FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22461
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2817345
State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
-----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 2,000,000 shares of the Company's Common
Stock ($1 par value) were outstanding as of July 31, 1998.
1
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Part II. Other Information
Item 4.
Submission of Matters to a Vote of Security Holders 18
Item 6.
Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
ASSETS
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Cash and due from banks ........................................................ $ 9,845,602 $ 5,367,937
Federal funds sold ............................................................. 400,000 --
------------ ------------
Cash and cash equivalents ...................................................... 10,245,602 5,367,937
Available-for-sale securities at fair value - amortized cost of
$55,706,027 - 1998 and $60,999,414 - 1997 ................................... 56,744,650 61,792,674
Loans receivable, net .......................................................... 183,383,802 166,387,650
Loans held for sale ............................................................ 3,069,000 1,345,615
Accrued interest receivable .................................................... 1,769,168 1,513,146
Premises and equipment, net .................................................... 4,855,930 4,534,281
Other assets ................................................................... 2,558,594 2,146,617
------------ ------------
Total assets ................................................................... $262,626,746 $243,087,920
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing ............................................................ $ 27,718,353 $ 26,456,357
Interest bearing ............................................................... 171,383,438 158,243,971
------------ ------------
Total deposits ................................................................. 199,101,791 184,700,328
Borrowed funds ................................................................. 12,000,000 11,300,000
Securities sold under agreements to repurchase ................................. 11,588,529 8,657,583
Other liabilities .............................................................. 1,916,174 1,515,231
------------ ------------
Total liabilities .............................................................. 224,606,494 206,173,142
------------ ------------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized; 2,000,000 shares issued
and outstanding (2,000,000 shares
authorized; 1,000,000 shares issued in 1997) ................................ 2,000,000 1,000,000
Additional paid-in capital ..................................................... 5,622,680 5,622,680
Retained earnings .............................................................. 29,712,070 29,768,536
Accumulated other comprehensive income ......................................... 685,502 523,562
------------ ------------
Total stockholders' equity ..................................................... 38,020,252 36,914,778
------------ ------------
Total liabilities and stockholders' equity ..................................... $262,626,746 $243,087,920
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June 30, 1998 and 1997
Six Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
Interest income
<S> <C> <C> <C> <C>
Loans .............................................. $ 8,197,735 $ 6,985,319 $ 4,241,822 $ 3,600,771
Available-for-sale securities ........................ 1,794,174 1,833,016 874,575 909,782
Federal funds sold ................................... 5,559 28,550 4,668 8,683
----------- ----------- ----------- -----------
Total interest income ................................... 9,997,468 8,846,885 5,121,125 4,519,236
Interest expense
Deposits ............................................. 3,715,201 3,382,187 1,879,801 1,743,281
Borrowed funds ....................................... 351,982 122,969 169,923 66,646
Securities sold under agreements to repurchase ....... 186,776 144,992 96,335 72,544
----------- ----------- ----------- -----------
Total interest expense .................................. 4,253,959 3,650,148 2,146,059 1,882,471
----------- ----------- ----------- -----------
Net interest income ..................................... 5,743,509 5,196,737 2,975,066 2,636,765
Provision for possible loan losses ...................... 150,000 0 100,000 0
----------- ----------- ----------- -----------
Net interest income after provision for
possible loan losses ................................. 5,593,509 5,196,737 2,875,066 2,636,765
----------- ----------- ----------- -----------
Noninterest income
Service charges ...................................... 269,453 253,174 139,255 130,855
Net realized gain on sale of available-for-sale
loans .............................................. 685,778 147,924 355,366 132,492
Loan servicing fee ................................... 94,725 105,301 41,030 51,694
