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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22461
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2817345
State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
-----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
The number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date: 2,041,775 shares of the Company's Common
Stock ($1 par value) were outstanding as of August 11, 2000.
<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 18
Part II. Other Information
Item 4
Submission of Matters to a Vote of Security Holders 19
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
-2-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
--------------------------------------------------------------------------------
<TABLE>
ASSETS
June 30, December 31,
2000 1999
(Unaudited)
------------- -------------
<S> <C> <C>
Cash and due from banks................................................. $ 11,181,108 $ 10,054,389
Available-for-sale securities - amortized cost of
$61,849,714 - 2000 ($62,592,629 - 1999).............................. 60,010,450 61,649,881
Loans receivable, net................................................... 323,236,411 284,279,189
Loans held for sale..................................................... 563,864 632,038
Accrued interest receivable............................................. 2,941,783 2,716,837
Premises and equipment, net............................................. 11,439,135 10,618,570
Restricted investments.................................................. 2,710,000 2,000,000
Other assets............................................................ 4,465,220 4,121,705
------------- -------------
Total assets............................................................ $416,547,971 $376,072,609
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing........................................................ 247,597,199 215,159,729
Noninterest bearing..................................................... 40,264,797 39,006,319
------------- -------------
Total deposits.......................................................... 287,861,996 254,166,048
Borrowed funds.......................................................... 54,927,246 54,405,599
Securities sold under agreements to repurchase.......................... 28,958,496 24,424,351
Other liabilities....................................................... 2,672,748 1,819,097
------------- -------------
Total liabilities....................................................... 374,420,486 334,815,095
------------- -------------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized
2,041,775 shares issued and outstanding............................... 2,041,775 2,041,775
Additional paid-in capital.............................................. 6,265,446 6,259,681
Retained earnings....................................................... 35,476,524 34,078,585
Accumulated other comprehensive loss.................................... (1,213,910) (622,527)
Unallocated common stock held by ESOP................................... (442,350) (500,000)
------------- -------------
Total stockholders' equity.............................................. 42,127,485 41,257,514
------------- -------------
Total liabilities and stockholders' equity.............................. $416,547,971 $376,072,609
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June 30, 2000 and 1999
Six Months Three Months
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income
Loans............................................... $13,681,387 $10,130,200 $ 7,122,350 $ 5,214,979
Available-for-sale securities....................... 1,873,186 1,508,199 954,798 735,785
Restricted investments.............................. 94,732 48,977 50,383 26,280
Federal funds sold.................................. 349 18,544 312 18,544
----------- ----------- ----------- ------------
Total interest income............................... 15,649,654 11,705,920 8,127,843 5,995,588
----------- ----------- ----------- ------------
Interest expense
Deposits............................................ 5,099,808 3,994,085 2,723,803 2,072,188
Borrowed funds...................................... 1,767,839 510,280 929,879 208,842
Securities sold under agreements to repurchase...... 604,230 289,073 325,948 159,795
----------- ----------- ----------- ------------
Total interest expense................................. 7,471,877 4,793,438 3,979,630 2,440,825
----------- ----------- ----------- ------------
Net interest income.................................... 8,177,777 6,912,482 4,148,213 3,554,763
Provision for loan losses.............................. 800,000 300,000 470,000 150,000
----------- ----------- ----------- ------------
Net interest income after provision for
