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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 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 1999 were $1,226,000. 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 $5.25 as of March 27, 2000, was
$3,785,617 (common stock, no par value). As of March 27, 2000, there were
outstanding 931,600 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 May 9, 2000 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.
The Company completed an 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 December 31, 1999, the Company had total assets of $33.3 million,
total deposits of $25.3 million, approximately 2,695 deposit accounts and
shareholders' equity of $7.8 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. The Bank has not sold
any residential mortgage loans as of December 31, 1999.
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 interest bearing and non-interest bearing checking 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 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, 1999, the Company had 10 full-time and 5 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
Selected Statistical Data for Clarkston Financial Corporation is presented
for 1999 in Management's Discussion and Analysis of Financial Condition and
Results of Operations. Clarkston State Bank commenced operations on January 4,
1999, and therefore the Guide 3 Statistical Disclosure by Bank Holding companies
would not be meaningful for 1998 and is not included.
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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.
Recent Legislation
Recently enacted federal legislation (the Gramm-Leach-Bliley Act of 1999)
eliminates many Federal and state law barriers to affiliations among banks and
other financial services providers. The legislation, which takes effect March
11, 2000, establishes a statutory framework pursuant to which full affiliations
can occur between banks and securities firms, insurance companies, and other
financial companies. The legislation provides some degree of flexibility in
structuring these new affiliations, although certain activities may only be
conducted through a holding company structure. The legislation preserves the
role of the Board of Governors of the Federal Reserve System as the umbrella
supervisor for holding companies, but incorporates a system of functional
regulation pursuant to which the various Federal and state financial supervisors
will continue to regulate the activities traditionally within their
jurisdictions. The legislation specifies that banks may not participate in the
new affiliations unless they are well-capitalized, well-managed and maintain a
rating under the Community Reinvestment Act of 1977 of at least "satisfactory"
among all affiliates.
At this time, the Company is unable to predict the impact this legislation
may have on the Company.
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The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, if the Commissioner deems the Bank's capital to be
impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank company, will require the prior written approval of the
Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment
leasing, securities brokerage, and consumer and commercial finance company
operations. As a result of recent amendments to the BHCA, well-capitalized and
well-managed bank holding companies may engage de novo in certain types of
non-banking activities without prior notice to, or approval of, the Federal
Reserve Board, provided that written notice of the new activity is 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
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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 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 securitie trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues 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 ban 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 o 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
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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.
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 durin the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of
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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 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
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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 unti an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the cumulative
dividends on preferred stock (should any such stock be issued and outstanding)
have been paid in full. The Bank's Articles of Incorporation do not authorize
the issuance of preferred stock and there are no current plans to seek such
authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment 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
-10-
<PAGE>
amount, that are not permissible for a national bank. Federal law, as
implemented by FDIC regulations, also prohibits FDIC-insured state banks and
their subsidiaries, subject to certain exceptions, from engaging as principal in
any activity that is not permitted for a national bank or its subsidiary
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC in accordance with
federal law. These restrictions are not currently expected to have a material
impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "IBBEA") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by IBBEA only if specifically
authorized by state law. The legislation allowed individual states to "opt-out"
of interstate branching authority by enacting appropriate legislation prior to
June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of th
assets) of an FDIC-insured bank, savings bank or savings and loan
-11-
<PAGE>
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.
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 1999 to a vote of
the Registrant's stockholders.
-12-
<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 are as follows for the
periods indicated:
<TABLE>
High Low
---- ---
1998
----
<S> <C> <C>
Fourth Quarter......................... $10.50 $8.75
1999
----
First Quarter.......................... $ 9.75 $7.00
Second Quarter......................... 9.50 7.13
Third Quarter.......................... 8.25 5.94
Fourth Quarter......................... 7.00 5.00
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions. Quotations do not
include intra-day highs and lows. On December 31, 1999, there were approximately
50 owners of record and approximately 1,1000 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Registrant's definitive Proxy Statement dated March 30, 2000, 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 30, 2000, 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.
-13-
<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 30, 2000,
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 30, 2000, 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 6, under the caption "Security Ownership of
Management" in the Registrant's definitive Proxy Statement dated March 30, 2000,
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 6, under the caption "Transactions Involving Management" in
the Registrant's definitive Proxy Statement dated March 30, 2000, and is
incorporated herein by reference and is filed as Exhibit 13 to this Form 10-KSB
Annual Report.
-14-
<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 Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the year ended
December 31, 1999, and the period from May 18, 1998
(inception) to December 31, 1998
Consolidated Statements of Changes in Stockholders' Equity for
the year ended December 31, 1999, and the period from
May 18, 1998 (inception) to December 31, 1998
Consolidated Statement of Cash Flows for the year ended
December 31, 1999, and 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.
-15-
<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 24, 2000.
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 24, 2000, 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 24, 2000
David T. Harrison, Principal Executive Officer and a Director
/s/ James L. Richardson March 24, 2000
James L. Richardson, Principal Financial and Accounting Officer
/s/ Edwin L. Adler March 24, 2000
Edwin L. Adler, Chairman of the Board and a Director
_____________________________ March 24, 2000
Louis D. Beer, Director
-16-
<PAGE>
/s/Charles L. Fortinberry March 24, 2000
Charles L. Fortinberry, Director
/s/ William J. Clark March 24, 2000
William J. Clark, Director
/s/ Bruce H. McIntyre March 24, 2000
Bruce H. McIntyre, Secretary and a Director
/s/ Robert A. Olsen March 24, 2000
Robert A. Olsen, Director
/s/ John H. Welker March 24, 2000
John H. Welker, Director
-17-
<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).