Net realized gain on sale of available-for-sale
securities ......................................... (5,646) 51,587 (8,321) 7,011
Other ................................................ 142,306 186,723 61,938 103,690
----------- ----------- ----------- -----------
Total noninterest income ................................ 1,186,616 744,709 589,268 425,742
Noninterest expenses
Salaries and employee benefits ....................... 1,716,393 1,512,587 1,026,585 827,164
Occupancy ............................................ 231,113 202,395 115,248 95,588
Furniture and fixtures ............................... 274,029 243,003 150,132 115,880
Michigan single business tax ......................... 99,000 99,200 42,000 49,100
Stationery, supplies, printing ...................... 117,387 53,860 74,116 28,251
Other ................................................ 682,269 646,582 356,362 367,909
----------- ----------- ----------- -----------
Total noninterest expenses .............................. 3,120,191 2,757,627 1,764,443 1,483,892
----------- ----------- ----------- -----------
Income before federal income taxes ...................... 3,659,934 3,183,819 1,699,891 1,578,615
Federal income taxes .................................... 1,066,400 976,597 484,000 510,076
----------- ----------- ----------- -----------
Net income .............................................. $ 2,593,534 $ 2,207,222 $ 1,215,891 $ 1,068,539
=========== =========== =========== ===========
Net income per share of common stock (basic).............. $ 1.30 $ 1.10 $ 0.61 $ 0.53
=========== ============ =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June, 30, 1998 and 1997
Six Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other comprehensive income before income taxes:
Change in unrealized gain (loss) on
available-for-sale securities.................. $245,364 ($ 83,400) $ 56,652 $ 444,676
Income tax (expense) benefit related to
other comprehensive income..................... (83,424) 28,356 (19,263) (151,190)
---------- ---------- ----------- -----------
Other comprehensive income (loss), net of
income taxes................................... 161,940 (55,044) 37,389 293,486
Net income ..................................... 2,593,534 2,207,222 1,215,891 1,068,539
---------- ---------- ----------- -----------
Comprehensive income..................................... $2,755,474 $2,152,178 $1,253,280 $1,362,025
========== ========== ========== ==========
</TABLE>
5
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Shares of common stock issued
and outstanding
Balance, beginning of period .................. 1,000,000 1,006,174
2 for 1 common stock split effected in the form
a dividend ................................. 1,000,000 0
Repurchases and retirements ................... 0 0
------------ ------------
Balance, end of period ........................ 2,000,000 1,006,174
============ ============
Common stock
Balance, beginning of period .................. $ 1,000,000 $ 1,006,174
2 for 1 common stock split effected in the form
a dividend ................................. 1,000,000 0
Repurchase and retirement of common shares .... 0 0
------------ ------------
Balance, end of period ........................ 2,000,000 1,006,174
============ ============
Additional paid-in-capital
Balance, beginning of period .................. 5,622,680 6,036,338
Repurchase and retirement of common shares .... 0 0
------------ ------------
Balance, end of period ........................ 5,622,680 6,036,338
============ ============
Retained earnings
Balance, beginning of period .................. 29,768,536 28,258,182
Net income .................................... 2,593,534 2,207,222
2 for 1 common stock split effected in the form
a dividend ................................. 1,000,000 0
Cash dividends ................................ (1,650,000) (2,545,620)
------------ ------------
Balance, end of period ........................ 29,712,070 27,919,784
============ ============
Accumulated other comprehensive income
Balance, beginning of period .................. 523,562 242,922
Net unrealized gain (loss) on available-
for-sale securities ........................ 161,940 (55,044)
------------ ------------
Balance, end of period ........................ 685,502 187,878
------------ ------------
Total stockholders' equity ........................... $ 38,020,252 $ 35,150,174
============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ...................................... $ 2,593,534 $ 2,207,222
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............. 221,983 212,148
Proceeds from sales of loans held
for sale ............................... 37,624,827 8,377,644
Disbursements for loans held for sale ..... (38,662,435) (8,229,720)
Net loss/(gain) on sale of available-for-
sale securities ........................ 5,646 (51,587)
Net gain on sale of loans held for sale .. (685,778) (147,924)
Net amortization of investment premiums ... 103,289 91,914
Changes in operating assets and liabilities
which provided (used) cash:
