FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 333-63685
CLARKSTON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3412321
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Clarkston, Michigan 48346
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 625-8585
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ____
Check here if there is no disclosure by delinquent filers in response to Item
405 of Regulation S-B is not contained in this form and no disclosure will 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-KSB
or any amendments to this Form 10-KSB. |X|
The registrant's revenues for 1998 were $35,000. The aggregate market value of
the voting and non-voting common equity held by non-affiliates of the
Registrant, based on a per share price of $8.25 as of March 10, 1999, was
$6,891,225 (common stock, no par value). As of March 10, 1999, there were
outstanding 951,000 shares of the Company's common stock (no par value).
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 20, 1999 are incorporated by reference into Part II and Part
III of this Report.
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PART I
ITEM 1: Business
The Company
Clarkston Financial Corporation (the "Company") was incorporated on May 18,
1998 under Michigan law and is a bank holding company owning all of the
outstanding common stock of Clarkston State Bank (the "Bank"). The Bank is
organized as a Michigan chartered bank with depository accounts insured by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank's initial primary
service area is Independence Township, which includes the City of Clarkston, and
the adjacent township of Waterford, both of which are located in North Oakland
County, Michigan. The Bank provides a full range of commercial and consumer
banking services for small to medium size businesses as well as individuals. The
Bank's lending strategy is to focus on commercial and consumer lending and to a
lesser extent residential mortgage lending. The Bank offers a broad array of
deposit products and may also provide customers with credit cards, trust
services, insurance products and investment products through third-party service
providers.
Significant events in 1998 included the Company's underwritten initial
public offering in November 1998. The Company issued 950,000 shares of common
stock in the initial public offering, resulting in net proceeds to the Company
of $8.8 million. On December 18, 1998, the Company transferred $8,496,860 to the
Bank to capitalize the Bank.
The Bank opened for business on January 4, 1999. As of February 28, 1999,
the Company had total assets of $12.3 million, total deposits of $3.8 million,
approximately 1,048 deposit accounts and shareholders' equity of $8.5 million.
The Company's and the Bank's main office is located at 15 South Main
Street, Clarkston, Michigan 48346, and its telephone number is (248) 625-8585.
Unless the context clearly indicates otherwise, financial information and other
references to the Company include the Bank.
Products and Services
Commercial Loans. Commercial loans are made primarily to small and
mid-sized businesses. These loans are and will be both secured and unsecured and
are made available for general operating purposes, acquisition of fixed assets
including real estate, purchases of equipment and machinery, financing of
inventory and accounts receivable, as well as any other purposes considered
appropriate. The Bank generally looks to a borrower's business operations as the
principal source of repayment, but will also receive, when appropriate,
mortgages on real estate, security interests in inventory, accounts receivable
and other personal property and/or personal guarantees.
Although the Bank takes a progressive and competitive approach to lending,
it stresses high quality in its loans. Because of the Bank's local nature,
management believes that quality control should be achievable while still
providing prompt and personal service. On a monthly basis, the Board of
Directors reviews selected loans made in the preceding month. In addition, a
loan committee of the Board of Directors of the Bank also reviews larger loans
for prior approval when the loan request exceeds the established limits for the
senior officers.
Commercial real estate lending involves more risk than residential lending,
because loan balances are greater and repayment is dependent upon the borrower's
operation. The Bank attempts to minimize risk associated with these transactions
by generally limiting its exposure to owner operated properties of well-
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known customers or new customers with an established profitable history. In many
cases, risk is further reduced by (i) limiting the amount of credit to any one
borrower to an amount less than the Bank's legal lending limit; and (ii)
avoiding certain types of commercial real estate financings.
Residential Real Estate Loans. The Bank originates residential mortgage
loans, which are generally long-term with either fixed or variable interest
rates. The Bank's general policy, which is subject to review by management as a
result of changing market and economic conditions and other factors, is to
retain all or a portion of variable interest rate mortgage loans in the Bank's
loan portfolio and to sell all fixed rate loans in the secondary market. The
Bank also offers home equity loans. The Bank retains servicing rights with
respect to residential mortgage loans that it originates.
Personal Loans and Credit. The Bank makes personal loans and lines of
credit available to consumers for various purposes, such as the purchase of
automobiles, boats and other recreational vehicles, home improvements and
personal investments. The Bank expects to retain substantially all of such
loans.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for home equity lines of credit, usually
involve more credit risk than mortgage loans because of the type and nature of
the collateral. While the Bank does not use a formal credit scoring system, the
Bank underwrites its loans carefully, with a strong emphasis on the amount of
the down payment, credit quality, employment stability and monthly income. These
loans are expected generally to be repaid on a monthly repayment schedule with
the source of repayment tied to the borrower's periodic income. In addition,
consumer lending collections are dependent on the borrower's continuing
financial stability, and are thus likely to be adversely affected by job loss,
illness and personal bankruptcy. In many cases, repossessed collateral for a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation of the underlying collateral.
The Bank believes that the generally higher yields earned on consumer loans help
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to serve the credit needs of the
communities and customers that it serves.
Loan Policy. As a routine part of the Bank's business, the Bank expects to
make loans to individuals and businesses located within the Bank's market area.
The Bank has adopted a Loan Policy that contains general lending guidelines and
is subject to review and revision by the Board of Directors from time to time.
The Company seeks to make sound loans, while recognizing that lending money
involves a degree of business risk.
Regulatory and supervisory loan-to-value limits are established by Section
304 of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The Bank's internal limitations will follow those limits and in
certain cases will be more restrictive than those required by the regulators.
Deposit Services. The Bank offers a broad range of deposit services,
including checking accounts, NOW accounts, savings accounts and time deposits of
various types. Transaction accounts and time certificates are tailored to the
principal market area at rates competitive with those offered in the area. All
deposit accounts are insured by the FDIC up to the maximum amount permitted by
law. The Bank solicits these accounts from individuals, businesses,
associations, financial institutions and government authorities. The Bank may
also use alternative funding sources as needed, including advances from Federal
Home Loan Banks, conduit financing and the packaging of loans for securitization
and sale.
Other Services. The Bank may establish relationships with correspondent
banks and other independent financial institutions to provide other services
requested by its customers, including loan
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participations where the requested loan amounts exceed the Bank's policies or
legal lending limits. The Bank may consider providing additional services in the
future, such as personal computer based at-home banking. Management believes
that the Bank's personalized service approach benefits from customer visits to
the Bank. Management will continue to evaluate the desirability of adding
telephone, electronic and at- home banking services. Should the Bank choose to
do so, the Bank could provide one or more of these services at a future date
using a third-party service provider.
Competition
There are many thrift institution, credit union and bank offices located
within the Bank's primary market area of North Oakland County, Michigan. The
Bank faces competition from thrift institutions, credit unions, and other banks
as well as finance companies, insurance companies, mortgage companies,
securities brokerage firms, money market funds and other providers of financial
services. Most of the Bank's competitors have been in business a number of
years, have established customer bases, are larger and have higher lending
limits than the Bank. The Bank competes for loans principally through its
ability to communicate effectively with its customers and understand and meet
their needs. Management believes that its personal service philosophy enhances
its ability to compete favorably in attracting individuals and small businesses.