loan losses........................................ 7,377,777 6,612,482 3,678,213 3,404,763
----------- ----------- ----------- ------------
Noninterest income
Service charges..................................... 606,083 341,562 342,971 184,470
Net gain on sale of available-for-sale loans........ 121,999 436,467 65,211 116,000
Loan servicing fees................................. 74,007 85,737 38,931 44,439
Net gain on sale of available-for-sale securities... 25,995 351,005 23,995 351,005
Insurance premiums.................................. 458,843 502,707 197,898 207,326
Brokerage fees...................................... 169,343 135,989 83,525 87,143
Other............................................... 93,124 71,678 43,753 29,553
----------- ----------- ----------- ------------
Total noninterest income............................... 1,549,394 1,925,145 796,284 1,019,936
----------- ----------- ----------- ------------
Noninterest expenses
Salaries and employee benefits...................... 3,277,238 2,911,267 1,515,551 1,550,106
Occupancy........................................... 373,202 289,918 186,467 155,611
Furniture and fixtures.............................. 575,102 464,344 285,050 263,302
Printing and supplies............................... 183,096 130,670 92,172 58,700
Other............................................... 1,512,564 1,217,712 707,646 625,486
----------- ----------- ----------- ------------
Total noninterest expense.............................. 5,921,202 5,013,911 2,786,886 2,653,405
----------- ----------- ----------- ------------
Income before federal income taxes..................... 3,005,969 3,523,716 1,687,611 1,771,294
Federal income taxes................................... 754,200 1,049,102 429,700 552,702
----------- ----------- ----------- ------------
Net income............................................. $ 2,251,769 $ 2,474,614 $ 1,257,911 $ 1,218,592
=========== =========== =========== ============
Net income per basic and diluted
share of common stock.............................. $ 1.11 $ 1.21 $ .62 $ .60
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
Six Months and Three Months ended June 30, 2000 and 1999
Six Months Three Months
------------------------------ ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Other comprehensive loss
<S> <C> <C> <C> <C>
Unrealized losses on available-for-sale securities
arising during the year................................ $ (896,038) $(1,754,238) $ (363,722) $(1,400,848)
Reclassification adjustment for realized gains
included in net income................................. 25,995 351,005 23,995 351,005
----------- ----------- ----------- ------------
Comprehensive loss before income tax benefit........... (870,043) (1,403,233) (339,727) (1,049,843)
Income tax benefit related to comprehensive loss....... 278,660 429,623 98,036 312,400
----------- ----------- ----------- ------------
Other comprehensive loss............................ (591,383) (973,610) (241,691) (737,443)
Net income............................................. 2,251,769 2,474,614 1,257,911 1,218,592
----------- ----------- ----------- ------------
Comprehensive income................................... $ 1,660,386 $ 1,501,004 $ 1,016,220 $ 481,149
=========== =========== =========== ============
</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,
---------------------------------------
2000 1999
---- ----
<S> <C> <C>
Shares of common stock issued and outstanding
Balance, beginning of period........................... 2,041,775 2,028,775
Issuance of common stock............................... - 13,000
------------- ------------
Balance, end of period................................. 2,041,775 2,041,775
============= ============
Common Stock
Balance, beginning of period........................... $ 2,041,775 $ 2,028,775
Issuance of common stock............................... - 13,000
------------- ------------
Balance, end of period................................. 2,041,775 2,041,775
------------- ------------
Additional paid-in capital
Balance, beginning of period........................... 6,259,680 5,622,680
Issuance of common stock............................... - 637,000
Allocation of ESOP shares.............................. 5,766 -
------------- ------------
Balance, end of period................................. 6,265,446 6,259,680
------------- ------------
Retained earnings
Balance, beginning of period........................... 34,078,585 31,592,372
Accumulated deficit in business combination............ - (368,524)
Net income............................................. 2,251,769 2,474,614
Cash dividends......................................... (853,830) (816,710)
------------- ------------
Balance, end of period................................. 35,476,524 32,881,752
