FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 issuer's 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 November 12, 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 9-18
Item 3
Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
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<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------
ASSETS
September 30, 1999 December 31, 1998
(Unaudited)
------------------ -----------------
<S> <C> <C>
Cash and due from banks ................................................... $ 9,135,802 $ 8,939,918
Available-for-sale securities - amortized cost of
$63,396,705 - 1999 ($55,079,539 - 1998)................................. 62,774,683 56,346,568
Loans receivable, net...................................................... 252,766,564 219,188,824
Loans held for sale........................................................ 2,703,701 4,679,962
Accrued interest receivable................................................ 2,463,941 2,026,185
Premises and equipment, net................................................ 10,025,292 7,186,364
Other assets............................................................... 4,145,904 3,409,984
------------- --------------
Total assets............................................................... $ 344,015,887 $ 301,777,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing........................................................... $ 208,429,501 $ 181,789,253
Noninterest bearing........................................................ 36,107,213 35,495,158
------------- -------------
Total deposits............................................................. 244,536,714 217,284,411
Borrowed funds............................................................. 30,065,057 27,995,284
Securities sold under agreements to repurchase............................. 25,846,671 14,373,304
Other liabilities.......................................................... 2,160,673 2,342,868
------------- -------------
Total liabilities.......................................................... 302,609,115 261,995,867
------------- -------------
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.......................................................... 34,015,851 31,294,233
Accumulated other comprehensive income (loss).............................. (410,534) 836,250
Unallocated common stock held by ESOP...................................... (500,000) 0
------------- -------------
Total stockholders' equity................................................. 41,406,772 39,781,938
------------- -------------
Total liabilities and stockholders' equity................................. $ 344,015,887 $ 301,777,805
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months and Three Months ended September 30, 1999 and 1998
Nine Months Three Months
---------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans ............................................... $15,620,398 $ 12,767,142 $5,490,198 $4,569,407
Available-for-sale securities......................... 2,415,861 2,636,948 858,685 842,774
Federal funds sold.................................... 54,238 19,927 35,694 14,368
---------- ------------ --------- ---------
Total interest income.................................... 18,090,497 15,424,017 6,384,577 5,426,549
Interest expense
Deposits ............................................. 6,142,247 5,647,703 2,148,162 1,932,502
Borrowed funds........................................ 758,949 563,351 248,669 211,369
Securities sold under agreements to repurchase........ 572,145 342,682 283,072 155,906
---------- ------------ --------- ---------
Total interest expense................................... 7,473,341 6,553,736 2,679,903 2,299,777
---------- ------------ --------- ---------
Net interest income...................................... 10,617,156 8,870,281 3,704,674 3,126,772
Provision for loan losses................................ 550,000 300,000 250,000 150,000
---------- ------------ --------- ---------
Net interest income after provision for
loan losses........................................... 10,067,156 8,570,281 3,454,674 2,976,772
---------- ------------ --------- ---------
Noninterest income
Service charges....................................... 551,262 416,835 209,700 147,382
Net gain on sale of available-for-sale loans.......... 508,795 912,361 72,328 226,583
Loan servicing fees................................... 122,363 145,562 36,626 50,837
Net gain (loss) on sale of available-for-sale
securities.......................................... 532,915 (5,646) 181,910 0
Other ............................................... 1,108,238 861,990 397,864 278,609
---------- ------------ --------- ---------
Total noninterest income................................. 2,823,573 2,331,102 898,428 703,411
Noninterest expenses
Salaries and employee benefits......................... 4,551,111 2,967,130 1,639,844 996,169
Occupancy.............................................. 510,217 460,606 178,554 195,842
Furniture and fixtures................................. 656,815 477,620 234,216 168,834
Michigan single business tax........................... 153,100 147,326 62,475 44,646
Printing and supplies................................. 222,426 187,556 91,756 61,479
Other ................................................ 1,732,379 1,337,378 605,292 579,261
---------- ------------ --------- ---------
Total noninterest expenses................................ 7,826,048 5,577,616 2,812,137 2,046,231
---------- ------------ --------- ---------
Income before federal income taxes........................ 5,064,681 5,323,767 1,540,965 1,633,952
Federal income taxes...................................... 1,455,969 1,540,164 406,867 474,630
---------- ------------ --------- ---------
Net income................................................ $ 3,608,712 $ 3,783,603 $1,134,098 $1,159,322
========== ============ ========= =========