10.5 Lease between Clarkston State Bank and Foodtown, Inc.,
incorporated by reference to Exhibit 10 to the Clarkston
Financial Corporation Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1999.
-18-
<PAGE>
13 Proxy Statement to shareholders. This exhibit, except for
those portions expressly incorporated by reference in this
filing, is furnished for the 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
-19-
<PAGE>
Exhibit 13
[LOGO]
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
March 30, 2000
Dear Shareholder:
We invite you to attend the 2000 Annual Meeting of Shareholders. This
year's meeting will be held on Tuesday, May 9, 2000, 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 MAY 9, 2000
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, May 9, 2000 at 10:00 A.M., local time, for the following
purposes:
1. To elect three 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 15, 2000, 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 30, 2000
Clarkston, Michigan
/s/ Bruce H. McIntyre
Bruce H. McIntyre
Secretary
<PAGE>
Dated: March 30, 2000
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
------------------
PROXY STATEMENT
For the Annual Meeting of Shareholders
to be held May 9, 2000
------------------
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, May 9, 2000, at 10:00 A.M., local time.
The Annual Meeting is being held for the following purposes:
1. To elect three 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.
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 15, 2000, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were outstanding 936,600 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 15, 2000, no person was known to management to be the
beneficial owner of more than 5% of the Corporation's common stock other than
Edwin L. Adler (who owned 70,035 shares representing 8.0% of the outstanding
shares) and Marian Marvay (who owned 60,000 shares representing 6.4% of the
outstanding shares).
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. Three 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 Charles L. Fortinberry,
Bruce H. McIntyre and Robert A. Olsen, 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 2000 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 three 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 March
15, 2000, furnished to the Corporation by the directors. As of March 15, 2000,
there were 936,600 issued and outstanding shares of common stock of the
Corporation.
<TABLE>
Amount and
Year First Nature of Percent of
Became a Beneficial Common
Age Director Ownership(1) Stock (2)
Nominees for Election as Directors for Terms
Expiring in 2003
<S> <C> <C> <C> <C>
Charles L. Fortinberry 44 1998 7,381 0.8%
Bruce H. McIntyre (a)(b) 70 1998 12,895 1.4%
Robert A. Olsen (b)(c) 55 1998 24,545 2.6%
Directors Whose Terms Expire in 2001
Edwin L. Adler (a)(b) 62 1998 75,035 8.0%
David T. Harrison (b)(c) 57 1998 29,154 3.1%
John H. Welker (c) 60 1998 42,362 4.5%
Directors Whose Terms Expire in 2002
Louis D. Beer 55 1998 10,545 1.1%
William J. Clark 50 1998 8,613 0.5%
</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. The share ownership of the following
directors includes shares subject to options that are presently
exercisable: Mr. Harrison (654 shares); Mr. Adler (1,635 shares); Mr. Beer
(545 shares); Mr. Clark (163 shares); Mr. Fortinberr (381 shares); Mr.
McIntyre (545 shares); Mr. Olsen (545 shares); and Mr. Welker (1,362
shares).
(2) Calculated based on the number of shares outstanding plus 5,830 shares with
respect to which officers and directors have the right to acquire
beneficial ownership under stock options exercisable within 60 days.
3
<PAGE>
David T. Harrison is the Chief Executive Officer, President and a director
of the Corporation and the Bank. Mr. Harrison has 31 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 a real estate investor. Until 1999 Mr. Adler was president of
Food Town Supermarkets, a chain of five stores in the Clarkston, Michigan area,
where he had 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 12 meetings in 1999. 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. The Corporation did not grant any Stock
options to directors during 1999.
A total of 71,250 shares of Common Stock have been reserved for issuance
under the Corporation's 1998 Founding Directors' Stock Option Plan, and the
Corporation to date has granted to its directors and organizers options to
purchase an aggregate of 58,318 shares.
4
<PAGE>
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 during 1999 and 1998 (the Corporation's first full year of
operations). No other executive officers of the Corporation or the Bank received
annual compensation in excess of $100,000 during 1998 or 1999.
<TABLE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
Other All
Annual Securities Other
Compen Underlying Compen-
Name and Principal Position Year Salary (1) Sation($) Options(#) Sation
<S> <C> <C> <C> <C> <C>
David T. Harrison.................................... 1999 $ 100,000 $0 0 $0
President and 1998 $ 16,666 $0 6,915 $0
Chief Executive Officer
</TABLE>
(1) Mr. Harrison's annual salary for 1999 was $100,000. Mr. Harrison received
total salary compensation of $16,666 during 1998.
Option Grants in 1999. No stock options were granted during 1999 to the
Named Executive or to any other officers or directors of the Corporation.
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, 1999. The Named Executive did not exercise any stock
options during 1999.
<TABLE>
Number of Shares Subject to Value of Unexercised
Unexercised Options Held In-the-Money Options at
at December 31, 1999 December 31, 1999(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David T. Harrison...................... 654 6,261 $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, 1999
(when the closing price of the Corporation's Common Stock was $5.50 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, 1999. 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.
