FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22461
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2817345
State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
-----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 2,000,000 shares of the Company's Common
Stock ($1 par value) were outstanding as of October 30, 1998.
-1-
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 3
Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K 18
Signatures 19
-2-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
ASSETS
September 30 December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Cash and due from banks ................................................... $ 6,662,849 $ 5,367,937
Federal funds sold......................................................... 0 -
-------------- --------------
Cash and cash equivalents.................................................. 6,662,849 5,367,937
Available-for-sale securities at fair value - amortized cost of
$56,232,503 - 1998 and $60,999,414 - 1997............................... 57,523,718 61,792,674
Loans receivable, net...................................................... 199,433,952 166,387,650
Loans held for sale........................................................ 6,187,029 1,345,615
Accrued interest receivable................................................ 1,957,750 1,513,146
Premises and equipment, net................................................ 5,692,249 4,534,281
Other assets............................................................... 2,669,198 2,146,617
-------------- --------------
Total assets............................................................... $ 280,126,745 $ 243,087,920
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing........................................................ $ 31,237,779 $ 26,456,357
Interest bearing........................................................... 177,260,157 158,243,971
-------------- --------------
Total deposits............................................................. 208,497,936 184,700,328
Borrowed funds............................................................. 14,319,143 11,300,000
Securities sold under agreements to repurchase............................. 15,787,096 8,657,583
Other liabilities.......................................................... 2,202,729 1,515,231
-------------- --------------
Total liabilities.......................................................... 240,806,904 206,173,142
-------------- --------------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized; 2,000,000 shares issued
and outstanding (2,000,000 shares
authorized; 1,000,000 shares issued in 1997)............................ 2,000,000 1,000,000
Additional paid-in capital................................................. 5,622,680 5,622,680
Retained earnings.......................................................... 30,844,948 29,768,536
Accumulated other comprehensive income..................................... 852,213 523,562
-------------- --------------
Total stockholders' equity................................................. 39,319,841 36,914,778
-------------- --------------
Total liabilities and stockholders' equity................................. $ 280,126,745 $ 243,087,920
============== ==============
</TABLE>
See accompanying notes.
-3-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
- --------------------------------------------------------------------------------
Nine Months and Three Months ended September 30, 1998 and 1997
Nine Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans .............................................. $ 12,767,142 $ 10,942,791 $ 4,569,407 $ 3,957,471
Available-for-sale securities......................... 2,636,948 2,755,239 842,772 922,224
Federal funds sold.................................... 19,927 59,188 14,368 30,639
------------- ------------- ------------ ------------
Total interest income.................................... 15,424,017 13,757,218 5,426,547 4,910,334
Interest expense
Deposits ............................................. 5,647,703 5,201,613 1,932,502 1,819,426
Borrowed funds........................................ 563,351 206,812 211,369 83,843
Securities sold under agreements to repurchase........ 342,682 242,595 155,906 97,603
------------- ------------- ------------ ------------
Total interest expense................................... 6,553,736 5,651,020 2,299,777 2,000,872
------------- ------------- ------------ ------------
Net interest income...................................... 8,870,281 8,106,198 3,126,770 2,909,462
Provision for possible loan losses....................... 300,000 0 150,000 0
------------- ------------- ------------ ------------
Net interest income after provision for
possible loan losses.................................. 8,570,281 8,106,198 2,976,770 2,909,462
------------- ------------- ------------ ------------
Noninterest income
Service charges....................................... 416,835 388,380 147,382 135,205
Net realized gain on sale of available-for-sale
loans............................................... 912,361 226,622 226,584 78,698
Loan servicing fee.................................... 145,562 155,382 50,836 50,081
Net realized gain (loss) on sale of available-for-sale
securities.......................................... (5,647) 75,066 0 23,479
Other ............................................... 216,574 279,558 74,268 92,835
------------- ------------- ------------ ------------
Total noninterest income................................. 1,685,685 1,125,008 499,070 380,298
Noninterest expenses
Salaries and employee benefits......................... 2,623,603 2,197,546 986,203 684,958
Occupancy.............................................. 410,443 270,571 100,336 92,230
Furniture and fixtures................................. 432,512 364,538 158,483 121,536
Michigan single business tax........................... 141,566 153,100 42,566 53,276
Stationery, supplies, printing........................ 174,979 19,981 57,591 6,625
Other ................................................ 1,206,051 1,079,964 523,755 369,447
------------- ------------- ------------ ------------
Total noninterest expenses................................ 4,989,154 4,085,700 1,868,934 1,328,072
------------- ------------- ------------ ------------
Income before federal income taxes........................ 5,266,812 5,145,506 1,606,906 1,961,688
Federal income taxes...................................... 1,540,400 1,576,000 474,000 599,404
------------- ------------- ------------ ------------
Net income................................................ $ 3,726,412 $ 3,569,506 $ 1,132,906 $ 1,362,284
============= ============= ============ ============
Net income per share of common stock (basic).............. $ 1.86 $ 1.77 $ 0.57 $ 0.68
============= ============= ============ ============
</TABLE>
See accompanying notes.