Net income per basic and diluted
share of common stock ............................. $ 1.77 $ 1.86 $ 0.56 $ 0.57
========== ============ ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months and Three Months ended September 30, 1999 and 1998
Nine Months Three Months
-------------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other comprehensive income before income taxes:
Change in unrealized gain on
available-for-sale securities.................. $(1,889,050) $ 497,956 $ (830,145) $ 252,592
Income tax benefit (expense) related to
other comprehensive income..................... 642,266 (169,305) 282,249 (85,881)
----------- ----------- ---------- ----------
Other comprehensive (loss) income........................ (1,246,784) 328,651 (547,896) 166,711
Net income............................................... 3,608,712 3,783,603 1,134,098 1,159,322
----------- ----------- ---------- ----------
Comprehensive income..................................... $ 2,361,928 $ 4,112,254 $ 586,202 $1,326,033
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
-----------------------------------------
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
2 for 1 common stock split effected in the
form of a dividend................................ 0 1,014,387
----------- ------------
Balance, end of period............................... 2,041,775 2,028,775
=========== ============
Common stock
Balance, beginning of period......................... $ 2,028,775 $ 1,014,388
Issuance of common stock............................. 13,000 0
2 for 1 common stock split effected in the
form of a dividend................................ 0 1,014,387
----------- ------------
Balance, end of period............................... 2,041,775 2,028,775
----------- ------------
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......................... 31,223,848 29,562,991
Net income........................................... 3,608,712 3,783,603
2 for 1 common stock split effected in the
form of a dividend................................ 0 (1,014,387)
Cash dividends....................................... (816,709) (1,650,000)
----------- ------------
Balance, end of period............................... 34,015,851 30,682,207
----------- ------------
Accumulated other comprehensive income (loss)
Balance, beginning of period......................... 836,250 523,562
Other comprehensive (loss) income.................... (1,246,784) 328,651
----------- ------------
Balance, end of period............................... (410,534) 852,213
----------- ------------
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.................................. $41,406,772 $ 39,185,875
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income .......................................... $ 3,608,712 $ 3,783,603
Adjustments to reconcile net income to net
cash provided by (used in)operating activities:
Depreciation and amortization................... 567,404 361,581
Proceeds from sales of loans held
for sale..................................... 40,485,673 48,587,394
Disbursements for loans held for sale........... (38,000,617) (52,516,447)
Net gain on sales of available-for-
sale securities ............................. (532,915) 5,646
Net gain on sales of loans held for sale....... (508,795) (912,361)
Net amortization of investment premiums......... 141,571 152,189
Changes in operating assets and liabilities
which (used) provided cash:
Accrued interest receivable............... (437,756) (444,604)
Other assets.............................. (735,920) (640,484)
Other liabilities......................... (182,195) 732,721
----------- -----------
Net cash provided by (used in) operating activities......... 4,405,162 (885,762)
----------- -----------
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities........................... 10,588,243 8,174,825
Proceeds from sales................................ 2,780,456 2,009,298
Purchases.......................................... (20,814,115) (5,744,350)
Net increase in loans held for investment............. (33,577,740) (33,046,302)
Purchases of premises and equipment................... (3,314,855) (1,501,549)
----------- -----------
Net cash used in investing activities....................... (44,338,011) (30,108,078)
----------- -----------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW
accounts and savings deposits...................... 4,543,001 17,284,297
Net increase in time deposits......................... 22,709,301 6,513,311
Net increase in borrowed funds........................ 2,069,773 3,031,209
Net increase in securities sold under agreements
to repurchase...................................... 11,473,367 7,129,513
Common stock dividends paid........................... (816,709) (1,650,000)
Proceeds from sale of common stock.................... 150,000 0
----------- -----------
Net cash provided by financing activities................... 40,128,733 32,308,330
----------- -----------
Net increase in cash and cash equivalents................... 195,884 1,314,490
Cash and cash equivalents, beginning of period.............. 8,939,918 5,368,359
----------- -----------
Cash and cash equivalents, end of period.................... $ 9,135,802 $ 6,682,849
=========== ===========
</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 nine month period ended September
30, 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 periods 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 numbers of common shares outstanding
were 2,037,207 for the nine month period ended September 30, 1999 and 2,028,775
shares for the same period in 1998. The weighted numbers of common shares
outstanding were 2,041,775 for the three month period ended September 30, 1999
and 2,028,775 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 reduction of stockholders' 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 financial statements and notes contained therein.
NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998
RESULTS OF OPERATIONS
Net income equaled $1,134,098 for the three months ended September 30,
1999, compared to $1,159,322 for the same period in 1998. This is a 2.18%
decrease over the same period in 1998. Net income for the nine month period
ended September 30, 1999 was $3,608,712, compared to $3,783,603 for the same
period in 1998. This is a 4.62% decrease over the same period in 1998. Returns
on average equity were 10.99% for the three months ended September 30, 1999 and
11.96% for 1998. Returns on average assets were 1.34% for the three months ended
September 30, 1999 and 1.68% for 1998. Returns on average equity were 11.87% for
the nine months ended September 30,1999 and 13.45% for 1998. Returns on average
assets were 1.52% for the nine months ended September 30, 1999 and 1.89% for
1998.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Nine Months and Three Months Ended
September 30, 1999 and 1998
------------------------------------------------------------
Nine Months Three Months
----------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income...................................... $ 3,609 $ 3,784 $ 1,134 $ 1,159
Per share..................................... $ 1.77 $ 1.86 $ 0.56 $ 0.57
Earnings ratios:
Return on average assets...................... 1.52% 1.89% 1.34% 1.68%
Return on average equity...................... 11.87% 13.45% 10.99% 11.96%
</TABLE>
NET INTEREST INCOME
The following schedule presents the average daily balances, interest
income (on a fully taxable equivalent basis) and interest expense and average
rates earned and paid for the Bank's major categories of assets, liabilities,
and shareholders' equity for the periods indicated:
-9-
<PAGE>
<TABLE>
Table 2 Interest Yields and Costs
Nine Months and Three Months ended September 30
(dollars in thousands)
Nine Months
-----------------------------------------------------------------
1999 1998
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 1,433 $ 54 5.06% $ 474 $ 20 5.62%
Securities:
Taxable 35,297 1,619 6.13% 38,610 1,824 6.32%
Tax-exempt 20,169 1,112 7.37% 19,457 1,132 7.78%
Loans(1)(2) 239,956 15,647 8.72% 186,751 12,790 9.16%
--------- ------- ------- ------
Total earning assets/
total interest income 296,855 18,432 8.30% 245,292 15,766 8.59%
------- ------
Cash and due from
banks 8,358 6,338
Unrealized Gain 549 1,003
All other assets 14,211 9,320
Allowance for loan loss (2,872) (2,608)
Total assets: $ 317,101 $259,345
======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 82,276 1,568 2.55% $ 69,353 1,480 2.85%
Time 118,301 4,574 5.17% 98,207 4,168 5.67%
Fed. Funds Purchased 24,734 748 4.04% 13,407 445 4.44%
Other Borrowed Money 13,407 593 5.91% 10,554 461 5.84%
--------- ------- -------- ------
Total interest bearing
liabilities/total
interest expense 238,718 7,483 4.19% 191,521 6,554 4.58%
------- ------
Noninterest bearing
deposits 36,133 27,944
All other liabilities 2,369 2,238
Stockholders' Equity:
Unrealized Holding
Gain/Loss 361 662
Common Stock,
Surplus,
Retained Earnings 39,520 36,980
--------- --------
Total liabilities and
stockholders' equity: $ 317,101 $259,345
========= ========
Interest spread 10,617 4.11% 8,870 4.01%
Net interest income-FTE $10,949 $9,212
======= ======
Net Interest Margin as a
Percentage of Average
Earning Assets 4.93% 5.02%
==== ====
</TABLE>
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<PAGE>
<TABLE>
Table 2 Interest Yields and Costs
Nine Months and Three Months ended September 30
(dollars in thousands)
Three Months
----------------------------------------------------------------------
1999 1998
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 2,870 $ 36 4.93% $ 1,017 $ 14 5.64%
Securities:
Taxable 38,407 590 6.09% 37,021 572 6.13%
Tax-exempt 20,893 374 7.10% 19,603 377 7.62%
Loans(1)(2) 250,767 5,499 8.70% 200,549 4,578 9.06%
-------- ------- -------- ------
Total earning assets/
total interest income 312,937 6,499 8.24% 258,190 5,541 8.51%
-------- ------- -------- ------
Cash and due from
banks 8,998 7,237
Unrealized Gain (274) 1,037
All other assets 15,725 10,283
Allowance for loan loss (2,909) (2,705)
Total assets: $334,477 $274,042
======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 84,631 550 2.58% $ 74,238 527 2.81%
