acquisition.
The Control Share Act entitles corporations to redeem control shares from
the acquiring person under certain circumstances. In other cases, the Control
Share Act confers dissenters' rights upon all of a corporation's shareholders
except the acquiring person.
The Control Share Act applies only to an "issuing public corporation." The
Company falls within the statutory definition of an "issuing public
corporation." The Control Share Act automatically applies to any "issuing public
corporation" unless the corporation "opts out" of the statute by so providing in
its articles of incorporation or bylaws. The Company has not "opted out" of the
Control Share Act.
Fair Price Act. Certain provisions of the MBCA (the "Fair Price Act")
establish a statutory scheme similar to the supermajority and fair price
provisions found in many corporate charters. The Fair Price Act provides that a
supermajority vote of 90% of the shareholders and no less than two-thirds of the
votes of non-interested shareholders must approve a "business combination." The
Fair Price Act defines a "business combination" to
39
<PAGE>
encompass any merger, consolidation, share exchange, sale of assets, stock
issue, liquidation, or reclassification of securities involving an "interested
shareholder" or certain "affiliates." An "interested shareholder" is generally
any person who owns 10% or more of the outstanding voting shares of the Company.
An "affiliate" is a person who directly or indirectly controls, is controlled
by, or is under common control with a specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others, that: (i) the purchase price to be paid for the shares of the
Company is at least equal to the highest of either (a) the market value of the
shares or (b) the highest per share price paid by the interested shareholder
within the preceding two-year period or in the transaction in which the
shareholder became an interested shareholder, whichever is higher; and (ii) once
a person has become an interested shareholder, the person must not become the
beneficial owner of any additional shares of the Company except as part of the
transaction which resulted in the interested shareholder becoming an interested
shareholder or by virtue of proportionate stock splits or stock dividends.
The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the Board of Directors has
approved or exempted from the requirements of the Fair Price Act by resolution
at any time prior to the time that the interested shareholder first became an
interested shareholder.
Classified Board. The Board of Directors of the Company is classified into
three classes, with each class serving a staggered, three-year term.
Classification of the Board could have the effect of extending the time during
which the existing Board of Directors could control the operating policies of
the Company even though opposed by the holders of a majority of the outstanding
shares of the Company's Common Stock.
Under the Company's Articles, all nominations for directors by a
stockholder must be delivered to the Company in writing at least 60 days prior
to the annual meeting of the shareholders, regardless of any postponements,
deferrals, or adjournments of the meeting to a later date. A nomination that is
not received prior to this deadline will not be placed on the ballot. The Board
believes that advance notice of nominations by shareholders will afford a
meaningful opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the Board of Directors, will
provide an opportunity to inform shareholders about such qualifications.
Although this nomination procedure does not give the Board of Directors any
power to approve or disapprove of shareholder nominations for the election of
directors, this nomination procedure may have the effect of precluding a
nomination for the election of directors at a particular annual meeting if the
proper procedures are not followed.
The Company's Articles provide that any one or more directors may be
removed at any time, with or without cause, but only by either (i) the
affirmative vote of a majority of "Continuing Directors" and at least 80% of the
directors; or (ii) the affirmative vote, at a meeting of the shareholders called
for that purpose, of the holders of at least 80% of the voting power of the
then-outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors, voting together as a single class. A
"Continuing Director" is generally defined in the Articles as any member of the
Board who is unaffiliated with any "interested shareholder" (generally, an owner
of 10% or more of the Company's outstanding voting shares) and was a member of
the Board prior to the time an interested shareholder became an interested
shareholder, and any successor of a Continuing Director who is unaffiliated with
an interested shareholder and is recommended to succeed a Continuing Director by
a majority of the Continuing Directors then on the Board.
Any vacancies in the Board of Directors for any reason, and any newly
created directorships resulting from any increase in the number of directors,
may be filled only by the Board of Directors, acting by an affirmative vote of a
majority of the Continuing Directors and an 80% majority of all of the directors
then in office, although less than a quorum. Any directors so chosen shall hold
office until the next annual meeting of shareholders at which directors are
elected to the class to which such a director was named and until their
respective successors shall be duly elected and qualified or their resignation
or removal. No decrease in the number of directors may shorten the term of any
incumbent director.
40
<PAGE>
Notice of Shareholder Proposals. Under the Company's Articles, the only
business that may be conducted at an annual meeting of shareholders is business
that has been brought before the meeting by or at the direction of the majority
of the directors or by a shareholders of the Company (a) who provides timely
notice of the proposal in writing to the secretary of the Company and the
proposal is a proper subject for action by shareholders under Michigan law or
(b) whose proposal is included in the Company's proxy materials in compliance
with all the requirements set forth in the applicable rules and regulations of
the Securities & Exchange Commission. To be timely, a shareholder's notice of
proposal must be delivered to, or mailed to and received at the principal
executive offices of the Company not less than sixty (60) days prior to the date
of the originally scheduled meeting regardless of any postponements, deferrals
or adjournments of that meeting to a later date. The shareholder's notice of
proposal must set forth in writing each matter the shareholder proposes to bring
before the meeting including: the name and address of the shareholder submitting
the proposal, as it appears on the Company's books and records; a representation
that the shareholder (i) is a holder of record of stock of the Company entitled
to vote at the meeting, (ii) will continue to hold to such stock through the
date on which the meeting is held, and (iii) intends to vote in person or by
proxy at the meeting and to submit the proposal for shareholder vote; a brief
description of the proposal desired to be submitted to the meeting for
shareholder vote and the reasons for conducting such business at the meeting;
and the description of any financial or other interest of the shareholder in the
proposal. This procedure may limit to some degree the ability of shareholders to
initiate discussions at annual shareholders meetings. It may also preclude the
conducting of business at a particular meeting if the proposed notice procedures
have not been followed.
Amendment or Repeal of Certain Provisions of the Articles. Under Michigan
law, the Board of Directors need not adopt a resolution setting forth an
amendment to the Articles of Incorporation before the shareholders may vote on
it. Unless the Articles of Incorporation provide otherwise, amendments of the
Articles of Incorporation generally require the approval of the holders of a
majority of the outstanding stock entitled to vote thereon, and if the amendment
would increase or decrease the number of authorized shares of any class or
series, or the par value of such shares, or would adversely affect the rights,
powers, or preferences of such class or series, a majority of the outstanding
stock of such class or series also would be required to approve the amendment.
The Company's Articles require that in order to amend, repeal or adopt any
provision inconsistent with Article VIII relating to the Board of Directors, the
affirmative vote of at least 80% of the issued and outstanding shares of the
Company's capital stock entitled to vote in the election of directors, voting as
a single class; provided, however, that such amendment or repeal or inconsistent
provision may be made by a majority vote of such shareholders at any meeting of
the shareholders duly called and held where such amendment has been recommended
for approval by at least 80% of all directors then holding office and by a
majority of the "continuing directors." These amendment provisions could render
it more difficult to remove management or for a person seeking to effect a
merger or otherwise gain control of the Company. These amendment requirements
could, thus, adversely affect the potential realizable value of shareholders'
investments.
