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 March 31, 1999
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: 2,041,775 shares of the Company's Common
Stock ($1 par value) were outstanding as of March 31, 1999.
-1-
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 3
Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K 18
Signatures 19
-2-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
ASSETS
March 31, December 31,
1999 1998
(Unaudited)
----------- ---------
<S> <C> <C>
Cash and due from banks ................................................... $ 7,736,553 $ 8,939,918
Available-for-sale securities - amortized cost of
$53,906,096 - 1999 ($55,079,539 - 1998)................................. 54,819,735 56,346,568
Loans receivable, net...................................................... 226,050,122 219,188,824
Loans held for sale........................................................ 5,528,755 4,679,962
Accrued interest receivable................................................ 2,181,278 2,026,185
Premises and equipment, net................................................ 8,033,349 7,186,364
Other assets............................................................... 3,543,087 3,409,984
------------- --------------
Total assets............................................................... $ 307,892,879 $ 301,777,805
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing........................................................... $ 199,244,766 $ 181,789,253
Noninterest bearing........................................................ 32,054,167 35,495,158
------------- --------------
Total deposits............................................................. 231,298,933 217,284,411
Borrowed funds............................................................. 17,238,056 27,995,284
Securities sold under agreements to repurchase............................. 15,769,043 14,373,304
Other liabilities.......................................................... 2,607,122 2,342,868
------------- --------------
Total liabilities.......................................................... 266,913,154 261,995,867
------------- --------------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized;
2,041,775 shares issued and outstanding (2,028,775 shares in 1998) 2,041,775 2,028,775
Additional paid-in capital................................................. 6,259,680 5,622,680
Retained earnings.......................................................... 32,578,187 31,294,233
Accumulated other comprehensive income..................................... 600,083 836,250
Unallocated common stock held by ESOP...................................... (500,000) 0
------------- --------------
Total stockholders' equity................................................. 40,979,725 39,781,938
------------- --------------
Total liabilities and stockholders' equity................................. $ 307,892,879 $ 301,777,805
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Three Months ended March 31, 1999 and 1998
1999 1998
---- ----
<S> <C> <C>
Interest income
Loans ............................................... $ 4,915,221 $ 3,955,853
Available-for-sale securities......................... 795,111 919,599
Federal funds sold.................................... 0 891
----------- -----------
Total interest income.................................... 5,710,332 4,876,343
Interest expense
Deposits ............................................. 1,921,897 1,835,400
Borrowed funds........................................ 301,438 182,059
Securities sold under agreements to repurchase........ 129,278 90,441
----------- -----------
Total interest expense................................... 2,352,613 2,107,900
----------- -----------
Net interest income...................................... 3,357,719 2,768,443
Provision for loan losses................................ 150,000 50,000
----------- -----------
Net interest income after provision for
loan losses........................................... 3,207,719 2,718,443
----------- -----------
Noninterest income
Service charges....................................... 157,092 130,198
Net gain on sale of available-for-sale loans.......... 320,467 330,412
Loan servicing fees................................... 41,298 53,695
Net gain on sale of available-for-sale securities..... 0 2,674
Other ............................................... 386,352 339,850
----------- -----------
Total noninterest income................................. 905,209 856,829
Noninterest expenses
Salaries and employee benefits......................... 1,361,161 827,593
Occupancy.............................................. 134,307 133,546
Furniture and fixtures................................. 201,042 147,353
Michigan single business tax........................... 35,080 58,600
Printing and supplies................................. 71,970 47,405
Other ................................................ 556,946 356,274
----------- -----------
Total noninterest expenses................................ 2,360,506 1,570,771
----------- -----------
Income before federal income taxes........................ 1,752,422 2,004,501
Federal income taxes...................................... 496,400 585,132
----------- -----------
Net income................................................ $ 1,256,022 $ 1,419,369
=========== ===========
Net income per basic share of common stock ............... $ 0.63 $ 0.70
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Three Months ended March 31, 1999 and 1998
Three Months
------------
1999 1998
---- ----
<S> <C> <C>
Other comprehensive income before income taxes:
Change in unrealized gain on
available-for-sale securities.................. $ (353,390) $ 188,712
Income tax benefit (expense) related to
other comprehensive income..................... 117,223 (64,161)
---------- ----------
Other comprehensive (loss) income................. (236,167) 124,551
Net income............................................... 1,256,022 1,419,369
---------- ----------
Comprehensive income..................................... $1,019,855 $1,543,920
========== ==========
</TABLE>
-5-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Three Months Ended March 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Shares of common stock issued and outstanding
Balance, beginning of period......................... $ 2,028,775 $ 1,014,388
Issuance of common stock............................. 13,000 0
----------- ------------
Balance, end of period............................... 2,041,775 1,014,388
=========== ============
Common stock
Balance, beginning of period......................... $ 2,028,775 $ 1,014,388
Issuance of common stock............................. 13,000 0
----------- ------------
Balance, end of period............................... 2,041,775 1,014,388
----------- ------------
Additional paid-in-capital..................................
