FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22461
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2817345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
-----------
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. _X_
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based on a per share price of $55.75 as of
March 1, 2000, was approximately $113,829,179 (common stock, $1.00 par value).
As of March 1, 2000, there were outstanding 2,041,775 shares of the Company's
Common Stock ($1.00 par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 27, 2000 are incorporated by reference into Part III of this
report.
<PAGE>
Item 1. Business.
O.A.K. Financial Corporation (the "Company"), a Michigan business
corporation, is a one bank holding company, which owns all of the outstanding
capital stock of Byron Center State Bank (the "Bank"), a Michigan banking
corporation. The Company was formed in 1988 for the purpose of acquiring all of
the common stock of the Bank in a shareholder approved reorganization, which
became effective October 13 of 1988.
The Bank was originally organized in 1921 as a Michigan banking
corporation. As of December 31, 1999, the Bank had approximately 159 full-time
and part-time employees. None of the Bank's employees are subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
principal executive offices of the Company and the Bank are located at 2445 84th
Street, S.W., Byron Center, Michigan 49315. The Bank's main office is located in
Byron Center and it serves othe communities with branch offices in Allendale,
Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Jamestown, Moline and
Zeeland. The Bank's offices are located in Kent County, Ottawa County and the
northern portion of Allegan County.
The area in which the Bank's offices are located, which is basically south
and west of the city of Grand Rapids, has historically been rural in character
but now has a growing urban population as the Grand Rapids Metropolitan Area
expands south and west. The populations of the cities in which the Banks offices
are located are approximately as follows: Byron Center - 1,000; Dorr - 1,450;
Grand Rapids - 189,125; Grandville - 16,500; Hudsonville - 6,170; Jamestown -
300; Moline - 800; Hamilton - 600; Zeeland - 6,000; Allendale - 9,600.
The Bank also owns a subsidiary, O.A.K. Financial Services, which is
responsible for mutual fund products and securities brokerage services and also
offers retirement planning services and provides investment management and
advisory services. O.A.K. Financial Services in turn owns Dornbush Insurance
Agency which was acquired February 1, 1999. Dornbush Insurance Agency sells
property and casualty, life, disability and long-term care insurance products.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These traditional consumer services include checking
accounts, savings accounts, certificates of deposit, commercial loans, real
estate loans, installment loans, collections, traveler's checks, night
depository, safe deposit boxes and U.S. Savings Bonds. Currently, the Bank does
not offer trust services. The Bank maintains correspondent relationships with
major banks in Detroit and Grand Rapids, pursuant to which the Bank engages in
federal funds sale and purchase transactions, the clearance of checks and
certain foreign currency transactions. In addition, the Bank participates with
other financial institutions to fund certain large commercial loans which would
exceed the Bank's legal lending limit if made solely by the Bank.
The Bank's deposits are generated in the normal course of business, and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. No material portion of the Bank's loans is concentrated
within a single industry or group of related industries. As of December 31,
1999, the Bank's certificates of deposits of $100,000 or more constituted
approximately 13% of total deposit liabilities. The Bank's deposits originate
primarily from its service area, and the Bank does, on a very limited basis,
obtain large deposits from outside this area.
The Bank's principal sources of revenue are interest and fees on loans and
interest on investment securities. Interest and fees on loans constituted
approximately 75.5% and 74.1% of total revenues for the years ended December 31,
1999, and December 31, 1998, respectively. Interest on investment securities,
including short-term investments, restricted investments and federal funds sold,
constituted approximately 11.9% and 14.7% of total revenues in 1999 and 1998.
Revenues were also generated from deposit service charges, sales of loans and
securities and other financial service fees.
The Bank provides real estate, consumer and commercial loans to customers
in its market. Eighty percent (80%) of the Bank's loan portfolio is held in
fixed rate loans as of December 31, 1999. Most of these loans, approximately
86.6%, mature within five years of issuance. Approximately $30,805,000 of loans
(or 10.7% of the Bank's total loan portfolio) have fixed rates with maturities
exceeding five years. Of the Bank's interest-bearing deposits,
-1-
<PAGE>
41.4% are held in savings, NOW and MMDAs, all of which are variable rate
products. Of the $126,125,000 in certificates, approximately $96,124,000 mature
within one year, with the balance maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration of race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved within the limits of each lending officer's authority. Loan requests in
excess of $1,000,000 are required to be presented to the Board of Directors or
the Executive Committee of the Board for review and approval.
As described in more detail in Table 20 on page 30, the Bank's ratio of
rate sensitive assets to rate sensitive liabilities as of December 31, 1999, was
a 17% positive gap, compared to a 20 % positive gap at December 31, 1998. As
indicated on page 30, the entire balance of savings, NOW, and MMDAs are not
categorized as 0 to 3 months, although they are variable rate products. Some of
these balances are core deposits which are not considered rate sensitive based
on the Bank's historical experiences.
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank has also sold
student loans and regularly sells fixed rate and conforming adjustable rate
residential mortgages to the Federal Home Loan Mortgage Corporation ("Freddie
Mac"). Those residential real estate mortgage loan requests that do not meet
Freddie Mac criteria are reviewed by the Bank for approval and, if approved, are
retained in the Bank's loan portfolio. The Bank has the ability to purchase
loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It
provides for unlimited investment in U.S. government bonds, with the maximum
size of a single purchase limited to $3,000,000 and a maximum maturity of
fifteen years. Municipal bonds with an A rating or better may be purchased to
provide nontaxable income, with the maximum life of municipal bonds limited to
ten years. Nonrated bonds may be purchased from local communities that are
familiar to the Bank, with a maximum block size of a single purchase limited to
$250,000. Investments in states other than Michigan may not exceed 10% of the
municipal portfolio, and investments in a single issuer may not exceed 5% of
equity capital. Mortgage backed securities, which are fully collateralized by
securities issued by government sponsored agencies, may be purchased in block
sizes of up to $3,000,000, provided the average life expectancy does not exceed
ten years.
In addition, certain collateralized mortgage obligations may be purchased
if their average life does not exceed five years. In addition to these
referenced thresholds affecting the acquisition of investment securities,
holdings of approved "non high-risk mortgage securities" are required to be
"stress tested" at least annually. The acquisition of "high-risk mortgage
securities" is prohibited. In no case may the Bank participate in such
activities as "gains trading," "when-issued" trading, "pair offs," corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Bank's Board of
Directors.
Bank Competition
The Bank has ten offices, one within each of the communities it serves. See
"Properties" below for more detail on these facilities. Within these
communities, its principal competitors are Comerica Bank, Bank One, Old Kent
Bank, Ameribank, Flagstar Bank, National City Bank, Huntington Bank, Michigan
National Bank and United Bank of Michigan. Each of these financial institutions,
which are headquartered in larger metropolitan areas, have significantly greater
assets and financial resources than the Company, with the exception of United
Bank of Michigan. Based on deposit information as of June 30, 1999, the Bank
holds approximately 2.7% of deposits in the Kent County market, 2.2% of deposits
in the Ottawa County market, and 6.6% of the deposits in the Allegan County
market. Information as to asset size of competitor financial institutions is
derived from publicly available reports filed by and with regulatory agencies.
The financial services industry continues to be increasingly competitive.
Principal methods of competition include loan and deposit pricing, advertising
and marketing programs and the types and quality of services provided.
-2-
<PAGE>
The deregulation of the financial service industry has led to increased
competition among banks and other financial institutions for a significant
portion of funds which have traditionally been deposited with commercial banks.
Competition within the Bank's markets has been relatively stable within the past
several years. However, with the enactment of recent legislation discussed under
the caption "Supervision and Regulation" and the increased use of internet
banking, it is expected that competition may become more intense. Management
continues to evaluate the opportunities for the expansion of products and
services, such as trust services, and additional branching opportunities.
Growth of Bank
The following table sets forth certain financial information regarding the
growth of the Bank (and accordingly, excludes holding company data):
<TABLE>
Balances as of December 31,
------------------------------------------------------------------------
(in thousands)
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $375,741 $299,882 $241,283 $216,755 $210,307
Loans, Net of Unearned Income 288,330 222,133 168,953 45,069 142,813
Securities 62,818 54,734 59,988 57,302 56,702
Noninterest-Bearing Deposits 40,352 35,919 26,459 23,807 19,211
Interest-Bearing Deposits 215,160 181,789 158,244 146,442 150,807
Total Deposits 255,512 217,708 184,703 170,249 170,018
Stockholders' Equity 39,655 37,983 35,107 34,744 31,979
==========================================================================================================================
</TABLE>
The Main Office in Byron Center began in a small 600 square foot building
in 1921. It was expanded to 1,100 square feet in 1954. In 1965 the Bank moved
next door to a new 10,000 square foot building. In 1987 construction of another
new building of 30,000 square feet was begun. The Main Office moved to this
facility in 1988 and currently occupies this space. In 1999 the Main Office
added an 8,000 square foot addition to its facility. The Bank's first branch was
opened in 1963 when the bank refitted an old bank building in Jamestown. The
building was once a bank which closed during the Great Depression. The Bank's
next branch was opened in Cutlerville in 1972. The original 2,500 square foot
building was expanded with a 1,000 square foot addition in 1987. The Bank's Dorr
office was opened in 1986 at the site of the Hillcrest Mall. It is a 2,500
square foot facility with a 2,500 square foot storage basement. In 1991, the
Bank opened its branch in Hudsonville. The Bank maximized this sit for future
expansion with a 10,000 square foot building. The Bank occupies 2,500 square
feet while the remainder is rented to various office use tenants. During 1995,
the Bank purchased and remodeled a former bank branch in Grandville. Also, the
same year, the Bank purchased from National City Bank a building and the
deposits of its Moline branch. Currently, the Bank operates three off-site ATMs.
The Bank opened three new branches in 1998 at 10500 Chicago Drive in
Zeeland, Michigan, 6163 Lake Michigan Drive in Allendale, Michigan and 4601
134th Avenue, Suite C in Hamilton, Michigan. All of these facilities were
initially leased. In February 1999, the Kentwood, Michigan branch was opened for
business in a former bank building purchased from National City Bank. In August
1999, the Bank's Allendale branch was completed and opened at 5980 Lake Michigan
Drive in Allendale in a 10,000 squar foot building owned by the Bank with the
Bank occupying 2,500 square feet and the remainder to be used for rental to
office use tenants. In December 1999, the Bank moved its Hamilton Branch to a
newly completed 3,600 square foot facility owned by the Bank at 3614 M-40,
Hamilton, Michigan.
-3-
<PAGE>
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on the Company, the Bank and the business of the Company and the
Bank.
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"),
the Internal Revenue Service, and state taxing authorities. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services industry.
The GLB Act modifies many of the principal federal laws which regulate financial
institutions and sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers a more complete array of financial products and
services. Specifically, the GLB Act provides two new vehicles through which a
banking organization can engage in a variety of activities which, prior to the
Act, were not permitted. First, a bank holding company meeting certain
requirements may elect to become a financial holding company ("FHC"). FHCs are
generally authorized to engage in all "financial activities" and, under certain
circumstances, to make equity investments in other companies (i.e., merchant
banking). In order to be eligible to elect to become a FHC, a bank holding
company and all of its depositary financial institutions must: (1) be "well
capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or
better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depositary financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a FHC or else the FHC will be subject to various restrictions. The
Federal Reserve Board will be the umbrella regulator of FHCs, but functional
regulation of a FHC's separately regulated subsidiaries will be conducted by
their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
-4-
<PAGE>
The GLB Act also imposes several rules that are designed to protect the
privacy of the customers of financial institutions. For example, the GLB Act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Company and the Bank are also
subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a FHC. The Company believes that it is qualified to elect FHC status but
has not yet decided to do so.
The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, if the Commissioner deems the Bank's capital to be
impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment
leasing, securities brokerage, and consumer and commercial finance company
operations. As a result of recent amendments to the BHCA, well-capitalized and
well-managed bank holding companies may engage de novo in certain types of
non-banking activities without prior notice to, or approval of, the Federal
Reserve Board, provided that written notice of the new activity is
-5-
<PAGE>
given to the Federal Reserve Board within 10 business days after the activity is
commenced. If a bank company wishes to engage in a non-banking activity by
acquiring a going concern, prior notice and/or prior approval will be required,
depending upon the activities in which the company to be acquired is engaged,
the size of the company to be acquired and the financial and managerial
condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total average assets,
and (ii) a risk-based requirement expressed as a percentage of total
risk-weighted assets. The leverage capital requirement consists of a minimum
ratio of Tier 1 capital (which consists principally of shareholders' equity) to
total average assets of 3% for the most highly rated companies, with minimum
requirements of 4% to 5% for all others. The risk-based requirement consists of
a minimum ratio of total capital to total risk-weighted assets of 8%, of which
at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securitie trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received by it in the form of dividends
paid by the Bank. Thus, the Company's ability to pay dividends to its
shareholders is indirectly limited by statutory restrictions on the Bank's
ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank -
Dividends." Further, the Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which can only be funded in ways that weakened the bank company's
financial health, such as by borrowing. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies. Similar enforcement powers over the Bank are possessed by the
FDIC. The "prompt corrective action" provisions of federal law and regulation
authorizes the Federal Reserve Board to restrict the payment of dividends by the
Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution. The Company's Articles of Incorporation do not
authorize the issuance of preferred stock and there are no current plans to seek
such authorization.
-6-
<PAGE>
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF. These agencies and the federal and state laws applicable to the Bank and
its operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 1999, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category. For 1999, the Bank paid $31,989 in BIF insurance
assessments, representing a premium of .01%.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily durin the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay FICO assessments at a rate equal to
approximately 0.013% of deposits. Between January 1, 2000 and the maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits.
Capital Requirements. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total average assets of 3% for the most highly-rated banks with minimum
requirements of 4% to 5% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists
principally of shareholders' equity. These capital requirements are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual institutions. For
example, FDIC regulations provide that higher
-7-
<PAGE>
capital may be required to take adequate account of, among other things,
interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<TABLE>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
As of December 31, 1999, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the cumulative
dividends on preferred stock (should any such stock be issued and outstanding)
have been paid in full. The Bank's Articles of Incorporation do not authorize
the issuance of preferred stock and there are no current plans to seek such
authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment
-8-
<PAGE>
of any assessment due to the FDIC. In addition, the FDIC may prohibit the
payment of dividends by the Bank, if such payment is determined, by reason of
the financial condition of the Bank, to be an unsafe and unsound banking
practice.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal shareholders of the Company, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "IBBEA") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather
-9-
<PAGE>
than the acquisition of an out-of-state bank in its entirety) is allowed by
IBBEA only if specifically authorized by state law. The legislation allowed
individual states to "opt-out" of interstate branching authority by enacting
appropriate legislation prior to June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of th
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
-10-
<PAGE>
Item 2. Properties.