Board Evaluation of Certain Offers Article IX of the Company's Articles
provides that the Board of Directors shall not approve, adopt or recommend any
offer of any person or entity (other than the Company) to make a tender or
exchange offer for any Company Common Stock, to merge or consolidate the Company
with any other entity, or to purchase or acquire all or substantially all of
Company's assets, unless and until the Board has evaluated the offer and
determined that it would be in compliance with all applicable laws and that the
offer is in the best interests of the Company. In doing so, the Board may rely
on an opinion of legal counsel who is independent from the offeror, and/or any
test such legal compliance in front of any court or agency that may have
appropriate jurisdiction over the matter.
In making its determination, the Board must consider all factors it deems
relevant, including but not limited to: (i) the adequacy and fairness of the
consideration to be received by the Company and/or its shareholders, considering
historical trading prices of the Company's Common Stock, the price that could be
achieved in a negotiated sale of the Company as a whole, past offers, and the
future prospects of the Company; (ii) the potential social and economic impact
of the proposed transaction on the Company, its employees, customers and
vendors; (iii) the potential social and economic impact of the proposed
transaction on the communities in which the Company and its subsidiaries operate
or are located; (iv) the business and financial condition and earnings prospects
of the
41
<PAGE>
proposed acquiring person or entity; and (v) the competence, experience and
integrity of the proposed acquiring person or entity and its or their
management.
In order to amend, repeal, or adopt any provision that is inconsistent with
Article IX, at least 80% of the shareholders, voting together as a single class,
must approve the change, unless the change has been recommended for approval by
at least 80% of the directors, in which case a majority of the voting stock
could approve the action.
Item 12. Indemnification of Directors and Officers.
INDEMNIFICATION MATTERS AND LIMITATION OF LIABILITY
The Company's Articles and Bylaws require the Company to indemnify its
directors and executive officers to the fullest extent permitted by law in
connection with any actual or threatened proceedings in which such persons are a
witness or which is brought against them in their capacity as a director,
officer, employee, agent, or fiduciary of the Company or any entity which such
persons serve at the request of the Company.
The MBCA provides a detailed statutory framework addressing the
indemnification of directors, officers, employees and agents against liabilities
and expenses from legal proceedings brought against them by reason of their
status or service in their respective corporate capacities. The MBCA
distinguishes between indemnification in actions threatened or made by third
parties and actions threatened or made by or in the right of a corporation. A
corporation is permitted to grant indemnification for actual and reasonable
expenses (including attorneys' fees), judgments, fines and settlement amounts as
a result of actions, suits or proceedings threatened or made by third parties.
With respect to actions brought by or in the right of the corporation, a
corporation may only provide indemnification for actual and reasonable expenses
(including attorneys' fees) and settlement amounts. Also, under the MBCA,
indemnification may be mandatory or discretionary. Indemnification of expenses
is mandatory to the extent that a person has been successful in defending any
action. In situations where indemnification is not mandatory, a corporation is
permitted to indemnify its personnel upon a determination that such person or
persons acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation or its shareholders and, in a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. This determination may be made by a majority of a quorum of
disinterested directors, a committee of disinterested directors, independent
legal counsel, all independent directors not a party to the action, or the
shareholders. In the event an individual is found liable to the corporation as a
result of a claim brought by or in the right of the corporation, the
determination must be by the court where the action is litigated or another
court of competent jurisdiction. The MBCA also authorizes the advancement of
litigation expenses upon the receipt of an undertaking by the individual to
repay such expenses if it is ultimately determined that the individual is not
entitled to indemnification.
The Company's Articles also limit the personal liability of directors for
monetary damages with respect to claims by the Company or its shareholders
resulting from certain negligent acts or omissions. Under Michigan law,
directors owe certain fiduciary duties to the corporation which they serve and
its shareholders, including the duty of care (which requires a director to make
informed and well-reasoned business decisions) and the duty of loyalty (which
requires a director to act in good faith and in the best interests of the
corporation and its shareholders). The Company's Restated Articles provide the
Company's directors with protection against personal monetary liability for
breaches of their duty of care, including negligence or gross negligence, in the
performance of their duties as directors. However, directors of the Company
remain liable for (a) breaches of their duty of loyalty to the Company and its
shareholders, such as fraud or other involvement in transactions which involve a
material conflict of interest; (b) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; or (c)
transactions from which a director derives an improper personal benefit. Also,
the Restated Articles do not absolve directors of liability under Section 551(1)
of the MBCA, which proscribes the unlawful declaration of dividends, or other
distributions of assets to shareholders, the unlawful purchase of shares of the
Company's securities and the making of an unlawful loan to an officer, director
or employee of the Company. If the MBCA is amended in the future to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors of the Company will be eliminated
or limited to the fullest extent permitted by the MBCA, as so amended, without
further action or approval by the shareholders, unless shareholder
42
<PAGE>
approval is required by the amending legislation. While the Restated Articles
provide directors with protection from awards of monetary damages for breaches
of their duty of care, it does not eliminate a director's duty of care. The
Articles have no effect on the availability of equitable remedies such as an
action to enjoin or rescind a transaction involving a breach of duty; however,
in some circumstances as a practical matter, equitable remedies may be of
limited utility. In addition, the Restated Articles apply only to claims against
a director arising out of his or her role as a director; it does not apply to
his or her acts or omissions in any other capacity, such as an officer, or to
his or her responsibilities under other laws, such as federal securities laws.
Also, the Restated Articles do not apply to actions by third parties with no
relationship to the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
43
<PAGE>
O.A.K. FINANCIAL CORPORATION TABLE OF CONTENTS
AND SUBSIDIARY
PAGE
Independent Auditors' Report................................................ 45
Audited Consolidated Financial Statements
Consolidated Balance Sheets.............................................. 46
Consolidated Statements of Income........................................ 47
Consolidated Statements of Changes in Stockholders' Equity............... 48
Consolidated Statements of Cash Flows.................................... 49
Notes to Consolidated Financial Statements........................... 50-63
Unaudited Consolidated Interim Financial Statements
Interim Consolidated Balance Sheet as of March 31, 1997 (unaudited)...... 64
Interim Consolidated Statements of Income for the three months ended
March 31, 1997 and 1996 (unaudited)................................... 65
Interim Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 1997 and 1996 (unaudited)................ 66
Interim Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited)................................... 67
Notes to Interim Consolidated Financial Statements (unaudited)........... 68
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
O.A.K. Financial Corporation and Subsidiary
Byron Center, Michigan
We have audited the accompanying consolidated balance sheets of O.A.K. Financial
Corporation and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of O.A.K. Financial
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O.A.K. Financial
Corporation and Subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Rehmann Robson
Grand Rapids, Michigan
January 13, 1997
45
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
<TABLE>
December 31
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks (Note 10).......................................... $ 6,399,085 $ 4,911,104
Federal funds sold......................................................... 400,000 -
Cash and cash equivalents.................................................. 6,799,085 4,911,104
Available-for-sale securities at fair value - amortized cost of
$57,703,349 - 1996 and $56,301,788 - 1995 (Note 2)...................... 58,071,403 57,275,195
Loans receivable, net (Notes 3 and 4)...................................... 142,693,370 140,507,668
Loans held for sale (Note 3)............................................... 1,933,000 180,000
Accrued interest receivable................................................ 1,453,398 1,570,144
Premises and equipment, net (Note 5)....................................... 4,653,473 4,618,006
Other assets............................................................... 1,922,801 1,818,268
Total assets............................................................... $ 217,526,530 $ 210,880,385
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6)
Interest bearing........................................................... $ 146,442,392 $ 150,807,376
Noninterest bearing........................................................ 23,778,515 19,204,467
Total deposits............................................................. 170,220,907 170,011,843
Borrowed funds (Note 7).................................................... 2,800,000 1,600,000
Securities sold under agreements to repurchase (Note 8).................... 7,336,298 4,936,557
Other liabilities.......................................................... 1,625,709 1,773,116
Total liabilities.......................................................... 181,982,914 178,321,516
Stockholders' equity
Common stock, $1 par value; 2,000,000 shares authorized;
1,006,174 shares issued and outstanding,
(915,562 shares in 1995)................................................ 1,006,174 915,562
Additional paid-in capital................................................. 6,036,338 6,084,056
Retained earnings.......................................................... 28,258,182 24,916,801
Net unrealized gain on available-for-sale securities (Note 2).............. 242,922 642,450
Total stockholders' equity................................................. 35,543,616 32,558,869
Total liabilities and stockholders' equity................................. $ 217,526,530 $ 210,880,385
</TABLE>
See accompanying notes.