Balance, beginning of periods........................ 5,622,680 5,622,680
Issuance of common stock............................. 637,000 0
----------- ------------
Balance, end of period............................... 6,259,680 5,622,680
----------- ------------
Retained earnings
Balance, beginning of period......................... 31,322,165 29,562,991
Net income........................................... 1,256,022 1,419,369
Cash dividends....................................... 0 1,000,000
----------- ------------
Balance, end of period............................... 32,578,187 29,982,360
----------- ------------
Accumulated other comprehensive income
Balance, beginning of period......................... 836,250 523,562
Other comprehensive (loss) income.................... (236,167) 124,551
----------- ------------
Balance, end of period............................... 600,083 648,113
----------- ------------
Unallocated common stock held by ESOP
Balance, beginning of period......................... 0 0
Issuance of 10,000 shares to ESOP.................... (500,000) 0
Balance, end of period............................... (500,000) 0
----------- ------------
Total stockholders' equity.................................. $40,979,725 $37,267,541
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income .......................................... $ 1,256,022 $ 1,419,369
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 160,933 122,175
Proceeds from sales of loans held
for sale..................................... 21,652,278 18,048,284
Disbursements for loans held for sale........... (22,180,604) (19,462,258)
Net gain on sales of available-for-
sale securities ............................. 0 (2,674)
Net gain on sales of loans held for sale....... (320,467) (330,411)
Net amortization of investment premiums......... 42,203 51,053
Changes in operating assets and liabilities
which (used) provided cash:
Accrued interest receivable............... (155,093) (319,169)
Other assets.............................. (133,103) (273,780)
Other liabilities......................... 264,254 1,831,124
-------------- -----------
Net cash provided by operating activities................... 586,423 1,083,713
-------------- -----------
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities........................... 2,660,987 2,026,934
Proceeds from sales................................ 0 533,705
Purchases.......................................... (1,387,552) (1,343,598)
Net increase in loans held for investment............. (6,861,298) (5,980,612)
Purchases of premises and equipment................... (1,004,958) ( 123,130)
-------------- -----------
Net cash used in investing activities....................... (6,592,821) (4,886,701)
-------------- -----------
Cash Flows from Financing Activities:
Net decrease in demand deposits, NOW
accounts and savings deposits...................... (3,840,877) (456,985)
Net increase in time deposits......................... 17,855,399 5,195,454
Net (decrease) increase in borrowed funds............. (10,757,228) 594,625
Net increase in securities sold under agreements
to repurchase...................................... 1,395,739 863,760
Common stock dividends paid........................... 0 (1,000,000)
Proceeds from sale of common stock.................... 150,000 0
-------------- -----------
Net cash provided by financing activities................... 4,803,033 5,196,854
-------------- -----------
Net increase in cash and cash equivalents................... (1,203,365) 1,393,866
Cash and cash equivalents, beginning of period.............. 8,939,918 5,368,359
-------------- -----------
Cash and cash equivalents, end of period.................... $ 7,736,553 $ 6,762,225
============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-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 three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Corporation's annual report on Form 10-K for the year ended December 31 1998.
