FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 13, 1999.
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<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 4.
Submission of Matters to a Vote of Security Holders 18
Item 6.
Exhibits and Reports on Form 8-K 18
Signatures 19
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<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
ASSETS
June 30, 1999 December 31, 1998
(Unaudited)
<S> <C> <C>
Cash and due from banks ................................................... $ 8,462,115 $ 8,939,918
Available-for-sale securities - amortized cost of
$53,742,911 - 1999 ($55,079,539 - 1998)................................. 53,534,789 56,346,568
Loans receivable, net...................................................... 237,432,660 219,188,824
Loans held for sale........................................................ 3,497,347 4,679,962
Accrued interest receivable................................................ 2,158,282 2,026,185
Premises and equipment, net................................................ 9,238,913 7,186,364
Other assets............................................................... 3,617,455 3,409,984
-------------- --------------
Total assets............................................................... $ 317,941,561 $ 301,777,805
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing........................................................... $ 203,435,315 $ 181,789,253
Noninterest bearing........................................................ 34,133,364 35,495,158
-------------- --------------
Total deposits............................................................. 237,568,679 217,284,411
Borrowed funds............................................................. 14,474,347 27,995,284
Securities sold under agreements to repurchase............................. 22,690,979 14,373,304
Other liabilities.......................................................... 2,661,709 2,342,868
-------------- --------------
Total liabilities.......................................................... 277,395,714 261,995,867
-------------- --------------
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.......................................................... 32,881,752 31,294,233
Accumulated other comprehensive income (loss).............................. (137,360) 836,250
Unallocated common stock held by ESOP...................................... (500,000) 0
-------------- --------------
Total stockholders' equity................................................. 40,545,847 39,781,938
-------------- --------------
Total liabilities and stockholders' equity................................. $ 317,941,561 $ 301,777,805
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June 30, 1999 and 1998
Six Months Three Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans ............................................... $10,130,200 $ 8,197,735 $5,214,979 $4,241,882
Available-for-sale securities......................... 1,557,176 1,794,174 762,065 874,575
Federal funds sold.................................... 18,544 5,559 18,544 4,668
----------- ----------- ----------- ----------
Total interest income.................................... 11,705,920 9,997,468 5,995,588 5,121,125
Interest expense
Deposits ............................................. 3,994,085 3,715,201 2,072,188 1,879,801
Borrowed funds........................................ 510,280 351,982 208,842 169,923
Securities sold under agreements to repurchase........ 289,073 186,776 159,795 96,335
----------- ----------- ----------- ----------
Total interest expense................................... 4,793,438 4,253,959 2,440,825 2,146,059
----------- ----------- ----------- ----------
Net interest income...................................... 6,912,482 5,743,509 3,554,763 2,975,066
Provision for loan losses................................ 300,000 150,000 150,000 100,000
----------- ----------- ----------- ----------
Net interest income after provision for
loan losses........................................... 6,612,482 5,593,509 3,404,763 2,875,066
----------- ----------- ----------- ----------
Noninterest income
Service charges....................................... 341,562 269,453 184.470 139,255
Net gain on sale of available-for-sale loans.......... 436,467 685,778 116,000 355,366
Loan servicing fees................................... 85,737 94,725 44,439 41,030
Net gain on sale of available-for-sale securities..... 351,005 (5,646) 351,005 (8,320)
Other ............................................... 710,374 583,381 324,022 243,531
----------- ----------- ----------- ----------
Total noninterest income................................. 1,925,145 1,627,691 1,019,936 770,862
Noninterest expenses
Salaries and employee benefits......................... 2,911,267 1,970,961 1,550,106 1,143,368
Occupancy.............................................. 289,918 264,764 155,611 131,218
Furniture and fixtures................................. 464,344 308,786 263,302 161,433
Michigan single business tax........................... 90,625 102,680 55,545 44,080
Printing and supplies................................. 130,670 126,077 58,700 78,672
Other ................................................ 1,127,087 758,117 570,141 401,843