46
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY INCOME
<TABLE>
For the Years Ended
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans ............................................... $ 13,922,548 $ 13,209,731 $11,377,159
Available-for-sale securities......................... 3,445,883 2,951,342 1,497,791
Held-to-maturity securities........................... - - 1,022,340
Federal funds sold.................................... 133,136 107,543 184,538
Total interest income.................................... 17,501,567 16,268,616 14,081,828
Interest expense
Deposits (Note 6)..................................... 6,770,126 6,311,550 5,113,431
Borrowed funds........................................ 137,212 168,952 189,061
Securities sold under agreements to repurchase........ 273,350 156,771 68,367
Total interest expense................................... 7,180,688 6,637,273 5,370,859
Net interest income...................................... 10,320,879 9,631,343 8,710,969
Provision for possible loan losses (Note 4).............. - 275,000 170,000
Net interest income after provision for
possible loan losses.................................. 10,320,879 9,356,343 8,540,969
Noninterest income
Service charges....................................... 529,471 491,654 537,010
Net realized gain (loss) on sale of available-
for-sale securities................................. 13,071 (3,728) (48,344)
Other ............................................... 532,399 431,289 176,336
Total noninterest income................................. 1,074,941 919,215 665,002
Noninterest expenses
Salaries and employee benefits........................ 2,649,626 2,169,657 1,993,030
Occupancy............................................. 361,280 348,645 322,996
Furniture and fixtures................................ 483,930 439,594 398,873
Michigan single business tax.......................... 197,000 172,000 147,900
Federal Deposit Insurance Corporation premium......... 17,096 175,622 327,258
Other ............................................... 1,459,596 1,205,573 906,445
Total noninterest expense................................ 5,168,528 4,511,091 4,096,502
Income before federal income taxes....................... 6,227,292 5,764,467 5,109,469
Federal income taxes (Note 9)............................ 1,852,000 1,760,000 1,429,000
Net income............................................... $ 4,375,292 $ 4,004,467 $ 3,680,469
Net income per share (Note 1)............................ $ 4.35 $ 3.98 $ 3.66
</TABLE>
See accompanying notes.
47
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
For the Years Ended
1996 1995 1994
<S> <C> <C> <C>
Shares of common stock issued
and outstanding
Balance, beginning of year.......................... 915,562 919,781 738,000
Common stock dividends.............................. 91,522 - 184,500
Repurchases and retirements......................... (910) (4,219) (2,719)
Balance, end of year................................ 1,006,174 915,562 919,781
Common stock
Balance, beginning of year.......................... $ 915,562 $ 919,781 $ 738,000
Common stock dividends.............................. 91,522 - 184,500
Repurchase and retirement of common shares.......... (910) (4,219) (2,719)
Balance, end of year................................ 1,006,174 915,562 919,781
Additional paid-in-capital
Balance, beginning of year.......................... 6,084,056 6,296,964 6,409,600
Repurchase and retirement of common shares.......... (47,718) (212,908) (112,636)
Balance, end of year................................ 6,036,338 6,084,056 6,296,964
Retained earnings
Balance, beginning of year.......................... 24,916,801 21,663,225 18,784,502
Net income.......................................... 4,375,292 4,004,467 3,680,469
Common stock dividends.............................. (91,522) - (184,500)
Cash dividends...................................... (942,389) (750,891) (617,246)
Balance, end of year................................ 28,258,182 24,916,801 21,663,225
Net unrealized gain (loss) on available-for-
sale securities
Balance, beginning of year.......................... 642,450 (979,808) -
Change in net unrealized gain (loss) on available-
for-sale securities net of applicable
deferred income taxes ($206,000 in 1996,
$836,000 in 1995, and $505,000 in 1994).......... (399,528) 1,622,258 (979,808)
Balance, end of year................................ 242,922 642,450 (979,808)
Total stockholders' equity.............................. $ 35,543,616 $ 32,558,869 $ 27,900,162
</TABLE>
See accompanying notes.
48
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH
AND SUBSIDIARY FLOWS
<TABLE>
For the Years Ended
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $ 4,375,292 $ 4,004,467 $ 3,680,469
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 441,655 404,823 394,194
Provision for possible loan losses.............. - 275,000 170,000
Proceeds from sales of loans held
for sale..................................... 21,917,000 16,760,358 14,045,414
Disbursements for loans held for sale........... (21,784,000) (16,655,358) (14,163,414)
Net (gain) loss on sale of available-for-
sale securities ............................. (13,071) 3,728 48,344
Net (gain) loss on loans held for sale.......... (133,000) (105,000) 118,000
Net amortization of investment premiums......... 211,107 157,995 307,051
Changes in operating assets and liabilities
which provided (used) cash:
Accrued interest receivable.............. 116,746 (264,408) (124,533)
Other assets............................. (104,533) (134,744) (481,239)
Other liabilities........................ (147,407) 378,887 50,897
Net cash provided by operating activities............... 4,879,789 4,825,748 4,045,183
Cash Flows from Investing Activities:
Held-to-maturity securities:
Proceeds from maturities.......................... - - 1,772,307
Purchases......................................... - - (341,596)
Available-for-sale securities:
Proceeds from maturities.......................... 9,466,608 6,733,468 10,170,634
Proceeds from sales............................... 3,159,555 5,219,981 2,591,664
Purchases......................................... (14,019,935) (22,004,083) (13,854,356)
Net increase in loans held for investment............ (3,938,702) (15,532,756) (10,907,475)
Purchases of premises and equipment.................. (477,122) (973,899) (553,566)
Net cash used in investing activities................... (5,809,596) (26,557,289) (11,122,388)
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW
accounts and savings deposits..................... 8,792,535 31,924 2,180,650
Net (decrease) increase in time deposits............. (8,583,471) 18,905,500 4,782,323
Net increase (decrease) in borrowed funds............ 1,200,000 (1,400,000) -
Net increase in securities sold under agreements
to repurchase..................................... 2,399,741 1,061,189 1,603,362
Common stock dividends paid.......................... (942,389) (750,891) (617,246)
Reduction of capital lease obligation................ - - (255,032)
Repurchase and retirement of common shares........... (48,628) (217,127) (115,355)
Net cash provided by financing activities............... 2,817,788 17,630,595 7,578,702
Net increase (decrease) in cash and
cash equivalents..................................... 1,887,981 (4,100,946) 501,497
Cash and cash equivalents, beginning of year............ 4,911,104 9,012,050 8,510,553
Cash and cash equivalents, end of year.................. $ 6,799,085 $ 4,911,104 $ 9,012,050
</TABLE>
See accompanying notes.