------------- ------------
Accumulated other comprehensive loss
Balance, beginning of period........................... (622,527) 836,250
Other comprehensive loss............................... (591,383) (973,610)
-------------- ------------
Balance, end of period................................. (1,213,910) (137,360)
-------------- ------------
Unallocated common stock held by ESOP
Balance, beginning of period........................... (500,000) 0
Unearned ESOP Compensation............................. - (500,000)
Allocation of ESOP shares..................... 57,650 -
-------------- ------------
Balance, end of period................................. (442,350) (500,000)
-------------- ------------
Total stockholders' equity.................................. $ 42,127,485 $ 40,545,847
============== ============
</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,
----------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,251,769 $ 2,474,614
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 491,536 355,276
Provision for loan losses........................ 800,000 300,000
Proceeds from sales of loans held
for sale................................... 9,906,334 33,074,315
Disbursements for loans held for sale............ (9,716,161) (31,455,234)
Net gain on sales of available-for-
sale securities (25,995) (351,005)
Net gain on sales of loans held for sale......... (121,999) (436,467)
Net amortization of investment premiums.......... 66,213 96,744
Changes in operating assets and liabilities
which (used) provided cash:
Accrued interest receivable................. (224,946) (132,097)
Other assets................................ 25,033 (207,471)
Other liabilities........................... 853,651 318,841
------------- -------------
Net cash provided by operating activities................... 4,305,435 4,037,516
------------- -------------
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from maturities......................... 5,206,806 6,746,422
Proceeds from sales.............................. 73,995 2,790,363
Purchases........................................ (4,578,104) (7,514,527)
Purchases of restricted investments....... (710,000) -
Net increase in loans held for investment.............. (39,757,222) (18,543,836)
Purchases of premises and equipment.................... (1,312,101) (2,408,037)
------------- -------------
Net cash used in investing activities....................... (41,076,626) (18,929,615)
------------- -------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW
accounts and savings deposits.................... (106,983) 1,045,341
Net increase in time deposits.......................... 33,802,931 19,238,927
Net increase (decrease) in borrowed funds.............. 521,647 (13,520,937)
Net increase in securities sold under agreements
to repurchase.................................... 4,534,145 8,317,675
Common stock dividends paid............................ (853,830) (816,710)
Proceeds from sale of common stock..................... - 150,000
------------- -------------
Net cash provided by financing activities................... 37,897,910 14,414,296
------------- -------------
Net increase (decrease) in cash and cash equivalents........ 1,126,719 (477,803)
Cash and cash equivalents, beginning of period.............. 10,054,389 8,939,918
------------- -------------
Cash and cash equivalents, end of period.................... $ 11,181,108 $ 8,462,115
============= =============
</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,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. 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, 1999.
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. (DIC) based on a conversion ratio of .719475 shares of
the Corporation's common stock. The merger was accounted for as a pooling of
interests. DIC's results were immaterial prior to the merger and, accordingly,
the Corporation's financial statements were not restated for periods prior to
the merger to reflect the financial position and operations of DIC.
NOTE 2 STOCKHOLDERS' EQUITY
The net income per share amounts are based on the weighted average number
of common shares outstanding. The weighted average numbers of common shares
outstanding were 2,034,494 for the six month period ended June 30, 2000 and
2,039,814 shares for the same period in 1999. The weighted numbers of common
shares outstanding were 2,034,703 for the three month period ended June 30, 2000
and 2,041,775 shares for the same period in 1999.
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. During the first quarter of
2000, 1,153 common shares with an average fair value of $55 per share were
released and allocated to plan participants and, accordingly, unearned ESOP
compensation was reduced by the $57,650 cost of the shares to the ESOP.