Accrued interest receivable ......... (256,022) (51,588)
Other assets ........................ (411,977) (972,272)
Other liabilities ................... 400,943 978,048
------------ ------------
Net cash provided by operating activities ............. 934,010 2,413,885
------------ ------------
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities ..................... 5,836,744 5,159,082
Proceeds from sales .......................... 2,009,298 2,128,928
Purchases .................................... (2,735,750) (7,822,728)
Net increase in loans held for investment ....... (16,996,152) (9,519,166)
Purchases of premises and equipment ............. (552,894) (132,129)
------------ ------------
Net cash used in investing activities ................. (12,438,754) (10,186,013)
------------ ------------
Cash Flows from Financing Activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings deposits ................ 8,507,797 (1,699,992)
Net increase in time deposits ................... 5,893,666 8,682,330
Net increase in borrowed funds .................. 700,000 1,700,000
Net increase in securities sold under agreements
to repurchase ................................ 2,930,946 1,149,439
Common stock dividends paid ..................... (1,650,000) (2,545,620)
------------ ------------
Net cash provided by financing activities ............. 16,382,409 7,286,157
------------ ------------
Net increase (decrease) in cash and cash equivalents .. 4,877,665 (485,971)
Cash and cash equivalents, beginning of period ........ 5,367,937 6,799,085
------------ ------------
Cash and cash equivalents, end of period .............. $ 10,245,602 $ 6,313,114
============ ============
</TABLE>
See accompanying notes.
7
<PAGE>
O.A.K. FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Corporation's annual
report for the year ended December 31, 1997.
NOTE 2 STOCKHOLDERS EQUITY
On May 7, 1998, the Board of Directors declared a 2-for-1 split of the
Corporation's common stock to be effected on July 1, 1998 by means of a
one-for-one stock dividend to shareholders of record on June 1, 1998. The par
value of the common stock remained at $1 per share. As a result, $1,000,000,
representing the total par value of the new shares issued, has been transferred
from retained earnings to common stock. All references in the consolidated
financial statements to amounts per share and to the number of shares have been
restated to give retroactive effect to the stock split.
NOTE 3 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number
of common shares outstanding. The weighted number of common shares outstanding
were 2,000,000 for the six month period ended June 30, 1998 and 2,012,348 shares
for the same period in 1997, as adjusted for the effect of the common stock
split effected in the form of a dividend.
NOTE 4 ADOPTION OF SFAS NO. 130
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, on January 1, 1998. The Statement
establishes standards for reporting and displaying comprehensive income and its
components. SFAS No. 130 requires that all components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. For the Corporation, comprehensive income includes
net income and changes in unrealized gains and losses on available-for-sale
securities.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
O.A.K. Financial Corporation (the "Corporation") is a single bank holding
company whose sole subsidiary is Byron Center State Bank (the "Bank"). The Bank
has eight offices serving eight communities in Kent, Ottawa and Allegan
Counties. Neither the Corporation nor the Bank has had any acquisition activity
in their respective histories.
The following is management's discussion and analysis of the factors that
influenced O.A.K. Financial Corporation's financial performance. The discussion
should be read in conjunction with the Corporation's 1997 annual report and with
the unaudited interim financial statements and notes.
SIX MONTHS ENDING JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $1,215,891 for the three months ending June 31, 1998,
compared to $1,068,539 for the same period in 1997. This is a 13.79% increase
over the same period in 1997. Net income for the six month period ended June 30,
1998 was $2,593,534, compared to $2,207,222 for the same period in 1997. This is
a 17.50% increase over the same period in 1997. Return on average equity was
12.92% for the three months ending June 30, 1998 and 12.34% for 1997. Return on
average assets was 1.90% for the three months ending June 30, 1998 and 1.88% for
1997.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Six Months and Three Months Ended June 30,
Six Months Three Months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income...................................... $ 2,594 $ 2,207 $ 1,216 $ 1,068
Per Share(1).................................. $ 1.30 $ 1.10 $ 0.61 $ 0.53
Earnings ratios:
Return on average assets...................... 2.08% 2.02% 1.90% 1.88%
Return on average equity...................... 13.99% 12.72% 12.92% 12.34%
</TABLE>
(1) As adjusted for 2 for 1 common stock split effected in the form a dividend.