49
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - O.A.K. Financial Corporation (the "Corporation") through its wholly
owned subsidiary, Byron Center State Bank (the "Bank") provides a variety of
financial services to individuals and businesses in the southern portion of the
greater Grand Rapids, Michigan area through its seven branches located in Byron
Center, Jamestown, Cutlerville, Hudsonville, Grandville, Moline and Dorr. Active
competition, principally from other commercial banks and credit unions, exists
in all of the Bank's principal markets. The Bank's results of operations can be
significantly affected by changes in interest rates or changes in the local
economic environment.
The Bank's primary deposit products are interest and noninterest bearing
checking accounts, savings accounts and time deposits and its primary lending
products are commercial loans, real estate mortgages, and consumer loans.
The Bank is a state chartered bank and a member of the Federal Deposit Insurance
Corporation's ("FDIC") Bank Insurance Fund. The Bank is subject to the
regulations and supervision of the FDIC, Federal Reserve Bank and the Financial
Institutions Bureau and undergoes periodic examinations by these regulatory
authorities (see Note 10).
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for possible loan losses and
the fair value of certain financial instruments.
Accounting Policies - The accounting policies used in the preparation of the
accompanying consolidated financial statements conform to predominant banking
industry practices and are based on generally accepted accounting principles.
The principles which materially affect the determination of the Corporation's
financial position or results of operations are summarized as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are sold for a one-day period.
Available-For-Sale Securities
All securities are classified as available-for-sale and are recorded at fair
value. Unrealized gains and losses, net of the effect of applicable deferred
income taxes, on available-for-sale securities are recognized as a separate
component of stockholders' equity. Realized gains or losses on securities sold
are determined using the specific identification method.
Loans held for Investment and Related Income
Loans held for investment are stated at their principal amount outstanding.
Interest on loans is accrued over the term of the loan based on the principal
amount outstanding. Management reviews loans delinquent 90 days or more to
determine if interest accrual should be discontinued based on the estimated fair
market value of the collateral on a present value basis, or the present value of
estimated future cash flows. Under SFAS No. 114 as amended by SFAS No. 118, the
carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreased due to
changes in estimates of future payments and due to the passage of time are
reported as reductions or increases in the provision for loan losses.
Loan fees net of direct loan origination costs are deferred and recognized as
interest income over the term of the loan using the constant yield method.
50
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate amortized cost or
market value. Lower of cost or market value adjustments, as well as realized
gains and losses, are recorded in current earnings.
The Bank adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on
January 1, 1996. SFAS No. 122 requires the Banks to recognize as separate assets
the rights to service mortgage loans for others that have been acquired by
purchase or the origination and subsequent sale of a loan. The fair value of
capitalized originated mortgage servicing rights has been determined based upon
market value quotes for similar servicing. These mortgage servicing rights are
amortized in proportion to and over the period of estimated net loan servicing
income. SFAS No. 122 also requires the Bank to assess mortgage servicing rights
for impairment based on the fair value of those rights. For purposes of
measuring impairment, the risk characteristics used by the Bank include the
underlying loans' interest rates, term of loan and loan types. Gains and losses
on the sale of loans, which are sold without recourse, are recognized when
proceeds from the loan sales are received by the Bank and are measured by the
difference between the net selling price and the carrying value of such loans.
The impact of adopting SFAS No. 122 on the Corporation's consolidated financial
position and results of operations was not material.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis.
Allowance for Possible Loan Losses
An allowance for possible loan losses is recorded because some loans may not be
repaid in full. The allowance is increased by a provision in the income
statement and by recoveries on loans previously charged off. The allowance is
decreased as loans are charged off. A charge-off, in whole or in part, occurs
once a significant probability of loss has been determined, with consideration
given to such factors as the customer's financial condition, underlying
collateral and guarantees. Collection efforts continue and future recoveries may
occur with respect to loans previously charged off.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Management's evaluation of the allowance is based upon periodic
reviews of the loan portfolios. These reviews are performed by the responsible
lending officers and internal loan review personnel who consider, among other
factors, the Bank's past loan loss experience, the effects of current
developments with respect to the borrowers, the estimated value of underlying
collateral, changes in economic conditions, specific impaired loans, and results
of examinations by bank regulatory authorities.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan (SFAS No. 114), which was later amended by Statement of Financial
Accounting Standards No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures (SFAS No. 118). These Standards, adopted
by the Corporation at January 1, 1995, require that impaired loans, as defined,
be measured based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or at the fair value of collateral if the loan is
collateral dependent. Under these standards, loans considered to be impaired are
reduced to the present value of expected future cash flows or to the fair value
of collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to increase,
such increase is reported as additional provision for loan losses. The effect of
adopting SFAS Nos. 114 and 118 did not have a significant impact on the
consolidated financial position or results of operations of the Corporation.
Smaller-balance homogeneous loans are residential first mortgage loans secured
by one-to-four family residences, residential construction loans, automobile,
home equity and second mortgage loans and are collectively evaluated for
impairment. Commercial loans and first mortgage loans secured by other
properties are evaluated individually for impairment. Management uses the
Corporation's normal credit analysis information, including delinquency reports,
non-accrual listings and an internally prepared watch list, to identify loans
which should be evaluated for impairment. A loan is considered impaired when
management concludes it is probable that the borrower will not remit payments in
accordance with the terms of the agreement. Loans, or portions thereof, are
charged off when deemed uncollectible. The nature of disclosures for impaired
loans is considered generally comparable to prior nonaccrual, past due, trouble
debt restructuring and nonperforming asset disclosures.
51
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In management's judgment, the allowance for possible loan losses is maintained
at a level adequate to provide for estimated potential losses inherent in the
loan portfolio. However, because of uncertainties inherent in the estimation
process, it is possible that the allowance for possible loan losses may change
in the near term.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and accelerated methods
over the related assets estimated useful lives which generally range from 5 to
39 years. Maintenance, repairs and minor alterations are charged to current
operations as expenditures occur and major improvements are capitalized.
Net Income Per Share
Net income per share of common stock is calculated on the basis of the weighted
average number of shares outstanding, which was approximately 1,007,000 in 1996,
1,010,000 in 1995 and 1,014,000 in 1994. All per share amounts have been
retroactively restated to give effect to the 1996 common stock dividend.
Issued But Not Yet Adopted Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities (SFAS No. 125).
This Statement changes the accounting for mortgage servicing rights retained by
the loan originator. Under the Statement, if the originator sells or securities
mortgage loans and retains the related servicing rights, the total costs of the
mortgage loan are allocated between the loan (without the servicing rights) and
the servicing rights, based on their relative fair values. Under current
practice, all such costs are assigned to the loan. The costs allocated to
mortgage servicing rights will be recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights will be periodically evaluated for
impairment. Impairment will be recognized using the fair value of individual
stratum of servicing rights based on the underlying risk characteristics of the
serviced loan portfolio, compared to an aggregate portfolio approach under
existing accounting guidance. Based on the Corporation's historical levels of
mortgage originations for sale in the secondary market, management anticipates
that the impact of SFAS No. 125 on the Corporation's financial position and
results of operations will not be material.