-4-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months and Three Months ended September 30, 1998 and 1997
Nine Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other comprehensive income before income taxes:
Change in unrealized gain on
available-for-sale securities.................. $ 497,956 $ 210,792 $ 252,592 $ 294,192
Income tax expense related to
other comprehensive income..................... (169,305) (71,669) (85,881) (100,025)
---------- ----------- ----------- ----------
Other comprehensive income, net of
income taxes................................... 328,651 139,123 166,711 194,167
Net income............................................... 3,726,412 3,569,506 1,312,906 1,362,284
---------- ----------- ----------- ----------
Comprehensive income..................................... $4,055,063 $ 3,708,629 $1,479,617 $1,556,451
========== =========== =========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended September 30
1998 1997
---- ----
<S> <C> <C>
Shares of common stock issued
and outstanding
Balance, beginning of period......................... 1,000,000 1,006,174
2 for 1 common stock split effected in the form
a dividend........................................ 1,000,000 0
------------- -------------
Balance, end of period............................... 2,000,000 1,006,174
============= =============
Common stock
Balance, beginning of period......................... $ 1,000,000 $ 1,006,174
2 for 1 common stock split effected in the form
a dividend........................................ 1,000,000 0
------------- -------------
Balance, end of period............................... 2,000,000 1,006,174
============= =============
Additional paid-in-capital.................................. 5,622,680 6,036,338
============= =============
Retained earnings
Balance, beginning of period......................... 29,768,536 28,258,182
Net income........................................... 3,726,412 3,569,506
2 for 1 common stock split effected in the form
a dividend........................................ (1,000,000) 0
Cash dividends....................................... (1,650,000) (2,545,620)
------------- -------------
Balance, end of period............................... 30,844,948 29,282,068
============= =============
Accumulated other comprehensive income
Balance, beginning of period......................... 523,562 242,922
Net unrealized gain on available-for-sale
securities........................................ 328,651 139,123
------------- -------------
Balance, end of period............................... 852,213 382,045
------------- -------------
Total stockholders' equity.................................. $39,319,841 $36,706,625
============= =============
</TABLE>
See accompanying notes.