The Bank actively solicits retail customers and will compete for deposits by
offering customers personal attention, professional service, off-site ATM
capability, and competitive interest rates.
Environmental Matters
The Company does not believe that existing environmental regulations will
have any material effect upon the capital expenditures, earnings, and
competitive position of the Company.
Employees
As of December 31, 1998, the Company had 8 full-time and 2 part-time
employees. The Company has assembled a staff of experienced, dedicated
professionals whose goal is to provide outstanding service. None of the
Company's employees are represented by collective bargaining agents.
Selected Statistical Data
The information required by Guide 3-Statistical Data for Bank Holding
Companies is not applicable to the Company because the Bank did not begin
operations until after December 31, 1998.
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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.
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
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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 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 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
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shareholders' equity) to total 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 securities 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 will be received by it in the form of
dividends, if any, paid by the Bank. Thus, the Company's ability to pay
dividends to its shareholders will indirectly be limited by statutory
restrictions on its 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 is not authorized to issue preferred
stock and has no current plans to seek to authorize any preferred stock.
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.
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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 1998, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category.
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 during 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 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 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. As a
condition to regulatory approval of the Bank's
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formation, the Bank was required to have an initial capitalization sufficient to
provide a ratio of Tier 1 capital to total estimated assets of at least 8% at
the end of the third year of operation.
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
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<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>
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.
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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 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
-9-
<PAGE>
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 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 the
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: Description of Property.
The Bank is leasing a building located at 15 South Main Street in downtown
Clarkston, Michigan for use as the Bank's main office and the Company's
headquarters. This building consists of approximately 3,890 square feet. The
building was formerly a branch of a large regional bank and has been a bank
branch since 1911. The building has a night deposit box, safe deposit boxes and
a complete security system, and has an ATM machine. The Bank believes that this
space will be adequate for its present needs. In order to conserve the Bank's
capital, eight directors agreed to purchase the building in September, 1998
specifically for the purpose of leasing the property to the Bank. The building
is leased on an arms-length basis from an entity owned by eight of the Company's
and the Bank's directors. See Item 12 "Certain Relationships and Related
Transactions." The lease for the Bank's office has an initial term of five years
and the Bank has three renewal options of five years each. The monthly lease
payments are $5,000 per month for the first two years and thereafter $5,165 per
month. In addition, the Bank is required to make payments for taxes, insurance
and other operating expenses.
The Company believes its facilities are well-maintained, adequately insured
and primarily utilized.
ITEM 3: Legal Proceedings.
As the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking, to which the
Company or any of its subsidiaries is a party of or which any of its properties
is the subject.
ITEM 4: Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 1998 to a vote of
the Registrant's stockholders.
-11-
<PAGE>
PART II
ITEM 5: Market for Common Equity and Related Stockholder Matters.
The Company's common stock has traded in the over-the-counter market since
the completion of the company's initial public offering in November 1998. High
and low bid prices, as reported on the OTC Bulletin Board, for the fourth
quarter of 1998 are as follows:
<TABLE>
High Low
---- ---
<S> <C> <C>
Fourth Quarter of 1998 $10.50 $8.75
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. Fiscal 1998
quotations do not include intra-day highs and lows. On December 31, 1998, there
were approximately 75 owners of record and approximately 1,100 beneficial owners
of the Company's common stock.
No cash dividends have been declared to date on the Company's common stock.
The Company expects that all earnings, if any, will be retained to finance the
growth of the Company and the Bank and that no cash dividends will be paid for
the foreseeable future. If and when dividends are declared, the Company will be
dependent upon dividends paid to it by the bank for funds to pay dividends on
the common stock.
ITEM 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth in Appendix A, under the caption "Plan of
Operation" of the Registrant's definitive Proxy Statement dated March 5, 1999,
is hereby incorporated by reference and is filed as Exhibit 13 to this Form
10-KSB Annual Report.
ITEM 7: Financial Statements.
The information set forth in Appendix A, under the caption "Consolidated
Financial Statements," of the Registrant's definitive Proxy Statement dated
March 5, 1999, is hereby incorporated by reference and is filed as Exhibit 13 to
this Form 10-KSB Annual Report.
ITEM 8: Changes in and Disagreements With Accountants and Financial Disclosure.
There have been no disagreements with the Company's independent public
accountants.
-12-
<PAGE>
PART III
ITEM 9: Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information set forth on page 3, under the caption "Information About
Directors" of the Registrant's definitive Proxy Statement dated March 5, 1999,
is hereby incorporated by reference and is filed as Exhibit 13 to this Form
10-KSB Annual Report.
The Company's common stock is not registered under the Securities Exchange
Act of 1934, and therefore the Company's officers and directors are not required
to and do not file beneficial ownership reports pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
ITEM 10: Executive Compensation.
Information relating to compensation of the Registrant's executive officers
and directors is contained on Exhibit 13, under the captions "Compensation of
Directors" and "Executive Compensation," in the Registrant's definitive Proxy
Statement dated March 5, 1999, and is incorporated herein by reference and is
filed as Exhibit 13 to this Form 10-KSB Annual Report.
ITEM 11: Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners and
management is contained on page 7, under the caption "Security Ownership of
Management" in the Registrant's definitive Proxy Statement dated March 5, 1999,
and is incorporated herein by reference and is filed as Exhibit 13 to this Form
10-KSB Annual Report.
ITEM 12: Certain Relationships and Related Transactions.
Information relating to certain relationships and related transactions is
contained on page 8, under the caption "Transactions Involving Management" in
the Registrant's definitive Proxy Statement dated March 5, 1999, and is
incorporated herein by reference and is filed as Exhibit 13 to this Form 10-KSB
Annual Report.
-13-
<PAGE>
ITEM 13: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) Financial Statements.
1. The following documents are filed as part of Item 7 of this report:
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statement of Operations for the period from May 18,
1998 (inception, to December 31, 1998
Consolidated Statement of Changes in Stockholders' Equity for the
period from May 18, 1998 (inception) to December 31, 1998
Consolidated Statement of Cash Flows for the period from May 18,
1998 (inception) to December 31, 1998
Notes to Consolidated Financial Statements
2. Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been omitted.
3. The following exhibits are filed as part of this report:
Reference is made to the exhibit index which follows the signature
page of this report.
The Registrant will furnish a copy of any exhibits listed on
the Exhibit Index to any shareholder of the Registrant without
charge upon written request of David T. Harrison, Clarkston
Financial Corporation, 15 South Main Street, Clarkston, Michigan
48346.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the
Registrant filed no Current Reports on Form 8-K.
-14-
<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 12, 1999.
CLARKSTON FINANCIAL CORPORATION
/s/ David T. Harrison
David T. Harrison
Chief Executive Officer and President
(Principal Executive Officer)
/s/ James L. Richardson
James L. Richardson
Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 12, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated. Each director of the
Registrant, whose signature appears below, hereby appoints David T. Harrison and
James L. Richardson, and each of them severally, as his attorney-in-fact, to
sign in his name and on his behalf, as a director of the Registrant, and to file
with the Commission any and all Amendments to this Report on Form 10-KSB.