Federal Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of the taxes currently due plus deferred taxes.
Deferred income taxes are recognized for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Deferred income tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets or liabilities are
recorded or settled. As changes in income tax laws or rates are enacted,
deferred income tax assets and liabilities are adjusted through the provision
for income taxes.
The Corporation and its subsidiary file a consolidated federal income tax return
on a calendar year basis.
Reclassifications
Certain amounts as originally reported in the 1995 and 1994 financial statements
have been reclassified to conform to the 1996 presentation.
52
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
2. AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value of investment securities, all of which are classified as
available-for-sale as of December 31, are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value Value
<S> <C> <C> <C> <C>
U.S. Treasury, government
agencies and corporations......... $ 40,189,845 $ 212,111 $ 354,029 $ 40,047,927
States and political subdivisions... 15,369,629 520,170 9,910 15,879,889
Other............................... 2,143,875 - 288 2,143,587
Total............................... $ 57,703,349 $ 732,281 $ 364,227 $ 58,071,403
Gross Gross
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value Value
U.S. Treasury, government
agencies and corporations......... $ 38,366,119 $ 372,364 $ 154,850 $ 38,583,633
States and political subdivisions... 15,557,975 767,065 12,506 16,312,534
Other............................... 2,377,694 1,385 51 2,379,028
Total............................... $ 56,301,788 $ 1,140,814 $ 167,407 $ 57,275,195
</TABLE>
At December 31, 1996, the amortized cost and fair value of available-for-sale
securities by contractual maturity is shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
Amortized
Cost Fair Value
<S> <C> <C>
Due in one year or less......................................... $ 3,477,733 $ 3,519,640
Due after one year through five years........................... 6,384,478 6,669,316
Due after five years through ten years.......................... 7,337,311 7,499,315
Due after ten years............................................. 1,100,657 1,121,774
Subtotal........................................................ 18,300,179 18,810,045
Mortgage-backed securities...................................... 39,403,170 39,261,358
Total........................................................... $ 57,703,349 $58,071,403
</TABLE>
Investment income from taxable and nontaxable securities for the years
ended December 31, is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Taxable........................................... $2,523,572 $1,982,424 $1,497,791
Nontaxable........................................ 922,311 968,918 1,022,340
Total............................................. $3,445,883 $2,951,342 $2,520,131
</TABLE>
53
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
2. INVESTMENT SECURITIES (Continued)
Proceeds from sales of available-for-sale securities during 1996 and 1995 were
$3,159,555 and $5,219,981, respectively. The gross gains and gross losses
realized on sales for the years ended December 31, are as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Gross realized gains.............................. $ 19,711 $ 19,950 $ 18,356
Gross realized losses............................. (6,640) (23,678) (66,700)
Net realized gain (loss) on sale of
available-for-sale securities................ $ 13,071 $ (3,728) $(48,344)
</TABLE>
Investment securities with a carrying value of approximately $14,404,000 and
$14,491,000 at December 31, 1996 and 1995, respectively, were pledged to secure
public deposits and for various other purposes as required or permitted by law.
The fair value of these investments approximates carrying value.
3. LOANS
The Bank grants commercial, consumer and residential loans to customers
primarily in a fifteen mile radius of its branches which are located south of
Grand Rapids, Michigan. Substantially all of the consumer and residential loans
are secured by various items of property, while commercial loans are secured
primarily by business assets, and personal guarantees; a portion of loans are
unsecured. The source of repayment of approximately 20% of the loan portfolio is
generated from cash flows from developers and owners of commercial real estate.
Major classifications of loans held for investment at December 31 are as
follows:
<TABLE>
1996 1995
<S> <C> <C>
Commercial.................................................. $ 27,451,855 $ 26,911,497
Commercial real estate...................................... 72,280,315 71,690,177
Residential real estate..................................... 33,443,275 33,530,245
Consumer.................................................... 11,893,895 10,680,597
Total loans receivable, net of deferred
loan fees of $309,351 and $377,160...................... 145,069,340 142,812,516
Allowance for possible loan losses.......................... (2,375,970) (2,304,848)
Loans receivable, net....................................... $ 142,693,370 $140,507,668
</TABLE>
At December 31, 1996, scheduled maturities of loans with fixed rates of
interest are as follows:
<TABLE>
<S> <C>
One year or less................................. $ 13,130,033
One to five years................................ 75,270,626
Over five years.................................. 7,589,928
Total .......................................... $ 95,990,587
</TABLE>
54
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
3. LOANS (Continued)
Variable rate loans of $49,078,753 at December 31, 1996 reprice quarterly or
more frequently.
The Bank sells certain fixed-rate residential real estate mortgage loans. Net
gains (losses) totaled $133,000, $105,000 and ($118,000) on the sale of mortgage
loans in 1996, 1995 and 1994, respectively.
The Bank extends loan commitments in the normal course of business to meet
financing needs of its customers. These commitments to make loans and lines of
credit are recorded when proceeds are disbursed. The Bank follows the same
credit policy to make such commitments, including collateral, as is followed for
those loans recorded in the financial statements; no significant losses are
anticipated as a result of these commitments. At December 31, 1996, the Bank had
commitments for standby letters of credit of approximately $2,056,000, loan
commitments outstanding of approximately $10,218,000 and unused credit lines and
revolving credit agreements of approximately $37,971,000.
Loans on which the accrual of interest has been discontinued and those loans
past due 90 days or more amounted to $1,194,007 and $945,143 at December 31,
1996 and 1995, respectively. Interest income that would have been recorded under
the original terms of such loans would have been approximately $201,000,
$102,000 and $18,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
At December 31, 1996 and 1995, the Bank was servicing loans for others amounting
to approximately $82,000,000 and $72,000,000, respectively; such loans are not
included in the accompanying balance sheets. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and taxing authorities, and foreclosure
processing. Loan servicing income is recorded on an accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees.
Certain directors, executive officers and their related interests were loan
customers of the Bank. All such loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions and do not represent more than a normal risk of
collectibility or present other unfavorable features. The total loans
outstanding to these customers aggregated approximately $2,738,000 and
$3,477,000 at December 31, 1996 and 1995, respectively; new loans and repayments
during 1996 were $232,000 and $957,000, respectively.
