FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
-----------
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 8-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based on a per share price of $69 as of March
1, 1998, was $55,230,291 (common stock, $1.00 par value). As of December 31,
1997, there were outstanding 1,000,000 shares of the Company's Common Stock
($1.00 par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 16, 1998 are incorporated by reference into Part III of this
report.
<PAGE>
Item 1. 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 December 31, 1997, the Bank had approximately 104 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 boxes 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,
1997, the Bank's certificates of deposits of $100,000 or more constituted
approximately 6% 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 74.1% and 74.8% of total revenues for the periods ended December
31, 1997, and December 31, 1996, respectively. Interest on investment
securities, including short-term investments and federal funds sold, constituted
approximately 18.6% and 19.2% of total revenues in 1997 and 1996. 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. 69.6 percent of the Bank's loan portfolio is in fixed rate loans
as of December 31, 1997. Most of these loans, approximately 91.7%, mature within
five years of issuance. Approximately $9,757,000 in loans (or roughly 5.8% of
the Bank's total loan portfolio) have fixed rates with maturities exceeding five
years. 40.9 percent of the Bank's interest-bearing deposits are held in savings,
NOW and MMDAs, all of which are variable rate products. Of the $93,568,000 in
certificates, approximately $65,980,000 mature within one year, with the balance
maturing within a five year period.
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,
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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 $750,000 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 20 on page 27, the Bank's ratio of
rate sensitive assets to rate sensitive liabilities as of December 31, 1997, was
a 23% positive gap, compared to a 4% negative gap at December 31, 1996. As
indicated on page 27, 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, Huntington Bank, Michigan National Bank and United
Bank of Michigan. Each of these financial institutions, which are headquartered
in larger metropolitan areas, have significantly greater assets and financial
resources than the Company, with the exception of United Bank of Michigan. 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% 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 be 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 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.
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Growth of Bank
The following table sets forth certain financial information regarding the
growth of the Bank (and accordingly, excludes holding company data):
<TABLE>
Balances as of December 31,
(in thousands)
==========================================================================================================================
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $241,283 $216,755 $210,307 $187,079 $176,858
Loans, Net of Unearned Income 168,953 145,069 142,813 127,286 115,176
Securities 59,988 57,302 56,702 45,598 47,383
Noninterest-Bearing Deposits 26,459 23,807 19,211 16,478 16,088
Interest-Bearing Deposits 158,244 146,442 150,807 134,603 128,128
Total Deposits 184,703 170,249 170,018 151,081 144,216
Stockholders' Equity 35,107 34,744 31,979 27,728 25,772
====================================== ================= =============== =============== =============== ===============
</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 off-site ATMs. The Bank
leased space at 10500 Chicago Drive in Zeeland, Michigan for its next branch
which is expected to open in March 1998.
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 such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on the Company, the Bank and the business of the Company and the
Bank.
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 economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"),
the Internal Revenue Service, and state taxing
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authorities. The effect of such statutes, regulations and policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to 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 Bank or the Company.
Federal law and regulations 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 Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board 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, if the Commissioner deems the Bank's capital to be
impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by 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 company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board 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.
Effective September 29, 1995, bank holding companies may 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 company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, 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 Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations,
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such permissible non-banking activities include such things as mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. As a result of recent amendments to the BHCA,
well-capitalized and well-managed bank holding companies may engage de novo in
certain types of non-banking activities without prior notice to, or approval of,
the Federal Reserve Board, provided that written notice of the new activity is
given to the Federal Reserve Board within 10 business days after the activity is
commenced. If a bank company wishes to engage in a non-banking activity by
acquiring a going concern, prior notice and/or prior approval will be required,
depending upon the activities in which the company to be acquired is engaged,
the size of the company to be acquired and the financial and managerial
condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank 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 the bank company. The Federal Reserve Board 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.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total assets, and (ii)
a risk-based requirement expressed as a percentage of total risk-weighted
assets. The leverage capital requirement consists of a minimum ratio of Tier 1
capital (which consists principally of shareholders' equity) to total assets of
3% for the most highly rated companies, with minimum requirements of 4% to 5%
for all others. The risk- based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. 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 Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received by it in the form of dividends
paid by the Bank. Thus, the Company's ability to pay dividends to its
shareholders is indirectly limited by statutory restrictions on the Bank's
ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank -
Dividends." Further, the Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which can only be funded in ways that weakened the bank company's
financial health, such as by borrowing. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies. Similar enforcement powers over the Bank are possessed by the
FDIC. The "prompt corrective action" provisions of federal law and regulation
authorizes the Federal Reserve Board to restrict the payment of dividends by the
Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal
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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 Company is authorized to issue preferred stock but it has no
current plans to issue any such preferred stock.
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, 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. These agencies and the federal and state laws applicable to the Bank and
its operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 1998, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category. For 1997, the Bank paid $26,753 in BIF insurance
assessments, representing a premium of .02%.
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.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay FICO assessments at a rate equal to
approximately 0.013% of deposits. Between January 1, 2000 and the maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits
Capital Requirements. 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
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all others, and a risk-based capital requirement consisting of a minimum ratio
of total capital to total risk-weighted assets of 8%, at least one-half of which
must be Tier 1 capital. Tier 1 capital consists principally of shareholders'
equity. These capital requirements are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk
profiles of individual institutions. For example, FDIC regulations provide that
higher capital may be required to take adequate account of, among other things,
interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. As a condition to
regulatory approval of the Bank's formation, the Bank was required to have an
initial capitalization sufficient to provide a ratio of Tier 1 capital to total
estimated assets of at least 8% at the end of the third year of operation.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<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>
As of December 31, 1997, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. 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. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. 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
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issued and outstanding) have been paid in full. The Bank's Articles of
Incorporation do not authorize the issuance of preferred stock and there are no
current plans to seek such authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by the Bank, if such
payment is determined, by reason of the financial condition of the Bank, to be
an unsafe and unsound banking practice.
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
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. 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,
federal law 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.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. 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.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. 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, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. 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 directors and officers.
8
<PAGE>
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "IBBEA") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
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 IBBEA only if specifically
authorized by state law. The legislation allowed individual states to "opt-out"
of interstate branching authority by enacting appropriate legislation prior to
June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) 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 by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) 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, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
Item 2. 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. The Bank is in the process of
renovating a leased office space at 10500 Chicago Drive, Zeeland, Michigan,
which will open in March 1998.
Item 3. 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 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
9
<PAGE>
Additional Item - Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among the officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the
Company's officers as of December 31, 1997:
<TABLE>
Year Became
Name Age Position with Company an Officer
<S> <C> <C> <C>
John A. Van Singel 43 President, CEO and director of the Company 1976
and the Bank
Lois Smalligan 65 Director of the Company and the Bank, Vice 1975
President of the Bank
John Peterson 49 Executive Vice President of the Bank 1983
Forrest Bowling 49 Vice President of the Bank 1988
Martin Braun 42 Vice President of the Bank 1988
</TABLE>
[INTENTIONALLY LEFT BLANK]
10
<PAGE>
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
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, 1996, through December 31, 1997, there
were, so far as the Company's management knows, 110 sales of shares of the
Company's Common Stock, involving a total of 73,295 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 $70.00 per share in the fourth
quarter of 1997 and the first quarter of 1998, and the lowest price was $52.00
per share in the third quarter of 1996. To the knowledge of management, the last
sale of Common Stock occurred on February 10, 1998, involving the sale of 194
shares at a price of $70.00 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 1996 and 1997 and through February 10, 1998,
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
1996 High Low
---- ---- ---
<S> <C> <C> <C>
First Quarter......................... $ 49.09 $ 49.09
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
Third Quarter......................... 68.00 63.00
Fourth Quarter........................ 70.00 68.00 $.57
1998 High Low
First Quarter......................... $ 70.00 $ 69.00 $1.00 (2)
</TABLE>
(1) A special dividend of $2.00 per share.
(2) A special dividend of $1.00 per share.
There are 2,000,000 shares of the Company's Common Stock authorized, of
which 1,000,000 shares were issued and outstanding as of February 28, 1998.
There were approximately 620 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.
11
<PAGE>
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.