Additional paid-in capital was credited for the fair value of the shares
released in excess of their cost to the ESOP.
-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. (DIC) in a
stock for stock transaction. Total assets of DIC were $359,873. The transaction
was accounted for as a pooling-of-interests. Accordingly the assets, liabilities
and stockholders equity as reported by DIC 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 DIC common stock received .719475
shares of O.A.K. Financial Corporation common stock, par value $1.00 per share,
for each share of DIC 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 1999 annual report on Form
10-K and the audited financial statements and notes contained therein.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
RESULTS OF OPERATIONS
Net income equaled $1,257,911 for the three months ended June 30, 2000,
compared to $1,218,592 for the same period in 1999. This is a 3.23% increase
over the same period in 1999. Net income for the six month period ended June 30,
2000 was $2,251,769 compared to $2,474,614 for the same period in 1999. This is
a 9.01% decrease over the same period in 1999. Return on average equity was
12.03% for the three months ended June 30, 2000 and 12.12% for 1999. Return on
average assets were 1.24% for the three months ended June 30, 2000 and 1.56% for
1999. Return on average equity was 10.84% for the six months ended June 30, 2000
and 12.44% for 1999. Return on average assets were 1.14% for the six months
ended June 30, 2000 and 1.62% for 1999. The following discussion explains
reasons for changes in growth and financial performance for the six month and
three month period ended June 30,2000. Management expects improvement in
quarterly comparative financial performance during the remainder of the year.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Six Months and Three Months Ended
June 30, 2000 and 1999
--------------------------------------------------------------------
Six Months Three Months
------------------------------ ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.................................. $ 2,252 $2,475 $ 1,258 $1,219
Per share................................. $ 1.11 $ 1.21 $ 0.62 $ 0.60
Earnings ratios:
Return on average assets.................. 1.14% 1.62% 1.24% 1.56%
Return on average equity.................. 10.84% 12.44% 12.03% 12.12%
</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
2000 1999 2000 1999
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 $ 6 $ - 6.00% $ 702 $ 19 5.33% $ 2 $ - 6.25% $ 1,383 $ 18 5.24%
Securities:
Taxable 42,287 1,381 6.57% 33,731 1,029 6.15% 43,128 717 6.68% 33,117 509 6.17%
Tax-exempt 23,089 795 6.93% 19,800 738 7.51% 22,846 390 6.87% 19,466 353 7.28%
Loans(1)(2) 308,645 13,696 8.92% 234,462 10,148 8.73% 318,887 7,149 9.02% 239,737 5,224 8.74%
------- ------ ------- ------ ------- ----- ------- -----
Total earning
assets/total
interest income 374,027 15,872 8.53% 288,695 11,934 8.34% 384,863 8,256 8.63% 293,703 6,104 8.34%
------ ------ ------- ----- ------- -----
Cash and due from
banks 9,067 8,022 9,280 8,246
Unrealized (1,547) 969 (1,687) 768
(loss)Gain
All other assets 17,906 13,419 18,283 13,960
Allowance for loan
loss (3,632) (2,852) (3,855) (2,822)
Total assets: $395,821 $308,253 $406,884 $313,855
======== ======== ======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $87,856 $ 1,190 2.72% $81,080 1,018 2.53% $86,932 594 2.75% $ 82,102 518 2.53%
Time 141,856 3,910 5.54% 115,236 2,976 5.21% 149,723 2,130 5.72% 120,868 1,554 5.16%
Fed. Funds Purchased 44,756 1,205 5.42% 21,601 418 3.90% 44,538 627 5.66% 19,326 179 3.71%
Other Borrowed Money 38,337 1,167 6.12% 13,234 388 5.91% 40,988 629 6.17% 13,449 196 5.85%
----- ----- ------ ---- ------- --- ------- ----
Total interest bearing
liabilities/total
interest expense 312,805 7,472 4.80% 231,151 4,800 4.19% 322,181 3,980 4.97% 235,745 2,447 4.16%
Noninterest bearing ----- ----- ------- -------
deposit 39,842 34,538 40,795 35,374
All other liabilities 1,962 2,461 2,206 2,394
Stockholders' Equity:
Unrealized Holding
Gain(Loss) (1,021) 638 (1,113) 504
Common Stock, Surplus,
Retained Earnings 42,233 39,465 42,815 39,838
Total liabilities and ------ ------ ------ ------
stockholders' equity: $395,821 $308,253 $406,884 $313,855
======== ======== ======== ========
Interest spread 8,178 3.73% 6,912 4.15% 4,167 3.66% 3,555 4.18%
Net interest
income-FTE $ 8,400 $ 7,134 $ 4,276 $ 3,657
Net Interest Margin ------- ------- ------- -------
as a Percentage
of Average
Earning Assets 4.52% 4.98% 4.47% 4.99%
===== ===== ===== =====
Earning Assets
</TABLE>
(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, 2000 of $82,588 and $90,448 in 1999. For the three months ended
June 30, 2000 and 1999 the amounts were $39,295 and $41,949.