Time 124,331 1,599 5.10% 99,605 1,406 5.60%
Fed. Funds Purchased 30,897 330 4.24% 17,049 187 4.37%
Other Borrowed Money 13,741 205 5.91% 12,162 180 5.87%
-------- ------- -------- ------
Total interest bearing
liabilities/total
interest expense 253,600 2,684 4.20% 203,054 2,300 4.50%
-------- --------
Noninterest bearing
deposits 39,217 30,180
All other liabilities 2,210 2,374
Stockholders' Equity:
Unrealized Holding
Gain/Loss (181) 685
Common Stock,
Surplus,
Retained Earnings 39,631 37,749
--------- --------
Total liabilities and
stockholders' equity: $334,477 $274,042
========= ========
Interest spread 3,705 4.04% 3,127 4.01%
Net interest income-FTE $ 3,815 $3,241
======= ======
Net Interest Margin as a
Percentage of Average
Earning Assets 4.84% 4.98%
==== ====
-10-
</TABLE>
<PAGE>
( 1 ) Non-accruing loans are not significant during the periods indicated,
and for purposes of the computations above, are included in the
average daily loan balances.
( 2 ) Interest on loans includes net origination fees for the nine months
ended September 30, 1999 of $139,955 and $135,968 in 1998. For the
three months ended September 30, 1999 and 1998 the amounts were
$49,507 and $51,210.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $574,000 to $3,815,000 for the
three month period ended September 30, 1999, a 17.71% increase from the same
period in 1998. The major factors for the increase in net interest income for
the three months ended September 30, 1999 were non-interest bearing deposits
averaged $9,037,000 higher in 1999 than in the same period in 1998 and the loan
portfolio balance averaged $50,218,000 higher in 1999 compared to 1998. Earning
assets averaged $54,747,000, 21.20% higher for the three month period ended
September 30, 1999 compared to 1998; this volume change resulted in an
additional $1,168,000 in FTE interest income. The asset growth for the three
months ended September 30, 1999 was primarily funded by a 24.82% ($24,726,000)
increase in time deposits average balance and a 81.22% ($13,848,000) increase in
Fed Funds Purchased average balance and a 29.94% ($9,037,000) increase in
non-interest bearing deposits. For the three months ended September 30, 1999 the
average FTE interest rate earned on assets decreased .27%, decreasing FTE
interest income by $210,000. 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 .30%,
decreasing interest expense by $174,000. The net difference between interest
rates earned and paid was a $36,000 decrease in FTE net interest income. For the
three months ended September 30, 1999 the net interest yield decreased .14%
versus the same period in 1998; management expects this trend to continue. The
Corporation is benefiting from current mergers and acquisitions of other
financial institutions in its market area. For the nine month period ended
September 30, 1999 tax equivalent net interest income increased $1,737,000 to
$10,949,000, a 18.86% increase from the same period in 1998. The major factors
for the increase in net interest income for the nine months ended September 30,
1999 were noninterest bearing deposits averaged $8,189,000 higher in 1999 than
in the same period in 1998 and the loan portfolio balance averaged $53,205,000
higher in 1999 compared to 1998. Earning assets averaged $51,563,000, a 21.02%
increase for the nine months ended September 30, 1999. The average FTE interest
rate earned on assets decreased .29%, decreasing FTE interest income by $727,000
and the average rate paid on deposits, fed funds purchased and other borrowed
money decreased .39%, decreasing interest expense by $562,000. The difference
between interest rates earned and paid was a $165,000 decrease in FTE net
interest income. The net interest yield decreased .09% for the nine month period
ended September 30, 1999 versus the same period in 1998.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
-11-
<PAGE>
Table 3 Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30,
1999 Compared to 1998
Amount of
Increase/(Decrease)
Due to Change in
---------------------------------------------------------------------------
Nine Months Three Months
------------------------------------- ------------------------------------
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................. $ 36 $ (2) $ 34 $ 23 $ (1) $ 22