-6-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................ $ 3,726,412 $ 3,569,506
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization................... 343,581 319,243
Proceeds from sales of loans held
for sale..................................... 48,587,394 12,365,127
Disbursements for loans held for sale........... (52,516,447) (13,078,505)
Net loss/(gain) on sales of available-for-
sale securities ............................. 5,646 (75,066)
Net gain on sales of loans held for sale....... (912,361) (226,622)
Net amortization of investment premiums......... 152,189 160,287
Changes in operating assets and liabilities
which provided (used) cash:
Accrued interest receivable............... (444,604) (129,670)
Other assets.............................. (522,581) (206,921)
Other liabilities......................... 687,497 92,157
------------- ------------
Net cash (used in) provided by operating activities......... (893,274) 2,789,536
------------- ------------
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities........................... 8,174,825 8,036,277
Proceeds from sales................................ 2,009,298 3,028,076
Purchases.......................................... (5,744,350) (12,713,959)
Net increase in loans held for investment............. (33,046,302) (12,756,251)
Purchases of premises and equipment................... (1,501,549) ( 165,180)
------------- ------------
Net cash used in investing activities....................... (30,108,078) (14,571,037)
------------- ------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW
accounts and savings deposits...................... 17,284,297 1,280,382
Net increase in time deposits......................... 6,513,311 10,294,306
Net increase in borrowed funds........................ 3,019,143 2,200,000
Net increase in securities sold under agreements
to repurchase...................................... 7,129,513 2,132,039
Common stock dividends paid........................... (1,650,000) (2,545,620)
------------- ------------
Net cash provided by financing activities................... 32,296,264 13,361,107
------------- ------------
Net increase in cash and cash equivalents................... 1,294,912 1,579,606
Cash and cash equivalents, beginning of period.............. 5,367,937 6,799,085
------------- ------------
Cash and cash equivalents, end of period.................... $ 6,662,849 $ 8,378,691
============= ============
</TABLE>
See accompanying notes.
-7-
<PAGE>
O.A.K. FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 1997.
NOTE 2 STOCKHOLDERS EQUITY
On May 7, 1998, the Board of Directors declared a 2-for-1 split of the
Corporation's common stock with an effective date of July 1, 1998 by means of a
one-for-one stock dividend to shareholders of record on June 1, 1998. The par
value of the common stock remained at $1 per share. As a result, $1,000,000,
representing the total par value of the new shares issued, has been transferred
from retained earnings to common stock. All references in the consolidated
financial statements to amounts per share and to the number of shares have been
restated to give retroactive effect to the stock split.
NOTE 3 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number
of common shares outstanding. The weighted number of common shares outstanding
used in the computation was 2,000,000 for the nine month period ended September
30, 1998 and 2,012,348 shares for the same period in 1997.
NOTE 4 ADOPTION OF SFAS NO. 130
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, on January 1, 1998. The Statement
establishes standards for reporting and displaying comprehensive income and its
components. SFAS No. 130 requires that all components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. For the Corporation, comprehensive income includes
net income and changes in unrealized gains and losses on available-for-sale
securities.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
O.A.K. Financial Corporation (the "Corporation") is a single bank holding
company whose sole subsidiary is Byron Center State Bank (the Bank). The Bank
has nine banking offices serving nine communities in Kent, Ottawa and Allegan
Counties. Neither the Corporation nor the Bank has had any acquisition activity
in their respective histories.
The following is management's discussion and analysis of the factors that
influenced O.A.K. Financial Corporation's financial performance. The discussion
should be read in conjunction with the Corporation's 1997 annual report and with
the unaudited financial statements and notes.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $1,132,906 for the three months ended September 30,
1998, compared to $1,362,284 for the same period in 1997. This is a 16.83%
decrease over the same period in 1997. Net income for the nine month period
ended September 30, 1998 was $3,726,412, compared to $3,569,506 for the same
period in 1997. This is a 4.40% increase over the same period in 1997. Return on
average equity was 11.65% for the three months ended September 30, 1998 and
15.04% for 1997. Return on average assets was 1.64% for the three months ended
September 30, 1998 and 2.34% for 1997. Return on average equity was 13.19% for
the nine months ended September 30,1998 and 13.47% for 1997. Return on average
assets was 1.92% and 2.13% for the nine months ended September 30, 1998 and
1997, respectively.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Nine Months and Three Months Ended September 30,
Nine Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income...................................... $ 3,726 $ 3,570 $ 1,133 $ 1,362
Per Share(1).................................. $ 1.86 $ 1.77 $ 0.57 $ 0.68
Earnings ratios:
Return on average assets...................... 1.92% 2.13% 1.64% 2.34%
Return on average equity...................... 13.19% 13.47% 11.65% 15.04%
(1) As adjusted for 2 for 1 common stock split effected in the form of a
dividend.