[INTENTIONALLY LEFT BLANK]
12
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 18,624 $ 17,502 $ 16,268 $ 14,082 $ 12,773
Interest expense 7,693 7,181 6,637 5,371 5,118
Net interest income 10,931 10,321 9,631 8,711 7,655
Provision for loan losses 50 0 275 170 510
Noninterest income 1,542 1,075 919 665 1,523
Noninterest expenses 5,782 5,169 4,511 4,097 3,761
Income before federal 6,641 6,227 5,764 5,109 4,907
income taxes
Net income 4,626 4,375 4,004 3,680 3,396
Per Share Data(1):
Net income 4.60 4.35 3.98 3.66 3.38
Cash dividends declared 3.10 .94 .82 .67 .67
Book Value 36.91 35.32 32.24 27.51 25.55
Weighted average shares
outstanding (1) 1,005 1,007 1,010 1,014 1,015
Balance Sheet Data:
Total assets $243,088 $217,527 $210,880 $187,244 $176,914
Loans, net of unearned income 168,953 145,069 142,813 127,286 115,176
Allowance for loan losses 2,565 2,376 2,305 2,056 2,049
Deposits 184,700 170,221 170,012 151,074 144,111
Stockholders' equity 36,915 35,544 32,559 27,900 25,932
Ratios:
Tax equivalent net interest
income to average earning
assets 5.24% 5.23% 5.42% 5.24% 5.09%
Return on average equity 13.08 12.87 13.21 13.64 13.84
Return on average assets 2.03 2.03 2.07 2.02 2.02
Nonperforming loans to
total loans 0.14 0.82 0.66 0.24 0.63
Tier 1 leverage ratio 15.03 15.97 15.42 15.36 15.45
Dividend payout ratio 67.35 21.54 18.75 16.77 14.56
Equity to asset ratio 15.19 16.34 15.44 14.90 14.66
</TABLE>
(1) At year end.
13
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following financial review presents management's discussion and
analysis of consolidated financial condition and results of operations during
the period of 1995 through 1997. 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 various bank rating
companies. The Company has had twelve consecutive years of returns on average
assets of over 2%. The Company's capital ratio of 15.03% 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 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
re-leveraging 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 has increased its dividend pay-out ratio over the
years from 15% in 1993 to 67% in 1997. However, the 1997 ratio reflects a
special one time $2.00 per share cash dividend paid out in January 1997.
Effective January 22, 1998, the Board of Directors declared a $1.00 per share
special cash dividend resulting in a return of $1,000,000 in excess capital to
the stockholders.
Results of Operations
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income.................................. $4,626 $4,375 $4,004
Per share of common stock................. 4.60 4.35 3.98
Earnings ratios:
Return on average assets.................. 2.03% 2.03% 2.07%
Return on average equity.................. 13.08 12.89 13.21
</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 Company's major categories of assets, liabilities, and
stockholders' equity for the periods indicated:
14
<PAGE>
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Year ended December 31,
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fed. funds sold $ 1,197 $ 67 5.60% $ 2,483 $ 133 5.36% $ 1,850 $ 108 5.81%
Securities:
Taxable 41,684 2,696 6.47 39,831 2,524 6.34 32,540 1,982 6.09
Tax-exempt 16,681 1,373 8.23 14,875 1,283 8.63 15,174 1,355 8.93
Loans(1)(2) 156,657 14,887 9.50 147,529 13,952 9.46 135,557 13,232 9.76
--------- -------- --------- -------- --------- --------
Total earning assets/total
interest income 216,219 $19,023 8.80 204,718 $17,892 8.74 185,121 $16,673 9.01
------- ------- -------
Cash and due from banks 4,956 4,474 3,917
Unrealized Gain(Loss) 289 420 (293)
All other assets 8,427 7,999 7,048
Allowance for loan loss (2,477) (2,462) (2,187)
----------- ---------- ----------
Total assets $227,414 $215,149 $193,606
======== ======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $ 63,927 $ 1,927 3.01% $ 62,076 $ 1,854 2.99% $ 57,751 $ 1,892 3.28%
Time 90,180 5,131 5.69 87,885 4,916 5.59 80,319 4,419 5.50
Fed Funds Purchased 9,038 369 4.08 8,004 301 3.76 4,304 166 3.86
Other Borrowed Money 4,443 266 5.99 1,893 110 5.81 2,843 159 5.59
---------- --------- ---------- --------- ---------
Total interest bearing
liabilities/total
interest expense 167,588 $ 7,693 4.59 159,858 $ 7,181 4.49 145,217 $ 6,637 4.57
-------- -------- --------
Noninterest bearing deposits 22,764 19,762 16,744
All other liabilities 1,773 1,543 1,328
Stockholders' Equity:
Unrealized Holding Gain(Loss) 191 277 (192)
Common Stock, Surplus,
Retained Earnings 35,098 33,709 30,509
--------- --------- ----------
Total liabilities and
stockholders' equity $227,414 $215,149 $193,606
======== ======== ========
Interest spread $10,931 4.21% $10,321 4.25% $ 9,631 4.44%
===== ===== =====
Net interest income-FTE $11,330 $10,711 $10,036
======= ======= =======
Net Interest Margin as
a Percentage of Average
Earning Assets - FTE 5.24% 5.23% 5.20%
===== ===== =====
</TABLE>
15
<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 $249,067 in
1997 and $263,376 in 1996 and $265,562 in 1995.
Net interest income is the principal source of income for the Company. Tax
equivalent net interest income increased $619,000 to $11,330,000, a 5.78%
increase from the same period in 1996. In the prior year, tax equivalent net
interest income increased by 6.7% to $10,711,000 from $10,036,000 in 1995.
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>
1997 Compared to 1996 1996 Compared to 1995
----------------------- ---------------------
Amount of Amount of
Increase/(Decrease) Increase/(Decrease)
Due to Change In Due to Change In
Net Net
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.............. $ (72) $ 6 $ (66) $ 34 $ (8) $ 26
Securities:
Taxable...................... 120 52 172 462 80 542
Tax Exempt 149 (59) 90 (26) (46) (72)
Loans........................... 867 68 935 1,133 (413) 720
-------- -------- -------- ------- ---------- --------
Total interest income........... 1,064 67 1,131 1,603 (387) 1,216
------- -------- ------- ------- ---------- -------
Interest Expense
Interest bearing deposits:
Savings/NOW Accounts......... 56 17 73 129 (167) (38)
Time......................... 131 84 215 423 74 497
Fed Funds Purchased.......... 42 26 68 139 (4) 135
Other Borrowed Money......... 152 4 156 (55) 6 (49)
-------- --------- -------- ---------- ----------- ---------
Total Interest Expense....... 381 131 512 636 (91) 545
------- ------- -------- -------- ---------- -------
Net interest income (FTE)....... $ 683 $ (64) $ 619 $ 967 $ (294) $ 671
====== ========= ======= ======= ======== =======
</TABLE>
The Company's commitment to reinvesting in its communities is evident in
its ratios of loans to assets and loans to deposits, which 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.)
16
<PAGE>
Net interest income as a percent of total interest income FTE was 59.6%,
59.9% and 60.2%, for 1997, 1996 and 1995 respectively. Net interest margin was
5.24%, 5.23% and 5.20% for the same periods.
Interest from loans represents 78.3%, 78.0% and 79.4% of total interest
income for 1997, 1996 and 1995 respectively. Net interest income is strongly
influenced by results of the Bank's lending activities.
Total interest expense increased 7.1% from 1996 to 1997 and also increased
8.2% from 1995 to 1996, the variances are detailed in table 3. 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
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
As a percent of average earning assets
Loans...................................... 72% 72% 73%
Other earning assets....................... 28% 28% 27%
----- ----- -----
Average earning assets.................. 100% 100% 100%
Savings and NOW accounts................... 38% 39% 40%
Time deposits.............................. 54% 55% 55%
Other borrowings........................... 8% 6% 5%
----- ----- -----
Average interest bearing liabilities.... 100% 100% 100%
Earning asset ratio.......................... 95% 95% 96%
</TABLE>
Table 5 - Noninterest Income (in thousands)
<TABLE>
Year Ended December 31
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service charges on deposit accounts ......... $ 527 $ 529 $492
Net gains (losses) on asset sales:
Loans...................................... 414 133 105
Securities................................. 66 13 (4)
Other........................................ 535 400 326
------- ------- ------
Total noninterest income................ $1,542 $1,075 $919
====== ====== ====
</TABLE>
Non-interest Income
Non-interest income consists of service charges on deposit accounts,
service fees, gains on investment securities available-for-sale and gains from
sales of loans to the Federal Home Loan Mortgage Corporation (Freddie Mac). The
Company retains the servicing rights on these loans. Non-interest income
increased $467,000 or 43% for 1997 versus 1996. The increase was primarily due
to a $281,000 increase in gains on real estate mortgage loan sales, a $139,000
increase in brokerage and annuity commissions and a $53,000 increase on gains of
securities available-for-sale.