----------- ----------- ----------- ----------
Total noninterest expenses................................ 5,013,911 3,531,385 2,653,405 1,960,614
----------- ----------- ----------- ----------
Income before federal income taxes........................ 3,523,716 3,689,815 1,771,294 1,685,314
Federal income taxes...................................... 1,049,102 1,065,534 552,702 480,402
----------- ----------- ----------- ----------
Net income................................................ $ 2,474,614 $ 2,624,281 $ 1,218,592 $1,204,912
=========== =========== =========== ==========
Net income per basic and diluted
share of common stock ............................. $ 1.21 $ 1.29 $ 0.60 $ 0.59
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June 30, 1999 and 1998
Six 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.................. $(1,475,167) $ 245,364 $(1,117,338) $ 56,652
Income tax benefit (expense) related to
other comprehensive income..................... 501,557 (83,424) 379,895 (19,263)
----------- ----------- ----------- ----------
Other comprehensive (loss) income........................ (973,610) 161,940 (737,443) 37,389
Net income 2,474,614 2,624,281 1,218,592 1,204,912
----------- ----------- ----------- ----------
Comprehensive income..................................... $ 1,501,004 $ 2,786,221 $ 481,149 $1,242,301
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended June 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........................................... 2,474,614 2,624,281
2 for 1 common stock split effected in the
form of a dividend................................ 0 (1,014,387)
Cash dividends....................................... (816,710) (1,650,000)
------------ ------------
Balance, end of period............................... 32,881,752 29,522,885
------------ ------------
Accumulated other comprehensive income
Balance, beginning of period......................... 836,250 523,562
Other comprehensive (loss) income.................... (973,610) 161,940
------------ ------------
Balance, end of period............................... (137,360) 685,502
------------ ------------
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.................................. $ 40,545,847 $37,859,842
============ ============
</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>
Six Months Ended June 30,
1999 1998
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net income .......................................... $ 2,474,614 $ 2,624,281
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 355,276 239,983
Proceeds from sales of loans held
for sale..................................... 33,074,315 37,624,827
Disbursements for loans held for sale........... (31,455,234) (38,662,435)
Net gain on sales of available-for-
sale securities ............................. (351,005) 5,646
Net gain on sales of loans held for sale....... (436,467) (685,778)
Net amortization of investment premiums......... 96,744 103,289
Changes in operating assets and liabilities
which (used) provided cash:
Accrued interest receivable............... (132,097) (256,022)
Other assets.............................. (207,471) (509,626)
Other liabilities......................... 318,841 432,029
----------- ------------
Net cash provided by operating activities................... 3,737,516 916,194
----------- ------------
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from maturities........................... 6,746,422 5,836,744
Proceeds from sales................................ 2,790,363 2,009,298
Purchases.......................................... (7,514,527) (2,735,750)
Net increase in loans held for investment............. (18,243,836) (16,996,152)
Purchases of premises and equipment................... (2,408,037) ( 552,894)
----------- ------------
Net cash used in investing activities....................... (18,629,615) (12,438,754)
----------- ------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW
accounts and savings deposits...................... 1,045,341 8,507,797
Net increase in time deposits......................... 19,238,927 5,893,666
Net (decrease) increase in borrowed funds............. (13,520,937) 742,844
Net increase in securities sold under agreements
to repurchase...................................... 8,317,675 2,930,946
Common stock dividends paid........................... (816,710) (1,650,000)
Proceeds from sale of common stock.................... 150,000 0
----------- ------------
Net cash provided by financing activities................... 14,414,296 16,425,253
----------- ------------
Net (decrease) increase in cash and cash equivalents........ (477,803) 4,902,693
Cash and cash equivalents, beginning of period.............. 8,939,918 5,368,359
----------- ------------
Cash and cash equivalents, end of period.................... $ 8,462,115 $ 10,271,052
=========== ============
</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 six month period ended June 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 2,039,814 for the six month period ended June 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 June 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 transactions. 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 unaudited financial statements and notes contained therein.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