Effective February 1, 1999, the Corporation issued 28,775 shares of its
common stock in exchange for all of the outstanding common stock of Dornbush
Insurance Company, Inc. (DIA) based on a conversion ratio of .719475 shares of
the Corporation's common stock, for a total value of $1,438,750. The merger has
been accounted for as a pooling of interests. Accordingly, the Corporation's
consolidated financial statements have been restated for all period prior to the
business combination to include the combined financial results of O.A.K.
Financial Corporation and DIA. DIA's results were immaterial prior to the
merger.
NOTE 2 STOCKHOLDERS EQUITY
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 2,009,056 for the three month period ending March 31, 1999 and 2,000,000
shares for the same period in 1998.
In connection with the Corporation's 401(k) savings and profit-sharing
plan, one-third of the Corporation's payment into the profit-sharing plan is to
be paid in O.A.K. Corporation common stock pursuant to an employee stock
ownership plan (ESOP) established on January 29, 1999. On that date, the
Corporation loaned $500,000 to the ESOP to enable the ESOP to purchase 10,000
newly issued shares of the Corporation's common stock at a price of $50 per
share. The loan obligation of the ESOP is considered unearned employee benefit
expense and, as such, is presented in the accompanying consolidated financial
statements as a deduction of stockholder's equity.
-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 eleven banking offices serving eleven communities in Kent, Ottawa and
Allegan Counties. Following the close of business on January 31, 1999 the
Corporation completed the merger of Dornbush Insurance Company Inc. (DIA) in a
stock for stock transaction. Total assets of DIA were $ 359,873. The transaction
was accounted for as a pooling-of-interests. Accordingly the assets, liabilities
and stockholders' equity as reported by DIA prior to consummation, were combined
with the assets, liabilities and stockholder's equity of the Corporation. Under
the terms of the merger agreement, holders of DIA common stock received .719475
shares of O.A.K. Financial Corporation common stock, par value $1.00 per share,
for each share of DIA common stock resulting in the issuance of 28,775 shares of
the Corporation's common stock.
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 1998 annual report on Form
10-K and the audited financial statements and notes contained therein.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
RESULTS OF OPERATIONS
Net income equaled $1,256,022 for the three months ending March 31, 1999,
compared to $1,419,369 for the same period in 1998. This is a 11.51% decrease
over the same period in 1998. Return on average equity was 12.71% for the three
months ending March 31, 1999 and 15.55% for 1998. Return on average assets was
1.68% for the three months ending March 31, 1999 and 2.33% for the same period
in 1998.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net income...................................... $ 1,256 $ 1,419
Per share..................................... $ 0.63 $ 0.70
Earnings ratios:
Return on average assets...................... 1.68% 2.33%
Return on average equity...................... 12.71% 15.55%
</TABLE>
NET INTEREST INCOME
The following schedule presents the average daily balances, interest income
(on a fully taxable equivalent basis) and interest expense and average rates
earned and paid for the Bank's major categories of assets, liabilities, and
shareholders' equity for the periods indicated:
-9-
<PAGE>
Table 2 Interest Yields and Costs
<TABLE>
Three Months ended March 31
1999 1998
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
Assets:
<S> <C> <C> <C> <C> <C> <C>
Fed. funds sold $ 14 $ 0 4.75% $ 66 $ 1 5.49%
Securities:
Taxable 34,351 520 6.14% 41,256 649 6.38%
Tax-exempt 20,139 384 7.74% 19,196 377 7.96%
Loans(1)(2) 229,128 4,926 8.72% 173,396 3,962 9.27%
--------- --------- --------- --------
Total earning assets/ total interest
income 283,632 5,830 8.34% 233,914 4,989 8.65%
--------- --------
Cash and due from banks 7,814 5,550
Unrealized Gain 1,173 989
All other assets 12,991 8,562
Allowance for loan loss (2,883) (2,552)
Total assets: $302,727 $246,463
========= =========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/ NOW accounts $ 80,046 500 2.54% $ 65,385 477 2.96%
Time 109,540 1,422 5.26% 95,855 1,359 5.75%
Fed. Funds Purchased 23,902 239 4.06% 12,249 142 4.71%
Other Borrowed Money 13,056 192 5.96% 8,615 130 6.13%
--------- --------- --------- --------
Total interest bearing
liabilities/total interest expense 226,544 2,353 4.21% 182,104 2,108 4.69%
--------- --------
Noninterest bearing deposits 33,689 25,196
All other liabilities 2,546 2,320
Stockholders' Equity:
Unrealized Holding Gains 773 653
Common Stock, Surplus, Retained
Earnings 39,175 36,190
--------- ---------
Total liabilities and
stockholders' equity: $302,727 $246,463
========= =========
Interest spread 3,358 4.13% 2,768 3.95%
Net interest income-FTE $3,477 $2,881
====== ========
Net Interest Margin as a Percentage of
Average Earning Assets 4.97% 4.99%
===== =====
</TABLE>
-10-
<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 three months
ended March 31, 1999 of $48,499 and $38,760 in 1998.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $596,000 to $3,477,000 for the
three month period ended March 31, 1999, a 20.69% increase from the same period
in 1998. The major factors for the increase in net interest income for the three
months ended March 31, 1999 were non-interest bearing deposits averaged
$8,493,000 higher in 1999 than in the same period in 1998, a 33.71% increase,
and the loan portfolio balance averaged $55,732,000 higher in 1999 compared to
1998, a 32.14% increase. Earning assets averaged $49,718,000 higher, a 21.25%
increase from the three month period ending March 31,1998; this volume change
resulted in an additional $1,110,000 in FTE interest income. The asset growth
for the three months ended March 31, 1999 was primarily funded by a 22.42% (
$14,661,000) increase in MMDA, savings and NOW accounts and a 14.28% increase
($13,685,000) in time deposits, and a $11,653,000 increase (95.13%) increase in
Fed Funds Purchased, and a $8,493,000 increase (33.71%) in non-interest bearing
deposits. For the three months ended March 31, 1999 the average FTE interest
rate earned on assets decreased .31%, decreasing FTE interest income by
$269,000. The major reason for 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 .48%, decreasing interest
expense by $207,000. The net difference between interest rates earned and paid
was a $62,000 decrease in FTE net interest income.
For the three months ended March 31, 1999 the net interest yield decreased
.02% versus the same period in 1998. Management expects this trend to continue,
the majority of the deposit growth for the remainder of 1999 is expected to be
from time deposits which are a higher cost of funds than savings and NOW
accounts, as a result the FTE net interest yield is expected to decrease
somewhat in the next nine months.