Signature
/s/ David T. Harrison March 12, 1999
David T. Harrison, Principal Executive Officer and a Director
/s/ James L. Richardson March 12, 1999
James L. Richardson, Principal Financial and Accounting Officer
/s/ Edwin L. Adler March 12, 1999
Edwin L. Adler, Chairman of the Board and a Director
/s/ Louis D. Beer March 12, 1999
Louis D. Beer, Director
-15-
<PAGE>
/s/ Charles L. Fortinberry March 12, 1999
Charles L. Fortinberry, Director
/s/ William J. Clark March 12, 1999
William J. Clark, Director
/s/ Bruce H. McIntyre March 12, 1999
Bruce H. McIntyre, Secretary and a Director
/s/ Robert A. Olsen March 12, 1999
Robert A. Olsen, Director
/s/ John H. Welker March 12, 1999
John H. Welker, Director
-16-
<PAGE>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Number and Description Page
------------------------------ ------------
3.1 Articles of Incorporation of Clarkston Financial Corporation,
incorporated by reference to Exhibit 3.1 to the Clarkston
Financial Corporation Registration Statement on Form SB-2
(Registration No. 333-63685).
3.2 Bylaws of Clarkston Financial Corporation, incorporated by
reference to Exhibit 3.2 to the Clarkston Financial Corporation
Registration Statement on Form SB-2 (Registration No. 333-63685).
4 Specimen stock certificate of Clarkston Financial Corporation,
incorporated by reference to Exhibit 4 to the Clarkston Financial
Corporation Registration Statement on Form SB-2 (Registration No.
333-63685).
10.1 Clarkston Financial Corporation Stock Compensation Plan,
incorporated by reference to Exhibit 10.1 to the Clarkston
Financial Corporation Registration Statement on Form SB-2
(Registration No. 333-63685).
10.2 Clarkston Financial Corporation 1998 Founding Directors Stock
Option Plan, incorporated by reference to Exhibit 10.2 to the
Clarkston Financial Corporation Registration Statement on Form
SB-2 (Registration No. 333-63685).
10.3 Lease Agreement dated September 10, 1998, for the facility
located at 15 South Main Street, Clarkston, Michigan, 48346,
incorporated by reference to Exhibit 10.3 to the Clarkston
Financial Corporation Registration Statement on Form SB-2
(Registration No. 333-63685).
10.4 Data Processing Agreement between Jack Henry and Associates, Inc.
And Clarkston State Bank dated October, 1998, incorporated by
reference to Exhibit 10.4 to the Clarkston Financial Corporation
Registration Statement on form SB-2 (Registration No. 333-63685).
13 Proxy Statement to shareholders. This exhibit, except for those
portions expressly incorporated by reference in this filing, is
furnished for the
-17-
<PAGE>
information of the Securities and Exchange Commission and is not
deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant
23 Consent of Plante & Moran, LLP, independent public accountants
24 Power of Attorney (included on the signature page on page 15 of
the Annual Report on Form 10-KSB)
27 Financial Data Schedule
-18-
<PAGE>
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
March 5, 1999
Dear Shareholder:
We invite you to attend the 1999 Annual Meeting of Shareholders. This
year's meeting will be held on Tuesday, April 20, 1999, at 10:00 a.m., at Deer
Lake Racquet Club, 6167 White Lake Road, Clarkston, Michigan 48346.
Our audited financial statements are included in an appendix to this Proxy
Statement.
It is important that your shares are represented at the Annual Meeting.
Please carefully read the Notice of Annual Meeting and Proxy Statement. Whether
or not you expect to attend the Annual Meeting, please sign, date and return the
enclosed Proxy in the envelope provided at your earliest convenience.
Sincerely,
/s/ David T. Harrison
David T. Harrison
Chief Executive Officer
and President
<PAGE>
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 20, 1999
To Our Shareholders:
The Annual Meeting of Shareholders of Clarkston Financial Corporation will
be held at Deer Lake Racquet Club, 6167 White Lake Road, Clarkston, Michigan
48346, on Tuesday, April 20, 1999 at 10:00 A.M., local time, for the following
purposes:
1. To elect two directors, each to hold office for a three year term.
2. To transact such other business as may properly come before the
meeting or at any adjournment thereof.
Shareholders of record at the close of business March 1, 1999, will be
entitled to vote at the meeting or any adjournment thereof. Whether or not you
expect to be present in person at this meeting, you are urged to sign the
enclosed Proxy and return it promptly in the enclosed envelope. If you do attend
the meeting and wish to vote in person, you may do so even though you have
submitted a Proxy.
By order of the Board of Directors
Dated: March 5, 1999
Clarkston, Michigan
/s/ Bruce H. McIntyre
Bruce H. McIntyre
Secretary
<PAGE>
Dated: March 5, 1999
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
------------------
PROXY STATEMENT
For the Annual Meeting of Shareholders
to be held April 20, 1999
------------------
SOLICITATION OF PROXIES FOR ANNUAL MEETING
This Proxy Statement is furnished to the Shareholders of Clarkston
Financial Corporation (the "Corporation") in connection with the solicitation by
the Board of Directors of proxies to be used at the Annual Meeting of
Shareholders which will be held at Deer Lake Racquet Club, 6167 White Lake Road,
Clarkston, Michigan 48346, April 20, 1999, at 10:00 A.M., local time.
The Annual Meeting is being held for the following purposes:
1. To elect two directors, each to hold office for a three year term.
2. To transact such other business as may properly come before the
meeting or at any adjournment thereof.
If a proxy in the form distributed by the Corporation's Board of Directors
is properly executed and returned to the Corporation, the shares represented by
the proxy will be voted at the Annual Meeting of Shareholders and at any
adjournment of that meeting. Where shareholders specify a choice, the proxy will
be voted as specified. If no choice is specified, the shares represented by the
proxy will be voted FOR the nominees named by the Board of Directors in the
proxy. Shares not voted at the meeting, whether by abstention, broker non-vote,
or otherwise, will not be treated as votes cast at the meeting. Votes cast at
the meeting and submitted by proxy will be tabulated by the Corporation's
transfer agent.
A proxy may be revoked prior to its exercise by delivering a written notice
of revocation to the secretary of the Corporation, executing and delivering a
proxy of a later date or attending the meeting and voting in person. Attendance
at the meeting does not automatically act to revoke a proxy.
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On March 1, 1999, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were outstanding 951,000 shares of
common stock of the Corporation. Shares cannot be voted unless the shareholder
is present at the meeting or is represented by proxy.
As of March 1, 1999, no person was known to management to be the beneficial
owner of more than 5% of the Corporation's common stock.
ELECTION OF DIRECTORS
The Corporation's Articles of Incorporation provide for the division of the
Board of Directors into three classes of nearly equal size with staggered
three-year terms of office. The number of directors constituting the Board of
Directors is determined from time to time by the Board of Directors. The Board
is currently composed of eight members. Two persons have been nominated for
election to the Board, each to serve a three-year term expiring at the 2002
Annual Meeting of Shareholders. The Board has nominated Louis D. Beer and
William J. Clark, each of whom is an incumbent director.