5
<PAGE>
Security Ownership of Management. The following table shows, as of March
15, 2000, 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.............................................. 29,154 3.1%
Chief Executive Officer
and President
All Executive Officers and Directors as a Group
(eight persons).............................................. 210,530 22.3%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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-affiliate 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.
Directors and officers of the Corporation and their associates were
customers of, and had transactions with, the Corporation's subsidiary Bank in
the ordinary course of business during 1999. 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.
6
<PAGE>
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 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 PROPOSALSC2001 ANNUAL MEETING
Any proposal of a shareholder intended to be presented for action at the
2001 annual meeting of the Corporation must be received by the Corporation at 15
South Main Street, Clarkston, Michigan 48346, not later than January 1, 2001, if
the shareholder wishes the proposal to be included in the Corporation's proxy
materials for that meeting.
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, 1999, 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 30, 2000. Bruce H. McIntyre
Secretary
7
<PAGE>
APPENDIX
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... A-2
Independent Auditors Report.................................................A-12
Consolidated Financial Statements
Consolidated Balance Sheet.............................................A-13
Consolidated Statement of Operations...................................A-14
Consolidated Statement of Changes in Shareholders' Equity..............A-15
Consolidated Statement of Cash Flows...................................A-16
Notes to Consolidated Financial Statements.............................A-17
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Corporation and the Bank.
This section should be read in conjunction with the consolidated financial
statements and the supplemental financial data contained elsewhere in this
Appendix.
Overview
Clarkston Financial Corporation (the "Company") is a Michigan corporation
incorporated on May 18, 1998. The Company is the bank holding company for
Clarkston State Bank (the "Bank"). The Bank commenced operations on January 4,
1999. The Bank is a Michigan chartered bank with depository accounts insured by
the Federal Deposit Insurance Corporation. The Bank provides a full range of
commercial and consumer banking services, primarily in Clarkston, Michigan and
the surrounding market area primarily located in north Oakland County, Michigan.
The Company's plan of operation has been to establish its management team
within the first year of its operations and to grow in a prudent manner,
primarily by providing prompt, quality service. Management believes that it has
been successful in establishing a management team that can administer the
Company's growth in such a manner.
On April 6, 1999, the Bank entered into an agreement with The State Bank of
Fenton, Michigan, to acquire certain assets and assume certain deposit
liabilities with respect to The State Bank's branch office located in the Farmer
Jack's grocery store at 6555 Sashabaw Road, Clarkston, Michigan. This
transaction was consummated on July 16, 1999 and added $1.8 million in deposits
to the Bank's totals. A deposit premium of 9.24% of deposits (as finally
adjusted) was paid to The State Bank for these deposits, along with $17,000 for
various fixed assets and equipment. The Bank leases the branch space from Farmer
Jack's at a rental rate of $2,750 per month under a lease which runs until July
2002.
Financial Condition
Summary. Total assets of the Corporation increased to $33.3 million at
December 31, 1999, from $8.7 million at December 31, 1998. The increase in
assets is primarily attributable to the Bank continuing to attract customer
deposits The fourth quarter of 1999 was the Company's fourth quarter of
operations, and the number of deposit accounts increased to approximately 2,695
accounts at December 31, 1999. Management attributes the strong growth in
deposits to quality customer service and the desir of customers to deal with a
local bank. The Company anticipates that the Bank's assets will continue to
increase during 2000, which will be the Bank's second full year of operations.
However, management does not believe that the rate of increase will be as rapid
as it was during the first year of operation.
A-2
<PAGE>
Cash and Cash Equivalents. Cash and cash equivalents, which include federal
funds sold and short-term investments, decreased $5.9 million, or 70% to $2.5
million at December 31, 1999, from $8.4 million at December 31, 1998. The
decrease is the result of the increase in the investment and loan portfolios
since December 31, 1998.
Securities. The Bank classifies as Held to Maturity all securities with a
maturity date of two years or more from date of purchase. All other securities
are classified as Available for Sale. Securities available for sale were $9.3
million at December 31, 1999, compared to $0 at December 31, 1998. The increase
is the result of the investment of customer deposits that have been obtained
since December 31, 1998, and also the purchase of securities using cash
generated by a reduction in federal funds sold. The securities may be sold to
meet the Bank's liquidity needs. The primary objective of the Company's
investing activities is to provide for the safety of the principal invested.
Secondary considerations include earnings, liquidity and overall exposure to
changes in interest rates. Excluding those holdings of the investment portfolio
in U.S. Treasury and U.S. Government Agency Securities, there were no
investments in securities of any one issuer which exceeded 10% of shareholders'
equity other than securities of the following issuers at the book value
indicated as of December 31, 1999: Patts Enterprises ($1,340,000), Kool Capital
($960,000), Tack Capital ($1,000,000), Cunat (Northfield) ($850,000) and JPV
Capital ($1,000,000).
