FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 issuer's classes of common
stock, as of the latest practicable date: 2,041,775 shares of the Company's
Common Stock ($1 par value) were outstanding as of November 12, 2000.
-1-
<PAGE>
INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-18
Item 3
Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K 19
Signatures 20
-2-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
--------------------------------------------------------------------------------
<TABLE>
ASSETS
September 30, December 31,
2000 1999
(Unaudited)
------------- -------------
<S> <C> <C>
Cash and due from banks................................................. $ 9,639,527 $ 10,054,389
Available-for-sale securities - amortized cost of
$67,699,549 - 2000 ($62,592,629 - 1999).............................. 67,347,663 61,649,881
Loans receivable, net................................................... 330,229,464 284,279,189
Loans held for sale..................................................... 525,682 632,038
Accrued interest receivable............................................. 3,134,233 2,716,837
Premises and equipment, net............................................. 11,637,845 10,618,570
Restricted investments.................................................. 2,710,000 2,000,000
Other assets............................................................ 3,921,321 4,121,705
------------ ------------
Total assets............................................................ $429,145,735 $376,072,609
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing........................................................ 264,945,091 215,159,729
Noninterest bearing..................................................... 38,110,378 39,006,319
------------ ------------
Total deposits.......................................................... 303,055,469 254,166,048
Borrowed funds.......................................................... 44,893,418 54,405,599
Securities sold under agreements to repurchase.......................... 33,825,690 24,424,351
Other liabilities....................................................... 2,862,758 1,819,097
------------ ------------
Total liabilities....................................................... 384,637,335 334,815,095
------------ ------------
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....................................................... 36,873,339 34,078,585
Accumulated other comprehensive loss.................................... (229,810) (622,527)
Unallocated common stock held by ESOP................................... (442,350) (500,000)
------------ ------------
Total stockholders' equity.............................................. 44,508,400 41,257,514
------------ ------------
Total liabilities and stockholders' equity.............................. $429,145,735 $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>
Nine Months and Three Months ended September 30,
2000 and 1999
Nine Months Three Months
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income
Loans............................................... $21,237,665 $15,620,398 $ 7,556,278 $ 5,490,198
Available-for-sale securities....................... 2,893,113 2,340,097 1,019,927 831,898
Restricted investments.............................. 145,330 75,764 50,598 26,787
Federal funds sold.................................. 634 54,238 285 35,694
----------- ----------- ----------- -----------
Total interest income.................................. 24,276,742 18,090,497 8,627,088 6,384,577
----------- ----------- ----------- -----------
Interest expense
Deposits............................................ 8,343,101 6,142,247 3,243,293 2,148,162
Borrowed funds...................................... 2,486,991 758,949 719,152 248,669
Securities sold under agreements to repurchase...... 1,009,224 572,145 404,994 283,072
----------- ----------- ----------- -----------
Total interest expense................................. 11,839,316 7,473,341 4,367,439 2,679,903
----------- ----------- ----------- -----------
Net interest income.................................... 12,437,426 10,617,156 4,259,649 3,704,674
Provision for loan losses.............................. 1,200,000 550,000 400,000 250,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses........................................ 1,237,426 10,067,156 3,859,649 3,454,674
----------- ----------- ----------- -----------
Noninterest income
Service charges..................................... 976,492 551,262 370,409 209,700
Net gain on sale of available-for-sale loans........ 222,060 508,795 100,061 72,328
Loan servicing fees................................. 117,131 122,363 43,124 36,626