Holders of common stock should complete the accompanying proxy. Unless
otherwise directed by a shareholder's proxy, it is intended that the votes cast
upon exercise of proxies in the form accompanying this statement will be in
favor of electing the nominees as directors for the terms indicated above. Each
of the nominees is presently serving as a director. The following pages of this
Proxy Statement contain more information about the nominees and other directors
of the Corporation.
Except for those persons nominated by the Board of Directors, no other
persons may be nominated for election at the 1999 Annual Meeting. The
Corporation's Articles of Incorporation require at least 60 days prior written
notice of any other proposed shareholder nomination and no such notice has been
received.
A plurality of the votes cast at the Annual Meeting is required to elect
the nominees as directors of the Corporation. As such, the two individuals who
receive this number of votes cast by the holders of the Corporation's common
stock will be elected as directors. Shares not voted at the meeting, whether by
abstention, broker non-vote, or otherwise, will not be treated as votes cast at
the meeting. Votes cast at the meeting and submitted by proxy will be tabulated
by the Corporation.
If any nominee becomes unavailable for election due to circumstances not
now known, the accompanying proxy will be voted for such other person to become
a director as the Board of Directors selects.
The Board of Directors recommends a vote FOR the election of each of the
persons nominated by the Board.
2
<PAGE>
INFORMATION ABOUT DIRECTORS
The content of the following table is based upon information as of February
1, 1999, furnished to the Corporation by the directors. As of February 1, 1999,
there were 951,000 issued and outstanding shares of common stock of the
Corporation.
<TABLE>
Amount and Nature of Percent of
Year First Beneficial Common
Became a Ownership(1) Stock
Name Age Director
- --------------------------------------------- ----- ------------ -------------- --------
<S> <C> <C> <C> <C>
Nominees for Election as Directors for Terms
Expiring in 2002
Louis D. Beer 53 1998 10,000 1.1%
William J. Clark 48 1998 3,200 *
Directors Whose Terms Expire in 2000
Charles L. Fortinberry 42 1998 7,000 *
Bruce H. McIntyre (a)(b) 68 1998 10,000 1.1%
Robert A. Olsen (b)(c) 53 1998 12,500 1.3%
Directors Whose Terms Expire in 2001
Edwin L. Adler (a)(b) 60 1998 30,000 3.2%
David T. Harrison (b)(c) 56 1998 14,000 1.5%
John H. Welker (c) 58 1998 29,000 2.6%
*Denotes ownership of less than one percent.
</TABLE>
(a) Member Audit Committee
(b) Member Executive Committee
(c) Member Personnel Committee
(1) Each director owns the shares directly and has sole voting and
investment power or shares voting and investment power with his or her
spouse under joint ownership. Includes shares of common stock that are
issuable under options exercisable within sixty days, of which there
were none as of February 1, 1999.
3
<PAGE>
David T. Harrison is the Chief Executive Officer, President and a director
of the Corporation and the Bank. Mr. Harrison has 30 years of experience in the
banking industry. Mr. Harrison was employed by First of America Bank from 1963
to 1991, and most recently served from 1989 to 1991 as Chief Executive Officer
and President of First of America Bank-Southeast, in Detroit, a Michigan banking
corporation that had over $4 billion in assets in 1991. Mr. Harrison has served
as Chief Executive Officer and President of Pinnacle Appraisal Group of
Clarkston, Michigan, from 1991 to the present. Mr. Harrison has also served as
Chief Executive Officer and President of Trophy Homes, a residential builder, of
Clarkston, Michigan, from 1995 to the present. Mr. Harrison has served as a
director of Credit Acceptance Corporation from 1991 to the present.
Edwin L. Adler is the Chairman and a director of the Corporation and the
Bank. Mr. Adler is president of Food Town Supermarkets, a chain of five stores
in the Clarkston, Michigan area, where he has been employed since 1963.
Louis D. Beer is a director of the Corporation and the Bank. Mr. Beer has
served since 1993 as the chairman of First Public Corporation, a real estate,
financial and business consulting firm located in Saginaw, Michigan.
William J. Clark is a director of the Corporation and the Bank. Mr. Clark
has served since October 1996 as the general manager of Coldwell Banker
Professionals, a real estate brokerage firm in Clarkston, Michigan. Mr. Clark
was employed by Clarkston Real Estate Services Inc. from 1989 through October
1996.
Charles L. Fortinberry is a director of the Corporation and the Bank. Mr.
Fortinberry is an automobile dealer and is the president of Clarkston Motors,
Inc., where he has been employed since 1985.
Bruce H. McIntyre is the Secretary and a director of the Corporation and
the Bank. Mr. McIntyre has served as president of McIntyre Media, LLC, a media
consulting firm, since October 1996. From 1971 through September 1996, Mr.
McIntyre was employed by Capital Cities/ABC, Inc., most recently as vice
president of the publishing division. Mr. McIntyre was the publisher of the
Oakland Press from 1977 through February 1995.
Robert A. Olsen is a director of the Corporation and the Bank. Mr. Olsen is
the president of Planned Financial Services, Inc., where he has been employed
since 1974.
John H. Welker is a director of the Corporation and the Bank. Mr. Welker is
president of Numatics, Inc., where he has been employed since 1965. Numatics,
Inc. is a global developer and manufacturer of pneumatic components for
automated machinery used in various industries.
The Board of Directors had 13 meetings in 1998. The Corporation has no
nominating committee. All directors attended at least three-fourths of the
aggregate number of meetings of the Board and Board committees which they were
eligible to attend.
COMPENSATION OF DIRECTORS
Directors of the Corporation are not paid any cash compensation for Board
meetings or Committee meetings attended. In 1998 the Corporation granted to each
of the directors options to purchase shares of Common Stock. Such directors are
reimbursed for their expenses for each meeting attended.
A total of 75,000 shares of Common Stock have been reserved for issuance
under the Corporation's 1998 Founding Directors' Stock Option Plan, and the
Corporation has granted to its directors and organizers options to purchase an
aggregate of 58,318 shares.
4
<PAGE>
Effective November 13, 1998, the Corporation awarded stock options to
purchase an aggregate of 29,160 shares to the directors of the Corporation and
the Bank in the following amounts: Mr. Harrison (3,645 shares); Mr. Adler (3,645
shares); Mr. Beer (3,645 shares); Mr. Clark (3,645 shares); Mr. Fortinberry
(3,645 shares); Mr. McIntyre (3,645 shares); Mr. Olsen (3,645 shares); and Mr.
Welker (3,645 shares). These options are subject to vesting requirements and 20%
of the shares subject to each option vest in each year in which the Corporation
achieves a performance goal determined in advance by the Board of Directors of
the Corporation. Pursuant to their terms, these options must be completely
vested nine and one half years after their date of grant, regardless of whether
the Corporation achieves the performance goals. These stock options were granted
pursuant to the 1998 Founding Directors' Stock Option Plan have an exercise
price of $10.00 per share, and expire on November 13, 2008.