<TABLE>
Maturing (Dollars in Thousands)
Due Within Five to Ten
One Year One to Five Years Years After Ten Years Totals
Amor- Gross Est. Avg. Est. Avg. Est. Avg. Est. Avg. Est. Avg.
tized unreal- Market Yield Market Yield Market Yield Market Yield Market Yield
Cost ized Value Value Value Value Value
Loss
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
U.S. Government
Agencies $1,313 $ 2 $1,311 6.02% $1,311 6.02%
Obligations of state and
Political subdivisions 1,198 10 499 6.45% $689 6.00% 1,188 6.19%
Corporate securities
Backed by letters of
Credit 6,130 0 6,130 5.96% 6,130 5.96%
Corporate 675 10 25 8.00% 640 5.62% 665 5.63%
Total Available for $9,316 $ 22 $7,965 6.01% $1,329 5.81% $9,294 5.98%
Sale
Hold To maturity;
U.S. Government
Agencies $9,507 $91 $6.948 6.63% $1,969 6.88% $499 6.40% $9,416 6.70%
Corporate 97 3 94 7.05% 94 7.05%
Total Hold to Maturity $9,604 $94 $7,042 6.63% $1,969 6.88% $499 6.88% $9,510 6.69%
</TABLE>
The Loan Portfolio. The majority of loans are made to businesses in the
form of commercial loans and real estate mortgages. Commercial loans account for
approximately 53% of the Bank's total loan portfolio. Residential mortgages
accounts for 22% of the portfolio, and consumer loans account for 25% of the
portfolio.
A-3
<PAGE>
Below is a schedule of the loan amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate Total
<S> <C> <C> <C>
Due within 3 months................................. $ 196 $1,911 $2,107
Due after 3 months within 1 year.................... 465 387 852
Due after one but within five years................. 5,246 1,059 6,305
Due after five years................................ 1,999 0 1,999
------- ------- -------
Total............................................... $7,906 $3,357 $11,263
Allowance for Loan Losses........................... 140
-------
Total Loans Receivable, Net......................... $11,123
=======
</TABLE>
Nonperforming Assets. There are no nonperforming loans as of December 31,
1999. Management believes that the allowance for loan losses is adequate for the
lending portfolio. Loan performance is reviewed regularly by external loan
review specialists, loan officers, and senior management. When reasonable doubt
exists concerning collectibility of interest or principal, the loan will be
placed in nonaccrual status. Any interest previously accrued but not collected
at that time will be reversed and charged against current earnings. As of
December 31, 1999 there were no other material interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies, which, if implemented, would have a material impact on the
Corporation's liquidity, capital or operations.
Loan Loss Experience (in thousands)
The following is a summary of loan balances at the end of the period and
their daily average balances, changes in the allowance for possible loan losses
arising from loans charged off and recoveries on loans previously charged off,
and additions to the allowance which have been expensed.
<TABLE>
December 31, 1999
<S> <C>
Loans:
Average daily balance of loans for the year....................... $ 4,707
Amount of loans outstanding at end of period...................... 11,263
Allowance for loan losses:
Balance at beginning of year...................................... 0
Additions to allowances charged to operations..................... 142
Net (recoveries) charge offs...................................... 2
---------
Balance at end of year....................................... $ 140
=========
Ratios:
Net (recoveries) charge offs to losses outstanding at year-end.... .02%
Allowance for loan losses to loans outstanding at year end........ 1.24%
</TABLE>
A-4
<PAGE>
Allocation of the Allowance for Loan Losses
The allowance for loan losses as of December 31, 1999, was $140,000
representing approximately 1.24% of gross loans outstanding. The Bank has not
experienced any material credit losses as of December 31, 1999. The allowance
for loan losses is maintained at a level management feels is adequate to absorb
losses inherent in the loan portfolio. Management prepares an evaluation which
is based upon a continuous review of the Bank's loan portfolio, the Bank's and
industry's historical loan loss experience, known and inherent risks included in
the loan portfolio, composition of loans, growth of the portfolio and current
economic conditions. The allowance for loan losses is analyzed quarterly by
management. In so doing, management assigns a portion of the allowance to the
entire portfolio by loan type and to specific credits that have been identified
as problem loans and reviews past loss experience. The local economy and
particular concentrations are considered, as well as a number of other factors.
<TABLE>
Year Ended
December 31, 1999
% of each
category
Allowance to total
Amount loans
<S> <C> <C>
Commercial.................................................... $74 .66%
Real estate mortgages......................................... 32 .28
Consumer...................................................... 34 .30
Unallocated................................................... 0 0
---- -----
Total.................................................... $140 1.24%
==== =====
</TABLE>
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type.
Deposits. Deposits are gathered from the communities the Bank serves.
Deposits increased to $25.3 million at December 31, 1999.
Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the
weighted average rates paid thereon.
<TABLE>
Average for the Year
1999
Amount Average Rate
<S> <C> <C>
Noninterest bearing demand........... $ 1,320 0%
MMDA/Savings......................... 5,940 3.16%
Time................................. 4,513 5.43%
-------- -----
Total Deposits.................... $ 11,773 3.67%
</TABLE>
A-5
<PAGE>
Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1999:
<TABLE>
Amount
<S> <C>
Three months or less.......................... $1,153
Over 3months through 1 year................... 2,484
Over 1 year................................... 202
--------
$3,839
========
</TABLE>
The Bank operates in a very competitive environment. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive with the market. Management also attempts to offer a wide
variety of products to meets the needs of its customers. The Bank offers
business and consumer checking accounts, regular and money market savings
accounts, and certificates having many options in their terms.
Premises and Equipment. Bank premises and equipment were $337,000 at
December 31, 1999.
Accumulated Deficit. As of December 31, 1999, the Company had an
accumulated deficit of $753,000. The accumulated deficit is primarily the result
of losses incurred in starting the bank and in the first year of operations,
including the impact of provisions for loan losses which totaled $142,000 in
1999.