The Bank operates from eleven facilities, located in seven communities, in
Kent, Ottawa and Allegan Counties, Michigan. The Bank's main office is located
at 2445 84th Street, S.W., Byron Center, Michigan. This facility is a two story
30,000 square foot building constructed in 1988 with an 8,000 square foot two
story addition completed in 1999 and is owned by the Bank. The Bank's branch
offices in Allendale, Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville,
Jamestown, Moline and Zeeland ar all single story facilities ranging in size
from 1,100 square feet to 10,000 square feet. The Bank owns its branch offices
in Allendale, Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Kentwood
and Moline. The Bank leases the facilities occupied by the Zeeland branch. The
Bank is in the process of construction of its Zeeland office at 9581 Riley,
Zeeland, Michigan which is scheduled to open the middle of June 2000.
Item 3. Legal Proceedings.
Neither the Company nor the Bank is involved in any legal proceedings other
than routine litigation incidental to the ordinary conduct of the business of
the Bank, none of which would result in a material impact on the Company or the
Bank, individually or in the aggregate, in the event of an adverse outcome.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
-11-
<PAGE>
Additional Item - Executive Officers
Executive officers of the Company are appointed annually by the Board of
Directors. There are no family relationships among the officers and/or the
directors of the Company, or any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the
Company's officers as of December 31, 1999:
<TABLE>
Year Became
Name Age Position with Company an Officer
---- --- --------------------- ----------
<S> <C> <C> <C>
John A. Van Singel 45 President, CEO and director of the Company
and the Bank 1976
John Peterson 51 Director of the Company and the Bank,
Executive Vice President of the Bank 1983
Lois Smalligan 67 Director of the Company and the Bank,
Vice President of the Bank 1975
Rob Arnoys 32 Vice President of the Bank 1996
Forrest Bowling 51 Vice President of the Bank 1988
Martin Braun 44 Vice President of the Bank 1988
Todd Harrell 48 Vice President of the Bank 1993
Melissa Lee 30 Vice President of the Bank 1996
Stanley Roberts 46 Vice President of the Bank 1998
Brad Slagh 42 Vice President of the Bank 1997
</TABLE>
[INTENTIONALLY LEFT BLANK]
-12-
<PAGE>
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
There is no active market for the Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
sales through brokers and direct sales by shareholders of which the Company's
management is aware. It is the understanding of the management of the Company
that over the last two years, the Company's Common Stock has sold at prices in
excess of book value. From January 1, 1998, through December 31, 1999, there
were, so far as the Company's management knows, 79 sales of shares of the
Company's Common Stock, involving a total of 34,888 shares. The price was
reported to management in only a few of these transactions, and management has
no way of confirming the prices which were reported. During this period, the
highest price known by management to be paid was $60.00 per share in the second
and fourth quarters of 1999 and the first quarter of 2000, and the lowest price
was $32.00 per share in the third quarter of 1998. To the knowledge of
management, the last sale of Common Stock occurred on February 4, 2000,
involving the sale of 200 shares at a price of $58.00 per share. The per share
information has been adjusted for the July 1, 1998, 2-for 1 stock split in the
form of a dividend.
The following table sets forth the range of high and low sales prices of
the Company's Common Stock during 1998 and through February 10, 2000, based on
information made available to the Company, as well as per share cash dividends
declared during those periods. Although management is not aware of any
transactions at higher or lower prices, there may have been transactions at
prices outside the ranges listed below:
<TABLE>
Cash
Sales Prices Dividends Declared
------------ ------------------
1998 High Low
---- ---- ---
<S> <C> <C> <C>
First Quarter...................... $ 35.00 $ 34.50 $ .50 (1)
Second Quarter..................... 35.00 35.00 $ .325
Third Quarter...................... 42.00 32.00
Fourth Quarter..................... 50.00 42.00 $ .35
1999 High Low
---- ---- ---
First Quarter...................... $ 50.00 $ 46.00
Second Quarter..................... 60.00 50.00 $ .40
Third Quarter...................... 52.75 51.00
Fourth Quarter..................... 60.00 53.50 $ .42
2000
----
First Quarter...................... $60.00 $55.00
</TABLE>
(1) A special dividend of $.50 per share.
On May 7, 1998, the Board of Directors declared a 2-for-1 split of the
Corporation's common stock with an effective date of July 1, 1998 by means of a
one-for-one stock dividend to shareholders of record on June 1, 1998. All
references to per share amounts and prices of the shares have been restated to
give retroactive effect to the stock split.
-13-
<PAGE>
There are 4,000,000 shares of the Company's Common Stock authorized, of which
2,041,775 shares were issued and outstanding as of February 29, 2000. There were
approximately 817 shareholders of record, including trusts and shares jointly
owned, as of that date. Directors and officers of the Company hold options to
purchase a total of 11,750 shares of the Company's Common Stock. No other
warrants or options exist for the purchase of additional common stock of the
Company.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Cash dividends have been paid on a semi-annual
basis. In determining dividends, the Board of Directors considers the earnings,
capital requirements and financial condition of the Company and the Bank, along
with other relevant factors. The Company's principal source of funds for cash
dividends is the dividends pai by the Bank. The ability of the Company and the
Bank to pay dividends is subject to regulatory restrictions and requirements.
See the discussion under "Business-Supervision and Regulation" above.
[INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $25,080 $ 21,134 $ 18,624 $ 17,502 $ 16,268
Interest expense 10,528 8,916 7,693 7,181 6,637
Net interest income 14,552 12,218 10,931 10,321 9,631
Provision for loan losses 1,250 400 50 0 275
Noninterest income 3,621 2,659 1,542 1,075 919
Noninterest expenses 10,603 7,334 5,782 5,169 4,511
Income before federal
income taxes 6,320 7,144 6,641 6,227 5,764
Net income 4,529 5,076 4,626 4,375 4,004
Per Share Data(1)(2):
Net income $ 2.23 $ 2.54 $ 2.30 $ 2.17 $ 1.99
Cash dividends declared .82 1.18 1.55 .47 .41
Book Value 20.31 19.98 18.37 17.66 16.12
Weighted average shares
outstanding (1) 2,031 2,000 2,010 2,014 2,020
Balance Sheet Data:
Total assets $376,073 $301,494 $243,088 $217,527 $210,880
Loans, net of unearned income 287,830 222,133 168,953 145,069 142,813
Allowance for loan losses 3,551 2,879 2,565 2,376 2,305
Deposits 254,166 217,291 184,700 170,221 170,012
Stockholders' equity 41,258 39,953 36,915 35,544 32,559
Ratios:
Tax equivalent net interest
income to average earning assets 4.89% 5.02% 5.24% 5.23% 5.42%
Return on average equity 11.08 13.28 13.08 12.89 13.21
Return on average assets 1.38 1.90 2.03 2.03 2.07
Nonperforming loans to
total loans 1.90 0.26 0.14 0.82 0.66
Tier 1 leverage ratio 12.64 14.74 15.03 15.97 15.42
Dividend payout ratio 36.97 46.30 67.35 21.54 18.75
Equity to asset ratio 10.97 13.25 15.19 16.34 15.44
</TABLE>
(1) At year end in thousands.
(2) As restated for a 2-for-1 common stock split effected in the form of a
dividend in 1998.
-15-
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
The following financial review presents management's discussion and
analysis of consolidated financial condition and results of operations during
the period of 1997 through 1999. The discussion should be read in conjunction
with the Company's consolidated financial statements and accompanying notes
thereto.
Summary
The Company and its subsidiary bank, Byron Center State Bank ("Bank"),
consistently have been ranked as a high performance community bank by various
bank rating companies. The Company's equity to asset ratio of 10.97% as of
December 31, 1999, makes it one of the stronger capitalized community banks in
the State of Michigan.
To achieve this status, the Company has relied on years of continuous
improvements in a culture that emphasizes quality assets, managed in an
efficient manner so as to minimize the cost of overhead. Technology has also
been a key component to the Company' success and will remain an important tool
that will help management deliver more services and manage more assets at a
lower cost to support these functions.
The Company has a surplus of capital. The Board of Directors has made it a
priority to make more efficient use of capital by re-leveraging capital through
aggressive yet careful growth. This is expected to be accomplished through
competitive, cost effective products and services, efficiently delivered without
compromising the Bank's risk and underwriting standards. The asset growth of the
Company in 1999 was 24.74%. This growth was a result of existing branches
cross-selling products to existing customers and targeting non-bank customers
who are in the Company's market area. The Company's four newest branches,
Kentwood, Hamilton, Zeeland and Allendale are positioning themselves to be the
largest contributors to the growth in year 2000. The Company has increased its
regular cash dividend pay-out ratio over the years from 15% in 1993 to 37% in
1999, although there can be no assurance that the Company will maintain
comparable pay-out ratios in the future.
Results of Operations
Table 1 Earnings Performance (in thousands, except per share data)
<TABLE>
Year Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income................................. $4,529 $5,076 $4,626
Per share of common stock................ 2.23 2.54 2.30
Earnings ratios:
Return on average assets................. 1.38% 1.90% 2.03%
Return on average equity................. 11.08% 13.28% 13.08%
</TABLE>
Net income decreased 10.78% in 1999 as a result of the implementation of
the growth strategy that originated from the Board of Directors. During the last
two years as a part of this strategy, the Bank opened four new branches and
expanded its corporate operations. The start-up and on-going expenses of these
new operations prior to attaining full income generation potential were a major
reason for the Company's decline in overall profitability and in earnings as a
percent of assets and average equity. The expense in 1999 for the growth
strategy is expected to enhance future years' profitability and growth.
The Bank's net interest margin (on a fully taxable equivalent ["FTE"]
basis) is well above peers. Management actively manages the pricing of assets
and funding costs of the liabilities. The net interest margin-FTE decreased .13%
from 5.02% in 1998 to 4.89% in 1999. The Company's strategy with the four new
branches and existing branches is to grow the Company's business with
approximately the same percentage mix of deposits as is reflected in Table 16.
-16-
<PAGE>
The Bank has had and expects to continue t have success at gathering local
retail interest bearing deposits which are less expensive than national
wholesale interest bearing deposits.
The loan portfolio increased 29.6% from $222,133,000 in 1998 to
$287,830,000 in 1999. The loan growth was funded by the $36,875,000 increase in
deposits and a $36,704,000 increase in borrowed funds and securities sold under
agreements to repurchase. The majority of the growth was fixed rate loans with a
maturity of 5 years or less. This growth required additional provisions to be
allocated to the allowance for loan losses. The highest percentage growth in the
overall loan portfolio was the consumer loan portfolio (52%), which was the
result of the Bank's indirect lending program, mostly automobile loans. Indirect
lending loans have a higher credit risk than direct lending loans. Consumer loan
net charge-offs increased $528,000 in 1999 compared to 1998. The increased
indirect loan charge-offs resulted in additional provisions being allocated to
the allowance for loan losses. Real estate mortgage loan originations decreased
28% from $91,446,000 in 1998 to $65,668,000 in 1999. This resulted in a
$27,311,000 decrease in real estate mortgage loan sales. In turn this lower
volume was a result of a higher interest rate environment and a slowdown in the
refinance business. The net gains on the sale of real estate mortgage loans
decreased $767,000 (56%).
[INTENTIONALLY LEFT BLANK]
-17-
<PAGE>
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 Company's major categories of assets, liabilities, and
stockholders' equity for the periods indicated:
Table 2 - Interest Yields and Costs (in thousands)
<TABLE>
Year ended December 31,
1999 1998 1997
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fed. funds sold $ 1,079 $ 53 4.91% $ 375 $ 21 5.60% $ 1,197 $ 67 5.60%
Securities:
Taxable 36,551 2,280 6.23 38,030 2,410 6.34 41,684 2,710 6.50
Tax-exempt 20,885 1,514 7.25 19,442 1,497 7.70 16,681 1,359 8.15
Loans(1)(2) 248,440 21,691 8.73 194,728 17,661 9.07 156,657 14,887 9.50
------- ------- ---- -------- ------- --------- --------
Total earning assets/
total interest income 306,955 25,538 8.32 252,575 21,589 8.55 216,219 19,023 8.80
Cash and due from banks 8,601 6.507 4,956
Unrealized gain 212 1,085 289
All other assets 14,968 9,428 8,427
Allowance for loan loss (2,936) (2,663) (2,477)
-------- -------- --------
Total assets $327,800 $266,932 $227,414
======== ======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $ 83,740 $ 2,153 2.57% $ 71,658 $ 2,027 2.83% $ 63,927 $ 1,927 3.01%
Time 120,114 6,215 5.17 98,870 5,547 5.61 90,180 5,131 5.69
Fed Funds Purchased 28,901 1,252 4.33 15,767 685 4.35 9,038 369 4.08
Other Borrowed Money 15,342 918 5.98 10,966 656 5.99 4,443 266 5.99
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities/total
interest expense 248,097 10,538 4.25 197,261 8,915 4.52 167,588 7,693 4.59
-------- ------ -------
Noninterest bearing deposits 36,452 29,324 22,764
All other liabilities 2,369 2,136 1,773
Stockholders' Equity:
Accumulated other comprehensive
income 361 716 191
Common Stock, Paid-in Capital,
Retained Earnings 40,521 37,495 35,098
-------- --------- --------
Total liabilities and
stockholders' equity $327,800 $266,932 $227,414
======== ======== ========
Interest spread $14,552 4.07% $12,218 4.03% $10,931 4.21%
------- ===== ===== =====
Net interest income-FTE $15,000 $12,674 $11,330
======= ======= =======
Net Interest Margin as a
Percentage of Average
Earning Assets - FTE 4.89% 5.02% 5.24%
===== ===== =====
</TABLE>
(1) Average nonaccrual loans were not significant during the years indicated,
and for purposes of the computations above, are included in the average
daily loan balances.
(2) Interest on loans includes net origination fees totaling $190,720 in 1999,
$183,443 in 1998 and $249,067 in 1997.
Net interest income is the principal source of income for the Corporation.