RESULTS OF OPERATIONS
Net income equaled $1,218,592 for the three months ended June 30, 1999,
compared to $1,204,912 for the same period in 1998. This is a 1.14% increase
over the same period in 1998. Net income for the six month period ended June 30,
1999 was $2,474,614, compared to $2,624,281 for the same period in 1998. This is
a 5.70% decrease over the same period in 1998. Return on average equity was
12.12% for the three months ended June 30, 1999 and 12.86% for 1998. Return on
average assets were 1.56% for the three months ended June 30, 1999 and 1.88% for
1998. Return on average equity was 12.44% for the six months ended June 30,1999
and 14.22% for 1998. Return on average assets were 1.62% for the six months
ended June 30, 1999 and 2.10% for 1998.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Six Months and Three Months Ended
June 30, 1999 and 1998
Six Months Three Months
------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income...................................... $ 2,475 $ 2,624 $ 1,219 $ 1,205
Per share..................................... $ 1.21 $ 1.29 $ 0.60 $ 0.59
Earnings ratios:
Return on average assets...................... 1.62% 2.10% 1.56% 1.88%
Return on average equity...................... 12.44% 14.22% 12.12% 12.86%
</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>
Six Months and Three Months ended June 30
(dollars in thousands)
Six Months Three Months
1999 1998 1999 1998
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Fed. funds sold $ 702 $ 19 5.33% $ 198 $ 6 5.67% $ 1,383 $ 18 5.24% $ 328 $ 5 5.71%
Securities:
Taxable 33,731 1,029 6.15% 39,404 1,252 6.41% 33,117 509 6.17% 37,571 603 6.44%
Tax-exempt 19,800 738 7.51% 19,383 755 7.85% 19,466 353 7.28% 19,568 378 7.75%
Loans(1)(2) 234,462 10,148 8.73% 179,737 8,212 9.21% 239,737 5,224 8.74% 186,008 4,266 9.20%
-------- ------ -------- ------ -------- ------ -------- ------
Total earning assets/
total interest income 288,695 11,934 8.34% 238,722 10,255 8.64% 293,703 6,104 8.34% 243,475 5,252 8.65%
------ ------ -------- ------ -------- ------
Cash and due from
banks 8,022 5,887 8,246 6,242
Unrealized Gain 969 985 768 981
All other assets 13,419 8,823 13,960 9,026
Allowance for loan loss (2,852) (2,559) (2,822) (2,566)
Total assets: $308,253 $251,858 $313,855 $257,158
======== ======== ======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $ 81,080 1,018 2.53% $ 66,869 953 2.87% $ 82,102 518 2.53% $ 68,337 476 2.79%
Time 115,236 2,976 5.21% 97,497 2,762 5.71% 120,868 1,554 5.16% 99,121 1,404 5.68%
Fed. Funds Purchased 21,601 418 3.90% 11,557 257 4.49% 19,326 179 3.71% 10,871 115 4.25%
Other Borrowed Money 13,234 388 5.91% 9,748 282 5.83% 13,449 196 5.85% 10,570 151 5.73%
-------- ------ -------- ------ -------- ------ -------- ------
Total interest bearing
liabilities/total
interest expense 231,151 4,800 4.19% 185,671 4,254 4.62% 235,745 2,447 4.16% 188,899 2,146 4.56%
------ ------ -------- --------
Noninterest bearing
deposits 34,538 26,786 35,374 28,359
All other liabilities 2,461 2,185 2,394 2,305
Stockholders' Equity:
Unrealized Holding
Gain/Loss 638 650 504 648
Common Stock,
Surplus,
Retained Earnings 39,465 36,566 39,838 36,947
-------- -------- -------- --------
Total liabilities and
stockholders' equity: $308,253 $251,858 $313,855 $257,158
======== ======== ======== ========
Interest spread 6,912 4.15% 5,744 4.02% 3,555 4.18% 2,975 4.09%
Net interest income-FTE $7,134 $5,971 $3,657 $3,106
====== ====== ====== ======
Net Interest Margin as a
Percentage of Average
Earning Assets 4.98% 5.04% 4.99% 5.09%
===== ===== ===== =====
</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 six months ended
June 30, 1999 of $90,448 and $84,758 in 1998. For the three months ended
June 30, 1999 and 1998 the amounts were $41,949 and 45,998.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $551,000 to $3,657,000 for the
three month period ended June 30, 1999, a 17.74% increase from the same period
in 1998. The major reasons for the increase in net interest income for the three
months ended June 30, 1999 were non-interest bearing deposits averaged
$7,015,000 higher in 1999 than in the same period in 1998 and the loan portfolio
balance averaged $53,729,000 higher in 1999 compared to 1998. Earning assets
averaged $50,228,000, 20.63% higher for the three month period ended June 30,
1999 compared to 1998; this volume change resulted in an additional $1,113,000
in fully taxable equivalent ("FTE") interest income. The asset growth for the
three months ended June 30, 1999 was primarily funded by a 21.94% ($21,747,000)
increase in time deposits average balance and a 77.78% ($8,455,000) increase in
Fed Funds Purchased average balance and a 24.74% (7,015,000) increase in
non-interest bearing deposits. For the three months ended June 30, 1999 the
average FTE interest rate earned on assets decreased .31%, decreasing FTE
interest income by $261,000. The major causes of the decrease were 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 .40%,
decreasing interest expense by $186,000. The net difference between interest
rates earned and paid was a $75,000 decrease in FTE net interest income. For the
three months ended June 30, 1999 the net interest yield decreased .10% versus
the same period in 1998 and management expects this trend to continue.