NET INTEREST INCOME
The following schedule presents the average daily balances, interest income
(on a fully taxable equivalent basis) and interest expense and average rates
earned and paid for the Bank's major categories of assets, liabilities, and
shareholders' equity for the periods indicated:
9
<PAGE>
<TABLE>
Table 2 Interest Yields and Costs
Six Months and Three Months ended June 30
Six Months Three Months
1998 1997 1998 1997
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fed. funds sold $ 198 $ 6 5.67% $ 1,037 $ 29 5.55% $ 328 $ 5 5.71% $ 590 $ 9 5.90%
Securities:
Taxable 39,404 1,252 6.41% 41,570 1,349 6.55% 37,571 603 6.44% 41,157 668 6.51%
Tax-exempt 19,383 755 7.85% 16,141 672 8.40% 19,568 378 7.75% 16,245 335 8.28%
Loans(1)(2) 179,737 8,212 9.21% 150,526 6,999 9.38% 186,008 4,266 9.20% 153,920 3,609 9.40%
------- ------ ----- ------- ----- ----- ------- ----- ----- ------- ----- -----
Total earning assets/
total interest income 238,722 10,225 8.64% 209,274 9,049 8.72% 243,475 5,252 8.65% 211,912 4,621 8.75%
Cash and due from
banks 5,862 4,729 6,217 4,790
Unrealized Gain/Loss 985 63 981 (169)
All other assets 8,480 8,567 8,683 8,952
Allowance for loan loss (2,559) (2,422) (2,566) (2,469)
Total assets: $251,490 $220,211 $256,790 $223,016
======== ======== ======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 66,869 $ 953 2.87% $ 63,272 $ 934 2.98% $ 68,337 $ 476 2.79% $ 62,714 $ 464 2.97%
Time 97,497 2,762 5.71% 87,474 2,448 5.64% 99,121 1,404 5.68% 90,372 1,279 5.68%
Fed. Funds Purchased 11,557 257 4.49% 8,220 161 3.96% 10,871 115 4.25% 7,803 80 4.09%
Other Borrowed Money 9,446 282 6.01% 3,621 107 5.94% 10,268 151 5.90% 4,063 60 5.89%
------- ----- ----- ------ ------ ----- ------- ----- ----- -------- ----- -----
Total interest bearing 185,369 4,254 4.63% 162,587 3,650 4.53% 188,597 2,146 4.56% 164,952 1,883 4.58%
----- ------ ----- ----- -----
liabilities/total
interest expense
Noninterest bearing 26,786 21,421 28,359 21,718
deposits
All other liabilities 1,958 1,682 2,078 1,746
Stockholders' Equity:
Unrealized Holding
Gain/Loss 650 41 648 (112)
Common Stock,
Surplus,
Retained Earnings 36,727 34,480 37,108 34,712
------ ------ ------ -------
Total liabilities and
stockholders' equity: $251,490 $ 220,211 $256,790 $223,016
======== ========= ======== ========
Interest spread 5,744 4.01% 5,197 4.19% 2,975 4.09% 2,637 4.17%
Net interest income-FTE $5,971 $5,399 $3,106 $2,738
====== ====== ====== ======
Net Interest Margin as a
Percentage of Average
Earning Assets 5.04% 5.20% 5.09% 5.18%
===== ===== ===== =====
</TABLE>
<PAGE>
(1) Non-accruing loans are not significant during the periods indicated, and
for purposes of the computations above, are included in the average daily
loan balances.