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>
Three Months Ended March 31,
1999 Compared to 1998
Amount of
Increase/(Decrease)
Due to Change in
--------------------------------------------------------------
Total Amount
of
Average Increase/
Volume Rate (Decrease)
------ ------- ----------
Interest Income
<S> <C> <C> <C>
Federal funds sold......................... $ (1) $ 0 $ (1)
Securities:
Taxable................................ (105) (24) (129)
Tax Exempt............................. 18 (11) 7
Loans.................................... 1,198 (234) 964
--------- ---------- ---------
Total interest income.................... 1,110 (269) 841
Interest Expense
Interest bearing deposits
Savings/Now accounts..................... 92 (69) 23
Time..................................... 178 (115) 63
Fed. Funds Purchased..................... 117 (20) 97
Other Borrowed Money..................... 65 (3) 62
--------- ---------- ---------
Total interest expense................... 452 (207) 245
--------- ---------- ---------
Net Interest Income (FTE) $ 658 $ ( 62) $ 596
========= ========== =========
</TABLE>
-12-
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Three Months ended March 31
1999 1998
------ -----
<S> <C> <C>
Service charges on deposit accounts....................... $ 157 $ 130
Net gains on asset sales:
Loans................................................. 320 330
Securities............................................ 0 3
Other..................................................... 428 394
-------- --------
Total noninterest income............................. $ 905 $ 857
======== ========
</TABLE>
Noninterest Income
Non-interest income consists of service charges on deposit accounts,
service fees, gains on investment securities available for sale, gains from
sales of loans to Federal Home Loan Mortgage Corporation (Freddie Mac) and
commissions from insurance sales. The Corporation retains the servicing rights
on sold (Freddie Mac) loans. Noninterest income increased $48,000 or 5.6% for
the three month period ending March 31, 1999 versus 1998. The increase was due
mainly to a $27,000 increase in service charge fees on deposit accounts.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Three Months Ended March 31
1999 1998
------ -----
<S> <C> <C>
Salaries and employee benefits........................... $ 1,361 $ 828
Occupancy and equipment.................................. 335 281
FDIC assessment.......................................... 8 7
Postage.................................................. 41 5
Printing and supplies................................. 72 47
Marketing................................................ 91 58
Michigan Single Business Tax............................. 35 59
Other.................................................... 418 286
---------- ----------
Total noninterest expense........................... $ 2,361 $ 1,571
========== ==========
</TABLE>
Noninterest Expense
Non-interest expense increased $790,000 or 50.29% for the three month
period ending March 31, 1999 versus 1998. The major factors for the increase
were a $533,000 increase, or 64.37%, in salary and employee benefits, a $54,000
increase, 19.22%, in occupancy and equipment, a $36,000 increase, 720%, in
postage expense, a $25,000 increase, 53.19%, in stationery, supplies and
printing expense. The majority of these increases are all related to the three
new branch locations that were opened in 1998 and the fourth branch opening in
early 1999. Staffing the new branches and additional support at the corporate
office for the new branches and growth from existing offices were the two major
factors for the salary and employee benefit expense increase.
-13-
<PAGE>
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Three Months Ended March 31,
1999 1998
------ -----
<S> <C> <C>
Nonaccrual loans................................................ $ 350 $ 105
90 days or more past due & still accruing....................... 89 84
-------- --------
Total Nonperforming Loans.................................. 439 189
Other real estate............................................... 116 0
-------- --------
Total Nonperforming Assets.................................. $ 555 $ 189
======== ========
Nonperforming loans as a percent of total loans................. .19% .11%
Nonperforming assets as a percent of total loans................ .24% .11%
Nonperforming loans as a percent of the loan loss reserve....... 15.83% 7.5%
</TABLE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Three Months Ended March 31
1999 1998
------ ------
<S> <C> <C>
Loans:
Average daily balance of loans for the period.................... $224,024 $173,396
Amount of loans outstanding at end of period..................... 228,824 177,975
Allowance for loan losses:
Balance at beginning of period................................... 2,879 2,565
Loans charged off:
Commercial.................................................... 0 70
Consumer...................................................... 313 45
--------- ----------
Total charge-offs........................................... 313 115
Recoveries of loans previously charged off:
Commercial.................................................... 8 6
Consumer...................................................... 50 15
--------- ----------
Total recoveries........................................... 58 21
--------- ----------
Net loans charged off............................................ 255 94