Net gain on sale of available-for-sale securities... 86,917 532,915 60,922 181,910
Insurance premiums.................................. 709,966 779,787 251,123 277,080
Brokerage fees...................................... 226,053 222,814 56,710 86,825
Other............................................... 216,263 105,637 123,139 33,959
----------- ----------- ----------- -----------
Total noninterest income............................... 2,554,882 2,823,573 1,005,488 898,428
----------- ----------- ----------- -----------
Noninterest expense
Salaries and employee benefits...................... 5,016,222 4,551,111 1,738,984 1,639,844
Occupancy........................................... 568,519 510,217 195,317 178,554
Furniture and fixtures.............................. 879,272 656,815 304,170 234,216
Printing and supplies............................... 246,761 222,426 63,665 91,756
Other............................................... 2,209,250 1,885,479 696,686 667,767
----------- ----------- ----------- -----------
Total noninterest expense.............................. 8,920,024 7,826,048 2,998,822 2,812,137
----------- ----------- ----------- -----------
Income before federal income taxes..................... 4,872,284 5,064,681 1,866,315 1,540,965
Federal income taxes................................... 1,223,700 1,455,969 469,500 406,867
----------- ----------- ----------- -----------
Net income............................................. $ 3,648,584 $ 3,608,712 $ 1,396,815 $ 1,134,098
=========== =========== =========== ===========
Net income per basic and diluted
share of common stock.............................. $ 1.79 $ 1.77 $ 0.68 $ 0.56
=========== =========== =========== ===========
</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>
Nine Months and Three Months ended September 30,
2000 and 1999
Nine Months Three Months
----------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale
securities arising during the year.................. $ 594,447 $(2,421,965) $ 1,490,486 $ (1,012,055)
Reclassification adjustment for realized gains
included in net income............................. 86,917 532,915 60,922 181,910
----------- ----------- ---------- ------------
Comprehensive income (loss) before income tax
(expense) benefit.................................. 681,364 (1,889,050) 1,551,408 (830,145)
Income tax (expense) benefit related to
comprehensive income............................... (288,647) 642,266 (567,308) 282,249
----------- ----------- ---------- ------------
Other comprehensive income (loss) ................. 392,717 (1,246,784) 984,100 (547,896)
Net income......................................... 3,648,584 3,608,712 1,396,815 1,134,098
----------- ----------- ---------- ------------
Comprehensive income............................... $ 4,041,301 $ 2,361,928 $2,380,915 $ 586,202
=========== =========== ========== ============
</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>
Nine Months ended September 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............................................. 3,648,584 3,608,712
Cash dividends......................................... (853,830) (816,709)
------------ ------------
Balance, end of period................................. 36,873,339 34,015,851
------------ ------------
Accumulated other comprehensive loss
Balance, beginning of period........................... (622,527) 836,250
Other comprehensive income (loss)...................... 392,717 (1,246,784)
------------ ------------
Balance, end of period................................. (229,810) (410,534)
------------ ------------
Unallocated common stock held by ESOP
Balance, beginning of period........................... (500,000) -
Unearned ESOP compensation............................. - (500,000)
Allocation of ESOP shares.............................. 57,650 -
------------ ------------
Balance, end of period................................. (442,350) (500,000)
------------ ------------
Total stockholders' equity.................................. $ 44,508,400 $ 41,406,772
============ ============
</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>
Nine Months ended September 30,
-------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. 3,648,584 $ 3,608,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 775,524 567,404
Provision for loan losses........................ 1,200,000 550,000
Proceeds from sales of loans held
for sale................................... 14,698,365 40,485,673
Disbursements for loans held for sale............ (14,369,949) (38,000,617)
Net gain on sales of available-for-
sale securities (86,917) (532,915)
Net gain on sales of loans held for sale......... (222,060) (508,795)
Net amortization of investment premiums.......... 88,599 141,571