(2) Interest on loans includes net origination fees for the six months ending
June 30, 1998 of $84,758 and $129,470 in 1997.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $368,000 to $3,106,000 for the
three month period ended June 30, 1998, a 13.44% increase from the same period
in 1997. The major factors for the increase in net interest income for the three
months ended June 30, 1998 were non-interest bearing deposits averaged
$6,641,000 higher in 1998 than in the same period in 1997 and the loan portfolio
balance averaged $32,088,000 higher in 1998 compared to 1997. Earning assets
averaged $31,563,000, 14.89% higher for the three month period ending June 30,
1998 compared to 1997; this volume change resulted in an additional $738,000 in
fully taxable equivalent ("FTE") interest income. The asset growth for the three
months ended June 30, 1998 was primarily funded by a 9.68%, $8,749,000 increase
in time deposits and a $6,205,000 increase in other borrowed money and a
$6,641,000 increase in non-interest bearing deposits. For the three months ended
June 30, 1998 the average FTE interest rate earned on assets decreased .10%,
decreasing FTE interest income by $107,000. The major factor of the decrease was
lower yields on the investment portfolio and the loan portfolio. The average
interest rate paid on deposits, fed funds purchased and other borrowed money
decreased .02%, decreasing interest expense by $24,000. The net difference
between interest rates earned and paid was a $368,000 increase in FTE net
interest income.
For the three months ended June 30, 1998 the net interest yield decreased
.09% versus the same period in 1997. Management expects this trend to continue.
The Corporation is benefiting from current mergers and acquisitions in its
market area which have caused customers of acquired organizations to leave these
organizations and open new lower interest bearing accounts with the Bank. For
the six month period ending June 30, 1998, tax equivalent net interest income
increased $572,000 to $5,971,000, a 10.59% increase from the same period in
1997. The major factors for the increase in net interest income for the six
months ended June 30, 1998, were noninterest bearing deposits averaged
$5,365,000 higher in 1998 than in the same period in 1997 and the loan portfolio
balance averaged $29,448,000 higher in 1998 compared to 1997. Earning assets
averaged $29,448,000, 14.07%. For the six months ended June 30, 1998, the
average FTE interest rate earned on assets decreased .08%, decreasing FTE
interest income by $191,000 while the average rate paid on deposits, fed funds
purchased and other borrowed money increased .10%, increasing interest expense
by $21,000. The difference between interest rates earned and paid was a $572,000
increase in FTE net interest income. The net interest yield decreased .16% for
the six month period ending June 30, 1998 versus the same period in 1997.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent ("FTE") basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
11
<PAGE>
Table 3 Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
Six Months and Three Months Ended June 30,
1998 Compared to 1997
Amount of
Increase/(Decrease)
Due to Change in
Six Months Three Month
Total Total
Amount Amount
of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold............... $ (24) $ 1 $ (23) $ (4) $ 0 $ (4)
Securities:
Taxable...................... (69) (28) (97) (58) (7) (65)
Tax Exempt................... 126 (43) 83 64 (21) 43
Loans.......................... 1,334 (121) 1,213 736 (79) 657
--------- ----------- ----------- ---------- ---------- ----------
Total interest income.......... 1,367 (191) 1,176 738 (107) 631
Interest Expense
Interest bearing deposits
Savings/Now accounts........... 51 (32) 19 39 (27) 12
Time........................... 284 30 314 125 0 125
Fed. Funds Purchased........... 74 22 96 32 3 35
Other Borrowed Money........... 174 1 175 91 0 91
---------- ------------ ---------- ------------ ----------- ----------
Total interest expense......... 583 21 604 287 (24) 263
---------- ---------- ---------- ----------- ---------- ---------
Net Interest Income (FTE) $ 784 $ (212) $ 572 $ 451 $ (83) $ 368
======== ======== ========= ========= ========= ========
</TABLE>
12
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Six Months and Three Months ended June 30,
1998 Compared to 1997
Six Months Three Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Service charges on deposit accounts................. $ 270 $ 253 $ 139 $ 131
Net gains (losses) on asset sales:
Loans........................................... 686 148 355 132
Securities...................................... (6) 52 (8) 7
Other............................................... 237 292 103 156
----------- ----------- ----------- ----------
Total noninterest income....................... $ 1,187 $ 745 $ 589 $ 426
========== =========== ========== ==========
</TABLE>
Noninterest Income
Noninterest income consists of service charges on deposit accounts, service