For the six month period ended June 30, 1999 tax equivalent net interest
income increased $1,163,000 to $7,134,000, a 19.48% increase from the same
period in 1998. The major reasons for the increase in net interest income for
the six months ended June 30, 1999 were noninterest bearing deposits averaged
$7,752,000 higher in 1999 than in the same period in 1998 and the loan portfolio
balance averaged $54,725,000 higher in 1999 compared to 1998. Earning assets
averaged $49,973,000, a 20.93% increase for the six months ended June 30, 1999.
The average FTE interest rate earned on assets decreased .30%, decreasing FTE
interest income by $516,000 and the average rate paid on deposits, fed funds
purchased and other borrowed money increased .43%, decreasing interest expense
by $386,000. The difference between interest rates earned and paid was a
$130,000 decrease in FTE net interest income. The net interest yield decreased
.06% for the six month period ended June 30, 1999 versus the same 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>
Six Months and Three Months Ended June 30,
1999 Compared to 1998
Amount of
Increase/(Decrease)
Due to Change in
Six 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................. $ 13 $ 0 $ 13 $ 13 $ 0 $ 13
Securities:
Taxable........................ (173) (50) (223) (69) (25) (94)
Tax Exempt..................... 16 (33) (17) (2) (23) (25)
Loans............................ 2,369 (433) 1,936 1,171 (213) 958
-------- -------- --------- --------- --------- ---------
Total interest income............ 2,225 (516) 1,709 1,113 (261) 852
Interest Expense
Interest bearing deposits
Savings/Now accounts............. 178 (113) 65 87 (45) 42
Time............................. 458 (244) 214 280 (130) 150
Fed. Funds Purchased............. 194 (33) 161 78 (14) 64
Other Borrowed Money............. 102 4 106 42 3 45
-------- -------- --------- --------- --------- ---------
Total interest expense........... 932 (386) 546 487 (186) 301
-------- -------- --------- --------- --------- ---------
Net Interest Income (FTE).......... $ 1,293 $ (130) $ 1,163 $ 626 $ (75) $ 551
======== ======== ========= ========= ========= =========
</TABLE>
-12-
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Six Months and Three Months ended June 30,
1999 Compared to 1998
Six Months Three Months
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Service charges on deposit accounts................... $ 342 $ 270 $ 185 $ 139
Net gains on asset sales:
Loans............................................. 436 686 116 355
Securities........................................ 351 (6) 351 (8)
Other................................................. 796 678 368 285
--------- --------- --------- --------
Total noninterest income......................... $ 1,925 $ 1,628 $ 1,020 $ 771
========= ========= ========= =======
</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 $249,000 or 32% for the three month period ended June 30, 1999 versus
1998. The increase was due primarily to a $359,000 increase in gains on
securities available-for-sale, and a $239,000 decrease on gains of real estate
mortgage loan sales. For the six months ended June 30,1999 non-interest income
increased $297,000, (18%). The increase was due primarily to a $357,000 increase
in gains on securities available-for-sale, and a $250,000 decrease on gains of
real estate mortgage loan sales.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Six Months and Three Months Ended June 30,
1999 and 1998
Six Months Three Months
------------ -------------
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Salaries and employee benefits..................... $ 2,911 $ 1,971 $ 1,550 $ 1,143
Occupancy and equipment............................ 754 574 419 293
FDIC assessment.................................... 15 14 8 7
Postage............................................ 73 29 32 24
Printing and supplies.............................. 131 126 59 79
Marketing.......................................... 118 145 27 87
Michigan Single Business Tax....................... 91 103 56 79
Other.............................................. 921 569 502 249
----------- ----------- ----------- -----------
Total noninterest expense..................... $ 5,014 $ 3,531 $ 2,653 $ 1,961
=========== =========== =========== ===========
</TABLE>
Noninterest Expense
Non-interest expense increased $541,000 (41%) for the three month period
ended June 30, 1999 versus 1998. The major factors were a $407,000 increase
(36%) in salaries and employee benefits and a $126,000 increase (43%) 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 staffing support at the corporate office for the new
branches and growth from existing branches were the two primary reasons for the
salary and employee benefit expense increase. For the six month period ended
June 30, 1999 non-interest expense increased $1,483,000 (42%)to $5,014,000
principally due to salaries and employee benefits expense which increased
$940,000 (48%)to $2,911,000, a 180,000 (31%) increase in occupancy expenses and
a $44,000 increase (152%) in postage expense for the six month period ended June
30, 1999 versus 1998.