17
<PAGE>
Table 6 Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
<TABLE>
Year ended December 31
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real estate mortgage loan originations....... $39,112 $40,934 $34,585
Real estate mortgage loan sales.............. 20,567 21,784 16,655
Real estate mortgage loans servicing
rights sold.............................. 0 0 0
Net gains on the sale of real
estate mortgage loans.................... 414 133 105
Net gains as a percent of real
estate mortgage loan sales............... 2.01% 0.61% 0.63%
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $414,000,
$133,000 and $105,000 in 1997, 1996 and 1995 respectively. The increase from
1996 to 1997 of $281,000 was a result of adopting FASB 125 and a more favorable
interest rate environment. The increases from 1995 to 1996 were obtained by
increased loan originations and favorable interest rates.
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 Company's consolidated
financial position and results of operations.
Noninterest Expense
Table 7 - Noninterest Expense (in thousands)
<TABLE>
Year ended December 31
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits............... $3,028 $2,650 $2,170
Occupancy and equipment...................... 897 845 788
FDIC assessment.............................. 27 17 176
Postage...................................... 129 104 93
Printing and supplies........................ 118 132 122
Marketing.................................... 163 161 131
Michigan Single Business Tax................. 220 197 172
Other........................................ 1,200 1,063 859
------ ------- -------
Total noninterest expense.................. $5,782 $5,169 $4,511
====== ====== ======
</TABLE>
Table 7 lists the Bank's most significant noninterest expenses.
Non-interest expense increased $613,000 or 11.9% for 1997 versus 1996.
Salaries and employee benefits increased $378,000 to $3,028,000, a 14.3%
increase which was the major factor for the increase in non-interest expense.
Non-interest expense increased $658,000 or 14.6% in 1996 versus 1995.
Salaries and employee benefits increased $480,000 to $2,650,000, a 22.1%
increase which was the major factor for the increase in non-interest expense.
18
<PAGE>
The 1997 and 1996 increases in salary and employee benefit expense are
related to increased staffing, annual hourly and salary pay adjustments and
increased medical insurance expenses. The increased staffing is a long term
initiative that will be utilized to improve asset quality, regulatory compliance
and build and improve marketing and sales support.
Financial Condition--Summary
During 1997, total assets increased 11.8% to $243,087,920, deposits
increased 8.5% to 184,700,328 and loans grew 16.5% to $168,953,080. The Bank is
emphasizing relationship banking and has competed aggressively to obtain
deposits and loans. A discussion of changes in balance sheet amounts by major
categories follows:
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 Company to earn the highest interest rates available on loans. Loan
demand in the Bank's service area is expected to remain strong 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 servicing rights on substantially all
such sold loans. Over the past six years the Bank has built an eighty-seven
million dollar servicing portfolio with the Federal Home Loan Mortgage
Corporation ("FHLMC"). At December 31, 1997 and 1996, the Bank was servicing
loans of $93,000,000 and $82,000,000, respectively, which relate primarily to
residential mortgages originated by the Bank. The Bank originated $39,112,000
(441 loans) and $40,934,000 (485 loans) in mortgage loans in 1997 and
1996,respectively, and sold to FHLMC $20,567,000 (233 loans) in 1997 and
$21,784,000 (262 loans) in 1996. Repayments and early payoffs were $13,102,000
in 1997 and $17,484,000 in 1996.
The loan portfolio mix at December 31, 1997 consists of 53% commercial real
estate, 23% residential real estate, 16% commercial and 8% consumer installment.
The growth rate of the lending portfolio was 1.6% from 1995 to 1996 and 16.5%
from 1996 to 1997.
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>
Year ended December 31
1997 1996 1995
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial Real Estate..................... $ 90,005 53 $ 72,280 50 $ 71,690 50
Residential Real Estate.................... 38,886 23 33,443 23 33,530 24
Other Commercial........................... 26,380 16 27,452 19 26,912 19
Installment................................ 13,682 8 11,894 8 10,681 7
--------- -- --------- -- --------- --
Total loans............................. $168,953 100% $145,069 100% $142,813 100%
==== ==== ====
Less:
Allowance for Loan Losses................. (2,565) (2,376) (2,305)
---------- ---------- ----------
Total Loans Receivable, Net................ $166,388 $142,693 $140,508
========= ======== ========
</TABLE>
19
<PAGE>
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
$ 750,001 to $1,600,000 Executive Loan Committee
0 to $ 750,000 Loan Committee
0 to $ 250,000 Class 1 Lender
0 to $ 150,000 Class 2 Lender
0 to $ 75,000 Class 3 Lender
0 to $ 30,000 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 Bank has
no foreign loans and there were no concentrations greater than 10% of total
loans that are not disclosed as a separate category in Table 8.
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, 1997 was only .1%. The Bank had net
recoveries of $139,000 and $71,000 in 1997 and 1996 respectively, while net
charge offs were $26,000 in 1995.
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, including loans considered impaired under SFAS No.
118, 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, 1997 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.............. $ 6,735 $ 26,516 $5,635 $ 38,886
Installment.......................... 1,550 11,578 554 13,682
Commercial Real Estate............... 13,492 73,173 3,340 90,005
Other Commercial..................... 15,457 10,587 336 26,380
---------- ---------- -------- --------
Totals......................... $37,234 $121,854 $9,865 $168,953
======= ======== ======
Allowance for Loan Losses............ (2,565)
----------
Total Loans Receivable, Net.......... $166,388
========
</TABLE>
20
<PAGE>
Below is a schedule of 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.................................... $ 4,627 $51,404 $ 56,031
Due after 3 months within 1 year....................... 11,179 0 11,179
Due after one but within five years.................... 91,986 0 91,986
Due after five years................................... 9,757 0 9,757
---------- --------- -----
Total.................................................. $117,549 $51,404 $168,953
======== =======
Allowance for Loan Losses.............................. (2,565)
-----------
Total Loans Receivable, Net............................ $166,388
========
</TABLE>
Table 10 - Nonperforming Assets(in thousands)
<TABLE>
December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans................................................ $ 105 $1,080 $835
90 days or more past due & still accruing....................... 132 114 111
------- --- ---
Total nonperforming loans................................... 237 1,194 946
Other real estate............................................... 45 0 0
-------- ------ ------
Total nonperforming assets.................................. $ 282 $1,194 $946
====== ====== ====
Nonperforming loans as a percent of total loans................. 0.14% 0.82% 0.66%
Nonperforming assets as a percent of total loans................ 0.17% 0.82% 0.66%
Nonperforming loans as a percent of the allowance 50% 41%
for loan losses............................................. 9%
</TABLE>
Nonperforming loans equal 9% of the Bank's allowance for loan losses as of
December 31, 1997, management believes that the allowance for loan losses is
adequate for these loans and the remainder of the lending portfolio. As of
December 31, 1997 there were no other interest bearing assets which required
classification. Management is not aware of any recommendations by regulatory
agencies, which, if implemented, would have a material impact on the Company's
liquidity, capital or operations.
It is expected that the $105,000 in non-accrual loans and the $45,000 in
other real estate will be liquidated without loss in 1998.
The table below presents the interest income that would have been earned on
non-performing loans outstanding at December 31, 1997, 1996, and 1995 had those
loans been accruing interest in accordance with the original terms of the loan
agreement (pro forma interest) and the amount of interest income actually
included in net interest income for those years.
21
<PAGE>
Table 11 - Foregone Interest on Non-Performing Loans
<TABLE>
For the Year Ended December 31
(in thousands)
1997 1996 1995
Non-accrual Restructured Non-accrual Restructured Non-accrual Restructured
<S> <C> <C> <C> <C> <C> <C>
Pro forma interest $11 $25 $212 $ - $103 $ -
Interest earned 8 25 11 - 1 -
----- ---- ----- ----- ---- -----
Foregone interest income $ 3 $ 0 $201 - $102 -
==== ==== ==== ===== ==== =====
</TABLE>
Table 12 - Loan Loss Experience(in thousands)
The following is a summary of loan balances at the end of each period and
their daily average balances, changes in the allowance for possible loan losses
arising from loans charged off and recoveries on loans previously charged off,
and additions to the allowance which have been expensed.