fees, gains on investment securities available for sale and gains from sales of
Federal Home Loan Mortgage Corporation (Freddie Mac) loans. The Corporation
retains the servicing rights of these loans. Noninterest income increased
$163,000 or 38% for the three month period ending June 30, 1998 versus 1997. The
increase was due primarily to a $223,000 increase in gains on real estate
mortgage loan sales, and a $53,000 decrease on other income. For the six months
ended June 30, 1998, noninterest income increased $442,000, 59%. The increase
was due primarily to a $538,000 increase in gains in real estate mortgage loan
sales, and a $58,000 decrease in gains in securities available-for-sale.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Six Months and Three Months Ended June 30
1998 and 1997
Six Months Three Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Salaries and employee benefits.................. $ 1,716 $ 1,513 $ 1,026 $ 827
Occupancy and equipment......................... 505 445 265 211
FDIC assessment................................. 14 13 7 7
Postage......................................... 22 34 18 31
Printing and supplies........................ 117 53 74 28
Marketing....................................... 101 73 51 35
Michigan Single Business Tax.................... 99 99 42 49
Other........................................... 546 528 281 296
------------ ------------- -------------- -------------
Total noninterest expense.................. $ 3,120 $ 2,758 $ 1,764 $ 1,484
========== =========== =========== ===========
</TABLE>
Noninterest Expense
Noninterest expense increased $280,000 or 18.87% for the three month period
ending June 30, 1998 versus 1997. The major factors were a $199,000 increase,
24.06% in salaries and employee benefits and a $54,000 increase, 25.59% in
occupancy expense and a $46,000 increase,164.29% in stationery, supplies and
printing expense. The increase in salary and occupancy expenses are primarily
related to two new branches, one in Zeeland, Michigan and one in Hamilton,
Michigan. The increase in supplies and printing expense was a result of
additional forms and supplies
13
<PAGE>
needed for the Bank and for the new branches. For the six month period ended
June 30, 1998, noninterest expense increased $362,000 to $3,120,000 or a 13.12%
increase, principally due to salaries and employee benefits expense which
increased $203,000 to $1,716,000 a 13.42% increase. The other noninterest
expenses were relatively constant for the three month period ended June 30, 1998
versus 1997.
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Six months and three Months
Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
Nonaccrual loans ...................................... $ 100 $ 233
90 days or more past due & still accruing 12 382
------ ------
Total Nonperforming Loans ........................ 112 615
Other real estate ..................................... 105 796
------ ------
Total Nonperforming Assets ........................ $ 217 $1,411
====== ======
Nonperforming loans as a percent of total loans........ .06% .39%
Nonperforming assets as a percent of total loans....... .11% .90%
Nonperforming loans as a percent of the loan loss
reserve............................................. 4.24% 25.00%
</TABLE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Six months and three months
Ended June 30, 1998 and 1997
Six Months Three Months
1998 1997 1998 1997
Loans:
<S> <C> <C> <C> <C>
Average daily balance of loans for the period......... $179,737 $149,744 $186,008 $153,559
Amount of loans outstanding at end of period.......... 189,092 156,651 189,092 156,651
Allowance for loan losses:
Balance at beginning of period........................ 2,565 2,376 2,521 2,381
Loans charged off:
Real estate........................................ 0 0 0 0
Commercial......................................... 70 0 0 0
Consumer........................................... 64 25 19 12
--------- --------- --------- --------
Total charge-offs................................ 134 25 19 12
Recoveries of loans previously charged off:
Real estate........................................ 0 0 0 0
Commercial......................................... 13 135 7 129
Consumer........................................... 45 19 30 7
--------- --------- --------- --------
Total recoveries................................ 58 154 37 136
--------- --------- --------- --------
Net loans charged off (recoveries).................... 76 (129) (18) (124)
Additions to allowance charged to operations 150 0 100 0
--------- --------- --------- --------
Balance at end of period........................ $ 2,639 $ 2,505 $ 2,639 $ 2,505
========= ========= ========= ========
Ratios:
Net loans charged off to avg loans outstanding........ .04% -.09% -.01% -.08%
Allowance for loan losses to loans outstanding........ 1.40% 1.60% 1.40% 1.60%
</TABLE>
14
<PAGE>
Table 8 Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the weighted
average rates paid thereon:
<TABLE>
Six Months and Three Months Ended
June 30, 1998 and 1997