A-6
<PAGE>
Results of Operations
Summary of Results. The Company incurred a net loss of $604,000 in 1999,
the Company's first year of operations. The retained deficit and net losses are
primarily the result of costs of opening the Bank's office, wages paid to
employees, and fees and expenses incurred in forming the Company and applying
for regulatory approvals. Significant ongoing additions to loan loss reserves
also contributed to net losses in 1999 as the Bank increased its loan portfolio.
Management believes that the expenditures made in 1998 and 1999 have created the
infrastructure and laid the foundation for future growth and profitability in
subsequent years.
Performance Ratios (in thousands, except per share data).
<TABLE>
Year Ended
December 31, 1999
<S> <C>
Net loss $(604)
Weighted average number of shares outstanding 941
Basic loss per share $(.64)
Earnings (Loss) ratios:
Return on average assets......................... (3.03%)
Return on average equity......................... (7.60%)
Average equity to average assets................. 39.9%
Dividend payout ratio............................ 0
</TABLE>
A-7
<PAGE>
Net Interest Income. The following schedule presents the average daily
balances, interest income and interest expense and average rates earned and paid
for the Corporation's major categories of assets, liabilities, and stockholders'
equity for the periods indicated:
<TABLE>
1999
Average Balance Interest Yield/Cost
<S> <C> <C> <C>
Assets:
Short term investments 3,208 168 5.23%
Securities:
Taxable 10,297 575 5.58%
Tax-exempt 633 37 5.85%
Loans 4,707 401 8.52%
Total earning assets/total interest income 8,845 1,181 6.26%
Cash and due from banks 601
Unrealized Gain (Loss) (22)
All other assets 563
Allowance for loan loss (60)
Total assets 19,950 1,181 5.92%
Liabilities and Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts 5,940 187 3.15%
Time 4,513 245 5.43%
Fed Funds Purchased
Other Borrowed Money
Total interest bearing liabilities/total interest expense 10,453 432 4.13%
Noninterest bearing deposits 1,320
All other liabilities 257
Stockholders' Equity:
Unrealized Holding Gain (Loss) (34)
Common Stock, Surplus, Retained Earnings 7,954
Total liabilities and stockholders' equity 19,950 432 2.17%
Interest spread 749
Net interest income -FTE 749
Net Interest Margin as a Percentage of
Average Earning Assets-FTE 18,846 749 3.97%
</TABLE>
A-8
<PAGE>
Composition of Average Earning Assets and Interest Paying Liabilities
<TABLE>
Year Ended
December 31, 1999
<S> <C> <C>
As a percent of average earning assets
Loans............................................. $ 4,707 25.0%
Other earning assets.............................. 14,138 75.0%
-------- ------
Average earning assets......................... $ 18,845 100.0%
========
As a percent of average interest bearing liabilities
Savings and DDA accounts.......................... 5,940 56.8%
Time deposits..................................... 4,513 43.2%
Other borrowings.................................. 0 ------
--------
Average interest bearing liabilities........... $ 10,453 100.0%
========
Earning asset ratio................................. 94.5%
</TABLE>
Allowance for Loan Losses. The Corporation had an allowance for loan losses
of approximately 1.24% of total loans at December 31, 1999. The provision for
loan losses for the year ended December 31, 1999 was $140,000. This amount was
provided as a result of the increase in the total loan portfolio. Management
considers it prudent during the first years of operations to provide for loan
losses at a level which is consistent with levels maintained by banks with
similar loan portfolios. Management will continue to monitor its loan loss
performance and adjust its loan loss reserve to more closely align itself to its
own history of loss experience.
Non-Interest Income. Non-interest income for the year ended December 31,
1999 was $45,000, consisting primarily of service fees on loan and deposit
accounts.
Non-Interest Expense. Non-interest expense for the year ended December 31,
1999, was $1.3 million. The main components of non-interest expense were
salaries and benefits which totaled $553,000 for the year ended December 31,
1999. Other significant components of non-interest expense consisted of
occupancy and equipment expenses, data processing fees, supplies and marketing
expenses.
Liquidity and Capital Resources
The Company obtained its initial equity capital in an initial public
offering of its common stock in November, 1998. The Company's plan of operation
for the next twelve months does not contemplate the need to raise additional
capital during that period. Management believes that its current capital and
liquidity will provide the Company with adequate capital to support its expected
level of deposit and loan growth and to otherwise meet its cash and capital
requirements for at least the next two or three years.
The Company's sources of liquidity include loan payments by borrowers,
maturity and sales of securities available for sale, growth of deposits and
deposit equivalents, federal funds sold, and the issuance of common stock.
Liquidity management involves the ability to meet the cash flow requirements of
the Company's customers. These customers may be either borrowers with credit
needs or depositors wanting to withdraw funds.
A-9
<PAGE>
Asset Liability Management and Market Risk Analysis
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. Management of interest rate sensitivity attempts to avoid widely
varying net interest margins and to achieve consistent net interest income
through periods of changing interest rates. Management monitors the Company's
exposure to interest rate changes using a GAP analysis.