<TABLE>
Year ended December 31
1997 1996 1995
---- ---- ----
Loans:
<S> <C> <C> <C>
Average daily balance of loans for the year.................... $155,286 $146,052 $135,282
Amount of loans outstanding at end of period................... $168,953 $145,069 $142,813
Allowance for loan losses:
Balance at beginning of year................................... $ 2,376 $ 2,305 $ 2,056
Loans charged off:
Real estate.................................................. 0 0 0
Commercial................................................... 0 108 25
Consumer..................................................... 124 71 75
--------- --------- ---------
Total charge-offs........................................ 124 179 100
Recoveries of loans previously charged off:
Real estate.................................................. 0 56 3
Commercial................................................... 224 157 57
Consumer..................................................... 39 37 14
--------- --------- ----------
Total recoveries......................................... 263 250 74
-------- --------- ----------
Net (recoveries) charge off.................................... (139) (71) 26
Additions to allowance charged to operations................... 50 0 275
---------- ----------- ----------
Balance at end of year................................... $ 2,565 $ 2,376 $ 2,305
======== ========= =========
Ratios:
Net (recoveries) charge offs................................... (.09% ) (.05%) .02%
Allowance for loan losses to loans outstanding at year end..... 1.52% 1.64% 1.61%
</TABLE>
Table 13 - Allocation of the Allowance for Loan Losses
The allowance for loan losses is analyzed quarterly 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.
22
<PAGE>
<TABLE>
Year ended December 31
1997 1996 1995
---- ---- ----
% of each % of each % of each
category category category
Allowance to total Allowance to total Allowance to total
Amount loans Amount loans Amount loans
<S> <C> <C> <C> <C> <C> <C>
Commercial..................... $1,895 1.1% $1,734 1.2% $1,707 1.2%
Real estate mortgages.......... 205 .1 188 .1 177 .1
Consumer....................... 179 .1 158 .1 136 .1
Unallocated.................... 286 .2 296 .2 285 .2
------- ------ ------- ------ ------- ----
Total........................ $2,565 1.5% $2,376 1.6% $2,305 1.6%
====== ===== ====== ======
</TABLE>
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type.
Investment Securities
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. The primary objective of
the Company's investing activities is to provide for safety of the principal
invested. Secondary considerations include earnings, liquidity, and the overall
exposure to changes in interest rates. The Company's net holdings of investment
securities increased $3.7 million in 1997. The mortgage backed securities are
issues of the Federal Home Loan Mortgage Corporation, GNMA, and FNMA which pay
monthly amortized principal and interest payments.
Table 14 - Securities Available for Sale Portfolio
<TABLE>
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury and U.S. Government Agencies..................... $ 39,176 $ 40,048 $ 38,584
State and politicial subdivisions............................... 19,604 15,880 16,312
Other........................................................... 3,013 2,143 2,379
---------- --------- ---------
$ 61,793 $ 58,071 $ 57,275
========= ======== ========
</TABLE>
Excluding those holdings of the investment portfolio in U.S. Treasury and
U.S. Government Agency Securities, there were no investments in securities of
any one issuer which exceeded 10% of shareholders' equity.
Table 15 - Schedule of Maturities of Investment Securities and Weighted
Average Yields
The following is a schedule of maturities and their weighted average yield
of each category of investment securities as of December 31, 1997. The weighted
average interest rates have been computed on a fully taxable equivalent basis,
based on amortized cost. The rates shown on securities issued by states and
political subdivisions are stated on a taxable equivalent basis using a 34% tax
rate.
23
<PAGE>
<TABLE>
Maturing
(Dollars in Thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
Estimated Estimated Estimated Estimated Estimated
Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury
and U.S.
Government
Agencies $ - - $ 453 6.28% $ 7,373 6.70% $31,350 6.74% $ - -
States and
Political
Subdivisions 2,458 9.53% 6,102 9.68% 6,394 7.79% 4,650 7.66% - -
Other Securities - - - - - - - - 3,013 7.11%
------- --------- ---------- ---------- -------
$2,458 9.53% $6,555 9.43% $13,767 7.20% $36,000 6.86% $3,013 7.11%
</TABLE>
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 16 indicates a relatively stable base of deposits spread over the
Bank's product lines. Average total deposits grew 4.2% from 1996 to 1997 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. The increase in 1997 resulted primarily in gaining market
share.
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 nine automated
teller machines, three of which are off-site.
Table 16 - Average Daily Deposits (in thousands)
<TABLE>
Average for the Year
1997 1996 1995
Amount % of Assets Amount % of Assets Amount % of Assets
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.............. $ 22,764 10% $ 19,762 9% $ 16,744 9%
NOW accounts............................ 12,687 6 11,840 6 10,335 5
MMDA/Savings ........................... 51,240 22 50,236 23 47,416 25
Time.................................... 90,180 40 87,885 41 80,319 41
--------- ---- --------- ---- --------- --
Total Deposits....................... $176,871 78% $169,723 79% $154,814 80%
======== === ======== === ======== ===
</TABLE>
24
<PAGE>
Table 17 - Average Deposit Balances
The following table sets forth the average deposit balances and the
weighted average rates paid thereon:
<TABLE>
Average for the Year
1997 1996 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.............. $ 22,764 $ 19,762 $ 16,744
NOW Accounts............................ 12,687 2.44% 11,840 2.44% 10,335 2.43%
MMDA/Savings............................ 51,240 3.16 50,236 3.11 47,416 3.46
Time.................................... 90,180 5.69 87,885 5.99 80,319 5.50
--------- ----- -------- ------ --------- ----
Total Deposits....................... $176,871 3.99% $169,723 3.99% $154,814 4.08%
======== ======== ========
</TABLE>
Table 18 - Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1997:
<TABLE>
Amount
<S> <C>
Three months or less............................. $2,923
Over 3 months through 6 months................... 2,083
Over 6 months through 1 year.................... 3,125
Over 1 year...................................... 3,236
-------
$11,367
</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 meets 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.
Market Risk
The Bank 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 Bank has not employed the use of derivative financial instruments
in managing the risk of changes in interest rates.
Capital
A financial institution's capital ratio is looked upon by the regulators
and the public as an indication of its soundness. Table 19 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.
In 1997, the Company paid dividends totaling $3,115,620, approximately 67%
of earnings. In 1996, the Company paid dividends of $942,389, approximately 22%
of earnings, and in 1995 dividends paid were $750,891, approximately 19% of
earnings.
25
<PAGE>
On February 2, 1998, the Company paid a special $1.00 per share dividend.
This is in addition to the anticipated regular dividends for 1998. The Company
will still remain in all the top regulatory categories for adequately and
well-capitalized institutions after paying such dividends.
Table 19 - Capital Resources (in thousands)
<TABLE>
Regulatory Requirements December 31
Adequately Well
Capitalized Capitalized 1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C>
Tier 1 capital..................... $35,689 $34,566 $31,129
Tier 2 capital..................... 2,293 1,976 1,923
--------- --------- --------
Total qualifying capital......... $37,982 $36,542 $33,052
======= ======= =======
Tier 1 leverage ratio.............. 4% 5% 15.03% 15.97% 15.42%
Tier 1 risk-based capital.......... 4% 6% 19.48% 21.92% 20.28%
Total risk-based capital........... 8% 10% 20.74% 23.18% 21.54%
</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 1997, the Bank's one year gap position
averaged a 8% negative gap.
Management was able to influence the gap by selling fixed rate mortgages,
investments/sales of available- for-sale securities that met the criteria that
filled the gap position decided by the Asset/Liability Committee.
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.