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following is an analysis of changes in the allowance for possible loan
losses for the years ended December 31:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year.......................... $ 2,304,848 $ 2,055,554 $ 2,049,153
Provision for possible loan losses.................. - 275,000 170,000
Recoveries.......................................... 249,854 74,053 135,451
Loans charged off................................... (178,732) (99,759) (299,050)
Balance, end of year................................ $ 2,375,970 $ 2,304,848 $ 2,055,554
</TABLE>
55
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES (Continued)
Information regarding impaired loans is as follows for the year ended
December 31:
<TABLE>
1996 1995
<S> <C> <C>
Average investment in impaired loans $ 847,835 $946,174
Interest income recognized on impaired loans including
interest income recognized on cash basis 14,456 11,085
Interest income recognized on impaired loans on
cash basis -- --
Information regarding impaired loans at December 31, was as follows:
Balance of impaired loans $1,079,602 $834,569
Less portion for which no allowance for loan losses
is allocated 0 0
Portion of impaired loan balance for which
an allowance for credit losses is allocated $1,079,602 $ 834,569
Portion of allowance for loan losses
allocated to the impaired loan balance $ 75,000 $ 85,752
</TABLE>
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
1996 1995
<S> <C> <C>
Land ............................................. $ 880,376 $ 820,376
Buildings and improvements.......................... 4,355,846 4,334,562
Furniture and equipment............................. 2,479,124 2,383,416
Total premises and equipment........................ 7,715,346 7,538,354
Less accumulated depreciation
and amortization................................ 3,061,873 2,920,348
Premises and equipment, net......................... $ 4,653,473 $ 4,618,006
</TABLE>
6. DEPOSITS
The following is a summary of the distribution of deposits at December
31:
<TABLE>
1996 1995
<S> <C> <C>
Interest bearing
NOW accounts............................................ $ 12,381,650 $ 12,023,144
Savings................................................. 30,514,376 28,509,032
Time, $100,000 and over................................. 6,768,833 7,435,574
Other time.............................................. 75,576,284 83,493,014
Money market demand..................................... 21,201,249 19,346,612
Total interest bearing...................................... 146,442,392 150,807,376
Noninterest bearing demand.................................. 23,778,515 19,204,467
Total deposits.............................................. $170,220,907 $170,011,843
</TABLE>
56
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
6. DEPOSITS (Continued)
At December 31, 1996, scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1997 ..................................................... $51,645,867
1998 ..................................................... 15,489,570
1999 ..................................................... 6,975,736
2000 ..................................................... 6,974,889
2001 ..................................................... 1,259,055
Total time deposits.................................. $82,345,117
</TABLE>
Deposits of Bank directors, executive officers and their related interests were
approximately $1,282,000 and $788,000 at December 31, 1996 and 1995,
respectively. Interest expense on time deposits issued in denominations of
$100,000 or more was approximately $270,000 in 1996, $227,000 in 1995 and
$153,000 in 1994.
7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following amounts:
<TABLE>
1996 1995
<C> <C> <C>
Federal funds purchased..................................... $ 1,300,000 $ 100,000
Federal Home Loan Bank fixed-rate advance
(5.92%, maturing in 1997)............................... 1,500,000 1,500,000
Total borrowed funds........................................ $ 2,800,000 $ 1,600,000
</TABLE>
Federal funds are generally purchased for a one-day period. The Federal Home
Loan Bank borrowings are collateralized by U.S. government agency securities
with a fair value of approximately $1,954,000 and $3,652,000 at December 31,
1996 and 1995, respectively.
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1996 and 1995
mature within one day from the transaction date and have an average interest
rate of 3.6% and 3.8%, respectively. The U.S. government agency securities
underlying the agreements have a fair value of approximately $11,164,000 and
$9,348,000 at December 31, 1996 and 1995, respectively. Such securities remain
under the control of the Bank. The maximum amount outstanding at any month end
during the years ended December 31, 1996 and 1995 was $9,131,354 and $4,936,557,
respectively with the daily average balance being $7,524,513 and $4,138,207,
respectively.
57
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
9. FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended December 31
consists of:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Current..................................... $1,859,000 $1,725,000 $1,418,000
Deferred.................................... (7,000) 35,000 11,000
Federal income taxes........................ $1,852,000 $1,760,000 $1,429,000
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the statutory federal income tax rate of 34% to income before
taxes for the years ended December 31, is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Statutory rate applied to
income before income taxes.............. $2,117,279 $1,959,919 $1,737,220
Effect of tax-exempt interest
income.................................. (294,221) (308,941) (335,417)
Change in valuation allowance............... 25,000 110,000 600
Other - net................................. 3,942 (978) 26,597
Federal income taxes........................ $1,852,000 $1,760,000 $1,429,000
</TABLE>
The net deferred income tax asset as of December 31, is comprised of the
tax effect of the following temporary differences:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................... $ 706,000 $ 682,000
Deferred compensation plan.............................. 187,000 151,000
Deferred loan fees...................................... 28,000 54,000
Total deferred tax assets................................... 921,000 887,000
Deferred tax liability - discount accretion................. (14,000) (12,000)
Valuation allowance......................................... (655,000) (630,000)
Net deferred tax assets entering into the
provision for federal income taxes........................ 252,000 245,000
Additional deferred tax liability related to
the net unrealized gain on available-for-sale
securities.............................................. (125,000) (330,000)
Net deferred tax asset (liability) included in
other assets (liabilities)................................ $ 127,000 $ (85,000)
</TABLE>
58
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
10. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary regulator, the Federal Reserve Bank ("FRB"). Failure to meet minimum
capital requirements can initiate certain mandatory and/or discretionary actions
by the FRB. These actions could have a material effect on the Bank's financial
statements. Under FRB capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities, certain
off-balance- >=sheet items and capital as calculated under regulatory accounting
standards. The Bank's required capital is also subject to regulatory qualitative
judgment regarding the Bank's interest rate risk exposure and credit risk.
Measurements established by regulation to ensure capital adequacy require the
Bank to maintain minimum ratios of capital to average assets, Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets. Management believes,
as of December 31, 1996, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1996, the Bank would be categorized as well capitalized. To
be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table.
The Bank's actual capital amounts and ratios are also presented in the table
(dollars in thousands).
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to
risk weighted assets)........ $36,542 23.18% $12,614 Greater than or $15,767 Greater than or
equal to 8.0% equal to 10.0%
Tier 1 capital (to
risk weighted assets)........ $34,566 21.92% $ 6,307 Greater than or $ 9,460 Greater than or
equal to 4.0% equal to 6.0%
Tier 1 capital (to
average assets).............. $34,566 15.97% $ 8,656 Greater than or $10,820 Greater than or
equal to 4.0% equal to 5.0%
</TABLE>
The Bank is required to deposit certain amounts with the Federal Reserve Bank.
These reserve balances vary depending upon the level of certain customer
deposits in the Bank. At December 31, 1996 and 1995, those required reserve
balances were $912,000 and $834,000, respectively.
The Bank is also subject to limitations under the Federal Reserve Act on the
amount of loans or advances that can be extended to the Corporation and
dividends that can be paid to the Corporation. Approval is needed if total
dividends declared in any calendar year exceed the retained "net profit" (as
defined in the Federal Reserve Act) of that year plus the retained "net profit"
of the preceding two years. The amount that was not subject to this restriction
is approximately $8,671,000 at January 1, 1997.
11. RETIREMENT PLANS
Profit Sharing - The Bank maintains a profit sharing plan for substantially all
employees. Under the plan, employees may make voluntary contributions based on a
percentage of covered compensation. The plan also allows the Bank, at the
discretion of the Board of Directors, to provide an annual contribution. The
Bank's contributions to the profit sharing plan were $191,459, $151,102, and
$147,701 for the years ended December 31, 1996, 1995 and 1994, respectively.
Deferred Compensation - The Bank sponsors a deferred compensation plan for all
directors who wish to participate. The cost of this plan was $102,563, $49,179
and $54,494 for the years ended December 31, 1996, 1995 and 1994, respectively.
The projected benefit obligation for this plan was $549,778 and $444,929 as of
December 31, 1996 and 1995, respectively, and is included in other liabilities.