Securities:
Taxable........................ (152) (53) (205) 21 (3) 18
Tax Exempt..................... 39 (59) (20) 23 (26) (3)
Loans............................ 3,470 (613) 2,857 1,101 (180) 921
------ ------ ------- ------ ------ -------
Total interest income............ 3,393 (727) 2,666 1,168 (210) 958
Interest Expense
Interest bearing deposits
Savings/Now accounts............. 246 (158) 88 68 (45) 23
Time............................. 777 (371) 406 318 (125) 193
Fed. Funds Purchased............. 342 (39) 303 148 (5) 143
Other Borrowed Money............. 126 6 132 24 1 25
------ ------ ------- ------ ------ -------
Total interest expense........... 1,491 (562) 929 558 (174) 384
------ ------ ------- ------ ------ -------
Net Interest Income (FTE).......... $ 1,902 $ (165) $ 1,737 $ 610 $ (36) $ 574
======= ====== ======= ====== ======= =======
</TABLE>
-12-
<PAGE>
<TABLE>
Table 4 Noninterest Income (in thousands)
Nine Months and Three Months ended September 30,
1999 Compared to 1998
Nine Months Three Months
-------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service charges on deposit accounts................. $ 551 $ 417 $ 210 $ 147
Net gains on asset sales:
Loans........................................... 509 912 72 227
Securities...................................... 533 (6) 182 0
Other............................................... 1,231 1,008 434 329
-------- ------- -------- --------
Total noninterest income....................... $ 2,824 $ 2,331 $ 898 $ 703
======== ======= ======== ========
</TABLE>
Noninterest 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 Federal Home Loan Mortgage Corporation (Freddie Mac) loans. The
Corporation retains the servicing rights of these loans. Non-interest income
increased $195,000 or (28%) for the three month period ended September 30, 1999
versus 1998. The increase was due primarily to a $182,000 increase in gains of
securities available-for-sale, other miscellaneous income increased $105,000 for
the three month period ended September 30, 1999 versus 1998, and a $155,000
decrease on gains of real estate mortgage loan sales. For the nine months ended
September 30,1999 non-interest income increased $493,000, (21%). The increase
was due primarily to a $539,000 increase in gains of securities
available-for-sale, other miscellaneous income increased $223,000 and a $403,000
decrease on gains of real estate mortgage loan sales.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30,
1999 and 1998
Nine Months Three Months
------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits..................... $ 4,551 $ 2,967 $ 1,640 $ 996
Occupancy and equipment............................ 1,167 938 413 365
FDIC assessment.................................... 23 21 8 7
Postage............................................ 111 64 38 35
Printing and supplies........................... 222 188 92 61
Marketing.......................................... 255 246 105 70
Michigan Single Business Tax....................... 153 147 62 45
Other.............................................. 1,344 1,007 454 467
--------- -------- -------- --------
Total noninterest expense..................... $ 7,826 $ 5,578 $ 2,812 $ 2,046
========= ======== ======== ========
</TABLE>
Noninterest Expense
Non-interest expense increased $766,000 (37%) for the three month period
ended September 30, 1999 versus 1998. The major factors were a $644,000 increase
(65%) in salaries and employee benefits and a $48,000 increase (13%) in
occupancy expense. The majority of these increases are all related to the four
new branch locations that were opened in late 1998 and early 1999. Staffing the
new branches and additional support at the corporate office for the new branches
and growth from existing branches were the two primary factors for the salary
and employee benefit expense increase. For the nine month period ended September
30, 1999 non-interest expense increased $2,248,000 (40%)to $7,826,000
principally due to salaries and employee benefits expense which increased
$1,584,000 (53%)to $4,551,000,
-13-
<PAGE>
a $229,000 (24%) increase in occupancy expenses and a $47,000 increase (73%) in
postage expense for the nine month period ended September 30, 1999 versus 1998.