</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 the periods indicated:
-9-
<PAGE>
<TABLE>
Table 2 Interest Yields and Costs
Nine Months and Three Months ended September 30
Nine Months
1998 1997
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 474 $ 20 5.62% $ 1,410 $ 59 5.61%
Securities:
Taxable 38,610 1,824 6.32% 41,566 2,022 6.51%
Tax-exempt 19,457 1,132 7.78% 16,289 1,018 8.35%
Loans(1)(2) 186,751 12,790 9.16% 153,439 10,964 9.55%
----------- ---------- --------- ---------
Total earning assets/
total interest income 245,292 15,766 8.59% 212,704 14,063 8.84%
Cash and due from
banks 6,320 4,898
Unrealized Gain/Loss 1,003 169
All other assets 8,970 8,568
Allowance for loan loss (2,608) (2,458)
Total assets: $258,977 $223,881
======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 69,353 $ 1,480 2.85% $ 63,498 $ 1,424 3.00%
Time 98,207 4,168 5.67% 89,023 3,778 5.67%
Fed. Funds Purchased 13,407 445 4.44% 8,637 260 4.03%
Other Borrowed Money 10,263 461 6.01% 4,202 189 6.02%
--------- -------- ------ -------- -------
Total interest bearing 191,230 6,554 4.58% 165,360 5,651 4.57%
-------- -------
liabilities/total
interest expense
Noninterest bearing 27,944 22,007
deposits
All other liabilities 2,027 1,717
Stockholders' Equity:
Unrealized Holding
Gain/Loss 662 112
Common Stock,
Surplus,
Retained Earnings 37,114 34,685
--------- ---------
Total liabilities and
stockholders' equity: $258,977 $ 223,881
======== =========
Interest spread 8,870 4.01% 8,106 4.27%
Net interest income-FTE $9,212 $8,412
====== ======
Net Interest Margin as a
Percentage of Average
Earning Assets 5.02% 5.29%
===== =====
-10-
</TABLE>
<PAGE>
<TABLE>
Table 2 Interest Yields and Costs
Nine Months and Three Months ended September 30
Three Months
1998 1997
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
Assets:
<S> <C> <C> <C> <C> <C> <C>
Fed. funds sold $ 1,017 $ 14 5.64% $ 2,142 $ 31 5.67%
Securities:
Taxable 37,021 572 6.13% 41,559 673 6.42%
Tax-exempt 19,603 377 7.62% 16,580 346 8.27%
Loans(1)(2) 200,549 4,578 9.06% 159,169 3,964 9.88%
-------- ------ --------- --------
Total earning assets/
total interest income 258,190 5,541 8.51% 219,450 5,014 9.06%
Cash and due from
banks 7,219 5,231
Unrealized Gain/Loss 1,037 381
All other assets 9,933 8,567
Allowance for loan loss (2,705) (2,530)
Total assets: $273,674 $231,099
======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 74,238 $ 527 2.81% $ 63,944 $ 489 3.04%
Time 99,605 1,406 5.60% 92,070 1,330 5.73%
--------
Fed. Funds Purchased 17,049 187 4.37% 9,456 99 4.14%
Other Borrowed Money 11,871 180 6.00% 5,345 83 6.14%
--------- ------ --------- --------
Total interest bearing 202,763 2,300 4.50% 170,815 2,001 4.65%
------ --------
liabilities/total
interest expense
Noninterest bearing 30,180 23,161
deposits
All other liabilities 2,163 1,784
Stockholders' Equity:
Unrealized Holding
Gain/Loss 685 251
Common Stock,
Surplus,
Retained Earnings 37,883 35,088
-------- --------
Total liabilities and
stockholders' equity: $273,674 $231,099
======== ========
Interest spread 3,127 4.01% 2,909 4.41%
Net interest income-FTE $3,241 $3,013
====== ======
Net Interest Margin as a
Percentage of Average
Earning Assets 4.98% 5.45%
===== =====