26
<PAGE>
Table 20 - Asset/Liability Gap Position (in thousands)
<TABLE>
December 31, 1997
0-3 4-12 1-5 5+
Months Months Years Years Total
Interest earning assets:
<S> <C> <C> <C> <C> <C>
Loans................................... $56,031 $ 11,179 $ 91,986 $ 9,757 $168,953
Securities.............................. 11,652 6,182 9,182 34,777 61,793
Loans held for sale..................... 1,346 0 0 0 1,346
--------- ---------- ----------- ---------- ----------
Total interest earning assets........... 69,029 17,361 101,168 44,534 232,092
-------- -------- --------- -------- ---------
Interest bearing liabilities:
Savings & NOW........................... $21,498 $ 0 $ 0 $ 43,178 $ 64,676
Time.................................... 19,413 46,568 27,587 0 93,568
-------- -------- -------- ----------- ---------
Total deposits.......................... 40,911 46,568 27,587 43,178 158,244
Other borrowings........................ 13,958 0 6,000 0 19,958
-------- ---------- -------- ----------- ---------
Total interest bearing liabilities..... 54,869 46,568 33,587 43,178 178,202
-------- -------- -------- --------- ---------
Rate sensitivity gap and ratios:
Gap for period.......................... $14,160 ($29,207) $ 67,581 $ 1,356
Cumulative gap.......................... 14,160 (15,047) 52,534 53,890
Ratio for period.......................... 6.10% (12.58)% 29.1% .58%
Cumulative rate sensitive ratio........... 6.10 (6.48) 22.63 23.22
</TABLE>
The 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.
Year 2000
Management has evaluated the likely impact of the Year 2000 issue on the
operating systems of the Company and the Bank. Based on its continuing
evaluation, Management does not anticipate material expenditures to ensure that
these systems are compliant.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
O.A.K. FINANCIAL CORPORATION TABLE OF CONTENTS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
PAGE
Independent Auditors' Report........................................... 29
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................... 30
Consolidated Statements of Income................................... 31
Consolidated Statements of Changes in Stockholders' Equity.......... 32
Consolidated Statements of Cash Flows............................... 33
Notes to Consolidated Financial Statements.......................... 34-47
28
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Rehmann Robson, P.C.
Grand Rapids, Michigan
January 13, 1998
29
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- -------------------------------------------------------------------------------
<TABLE>
December 31
ASSETS 1997 1996
---- ----
<S> <C> <C>
Cash and due from banks (Note 10).......................................... $ 5,367,937 $ 6,399,085
Federal funds sold......................................................... - 400,000
-------------- --------------
Cash and cash equivalents.................................................. 5,367,937 6,799,085
Available-for-sale securities - amortized cost of
$60,999,414 - 1997 and $57,703,349 - 1996 (Notes 2, 7 and 8)............ 61,792,674 58,071,403
Loans receivable, net (Notes 3 and 4)...................................... 166,387,650 142,693,370
Loans held for sale........................................................ 1,345,615 1,933,000
Accrued interest receivable................................................ 1,513,146 1,453,398
Premises and equipment, net (Note 5)....................................... 4,534,281 4,653,473
Other assets............................................................... 2,146,617 1,922,801
Total assets............................................................... $ 243,087,920 $ 217,526,530
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6)
Noninterest bearing........................................................ $ 26,456,357 $ 23,778,515
Interest bearing........................................................... 158,243,971 146,442,392
-------------- --------------
Total deposits............................................................. 184,700,328 170,220,907
Borrowed funds (Note 7).................................................... 11,300,000 2,800,000
Securities sold under agreements to repurchase (Note 8).................... 8,657,583 7,336,298
Other liabilities.......................................................... 1,515,231 1,625,709
-------------- --------------
Total liabilities.......................................................... 206,173,142 181,982,914
-------------- --------------
Stockholders' equity (Note 10)
Common stock, $1 par value; 2,000,000 shares authorized;
1,000,000 shares issued and outstanding,
(1,006,174 shares in 1996).............................................. 1,000,000 1,006,174
Additional paid-in capital................................................. 5,622,680 6,036,338
Retained earnings.......................................................... 29,768,536 28,258,182
Net unrealized appreciation on available-for-sale securities (Note 2)...... 523,562 242,922
------- -------
Total stockholders' equity................................................. 36,914,778 35,543,616
-------------- --------------
Total liabilities and stockholders' equity................................. $ 243,087,920 $ 217,526,530
============== ==============
</TABLE>
See accompanying notes.
30
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY INCOME
- -------------------------------------------------------------------------------
<TABLE>
For the Years Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans ............................................... $ 14,858,954 $ 13,922,548 $ 13,209,731
Available-for-sale securities (Note 2)................ 3,697,712 3,445,883 2,951,342
Federal funds sold.................................... 67,073 133,136 107,543
------------- -------------- -------------
Total interest income.................................... 18,623,739 17,501,567 16,268,616
------------- -------------- -------------
Interest expense
Deposits (Note 6)..................................... 7,058,031 6,770,126 6,311,550
Borrowed funds........................................ 314,015 137,212 168,952
Securities sold under agreements to repurchase........ 320,519 273,350 156,771
------------- -------------- -------------
Total interest expense................................... 7,692,565 7,180,688 6,637,273
------------- -------------- -------------
Net interest income...................................... 10,931,174 10,320,879 9,631,343
Provision for possible loan losses (Note 4).............. 50,000 - 275,000
------------- -------------- -------------
Net interest income after provision for
possible loan losses.................................. 10,881,174 10,320,879 9,356,343
------------- -------------- -------------
Noninterest income
Service charges....................................... 527,099 529,471 491,654
Net realized gain on sale of available-for-sale
loans (Note 3)...................................... 414,364 133,000 105,000
Loan service fee...................................... 203,295 180,837 158,632
Net realized appreciation (depreciation) on sale
of available-for-sale securities (Note 2)........... 66,190 13,071 (3,728)
Other ............................................... 331,126 218,562 167,657
------------- -------------- -------------
Total noninterest income................................. 1,542,074 1,074,941 919,215
------------- -------------- -------------
Noninterest expenses
Salaries and employee benefits........................ 3,028,338 2,649,626 2,169,657
Occupancy............................................. 384,237 361,280 348,645
Furniture and fixtures................................ 512,896 483,930 439,594
Michigan single business tax.......................... 220,000 197,000 172,000
Federal Deposit Insurance Corporation premium......... 26,726 17,096 175,622
Other ............................................... 1,609,277 1,459,596 1,205,573
------------- -------------- -------------
Total noninterest expenses............................... 5,782,274 5,168,528 4,511,091
------------- -------------- -------------
Income before federal income taxes....................... 6,640,974 6,227,292 5,764,467
Federal income taxes (Note 9)............................ 2,015,000 1,852,000 1,760,000
------------- -------------- -------------
Net income............................................... $ 4,625,974 $ 4,375,292 $ 4,004,467
============= ============== =============
Net income per share of common stock (Note 1)........... $ 4.60 $ 4.35 $ 3.98
============= ============== =============
</TABLE>
See accompanying notes.
31
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
For the Years Ended
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Shares of common stock issued and outstanding
Balance, beginning of year.......................... 1,006,174 915,562 919,781
Common stock dividends.............................. - 91,522 -
Repurchases and retirements......................... (6,174) (910) (4,219)
--------------- -------------- --------------
Balance, end of year................................ 1,000,000 1,006,174 915,562
============== ============= =============
Common stock
Balance, beginning of year.......................... $ 1,006,174 $ 915,562 $ 919,781
Common stock dividends.............................. - 91,522 -
Repurchase and retirement of common shares.......... (6,174) (910) (4,219)
--------------- -------------- --------------
Balance, end of year................................ 1,000,000 1,006,174 915,562
-------------- ------------- -------------
Additional paid-in-capital
Balance, beginning of year.......................... 6,036,338 6,084,056 6,296,964
Repurchase and retirement of common shares.......... (413,658) (47,718) (212,908)
--------------- -------------- --------------
Balance, end of year................................ 5,622,680 6,036,338 6,084,056
-------------- ------------- -------------
Retained earnings
Balance, beginning of year.......................... 28,258,182 24,916,801 21,663,225
Net income.......................................... 4,625,974 4,375,292 4,004,467
Common stock dividends.............................. - (91,522) -
Cash dividends...................................... (3,115,620) (942,389) (750,891)
--------------- -------------- --------------
Balance, end of year................................ 29,768,536 28,258,182 24,916,801
-------------- ------------- -------------
Net unrealized gain (loss) on available-for-
sale securities
Balance, beginning of year.......................... 242,922 642,450 (979,808)
Change in net unrealized appreciation
(depreciation) on available-for-sale
securities....................................... 280,640 (399,528) 1,622,258
-------------- -------------- -------------
Balance, end of year................................ 523,562 242,922 642,450
-------------- ------------- -------------
Total stockholders' equity.............................. $ 36,914,778 $ 35,543,616 $ 32,558,869
============== ============= =============
</TABLE>
See accompanying notes.