Asset/Liability Gap Position (in thousands)
<TABLE>
1 to 3 4 to 12 1 to 5 Over 5 Total
Month Months Years Years
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Federal Funds sold $ 1,600 $ 1,600
Investment securities 6,130 $ 1,835 $ 8,452 $ 2,480 18,897
Loans - by maturity 2,107 852 6,305 1,999 11,263
--------- ------- ------- ------- -------
Total interest-earning assets 9,837 2,687 14,757 4,479 31,760
Interest Bearing Liabilities
DDA and Money Market 849 1,385 2,535 251 5,020
Savings accounts 370 926 4,628 247 6,171
Certificates of deposit 1,816 5,169 4,421 11,406
--------- ------- ------- ------- -------
Total interest-bearing Liabilities 3,035 7,480 11,584 498 22,597
Rate sensitivity gap and ratios:
Gap for period 6,802 (4,793) 3,173 3,981 9,163
Cumulative gap 6,802 2,009 5,182 9,163 9,163
Percentage of cumulative gap
to total assets 20.45% 6.04% 15.58% 27.54% 27.54%
</TABLE>
Other variables besides interest rate changes may have an impact on the
financial condition of the Bank including, but not limited to, growth of the
company, structure of the balance sheet, and economic and competitive factors.
A-10
<PAGE>
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.
The Company completed its Year 2000 assessment and remediation by December
31, 1999 after spending approximately $15,000 on the Year 2000 issue.
As of March 15, 2000, the Company had not experienced any material adverse
effects on its operations as a result of the Year 2000 issue. However, there can
be no assurance that the systems of other companies that interact with the
Company are sufficiently Year 2000 compliant.
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 limite to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
A-11
<PAGE>
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, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1999 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clarkston Financial Corporation and subsidiary as of December 31, 1999 and 1998
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1999 and for the period from May 18, 1998 (inception)
through December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Plante & Moran, LLP
Troy, Michigan
January 27, 2000
A-12
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
(000s omitted)
<TABLE>
December 31
-----------
1999 1998
Assets ---- ----
<S> <S> <C>
Cash and cash equivalents:
Cash and due from banks $ 867 $ 92
Federal funds sold 1,600 8,350
------ -----
Total cash and cash equivalents 2,467 8,442
Securities held to maturity (Note 2) 9,604 -
Securities available for sale (Note 2) 9,294 -
Loans (Note 3) 11,263 -
Allowance for possible loan losses (Note 4) (140) -
----- -----
Net loans 11,123 -
Bank premises and equipment (Note 5) 337 291
Interest receivable 256 -
Other assets 185 -
---- -----
Total assets $ 33,266 $ 8,733
======== =======
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 2,671 $ -
Interest-bearing (Note 6) 22,595 -
------- -----
Total deposits 25,266 -
Interest payable and other liabilities 163 126
---- ---
Total liabilities 25,429 126
Stockholders' Equity Common stock - No par value:
Authorized - 10,000,000 shares 4,306 4,378
Issued and outstanding - 931,600 shares and 951,000 shares at
December 31, 1999 and 1998, respectively
Capital surplus 4,306 4,378
Accumulated deficit (753) (149)
Accumulated other comprehensive loss (22) -
---- -----
Total stockholders' equity 7,837 8,607
------ -----
Total liabilities and stockholders' equity $ 33,266 $ 8,733
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
A-13
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Operations
(000s omitted, except per share data)
<TABLE>
May 18, 1998
(Inception)
Year Ended Through
December 31, December 31,
1999 1998
<S> <C> <C>
Interest Income
Interest and fees on loans $ 401 $ -
Interest on investment securities:
Taxable securities 575 -
Tax-exempt securities 37 -
Interest on federal funds sold 168 35
---- ----
Total interest income 1,181 35
Interest Expense
Deposits 432 -
Other - 4
---- ----
Total interest expense 432 4
---- ----
Net Interest Income 749 31
Provision for Possible Loan Losses (Note 4) 142 -
---- ----
Net Interest Income After Provision for Possible Loan Losses 607 31
Other Operating Income (Loss)
Service fees on loan and deposit accounts 81 -
Loss on sale of securities (48) -
Other 12 -
---- ----
Total other operating income 45 -
Other Operating Expenses
Salaries and employee benefits 553 68
Occupancy 219 32
Advertising 127 8
Outside processing 98 -
Professional fees 72 -
Supplies 35 -
Organizational costs - 56
Other 152 16
---- ----
Total other operating expenses 1,256 180
----- ---
Loss - Before income taxes (604) (149)
Provision for Income Taxes (Note 7) - -
------ -----
Net Loss $ (604) $ (149)
======== =======
Basic and Fully Diluted Loss per Share of Common Stock (Note 14) $ (0.64) $ (0.96)
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
A-14
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
(000s omitted, except per share data)
<TABLE>
Accumulated
Other Total
Common Capital Accumlated Comprehensive Stockholders'
Stock Surplus Deficit Loss Equity
<S> <C> <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 (loss) - Net loss - - (149) - (149)
---- ----- ----- ---- -----
Balance - December 31, 1998 4,378 4,378 (149) - 8,607
Purchase of outstanding common stock (72) (72) - - (144)
Comprehensive income (loss):
Net loss - - (604) - (604)
Change in unrealized loss on securities
available for sale - - - (22) (22)
----
Net comprehensive loss (626)
------- ------- ------- ------ -------
Balance - December 31, 1999 $ 4,306 $ 4,306 $ (753) $ (22) $ 7,837
======= ======= ======= ====== =======
</TABLE>
Book value per share is $8.41 and $9.05 at December 31, 1999 and 1998,
respectively.
See Notes to Consolidated Financial Statements.