-10-
</TABLE>
<PAGE>
(1) Non-accruing 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 for the nine months
ended September 30, 1998 of $135,969 and $85,519 in 1997. For the
three months ended September 30, 1998 and 1997, the amounts were
$51,210 and $55,874, respectively.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $228,000 to $3,241,000 for the
three month period ended September 30, 1998, a 7.56% increase from the same
period in 1997. The major factors for the increase in net interest income for
the three months ended September 30, 1998 were non-interest bearing deposits
averaged $7,019,000 higher during the three month period ended September 30,
1998 than in the same period in 1997 and the loan portfolio balance averaged
$41,380,000 higher during the three month period ended September 30, 1998
compared to 1997. Earning assets averaged $38,740,000, 17.65% higher for the
three month period ended September 30, 1998 compared to 1997; this volume change
resulted in an additional $555,000 in fully taxable equivalent (FTE) interest
income. The asset growth for the three months ended September 30, 1998 was
primarily funded by a $7,535,000 increase in time deposits and a $6,526,000
increase in other borrowed money and a $7,019,000 increase in non-interest
bearing deposits . For the three months ended September 30, 1998 the average FTE
interest rate earned on assets decreased .55%, decreasing FTE interest income by
$390,000. The major factor of the decrease was lower yields on the investment
portfolio and the loan portfolio. The average interest rate paid on deposits,
fed funds purchased and other borrowed money decreased .15%, decreasing interest
expense by $63,000. The net difference between interest rates earned and paid
was a $327,000 decrease in FTE net interest income. For the three months ended
September 30, 1998 the net interest yield decreased .47% versus the same period
in 1997, management expects this trend to continue, but at a more stable pace.
The company is benefiting from current mergers and acquisitions in it's market
area, new customers opening lower interest bearing accounts. For the nine month
period ended September 30, 1998 tax equivalent net interest income increased
$800,000 to $9,212,000, a 9.51% increase from the same period in 1997. The major
factors for the increase in net interest income for the nine months ended
September 30, 1998 was noninterest bearing deposits averaged $5,937,000 higher
in 1998 than in the same period in 1997 and the loan portfolio balance averaged
$33,312,000 higher in 1998 compared to 1997. Earning assets increased
$32,588,000, 15.32% increase over the nine months ended September 30, 1997. The
average FTE interest rate earned on assets decreased .25%, decreasing FTE
interest income by $584,000 and average rate paid on deposits, fed funds
purchased and other borrowed money increased .01%, decreasing interest expense
by $42,000. The difference between interest rates earned and paid was a $800,000
increase in FTE net interest income. The net interest yield decreased .27% for
the nine month period ended September 30, 1998 versus the same the same period
in 1997.
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.