Additions to allowance charged to operations 150 50
--------- ----------
Balance at end of period................................... $ 2,774 $ 2,521
========= ==========
Ratios:
Net loans charged off to avg loans outstanding................... .11% .05%
Allowance for loan losses to loans outstanding................... 1.21% 1.42%
</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>
Three Months Ended March 31
1999 1998
------------------------- ------------------------
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest bearing demand..................... $ 33,689 $ 25,196
MMDA/Savings and NOW accounts.................. 80,046 2.54% 65,385 2.96%
Time........................................... 109,540 5.26% 95.855 5.75%
--------- ----- --------- -----
Total Deposits............................. $ 223,275 3.49% $ 186,436 3.99%
========= ===== ========= =====
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of March 31, 1999:
<TABLE>
Amount
<S> <C>
Three months or less....................................... $ 11,126
Over 3 months through 6 months............................. 945
Over 6 months through 1 year.............................. 10,510
Over 1 year................................................ 1,498
--------
$ 24,079
========
</TABLE>
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $6,115,000, 2.03% to $307,893,000 from December 31,
1998 to March 31, 1999. The significant changes were an increase in loans of
$6,861,000, a 3.13% increase. Deposits increased $14,015,000, 6.45% to
$231,299,000; non-interest bearing deposits decreased $3,441,000 and interest
bearing deposits increased $17,456,000. The Corporation expects deposits to
increase through-out the remainder of the year. Borrowed funds increased
$10,757,000.
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 2.51% of total assets as of March 31,
1999 versus 2.96% as of December 31, 1998. For the three month period ending
March 31, 1999, $586,000 in net cash was provided from operations, investing
activities used $7,093,000, and financing activities provided $5,303,000. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $1,203,000 decrease in cash and cash equivalents during the
three month period ending March 31, 1999.
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 accumulated other comprehensive income. For the
three month period ending March 31, 1999 capital increased $1,198,000, which
includes a $236,000 decrease of accumulated other comprehensive income.
There are minimum risk based capital regulatory guidelines placed on the
Corporation's capital by The Federal Reserve Board. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of March 31, 1999:
Table 9 Capital Resources (in thousands)
<TABLE>
Regulatory Requirements
March 31
-----------------------------
Adequately Well
Capitalized Capitalized 1999 1998
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital........................ $38,657 $35,910
Tier 2 capital......................... 2,774 2,399
Total qualifying capital............ $41,431 $38,309
Ratio of equity to total assets
Tier 1 leverage ratio.................. 4% 5% 12.85% 14.61%
Tier 1 risk-based capital.............. 4% 6% 15.22% 18.72%
Total risk-based capital............... 8% 10% 16.32% 19.97%
</TABLE>
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 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.
Coorporation management has developed and the Board of Directors has
approved a comprehensive Year 2000 Compliance Plan. The Corporation has an
internal task force to assess Year 2000 compliance by the Corporation, its
vendors, and major commercial loan customers. In addition, the Bank asks
commercial borrowers about Year 2000 compliance as part of the loan application
and review process.
To date, the Corporation has spent approximately $5,000 on Year 2000
compliance and expects to spend an additional $5,000 to complete this work.
The Corporation presently anticipates that it will complete its Year 2000
assessment and remediation by December 31, 1999. However, there can be no
assurance that the Corporation will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the
Corporation may be adversely affected by the inability of other businesses whose
systems interact with the Corporation to become Year 2000 compliant.
-16-
<PAGE>
Although the Corporation expects its internal systems to be Year 2000
compliant as described above, the Corporation is in the process of preparing a
contingency plan that will specify what it plans to do if important internal or
external systems are not Year 2000 compliant in a timely manner.
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 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 subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information 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 by
the Asset/Liability Committee. 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 has no market risk
sensitive instruments held for trading purposes. Management believes the
Corporation's market risk is reasonable at this time.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on 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 March 31, 1999 to be signed on its behalf by the undersigned hereunto duly
authorized.
O.A.K. FINANCIAL CORPORATION
John A. Van Singel
(Chief Executive Officer)
Martin R. Braun
(Principal Accounting Officer)
DATE: 5/14/99
-19-
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