-10-
<PAGE>
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $619,000 to $4,276,000 for the
three month period ended June 30, 2000, a 17% increase from the same period in
1999. The major reasons for the increase in net interest income for the three
months ended June 30, 2000 were non-interest bearing deposits averaged
$5,421,000 higher in 2000 than in the same period in 1999 and the loan portfolio
balance averaged $79,150,000 higher in 2000 compared to 1999. Average earning
assets increased $91,160,000 or 31% for the three month period ended June 30,
2000 compared to 1999; this volume change resulted in an additional $1,969,000
in fully taxable equivalent ("FTE") interest income. The asset growth for the
three months ended June 30, 2000 was primarily funded by a 24% ($28,855,000)
increase in time deposits average balance and a 130% ($25,212,000) increase in
Fed Funds Purchased average balance and a 205% ($27,539,000) increase in other
borrowed money. For the three months ended June 30, 2000 the average FTE
interest rate earned on assets increased .29%, increasing FTE interest income by
$183,000. The major causes of the increase were higher yields on the taxable
investment portfolio and the loan portfolio. The average interest rate paid on
deposits, fed funds purchased and other borrowed money increased .81%,
increasing interest expense by $313,000. The net difference between interest
rates earned and paid was a $130,000 decrease in FTE net interest income. For
the three months ended June 30, 2000 the net interest yield decreased .52%
versus the same period in 1999.
For the six month period ended June 30, 2000 tax equivalent net interest
income increased $1,266,000 to $8,178,000, an 18% increase from the same period
in 1999. The major reasons for the increase in net interest income for the six
months ended June 30, 2000 were noninterest bearing deposits averaged $5,304,000
higher in 2000 than in the same period in 1999 and the loan portfolio balance
averaged $74,183,000 higher in 2000 compared to 1999. Average earning assets
increased $85,332,000 or 30%, for the six months ended June 30, 2000. The
average FTE interest rate earned on assets increased .19%, increasing FTE
interest income by $271,000 and the average rate paid on deposits, fed funds
purchased and other borrowed money increased .61%, increasing interest expense
by $459,000. The difference between interest rates earned and paid was a
$188,000 decrease in FTE net interest income. The net interest yield decreased
.46% for the six month period ended June 30, 2000 versus the same the same
period in 1999.
Management expects the FTE net interest yield to decrease for the remainder
of the year, since the majority of the deposit and funding growth is expected to
be from time deposits and other borrowed money which are a higher cost of funds
than savings and NOW accounts.
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,
2000 Compared to 1999
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............. $ (19) $ - $ (19) $ (18) $ - $ (18)
Securities:
Taxable.................. 280 72 352 154 54 208
Tax Exempt............... 113 (56) 57 58 (21) 37
Loans....................... 3,293 255 3,548 1775 150 1,925
------- -------- --------- ------- -------- ---------
Total interest income........ 3,667 271 3,938 1,969 183 2,152
Interest Expense
Interest bearing deposits
Savings/Now accounts........ 92 80 172 33 43 76
Time........................ 733 201 934 410 166 576
Fed. Funds Purchased........ 624 163 787 355 93 448
Other Borrowed Money........ 764 15 779 422 11 433
------- -------- --------- ------- -------- ---------
Total interest expense...... 2,213 459 2,672 1,220 313 1,533
------- -------- --------- ------- -------- ---------
Net Interest Income (FTE)...... $ 1,454 $ (188) $ 1,266 $ 749 $ (130) $ 619
======= ======== ========= ======= ======== =========
</TABLE>
-12-
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Six Months and Three Months Ended June 30,
2000 Compared to 1999
Six Months Three Months
------------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts.................... $606 $ 342 $ 343 $ 185
Net gains on asset sales:
Loans.............................................. 122 436 65 116
Securities......................................... 26 351 24 351
Loan servicing fees.................................... 74 86 39 44
Insurance premium revenue.............................. 459 502 198 207
Brokerage revenue...................................... 169 136 83 87
Other.................................................. 93 72 44 30
------- ------- ----- -------
Total noninterest income.......................... $ 1,549 $ 1,925 $ 796 $ 1,020
======= ======= ===== =======
</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
decreased $224,000 or 22% for the three month period ended June 30, 2000 versus
1999. The decrease was due primarily to a $327,000 decrease in gains on the sale
of securities, and a $51,000 decrease on gains of real estate mortgage loan
sales, and a $158,000 increase in service charges on deposit accounts. For the
six months ended June 30, 2000 non-interest income decreased $376,000 or 20%.