The Bank has purchased life insurance policies on participating directors. The
cash surrender value of these policies was $879,440 and $868,439 at December 31,
1996 and 1995, respectively, and is included in other assets on the accompanying
balance sheets.
59
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
12. CONTINGENCIES
The Bank is party to litigation arising in the normal course of business. In the
opinion of management, based on consultation with legal counsel, liabilities
from such litigation, if any, would not have a material effect on the
Corporation's consolidated financial statements. As a result of acquiring real
estate from foreclosure proceedings, the Bank is subject to potential claims and
possible legal proceedings involving environmental matters. No such claims have
been asserted at December 31, 1996.
13. FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments - The Bank utilized quoted market prices,
where available, to compute the fair value of its financial instruments. In
cases where quoted market prices were not available, the Bank used present value
methods to estimate the fair values of its financial instruments. These
estimates of fair value are significantly affected by the assumptions made and,
accordingly, do not necessarily indicate amounts which could be realized in a
current market exchange. The fair values of certain financial instruments and
all nonfinancial instruments including, among other elements, the estimated
earning power of core deposit accounts, the trained workforce, customer goodwill
and similar items are not required to be determined.
Accordingly, the aggregate net fair values are not necessarily indicative of the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating the
fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the balance sheets
for cash and federal funds sold approximate those assets' fair values.
Investment Securities - Fair values for investment securities are based on
quoted market prices.
Loans Receivable - For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values approximate carrying values. The
fair values for other loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to
estimate the effect of declines, if any, in the credit quality of borrowers
since the loans were originated.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and money market accounts)
are, by definition, equal to the amount payable on demand. The fair values of
approximately 52% and 47% of the Bank's deposits at December 31, 1996 and 1995,
respectively were equal to their carrying values. Fair values for fixed rate
time deposits and other time deposits with stated maturities are based on the
discounted value of contractual cash flows, using interest rates currently being
offered for deposits of similar remaining maturities.
Off-Balance-Sheet Instruments - Commitments to extend credit were evaluated and
fair value was estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. As the Bank does not charge fees for
lending commitments, it is not practicable to estimate the fair value of these
instruments.
60
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
13. FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bank's financial instruments at December 31,
are as follows:
<TABLE>
Carrying Fair
Amount Value
1996
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................. $ 6,799,085 $ 6,799,085
Investment securities..................................... 58,071,403 58,071,403
Net loans................................................. 144,626,370 146,625,000
Accrued interest receivable............................... 1,453,398 1,453,398
Financial liabilities:
Deposits.................................................. 170,220,907 170,700,000
Borrowed funds............................................ 2,800,000 2,802,000
Securities sold under agreements
to repurchase......................................... 7,336,298 7,336,298
Other liabilities......................................... 1,625,709 1,625,709
</TABLE>
61
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
13. FINANCIAL INSTRUMENTS (Continued)
<TABLE>
Carrying Fair
Amount Value
1995
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................. $ 4,911,104 $ 4,911,104
Investment securities..................................... 57,275,195 57,275,195
Net loans................................................. 140,687,668 141,656,333
Accrued interest receivable............................... 1,570,144 1,570,144
Financial liabilities:
Deposits.................................................. 170,011,843 170,240,026
Borrowed funds............................................ 1,600,000 1,611,373
Securities sold under agreements
to repurchase......................................... 4,936,557 4,936,557
Other liabilities......................................... 1,773,116 1,773,116
</TABLE>
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for interest and income taxes during the years ended December
31, is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Interest................................ $7,216,223 $6,475,906 $5,354,382
Income taxes............................ $1,916,713 $ 1,683,171 $ 1,513,106
</TABLE>
15. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
The following summarizes parent company financial information as of
December 31, 1996 and 1995 and the related condensed statements of income
and cash flows for each of the three years in the period ended December 31,
1996:
<TABLE>
Condensed Balance Sheets
1996 1995
<S> <C> <C>
Assets
Cash.......................................................... $ 6,418 $ 6,417
Investment in subsidiary...................................... 34,743,670 31,979,377
Available-for-sale securities................................. 793,528 573,075
Total assets.................................................... $ 35,543,616 $ 32,558,869
Stockholders' equity............................................ $ 35,543,616 $ 32,558,869
</TABLE>
62
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
15. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (Continued)
<TABLE>
Condensed Statements of Income
1996 1995 1994
<S> <C> <C> <C>
Income
Dividends from subsidiary...................... $ 1,211,471 $ 1,375,539 $ 744,601
Interest from available-for-sale securities.... 22,232 10,126 7,389
Total income..................................... 1,233,703 1,385,665 751,990
Other expenses................................... 22,232 10,126 7,389
Income before equity in undistributed net
income of subsidiary........................... 1,211,471 1,375,539 744,601
Equity in undistributed net income of
subsidiary..................................... 3,163,821 2,628,928 2,935,868
Net income....................................... $ 4,375,292 $ 4,004,467 $ 3,680,469
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................... $ 4,375,292 $ 4,004,467 $ 3,680,469
Adjustments to reconcile net income
to net cash from operating activities:
Undistributed earnings of subsidiary...... (3,163,821) (2,628,928) (2,935,868)
Amortization.............................. - - 897
Net cash provided by operating
activities.................................... 1,211,471 1,375,539 745,498
Cash Flows from Investing Activities:
Available-for-sale securities purchased....... (220,453) (407,521) (110,251)
Available-for-sale securities matured......... - - 100,000
Net cash used in investing activities........... (220,453) (407,521) (10,251)
Cash Flows from Financing Activities:
Repurchase of common stock.................... (48,628) (217,127) (115,355)
Dividends paid................................ (942,389) 750,891) 617,246)
Net cash used in financing activities........... (991,017) (968,018) (732,601)
Net increase in cash............................ 1 - 2,646
Cash and cash equivalents,
beginning of year............................. 6,417 6,417 3,771
Cash and cash equivalents,
end of year................................... $ 6,418 $ 6,417 $ 6,417
</TABLE>
64
<PAGE>
O.A.K. FINANCIAL CORPORATION INTERIM CONSOLIDATED
AND SUBSIDIARY BALANCE SHEET
<TABLE>
March 31
1997
ASSETS (unaudited)
<S> <C>
Cash and due from banks.......................................$ 5,056,295
Federal funds sold............................................ 3,000,000
Cash and cash equivalents..................................... 8,056,295
Available-for-sale securities at fair value - amortized cost of
$57,712,154................................................ 57,552,142
Net loans..................................................... 148,177,763
Accrued interest receivable................................... 1,574,630
Premises and equipment net.................................... 4,617,119
Other assets.................................................. 2,910,113
Total assets..................................................$ 222,888,062
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing..............................................$ 151,244,875
Noninterest bearing........................................... 23,415,639
Total deposits................................................ 174,660,514
Borrowed funds................................................ 3,500,000
Securities sold under agreements to repurchase ............... 8,249,234
Other liabilities............................................. 2,156,894
Total liabilities............................................. 188,566,642
Stockholders' equity
Common stock, $1 par value; 2,000,000 shares authorized;
1,006,174 shares issued and outstanding.................... 1,006,174
Additional paid-in capital.................................... 6,036,338
Retained earnings............................................. 27,384,516
Net unrealized loss on available-for-sale securities.......... (105,608)
Total stockholders' equity.................................... 34,321,420
Total liabilities and stockholders' equity....................$ 222,888,062
</TABLE>
See notes to interim consolidated financial statements.