In the current year, tax equivalent net income increased $2,326,000 to
$15,000,000 a 18.35% increase from the same period in 1998. The increase was a
result of the growth of the Corporation, average earning assets grew 21.53%,
listed below are the details of the major
-18-
<PAGE>
components that made up the increase. The major factors for the increase in net
interest income were the loan portfolio balance averaged 27.58% ($53,712,000)
higher in 1999 compared to 1998 and non-interest bearing deposits averaged
24.30% ($7,128,000) higher in 1999 compared to 1998. Non-deposit funding
averaged 65.50% ($17,510,000) higher in 1999 compared to 1998. The Corporation
used non-deposit funding to support the asset growth because of the lower
interest cost of funds. The fully taxable equivalent ("FTE") net interest margin
decreased .13% from 5.02% in 1998 to 4.89% in 1999. Management expects the
declining trend in FTE net interes margin to continue because of fierce
competition for deposits in its local markets and because of the upward pressure
on costs of funds from increases in the Federal Fund rates. Management
aggressively sought after the lowest cost of funding in 1999 increasing its
borrowings from the FHLB and increasing the Treasury Tax and Loan borrowing
limit.
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 base 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.
Table 3 - Change in Tax Equivalent Net Interest Income (in thousands)
<TABLE>
1999 Compared to 1998 1998 Compared to 1997
----------------------- ----------------------
Amount of Amount of
Increase/(Decrease) Increase/(Decrease)
Due to Change In Due to Change In
Net Net
Amount of Amount of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold........... $ 36 $ (4) $ 32 $ (46) $ 0 $ (46)
Securities:
Taxable................... (92) (38) (130) (232) (54) (286)
Tax Exempt................ 105 (88) 17 213 (89) 124
Loans........................ 4,689 (659) 4,030 3,453 (679) 2,774
--------- ---------- --------- --------- --------- --------
Total interest income........ 4,738 (789) 3,949 3,388 (822) 2,566
--------- ---------- --------- --------- --------- --------
Interest Expense
Interest bearing deposits:
Savings/NOW Accounts...... 310 (184) 126 219 (119) 100
Time...................... 1,098 (430) 668 488 (72) 416
Fed Funds Purchased....... 569 (2) 567 293 23 316
Other Borrowed Money...... 261 1 262 390 0 390
---------- ---------- --------- --------- --------- --------
Total Interest Expense.... 2,238 (615) 1,623 1,390 168 1,222
---------- ---------- --------- --------- --------- --------
Net interest income (FTE).... $ 2,500 $ (174) $ 2,326 $ 1,998 $ (654) $ 1,344
========== ========== ========= ========= ========= ========
</TABLE>
The Company's commitment to reinvesting in the communities it serves is
evident in its ratios of loans to assets and loans to deposits, which are
generally greater than the comparable ratios of the Company's peers. This in
turn translates into above peer net interest margin. (Based on FFIEC iniform
bank performance report.)
-19-
<PAGE>
Net interest income as a percent of total interest FTE was 58.7%, 58.7%,
and 59.6% for 1999, 1998 and 1997, respectively. Net interest margin was 4.89%,
5.02% and 5.24% for the same years.
Interest from loans represents 84.9%, 81.8% and 78.3% of total interest
income for 1999, 1998 and 1997, respectively. Net interest income is strongly
influenced by results of the Bank's lending activities.
Total interest expense increased 18.2% from 1998 to 1999 and also increased
15.9% from 1997 to 1998: such variances are detailed in Table 3. Cost of funds
are influenced by economic conditions and activities of the Federal Reserve. The
Bank's asset/liability committee seeks to manage sources and uses of funds, and
to monitor the gap in maturities of these funds to maintain a steady net
interest margin in varying market conditions.
Table 4 - Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Year ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
As a percent of average earning assets
Loans..................................... 81% 77% 72%
Other earning assets...................... 19% 23% 28%
----- ---- -----
Average earning assets................. 100% 100% 100%
Savings and NOW accounts.................. 34% 36% 38%
Time deposits............................. 48% 50% 54%
Other borrowings.......................... 18% 14% 8%
----- ---- ------
Average interest bearing liabilities... 100% 100% 100%
Average earning asset ratio................. 94% 95% 95%
</TABLE>
Table 5 - Noninterest Income (in thousands)
<TABLE>
Year Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service charges on deposit accounts ...... $ 811 $ 588 $ 527
Net gains on asset sales:
Loans................................... 600 1,367 414
Securities.............................. 533 204 66
Loan servicing fees....................... 148 184 203
Insurance premium revenue................. 1,043 0 0
Brokerage revenue......................... 322 166 206
Other..................................... 164 150 126
------- ------ ------
Total noninterest income............. $3,621 $2,659 $1,542
====== ====== ======
</TABLE>
Noninterest Income
Noninterest income consists of service charges on deposit accounts, service
fees, gains on investment securities available for sale and gains from sales of
Federal Home Loan Mortgage Corporation (Freddie Mac) loans. The Corporation
retains the servicing rights of these loans. Non-interest income increased
$962,000 or 36% for 1999 versus 1998. The increase was due primarily to the
February 1, 1999 merger with Dornbush Insurance Agency, as a result of which
insurance premium revenue of $1,043,00 is included in 1999 non-interest income.
Other increases in non-
-20-
<PAGE>
interest income include a $223,000 (38%) increase in service charges on deposit
accounts, due to the deposit growth during the year. Net gain on securities
sales increased $329,000 (161%) and brokerage revenue increased $156,000 (94%)
in 1999 versus 1998. The brokerage revenue increase was due to increased sales
volume. Net gains on loan sales decreased $767,000 (56%), a direct result of the
interest rate increases during the year resulting in the slowdown of customers
refinancing higher interest rate mortgages.
Table 6 Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
<TABLE>
Year ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Total Real estate mortgage loan
originations........................ $65,668 $91,446 $39,112
Real estate mortgage loan sales........... 44,764 72,075 20,568
Real estate mortgage loans servicing
rights sold........................... 0 0 0
Net gains on the sale of real
estate mortgage loans................. 600 1,367 414
Net gains as a percent of real
estate mortgage loan sales............ 1.34% 1.90% 2.01%
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $600,000,
$1,367,000 and $414,000 in 1999, 1998 and 1997, respectively. The decrease from
1998 to 1999 of $767,000 was a result of the less favorable interest rate
environment which slowed new mortgage loan business and caused a major slowdown
in the refinance business. The increase from 1997 to 1998 of $953,000 was a
result of a more favorable interest rate environment. The Bank sells the
majority of its fixed-rate obligations. Such loans are sold without recourse.
The Bank retains servicing rights on real estate mortgage loans sold.
Noninterest Expense
Table 7 - Noninterest Expense (in thousands)
<TABLE>
Year ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits............ $ 5,933 $3,918 $3,028
Occupancy and equipment................... 1,728 1,143 897
FDIC assessment........................... 32 28 27
Postage................................... 152 115 129
Printing and supplies..................... 286 268 118
Marketing................................. 233 213 163
Michigan Single Business Tax.............. 192 192 220
Other..................................... 2,046 1,457 1,200
------- ------ ------
Total noninterest expense............... $10,602 $7,334 $5,782
======= ====== ======
</TABLE>
Table 7 lists the Bank's most significant noninterest expenses.
-21-
<PAGE>
Non-interest expense increased $3,268,000 (45%) for 1999 versus 1998. This
increase is due in part to the February 1,1999 merger with Dornbush Insurance
Agency which incurred noninterest expenses totaling $924,000 in 1999. Increases
in non-interest expense include a $2,015,000 increase (51%) in salaries and
employee benefits of which $640,000 (32%) relate to the Dornbush Insurance
Agency merger. Occupancy expense increased $585,000 (51%) in 1999 versus 1998.
The majority of these increases are all related to the four new branch locations
that were opened in late 1998 and early 1999 and the addition to the main
office. Staffing the new branches and additional support at the corporate office
for the new branches and growth from existing branches were the two primary
factors for the salary and employee benefit expense increase.
Non-interest expense increased $1,552,000 (27%) for 1998 versus 1997.
Salaries and employee benefits increased $890,000 to $3,918,000, a 29% increase
which was the major factor for the increase in non-interest expense. The
increase was primarily due to staffing three new branches.
Financial Condition --Summary
During 1999, total assets increased 25% to $376,072,609, deposits increased
17% to $254,166,048 and loans increased 30% to $284,279,189. The Bank is
emphasizing relationship banking and has competed aggressively to obtain
deposits and loans. A discussion of changes in balance sheet amounts by major
categories follows:
The Loan Portfolio
The loan personnel of the Bank are committed to making quality loans that
produce a competitive rate of return for the Bank and also serve the community
by providing funds for home purchases, business purposes, and consumer needs. It
is management's intent to maintain a loan to deposit ratio of at least 80%,
enabling the Company to earn the highest interest rates available on loans. Loan
demand in the Bank's service area is expected to remain strong to achieve that
goal.
The majority of loans are made to businesses in the form of commercial
loans and real estate mortgages. The Bank's consumer mortgage activity is
substantial; however, only a small portion of these loans are retained for the
Bank's own portfolio. The Bank does retain servicing rights on substantially all
such sold loans. Over the past eight years the Bank has built a servicing
portfolio of over $140,000,000 with the Federal Home Loan Mortgage Corporation
("FHLMC"). At December 31, 1999 and 1998, the Bank was servicing loans of
$147,956,000 and $126,651,000, respectively, which relate primarily to
residential mortgages originated by the Bank. The Bank originated $65,668,000
(652 loans) and $91,446,000 (1,073 loans) in mortgage loans in 1999 and 1998,
respectively, and sold to FHLMC $44,764,000 (513 loans) in 1999 and $72,075,000
(872 loans) in 1998. Repayments and early payoffs were $19,520,000 in 1999 and
$17,768,000 in 1998.
The loan portfolio mix at December 31, 1999 consists of 49% commercial real
estate, 15% residential real estate, 20% commercial and 16% consumer
installment. Consumer installment loans as a percentage of the loan portfolio
have doubled in the last two years as a result of the Bank's indirect lending
program, substantially all are vehicle loans. The growth rate of the lending
portfolio was 31.5% from 1997 to 1998 and 29.7% from 1998 to 1999.
Nearly 80% of loans are placed within the area the Bank designates as its
market for purposes of regulatory Community Reinvestment Act ("CRA") compliance.
Nearly all loans are placed within the metropolitan area of Grand Rapids and
surrounding communities.
-22-
<PAGE>
Table 8 - Loan Portfolio Composition (in thousands)
<TABLE>
Year ended December 31
1999 1998 1997
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial Real Estate.................... $140,648 49 $114,248 51 $ 90,005 53
Residential Real Estate................... 41,985 15 36,554 17 38,886 23
Other Commercial.......................... 58,793 20 40,825 18 26,380 16
Installment............................... 46,404 16 30,506 14 13,682 8
--------- ---- -------- ---- -------- ----
Total loans............................ 287,830 100% 222,133 100% 168,953 100%
==== ==== ====
Less:
Allowance for Loan Losses................ (3,551) (2,879) (2,565)
---------- -------- --------
Total Loans Receivable, Net............... $284,279 $219,254 $166,388
========== ======== ========
</TABLE>
The lending policy of the Bank was written to reduce credit risk, enhance
earnings and guide the lending officers in making credit decisions. There are 8
levels in the loan authorization procedure depending on the dollar amount of the
loan request.
$2,000,001 to $6,000,000 Board of Directors
$1,000,001 to $2,000,000 Executive Loan Committee
0 to $1,000,000 Loan Committee
0 to $ 300,000 Class 1 Lender
0 to $ 200,000 Class 2 Lender
0 to $ 75,000 Class 3 Lender
0 to $ 30,000 Class 4 Lender
Student Loans Only Class 5 Lender
The class of lender is approved by the Bank's Board of Directors. The Board
of Directors has appointed a Chief Lending Officer who is responsible for the
supervision of the lending activities of the Bank. The Board has also appointed
a loan review officer who monitors the credit quality of the loan portfolio
independent of the loan approval process. Periodic reviews are submitted by the
loan review officer to the Chief Lending Officer and these reviews are submitted
to the Audit/Compliance Committee on a quarterly basis. The Bank has no foreign
loans and there were no concentrations greater than 10% of total loans that are
not disclosed as a separate category in Table 8.
The extent of loan quality is demonstrated by the ratios of nonperforming
loans and charge offs as a percentage of the loan portfolio. As referenced in
more detail in Table 10 below, the Bank's ratio of nonperforming loans to total
loans at December 31, 1999 was 1.90% compared to .26% in 1998. The December 31,
1999 ratio is significantly higher than the historical average and the Bank does
not expect this high of a percentage in the future.
-23-
<PAGE>
Table 9 Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of
December 31, 1999 which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
<TABLE>
Maturing
(in thousands of dollars)
After one but
Within one Year within five years After five years Total
<S> <C> <C> <C> <C>
Residential Real Estate........... $13,136 $ 24,459 $ 4,390 $ 41,985
Installment....................... 2,058 38,411 5,935 46,404
Commercial Real Estate............ 25,891 95,097 19,660 140,648
Other Commercial.................. 28,972 26,421 3,400 58,793
-------- --------- -------- --------
Totals..................... $70,057 $184,388 $33,385 287,830
======= ======== =======
Allowance for Loan Losses......... (3,551)
---------
Total Loans Receivable, Net....... $284,279
=========
</TABLE>
Below is a schedule of the amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate Total
<S> <C> <C> <C>
Due within 3 months................................. $ 13,201 $55,623 $ 68,824
Due after 3 months within 1 year.................... 11,662 2,046 13,708
Due after one but within five years................. 174,493 0 174,493
Due after five years................................ 30,805 0 30,805
--------- --------- ---------
Total............................................... $230,161 $57,669 287,830
========= =========
Allowance for loan losses........................... (3,551)
---------
Total loans receivable, net......................... $284,279
=========
</TABLE>
Table 10 - Nonperforming Assets (in thousands)
<TABLE>
December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans............................................. $2,471 $ 353 $ 105
90 days or more past due & still accruing.................... 3,003 217 132
----- ------
Total nonperforming loans................................ 5,474 570 237
Other real estate............................................ 0 116 45
------ ------
Total nonperforming assets............................... $5,474 $ 686 $ 282
====== ======
Nonperforming loans as a percent of total loans.............. 1.90% 0.26% 0.14%
Nonperforming assets as a percent of total loans............. 1.90% 0.31% 0.17%
Nonperforming loans as a percent of the allowance
for loan losses.......................................... 154% 20% 9%
</TABLE>
-24-
<PAGE>
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. Three commercial real estate loans
account for $4,528,256 of the nonperforming loans. Although these three loans
are delinquent, the bank is fully collateralized as to each of them.