The decrease was due primarily to a $325,000 decrease in gains on the sale of
securities, and a $314,000 decrease on gains of real estate mortgage loan sales,
and a $264,000 increase in service charges on deposit accounts. Management
expects the income from service charges on deposit accounts to remain consistent
for the remainder of the year. The interest rate environment slowed new and
refinance mortgage loan business which resulted in the decrease in net gains on
loan sales for the six month period ended June 30, 2000. The Corporation sold
securities in the quarter ended June 30, 2000 which resulted in $351,000 in net
gains on securities sales.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Six Months and Three Months Ended June 30,
2000 and 1999
Six Months Three Months
------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employee benefits............... $ 3,277 $ 2,911 $ 1,516 $ 1,550
Occupancy and equipment...................... 948 754 472 419
FDIC assessment.............................. 26 15 13 8
Postage...................................... 82 73 53 32
Printing and supplies........................ 183 131 92 59
Marketing.................................... 171 118 76 27
Michigan Single Business Tax................. 107 91 40 56
Other........................................ 1,127 921 525 502
------ ------- ------ --------
Total noninterest expense............... $5,921 $ 5,014 $2,787 $ 2,653
====== ======= ====== ========
</TABLE>
-13-
<PAGE>
Noninterest Expense
Non-interest expense increased $134,000 or 5% for the three month period
ended June 30, 2000 versus 1999. The major factors were a $49,000 increase or
181% in marketing expense and a $53,000 increase or 13% in occupancy expense,
and a $33,000 increase or 56% in printing and supplies. For the six month period
ended June 30, 2000 non-interest expense increased $907,000 or 18% to $5,921,000
principally due to salaries and employee benefits expense which increased
$366,000 or 13% to $3,277,000, a 194,000 or 26% increase in occupancy expenses
and a $53,000 increase or 45% in marketing expense, a $52,000 increase or 40% in
printing and supplies expense for the six month period ended June 30, 2000
versus 1999. The majority of these increases are all related to the four new
branch locations that were opened in late 1998 and early 1999 and a new
marketing strategy.
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Six Months Ended
June 30, 2000 and 1999
2000 1999
--------- ---------
<S> <C> <C>
Nonaccrual loans............................................. $ 335 $ 346
90 days or more past due & still accruing.................... 303 3,108
--------- ---------
Total Nonperforming Loans............................... 638 3,454
Other real estate............................................ - 116
--------- ---------
Total Nonperforming Assets............................... $ 638 $ 3,570
========= =========
Nonperforming loans as a percent of total loans.............. .19% 1.44%
Nonperforming assets as a percent of total loans............. .19% 1.49%
Nonperforming loans as a percent of the loan loss reserve.... 16.10% 121.02%
</TABLE>
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. Management has been aggressively working on
the nonperforming loans, for the six month period ended June 30, 2000 versus
1999, nonperforming assets as a percent of total loans decreased 87%. For the
period ending June 30, 2000, $3,108,000 of the nonperforming assets consisted of
two commercial loans that were delinquent, the bank was fully collateralized and
the delinquency was resolved.
-14-
<PAGE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Six Months and Three Months Ended
June 30, 2000 and 1999
Six Months Three Months
------------------ ------------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Loans:
Average daily balance of portfolio loans for the period.... $307,997 $230,374 $ 318,253 $235,225
Amount of portfolio loans outstanding at end of period..... 327,200 240,303 327,200 240,303
Allowance for loan losses:
Balance at beginning of period............................. 3,551 2,879 3,612 2,774
Loans charged off:
Commercial.............................................. 193 0 33 0
Consumer................................................ 396 382 183 128
-------- -------- -------- --------
Total charge-offs..................................... 589 382 216 128
Recoveries of loans previously charged off:
Commercial.............................................. 77 16 52 8
Consumer................................................ 124 41 45 0
-------- -------- -------- --------
Total recoveries..................................... 201 57 97 8
-------- -------- -------- --------
Net loans charged off...................................... 388 375 119 120
Additions to allowance charged to operations 800 300 470 200
-------- -------- -------- --------
Balance at end of period............................. $ 3,963 $ 2,854 $ 3,963 $ 2,854
======== ======== ======== =========
Ratios:
Net loans charged off to avg loans outstanding............. .13% .16% .04% .05%
Allowance for loan losses to loans outstanding............. 1.21% 1.19% 1.21% 1.19%
</TABLE>
Loan Loss Experience
Management has monitored and made changes to underwriting requirements in
the indirect consumer loan portfolio. The percentage of net loans charged off to
average loans outstanding reflects the positive result of the changes. The net
loans charged off percentage is below peer averages. Management believes that
the allowance for loan losses to loans outstanding percentage is adequate.