A-15
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
(000s omitted)
<TABLE>
May 31, 1998
(Inception)
Year Ended Through
December 31, December 31,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (604) $ (149)
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 91 -
Provision for loan losses 142 -
Loss on sale of available-for-sale securities 48 -
Increase in interest receivable (256) -
Increase in other assets (195) -
Increase in interest payable and other liabilities 37 126
--- ---
Net cash used in operating activities (737) (23)
Cash Flows from Investing Activities
Purchase of securities available for sale (18,663) -
Proceeds from sale of available-for-sale securities 6,742 -
Proceeds from maturities of available-for-sale securities 2,557 -
Purchase of held-to-maturity investment securities (9,604) -
Premises and equipment expenditures (127) (291)
Net increase in loans (11,265) -
-------- ----
Net cash used in investing activities (30,360) (291)
Cash Flows from Financing Activities
Proceeds from related party notes payable - 415
Repayment of related party notes payable - (415)
Net increase in time deposits 11,406 -
Net increase in other deposits 13,860 -
Purchase of outstanding common stock (144) -
Net proceeds from public stock offering - 8,756
---- -----
Net cash provided by financing activities 25,122 8,756
------- -----
Net Increase (Decrease) in Cash and Cash Equivalents (5,975) 8,442
Cash and Cash Equivalents - Beginning of period 8,442 -
------ -----
Cash and Cash Equivalents - End of period $ 2,467 $ 8,442
======= =======
Supplemental Disclosure of Cash Flow Information - Cash paid for
Interest $ 354 $ 4
Taxes - -
</TABLE>
See Notes to Consolidated Financial Statements.
A-16
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 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 to Michigan communities in
Oakland County. Banking operations commenced on January 4, 1999.
Accordingly, certain of the footnotes contain single-year disclosures as
applicable.
Securities - Held-to-maturity securities are those securities that
management has the ability and positive intent to hold to maturity.
Held-to-maturity securities are recorded at cost, adjusted for amortization
of premium and accretion of discount.
Securities classified as available for sale are securities management had
identified that may be sold in the future to meet the bank's investment
objectives of quality, liquidity and yield and to avoid significant market
value deterioration. Available-for-sale securities are recorded at fair
value with unrealized gains and losses, net of income taxes, reported as a
component of other comprehensive income in stockholders' equity.
Gains or losses on the sale of securities are computed on the adjusted cost
of the specific security.
Loan Interest and Fee Income - Loans are generally reported at the
principal amount outstanding, net of unearned income. Nonrefundable loan
origination and certain direct loan origination costs are deferred and
included in interest income over the term of the related loan as a yield
adjustment.
A-17
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 1 - Summary of Significant Accounting Policies (Continued)
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discounted when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid interest accrued during the current year is reversed and all other
unpaid interest is charged to allowance for possible loan losses. Interest
accruals are generally resumed when all delinquent principal and interest
have been brought current or the loan becomes both well-secured and in the
process of collection.
Allowance for Possible Loan Losses - The allowance for possible loan losses
is maintained at a level considered by management to be adequate to absorb
losses inherent in existing loans and loan commitments. The adequacy of the
allowance is based on evaluations that take into consideration such factors
as prior loss experience, changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific
impaired or problem loans and commitments, and current an anticipated
economic conditions that may affect the borrower's ability to pay.
A portion of the total allowance for loan losses is related to impaired
loans. A loan is impaired when it is probable that the creditor will be
unable to collect all principal and interest amounts due according to the
established terms of the loan agreement. Loans that have been placed on
nonaccrual status or renegotiated in a troubled debt restructuring are
considered to be impaired. The allowance for loan losses for an impaired
loan is recorded at the amount by which the outstanding recorded principal
balance exceeds the fair value of the collateral and available cash flow on
the impaired loan. For a loan that is not collateral-dependent, the
allowance for loan losses is recorded at the amount by which the
outstanding recorded principal balance exceeds the current best estimate of
the future cash flows on the loan, discounted at the loan's effective
interest rate.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation, computed on the
straight-line method, is charged to operations over the estimated useful
lives of the properties. Leasehold improvements are amortized over the
terms of their respective leases or the estimated useful lives of the
improvements, whichever is shorter.
A-18
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 1 - Summary of Significant Accounting Policies (Continued)
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 for the period ended December 31,
1998, which were charged to expense as incurred. There were no organization
and preopening costs during 1999.
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.
Intangible Assets - Intangible assets totaling $182,000 consist entirely of
deposit intangibles acquired in a branch acquisition completed during 1999.
Amortization is calculated on a straight-line basis over the estimated
asset life of 8 years.
Earnings per Share - Basic earnings per share is based on the weighted
average number of shares outstanding during each period. Fully diluted
earnings per share are based on the weighted average shares outstanding,
assuming the exercise of the dilutive stock options. All potential dilutive
securities have been excluded from the computation in 1999 and 1998 because
their effect would be antidilutive.
Book Value per Share - Book value per share represents total stockholders'
equity divided by the total number of shares outstanding at the end of each
period.
Stock Options - The Corporation has two stock option plans (see Note 10).
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.
Other Comprehensive Income - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized
gains and losses on available-for-sale securities, are reported as a direct
adjustment to the equity section of the balance sheet. Such items, along
with net income, are considered components of comprehensive income. At
December 31, 1999, accumulated other comprehensive income consists solely
of unrealized losses on available-for-sale securities.
A-19
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 1 - Summary of Significant Accounting Policies (Continued)
Accounting for Derivative Instruments and Hedging Activities - In June
1998, Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued.