Changes in operating assets and liabilities
which (used) provided cash:
Accrued interest receivable................. (417,396) (437,756)
Other assets................................ 65,654 (735,920)
Other liabilities........................... 1,043,661 (182,195)
----------- -------------
Net cash provided by operating activities................... 6,424,065 4,955,162
----------- -------------
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from maturities......................... 6,602,986 10,588,243
Proceeds from sales.............................. 675,061 2,780,456
Purchases........................................ (12,386,649) (20,814,115)
Purchases of restricted investments................. (710,000) -
Net increase in loans held for investment.............. (47,150,275) (34,127,740)
Purchases of premises and equipment.................... (1,794,799) (3,314,855)
----------- -------------
Net cash used in investing activities....................... (54,763,676) (44,888,011)
----------- -------------
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts and savings deposits.................... 977,468 4,543,001
Net increase in time deposits.......................... 47,911,953 22,709,301
Net (decrease) increase in borrowed funds.............. (9,512,181) 2,069,773
Net increase in securities sold under agreements
to repurchase.................................... 9,401,339 11,473,367
Common stock dividends paid............................ (853,830) (816,709)
Proceeds from sale of common stock..................... - 150,000
----------- -------------
Net cash provided by financing activities................... 47,924,749 40,128,733
----------- -------------
Net (decrease) increase in cash and cash equivalents....... (414,862) 195,884
Cash and cash equivalents, beginning of period.............. 10,054,389 8,939,918
---------- -------------
Cash and cash equivalents, end of period.................... $ 9,639,527 $ 9,135,802
=========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
<PAGE>
O.A.K. FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine month period ended September
30, 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 Agency, 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. Due to the insignificance of the
financial statements of DIA, the Corporation's consolidated financial statements
have not been restated for all periods prior to the business combination to
reflect the financial position and results of operations of DIA, and pro-forma
financial information has not been disclosed. 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 average numbers of common shares
outstanding were 2,034,915 for the nine month period ended September 30, 2000
and 2,037,207 shares for the same period in 1999. The weighted numbers of common
shares outstanding were 2,034,703 for the three month period ended September 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 in the amount of $5,766 representing 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 Agency Inc. (DIA) in a
stock for stock transaction. Total assets of DIA were $359,873. The transaction
was accounted for as a pooling-of-interests. Accordingly the assets, liabilities
and stockholders' equity as reported by DIA prior to consummation, were combined
with the assets, liabilities and stockholders' 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 1999 annual report on Form
10-K and the financial statements and notes contained therein.
THREE AND NINE MONTHS ENDING SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Net income equaled $1,396,815 for the three months ended September 30,
2000, compared to $1,134,098 for the same period in 1999. This is a 23.17%
increase over the same period in 1999. Net income for the nine month period
ended September 30, 2000 was $3,648,584, compared to $3,608,712 for the same
period in 1999. This is a 1.10% increase over the same period in 1999. Return on
average equity was 12.83% for the three months ended September 30, 2000 and
10.99% for 1999. Return on average assets was 1.31% for the three months ended
September 30, 2000 and 1.34% for 1999. Return on average equity was 11.48% for
the nine months ended September 30,2000 and 11.87% for 1999. Return on average
assets was 1.20% for the nine months ended September 30, 2000 and 1.52% for
1999. The following discussion explains reasons for changes in growth and
financial performance for the nine month and three month periods ended September
30, 2000.
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Nine Months and Three Months Ended
September 30, 2000 and 1999
------------------------------------------------------------
Nine Months Three Months
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................... $ 3,649 $ 3,609 $ 1,397 $ 1,134