Nevertheless, a slightly larger than normal reserve portion has been allocated
to these specific assets. On February 20, 2000 the nonaccrual status and
delinquency were fully resolved as to $4,189,886 of these assets.
Nonperforming loans equal 154% of the Bank's allowance for loan losses as
of December 31,1999; management believes that the allowance for loan losses is
adequate for these loans and the remainder of the lending portfolio. As of
December 31, 1999 there were no other interest bearing assets which required
classification. Management is not aware of any recommendations by regulatory
agencies, which if implemented, would have a material impact on the Company's
liquidity, capital or results of operations.
The table below presents the interest income that would have been earned on
non-performing loans outstanding at December 31, 1999, 1998, and 1997 had those
loans been accruing interest in accordance with the original terms of the loan
agreement (pro forma interest) and the amount of interest income actually
included in net interest income for those years.
Table 11 - Foregone Interest on Non-Performing Loans
<TABLE>
For the Year Ended December 31
(in thousands)
1999 1998 1997
Non-accrual Restructured Non-accrual Restructured Non-accrual Restructured
<S> <C> <C> <C> <C> <C> <C>
Pro forma interest $139 $ - $33 $ - $11 $25
Interest earned 108 - 32 - 8 25
----
Foregone interest income $ 31 $ - $ 1 $ - $ 3 $ 0
====
</TABLE>
Table 12 - Loan Loss Experience (in thousands)
The following is a summary of loan balances (excluding loans held for sale)
at the end of each period and their daily average balances, changes in the
allowance for the loan losses arising from loans charged off and recoveries on
loans previously charged off, and additions to the allowance which have been
expensed.
Starting in the 2nd quarter of 1998 the bank aggressively targeted the
indirect consumer loan market, primarily auto loans. The program has increased
the consumer loan portfolio balance substantially and has raised the net charge
off percentage. Indirect lending results in higher credit risk then does direct
lending. Consumer loan net charge-offs increased $528,000 in 1999 compared to
1998. The increased indirect loan charge-offs resulted in additional provisions
being allocated to the allowance for loan losses. Management will continue to
monitor the results and make changes to the program as needed.
-25-
<PAGE>
<TABLE>
Year Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loans:
Average daily balance of loans for the year................. $245,349 $190,472 $155,286
Amount of loans outstanding at end of period................ $287,829 $222,133 $168,953
Allowance for loan losses
Balance at beginning of year................................ $2,879 $2,565 $ 2,376
Loans charged off:
Real estate............................................... 0 0 0
Commercial................................................ 45 90 0
Consumer.................................................. 625 117 124
---------- --------- ---------
Total charge-offs..................................... 670 207 124
Recoveries of loans previously charged off
Real estate............................................... 0 0 0
Commercial................................................ 24 33 224
Consumer.................................................. 68 88 39
---------- --------- ---------
Total recoveries...................................... 92 121 263
---------- --------- ---------
Net (charge off) recoveries................................. (578) (86) 139
Additions to allowance charged to operations................ 1,250 400 50
-------- --------- --------
Balance at end of year................................ $3,551 $ 2,879 $ 2,565
======== ========= ========
Ratios:
Net (charge offs) recoveries to average daily balance
of loans for the year.................................... (.24%) (.05%) .09%
Allowance for loan losses to loans outstanding at year end.. 1.23% 1.30% 1.52%
</TABLE>
Table 13 - Allocation of the Allowance for Loan Losses
The allowance for loan losses is analyzed quarterly by management. In so
doing, management assigns a portion of the allowance to specific credits that
have been identified as problem loans and reviews past loss experience. The
local economy and particular concentrations are considered, as well as a number
of other factors.
<TABLE>
Year ended December 31
1999 1998 1997
---- ---- ----
% of each % of each % of each
category category category
Allowance to total Allowance to total Allowance to total
Amount loans Amount loans Amount loans
<S> <C> <C> <C> <C> <C> <C>
Commercial................. $2,723 69.3% $2,175 69.8% $1,895 68.9%
Real estate mortgages...... 151 14.6 310 16.5 205 23.0
Consumer................... 637 16.1 378 13.7 179 8.1
Unallocated................ 40 .0 16 .0 286 .0
------ ----- ------ ------ ------ ------
Total.................... $3,551 100.0% $2,879 100.0% $2,565 100.0%
====== ===== ====== ====== ====== ======
</TABLE>
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type. Management has provided additions to the allowance for loan losses
to support the 1999 loan growth and to replenish the allowance for unusually
high charge-offs of consumer loans.
-26-
<PAGE>
Investment Securities
Securities are purchased and classified as "available-for-sale." These
securities may be sold to meet the Bank's liquidity needs or to improve the
quality of the investment portfolio. The primary objective of the Company's
investing activities is to provide for safety of the principal invested.
Secondary considerations include earnings, liquidity, and the overall exposure
to changes in interest rates. The Company's net holdings of investment
securities increased $7.3 million in 1999 and decreased $5.4 million in 1998.
The mortgage backed securities are issues of the Federal Home Loan Mortgage
Corporation, GNMA and FNMA which pay monthly amortized principal and interest
payments.
Table 14 - Available-for-Sale Securities Portfolio
<TABLE>
Year Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury and U.S. Government Agencies.................. $37,578 $32,453 $ 39,176
State and political subdivisions............................. 23,201 21,007 19,604
Other........................................................ 2,871 2,887 3,013
--------- -------- ---------
$63,650 $56,347 $ 61,793
========= ======== =========
</TABLE>
Excluding those holdings of the investment portfolio in U.S. Treasury and
U.S. Government Agency Securities, there were no investments in securities of
any one issuer which exceeded 10% of shareholders' equity.
Table 15 - Schedule of Maturities of Investment Securities and Weighted Average
Yields
The following is a schedule of maturities and their weighted average yield
of each category of investment securities as of December 31, 1999. The weighted
average interest rates have been computed on a fully taxable equivalent basis,
based on amortized cost. The rates shown on securities issued by states and
political subdivisions are stated on a taxable equivalent basis using a 34% tax
rate.
<TABLE>
Maturing
(Dollars in Thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
Fair Avg. Fair Avg. Fair Avg. Fair Avg. Fair Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
Available for Sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and U.S.
Government
Agencies $1,945 5.20% $19,298 6.59% $12,517 6.30% $3,818 7.27% $ - -
States and
Political
Subdivisions 1,229 10.42% 6,631 8.09% 11,196 7.39% 4,145 7.45% - -
Other Securities - - - - - - - - 871 7.40%
------ ------ ------- ----- ------- ---- ------ ----- ------ -----
$3,174 7.22% $25,929 6.96% $23,713 6.83% $7,963 7.36% $871 7.40%
====== ====== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
Deposits
Deposits are gathered from the communities the Bank serves. Recently the
Bank has emphasized relationship marketing to reinforce the core nature of its
deposit base.
-27-
<PAGE>
Table 16 indicates a relatively stable base of deposits spread over the
Bank's product lines. Average total deposits grew 20.2% from 1998 to 1999 and
grew 13.0% from 1997 to 1998. The increase in 1999 resulted primarily from
gaining market share in the Bank's market areas.
The Bank is continually enhancing its deposit products. In addition to
relationship pricing the Bank has instituted telephone and personal computer
banking as new alternatives to customer access. The Bank operates twelve
automated teller machines, three of which are off-site.
Table 16 - Average Daily Deposits (in thousands)
<TABLE>
Average for the Year
1999 1998 1997
Amount % of Assets Amount % of Assets Amount % of Assets
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand........ $ 36,452 11% $ 29,324 11% $ 22,764 10%
NOW accounts...................... 18,038 6 15,352 6 12,687 6
MMDA/Savings ..................... 65,702 20 56,306 21 51,240 22
Time.............................. 120,114 37 98,870 37 90,180 40
--------- ---- -------- --- -------- ---
Total Deposits................. $240,306 73% $199,852 75% $176,871 78%
======== ==== ======== === ======== ===
</TABLE>
Table 17 - Average Deposit Balances
The following table sets forth the average deposit balances and the
weighted average rates paid thereon:
<TABLE>
Average for the Year
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand......... $ 36,452 $29,324 $ 22,764
NOW Accounts....................... 18,038 2.19% 15,352 2.45% 12,687 2.44%
MMDA/Savings....................... 65,702 2.68 56,306 2.93 51,240 3.16
Time............................... 120,114 5.17 98,870 5.61 90,180 5.69
--------- ----- -------- ----- -------- -----
Total Deposits.................. $240,306 3.48% $199,852 3.79% $176,871 3.99%
========= ===== ======== ===== ======== =====
</TABLE>
Table 18 - Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1999:
<TABLE>
Amount
<S> <C>
Three months or less........................... $16,326
Over 3 months through 6 months................. 6,189
Over 6 months through 1 year.................. 6,095
Over 1 year.................................... 4,001
-------
$32,611
=======
</TABLE>
The Bank operates in a very competitive environment. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive with the market. Management also attempts to offer a wide
variety of products to meets the needs of its customers. The Bank offers
business and consumer checking accounts, regular and money market savings
accounts, and certificates having many options in their terms.
-28-
<PAGE>
Market Risk
The Bank complements its stable core deposit base with alternate sources of
funds, which includes advances from the Federal Home Loan Bank and on a very
limited basis, jumbo certificates of deposit from outside its market area.
Management evaluates the funding needs and makes a decision based on current
interest rates and terms whether to fund internally or from alternate sources.
To date, the Bank has not employed the use of derivative financial instruments
in managing the risk of changes in interest rates.
Capital
A financial institution's capital ratio is looked upon by the regulators
and the public as an indication of its soundness. Table 19 summarizes the
Company's regulatory capital and its capital ratios. Also shown are the capital
requirements established by the regulatory agencies for adequately and
well-capitalized institutions. The Bank's strong capital ratio puts it in the
best classification on which the FDIC bases its assessment charge. As capital
ratios continue to increase, management is challenged to find ways to
effectively invest and administer the Bank's resources.
In 1999, the Company paid cash dividends totaling $1,674,256, approximately
37% of earnings. Special cash dividends were paid in each of the two prior
years. In 1998 the Company paid cash dividends totaling $2,350,000,
approximately 46% of earnings. In 1997, the Company paid cash dividends totaling
$3,115,620, approximately 67% of earnings. The Company remains in all the top
regulatory categories for adequately and well-capitalized institutions after
paying such dividends.
Table 19 - Capital Resources (in thousands)
<TABLE>
Regulatory Requirements December 31
Adequately Well
Capitalized Capitalized 1999 1998 1997
----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Tier 1 capital.................. $41,183 $39,232 $35,689
Tier 2 capital.................. 3,551 2,879 2,293
--------- --------- --------
Total qualifying capital...... $44,734 $42,111 $37,982
========= ========= ========
Tier 1 leverage ratio........... 4% 5% 12.64% 14.74% 15.03%
Tier 1 risk-based capital....... 4% 6% 13.07% 16.02% 19.48%
Total risk-based capital........ 8% 10% 14.19% 17.20% 20.74%
</TABLE>
Asset/Liability Management
The Bank's Asset/Liability Management committee ("ALCO") meets regularly to
evaluate the Bank's interest rate sensitivity position, address issues of
liquidity, and review the interest margin, analyzing causes for changes in net
interest income. During 1999 the Bank's one year gap position averaged a
negative gap.
Management was able to influence the gap by selling fixed rate mortgages,
investments/sales of available-for-sale securities that met the criteria that
filled the gap position decided by the Asset/Liability Committee.
The Company's sources of liquidity include principal payments received on
loans, maturing investment securities, sale of securities held in the
"available-for-sale" designation, customer deposits, borrowings from the Federal
Home Loan Bank of Indianapolis, other bank borrowings, Federal Funds and the
issuance of common stock. The Company has ready access to significant sources of
liquidity on an almost immediate basis. Management anticipates no difficulty in
maintaining liquidity at levels necessary to conduct the Bank's day-to-day
business activity.
-29-
<PAGE>
Table 20 - Asset/Liability Gap Position (in thousands)
<TABLE>
December 31, 1999
0-3 4-12 1-5 5+
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans................................ $ 68,824 $13,708 $174,493 $30,805 $287,830
Securities (including restricted
investments) 12,418 2,502 9,234 39,496 63,650
Loans held for sale.................. 632 - - - 632
--------- -------- --------- -------- ---------
Total interest earning assets........ $ 81,874 $16,210 $183,727 $70,301 $352,112
========= ======== ========= ======== =========
Interest bearing liabilities:
Savings & NOW........................ $ 32,185 $ - $ - $56,850 $ 89,035
Time................................. 38,658 57,466 30,001 - 126,125
--------- -------- --------- -------- ---------
Total deposits....................... 70,843 57,466 30,001 56,850 215,160
Other borrowings..................... 58,624 8,000 12,206 - 78,830
--------- --------- --------- -------- ---------
Total interest bearing liabilities.. $129,467 $65,466 $ 42,207 $56,850 $293,990
========= ========= ========= ======== =========
Rate sensitivity gap and ratios:
Gap for period....................... (47,593) (49,256) 141,520 13,451
Cumulative gap....................... (47,593) (96,849) 44,671 58,122
Ratio for period as a % of assets...... (13.52)% (13.99)% 40.19% 3.82%
Cumulative rate sensitive ratio as
a % of assets....................... (13.52)% (27.51)% 12.69% 16.51%
</TABLE>
The savings and NOW accounts are categorized in the above table based upon
the Bank's historical experience.
Impact of Inflation
The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Bank than inflation. Although influenced by inflation,
changes in rates do not necessarily move in either the same magnitude or
direction as changes in the price of goods and services. Inflation does impact
the growth of total assets, creating a need to increase equity capital at a
higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
Year 2000
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare consolidated financial statements.
Company management developed and the Board of Directors approved a
comprehensive Year 2000 Compliance Plan. The Company had an internal task force
to assess Year 2000 compliance by the Company, its vendors, and major commercial
loan customers. In addition, the Bank asked commercial borrowers about Year 2000
compliance as part of the loan application and review process.
To date, the Company has not experienced any Year 2000 compliance problems.
Although considered unlikely, unanticipated problems, including problems
associated with non-compliant third parties, could still occur.
-30-
<PAGE>
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company 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 Company, are
generally identifiable by use of the words Abelieve," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company'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 Company and the subsidiaries include, but
are not limite 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 Company'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 Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Recent Legislation
Reference is made to the "Supervision and Regulation - Recent Legislation"
section of Item 1 which notes the potential competitive impact of the GLB Act on
the Company.
-31-
<PAGE>
ITEM 7A: 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 Company currently does not enter into futures, forwards,
swaps, or options. However, the Company 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 Company. Standby letters of credit are conditional commitments
issued by the Company 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 Company until the instrument is exercised.