Effective November 13, 1998, the Corporation awarded stock options to
purchase an aggregate of 29,158 shares to the directors of the Corporation and
the Bank in the following amounts: Mr. Harrison (3,270 shares); Mr. Adler (8,176
shares); Mr. Beer (2,725 shares); Mr. Clark (817 shares); Mr. Fortinberry (1,907
shares); Mr. McIntyre (2,725 shares); Mr. Olsen (2,725 shares); and Mr. Welker
(6,813 shares). These stock options were granted pursuant to the 1998 Founding
Directors' Stock Option Plan. These stock options vest 20% each year for five
years, have an exercise price of $10.00 per share, are exercisable beginning
December 31, 2000, and expire on November 13, 2008.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Corporation to
its Chief Executive Officer (the "Named Executive") for services rendered to the
Corporation from May 18, 1998 (inception) to December 31, 1998, the
Corporation's first full year of operations. No executive officers of the
Corporation or the Bank received annual compensation in excess of $100,000
during 1998.
<TABLE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
-------------------------------------- ------------
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary(1) sation ($) Options(#) sation
- --------------------------- ---- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
David T. Harrison....................... 1998 $16,666 0 6,915 $0
President and
Chief Executive Officer
</TABLE>
(1) Mr. Harrison received total salary compensation of $16,666 during 1998. Mr.
Harrison's annual salary at the present time is $100,000 per year.
5
<PAGE>
Option Grants in 1998. Shown below is information on grants of stock
options to the Named Executive during the period from May 18, 1998 (inception)
through December 31, 1998, pursuant to the Corporation's Stock Compensation Plan
and the Corporation's 1998 Founding Directors Stock Option Plan.
<TABLE>
Individual Grants
----------------------------------------------------------------------
Potential
Realizable
Value at
Assumed
Annual Rates
Number of Percent of of Stock Price
Securities Total Options Exercise or Appreciation
Underlying Granted to Base Price for Option
Options Employees in (per Expiration Term (4)
---------------------
Name Granted(1) 1998(2) share)(3) Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David T. Harrison 6,915 100.00% $10.00 11/13/08 $43,488 $110,207
President and
Chief Executive
Officer
</TABLE>
(1) Indicates number of shares which may be purchased pursuant to options
granted under the Corporation's Stock Compensation Plan on December 31,
1998. Options may not be exercised in full or in part prior to the
expiration of one year from the date of grant.
(2) Mr. Harrison is the only employee who was granted stock options in
1998. Options to purchase a total of 58,318 shares were granted to the
Corporation's founding directors in 1998, of which Mr. Harrison's stock
options represented 11.9%.
(3) The exercise price equals the price at which the Corporation offered
its stock to the public in its initial public offering. The exercise
price may be paid in cash, by the delivery of previously owned shares,
through the withholding of shares otherwise issuable upon exercise or a
combination thereof.
(4) These amounts are based on assumed rates of appreciation only. Actual
gains, if any, on stock option exercises will be dependent on overall
market conditions and on the future performance of the Corporation's
Common Stock. There can be no assurance that the amounts reflected in
this table will be realized.
6
<PAGE>
Year-End Options Values. Shown below is information with respect to
unexercised options to purchase shares of the Corporation's Common Stock granted
under the Option Plans to the Named Executive and the value of unexercised
options at December 31, 1998. The Named Executive did not exercise any stock
options during 1998.
<TABLE>
Number of Shares Subject to Value of Unexercised
Unexercised Options Held In-the-Money Options at
at December 31, 1998 December 31, 1998(1)
---------------------- ---------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David T. Harrison......................... 0 6,915 $0 0
Chief Executive Officer
and President
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of unexercised options reflects the market value of the
Corporation's Common Stock from the date of grant through December 31,
1998, (when the closing price of the Corporation's Common Stock was
$9.75 per share). Mr. Harrison's stock options have an exercise price
of $10.00 per share and were not in-the-money at December 31, 1998.
Value actually realized upon exercise by the Named Executive will
depend on the value of the Corporation's Common Stock at the time of
exercise.
Benefits. The Corporation provides group health and life insurance benefits
and supplemental unemployment benefits to its regular employees, including
executive officers.
Security Ownership of Management. The following table shows, as of February
1, 1999, the number of shares beneficially owned by the Named Executive
identified in the executive compensation tables of this proxy statement and by
all Directors and Executive Officers as a group. Except as described in the
notes following the table, the following persons have sole voting and
dispositive power as to all of their respective shares.
<TABLE>
Amount and Nature of Percent of
Name Beneficial Ownership Common Stock
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
David T. Harrison................................................. 14,000 1.5%
Chief Executive Officer
and President
All Executive Officers and Directors as a Group
(eight persons)................................................. 115,700 12.1%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
TRANSACTIONS INVOLVING MANAGEMENT
The Bank is leasing a building in downtown Clarkston, Michigan for use as
the Bank's main office and the Corporation's headquarters. The Bank leases the
building from a limited liability company wholly owned by Messrs. Harrison,
Adler, Beer, Clark, Fortinberry, McIntyre, Olsen and Welker, each of whom is a
director of the Corporation and the Bank. Management of the Corporation believes
that the terms of the lease are no less favorable to the Corporation than could
be obtained from non-affiliated parties.
During 1998, organizers of the Corporation and the Bank loaned
approximately $415,000 in aggregate amount to the Corporation to cover
organizational expenses of the Bank and the Corporation. Interest was payable on
the loans at the rate of 5.0% per annum. These loans were repaid in full in
December 1998.
Except as described in the preceding paragraph, no directors or officers of
the Corporation or their associates were customers of, or had transactions with,
subsidiaries of the Corporation other than in the ordinary course of business
during 1998. Clarkston State Bank did not commence operations until January 4,
1999, and has made loans and loan commitments to certain of its directors and
officers. All loans and commitments to officers and directors were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve an unusual risk of
collectibility or present other unfavorable features.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Corporation have been examined
by Plante & Moran, LLP, independent certified public accountants. A
representative of Plante & Moran, LLP is expected to be present at the annual
meeting with the opportunity to make a statement, if desired, and will be
available to respond to appropriate questions. It is anticipated that the
Corporation's Audit Committee will select the Corporation's auditors before the
end of this calendar year.
SHAREHOLDER PROPOSALS--2000 ANNUAL MEETING
Any proposal of a shareholder intended to be presented for action at the
2000 annual meeting of the Corporation must be received by the Corporation at 15
South Main Street, Clarkston, Michigan 48346, not later than January 1, 2000, if
the shareholder wishes the proposal to be included in the Corporation's proxy
materials for that meeting.
8
<PAGE>
AVAILABILITY OF 10-KSB ANNUAL REPORT
An annual report on Form 10-KSB to the Securities and Exchange Commission
for the year ended December 31, 1998, will be provided free to shareholders upon
written request. Write to Clarkston Financial Corporation, Attention: David T.
Harrison, 15 South Main Street, Clarkston, Michigan 48346. The Form 10-KSB and
certain other periodic filings are filed with the Securities and Exchange
Commission (the "Commission"). The Commission maintains an Internet web site
that contains reports and other information regarding companies, including the
Corporation, that file electronically. The Commission's web site address is
http:\\www.sec.gov.