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, 2000 and 1999
Six Months Three Months
---------- ------------
2000 1999 2000 1999
---------------- ---------------- ---------------- -----------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand........... $39,842 $ 34,538 $40,795 $35,374
MMDA/Savings and NOW accounts........ 87,856 2.72% 81,080 2.53% 86,932 2.75% 82,102 2.53%
Time................................. 141,856 5.54% 115,236 5.21% 149,723 5.72% 120,868 5.16%
------- ----- ------- ----- ------- ----- ------- -----
Total Deposits................... $269,554 3.81% $230,854 3.49% $277,450 3.95% $238,344 3.53%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
-15-
<PAGE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of June 30, 2000:
<TABLE>
Amount
------
<S> <C>
Three months or less.................................... $ 19,294
Over 3 months through 6 months.......................... 19,398
Over 6 months through 1 year............................ 14,240
Over 1 year............................................. 7,566
--------
$ 60,498
========
</TABLE>
As of June 30, 2000 the bank has purchased $17,690,000 in brokered
negotiable certificates of deposit as an alternate method of funding. The bank
will utilize this alternate method of funding in the future as management
evaluates their options and if the brokered negotiable C.D. market proves to be
the most viable funding method.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $40,475,000 or 11% to $416,548,000 from December 31,
1999 to June 30, 2000. The significant changes were an increase in loans
receivable, net of $38,957,000 or 14%. Deposits increased $33,696,000 or 13% to
$287,862,000, non-interest bearing deposits increased $1,259,000 and interest
bearing deposits increased $32,437,000. The Corporation expects deposits to
increase through-out the remainder of the year. Borrowed funds increased
$522,000 or 1% and securities sold under agreements to repurchase increased
$4,534,000 or 19%.
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 2.68% of total assets as of June 30, 2000
versus 2.67% as of December 31, 1999. For the six month period ended June 30,
2000, $3,937,000 in net cash was provided from operations, investing activities
used $40,714,000, and financing activities provided $37,904,000. The accumulated
effect of the Corporation's operating, investing and financing activities was a
$1,127,000 increase in cash and cash equivalents during the six month period
ended June 30, 2000.
The Corporation's liquidity is considered adequate by management.
-16-
<PAGE>
CAPITAL
The capital of the Corporation consists of common stock, additional paid-in
capital and retained earnings reduced by net unrealized (losses) on available
for sale securities and unearned ESOP compensation. For the six month period
ended June 30, 2000 capital increased $870,000, which includes a $1,214,000
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, 2000:
Table 9 Capital Resources (in thousands)
<TABLE>
Regulatory Requirements
June 30,
---------------------------------------
Adequately Well
Capitalized Capitalized 2000 1999
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital..................... $42,671 $39,961
Tier 2 capital..................... 3,963 2,870
------- -------
Total qualifying capital........ $46,634 $42,831
======= =======
Ratio of equity to total assets
Tier 1 leverage ratio.............. 4% 5% 10.48% 12.77%
Tier 1 risk-based capital.......... 4% 6% 12.03% 15.06%
Total risk-based capital........... 8% 10% 13.15% 16.14%
</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.
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.
-17-
<PAGE>
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 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Corporation was held on April
27, 2000. The following directors were elected at the annual meeting.
Votes
Name Term Expires For Abstain
---- ------------ --------- -------
John Peterson 2003 1,482,942 273,906
David Van Solkema 2003 1,482,942 273,906
Gerald Williams 2003 1,478,342 278,506
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 Form 10-Q for the quarter
ended June 30, 2000 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 Financial and Accounting Officer)
DATE: August 11, 2000