32
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
For the Years Ended
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 4,625,974 $ 4,375,292 $ 4,004,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 459,915 441,655 404,823
Provision for possible loan losses.............. 50,000 - 275,000
Proceeds from sales of loans held
for sale..................................... 20,981,500 21,917,000 16,760,358
Originations of loans held for sale............. (19,979,751) (21,784,000) (16,655,358)
Net (gain) loss on sale of available-for-
sale securities ............................. (66,190) (13,071) 3,728
Net gain on loans held for sale................. (414,364) (133,000) (105,000)
Net amortization of investment premiums......... 196,390 211,107 157,995
Changes in operating assets and liabilities
which provided (used) cash:
Accrued interest receivable.............. (59,748) 116,746 (264,408)
Other assets............................. (223,816) (104,533) (134,744)
Other liabilities........................ 290,516 (147,407) 378,887
--------------- --------------- --------------
Net cash provided by operating activities............... 5,860,426 4,879,789 4,825,748
--------------- -------------- --------------
Cash flows from investing activities:
Available-for-sale securities
Proceeds from maturities.......................... 10,278,679 9,466,608 6,733,468
Proceeds from sales............................... 7,445,638 3,159,555 5,219,981
Purchases......................................... (21,299,916) (14,019,935) (22,004,083)
Net increase in loans held for investment............ (23,744,280) (3,938,702) (15,532,756)
Purchases of premises and equipment.................. (335,955) (477,122) (973,899)
---------------- --------------- ---------------
Net cash used in investing activities................... (27,655,834) (5,809,596) (26,557,289)
---------------- --------------- ---------------
Cash flows from financing activities:
Net increase in non-interest bearing demand
deposits, NOW accounts and savings deposits....... 3,256,194 8,792,535 31,924
Net increase (decrease) in time deposits............. 11,223,227 (8,583,471) 18,905,500
Net increase (decrease) in borrowed funds............ 8,099,006 1,200,000 (1,400,000)
Net increase in securities sold under agreements
to repurchase..................................... 1,321,285 2,399,741 1,061,189
Dividends paid....................................... (3,115,620) (942,389) (750,891)
Repurchase and retirement of common shares........... (419,832) (48,628) (217,127)
---------------- --------------- ---------------
Net cash provided by financing activities............... 20,364,260 2,817,788 17,630,595
--------------- -------------- --------------
Net (decrease) increase in cash and
cash equivalents..................................... (1,431,148) 1,887,981 (4,100,946)
Cash and cash equivalents, beginning of year............ 6,799,085 4,911,104 9,012,050
--------------- -------------- --------------
Cash and cash equivalents, end of year.................. $ 5,367,937 $ 6,799,085 $ 4,911,104
=============== ============== ==============
</TABLE>
See accompanying notes.
33
<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 appreciation and depreciation, net of the effect of applicable
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. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity.
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 Statement of Financial Accounting Standards
("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.
34
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities
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. SFAS No. 122 as amended by
SFAS No. 125 requires the Bank 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 with servicing retained. 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. 125 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 Nos. 122 and 125 on the Corporation's
consolidated financial position and results of operations was not material.
Mortgage servicing rights are allocated between the loan (without the servicing
rights) and the servicing rights, based on their relative fair values. The costs
allocated to mortgage servicing rights are 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 is periodically evaluated for
impairment. Impairment is 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.
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.
35
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
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.
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.
Management annually reviews these assets to determine whether carrying values
have been impaired.
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 1,005,000 in 1997,
1,007,000 in 1996 and 1,010,000 in 1995. During 1997, the Corporation adopted
SFAS No. 128, "Earnings Per Share", which establishes new standards for the
computation, presentation, and disclosure requirements for earnings per share
("EPS"). Given the simple capital structure of the Corporation, adoption of the
standard had no effect on the EPS calculations and the restatement of prior EPS
data.
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 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation.
Issued But Not Yet Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." The statement defines comprehensive
income as "all changes in equity during a period, with exception of stock
issuance and dividends." The new pronouncement establishes standards for the
disclosure of comprehensive income and its components in the financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 requires companies to
define and report financial and descriptive information about its operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
Both standards will be adopted in 1998. The adoption of these new standards is
not expected to have a material impact on the Corporation's financial position
or results of operation.
36
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized appreciation, gross unrealized depreciation
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
1997 Cost Appreciation Depreciation Value
---- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C>
U.S. Treasury, government
agencies and corporations......... $ 38,998,513 $ 349,221 $ 172,346 $ 39,175,388
States and political subdivisions... 18,987,600 618,246 1,861 19,603,985
Other............................... 3,013,301 - - 3,013,301
------------- ------------ ---------- -------------
Total............................... $ 60,999,414 $ 967,467 $ 174,207 $ 61,792,674
============= ============ ========== =============
1996
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
============= ============ ========== =============
</TABLE>
At December 31, 1997, 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......................................... $ 2,435,636 $ 2,457,531
Due after one year through five years........................... 8,744,846 9,028,496
Due after five years through ten years.......................... 12,750,473 12,987,010
Due after ten years............................................. 3,530,792 3,635,464
-------------- -------------
Subtotal........................................................ 27,461,747 28,108,501
Mortgage-backed securities...................................... 33,537,667 33,684,173
-------------- -------------
Total........................................................... $ 60,999,414 $ 61,792,674
============== =============
</TABLE>
Investment income from taxable and nontaxable securities for the years ended
December 31, is as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxable........................................... $ 2,709,564 $ 2,523,572 $ 1,982,424
Nontaxable........................................ 988,148 922,311 968,918
----------- ----------- -----------
Total............................................. $ 3,697,712 $ 3,445,883 $ 2,951,342
=========== =========== ===========
</TABLE>
37
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. AVAILABLE-FOR-SALE SECURITIES (Concluded)
Proceeds from sales of available-for-sale securities during 1997, 1996 and 1995
were $7,445,638, $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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains.............................. $ 87,375 $ 19,711 $ 19,950
Gross realized losses............................. (21,185) (6,640) (23,678)
---------- ---------- ----------
Net realized gain (loss) on sale of
available-for-sale securities................ $ 66,190 $ 13,071 $ (3,728)
========= ========= ==========
</TABLE>
Investment securities with a carrying value of approximately $23,396,000 and
$14,404,000 at December 31, 1997 and 1996, 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>
1997 1996
---- ----
<S> <C> <C>
Commercial.................................................. $ 26,379,822 $ 27,451,855
Commercial real estate...................................... 90,004,939 72,280,315
Residential real estate..................................... 38,885,996 33,443,275
Consumer.................................................... 13,682,323 11,893,895
------------- -------------
Total loans receivable, net of deferred
loan fees of $213,259 - 1997 and $309,351 - 1996........ 168,953,080 145,069,340
Less allowance for possible loan losses..................... 2,565,430 2,375,970
------------- -------------
Loans receivable, net....................................... $ 166,387,650 $ 142,693,370
============= =============
</TABLE>
At December 31, 1997, scheduled maturities of loans with fixed rates of interest
are as follows:
<TABLE>
<S> <C>
One year or less......................................................... $ 15,805,568
One to five years........................................................ 91,986,459
Over five years.......................................................... 9,756,658
--------------
Total .................................................................. $ 117,548,685
==============
</TABLE>
38
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. LOANS (Concluded)
Variable rate loans of $51,404,395 at December 31, 1997 reprice quarterly or
more frequently.
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, 1997, the Bank had
commitments for standby letters of credit of approximately $1,902,000, loan
commitments outstanding of approximately $20,738,000 and unused credit lines and
revolving credit agreements of approximately $43,187,000.