-13-
<PAGE>
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Six Months Ended
June 30, 1999 and 1998
1999 1998
------ -----
<S> <C> <C>
Nonaccrual loans................................................ $ 346 $ 100
90 days or more past due & still accruing....................... 3,108 12
--------- ---------
Total Nonperforming Loans.................................. 3,454 112
Other real estate............................................... 116 105
--------- ---------
Total Nonperforming Assets.................................. $ 3,570 $ 217
========= =========
Nonperforming loans as a percent of total loans................. 1.44% .06%
Nonperforming assets as a percent of total loans................ 1.49% .11%
Nonperforming loans as a percent of the loan loss reserve....... 121.02% 4.24%
</TABLE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Six Months and Three Months Ended
June 30, 1999 and 1998
Six Months Three Months
------------ -------------
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Loans:
Average daily balance of loans for the period.......... $230,374 $179,737 $235,225 $186,008
Amount of loans outstanding at end of period........... 240,303 189,092 240,303 189,092
Allowance for loan losses:
Balance at beginning of period......................... 2,879 2,565 2,774 2,521
Loans charged off:
Commercial.......................................... 0 70 0 0
Consumer............................................ 432 64 128 19
--------- --------- -------- --------
Total charge-offs................................. 432 134 128 19
Recoveries of loans previously charged off:
Commercial.......................................... 16 13 8 7
Consumer............................................ 41 45 0 30
--------- --------- -------- --------
Total recoveries................................. 57 58 8 37
--------- --------- -------- --------
Net loans charged off.................................. 375 76 120 (18)
Additions to allowance charged to operations 350 150 200 100
--------- --------- -------- --------
Balance at end of period......................... $ 2,854 $ 2,639 $ 2,854 $ 2,639
========= ========= ======== ========
Ratios:
Net loans charged off to avg loans outstanding......... .16% .04% .05% -.01%
Allowance for loan losses to loans outstanding......... 1.19% 1.40% 1.19% 1.40%
</TABLE>
Loan Loss Experience
Starting in the second 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. Management will continue to monitor the results and make changes
to the program as needed.
-14-
<PAGE>
Table 8 Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the weighted
average rates paid thereon:
<TABLE>
Six Months and Three Months Ended
June 30, 1999 and 1998
Six 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......... $ 34,538 $ 26,786 $ 35,374 $ 28,359
MMDA/Savings and NOW accounts...... 81,080 2.53% 66,869 2.87% 82,102 2.53% 68,337 2.79%
Time............................... 115,236 5.21% 97,497 5.71% 120,868 5.15% 99,121 5.68%
-------- ----- -------- ----- -------- ----- --------- -----
Total Deposits................. $230,854 3.49% $191,152 3.92% $238,344 3.53% $195,817 3.89%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of June 30, 1999:
<TABLE>
Amount
<S> <C>
Three months or less....................................... $ 13,262
Over 3 months through 6 months............................. 4,762
Over 6 months through 1 year.............................. 5,302
Over 1 year................................................ 1,965
--------
$ 25,291
========
</TABLE>
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $16,164,000 (5%) to $317,942,000 from December 31,
1998 to June 30, 1999. The significant changes were an increase in loans
receivable, net of $18,244,000 (8%). Deposits increased $20,284,000 (9%) to
$237,569,000, non-interest bearing deposits decreased $1,362,000 and interest
bearing deposits increased $21,466,000. The Corporation expects deposits to
increase through-out the remainder of the year. Borrowed funds decreased
$13,521,000 (48%) and securities sold under agreements to repurchase increased
$8,318,000 (58%).