-11-
<PAGE>
Table 3 Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30,
1998 Compared to 1997
Amount of
Increase/(Decrease)
Due to Change in
Nine Months Three Month
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............... $ (39) $ 0 $ (39) $ (16) $ (1) $ (17)
Securities:
Taxable...................... (140) (58) (198) (70) (31) (101)
Tax Exempt................... 184 (70) 114 58 (27) 31
Loans.......................... 2,282 (456) 1,826 945 (331) 614
--------- -------- --------- --------- --------- ---------
Total interest income.......... 2,287 (584) 1,703 917 (390) 527
Interest Expense
Interest bearing deposits
Savings/Now accounts........... 125 (69) 56 73 (35) 38
Time........................... 390 0 390 106 (30) 76
Fed. Funds Purchased........... 158 27 185 84 4 88
Other Borrowed Money........... 272 0 272 99 (2) 97
--------- -------- ---------- --------- --------- ---------
Total interest expense......... 945 (42) 903 362 (63) 299
--------- -------- ---------- --------- --------- ---------
Net Interest Income (FTE) $ 1,342 $ (542) $ 800 $ 555 $ (327) $ 228
========= ======== ========== ========= ========= =========
</TABLE>
-12-
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Nine Months and Three Months ended September 30,
1998 Compared to 1997
Nine Months Three Months
------------- -------------
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Service charges on deposit accounts................. $ 417 $ 388 $ 147 $ 135
Net gains (losses) on asset sales:
Loans........................................... 912 227 227 79
Securities...................................... (6) 75 0 23
Other............................................... 363 435 125 143
-------- --------- -------- -------
Total noninterest income....................... $ 1,686 $ 1,125 $ 499 $ 380
======== ========= ======== =======
</TABLE>
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 Corporation
retains the servicing rights of these loans. Noninterest income increased
$119,000 or 31% for the three month period ended September 30, 1998 versus 1997.
The increase was due primarily to a $148,000 increase in gains on real estate
mortgage loan sales, offset by a $23,000 decrease on gains of securities
available-for-sale. For the nine months ended September 30,1998 noninterest
income increased $561,000 or 50% over the same period in 1997. The increase was
due primarily to a $685,000 increase in gains real estate mortgage loan sales,
and a $81,000 decrease on gains of securities available-for-sale.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30
1998 and 1997
Nine Months Three Months
------------- -------------
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Salaries and employee benefits.................. $ 2,624 $ 2,198 $ 986 $ 685
Occupancy and equipment......................... 843 635 259 214
FDIC assessment................................. 21 20 7 7
Postage......................................... 57 62 35 27
Printing and supplies........................... 175 84 58 32
Marketing....................................... 164 117 62 44
Michigan Single Business Tax.................... 142 153 43 53
Other........................................... 963 817 419 266
----------- ----------- ----------- ------------
Total noninterest expense.................. $ 4,989 $ 4,086 $ 1,869 $ 1,328
========== =========== =========== ============
</TABLE>
Noninterest expense increased $541,000 or 40.74% for the three month period
ended September 30, 1998 versus 1997. The major factors were a $301,000
increase, 43.94% in salaries and employee benefits and a $45,000 increase,
21.03% in occupancy and equipment expense and a $26,000 increase, 81.25% in
stationery, supplies and printing expense. The increases in salary and occupancy
expenses are primarily related to 2 new branches, one in Zeeland, Michigan and
one in Hamilton, Michigan. The increase in supplies and printing expense was a
result of additional forms and supplies needed for the bank and for the new
branches. The other noninterest expenses increased $153,000, 57.52% for the
three month period ended September 30, 1998 versus 1997. For the nine month
period ended September 30, 1998 noninterest expense increased $903,000 to
$4,989,000 or a 22.10% increase, principally due to
-13-
<PAGE>
salaries and employee benefits expense which increased $426,000 to $2,624,000 a
19.38% increase, a 32.76% increase in occupancy expenses, $208,000 and a $91,000
increase in stationery, supplies and printing expenses, 108.33% The other
noninterest expenses increased $146,000, 17.87% for the nine month period ended
September 30, 1998 versus 1997.