Loans on which the accrual of interest has been discontinued and those loans
past due 90 days or more amounted to $237,189 and $1,194,007 at December 31,
1997 and 1996, respectively. Interest income that would have been recorded under
the original terms of such loans would have been approximately $3,000, $201,000
and $102,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the Bank was servicing loans for others amounting
to approximately $93,000,000 and $82,000,000, 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 $5,615,000 and
$2,738,000 at December 31, 1997 and 1996, respectively; new loans and repayments
during 1997 were approximately $3,341,000 and $464,000, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year.......................... $ 2,375,970 $ 2,304,848 $ 2,055,554
Provision for possible loan losses.................. 50,000 - 275,000
Recoveries.......................................... 263,109 249,854 74,053
Loans charged off................................... (123,649) (178,732) (99,759)
------------- ------------- -------------
Balance, end of year................................ $ 2,565,430 $ 2,375,970 $ 2,304,848
============ ============ ============
</TABLE>
39
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. ALLOWANCE FOR POSSIBLE LOAN LOSSES (Concluded)
Information regarding impaired loans is as follows for the year ended December
31:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Balance of impaired loans at year-end.....................................$ 478,250 $ 1,079,602
Allowance for loan losses allocated
to the impaired loan balance............................................ 47,716 75,000
Average investment in impaired loans...................................... 620,890 847,835
Interest income recognized on impaired loans (no
interest income was recognized on the cash basis) ...................... 42,940 14,456
</TABLE>
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Land $ 880,376 $ 880,376
Buildings and improvements 4,369,850 4,355,846
Furniture and equipment 2,760,477 2,479,124
------------- -------------
Total premises and equipment 8,010,703 7,715,346
Less accumulated depreciation 3,476,422 3,061,873
------------- -------------
Premises and equipment, net $ 4,534,281 $ 4,653,473
============= =============
</TABLE>
6. DEPOSITS
The following is a summary of the distribution of deposits at December 31:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Interest bearing
NOW accounts............................................ $ 13,114,691 $ 12,381,650
Savings................................................. 31,576,744 30,514,376
Money market demand..................................... 19,984,192 21,201,249
Time, $100,000 and over................................. 11,367,451 6,768,833
Other time.............................................. 82,200,893 75,576,284
-------------- --------------
Total interest bearing...................................... 158,243,971 146,442,392
Noninterest bearing demand.................................. 26,456,357 23,778,515
-------------- --------------
Total deposits.............................................. $ 184,700,328 $ 170,220,907
============== ==============
</TABLE>
40
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. DEPOSITS (Concluded)
At December 31, 1997, scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 ..................................................... $ 65,980,464
1999 ..................................................... 15,484,389
2000 ..................................................... 10,057,027
2001 ..................................................... 638,832
2002 ..................................................... 1,407,632
-------------
Total time deposits......................................... $ 93,568,344
=============
</TABLE>
Deposits of Bank directors, executive officers and their related interests were
approximately $1,127,000 and $1,282,000 at December 31, 1997 and 1996,
respectively. Interest expense on time deposits issued in denominations of
$100,000 or more was approximately $520,000 in 1997, $270,000 in 1996 and
$227,000 in 1995.
7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following amounts:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Federal funds purchased..................................... $ 3,300,000 $ 1,300,000
Federal Home Loan Bank advances............................. 6,000,000 1,500,000
Treasury tax and loan note option........................... 2,000,000 400,994
------------ ------------
Total borrowed funds........................................ $ 11,300,000 $ 3,200,994
============ ============
</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 $6,892,000 and $1,954,000 at December 31,
1997 and 1996, respectively. The Federal Home Loan Bank advances at December 31,
1997 are comprised of three $2,000,000 advances with an average interest rate of
6.13%. Two of the advances are due in December 1999 with the third due July
2000. The Federal Home Loan advance at December 31, 1996 is a $1,500,000 advance
with an interest rate of 5.92%.
The Treasury Tax and Loan Note option is collateralized by U.S. Government
agency securities with a fair value of approximately $2,822,000 and $1,286,000
at December 31, 1997 and 1996, respectively. The Treasury Tax and Loan Note
option is a daily borrowing with the Federal Reserve Bank, due on demand, at 25
basis points below the national federal fund interest rate (5.25% at December
31, 1997).
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1997 and 1996
mature within one day from the transaction date and have an average interest
rate of 3.93% and 3.6%, respectively. The U.S. government agency securities
underlying the agreements have a fair value of approximately $13,573,000 and
$11,164,000 at December 31, 1997 and 1996, respectively. Such securities remain
under the control of the Bank. The maximum amount outstanding at any month end
during the years ended December 31, 1997 and 1996 was $9,661,240 and $9,131,354,
respectively with the daily average balance being $8,157,784 and $7,524,513,
respectively.
41
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. FEDERAL INCOME TAXES
The provision (benefit) for federal income taxes for the years ended
December 31 consists of:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current..................................... $ 1,953,700 $ 1,859,000 $ 1,725,000
Deferred.................................... 61,300 (7,000) 35,000
------------ ------------- ------------
Federal income taxes........................ $ 2,015,000 $ 1,852,000 $ 1,760,000
============ ============ ============
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to
income before income taxes.............. $ 2,257,829 $ 2,117,279 $ 1,959,919
Effect of tax-exempt interest
income.................................. (355,031) (294,221) (308,941)
Change in valuation allowance............... 64,000 25,000 110,000
Other - net................................. 48,202 3,942 (978)
----------- ------------ -------------
Federal income taxes........................ $ 2,015,000 $ 1,852,000 $ 1,760,000
============ ============ ============
</TABLE>
The net deferred income tax asset (liability) as of December 31, is
comprised of the tax effect of the following temporary differences:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses...................... $ 770,000 $ 706,000
Deferred compensation plan.............................. 224,000 187,000
Deferred loan fees...................................... 7,000 28,000
----------- -----------
Total deferred tax assets................................... 1,001,000 921,000
----------- -----------
Deferred tax liability:
Discount accretion...................................... (19,000) (14,000)
Deferred loan servicing................................. (72,000) -
------------ -----------
Total deferred tax liabilities.............................. (91,000) (14,000)
------------ ------------
Valuation allowance......................................... (719,000) (655,000)
------------ ------------
Net deferred tax assets entering into the determination of
the provision for federal income taxes.................... 191,000 252,000
Additional deferred tax liability related to
the net unrealized gain on available-for-sale
securities.............................................. (270,000) (125,000)
------------ ------------
Net deferred tax (liability) asset included in other
(liabilities) assets on the accompanying balance sheet.... $ (79,000) $ 127,000
============ ===========
</TABLE>
42
<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 total capital to risk weighted assets, Tier 1
capital to risk weighted assets and Tier 1 capital to average assets. Management
believes, as of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FRB categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To remain 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 presented in the table (dollars in thousands). There are no
conditions or events since the most recent notification that management believes
has changed the Bank's category.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to
risk weighted assets)........ $ 36,147 19.93% $ 14,629 >=8.0% $ 18,287 >=10.0%
Tier 1 capital (to
risk weighted assets)........ $ 33,880 18.68% $ 7,256 >=4.0% $ 10,884 >=6.0%
Tier 1 capital (to
average assets) ............. $ 33,880 14.13% $ 9,591 >=4.0% $ 11,989 >=5.0%
As of December 31, 1996
Total capital (to
risk weighted assets)........ $ 35,714 22.77% $ 12,548 >=8.0% $ 15,685 >=10.0%
Tier 1 capital (to
risk weighted assets)........ $ 33,753 21.52% $ 6,274 >=4.0% $ 9,411 >=6.0%
Tier 1 capital (to
average assets) ............. $ 33,753 15.45% $ 9,593 >=4.0% $ 11,991 >=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, 1997 and 1996, those required reserve
balances were $986,000 and $912,000, 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 $7,300,000 at January 1, 1998.
43
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 $203,055, $191,459, and
$151,102 for the years ended December 31, 1997, 1996 and 1995, respectively.
Deferred Compensation - The Bank sponsors a deferred compensation plan for all
directors who wish to participate. The projected benefit obligation for this
plan was $659,448 and $549,778 as of December 31, 1997 and 1996, respectively,
and is included in other liabilities. The Bank has purchased life insurance
policies on participating directors.
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, 1997.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation 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 Corporation 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.
Loans Held for Sale - The fair value of loans held for sale, including the fair
value of associated mortgage servicing rights, is estimated based on the present
value of estimated future cash flows of the loan and related servicing rights
using a discount rate commensurate with the risks associated with the respective
financial instruments.
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.
Securities Sold Under Agreements to Repurchase Fair value approximates the
carrying value since the majority of these instruments were entered into at our
near December 31, 1997 and 1996.
Borrowed Funds - The carrying amount is a reasonable estimate of fair value of
other borrowings as these financial instruments are tied to floating rate
indices such as prime and LIBOR, and reprice frequently.
44
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (Concluded)
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.