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 2.66% of total assets as of June 30, 1999
versus 2.96% as of December 31, 1998. For the six month period ended June 30,
1999, $3,738,000 in net cash was provided from operations, investing activities
used $18,630,000, and financing activities provided $14,414,000. The accumulated
effect of the Corporation's operating, investing and financing activities was a
$478,000 decrease in cash and cash equivalents during the six month period ended
June 30, 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 net unrealized gain(loss) on available for sale
securities. For the six month period ended June 30, 1999 capital increased
$764,000, which includes a $137,000 unrealized loss on investment securities
available for sale.
There are minimum risk based capital regulatory guidelines placed on the
Corporation's capital by The Federal Reserve Board. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of June 30, 1999:
Table 9 Capital Resources (in thousands)
<TABLE>
As of June 30, 1999 and 1998
Regulatory Requirements
Adequately Well
Capitalized Capitalized 1999 1998
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital........................ $39,961 $36,461
Tier 2 capital......................... 2,870 2,547
Total qualifying capital............ $42,831 $39,008
======= =======
Ratio of equity to total assets
Tier 1 leverage ratio.................. 4% 5% 12.77% 17.90%
Tier 1 risk-based capital.............. 4% 6% 15.06% 19.15%
Total risk-based capital............... 8% 10% 16.14% 14.23%
</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 $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
-16-
<PAGE>
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 theCorporation 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 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Corporation was held on
April 22, 1999. The following directors were elected at the annual
meeting.
Votes
Name Term Expires For Abstain
---- ------------ ----- -------
John A. Van Singel 2002 1,701,106 146,002
Lois Smalligan 2002 1,698,782 148,326
John Peterson 2000 1,440,861 406,247
At the annual meeting the shareholders also approved the O.A.K.
Financial Corporation 1999 Stock Compensation Plan. The vote was as
follows:
Votes Votes
For Against Abstain*
--------- ------- --------
1,118,986 351,409 376,763
At the annual meeting the shareholders also approved the O.A.K.
Financial Corporation 1999 Directors' Stock Option Plan. The vote was
as follow:
Votes Votes
For Against Abstain*
--------- ------- --------
1,085,190 617,688 126,666
*Includes broker non-votes.
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 June 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: 8/13/99
-19-
::ODMA\PCDOCS\GRR\328982\1
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,462,115
<INT-BEARING-DEPOSITS> 203,435,315
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,534,789
<INVESTMENTS-CARRYING> 53,742,911
<INVESTMENTS-MARKET> 53,534,789
<LOANS> 240,303,011
<ALLOWANCE> 2,870,352
<TOTAL-ASSETS> 317,941,561
<DEPOSITS> 237,568,679
<SHORT-TERM> 25,165,326
<LIABILITIES-OTHER> 2,661,709
<LONG-TERM> 12,000,000
0
0
<COMMON> 2,041,775
<OTHER-SE> 38,504,072
<TOTAL-LIABILITIES-AND-EQUITY> 317,941,561
<INTEREST-LOAN> 10,130,200
<INTEREST-INVEST> 1,557,176
<INTEREST-OTHER> 18,544
<INTEREST-TOTAL> 11,705,920
<INTEREST-DEPOSIT> 3,994,085
<INTEREST-EXPENSE> 4,793,438
<INTEREST-INCOME-NET> 6,912,482
<LOAN-LOSSES> 350,000
<SECURITIES-GAINS> 351,005
<EXPENSE-OTHER> 5,013,911
<INCOME-PRETAX> 3,523,716
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,474,614
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 4.15
<LOANS-NON> 346,000
<LOANS-PAST> 3,108,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,879,000
<CHARGE-OFFS> 432,000
<RECOVERIES> 57,000
<ALLOWANCE-CLOSE> 2,854,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