Per share.................................. $ 1.79 $ 1.77 $ 0.68 $ 0.56
Earnings ratios:
Return on average assets................... 1.20% 1.52% 1.31% 1.34%
Return on average equity................... 11.48% 11.87% 12.83% 10.99%
</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>
Nine Months and Three Months ended September 30,
(dollars in thousands)
Nine 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
------- -------- ---- ------- -------- ---- ------- -------- ---- ------- -------- ----
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fed. funds sold $ 10 $ 1 6.39% $ 1,433 $ 54 5.06% $ 17 $ 0 6.40% $ 2,870 $ 36 4.93%
Securities:
Taxable 43,217 2,156 6.66% 35,297 1,619 6.13% 45,216 776 6.82% 38,407 590 6.09%
Tax-exempt 23,195 1,205 6.94% 20,169 1,112 7.37% 23,405 395 6.71% 20,893 374 7.10%
Loans(1)(2) 316,796 21,286 8.97% 239,956 15,647 8.72% 332,133 7,572 9.07% 250,767 5,499 8.70%
------- ------ ------- ------ ------- ----- ------- -----
Total earning
assets/total
interest income 383,218 24,648 8.59% 296,855 18,432 8.30% 400,771 8,743 8.68% 312,937 6,499 8.24%
------- ------ ------- ------ ------- ----- ------- -----
Cash and due
from banks 9,177 8,358 9,400 8,998
Unrealized Gain (1,414) 549 (1,149) (274)
All other assets 18,236 14,211 18,705 15,725
Allowance for
loan loss (3,813) (2,872) (4,170) (2,909)
------- ------- ------- -------
Total assets: $405,404 $317,101 $423,557 $334,477
======== ======== ======== ========
Liabilities and
Stockholders' Equity:
Interest bearing deposits:
MMDA, Savings/
NOW accounts $88,363 1,835 2.78% $82,276 1,568 2.55% $ 89,369 646 2.88% $ 84,631 550 2.58%
Time 151,380 6,508 5.74% 118,301 4,574 5.17% 170,221 2,598 6.07% 124,331 1,599 5.10%
Fed. Funds Purchased 42,812 1,737 5.42% 24,734 748 4.04% 38,966 531 5.42% 30,897 330 4.24%
Other Borrowed Money 38,366 1,760 6.13% 13,407 593 5.91% 38,408 593 6.14% 13,741 205 5.91%
------ ----- ------ ----- -------- ----- ------- ------
Total interest
bearing
liabilities/total
interest expense 320,921 11,840 4.93% 238,718 7,483 4.19% 336,964 4,368 5.16% 253,600 2,684 4.20%
------ ------ ----- -----
Noninterest bearing
deposit 40,067 36,133 40,451 39,217
All other liabilities 2,654 2,369 3,064 2,210
Stockholders' Equity:
Unrealized Holding
Gain/(Loss) (933) 361 (758) (181)
Common Stock, Surplus,
Retained Earnings 42,695 39,250 43,836 39,631
------ ------ ------ ------
Total liabilities and
stockholders' equity: $405,404 $317,101 $423,557 $334,477
======== ======== ======== ========
Interest spread 12,468 3.66% 10,617 4.11% 4,268 3.52% 3,705 4.04%
Net interest
income-FTE $12,808 $10,949 $ 4,375 $3,815
======= ======= ======= ======
Net Interest Margin
as a Percentage of
Average Earning Assets 4.46% 4.93% 4.34% 4.84%
===== ===== ===== =====
</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 nine months ended
September 30, 2000 of $120,725 and $139,955 in 1999. For the three months
ended September 30, 2000 and 1999 the amounts were $38,137 and $49,507.
Net interest income is the principal source of income for the Corporation.
Tax equivalent net interest income increased $560,000 to $4,375,000 for the
three month period ended September 30, 2000, a 14.68% increase from the same
period in 1999. The major factor for the increase in net interest income for the
three months ended September 30, 2000 was the loan portfolio balance averaged
$81,366,000 higher in 2000 compared to 1999 and the taxable securities held for
sale averaged $6,809,000 higher in 2000 compared to 1999. Average earning assets
increased $87,834,000 or 28% for the three month period ended September 30, 2000
compared to 1999; this volume change resulted in an additional $1,968,000 in
fully taxable equivalent ("FTE") interest income. The asset growth for the three
months ended September 30, 2000 was primarily funded by a 37% ($45,890,000)
increase in time deposits average balance, a 180% ($24,667,000) increase in
other borrowed money and a 26% ($8,069,000) increase in Fed Funds Purchased
average balance; this volume change resulted in additional interest expense of
$1,225,000. For the three months ended September 30, 2000 the average FTE
interest rate earned on assets increased .44%, increasing FTE interest income by
$276,000. The major factors for the increase were higher yields on the loan
portfolio and the investment portfolio. The average interest rate paid on
deposits, Fed Funds Purchased and other borrowed money increased .96%,
increasing interest expense by $459,000. The net difference between interest
rates earned and paid was a $183,000 decrease in FTE net interest income. For
the three months ended September 30, 2000 the net interest margin decreased .50%
versus the same period in 1999.