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Nine months and three Months
Ended September 30, 1998 and 1997
1998 1997
------ -----
<S> <C> <C>
Nonaccrual loans....................................... $ 100 $ 189
90 days or more past due & still accruing.............. 103 492
-------- --------
Total Nonperforming Loans......................... 203 681
Other real estate...................................... 0 0
-------- --------
Total Nonperforming Assets......................... $ 203 $ 681
======== ========
Nonperforming loans as a percent of total loans........ .10% .42%
Nonperforming assets as a percent of total loans....... .10% .42%
Nonperforming loans as a percent of the loan loss
reserve............................................. 7.23% 26.85%
</TABLE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Nine months and three months
Ended September 30, 1998 and 1997
Nine Months Three Months
1998 1997 1998 1997
Loans:
<S> <C> <C> <C> <C>
Average daily balance of loans for the period......... $186,751 $153,439 $200,549 $159,169
Amount of loans outstanding at end of period.......... 208,429 160,859 208,429 160,859
Allowance for loan losses:
Balance at beginning of period........................ 2,565 2,376 2,639 2,505
Loans charged off:
Real estate........................................ 0 0 0 0
Commercial......................................... 73 0 3 0
Consumer........................................... 72 80 8 55
----------- ----------- ----------- ----------
Total charge-offs................................ 145 80 11 55
Recoveries of loans previously charged off:
Real estate........................................ 0 0 0 0
Commercial......................................... 18 218 5 83
Consumer........................................... 70 22 25 3
----------- ----------- ----------- ----------
Total recoveries................................ 88 240 30 86
----------- ----------- ----------- ----------
Net loans charged off (recoveries).................... 57 (160) (19) (31)
Additions to allowance charged to operations 300 0 150 0
----------- ----------- ----------- ----------
Balance at end of period........................ $ 2,808 $ 2,536 $ 2,808 $ 2,536
=========== =========== =========== ==========
Ratios:
Net loans charged off (recovered) to avg loans
outstanding........................................... .03% (.10%) (.01%) (.02%)
Allowance for loan losses to loans outstanding........ 1.35% 1.58% 1.35% 1.58%
</TABLE>
-14-
<PAGE>
Table 8 Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the weighted
average rates paid thereon:
<TABLE>
Nine Months and Three Months Ended
September 30, 1998 and 1997
Nine Months Three Months
------------- -------------
1998 1997 1998 1997
------ ------ ------ -----
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand............ $ 27,944 $ 22,007 $ 30,180 $ 23,161
MMDA/Savings and NOW accounts......... 69,353 2.85% 63,498 3.00% 74,238 2.81% 63,944 3.04%
Time.................................. 98,207 5.67% 89,023 5.67% 99,605 5.60% 92,070 5.73%
-------- ----- -------- ----- -------- ----- -------- -----
Total Deposits.................... $195,504 3.86% $174,528 3.99% $204,023 3.76% $179,175 4.03%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of September 30, 1998:
<TABLE>
Amount
<S> <C>
Three months or less...................................... $ 4,878
Over 3 months through 6 months............................ 2,246
Over 6 months through 1 year.............................. 3,425
Over 1 year............................................... 3,733
---------
$ 14,282
=========
</TABLE>
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $37,039,000, 15.24% to $280,127,000 from December
31, 1997 to September 30, 1998. The significant changes were an increase in
loans receivable, net of $33,046,000, a 19.86% increase and an increase in loans
held for sale of $4,841,000 a 359.79% increase. Deposits increased $23,798,000,
12.88% to $208,498,000. Non-interest bearing deposits increased $4,781,000 and
interest bearing deposits increased $19,016,000. The Corporation expects
deposits to increase through-out the remainder of the year. Borrowed funds
increased $3,019,000, 26.72% and securities sold under agreements to repurchase
increased $7,130,000, 82.35%.
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 2.38% of total assets as of September 30,
1998 versus 2.21% as of December 31, 1997. For the nine month period ended
September 30, 1998, $893,000 in net cash was used by operations, investing
activities used $30,108,000, and financing activities provided $32,296,000. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $1,295,000 increase in cash and cash equivalents during the
nine month period ended September 30, 1998.
The Corporation's liquidity is considered adequate by management.
-15-
<PAGE>
CAPITAL
The capital of the Corporation consists of common stock, additional paid-in
capital, retained earnings and net unrealized gain(loss) on available for sale
securities. For the nine month period ended September 30, 1998 capital increased
$2,405,000, which includes a $329,000 unrealized gain on investment securities
available for sale.