The estimated fair values of the Bank's financial instruments at December 31,
are as follows:
<TABLE>
Carrying Fair
Amount Value
1997
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................. $ 5,367,937 $ 5,367,937
Available-for-sale securities............................. 61,792,674 61,792,674
Loans receivable, net..................................... 166,387,650 168,077,719
Loans held for sale....................................... 1,345,615 1,345,615
Accrued interest receivable............................... 1,513,146 1,513,146
Financial liabilities:
Deposits.................................................. 184,700,328 185,197,789
Borrowed funds............................................ 11,300,000 11,314,409
Securities sold under agreements
to repurchase......................................... 8,657,583 8,657,583
Other liabilities......................................... 1,515,231 1,515,231
1996
Financial assets:
Cash and cash equivalents................................. $ 6,799,085 $ 6,799,085
Available-for-sale securities............................. 58,071,403 58,071,403
Loans receivable, net..................................... 142,693,370 144,692,000
Loans held for sale....................................... 1,933,000 1,933,000
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>
45
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for interest and income taxes during the years ended December 31, is
as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest................................ $ 7,583,946 $ 7,216,223 $ 6,475,906
============ ============ ============
Income taxes............................ $ 1,941,029 $ 1,916,713 $ 1,683,171
============ ============ ============
</TABLE>
15. SUBSEQUENT EVENT
Effective January 22, 1998, the Board of Directors declared a $1.00 per share
dividend.
16. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
The following summarizes parent company financial information as of December 31,
1997 and 1996 and the related condensed statements of income and cash flows for
each of the three years in the period ended December 31, 1997:
<TABLE>
Condensed Balance Sheets
1997 1996
---- ----
<S> <C> <C>
Assets
Cash.......................................................... $ 2,734 $ 6,418
Investment in subsidiary...................................... 35,107,243 34,743,670
Available-for-sale securities................................. 1,804,801 793,528
--------------- --------------
Total assets.................................................... $ 36,914,778 $ 35,543,616
=============== ==============
Stockholders' equity............................................ $ 36,914,778 $ 35,543,616
=============== ==============
</TABLE>
Condensed Statements of Income
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiary...................... $ 4,543,040 $ 1,211,471 $ 1,375,539
Interest from available-for-sale securities.... 38,876 22,232 10,126
------------- ------------- -------------
Total income..................................... 4,581,916 1,233,703 1,385,665
Other expenses................................... 38,876 22,232 10,126
------------- ------------- -------------
Income before equity in undistributed net
income of subsidiary........................... 4,543,040 1,211,471 1,375,539
Equity in undistributed net income of
subsidiary..................................... 82,934 3,163,821 2,628,928
------------- ------------- -------------
Net income....................................... $ 4,625,974 $ 4,375,292 $ 4,004,467
============= ============= =============
</TABLE>
46
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
16. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
Condensed Statements of Cash Flows
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 4,625,974 $ 4,375,292 $ 4,004,467
Adjustments to reconcile net income
to net cash from operating activities:
Undistributed earnings of subsidiary...... (82,934) (3,163,821) (2,628,928)
-------------- ----------- -----------
Net cash provided by operating
activities.................................... 4,543,040 1,211,471 1,375,539
------------- ------------- -------------
Cash flows from investing activities:
Available-for-sale securities purchased....... (1,011,272) (220,453) (407,521)
-------------- -------------- --------------
Cash flows from financing activities:
Repurchase and retirement of common
shares...................................... (419,832) (48,628) (217,127)
Dividends paid................................ (3,115,620) (942,389) (750,891)
-------------- -------------- --------------
Net cash used in financing activities........... (3,535,452) (991,017) (968,018)
-------------- -------------- --------------
Net (decrease) increase in cash and cash
equivalents................................... (3,684) 1 -
Cash and cash equivalents,
beginning of year............................. 6,418 6,417 6,417
------------- ------------- -------------
Cash and cash equivalents,
end of year................................... $ 2,734 $ 6,418 $ 6,417
============= ============= =============
</TABLE>
47
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Information About Directors and Nominees" on pages
4 through 5 of the Company's definitive proxy statement, as filed with the
Commission and dated March 20, 1998, relating to the April 16, 1998 Annual
Meeting of Shareholders, is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11. Executive Compensation.
The information set forth under the caption "Executive Compensation
Summary" on page 6 of the Company's definitive proxy statement, as filed with
the Commission and dated March 20, 1998, relating to the April 16, 1998 Annual
Meeting of Shareholders, is incorporated herein by reference. Information under
the caption "Committee Report on Executive Compensation" on pages 5 and 6 of the
definitive proxy statement is not incorporated by reference herein and is not
deemed to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Voting Securities and
Beneficial Ownership of Management" on page 3 of the Company's definitive proxy
statement, as filed with the Commission and dated March 20, 1998, relating to
the April 16, 1998 Annual Meeting of Shareholders, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" on page
6 of the Company's definitive proxy statement, as filed with the Commission and
dated March 20, 1998, relating to the April 16, 1998 Annual Meeting of
Shareholders, is incorporated herein by reference.
48
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheet for the Two Years Ended
December 31, 1997 and 1996
Consolidated Statements of Income for the Three Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders Equity for the
Three Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The
Exhibit Index is located on the final page of this report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1997.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 20, 1998.
O.A.K. FINANCIAL CORPORATION
/s/John A. Van Singel
John A. Van Singel
President, Chief Executive Officer
(Principal Executive Officer)
/s/Martin S. Braun
Martin R. Braun
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each director of the Registrant,
whose signature appears below, hereby appoints David G. Van Solkema and John A.
Van Singel, and each of them severally, as his or her attorney-in-fact, to sign
in his or her name and on his or her behalf, as a director of the Registrant,
and to file with the Commission any and all Amendments to this Report on Form
10-K.
Signature Date
/s/ Robert Deppe March 20, 1998
Robert Deppe
/s/ Norman Fifelski March 20, 1998
Norman Fifelski
/s/Dellvan Hoezee March 20, 1998
Dellvan Hoezee
/s/Barnard Hull March 20, 1998
Bernard Hull
/s/Lois Smalligan March 20, 1998
Lois Smalligan
/s/John A. Van Singel March 20, 1998
John A. Van Singel
/s/David Van Solkema March 20, 1998
David Van Solkema
/s/Gerald Williams March 20, 1998
Gerald Williams
50
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number Page
(21) Subsidiaries of Registrant.......................................
(27) Financial Data Schedule..........................................
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
3.1 Articles of Incorporation of the Registrant Exhibit 3.1 of Form 10, filed
in 1997 ("Form 10")
3.2 Bylaws of the Registrant Exhibit 3.2 of Form 10
4. Form of Registrant's Stock Certificate Exhibit 4 of Form 10
Material Contracts:
10 1988 Director Deferred Compensation Plan Exhibit 10 to From 10
51
<PAGE>
Exhibit 21 - Subsidiairies of Registrant
Byron Center State Bank - 100% owned
2445 84th Street, S.W.
Byron Center, MI 49315
52
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,367,937
<INT-BEARING-DEPOSITS> 158,243,971
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,792,674
<INVESTMENTS-CARRYING> 60,999,414
<INVESTMENTS-MARKET> 61,792,674
<LOANS> 168,953,080
<ALLOWANCE> 2,565,430
<TOTAL-ASSETS> 243,087,920
<DEPOSITS> 184,700,328
<SHORT-TERM> 13,957,583
<LIABILITIES-OTHER> 1,515,231
<LONG-TERM> 6,000,000
0
0
<COMMON> 1,000,000
<OTHER-SE> 35,914,778
<TOTAL-LIABILITIES-AND-EQUITY> 243,087,920
<INTEREST-LOAN> 14,858,954
<INTEREST-INVEST> 3,697,712
<INTEREST-OTHER> 67,073
<INTEREST-TOTAL> 18,623,739
<INTEREST-DEPOSIT> 7,058,031
<INTEREST-EXPENSE> 7,692,565
<INTEREST-INCOME-NET> 10,931,174
<LOAN-LOSSES> 50,000
<SECURITIES-GAINS> 66,190
<EXPENSE-OTHER> 5,782,274
<INCOME-PRETAX> 6,640,674
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,625,974
<EPS-PRIMARY> 4.60
<EPS-DILUTED> 4.60
<YIELD-ACTUAL> 4.21
<LOANS-NON> 105,000
<LOANS-PAST> 132,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,376,000
<CHARGE-OFFS> 124,000
<RECOVERIES> 263,000
<ALLOWANCE-CLOSE> 2,565,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