For the nine month period ended September 30, 2000 tax equivalent net
interest income increased $1,859,000 to $12,808,000, a 17% increase from the
same period in 1999. The major factors for the increase in net interest income
for the nine months ended September 30, 2000 were the loan portfolio balance
averaged $76,840,000 higher in 2000 compared to 1999 and noninterest bearing
deposits averaged $3,934,000 higher in 2000 than in the same period in 1999.
Average earning assets increased $86,363,000 or 29% for the nine months ended
September 30, 2000 resulting in additional interest income of $5,644,000. The
asset growth for the nine months ended September 30, 2000 was primarily funded
by a 28% ($33,079,000) increase in time deposits average balance, a 186%
($24,959,000) increase in other borrowed money and a 73% (18,078,000) increase
in Fed Funds Purchased average balance. The average FTE interest rate earned on
assets increased .29%, increasing FTE interest income by $572,000 and the
average rate paid on deposits, Fed Funds Purchased and other borrowed money
increased .74%, increasing interest expense by $930,000. The difference between
interest rates earned and paid was a $358,000 decrease in FTE net interest
income. The net interest yield decreased .47% for the nine month period ended
September 30, 2000 versus the same period in 1999.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
-11-
<PAGE>
Table 3 Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30,
2000 Compared to 1999
Amount of
Increase/(Decrease)
Due to Change in
---------------------------------------------------------------------------
Nine Months Three Months
--------------------------------- -------------------------------------
Total Total
Amount Amount
of of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------- ---------- ------ ------- ----------
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold.............. $ (68) $ 15 $ (53) $ (46) $ 10 $ (36)
Securities:
Taxable..................... 395 142 537 117 69 186
Tax Exempt.................. 157 (64) 93 42 (21) 21
Loans......................... 5,160 479 5,639 1,855 218 2,073
------- ------- -------- -------- ------- -------
Total interest income......... 5,644 572 6,216 1,968 276 2,244
Interest Expense
Interest bearing deposits
Savings/Now accounts.......... 127 140 267 34 62 96
Time.......................... 1,421 513 1,934 700 299 999
Fed. Funds Purchased.......... 734 255 989 110 91 201
Other Borrowed Money.......... 1,145 22 1,167 381 7 388
------- ------- -------- -------- ------- -------
Total interest expense........ 3,427 930 4,357 1,225 459 1,684
------- ------- -------- -------- ------- -------
Net Interest Income (FTE)....... $ 2,217 $ (358) $ 1,859 $ 743 $ (183) $ 560
======= ======= ======== ======== ======== =======
</TABLE>
-12-
<PAGE>
Table 4 Noninterest Income (in thousands)
<TABLE>
Nine Months and Three Months ended September 30,
2000 Compared to 1999
Nine Months Three Months
------------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts.............. $ 976 $ 551 $ 370 $ 210
Net gains on asset sales:
Loans........................................ 222 509 100 72
Securities................................... 87 533 61 182
Loan servicing fees.............................. 117 122 43 37
Insurance premium revenue........................ 710 780 251 277
Brokerage revenue................................ 226 223 57 87
Other............................................ 217 106 123 33
--------- --------- -------- ---------
Total noninterest income.................... $ 2,555 $ 2,824 $ 1,005 $ 898
========= ========= ======== =========
</TABLE>
Noninterest Income
Non-interest income consists of service charges on deposit accounts,
service fees, gains on sale of 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 $107,000 or 12% for the three month period ended September 30, 2000
versus 1999. The increase was due primarily to a $160,000 increase in service
charges on deposit accounts, a $90,000 increase in other income, a $28,000
increase in gains on the sale of loans offset by a $121,000 decrease in gains on
the sale of securities. For the nine months ended September 30, 2000,
non-interest income decreased $269,000 or 10%. The decrease was due primarily to
a $446,000 decrease in gains on the sale of securities, a $287,000 decrease in
gains on the sale of loans offset by a $425,000 increase in service charges on
deposit accounts.