64
<PAGE>
O.A.K. FINANCIAL CORPORATION INTERIM CONSOLIDATED
AND SUBSIDIARY STATEMENTS OF INCOME
(unaudited)
<TABLE>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Interest income
Loans .........................................................................$ 3,366,856 $ 3,415,915
Available-for-sale securities................................................... 940,926 870,973
Federal funds sold.............................................................. 19,867 23,822
Total interest income.............................................................. 4,327,649 4,310,710
Interest expense
Deposits........................................................................ 1,638,906 1,721,677
Borrowed funds.................................................................. 56,324 32,285
Securities sold under agreements to repurchase.................................. 72,448 62,212
Total interest expense............................................................. 1,767,678 1,816,174
Net interest income................................................................ 2,559,971 2,494,536
Provision for possible loan losses................................................. - -
Net interest income after provision for
possible loan losses............................................................ 2,559,971 2,494,536
Noninterest income
Service charges................................................................. 122,319 123,244
Net realized gain (loss) on sale of available-
for-sale securities........................................................... 44,576 11,571
Other ......................................................................... 152,072 126,595
Total noninterest income........................................................... 318,967 261,410
Noninterest expenses
Salaries and employee benefits.................................................. 685,423 557,703
Occupancy....................................................................... 93,789 86,267
Furniture and fixtures.......................................................... 116,088 107,047
Michigan single business tax.................................................... 50,724 49,800
Other ......................................................................... 327,710 339,838
Total noninterest expense.......................................................... 1,273,734 1,140,655
Income before federal income taxes................................................. 1,605,204 1,615,291
Federal income taxes............................................................... 466,521 531,000
Net income.........................................................................$ 1,138,683 $ 1,084,291
Net income per share...............................................................$ 1.13 $ 1.08
Average common equivalent shares outstanding.......................................$ 1,006,174 $ 1,007,118
</TABLE>
See notes to interim consolidated financial statements.
65
<PAGE>
O.A.K. FINANCIAL CORPORATION INTERIM CONSOLIDATED
AND SUBSIDIARY STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Shares of common stock issued and outstanding
Balance, beginning of period.................................................. 1,006,174 915,562
Common stock dividends........................................................ - -
Repurchase and retirement of common shares.................................... - -
Balance, end of period...........................................................$ 1,006,174 $ 915,562
Common stock
Balance, beginning of period.................................................$ 1,006,174 $ 915,562
Common stock dividends....................................................... - -
Repurchase and retirement of commons shares.................................. - -
Balance, end of period....................................................... 1,006,174 915,562
Additional paid-in-capital
Balance, beginning of period................................................. 6,036,338 6,084,056
Repurchase and retirement of common shares................................... - -
Balance, end of period....................................................... 6,036,338 6,084,056
Retained earnings
Balance, beginning of period................................................. 28,258,182 24,916,801
Net income................................................................... 1,138,683 1,084,291
Cash dividends............................................................... 2,012,349 -
Balance, end of period....................................................... 27,384,516 26,001,092
Net unrealized gain (loss) on available-for-
sale securities
Balance, beginning of period................................................. 242,922 642,450
Change in net unrealized gain (loss) on available-
for-sale securities net of applicable
deferred income taxes ($179,546 in 1997,
$105,709 in 1996)......................................................... (348,530) (205,200)
Balance, end of period....................................................... (105,608) 437,250
Total stockholders' equity.......................................................$ 34,321,420 $ 33,437,960
</TABLE>
See notes to interim consolidated financial statements.
66
<PAGE>
O.A.K. FINANCIAL CORPORATION INTERIM CONSOLIDATED
AND SUBSIDIARY STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................................$ 1,138,683 $1,084,291
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................................ 104,205 99,416
Net (gain) loss on sale of available-for-
sale securities ...................................................... (44,576) (11,571)
Net amortization of investment premiums.................................. 46,190 62,615
Changes in operating assets and liabilities
which provided (used) cash:
Accrued interest receivable....................................... (121,232) (115,660)
Other assets...................................................... (987,312) (46,607)
Other liabilities................................................. 531,185 449,876
Net cash provided by operating activities........................................ 667,143 1,522,360
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities...................................................... 1,881,889 1,976,507
Proceeds from sales........................................................... 2,128,928 3,160,608
Purchases..................................................................... (3,841,700) (4,052,803)
Net increase in loans............................................................ (3,551,393) (1,861,020)
Purchases of premises and equipment........................................... (67,851) (30,691)
Net cash used in investing activities............................................ (3,450,127) (807,399)
Cash Flows from Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings deposits.............................................. (1,057,754) (1,921,786)
Net increase (decrease) in time deposits...................................... 5,497,361 (1,032,068)
Net increase (decrease) in borrowed funds..................................... 700,000 (100,000)
Net increase in securities sold under agreements
to repurchase.............................................................. 912,936 3,045,054
Common stock dividends paid................................................... (2,012,349) -
Net cash provided by (used in) financing activities.............................. 4,040,194 (8,800)
Net increase in cash and cash equivalents....................................... 1,257,210 706,161
Cash and cash equivalents, beginning of period................................... 6,799,085 4,911,104
Cash and cash equivalents, end of period.........................................$ 8,056,295 $ 5,617,265
</TABLE>
See notes to interim consolidated financial statements.
67
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO INTERIM
AND SUBSIDIARY CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management of the Corporation, the accompanying unaudited
consolidated financial statements contain all the adjustments (consisting
only of normal recurring accruals) necessary to present fairly the
consolidated financial condition of the Corporation as of March 31, 1997
and the results of operations for the three-month periods ended March 31,
1997 and 1996. The results of operations for the three-month period ended
March 31, 1997 are not necessarily indicative of the results to be expected
for the full year.
2. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions and other pertinent factors. Loans on non-accrual status, past
due more than 90 days, or restructured amounted to $782,000 at March 31,
1997. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations).
3. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
4. The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," effective January 1, 1997. Adoption of SFAS
No. 125 did not have a material impact on consolidated financial condition
or results of operations.
5. The net income per share amounts are based on the weighted average number
of common shares outstanding. The weighted number of shares outstanding
were for the quarters ended March 31, 1997, and March 31, 1996.
In February 1997, the Financial Accounting Standards Board (FASB) issued
SAFS No. 128, Earnings Per Share. SFAS No. 128 simplifies the standards for
computing earnings per share (EPS) and makes them comparable to
international EPS standards. It also replaces the presentation of primary
EPS with a presentation of basic EPS. Since the Corporation has a simple
capital structure, implementation of SFAS No. 128 is not expected to have
an impact on the Corporation's reporting of EPS. SFAS No. 128 is required
to be implemented for periods ending after December 15, 1997.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
O.A.K. FINANCIAL CORPORATION
By /s/ John A. Van Singel
John A. Van Singel, President
Date: July , 1997
69
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
3.1 Articles of Incorporation of O.A.K. Financial Corporation*
3.2 Bylaws of O.A.K. Financial Corporation*
4 Form of Company Stock Certificate*
10 1988 Director Deferred Compensation Plan*
21 Subsidiaries of Registrant*
27 Financial Data Schedule
* Previously Filed
70