MISCELLANEOUS
The management is not aware of any other matter to be presented for action
at the meeting. However, if any such other matter is properly presented for
action, it is the intention of the persons named in the accompanying form of
proxy to vote thereon in accordance with their best judgment.
The cost of soliciting proxies in the accompanying form will be borne by
the Corporation. In addition to solicitation by mail, proxies may be solicited
in person, or by telephone or telegraph, by regular employees of the
Corporation.
By order of the Board of Directors
/s/ Bruce H. McIntyre
March 5, 1999. Bruce H. McIntyre
Secretary
9
<PAGE>
APPENDIX
Plan of Operation............................................................A-2
Independent Auditors Report..................................................A-4
Consolidated Financial Statements
Consolidated Balance Sheet..........................................A-5
Consolidated Statement of Operations................................A-6
Consolidated Statement of Changes in Shareholders' Equity...........A-7
Consolidated Statement of Cash Flows................................A-8
Notes to Consolidated Financial Statements..........................A-9
A-1
<PAGE>
PLAN OF OPERATION
Plan of Operation.
Clarkston Financial Corporation was incorporated on May 18, 1998, as a bank
holding company. The Company owns all of the outstanding shares of common stock
of Clarkston State Bank, a Michigan banking corporation (the "Bank"). The Bank
received all necessary regulatory approvals and began operations on January 4,
1998. Based on the preopening growth projections and the growth levels achieved
during the first few weeks of operations, management believes that the Bank is
likely to have adequate funds to meet its capital requirements for the next
several years.
During the next 12 months of operation the Company does not anticipate
requiring substantial additional equipment or building facilities. No
significant change in the number of employees is anticipated in the next year of
operations.
Total assets of the Company at December 31, 1998, were $8.7 million, and at
February 28, 1999, total assets were $12,304,066. As of February 28, 1999, the
Bank had total loans of $354,593 and total deposits of $3,778,474. The Bank
experienced significant growth during the initial period of operations from
January 4, 1999 to February 28, 1999. This growth is expected to continue into
1999.
As of December 31, 1998, the Company had an accumulated deficit of
$149,000. This accumulated deficit was primarily the result of preopening fees
and expenses. During 1999, the Bank expects to establish an allowance for loan
losses at a level of 1.5% of total loans, resulting in additional expected
losses for 1999. Management believes that the Company will generate a net loss
for 1999 as a result of the expenditures made to build its loan loss reserve,
build its management team and open its office. Significant ongoing additions to
loan loss reserves will also contribute to this deficit due to the projected
rapid increase in the loan portfolio. Management further believes that the
expenditures made in 1998 and 1999 will create the infrastructure and lay the
foundation for growth in subsequent years.
Year 2000 Compliance.
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements. The Company and the Bank were organized in 1998
and the Company acquired its computer equipment within the past twelve months
and has contracted with a leading supplier of information processing services.
This equipment and these services were purchased with assurances of Year 2000
compliance.
Company management has developed a comprehensive Year 2000 Compliance Plan.
The Company has procedures in place to assess Year 2000 compliance by the
Company and its vendors. In addition, the Bank asks commercial borrowers about
Year 2000 compliance as part of the loan application and review process.
To date, the Company has spent less than $20,000 on Year 2000 compliance.
Management believes that the additional costs to complete the Company's Year
2000 compliance will be minimal.
The Company presently anticipates that it will complete its Year 2000
assessment and any necessary remediation by December 31, 1999. However, there
can be no assurance that the Company will be successful in implementing its Year
2000 remediation plan according to the anticipated schedule. In addition, the
Company may be adversely affected by the inability of other companies whose
systems interact with the Company to become Year 2000 compliant.
A-2
<PAGE>
The Bank's core processing applications are provided by a third party
vendor, Jack Henry and Associates, Inc. The Company has received correspondence
from Jack Henry and Associates, Inc. which documents the status of their Year
2000 compliance. The Company has been advised that the Jack Henry and
Associates, Inc. software has been successfully tested for Year 2000 compliance.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company is in the process of preparing a contingency
plan that will specify what it plans to do if important internal or external
systems are not Year 2000 compliant in a timely manner.
Management does not anticipate that the Company will incur material
operating expenses or be required to invest heavily in computer system
improvements to be Year 2000 compliant. Nevertheless, the inability of the
Company to successfully address Year 2000 issues could result in interruptions
in the Company's business and have a material adverse effect on the Company's
results of operations.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The 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 "believe," "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 limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the 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.
A-3
<PAGE>
PLANTE & MORAN, LLP Suite 2000
505 N. Woodward Ave.
Bloomfield Hills, Michigan 48304-2966
Certified Public Accountant
Management Consultants
248-644-0300
FAX 248-644-0373
Independent Auditor's Report
To the Board of Directors and Stockholders
Clarkston Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Clarkston
Financial Corporation and subsidiary as of December 31, 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the period from May 18, 1998 (inception) through December 31, 1998.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clarkston Financial Corporation and subsidiary as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the period
from May 18, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Plante & Moran, LLP
January 29, 1999
A member of
Moores
Rowland
INTERNATIONAL
A worldwide association of independent accounting firms A-4
<PAGE>
Clarkston Financial Corporation and Subsidiary
- -------------------------------------------------------------------------------
Consolidated Balance Sheet
December 31, 1998
(000s omitted, except per share data)
<TABLE>
Assets
<S> <C>
Cash and cash equivalents
Cash and due from banks $ 92
Federal funds sold 8,350
-------
Total cash and cash equivalents 8,442
Premises and equipment 291
-------
Total assets $ 8,733
=======
Liabilities and Stockholders' Equity
Liabilities - Accounts payable $ 126
Stockholders' Equity (Note 7)
Common Stock - No par value:
Authorized - 10,000,000 shares 4,378
Issued and outstanding - 951,000 shares
Capital surplus 4,378
Accumulated deficit (149)
--------
Total stockholders' equity 8,607
--------
Total liabilities and stockholders' equity $8,733
========
</TABLE>
See Notes to Consolidated Financial Statements. A-5
<PAGE>
Clarkston Financial Corporation and Subsidiary
- -------------------------------------------------------------------------------
Consolidated Statement of Operations
Period from May 18, 1998 (inception)
through December 31, 1998
(000s omitted, except per share data)
<TABLE>
<S> <C>
Interest Income - Federal funds sold $ 35
Interest Expense - Related party notes payable (Note 2) 4
------
Net Interest Income 31
Other Operating Expenses
Advertising 8
Compensation (Note 5) 68
Insurance 9
Occupancy (Note 3) 32
Organizational Costs 56
Other 7
------
Total other operating expenses 180
------
Loss - Before income taxes (149)
Provision for Income Taxes (Note 4) -
------
Net Loss $ (149)
======
Net Loss per Common Share (Note 9) $(0.96)
======
</TABLE>
See Notes to Consolidated Financial Statements. A-6
<PAGE>
Clarkston Financial Corporation and Subsidiary
- -------------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
Period from May 18, 1998 (inception)
through December 31, 1998
(000s omitted, except per share data)
<TABLE>
Total
Common Capital Accumulated Stockholders'
Stock Surplus Deficit Equity
<S> <C> <C> <C> <C>
Balance - May 18, 1998 $ - $ - $ - $ -
Public stock offering 4,750 4,750 - 9,500
Cost of stock offering (372) (372) - (744)
Comprehensive income - Net loss - - (149) (149)
------ ------ ------- ------
Balance - December 31, 1998 $4,378 $4,378 $ (149) $8,607
====== ====== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements. A-7
<PAGE>
Clarkston Financial Corporation and Subsidiary
- -------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Period from May 18, 1998 (inception)
through December 31, 1998
(000s omitted, except per share data)
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net loss $ (149)
Adjustments to reconcile net loss to net cash from operating activities-
Increase in accounts payable 126
--------
Net cash used in operating activities (23)
Cash Flows from Investing Activities - Additions to premises and equipment
in process of installation (291)
Cash Flows from Financing Activities
Proceeds from related party notes payable 415
Repayment of related party notes payable (415)
Net proceeds from public stock offering 8,756
--------
Net cash provided by financing activities 8,756
--------
Net Increase in Cash and Cash Equivalents 8,442
Cash and Cash Equivalents - May 18, 1998 -
--------
Cash and Cash Equivalents - December 31, 1998 $ 8,442
========
Supplemental Disclosure of Cash Flow Infomation - Cash paid during the
year for
Interest $ 4
Taxes -
</TABLE>
See Notes to Consolidated Financial Statements. A-8
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Clarkston Financial Corporation
and subsidiary conform to generally accepted accounting principles.