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 September 30, 1998:
Table 9 Capital Resources (in thousands)
<TABLE>
Regulatory Requirements
September 30
Adequately Well
Capitalized Capitalized 1998 1997
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital......................... $37,758 $35,616
Tier 2 capital......................... 2,789 2,175
------- -------
Total qualifying capital............ $40,547 $37,791
======= =======
Ratio of equity to total assets
Tier 1 leverage ratio.................. 4% 5% 13.82% 15.46%
Tier 1 risk-based capital.............. 4% 6% 16.93% 20.51%
Total risk-based capital............... 8% 10% 18.18% 21.77%
</TABLE>
Year 2000 Issue
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements and to collect loans from customers whose
operations are negatively affected by year 2000 issue. The Corporation has an
internal task force to assess year 2000 compliance by the Corporation and its
vendors. In addition, the Bank asks commercial borrowers about year 2000
compliance as part of the loan application and review process. Management does
not anticipate that the Corporation will incur material operating expenses or be
required to invest heavily in computer system improvements to be year 2000
compliant. Nevertheless, the inability of the Corporation to successfully
address all year 2000 issues could result in interruptions in the Corporation's
business and have a material adverse effect on the Corporation's results of
operations.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Corporation and the Bank include, but are
not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information
-16-
<PAGE>
concerning the Corporation and its business, including additional factors that
could materially affect the Corporation's financial results, is included in the
Corporation's filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Corporation currently does not enter into futures,
forwards, swaps, or options. However, the Corporation is party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions. Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised.
The Corporation's exposure to market risk is reviewed on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize income. Management
realizes certain risks are inherent and that the goal is to identify and
minimize the risks. Tools used by management include the standard GAP report and
a simulation model. The Corporation complements its stable core deposit base
with alternate sources of funds, which includes advances from the Federal Home
Loan Bank and on a very limited basis, jumbo certificates of deposit from
outside its market area. Management evaluates the funding needs and makes a
decision based on current interest rates and terms whether to fund internally or
from alternate sources. To date, the Corporation has not employed the use of
derivative financial instruments in managing the risk of changes in interest
rates. The Corporation has no market risk sensitive instruments held for trading
purposes. Management considers the Corporation's market risk to be reasonable at
this time.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) Reports on Form 8K - None.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on For 10-Q for the quarter
ended September 30, 1998 to be signed on its behalf by the undersigned hereunto
duly authorized.
O.A.K. FINANCIAL CORPORATION
/s/ John A. Van Singel
John A. Van Singel
(Chief Executive Officer)
/s/ Martin R. Braun
Martin R. Braun
(Principal Accounting Officer)
DATE: 8/16/98
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,662,849
<INT-BEARING-DEPOSITS> 177,260,157
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,523,718
<INVESTMENTS-CARRYING> 56,232,503
<INVESTMENTS-MARKET> 57,523,718
<LOANS> 208,428,545
<ALLOWANCE> 2,807,564
<TOTAL-ASSETS> 280,126,745
<DEPOSITS> 208,497,936
<SHORT-TERM> 18,106,239
<LIABILITIES-OTHER> 2,202,728
<LONG-TERM> 12,000,000
0
0
<COMMON> 2,000,000
<OTHER-SE> 37,319,841
<TOTAL-LIABILITIES-AND-EQUITY> 280,126,745
<INTEREST-LOAN> 12,767,142
<INTEREST-INVEST> 2,636,948
<INTEREST-OTHER> 19,927
<INTEREST-TOTAL> 15,424,017
<INTEREST-DEPOSIT> 5,647,703
<INTEREST-EXPENSE> 6,553,736
<INTEREST-INCOME-NET> 8,870,281
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> (5,647)
<EXPENSE-OTHER> 4,989,154
<INCOME-PRETAX> 5,266,812
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,726,412
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 4.01
<LOANS-NON> 100,000
<LOANS-PAST> 103,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,565,000
<CHARGE-OFFS> 145,000
<RECOVERIES> 88,000
<ALLOWANCE-CLOSE> 2,808,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