The Company'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 Company has no market risk
sensitive instruments held for trading purposes. It appears the Company's market
risk is reasonable at this time.
-32-
<PAGE>
Item 8. Financial Statements and Supplementary Data.
O.A.K. FINANCIAL CORPORATION TABLE OF CONTENTS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
PAGE
Independent Auditors' Report 34
Consolidated Financial Statements
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Comprehensive Income 37
Consolidated Statements of Changes in Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
O.A.K. Financial Corporation and Subsidiary
Byron Center, Michigan
We have audited the accompanying consolidated balance sheets of O.A.K. Financial
Corporation and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of O.A.K. Financial Corporation's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O.A.K. Financial
Corporation and Subsidiary as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/Rehmann Robson, P.C.
Grand Rapids, Michigan
January 28, 2000
-34-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
December 31
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 10,054,389 $ 8,913,513
Available-for-sale securities - amortized cost of
$62,592,629 ($53,815,639 - 1998) 61,649,881 55,082,668
Loans receivable, net 284,279,189 219,253,824
Loans held for sale 632,038 4,679,962
Accrued interest receivable 2,716,837 2,026,185
Premises and equipment, net 10,618,570 7,092,765
Restricted investments 2,000,000 1,263,900
Other assets 4,121,705 3,181,173
------------- ------------
Total assets $ 376,072,609 $301,493,990
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing $215,159,729 $ 181,789,253
Noninterest bearing 39,006,319 35,501,554
------------- ------------
Total deposits 254,166,048 217,290,807
Borrowed funds 54,405,599 27,752,803
Securities sold under agreements to repurchase 24,424,351 14,373,304
Other liabilities 1,819,097 2,124,091
------------- ------------
Total liabilities 334,815,095 261,541,005
------------- ------------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized,
2,041,775 shares issued and outstanding
(2,000,000 shares in 1998) 2,041,775 2,000,000
Additional paid-in capital 6,259,681 5,622,680
Retained earnings 34,078,585 31,494,055
Accumulated other comprehensive (loss) income (622,527) 836,250
Unallocated common stock held by ESOP (500,000) -
------------- ------------
Total stockholders' equity 41,257,514 39,952,985
------------- ------------
Total liabilities and stockholders' equity $ 376,072,609 $301,493,990
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $21,656,573 $17,629,417 $14,858,954
Available-for-sale securities 3,264,615 3,396,933 3,610,882
Restricted investments 106,473 88,281 86,830
Federal funds sold 52,644 19,827 67,073
----------- ----------- ----------
Total interest income 25,080,305 21,134,458 18,623,739
----------- ----------- ----------
Interest expense
Deposits 8,368,069 7,574,458 7,058,031
Borrowed funds 1,327,843 849,088 314,015
Securities sold under agreements to repurchase 832,353 492,626 320,519
----------- ----------- ----------
Total interest expense 10,528,265 8,916,172 7,692,565
----------- ----------- ----------
Net interest income 14,552,040 12,218,286 10,931,174
Provision for loan losses 1,250,000 400,000 50,000
----------- ----------- ----------
Net interest income after provision for
loan losses 13,302,040 11,818,286 10,881,174
----------- ----------- ----------
Noninterest income
Service charges 811,369 587,786 527,099
Net gain on sales of loans held for sale 599,935 1,367,075 414,364
Loan servicing fees 148,042 183,735 203,295
Net gain on sales of availiable-for-sale securities 532,915 204,076 66,190
Insurance premiums 1,042,618 - -
Brokerage fees 321,615 165,801 206,296
Other 164,311 150,832 124,830
----------- ----------- ----------
Total noninterest income 3,620,805 2,659,305 1,542,074
----------- ----------- ----------
Noninterest expenses
Salaries and employee benefits 5,933,049 3,917,992 3,028,338
Occupancy 785,886 465,271 384,237
Furniture and fixtures 941,788 678,055 512,896
Michigan Single Business Tax 192,397 192,042 220,000
Printing and supplies 286,216 267,682 117,941
Other 2,463,516 1,813,030 1,518,862
----------- ----------- ----------
Total noninterest expenses 10,602,852 7,334,072 5,782,274
----------- ----------- ----------
Income before federal income taxes 6,319,993 7,143,519 6,640,974
Federal income taxes 1,791,000 2,068,000 2,015,000
----------- ----------- ----------
Net income $4,528,993 $5,075,519 $4,625,974
=========== =========== ==========
Net income per share of common
stock (basic and diluted) $2.23 $2.54 $2.30
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Other comprehensive (loss) income
Unrealized (losses) gains on available-
for-sale securities arising during the year $(2,742,692) $ 676,764 $ 491,830
Reclassification adjustment for realized
gains included in net income (532,915) (204,076) (66,190)
----------- ----------- ----------
Comprehensive (loss) income
before income taxes (2,209,777) 472,688 425,640
Income tax (benefit) expense related to
comprehensive income (751,000) 160,000 145,000
----------- ----------- ----------
Other comprehensive (loss) income (1,458,777) 312,688 280,640
Net income 4,528,993 5,075,519 4,625,974
----------- ----------- ----------
Comprehensive income $ 3,070,216 $ 5,388,207 $ 4,906,614
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Shares of common stock issued and outstanding
Balance, beginning of year 2,000,000 1,000,000 1,006,174
Common stock dividends - 1,000,000 -
Repurchases and retirements - - (6,174)
Common stock issued 13,000 - -
Issuance of common stock for business combination 28,775 - -
------------ ----------- -----------
Balance, end of year 2,041,775 2,000,000 1,000,000
============ =========== ===========
Common stock
Balance, beginning of year $ 2,000,000 $ 1,000,000 $ 1,006,174
Common stock dividends - 1,000,000 -
Repurchases and retirements - - (6,174)
Common stock issued 13,000 - -
Issuance of common stock for business combination 28,775 - -
------------ ----------- -----------
Balance, end of year 2,041,775 2,000,000 1,000,000
------------ ----------- -----------
Additional paid-in-capital
Balance, beginning of year 5,622,680 5,622,680 6,036,338
Repurchases and retirements - - (413,658)
Common stock issued 637,001 - -
------------ ----------- -----------
Balance, end of year 6,259,681 5,622,680 5,622,680
------------ ----------- -----------
Retained earnings
Balance, beginning of year 31,494,055 29,768,536 28,258,182
Accumulated deficit in business combination (270,207) - -
Net income 4,528,993 5,075,519 4,625,974
Common stock dividends - (1,000,000) -
Cash dividends (1,674,256) (2,350,000) (3,115,620)
------------ ----------- -----------
Balance, end of year 34,078,585 31,494,055 29,768,536
------------ ----------- -----------
Accumulated other comprehensive (loss) income
Balance, beginning of year 836,250 523,562 242,922
Other comprehensive (loss) income (1,458,777) 312,688 280,640
------------ ----------- -----------
Balance, end of year (622,527) 836,250 523,562
Unallocated common stock held by ESOP ------------ ----------- -----------
Balance, beginning of year - - -
Unearned ESOP compensation (500,000) - -
------------ ----------- -----------
Balance, end of year (500,000) - -
------------ ----------- -----------
Total stockholders' equity $41,257,514 $39,952,985 $36,914,778
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
<PAGE>
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,528,993 $ 5,075,519 $ 4,625,974
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 916,515 553,789 459,915
Provision for loan losses 1,250,000 400,000 50,000
Proceeds from sales of loans held
for sale 45,364,562 73,442,003 20,981,500
Originations of loans held for sale (40,716,703) (75,409,274) (19,979,751)
Net gain on sales of available-for-sale
securities (532,915) (204,076) (66,190)
Net gain on sales of loans held for sale (599,935) (1,367,075) (414,364)
Net amortization of investment premiums 163,506 203,231 196,390
Loss on sales of property and equipment 7,769 - -
Deferred income taxes (benefit) (85,000) 121,000 61,300
Changes in operating assets and liabilities
which (used) provided cash
Accrued interest receivable (690,652) (513,039) (59,748)
Other assets (186,327) (1,034,556) (223,816)
Other liabilities (304,994) 487,860 229,216
------------ ------------ ------------
Net cash provided by operating activities 9,114,819 1,755,382 5,860,426
------------ ------------ ------------
Cash flows from investing activities
Available-for-sale securities
Proceeds from maturities 11,425,763 11,773,936 10,278,679
Proceeds from sales 3,313,371 2,213,374 7,445,638
Purchases (23,146,715) (8,163,135) (21,219,616)
Purchases of restricted investments (736,100) (65,300) (80,300)
Net increase in loans held for investment (66,275,365) (53,266,174) (23,744,280)
Purchases of premises and equipment (4,361,920) (3,111,510) (335,955)
Proceeds from the sale of premises and equipment 11,858 - -
------------ ------------ ------------
Net cash used in investing activities (79,769,108) (50,618,809) (27,655,834)
------------ ------------ ------------
Cash flows from financing activities
Net increase in deposits 36,875,241 32,590,479 14,479,421
Net borrowed funds 26,393,132 16,452,803 8,099,006
Net increase in securities sold under agreements
to repurchase 10,051,047 5,715,721 1,321,285
Dividends paid (1,674,256) (2,350,000) (3,115,620)
Repurchase and retirement of common shares - - (419,832)
Proceeds from issuance of common stock 150,001 - -
------------ ------------ ------------
Net cash provided by financing activities 71,795,165 52,409,003 20,364,260
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,140,876 3,545,576 (1,431,148)
Cash and cash equivalents, beginning of year 8,913,513 5,367,937 6,799,085
------------ ------------ ------------
Cash and cash equivalents, end of year $ 10,054,389 $8,913,513 $5,367,937
============ ============ ============
Supplementary cash flows information
Interest paid $ 10,320,794 $ 8,838,116 $ 7,583,946
Income taxes paid 1,948,430 1,795,773 1,941,029
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - O.A.K. Financial Corporation (the "Corporation") through its wholly
owned subsidiary, Byron Center State Bank (the "Bank") provides a variety of
financial services to individuals and businesses in the southern portion of the
greater Grand Rapids, Michigan area through its ten branches located in Byron
Center, Jamestown, Cutlerville, Hudsonville, Grandville, Moline, Dorr, Hamilton,
Allendale and Zeeland. Active competition, principally from other commercial
banks and credit unions, exists in al of the Bank's principal markets. The
Bank's results of operations can be significantly affected by changes in
interest rates or changes in the local economic environment.
The Bank's primary deposit products are interest and noninterest bearing
checking accounts, savings accounts and time deposits and its primary lending
products are commercial loans, real estate mortgages, and consumer loans. Note 3
further describes the types of lending the Bank engages in and Note 6 provides
additional information on deposits. Note 2 discusses the types of securities the
Corporation invests in.
The Bank is a state chartered bank and a member of the Federal Deposit Insurance
Corporation's ("FDIC") Bank Insurance Fund. The Bank is subject to the
regulations and supervision of the FDIC, Federal Reserve Bank and the Financial
Institutions Bureau and undergoes periodic examinations by these regulatory
authorities (see Note 12).
Business Combination - 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. DIC, now a wholly-owned subsidiary of
the Bank, operates in the general insurance agency business and sells life,
health, property and casualty insurance. The merger has been accounted for as a
pooling of interests. Due to the insignificance of the financial statements of
DIC, 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 DIC, and pro-forma financial information
has not been disclosed.
Use of Estimates - In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated balance sheet and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The material estimate that is particularly
susceptible to significant change in the near term relates to the determination
of the allowance for loan losses.
Accounting Policies - The accounting policies used in the preparation of the
accompanying consolidated financial statements conform to predominant banking
industry practices and are based on generally accepted accounting principles.
The principles which materially affect the determination of the Corporation's
consolidated financial position or results of operations are summarized as
follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are sold for a one-day period. The
Corporation maintains deposit accounts in various financial institutions which
generally exceed FDIC insured limits or are not insured. Management believes the
Corporation is not exposed to any significant interest rate or other financial
risk as a result of these deposits.
Available-For-Sale Securities
Available-for-sale securities consist of bonds, notes and debentures not
classified as held-to-maturity securities and recorded at their estimated fair
value. Unrealized appreciation and depreciation, net of the effect of deferred
income taxes, on available-for-sale securities are reported as a net amount in
other comprehensive income. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity. Declines in the
fair value of securities below cost that are determined to be other than
temporary are reflected in earnings as realized losses. Gains or losses on the
sale of available-for-sale securities are determined using the specific
identification method.
Loans Held for Investment and Related Income
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid
principal balances adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans. Interest on loans is accrued
over the term of the loan based on the principal amount outstanding. The accrual
of interest on impaired loans is discontinued when, in the opinion of
management, the borrower may be unable to meet payments as scheduled. When the
-40-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
accrual of interest is discontinued, all uncollected accrued interest is
reversed. Interest income on such loans is recognized only to the extent cash
payment is received. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured. For impaired loans not classified as nonaccrual,
interest income continues to be accrued over the term of the loan based on the
principal amount outstanding.
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized as an adjustment of the related loan yield using the
interest method.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Gains
and losses on sales of such loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the unpaid
principal balance of the loans sold, adjusted for any yield differential,
servicing fees and servicing costs applicable to future years. Net unrealized
losses are recognized in a valuation allowance by charges to income.
The Bank currently retains servicing on all loans originated and sold into the
secondary market. Originated mortgage servicing rights ("OMRS") retained are
recognized for loans sold by allocating total costs incurred between the loan
and the servicing rights based on their relative fair values. The mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net future servicing revenue. The expected period of the estimated net
servicing income is based, in part, on the expected prepayment rate of the
underlying mortgage. The carrying value of the mortgage servicing rights is
periodically evaluated for impairment.
Loan administration fees earned for servicing loans for others are generally
calculated based on the outstanding principal balances for the loans serviced
and are recorded as revenue when received.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of the loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and initially recorded at fair value at the date of foreclosure
less estimated cost to sell, thereby establishing a new cost basis. Subsequent
to foreclosure, valuations are periodically performed by management and the real
estate is recorded at the lower of carrying amount or fair value less costs to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses fro foreclosed assets.
-41-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Credit Related Financial Instruments
In the ordinary course of business, the Bank has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and accelerated methods
based upon the useful lives of related assets which generally range from 5 to
approximately 40 years. Maintenance, repairs and minor alterations are charged
to current operations as expenditures occur and major improvements are
capitalized. Management annually reviews these assets to determine whether
carrying values have been impaired.