Management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates and assumptions.
Principles of Consolidation - The consolidated financial statements include
the accounts of Clarkston Financial Corporation (the "Corporation") and its
wholly owned subsidiary, Clarkston State Bank (the "Bank"). All significant
intercompany transactions are eliminated in consolidation.
Nature of Operations - Clarkston State Bank was formed during December 1998
for the purpose of conducting full-service commercial and consumer banking
and other financial products and services, initially through one branch
office, to Michigan communities in Oakland County. Banking operations
commenced subsequent to December 31, 1998.
Premises and Equipment - Premises and equipment are stated at cost to date
through December 31, 1998. Once placed in service, depreciation will be
computed on the straight-line method and charged to operations over the
estimated useful lives of the properties.
Organization and Preopening Costs - Organization and preopening costs
represent incorporation costs, legal and accounting costs, salaries and
other costs relating to the organization. The organization and preopening
costs totaled approximately $180,000 through December 31, 1998, which has
been charged to expense as incurred.
Offering Costs - Costs related to the offering of common stock have been
charged against the offering proceeds from the sale of the Corporation's
stock.
Earnings per Share - Basic earnings per share is based on the weighted
average number of shares outstanding during the period. Fully diluted
earnings per share are based on the weighted average shares outstanding,
assuming the exercise of the dilutive stock options.
Stock Options - The Corporation has two stock option plans (see Note 5).
Options granted to directors and key employees are accounted for using the
intrinsic value method, under which compensation expense is recorded at the
amount by which the market price of the underlying stock at grant date
exceeds the exercise price of an option. Under the Corporation's plans, the
exercise price on all options granted equals or exceeds the fair value of
the stock at the grant date. Accordingly, no compensation cost is recorded
as a result of stock option awards under the plan.
A-9
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 2 - Notes Payable - Related Parties
Notes payable totaling $415,000 were advanced from and repaid to the
Corporation's organizers during the period ended December 31, 1998. The
notes paid interest at 5 percent per annum and were due on demand. The
Corporation repaid the notes from the proceeds of the common stock
offering.
Note 3 - Operating Lease - Related Parties
The Bank entered into a lease for its main operating facility under a
five-year noncancelable lease expiring on October 1, 2003. The facility was
leased from an entity owned by the members of the Board of Directors of the
Corporation. Lease payment obligation is $5,000 per month through September
1, 2000 and $5,165 per month thereafter. The Bank is responsible for all
taxes, utilities and maintenance costs for the facility.
The annual future minimum lease payments required under the noncancelable
operating lease as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 60,000
2000 60,495
2001 61,980
2002 61,980
2003 46,485
</TABLE>
Note 4 - Income Taxes
Clarkston Financial Corporation and its subsidiary file a consolidated
income tax return. The Corporation has incurred certain organization and
start-up costs charged to expense in the financial statements, not
deductible for tax purposes totaling approximately $170,000 as of December
31, 1998. The tax benefit of the future deduction of these expenditures has
been offset in its entirety by a valuation allowance.
A-10
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 5 - Stock-based Compensation
The Corporation has two stock-based compensation plans. Under the
employees' Stock Compensation Plan ("Employee Plan"), the Corporation may
grant options to key employees for up to 25,000 shares of common stock.
Under the 1998 Founding Directors Stock Option Plan ("Director Plan"), the
Corporation may grant options for up to 75,000 shares of common stock.
Under both plans, there is a minimum vesting period of between one to three
years before the options may be exercised, and all options expire 10 years
after the date of their grant. Certain options under both plans vest based
on the achievement of various future financial and operational goals. All
such options vest 9.5 years after the date of grant regardless of
achievement of future goals. Under both plans, the exercise price of each
option equals the market price of the Corporation's common stock on the
date of grant.
The following table summarizes stock option transactions for both plans and
the related average exercise prices for the period from May 18, 1998
(inception) through December 31, 1998:
<TABLE>
Weighted
Average
Number of Excercise
Shares Price
<S> <C> <C>
Options outstanding - May 18, 1998 - $ -
Options granted 58,318 10.00
Options excercised - -
Options expired - -
------ ------
Options outstanding - December 31, 1998 58,318 $ 10.00
====== =======
</TABLE>
The following table shows summary information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
Stock Options Outstanding Stock Options Exercisable
- ----------------------------------------------------------------------- ------------------------------
Weighted
Range of Average Weighted Number of Weighted
Exercise Number of Remaining Average Shares Average
Prices Shares Contractual Life Exercise Price Exerciseable Exercise Price
- ----------------- ------------ ----------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.00 29,160 9.9 years $ 10.00 - $ -
10.00 29,158 9.9 years 10.00 - -
</TABLE>
A-11
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 5 - Stock-based Compensation (Continued)
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based
Compensation, but applies the intrinsic value method to account for its
plan. The Corporation has estimated fair value of the options at $3.81 and
$2.74 per share for contingent and non-contingent shares, respectively,
using a "minimum value" concept. The values were calculated using an
assumed interest rate of 6.5 percent and estimated lives of 7.5 years and
5.0 years for contingent and noncontingent shares, respectively. If the
Corporation had elected to recognize compensation costs for the plans based
on the fair value of awards at the grant date, net loss per share on a pro
forma basis would have been as follows (000s omitted except per share
data):
<TABLE>
As Pro
Reported Forma
<S> <C> <C>
Net loss $ (149) $ (153)
Net loss per common share (0.96) (0.99)
</TABLE>
Note 6 - Financial Instruments
Fair Values of Financial Instruments - The carrying amounts and estimated
fair values of the Corporation's financial instruments consist exclusively
of vault cash, due from banks and federal funds sold as of December 31,
1998. Due to the short-term nature of these assets, the carrying amount
approximates its fair value. Certain assets, the most significant being
premises and equipment, do not meet the definition of a financial
instrument and are excluded from this disclosure. Accordingly, this fair
value information is not intended to, and does not, represent Clarkston
Financial Corporation and subsidiary's underlying value.