Six Months Three Months
1998 1997 1998 1997
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand............ $ 26,786 $ 21,421 $ 28,359 $ 21,718
MMDA/Savings and NOW accounts......... 66,869 2.87% 63,272 2.98% 68,337 2.79% 62,714 2.97%
Time.................................. 97,497 5.71% 87,474 5.64% 99,121 5.68% 90,372 5.68%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Deposits.................... $191,146 3.92% $172,167 3.96% $195,817 3.85% $174,804 4.00%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of June 30, 1998:
<TABLE>
Amount
<S> <C>
Three months or less....................................... $ 3,858
Over 3 months through 6 months............................. 2,182
Over 6 months through 1 year............................... 2,415
Over 1 year................................................ 3,439
----------
$ 11,894
</TABLE>
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $19,539,000, 8.04% to $262,627,000 from December 31,
1997 to June 30,1998. The significant changes were an increase in loans of
$16,996,000, a 10.21% increase and an increase in cash and cash equivalents of
$4,878,000, a 90.87% increase. Deposits increased $14,401,000, 7.80% to
$199,102,000. Non-interest bearing deposits increased $1,262,000 and interest
bearing deposits increased $13,139,000. The Corporation expects deposits to
increase throughout the remainder of the year. Borrowed funds increased
$700,000.
LIQUIDITY
Management evaluates the Corporation's liquidity position on a regular
basis to assure that funds are available to meet borrower and depositor needs,
fund operations, pay cash dividends and to invest excess funds to maximize
income. The Corporation's sources of liquidity include cash and cash
equivalents, investment securities available for sale, principal payments
received on loans, Federal funds purchased, FHLB borrowings, deposits and the
issuance of common stock.
Cash and cash equivalents equaled 3.90% of total assets as of June 30, 1998
versus 2.21% as of December 31, 1997. For the six month period ending June 30,
1998, $934,000 in net cash was provided from operations, investing activities
used $12,438,000, and financing activities provided $16,382,000. The accumulated
effect of the Corporation's operating, investing and financing activities was a
$4,878,000 increase in cash and cash equivalents during the six month period
ending June 31, 1998.
The Corporation's liquidity is considered adequate by management.
15
<PAGE>
CAPITAL
The capital of the Corporation consists of common stock, additional paid in
capital, retained earnings and net unrealized gain (loss) on available-for-sale
securities. For the six period ending June 30, 1998 capital increased
$1,105,000, which includes a $162,000 unrealized gain on available-for-sale
investment securities.
There are minimum risk based capital regulatory guidelines placed on the
Corporation's capital by The Federal Reserve Board. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of June 30, 1998:
Table 9 Capital Resources (in thousands)
<TABLE>
As of June 30, 1998 and 1997
Regulatory Requirements
Adequately Well
Capitalized Capitalized 1998 1997
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital........................ $36,621 $34,245
Tier 2 capital......................... 2,543 2,117
Total qualifying capital............ $39,164 $36,362
Ratio of equity to total assets
Tier 1 leverage ratio.................. 4% 5% 14.30% 15.40%
Tier 1 risk-based capital.............. 4% 6% 18.01% 20.26%
Total risk-based capital............... 8% 10% 19.26% 21.52%
</TABLE>
Year 2000 Issue
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements and to collect loans from customers whose
operations are negatively affected by year 2000 issue. The Corporation has an
internal task force to assess year 2000 compliance by the Corporation and its
vendors. In addition, the Bank asks commercial borrowers about year 2000
compliance as part of the loan application and review process. Management does
not anticipate that the Corporation will incur material operating expenses or be
required to invest heavily in computer system improvements to be year 2000
compliant. Nevertheless, the inability of the Corporation to successfully
address all year 2000 issues could result in interruptions in the Corporation's
business and have a material adverse effect on the Corporation's results of
operations.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Corporation and the Bank include, but are
not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's
16
<PAGE>
market area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Corporation and its business, including additional factors that
could materially affect the Corporation's financial results, is included in the
Corporation's filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Corporation currently does not enter into futures,
forwards, swaps, or options. However, the Corporation is party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions. Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised.