Net Income Per Share
Net income per share of common stock is calculated on the basis of the weighted
average number of common shares outstanding, which was approximately 2,031,000
in 1999, 2,000,000 in 1998 and 2,010,000 in 1997. The effect of the assumed
issuance of the performance based incentive share awards and the assumed
exercise of the outstanding stock options had no effect in the calculation of
net income per share assuming dilution.
Federal Income Taxes
Federal income taxes are provided for the tax effects of transactions reported
in the consolidated financial statements and consist of the taxes currently due
plus deferred taxes. Deferred income taxes are recognized for temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred income
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets or
liabilities are recorded or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
As changes in income tax laws or rates are enacted, deferred income tax assets
and liabilities are adjusted through the provision for income taxes.
The Corporation and its subsidiary file a consolidated federal income tax return
on a calendar year basis.
Restricted Investments
The Bank is a member of the Federal Home Loan Bank System and is required to
invest in capital stock of the Federal Home Loan Bank of Indianapolis ("FHLB").
The amount of the required investment is determined and adjusted annually by the
FHLB. The investment is carried at cost plus the value assigned to stock
dividends.
The Bank is also a member of the Federal Reserve Bank System ("FRB"). The amount
of the required investment is determined by the FRB at the time the Bank becomes
a member. The amount of the investment may be adjusted thereafter and is carried
at cost.
Reclassifications
Certain amounts as originally reported in the 1998 and 1997 consolidated
financial statements have been reclassified to conform with the 1999
presentation.
New Accounting Standards
The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS #133") in June 1998. SFAS #133 requires companies to record
derivatives on the balance sheet as assets and liabilities measured at fair
value. The accounting for changes in value of derivatives will depend upon the
use of derivatives and whether they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 with earlier applications allowed and is to be applied
prospectively. The Corporation does not use interest rate swaps or other
derivatives in its management of risk and accordingly this statement is not
expected to have a material impact on the Corporation's financial statements.
-42-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized appreciation, gross unrealized depreciation
and fair value of investment securities, all of which are classified as
available-for-sale as of December 31, are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C>
U.S. government and
federal agency $38,328,604 $ 55,647 $ 805,829 $37,578,422
States and political subdivisions 23,393,327 162,987 355,553 23,200,761
Other 870,698 - - 870,698
------------- -------------- ----------- -------------
Total $62,592,629 $ 218,634 $1,161,382 $61,649,881
============= ============== =========== =============
1998
U.S. government and
federal agency $32,109,957 $ 391,951 $ 48,809 $32,453,099
States and political subdivisions 20,083,303 927,464 3,577 21,007,190
Other 1,622,379 - - 1,622,379
------------- --------------- ---------- --------------
Total $53,815,639 $ 1,319,415 $ 52,386 $55,082,668
============= =============== ========== ==============
</TABLE>
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 1999 is shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 1,219,110 $ 1,228,584
Due after one year through five years 8,412,203 8,485,850
Due after five years through ten years 20,643,525 20,191,066
Due after ten years 4,272,434 4,102,641
------------ ------------
Subtotal 34,547,272 34,008,141
Mortgage-backed securities 28,045,357 27,641,740
------------ ------------
Total $62,592,629 $61,649,881
============ ============
</TABLE>
Investment income from taxable and nontaxable securities for the years ended
December 31, is as follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Taxable $2,173,429 $2,322,330 $2,622,734
Nontaxable 1,091,186 1,074,603 988,148
---------- ----------- -----------
Total $3,264,615 $3,396,933 $3,610,882
========== ============ ===========
</TABLE>
-43-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Proceeds from sales of available-for-sale securities during 1999, 1998 and 1997
were $3,313,371, $2,213,374 and $7,445,638, respectively. The gross gains and
gross losses realized on sales for the years ended December 31 are as follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Gross realized gains $532,915 $231,259 $ 87,375
Gross realized losses - (27,183) (21,185)
----------- --------- ---------
Net realized gain on sales of
available-for-sale securities $532,915 $204,076 $ 66,190
=========== ========= =========
</TABLE>
The tax provision applicable to these net realized gains amounted to
approximately $181,000, $69,000 and $23,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Investment securities with carrying values of approximately $53,069,000 and
$34,943,000 at December 31, 1999 and 1998, respectively, were pledged to secure
public deposits or for other purposes as required or permitted by law.
3. LOANS
The Bank grants commercial, consumer and residential loans to customers
primarily in a fifteen mile radius of its branches which are located south of
Grand Rapids, Michigan. Substantially all of the consumer and residential loans
are secured by various items of property, while commercial loans are secured
primarily by business assets and personal guarantees; a portion of loans are
unsecured. The source of repayment of approximately 20% of the loan portfolio is
generated from cash flows from developers an owners of commercial real estate.
Major loan classifications at December 31 are as follows:
<TABLE>
1999 1998
<S> <C> <C>
Commercial real estate $140,647,468 $114,248,448
Residential real estate 41,985,097 36,554,021
Commercial 58,792,864 40,825,169
Consumer 46,404,313 30,505,562
------------- -------------
Total loans receivable, net of deferred loan
fees of $135,189 ($142,131 - 1998) 287,829,742 222,133,200
Less allowance for loan losses 3,550,553 2,879,376
------------- --------------
Loans receivable, net $284,279,189 $219,253,824
============= ==============
</TABLE>
At December 31, 1999, scheduled maturities of loans with fixed rates of interest
are as follows:
<TABLE>
<S> <C>
One year or less $ 24,863,104
One to five years 174,492,566
Over five years 30,805,360
--------------
Total $230,161,030
==============
</TABLE>
-44-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Variable rate loans in the amount of $57,668,712 at December 31, 1999 reprice
quarterly or more frequently.
The Bank services loans for others which generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and taxing authorities, and processing foreclosures. Loans being serviced as of
December 31, 1999, 1998 and 1997, approximated $146,000,000, $127,000,000 and
$93,000,000, respectively; such loans are not included in the accompanying
consolidated balance sheets.
The following table summarizes mortgage servicing rights capitalized and
amortized and the fair value of mortgage servicing rights included in other
assets in the accompanying consolidated balance sheets as of December 31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $ 918,093 $ 213,827 $ -
Mortgage servicing rights capitalized 491,995 798,975 226,289
Amortization (194,715) (94,709) (12,462)
Balance, end of year $ 1,215,373 $ 918,093 $ 213,827
============= ============ ============
</TABLE>
Information regarding impaired loans is as follows for the year ended December
31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Balance of impaired loans at year-end $5,474,469 $570,280 $478,250
Allowance for loan losses allocated
to the impaired loan balance 401,467 202,021 47,716
Average investment in impaired loans 1,607,204 445,645 620,890
Interest income recognized on
impaired loans (no interest
income was recognized on the
cash basis) 151,414 44,818 42,940
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
4. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses for the
years ended December 31:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $2,879,376 $2,565,430 $2,375,970
Provision for loan losses 1,250,000 400,000 50,000
Recoveries 91,451 121,382 263,109
Loans charged off (670,274) (207,436) (123,649)
----------- ----------- -----------
Balance, end of year $3,550,553 $2,879,376 $2,565,430
=========== =========== ===========
</TABLE>
-45-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
1999 1998
<S> <C> <C>
Land $2,164,869 $ 2,099,757
Buildings and improvements 8,206,963 5,252,099
Furniture and equipment 4,924,288 3,714,796
----------- ------------
Total premises and equipment 15,296,120 11,066,652
Less accumulated depreciation 4,677,550 3,973,887
----------- ------------
Premises and equipment, net $10,618,570 $ 7,092,765
=========== ============
</TABLE>
6. DEPOSITS
The following is a summary of the distribution of deposits at December 31:
<TABLE>
1999 1998
<S> <C> <C>
Interest bearing
NOW accounts $ 19,812,110 $ 17,182,308
Savings 38,760,645 36,980,476
Money market demand 30,461,552 26,508,552
Time, $100,000 and over 32,610,542 14,676,281
Other time 93,514,880 86,441,636
------------- ------------
Total interest bearing 215,159,729 181,789,253
Noninterest bearing demand 39,006,319 35,501,554
------------- ------------
Total deposits $ 254,166,048 $217,290,807
============= ============
</TABLE>
At December 31, 1999, scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000 $ 96,123,802
2001 16,721,710
2002 7,296,290
2003 1,607,325
2004 4,376,295
-------------
Total time deposits $126,125,422
=============
</TABLE>
Interest expense on time deposits issued in denominations of $100,000 or more
was approximately $1,365,000 in 1999, $721,000 in 1998 and $520,000 in 1997.
-46-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following obligations:
<TABLE>
1999 1998
<S> <C> <C>
Federal funds purchased $22,200,000 $14,200,000
Federal Home Loan Bank advances 28,000,000 12,000,000
Treasury tax and loan note option 4,000,000 1,552,803
Other borrowings 205,599 -
------------- ------------
Total borrowed funds $54,405,599 $27,752,803
============= ============
</TABLE>
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1-to-4 family whole mortgage loans and U.S. government agency
securities with a combined carrying value of approximately $39,898,000 and
$12,749,000 at December 31, 1999 and 1998, respectively.
The Treasury Tax and Loan Note option is collateralized by U.S. government
agency securities with a carrying value of approximately $4,521,000 and
$2,714,000 at December 31, 1999 and 1998, respectively. The Treasury Tax and
Loan Note option is a daily borrowing with the Federal Reserve Bank, due on
demand at 25 basis points below the national federal fund interest rate (5.50%
at December 31, 1999).
The Federal Home Loan Bank advances at December 31, 1999 and 1998 and their
contractual maturities are as follows:
<TABLE>
Rate at
December 31 1999 1998
Putable fixed rate advances:
<S> <C> <C> <C>
December 14, 1999 6.18% $ - $ 2,000,000
December 22, 1999 6.02% - 2,000,000
July 10, 2000 6.20% 2,000,000 2,000,000
September 25, 2000 6.05% 2,000,000 -
December 13, 2000 6.26% 4,000,000 -
January 22, 2001 5.57% 2,000,000 2,000,000
May 4, 2001 5.96% 2,000,000 2,000,000
September 24, 2001 6.26% 2,000,000 -
November 2, 2001 6.36% 2,000,000 -
May 1, 2002 6.44% 2,000,000 -
August 21, 2003 5.73% 2,000,000 2,000,000
----------------- ----------------
20,000,000 12,000,000
Short-term variable rate advances:
January 31, 2000 4.05% 6,000,000 -
July 12, 2000 5.13% 2,000,000 -
----------------- ----------------
$28,000,000 $12,000,000
================= ================
</TABLE>
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1999 and 1998
mature within one day from the transaction date and have an average interest
rate of 4.29% and 3.0%, respectively. The U.S. government agency securities
underlying the agreements have a carrying value and a fair value of
approximately $29,049,000 and $19,480,000 at December 31, 1999 and 1998,
respectively. Such securities remain under the control of the Bank. The maximum
amount outstanding at any month end during the years ended December 31, 1999 and
1998 was $28,965,000 and $17,272,000, respectively; the daily average balance
was $21,221,000 and $12,195,000, respectively.
-47-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended December 31 consists
of:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Current $1,876,000 $1,947,000 $1,953,700
Deferred (benefit) (85,000) 121,000 61,300
----------- ------------- ------------
Federal income tax expense $1,791,000 $2,068,000 $2,015,000
=========== ============= ============
</TABLE>
A reconciliation between federal income tax expense and the amount computed by
applying the statutory federal income tax rate of 34% to income before taxes for
the years ended December 31, is as follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Statutory rate applied to income
before income taxes $2,148,798 $2,428,756 $2,257,829
Effect of tax-exempt interest
income (341,898) (387,285) (355,031)
Change in valuation allowance (20,000) - 64,000
Other - net 4,100 26,529 48,202
----------- ------------- -------------
Federal income tax expense $1,791,000 $2,068,000 $2,015,000
=========== ============= =============
</TABLE>
The net deferred income tax asset (liability) as of December 31, is comprised of
the tax effect of the following temporary differences:
<TABLE>
1999 1998
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $1,106,000 $ 878,000
Deferred compensation plan 264,000 245,000
Deferred loan fees 2,000 3,000
----------- -----------
Total deferred tax assets 1,372,000 1,126,000
Valuation allowance (699,000) (719,000)
----------- -----------
Net deferred tax assets 673,000 407,000
Deferred tax liabilities
Depreciation (74,000) -
Discount accretion (31,000) (25,000)
Loan servicing rights (413,000) (312,000)
----------- -----------
Total deferred tax liabilities (518,000) (337,000)
----------- -----------
Net deferred tax assets entering into the determination
of the provision for federal income taxes 155,000 70,000
Additional deferred tax asset (liability) related to
other comprehensive income 321,000 (430,000)
----------- -----------
Net deferred tax asset (liability) included in other assets
(liabilities) on the accompanying consolidated balance sheets $ 476,000 $ (360,000)
=========== ===========
</TABLE>
-48-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. RELATED PARTY TRANSACTIONS
Loans
Certain directors, executive officers and their related interests were loan
customers of the Bank. All such loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions and do not represent more than a normal risk of
collectibility or present other unfavorable features. The total loans
outstanding to these customers aggregated approximately $5,282,000 and
$6,420,000 at December 31, 1999 and 1998, respectively; new loans and repayments
during 1999 were approximately $2,626,000 and $3,764,000, respectively.
Deposits
Deposits of Bank directors, executive officers and their related interests were
approximately $1,863,000 and $1,004,000 at December 31, 1999 and 1998,
respectively.
11. OFF-BALANCE SHEET ACTIVITIES
The Bank is a party to credit related 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, standby letters of credit and commercial letters of credit. Such
commitments involve to varying degrees elements of credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheets. The Bank
follows the same credit policy to make such commitments, including collateral as
is followed for those loans recorded in the consolidated financial statements;
no significant losses are anticipated as a result of these commitments.
The Bank's exposure to credit loss is represented by the contractual amount of
these commitments. The Bank follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
<TABLE>
Contract Amount
1999 1998
<S> <C> <C>
Commitments to grant loans $22,056,000 $46,556,000
Unfunded commitments under lines of credit 82,005,000 48,603,000
Commercial and standby letters of credit 2,506,000 2,532,000
</TABLE>
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 or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Bank, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Bank is committed.
Commercial and standby letters-of-credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank generally holds collateral supporting those commitments if deemed
necessary.