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Nine Months Ended
September 30, 1999 and 1998
1999 1998
-------- --------
<S> <C> <C>
Nonaccrual loans................................................ $ 342 $ 100
90 days or more past due & still accruing....................... 3,109 103
-------- --------
Total Nonperforming Loans.................................. 3,451 203
Other real estate............................................... 116 0
-------- --------
Total Nonperforming Assets.................................. $ 3,567 $ 203
======== ========
Nonperforming loans as a percent of total loans................. 1.35% .10%
Nonperforming assets as a percent of total loans................ 1.39% .10%
Nonperforming loans as a percent of the loan loss reserve....... 112.67% 7.23%
</TABLE>
The September 30, 1999 nonperforming percentages are lower than for the
quarter ended June 30, 1999. Management is aggressively working on the
nonperforming loans.
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. $3,109,000 of the nonperforming assets
consist of two commercial real estate loans that are delinquent but the Bank is
fully collateralized, a slightly larger than normal reserve portion has been
allocated to those specific assets, and the Bank expects to collect all
principal and interest owed on the larger of the two, before December 31, 1999,
and to have the delinquency fully resolved on the other by then.
-14-
<PAGE>
<TABLE>
Table 7 Loan Loss Experience (in thousands)
Nine Months and Three Months Ended
September 30, 1999 and 1998
Nine Months Three Months
-------------------- -------------------
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Loans:
Average daily balance of loans for the period.......... $239,927 $186,751 $250,737 $200,549
Amount of loans outstanding at end of period........... 255,830 208,429 255,830 208,429
Allowance for loan losses:
Balance at beginning of period......................... 2,879 2,565 2,854 2,639
Loans charged off:
Commercial.......................................... 0 73 0 3
Consumer............................................ 449 72 17 8
-------- -------- -------- --------
Total charge-offs................................. 449 145 17 11
Recoveries of loans previously charged off:
Commercial.......................................... 19 18 3 5
Consumer............................................ 64 70 23 25
-------- -------- -------- --------
Total recoveries................................. 83 88 26 30
-------- -------- -------- --------
Net loans charged off (recovered)...................... 366 57 (9) (19)
Additions to allowance charged to operations 550 300 200 150
-------- -------- -------- --------
Balance at end of period......................... $ 3,063 $ 2,808 $ 3,063 $2,808
======== ======== ======== ========
Ratios:
Net loans charged off to avg loans outstanding......... .15% .03% -.00% .01%
Allowance for loan losses to loans outstanding......... 1.20% 1.35% 1.20% 1.35%
</TABLE>
Loan Loss Experience
Starting in the 2nd quarter of 1998 the Bank aggressively targeted the
indirect consumer loan market, primarily auto loans. The program has increased
the consumer loan portfolio balance substantially and has raised the net charge
off percentage. For the three month period ended September 30, 1999, there were
net recoveries of $9,000. Current net charge off percentages are below peer
group comparisons. Management will continue to monitor the results and make
changes to the program as needed.