Table 5 Noninterest Expense (in thousands)
<TABLE>
Nine Months and Three Months Ended September 30,
2000 and 1999
Nine Months Three Months
-------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Salaries and employee benefits.................. $ 5,016 $ 4,551 $ 1,739 $ 1,640
Occupancy and equipment......................... 1,448 1,167 499 413
FDIC assessment................................. 39 23 13 8
Postage......................................... 122 111 40 38
Printing and supplies........................ 247 222 64 92
Marketing....................................... 241 255 70 105
Michigan Single Business Tax.................... 166 153 59 62
Other........................................... 1,641 1,344 515 454
---------- ---------- ---------- ----------
Total noninterest expense.................. $ 8,920 $ 7,826 $ 2,999 $ 2,812
========== ========== ========== ==========
</TABLE>
Noninterest Expense
Non-interest expense increased $187,000 or 7% for the three month period
ended September 30, 2000 versus 1999. The increase was due primarily to a
$99,000 increase or 6% in salaries and employee benefits and a $86,000 increase
or 21% in occupancy and equipment expense. The majority of the increase in the
occupancy and equipment expense relates to the four branch locations that were
opened in late 1998 and early 1999 and to the main office addition that was
completed in the 3RD quarter 1999. Three of these locations were opened in
leased space while the full service buildings were being constructed, the 1ST
was completed in the 3RD quarter 1999, the 2ND was completed in the 4TH
-13-
<PAGE>
quarter 1999 and the last location was completed in the 3RD quarter 2000. For
the nine month period ended September 30, 2000 non-interest expense increased
$1,094,000 or 14% to $8,920,000 principally due to salaries and employee
benefits expense which increased $465,000 or 10% to $5,016,000, a $281,000 or
24% increase in occupancy expenses and a $297,000 increase or 22% in other
expense for the nine month period ended September 30, 2000 versus 1999.
Table 6 Nonperforming Assets (in thousands)
<TABLE>
Nine Months Ended
September 30, 2000 and 1999
2000 1999
-------- --------
<S> <C> <C>
Nonaccrual loans............................................. $ 1,827 $ 342
90 days or more past due & still accruing.................... 896 3,109
-------- --------
Total Nonperforming Loans............................... 2,723 3,451
Other real estate............................................ - 116
-------- --------
Total Nonperforming Assets............................... $ 2,723 $ 3,567
======== ========
Nonperforming loans as a percent of total loans.............. .81% 1.35%
Nonperforming assets as a percent of total loans............. .81% 1.39%
Nonperforming loans as a percent of the loan loss reserve.... 62.76% 112.67%
</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. For the nine month period ended September
30, 2000 versus 1999, nonperforming assets as a percent of total loans decreased
42%.
-14-
<PAGE>
Table 7 Loan Loss Experience (in thousands)
<TABLE>
Nine Months and Three Months Ended
September 30, 2000 and 1999
Nine Months Three Months
---------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- ---------
Loans:
<S> <C> <C> <C> <C>
Average daily balance of loans for the period....... $315,766 $239,927 $331,121 $250,737
Amount of loans outstanding at end of period........ 334,568 255,830 334,568 255,830
Allowance for loan losses:
Balance at beginning of period...................... 3,551 2,879 3,963 2,854
Loans charged off:
Commercial....................................... 197 - 4 -
Consumer......................................... 438 42 17
-------- -------- ------- --------
449
Total charge-offs.............................. 635 46 17
449
Recoveries of loans previously charged off:
Commercial....................................... 87 19 10 3
Consumer......................................... 136 12 23
-------- -------- -------- --------
Total recoveries.............................. 223 64 22 26
-------- -------- -------- --------
83
Net loans charged off (recovered)................... 412 366 24 (9)
Additions to allowance charged to operations 1,200 550 400 200
-------- -------- -------- --------
Balance at end of period...................... $ 4,339 $ 3,063 $ 4,339 $ 3,063
======== ======== ======== ========
Ratios:
Net loans charged off to avg. loans outstanding..... .13% .15% .01% -.00%
Allowance for loan losses to loans outstanding...... 1.30% 1.20% 1.30% 1.20%
</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. The allowance for loan
losses to loans outstanding percentage has increased .10% for the nine months
ended September 30, 2000 versus 1999 as a result of additional provision for
loans classified as substandard.