-49-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. REGULATORY MATTERS
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by its primary regulator, the
Federal Reserve Bank ("FRB"). Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by the
FRB, that if undertaken, could have a direct material effect on the
Corporation's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of the their assets, liabilities, capital and certain
off-balance-sheet items as defined in the regulations and calculated under
regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measurements established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total capital and Tier 1 capital to risk
weighted assets and Tier 1 capital to average assets. Management believes, as of
December 31, 1999, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject. As of December 31, 1999 the most recent
notification from the FRB categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the most recent notification that management believes
has changed the Bank's category. The Corporation's and the Bank's actual capital
amounts and ratios as of December 31, 1999 and 1998 are als presented in the
table.
<TABLE>
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital to risk
weighted assets
Consolidated $44,734 14.19% $25,216 8.0% $ N/A N/A%
Bank 43,131 13.70 25,190 8.0 31,164 10.0
Tier 1 capital to risk
weighted assets
Consolidated 41,183 13.07 12,608 4.0 N/A N/A
Bank 39,580 12.57 12,595 4.0 18,893 6.0
Tier 1 capital to
average assets
Consolidated 41,183 12.64 13,038 4.0 N/A N/A
Bank 39,580 12.15 13,027 4.0 16,284 5.0
</TABLE>
-50-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital to risk
weighted assets
Consolidated $42,111 17.20% $19,587 8.0% $ N/A N/A%
Bank 39,305 16.22 19,386 8.0 24,232 10.0
Tier 1 capital to risk
weighted assets
Consolidated 39,232 16.02 9,776 4.0 N/A N/A
Bank 36,426 14.97 9,733 4.0 14,600 6.0
Tier 1 capital to
average assets
Consolidated 39,232 14.74 10,646 4.0 N/A N/A
Bank 36,426 13.73 10,612 4.0 13,265 5.0
</TABLE>
The Bank is required to deposit certain amounts with the Federal Reserve Bank.
These reserve balances vary depending upon the level of certain customer
deposits in the Bank. At December 31, 1999 and 1998, those required reserve
balances were $2,711,000 and $1,737,000, respectively.
The Bank is also subject to limitations under the Federal Reserve Act on the
amount of loans or advances that can be extended to the Corporation and
dividends that can be paid to the Corporation. The total amount of dividends
which may be paid at any date is generally limited to the retained earnings of
the Bank, and loans or advances are limited to 10 percent of the Bank's capital
stock and surplus on a secured basis. Approval is needed if total dividends
declared in any calendar year exceed the retained "net profit" (as defined in
the Federal Reserve Act) of that year plus the retained "net profit" of the
preceding two years. The amount that was not subject to this restriction is
approximately $6,019,000 at January 1, 2000. In addition, dividends paid by the
Bank to the Corporation would be prohibited if the effect thereof would cause
the Bank's capital to be reduced below applicable minimum capital requirements.
13. EMPLOYEE BENEFIT PLANS
401(k), Profit Sharing and Employee Stock Ownership Plan (ESOP) - The Bank
maintains a 401(k) Profit Sharing and Employee Stock Ownership Plan (the "Plan")
for substantially all employees. Under the 401(k) feature of the Plan, employees
may make voluntary contributions based on a percentage of covered compensation.
The Bank, at the discretion of the Board of Directors, may make matching
contributions and/or a profit sharing contribution. The Bank's matching and
profit sharing contributions were $200,332 $240,200 and $203,055 for 1999, 1998
and 1997, respectively.
The 401(k) and Profit Sharing Plan was amended as of January 29, 1999 to include
the ESOP. Under the guidelines of the amended Plan, any employee who has
attained the age of 21 and has completed six months of employment is eligible to
participate in the ESOP. The ESOP borrowed $500,000 from the Company to purchase
10,000 shares of O.A.K. Financial Corporation's common stock at a price of $50
per share. The loan is collateralized by the unearned shares of common stock
purchased by the ESOP; interest is charged at 7.5%. The loan will be repaid over
a period of 10 years principally from the portion of the Bank's discretionary
contribution and with any dividends received on the unallocated shares of common
stock. Shares purchased by the ESOP are held in suspense until allocated among
Plan participants as the loan is repaid. Contributions to the ESOP were $63,415
during the year ended December 31, 1999.
-51-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Contributions to the ESOP and shares released from suspense proportional to the
repayment of the ESOP loan are allocated among Plan participants on the basis of
compensation in the year of allocation. Benefits are vested as the participant
accumulates years of service with the Bank. A participant becomes 20% vested
after three years of service and is 100% vested after seven years of credited
service. Prior to the seven years of credited service, a person who terminates
employment for reasons other than death, normal retirement or disability will
receive only their vested portion of the ESOP benefit. Forfeitures are
reallocated among remaining participating employees in the same proportion as
contributions. Benefits are payable in stock or cash upon termination of
employment. The Bank's contributions to the ESOP are not fixed, so benefits
under the ESOP cannot be estimated. ESOP participants receive distributions from
their ESOP accounts only upon termination of service.
For the year ended December 31, 1999, 1,153 common shares with an average fair
value of $55 per share, were committed to be released. No shares have been
allocated as of that date. The fair value of unearned shares at December 31,
1999 was $550,000.
Stock Compensation and Stock Option Plans - A Stock Compensation Plan was
established as of January 28, 1999 to enable key employees to participate in the
future growth and profitability of the Corporation by offering them incentive
compensation through the issuance of stock options and performance share awards,
which are vested based on achievement of performance goals.
Performance share awards are earned and vested at the rate of 10% per year and
become exercisable after the first anniversary of the award date. The option
exercise price is at least 100% of the market value of the common stock at the
grant date. During 1999, 9,250 performance shares were awarded at an average
weighted fair value of $50 per share totaling $462,500.
The Company also has a Stock Option Plan for non-employee directors in addition
to the Stock Compensation plan for key employees.
The following table summarizes information about stock option transactions:
<TABLE>
Available Options Exercise
For Grant Outstanding Price
<S> <C> <C> <C>
Outstanding, January 1, 1999 - - -
Shares available for grant 200,000 - $50.00
Granted under Stock Option Plan (2,500) 2,500 50.00
Granted under Stock Compensation Plan (9,250) 9,250 50.00
----------- ---------- --------
Outstanding, December 31, 1999 188,250 11,750 $50.00
=========== ========== ========
</TABLE>
Under the terms of the Plans none of the options were exercisable at December
31, 1999.
All options expire 10 years after the date of the grant; 155,750 shares are
reserved for future issuance under the Stock Compensation Plan and 32,500 shares
are reserved for future issuance under the Stock Option Plan for non-employee
directors.
The Corporation has elected to apply the provisions of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" and,
accordingly, stock options do not constitute compensation expense in the
determination of net income. Had stock compensation expense been determined
pursuant to the methodology provided in Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" there would have
been no proforma effect on the consolidated results of operations.
Deferred Compensation - The Bank sponsors a deferred compensation plan for all
directors who wish to participate. The cost of the plan was $204,000, $152,000
and $109,000 in 1999, 1998 and 1997, respectively. The accrued benefit
obligation for this plan was $775,707 and $717,578 as of December 31, 1999 and
1998, respectively, and is included in other liabilities. The Bank has purchased
life insurance policies on participating directors.
-52-
<PAGE>
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. CONTINGENCIES
The Bank is party to litigation arising in the normal course of business. In the
opinion of management, based on consultation with legal counsel, liabilities
from such litigation, if any, would not have a material effect on the
Corporation's consolidated financial statements. As a result of acquiring real
estate from foreclosure proceedings, the Bank is subject to potential claims and
possible legal proceedings involving environmental matters. No such claims have
been asserted at December 31, 1999.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. The fair values of certain financial instruments and all
nonfinancial instruments are excluded from disclosure. These include, among
other elements, the estimated earning power of core deposit accounts, the
trained work force, customer goodwill and similar items. Accordingly, the
aggregate fair values ar not necessarily indicative of the underlying value of
the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value disclosures for financial instruments.
Cash and Cash Equivalents - The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate those assets' fair
values.
Investment Securities - Fair values for investment securities are generally
based on quoted market prices.
Restricted Investments - The carrying value of Federal Home Loan Bank stock and
Federal Reserve Bank stock approximates fair value based on the redemption
provisions of the Federal Home Loan Bank and the Federal Reserve Bank.
Loans Receivable - For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values approximate carrying values. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to
estimate the effect of declines, if any, in the credit quality of borrowers
since the loans were originated. Fair values for impaired loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Loans Held for Sale - The fair value of loans held for sale, including the fair
value of associated mortgage servicing rights, is estimated based on the present
value of estimated future cash flows of the loan and related servicing rights
using a discount rate commensurate with the risks associated with the respective
financial instruments.
Deposit Liabilities - The fair values for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts) which have no
stated maturity are, by definition, equal to the amount payable on demand.
Approximately 65% and 53% of the Bank's deposits at December 31, 1999 and 1998,
respectively have fair values equal to carrying values. The carrying amounts for
variable rate certificates of deposit and other variable rate time deposits
approximate their fair values at the reporting date. Fair values for fixed rate
time deposits and other time deposits with stated maturities are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities to a schedule of aggregated
expected monthly maturities.
-53-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Securities Sold Under Agreements to Repurchase Fair value approximates the
carrying value since the majority of these instruments were entered into at our
near December 31, 1999 and 1998.
Borrowed Funds - The carrying amounts of federal funds purchased, treasury tax
and loan note options, and variable rate advances approximate their fair values.
The fair values of the Corporation's long-term borrowings are estimated using
discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet
Instruments - Commitments to extend credit were evaluated and fair value was
estimated using the fees currently charged to enter into similar agreements,
taking into consideration the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. As the Bank does not charge fees for lending commitments,
it is not practicable to estimate the fair value of these instruments.
The estimated fair values of the Bank's financial instruments at December 31,
are as follows:
<TABLE>
1999 Carrying Fair
Amount Value
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 10,054,389 $ 10,054,389
Available-for-sale securities 61,649,881 63,649,881
Loans receivable, net 284,279,189 282,255,966
Loans held for sale 632,038 632,038
Accrued interest receivable 2,716,837 2,716,837
Restricted investments 2,000,000 2,000,000
Financial liabilities
Deposits 254,166,048 254,105,180
Borrowed funds 54,405,599 54,230,776
Securities sold under agreements
to repurchase 24,424,351 24,424,351
Other liabilities 1,819,097 1,819,097
1998
Financial assets
Cash and cash equivalents $ 8,913,513 $ 8,913,513
Available-for-sale securities 55,082,668 55,082,668
Loans receivable, net 219,253,824 223,293,988
Loans held for sale 4,679,962 4,679,962
Accrued interest receivable 2,026,185 2,026,185
Restricted investments 1,263,900 1,263,900
Financial liabilities
Deposits 217,290,807 218,071,445
Borrowed funds 27,752,803 27,913,887
Securities sold under agreements
to repurchase 14,373,304 14,373,304
Other liabilities 2,124,091 2,124,091
</TABLE>
-54-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
The following summarizes parent company only condensed balance sheets as of
December 31, 1999 and 1998 and the related condensed statements of income and
cash flows for each of the three years in the period ended December 31, 1999:
<TABLE>
Condensed Balance Sheets
1999 1998
<S> <C>
Assets
Cash $ 1,346,061 $ 416,959
Investment in subsidiary 39,655,037 37,983,469
Available-for-sale securities 832,023 1,612,479
------------- ---------------
Total assets $41,833,121 $40,012,907
============= ===============
Other borrowed funds $ 500,000 $ 59,922
Other liabilities 75,607 -
Stockholders' equity 41,257,514 39,952,985
------------- ---------------
Total liabilities and stockholders' equity $41,833,121 $40,012,907
============= ===============
</TABLE>
<TABLE>
Condensed Statements of Income
1999 1998 1997
Income
<S> <C> <C> <C>
Dividends from subsidiary $ 816,710 $2,362,500 $4,543,040
Interest from available-for-sale securities 36,045 59,065 38,876
Net realized gain on sale of
available-for-sale securities 507,134 209,722 -
----------- ------------ -----------
Total income 1,359,889 2,631,287 4,581,916
Other expenses 202,937 119,307 38,876
----------- ------------ -----------
Income before equity in undistributed net
income of subsidiary 1,156,952 2,511,980 4,543,040
Equity in undistributed net income of
subsidiary 3,372,041 2,563,539 82,934
----------- ------------ -----------
Net income $4,528,993 $5,075,519 $4,625,974
=========== ============ ===========
</TABLE>
-55-
<PAGE>
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED
AND SUBSIDIARY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
Condensed Statements of Cash Flows
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income $4,528,993 $ 5,075,519 $ 4,625,974
Adjustments to reconcile net income
to net cash provided by operating
activities
Net gain on available-for-sale securities (507,134) - -
Undistributed earnings of subsidiary (3,372,041) (2,563,539) (82,934)
Changes in other liabilities 15,685 59,922 -
----------- ------------ ------------
Net cash provided by operating
activities 665,503 2,571,902 4,543,040
----------- ------------ ------------
Cash flows from investing activities
Available-for-sale securities
Proceeds from sales 1,287,854 204,823 -
Purchases - (12,500) (1,011,272)
----------- ------------ ------------
Net cash provided by (used in)
investing activities 1,287,854 192,323 (1,011,272)
Cash flows from financing activities
Proceeds from common stock issued 650,001 - -
Repurchase and retirement of common
shares - - (419,832)
Dividends paid (1,674,256) (2,350,000) (3,115,620)
----------- ------------ ------------
Net cash used in financing activities (1,024,255) (2,350,000) (3,535,452)
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 929,102 414,225 (3,684)
Cash and cash equivalents, beginning of year 416,959 2,734 6,418
----------- ------------ ------------
Cash and cash equivalents, end of year $1,346,061 $ 416,959 $ 2,734
=========== ============= ============
</TABLE>
-56-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Information About Directors and Nominees" on pages
4 through 5 of the Company's definitive proxy statement, as filed with the
Commission and dated March 17, 2000, relating to the April 27, 2000 Annual
Meeting of Shareholders, is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11. Executive Compensation.
The information set forth under the caption "Executive Compensation
Summary" on page 6 of the Company's definitive proxy statement, as filed with
the Commission and dated March 17, 2000, relating to the April 27, 2000 Annual
Meeting of Shareholders, is incorporated herein by reference. Information under
the caption "Committee Report on Executive Compensation" on page 6 of the
definitive proxy statement is not incorporated by reference herein and is not
deemed to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Voting Securities and
Beneficial Ownership of Management" on page 3 of the Company's definitive proxy
statement, as filed with the Commission and dated March 17, 2000, relating to
the April 27, 2000 Annual Meeting of Shareholders, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" on page
7 of the Company's definitive proxy statement, as filed with the Commission and
dated March 17, 2000, relating to the April 27, 2000 Annual Meeting of
Shareholders, is incorporated herein by reference.