The Corporation's exposure to market risk is reviewed on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize income. Management
realizes certain risks are inherent and that the goal is to identify and
minimize the risks. Tools used by management include the standard GAP report and
a simulation model. The Corporation complements its stable core deposit base
with alternate sources of funds, which includes advances from the Federal Home
Loan Bank and on a very limited basis, jumbo certificates of deposit from
outside its market area. Management evaluates the funding needs and makes a
decision based on current interest rates and terms whether to fund internally or
from alternate sources. To date, the Corporation has not employed the use of
derivative financial instruments in managing the risk of changes in interest
rates. The Corporation has no market risk sensitive instruments held for trading
purposes. Management considers the Corporation's market risk to be reasonable at
this time.
17
<PAGE>
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of the Corporation was held
on April 16, 1998 ("Annual Meeting").
(b) The following directors were elected at the Annual Meeting for
terms expiring in 2001: Norman Fifelski, Dellvan Hoezee and
Robert Deppe. Other directors whose terms continued after the
meeting are as follows: David Van Solkema and Gerald Williams,
whose terms expire in 2000; and Lois Smalligan and John A. Van
Singel, whose terms expire in 1999.
(c) At the Annual Meeting, three directors were elected for terms
expiring in 2001 and shareholders approved an increase in
authorized common stock, $1.00 par value per share, from
2,000,000 to 4,000,000 shares.
The vote was as follows:
<TABLE>
ABSTAIN
FOR AGAINST (Including Broker Nonvotes)
Director Nominees:
<S> <C> <C> <C>
Norman Fifelski 640,921 161,491
Dellvan Hoezee 654,372 148,040
Robert Deppe 643,979 158,433
Gordon Van Singel 229,213
Increase in
Authorized Stock 801,356 28,504 6,178
</TABLE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) Reports on Form 8K - None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on For 10-Q for the quarter
ended June 30, 1998 to be signed on its behalf by the undersigned hereunto duly
authorized.
O.A.K. FINANCIAL CORPORATION
/s/ John A. Van Singel
John A. Van Singel
(Chief Executive Officer)
/s/ Martin R. Braun
Martin R. Braun
(Principal Accounting Officer)
DATE: August 12, 1998
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,245,602
<INT-BEARING-DEPOSITS> 171,383,438
<FED-FUNDS-SOLD> 400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,744,650
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 189,091,692
<ALLOWANCE> 2,638,891
<TOTAL-ASSETS> 262,626,746
<DEPOSITS> 199,101,791
<SHORT-TERM> 13,588,529
<LIABILITIES-OTHER> 1,916,174
<LONG-TERM> 10,000,000
0
0
<COMMON> 2,000,000
<OTHER-SE> 36,020,252
<TOTAL-LIABILITIES-AND-EQUITY> 262,626,746
<INTEREST-LOAN> 8,197,735
<INTEREST-INVEST> 1,794,174
<INTEREST-OTHER> 5,559
<INTEREST-TOTAL> 9,997,468
<INTEREST-DEPOSIT> 3,715,201
<INTEREST-EXPENSE> 4,253,959
<INTEREST-INCOME-NET> 5,743,509
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> (5,646)
<EXPENSE-OTHER> 3,120,191
<INCOME-PRETAX> 3,659,934
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,593,534
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 4.19
<LOANS-NON> 100,000
<LOANS-PAST> 12,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,565,000
<CHARGE-OFFS> 134,000
<RECOVERIES> 58,000
<ALLOWANCE-CLOSE> 2,639,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