Table 8 Average Daily Deposits (in thousands)
<TABLE>
The following table sets forth the average deposit balances and the weighted
average rates paid thereon:
Nine Months and Three Months Ended
September 30, 1999 and 1998
Nine Months Three Months
----------- ------------
1999 1998 1999 1998
--------------- -------------- -------------- ----------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.............. $ 36,133 $ 27,944 $ 39,217 $ 30,180
MMDA/Savings and NOW accounts........... 82,276 2.55% 69,353 2.85% 84,631 2.58% 74,238 2.81%
Time.................................... 118,301 5.17% 98,207 5.67% 124,331 5.10% 99,605 5.60%
-------- ----- -------- ---- -------- ---- -------- -----
Total Deposits...................... $236,710 3.47% $195,504 3.86% $248,179 3.44% $204,023 3.76%
======== ===== ======== ==== ======== ==== ======== =====
</TABLE>
-15-
<PAGE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of September 30, 1999:
Amount
------
Three months or less....................................... $15,381
Over 3 months through 6 months............................. 4,485
Over 6 months through 1 year.............................. 3,477
Over 1 year................................................ 2,690
-------
$26,033
=======
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $42,238,000 (14%) to $344,016,000 from December 31,
1998 to September 30, 1999. The significant changes were an increase in loans
receivable, net of $33,578,000 (15%). Deposits increased $27,252,000 (13%) to
$244,537,000, non-interest bearing deposits increased $612,000 and interest
bearing deposits increased $26,640,000. The Corporation expects deposits to
increase through-out the remainder of the year. Borrowed funds increased
$2,070,000 (7%) and securities sold under agreements to repurchase increased
$11,473,000 (80%).
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,
securities sold under agreements to repurchase and the issuance of common stock.
Cash and cash equivalents equaled 2.66% of total assets as of September 30,
1999 versus 2.96% as of December 31, 1998. For the nine month period ended
September 30, 1999, $4,405,000 in net cash was provided from operations,
investing activities used $44,338,000, and financing activities provided
$40,129,000. The accumulated effect of the Corporation's operating, investing
and financing activities was a $196,000 increase in cash and cash equivalents
during the nine month period ended September 30, 1999.
The Corporation's liquidity is considered adequate by management.
CAPITAL
The capital of the Corporation consists of common stock, additional paid-in
capital, retained earnings and accumulated other comprehensive income or loss.
For the nine month period ended September 30, 1999 capital increased $1,625,000,
which includes a $411,000 unrealized loss 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 September 30, 1999:
-16-
<PAGE>
Table 9 Capital Resources (in thousands)
<TABLE>
As of September 30, 1999 and 1998
Regulatory Requirements
Adequately Well
Capitalized Capitalized 1999 1998
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital........................ $41,108 $37,624
Tier 2 capital......................... 3,063 2,793
Total qualifying capital............ $44,171 $40,417
======= =======
Ratio of equity to total assets
Tier 1 leverage ratio.................. 4% 5% 12.31% 13.76%
Tier 1 risk-based capital.............. 4% 6% 14.49% 16.84%
Total risk-based capital............... 8% 10% 15.57% 18.09%
</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.
Corporation 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 $25,000 on Year 2000
compliance and does not expect to spend any significant additional amounts 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.
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.
-17-
<PAGE>
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.
-18-
<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.
-19-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on For 10-Q for the quarter
ended September 30, 1999 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: 11/12/99
-20-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,135,802
<INT-BEARING-DEPOSITS> 208,429,501
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,774,683
<INVESTMENTS-CARRYING> 63,396,705
<INVESTMENTS-MARKET> 62,774,683
<LOANS> 255,470,265
<ALLOWANCE> 3,063,022
<TOTAL-ASSETS> 344,015,887
<DEPOSITS> 244,536,714
<SHORT-TERM> 39,696,672
<LIABILITIES-OTHER> 2,160,673
<LONG-TERM> 16,215,056
0
0
<COMMON> 2,041,775
<OTHER-SE> 39,364,997
<TOTAL-LIABILITIES-AND-EQUITY> 344,015,887
<INTEREST-LOAN> 15,620,398
<INTEREST-INVEST> 2,415,861
<INTEREST-OTHER> 54,238
<INTEREST-TOTAL> 18,090,497
<INTEREST-DEPOSIT> 6,142,247
<INTEREST-EXPENSE> 7,473,341
<INTEREST-INCOME-NET> 10,617,156
<LOAN-LOSSES> 550,000
<SECURITIES-GAINS> 532,915
<EXPENSE-OTHER> 7,826,048
<INCOME-PRETAX> 5,064,681
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,608,712
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 4.11
<LOANS-NON> 342,000
<LOANS-PAST> 3,109,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,879,000
<CHARGE-OFFS> 449,000
<RECOVERIES> 83,000
<ALLOWANCE-CLOSE> 3,063,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