A-12
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 7 - Regulatory Matters
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
discretionary actions by regulators that could have a direct material
effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework, the Corporation
and the Bank must meet specific capital guidelines that involve
quantitative measures of the Corporation and the Bank's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and
ratios, which are shown in the table below.
As of December 31, 1998, the Bank's primary regulator categorized the Bank
as well-capitalized under the regulatory framework. To be categorized as
well-capitalized, minimum capital amounts and ratios must be maintained as
shown in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's capital
category.
<TABLE>
For Capital
Adequacy To be Well-
Actual Purposes capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-weighted assets) $8,607 438.98% $157 8.00% $ 196 10.00%
Tier 1 capital (to risk-weighted assets) $8,607 438.98% $ 78 4.00% $ 118 6.00%
Tier 1 capital (to average assets) $8,607 319.13% $108 4.00% $ 135 5.00%
</TABLE>
Note 8 - Parent-only Condensed Financial Information
The condensed financial information that follows presents the financial
condition of Clarkston Financial Corporation (the "Parent Company"), along
with the results of its operations and its cash flows. The parent company
has recorded its investments in subsidiary at cost plus its share of the
undistributed earnings of the subsidiary since inception. The Parent
Company recognizes dividends from the subsidiary as revenue and
undistributed earnings of the subsidiaries as other income. The Parent
Company financial information should be read in conjunction with the
Corporation's consolidated financial statements.
A-13
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 8 - Parent-only Condensed Financial Information (Continued)
The condensed balance sheet at December 31, 1998 (with 000s omitted) is as
follows:
<TABLE>
<S> <C>
Assets
Cash on deposit with correspondent bank $ 31
Receivable from subsidiary bank 229
Investment in subsidiary bank 8,387
-------
Total assets $ 8,647
=======
Liabilities - Accounts payable $ 40
Stockholders' Equity
Common Stock 4,378
Captial Surplus 4,378
Retained Earnings (149)
-------
Total stockholders' equity 8,607
-------
Total liablities and stockholders' equity $ 8,647
=======
</TABLE>
The condensed statement of operations for the period from May 18, 1998
(inception) through December 31, 1998 (000s omitted) is as follows:
<TABLE>
<S> <C>
Opertaing Income - Interest income - Federal funds sold $ 21
Operating Expenses 60
------
Loss - Before income taxes and equity in undistributed
loss of subsidiary (39)
Provision for Income Taxes -
------
Loss Before income taxes and equity in undistributed
loss of subsidiary (39)
Equity in Undisturbed Loss of Subsidiary (110)
------
Net Loss $ (149)
======
</TABLE>
A-14
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1998
Note 8 - Parent-only Condensed Financial Information (Continued)
The condensed statement of cash flows for the period from May 18, 1998
(inception) through December 31, 1998 (000s omitted) is as follows:
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net Loss $ (149)
Adjustments to reconcile net loss to net cash from
operating activities:
Equity in undistributed income of subsidiary 110
Increase in receivable from subsidiary bank (229)
Increase in accounts payable 40
-------
Net cash used in operating activities (228)
Cash Flows from Investing Activities - Investment in common stock
of bank subsidiary (8,497)
Cash Flows from Financing Activities
Proceeds from related party notes payable 415
Repayment of related party notes payable (415)
Net Proceeds from public stock offering 8,756
-------
Net cash provided by financing activities 8,756
-------
Net Increase in Cash and Cash Equivalents 31
Cash and Cash Equivalents - May 18, 1998 -
-------
Cash and Cash Equivalents - December 31, 1998 $ 31
=======
</TABLE>
Note 9 - Earnings per Share
Earnings (loss) per share data is the amount of earnings (loss) for the
period available to each share of common stock outstanding during the
reporting period. All potential dilutive securities have been excluded from
the computation because their effect would be antidilutive. The calculation
of earnings (loss) per share for the period from May 18, 1998 (inception)
through December 31, 1998 is as follows:
<TABLE>
<S> <C>
Net loss $ (149)
Weighted average number of shares outstanding for period 155
Net loss per common share (0.96)
</TABLE>
A-15
<PAGE>
SHAREHOLDER INFORMATION
Notice of Annual Meeting
The Company's Annual Meeting of Shareholders will be held at 10:00 a.m. on
April 20, 1999, at Deer Lake Racquet Club, 6167 White Lake Road, Clarkston,
Michigan 48346.
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company serves as transfer agent and
registrar of the Company's Common Stock. Their address is 2 Broadway, 19th
Floor, New York, New York 10004 (telephone 212-509- 4000).
Market Makers
The Company had two market makers at December 31, 1998: Roney Capital
Markets and Hilliard Lyons.
EXECUTIVE OFFICERS AND DIRECTORS
Executive Officers:
David T. Harrison, President and Chief Executive Officer of the Company
and the Bank
Bruce H. McIntyre, Secretary of the Company and the Bank
James L. Richardson, Treasurer of the Company and Vice President and
Controller of the Bank
Directors:
Edwin L. Adler, Director of the Company and the Bank
Louis D. Beer, Director of the Company and the Bank
William J. Clark, Director of the Company and the Bank
Charles L. Fortinberry, Director of the Company and the Bank
David T. Harrison, Director of the Company and the Bank
Bruce H. McIntyre, Director of the Company and the Bank
Robert A. Olsen, Director of the Company and the Bank
Ted J. Simon, Director of the Bank
John H. Welker, Director of the Company and the Bank
::ODMA\PCDOCS\GRR\243572\1
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Clarkston State Bank - 100% owned
Incorporated as a Michigan Banking Corporation
15 South Main Street
Clarkston, Michigan 48346
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Clarkston Financial Corporation
We consent to the incorporation by reference in the registration statements on
Form S-8 (File No. 333-70297 and File No. 333-70299) of our report dated January
29, 1999, on our audit of the consolidated financial statements for the period
from May 18, 1998 (inception) through December 31, 1998, which report is
included in this Annual report on From 10-KSB.
March 25, 1999 /s/ PLANTE & MORAN, LLP
Troy, Michigan
::ODMA\PCDOCS\GRR\248685\1
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information from SEC Form 10-KSB and is
qualifed in its entirety by reference to such financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-18-1998
<PERIOD-END> DEC-31-1998
<CASH> 92,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,350,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 8,733,000
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 126,000
<LONG-TERM> 0
0
0
<COMMON> 8,756,000
<OTHER-SE> (149,000)
<TOTAL-LIABILITIES-AND-EQUITY> 8,733,000
<INTEREST-LOAN> 0
<INTEREST-INVEST> 35,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 4,000
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 180,000
<INCOME-PRETAX> (149,000)
<INCOME-PRE-EXTRAORDINARY> (149,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,000)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