Table 8 Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the weighted
average rates paid thereon:
<TABLE>
Nine Months and Three Months Ended
September 30, 2000 and 1999
Nine 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........... $40,067 $ 36,133 $40,451 $ 39,217
MMDA/Savings and NOW accounts........ 88,363 2.78% 82,276 2.55% 89,369 2.88% 84,631 2.58%
Time................................. 151,380 5.74% 118,301 5.17% 170,221 6.07% 124,331 5.10%
------- ----- ------- ----- ------- ----- ------- -----
Total Deposits................... $279,810 3.98% $236,710 3.47% $300,041 4.30% $248,179 3.44%
======== ======== ======== ========
</TABLE>
-15-
<PAGE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of September 30, 2000:
<TABLE>
Amount
------
<S> <C>
Three months or less.................................... $ 34,983
Over 3 months through 6 months.......................... 22,323
Over 6 months through 1 year............................ 9,063
Over 1 year............................................. 7,238
--------
$ 73,607
========
</TABLE>
As of September 30, 2000 the bank had purchased $18,690,000 in brokered
negotiable certificates of deposit as an alternate method of funding. The bank
will utilize this method of funding in the future as long as the incremental
funding cost for brokered negotiable certificates remains the most attractive
funding option.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets increased $53,073,000 or 14% to $429,146,000 from December 31,
1999 to September 30, 2000. The significant changes were an increase in net
loans receivable of $45,950,000 or 16%. Deposits increased $48,889,000 or 19% to
$303,055,000, non-interest bearing deposits decreased $896,000 and interest
bearing deposits increased $49,785,000. The Corporation expects deposits to
increase through-out the remainder of the year. Borrowed funds decreased
$9,512,000 or 17% and securities sold under agreements to repurchase increased
$9,401,000 or 38%.
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, brokered
negotiable C.D.'s, securities sold under agreements to repurchase and the
issuance of common stock.
Cash and cash equivalents equaled 2.25% of total assets as of September 30,
2000 versus 2.67% as of December 31, 1999. For the nine month period ended
September 30, 2000, $6,424,000 in net cash was provided from operations,
investing activities used $54,764,000, and financing activities provided
$47,925,000. The accumulated effect of the Corporation's operating, investing
and financing activities was a $415,000 decrease in cash and cash equivalents
during the nine month period ended September 30, 2000.
The Corporation's liquidity is considered adequate by management.
CAPITAL
The capital of the Corporation consists of common stock, additional paid-in
capital and retained earnings reduced by accumulated other comprehensive loss.
For the nine month period ended September 30, 2000 capital increased $3,251,000,
which includes a $230,000 unrealized loss on available-for-sale investment
securities.
There are minimum risk based capital regulatory guidelines placed on the
Corporation's capital by The Federal Reserve Board. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of September 30, 2000:
-16-
<PAGE>
Table 9 Capital Resources (in thousands)
<TABLE>
As of September 30, 2000 and 1999
Regulatory Requirements
Adequately Well
Capitalized Capitalized 2000 1999
----------- ----------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital $44,080 $41,108
Tier 2 capital 4,339 3,063
----- -----
Total qualifying capital $48,419 $44,171
======= =======
Ratio of equity to total assets
Tier 1 leverage ratio 4% 5% 10.40% 12.31%
Tier 1 risk-based capital 4% 6% 12.41% 14.49%
Total risk-based capital 8% 10% 13.63% 15.57%
</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.
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.
-17-
<PAGE>
The Corporation's exposure to market risk is reviewed on a regular basis by
the Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximize income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a simulation model. The Corporation has no market risk
sensitive instruments held for trading purposes. Management believes the
Corporation's market risk is reasonable at this time.
-18-
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) Reports on Form 8K - None.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form10-Q for the quarter
ended September 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/ James A. Luyk
James A. Luyk
(Chief Financial Officer)
DATE: 11/14/00
-20-