-57-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows for each of the
Years Ended December 31, 1998, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation
S-K) The Exhibit Index is located on the final page of this
report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1999.
-58-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 9, 2000.
O.A.K. FINANCIAL CORPORATION
/s/ John A. Van Singel
John A. Van Singel
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Martin R. Braun
Martin R. Braun
Vice President
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each director of the Registrant,
whose signature appears below, hereby appoints David G. Van Solkema and John A.
Van Singel, and each of them severally, as his or her attorney-in-fact, to sign
in his or her name and on his or her behalf, as a director of the Registrant,
and to file with the Commission any and all Amendments to this Report on Form
10-K.
Signature Date
/s/ Robert Deppe March 9, 2000
Robert Deppe
/s/ Norm Fifelski March 9, 2000
Norman Fifelski
/s/ Dellvan Hoezee March 9, 2000
Dellvan Hoezee
/s/ John Peterson March 9, 2000
John Peterson
/s/ Lois Smalligan March 9, 2000
Lois Smalligan
/s/ John A. Van Singel March 9, 2000
John A. Van Singel
/s/ David Van Solkema March 9, 2000
David Van Solkema
____________________________ March 9, 2000
Gerald Williams
-59-
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number
- ------
10 Director Deferred Compensation Plan
21 Subsidiaries of Registrant
27 Financial Data Schedule
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number
- ------
3.1 Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 10, as amended.
3.2 Amendment to the Articles of Incorporation of Registrant filed April
28, 1998, increasing authorized shares of common stock from 2,000,000
to 4,000,000 shares, incorporated by reference to Exhibit 3 of
Registrant's Report on Form 10-K for the year ended December 31, 1998.
3.3 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1
of the Registrant's Registration Statement on Form 10, as amended.
4 Form of Registrant's Stock Certificate are incorporated by reference
to Exhibit 3.1 of the Registrant's Registration Statement on Form 10,
as amended.
10.1 1999 Stock Compensation Plan, incorporated by reference to Appendix A
to the Registrant's Definitive Proxy Statement filed with respect to
its April 22, 1999 annual meeting of shareholders.
10.2 Nonemployee Directors' Stock Option Plan, incorporated by reference to
Appendix A to the Registrant's Definitive Proxy Statement filed with
respect to its April 22, 1999 annual meeting of shareholders.
10.3 1988 Director Deferred Compensation Plan is incorporated by reference
to Exhibit 10 of the Registrant's Registration Statement on Form 10,
as amended.
-60-
<PAGE>
EXHIBIT 10 - FORM OF DIRECTOR DEFERRED COMPENSATION PLAN
DEFERRED COMPENSATION AGREEMENT
THIS DEFERRED COMPENSATION AGREEMENT dated this __________ day of
_________________ by and between BYRON CENTER STATE BANK, hereinafter the
"Company", and __________________________________, hereinafter the "Director".
RECITALS
WHEREAS, Director is a director of the Company; and
WHEREAS, the services of Director and Director's experience and the
knowledge of the affairs of the Company are extremely valuable to the Company;
and
WHEREAS, the Company desires that Director remain in its service, wishes to
continue to receive the benefit of Director's knowledge and experience, and is
willing to offer Director an incentive in the form of deferred compensation.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Duties and Compensation. Director shall remain a director of the
Company with Director's duties, compensation and terms of employment in
that capacity to be such as may be determined from time to time by the
Board of Directors until such service is terminated by either the Company
or Director. If Director remains as a director of the Company until
retirement, Director shall further be entitled to such amounts of deferred
compensation as are provided hereinafter.
2. Deferred Compensation Account.
(a) In lieu of paying the Director an annual retainer for
services as a director of the Company, the Company shall each year
credit as deferred compensation to an account for Director's benefit
an amount equal to the amount of the annual retainer which would
otherwise be payable to the Director for service as a director of the
Company for the following twelve months. The Company shall maintain
the account on its records and designated as the Deferred Compensation
Account for Director. Director shall be informed in writing by the
Company of the amount of deferred compensation, and the time as of
which such deferred compensation is credited to Director's Deferred
Compensation Account. Any amounts of deferred compensation credited to
Director's Deferred Compensation Account may be kept in cash or
invested and reinvested in mutual funds, stocks, bonds, securities, a
policy or policies of life insurance on Director's life, or any other
assets, or such amount may be used by th Company in connection with
the operation of its business, as may be determined by the Board of
Directors of the Company.
(b) As an investment for Director's Deferred Compensation
Account, the Board of Directors may direct the Company to purchase a
policy of life insurance on the life of Director. In the event that
such a life insurance policy is purchased for purposes of this
Agreement, the Company shall be the applicant, owner and beneficiary
of the policy. The Company shall have all rights under the policy and
all incidents of ownership under the policy.
3. Payment of Deferred Compensation at Retirement. Upon Director's
retirement, the Company shall pay Director deferred compensation in equal
annual installments for 15 years certain, an amount determined to be the
greater of (a) or (b) as follows:
(a) One-fifteenth (1/15) of the amount credited to Director's
Deferred Compensation Account, if any, upon the date Director retires.
-61-
<PAGE>
(b) The sum of the following:
(i) An amount equal to one-fifteenth (1/15) of the cash
value, if any, on the date Director retires of any insurance
policy purchased by the Company on Director's life as an
investment for purposes of this Deferred Compensation Agreement;
plus
(ii) An amount equal to the increase, if any, in cash value,
from the policy anniversary date in the year of retirement to the
policy anniversary date following the year of retirement.
4. Commencement of Deferred Compensation Payments. Deferred
Compensation payments shall commence at retirement of the Director. Normal
retirement shall be age 65.
At the request of the Director and subject to approval of the Board of
Directors, retirement of the Director can commence at an age other than 65.
The amount of such payments will be determined in accordance with the
formula in paragraph 3, as of the date the Director actually retires.
Postponing or accelerating the normal retirement age under this
paragraph is subject to the sole and absolute discretion of the Board of
Directors. The Director shall not participate in any way in the Board's
decision as to any such postponement or acceleration. Once the Director
attains normal retirement age, or is granted early retirement by the Board
of Directors of the Company, benefits will not be subject to a risk of
forfeiture.
5. Payment of Deferred Compensation In Event of Director's Total And
Permanent Disability. In the event of Director's total and permanent
disability prior to commencement of payments provided under paragraphs 3 or
4, the Company shall pay Director the deferred compensation in the same
amount and the same manner and schedule as set forth in paragraphs 3 and 4
when the Director attains normal retirement age.
6. Payment of Death Benefit In Lieu Of Deferred Compensation. In the
event of Director's death when Director has not begun receiving payments of
deferred compensation under paragraphs 3 or 4, the Company shall pay
Director's designated beneficiary a death benefit, in lieu of deferred
compensation, in an amount determined to be the greater of (a) or (b) as
follows:
(a) The amount credited to Director's Deferred Compensation
Account, if any, upon the date of Director's death.
(b) An amount equal to 10 percent of the death benefit, if any,
received by the Company as a result of Director's death from any
insurance policy purchased by the Company on Director's life as an
investment for purposes of this Deferred Compensation Agreement,
payable each year for 10 years.
Payment under this paragraph shall commence within 6 months following
the date of the Director's death. Payment of this benefit shall be in lieu
of deferred compensation benefits described in paragraphs 3 and 4. Payment
under this paragraph will constitute complete and total satisfaction of the
obligations of the Company provided under this Agreement.
7. Payment of Deferred Compensation In Event of Director's Death When
Director Has Begun Receiving Payments Under Paragraphs 3 or 4. In the event
of Director's death when Director has begun receiving payments under
paragraphs 3 or 4, the Company shall pay Director's designated beneficiary
the remaining annual deferred compensation payments, if any, to complete
the 15 year certain requirement.
Any payments becoming due to the Director's designated beneficiary
shall be made in the same amount and at the same time as would have been
paid to the Director, until the Company has paid a total of 15 annual
installments to the Director and/or the Director's designated beneficiary.
-62-
<PAGE>
8. No Duplication of Deferred Compensation. Deferred compensation
shall not be paid to Director, or to his designated beneficiary, under
greater than one of the following paragraphs of the Agreement: 3, 4, 6 and
7.
9. Designated Beneficiary. For purposes of this Agreement, the
designated beneficiary shall be as provided on Exhibit "A" attached to this
Agreement. Director may change the designated beneficiary by notice in
writing to the Company at any time. If the designated beneficiary shall die
after commencement of payments to the designated beneficiary, remaining
payments, if any, shall be paid to the estate of the designated
beneficiary.
10. Prohibition Against Assignment. Except as otherwise expressly
provided herein, Director agrees on behalf of himself and on behalf of his
personal representatives, heirs, legatees, distributees and any other
person or persons claiming any benefits under him by virtue of this
Agreement, that this Agreement and the rights, interests and benefits
hereunder shall not be assigned, transferred, pledged or hypothecated in
any way by Director or any personal representative, heir, legatee,
distributee or other person claiming under Director by virtue of this
Agreement and shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge or hypothecation or
other disposition of the Agreement or of such rights, interests and
benefits contrary to the foregoing provisions, or the levy of any
attachment or similar process thereupon, shall be null and void and without
effect and the Company shall have no further liability hereunder.
11. Notices and Elections. Any notice or election to be given
hereunder shall be sent by certified mail, return receipt requested, to the
Company at its registered office and to Director at such address as is
carried on the records of the Company. Either party may change the address
to which notices are to be addressed by notice in writing given to the
other in accordance with the terms hereof. The effective date of any such
notice shall be the date of mailing, as determined by postmark.
12. Funds. Nothing contained in this Agreement and no action taken
pursuant to the provisions of this Agreement shall create or be construed
to create a trust of any kind, a fund, or fiduciary relationship between
the Company and the Director, his designated beneficiary or any other
person. Any funds, including all investments and any life insurance
policies, used to determine payment under the Agreement shall be a part of
the general funds and assets of the Company and subject to the claims of
the Company's general creditors and no person other than the Company shall
by virtue of the provisions of this Agreement have any right, interest, or
title in such funds. To the extent that any person acquires a right to
receive payments from the Company under this Agreement, such right shall be
not greater than the right of any unsecured general creditor of the
Company. Benefits provided by this Agreement are separate from and
unrelated to the proceeds or value of any insurance policy purchased by the
Company to informally fund this Agreement. Director shall not have any
present right or interest in, nor any deferred claim to, or beneficial
ownership of, any insurance policy held by the Company with respect to this
Agreement.
13. Acceleration of Benefits. At the discretion of the Board of
Directors of the Company acting without any participation by the Director,
the Company shall retain the right to accelerate the payment of any
benefits remaining due to the Director or the Director's designated
beneficiaries under this agreement. Any acceleration of benefits shall be
discounted at an interest rate equal to the "Federal Funds Rate" which
shall be the mean of the high and low rates quoted for Federal Funds in th
"Money Rates" column of The Wall Street Journal for the business day
preceding the date on which the Company notifies the Director or the
Director's designated beneficiaries of the Company=s intention to
accelerate payment. Any such payment will constitute complete and total
satisfaction of the obligations of the Company provided under this
Agreement.
14. Effect Upon Director Relationship. Nothing in this Agreement shall
be construed as granting Director the right to be continued as a director
of the Company, or as a limitation on the right of the Company to terminate
the service of Director at any time.
15. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successor of the Company and any such successor shall be
deemed substituted for the Company under the terms of this Agreement. As
used in this agreement, the term "successor" shall include any person,
firm, corporation, or other business entity which at any time, whether by
merger, purchase or otherwise, acquires all or substantially all of the
assets or business of the Company.
-63-
<PAGE>
16. Governing Law. This Agreement shall be interpreted, construed,
enforced, and performed in accordance with the laws of the State of
Michigan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
DIRECTOR: COMPANY:
___________________________ By: ____________________________________
Its _________________________________
-64-
<PAGE>
EXHIBIT "A"
DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION FOR
--------------------------------
In the event of my death, my primary beneficiary shall be:
____________________________________________________________
In the event my primary beneficiary predeceases me my contingent beneficiary
shall be:
____________________________________________________________
__________________________________ ________________________________
Print Witness Name Print Director Name
__________________________________ ________________________________
Witness Signature Director Signature
Date:___________________________
-65-
<PAGE>
Exhibit 21 - Subsidiaries of Registrant - 100% Owned
Byron Center State Bank
2445 84th Street, S.W.
Byron Center, MI 49315
O.A.K. Financial Services, Inc. (100% owned subsidiary of
Byron Center State Bank)
2445 84th Street, S.W.
Byron Center, MI 49315
Dornbush Insurance Agency, Inc. (100% owned subsidiary of
O.A.K. Financial Services, Inc.)
5445 32nd Avenue
Hudsonville, MI 49426
-66-
::ODMA\PCDOCS\GRR\374343\2
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,054,389
<INT-BEARING-DEPOSITS> 215,159,729
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,649,881
<INVESTMENTS-CARRYING> 64,593,108
<INVESTMENTS-MARKET> 63,649,881
<LOANS> 284,911,227
<ALLOWANCE> 3,550,553
<TOTAL-ASSETS> 376,072,609
<DEPOSITS> 254,166,048
<SHORT-TERM> 66,624,351
<LIABILITIES-OTHER> 1,819,097
<LONG-TERM> 12,205,599
0
0
<COMMON> 2,041,775
<OTHER-SE> 39,215,739
<TOTAL-LIABILITIES-AND-EQUITY> 376,072,609
<INTEREST-LOAN> 21,656,573
<INTEREST-INVEST> 3,371,088
<INTEREST-OTHER> 52,644
<INTEREST-TOTAL> 25,080,305
<INTEREST-DEPOSIT> 8,368,069
<INTEREST-EXPENSE> 10,528,265
<INTEREST-INCOME-NET> 14,552,040
<LOAN-LOSSES> 1,250,000
<SECURITIES-GAINS> 532,915
<EXPENSE-OTHER> 10,602,852
<INCOME-PRETAX> 6,319,993
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,528,993
<EPS-BASIC> 2.23
<EPS-DILUTED> 2.23
<YIELD-ACTUAL> 4.07
<LOANS-NON> 2,471,000
<LOANS-PAST> 3,003,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,879,000
<CHARGE-OFFS> 670,000
<RECOVERIES> 92,000
<ALLOWANCE-CLOSE> 3,551,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40,000
</TABLE>