SFAS 133 requires all derivative instruments to be recorded on the balance
sheet at estimated fair value. Changes in the fair value of derivative
instruments are to be recorded each period either in current earnings or
other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, on the type of hedge
transaction. SFAS 133 is effective for the year 2000. The Corporation is
currently evaluating the impact of SFAS 133. It is expected that, because
the Corporation is not subject to any significant derivative contracts as
of December 31, 1999, implementation of the new standard will not have a
material impact on the Corporation's financial statements.
Reclassifications - Certain prior year amounts have been reclassified to
conform to current year presentation.
Note 2 - Securities
The amortized cost and estimated market value of securities are as follows
at December 31, 1999 (000s omitted):
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
<S> <C> <C> <C> <C>
Held-to-maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,507 $ - $ 91 $ 9,416
Corporate securities 97 - 3 94
------- ------- ----- -------
Total $ 9,604 $ - $ 94 $ 9,510
======= ======= ===== =======
Available-for-sale securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 1,313 $ - $ 2 $ 1,311
Obligations of state and political subdivisions 1,198 - 10 1,188
Corporate securities backed by
letters of credit 6,130 - - 6,130
Corporate securities 675 - 10 665
------- ------- ----- -------
Total $ 9,316 $ - $ 22 $ 9,294
======= ======= ===== =======
</TABLE>
A-20
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 2 - Securities (Continued)
The amortized cost and estimated market value of held-to-maturity
securities at December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties (000s omitted):
<TABLE>
Held to Maturity Available for Sale
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 7,969 $ 7,965
Due in one year through five years 7,124 7,042 1,347 1,329
Due after five years through ten years 1,981 1,969 - -
Due after ten years 499 499 - -
------- ------- ------- -------
Total $ 9,604 $ 9,510 $ 9,316 $ 9,294
======= ======= ======= =======
</TABLE>
Securities having a carrying value of $1,060,000 (market value of
$1,052,000) were pledged at December 31, 1999 to secure public deposits,
repurchase agreements and for other purposes required by law.
Proceeds from the sale of available-for-sale securities during 1999 totaled
$6,742,000. Gross gains of $0 and gross losses of $48,000 were recognized
on those sales in 1999. There were no sales of securities during 1998.
Note 3 - Loans
Major categories of loans included in the portfolio at December 31, 1999
are as follows (000s omitted):
<TABLE>
<S> <C>
Commercial $ 5,936
Residential mortgage 2,529
Consumer 2,798
--------
Total $ 11,263
========
</TABLE>
A-21
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 3 - Loans (Continued)
Certain directors of the Bank, including their associates, were loan
customers of the subsidiary bank during 1999. Such loans were made in the
ordinary course of business and do not involve more than a normal risk of
collectibility. The outstanding loan balance for these persons at December
31, 1999 totaled $1,146,000. During 1999, $1,167,000 of new loans were made
and repayments totaled $21,000. The total unused commitments for these
loans totaled $283,000 at December 31, 1999.
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 1999 are as follows (000s omitted):
<TABLE>
Within One One to Five After Five
Year Years Years Total
<S> <C> <C> <C> <C>
Commercial $ 2,494 $ 2,594 $ 848 $ 5,936
Mortgage 22 1,604 903 2,529
Consumer 443 2,107 248 2,798
------- -------- ------- --------
Total $ 2,959 $ 6,305 $ 1,999 $ 11,263
======= ======== ======= ========
Loans at fixed interest rates $ 661 $ 5,246 $ 1,999 $ 7,906
Loans at variable interest rates 2,298 1,059 - 3,357
------- -------- ------- --------
Total $ 2,959 $ 6,305 $ 1,999 $ 11,263
======= ======== ======= ========
</TABLE>
Note 4 - Allowance for Possible Loan Losses
A summary of the activity in the allowance for possible loan losses (ALL)
is as follows (000s omitted):
<TABLE>
<S> <C>
Balance - Beginning of year $ -
Provision charged to operations 142
Loan losses (2)
Loan loss recoveries -
-------
Balance - End of year $ 140
=======
As a percent of total loans 1.24%
=======
</TABLE>
The Bank considers all nonaccrual and reduced-rate loans (with the
exception of residential mortgages and consumer loans) to be impaired.
There are no such loans outstanding as of December 31, 1999.
A-22
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 5 - Bank Premises and Equipment
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Building improvements $ 87 $ -
Furniture and equipment 332 -
Additions in process - 291
------ ------
Total bank premises and equipment 419 291
Less accumulated depreciation 82 -
------ ------
Net carrying amount $ 337 $ 291
====== ======
</TABLE>
Note 6 - Deposits
The following is a summary of interest-bearing deposit accounts at December
31, 1999:
<TABLE>
1999
<S> <C>
Interest checking $ 3,111
Savings 6,170
Money market savings 1,908
Time:
$100,000 and over 3,839
Under $100,000 7,567
-------
Total interest-bearing deposits $22,595
=======
</TABLE>
The remaining maturities of certificates of deposit outstanding at December 31,
1999 are as follows (000s omitted):
<TABLE>
Under $100,000 $100,000 and Over
<S> <C> <C>
2000 $ 3,348 $ 3,637
2001 4,219 102
2002 - 100
------- -------
Total $ 7,567 $ 3,839
======= =======
</TABLE>
A-23
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 7 - Income Taxes
The Corporation and its bank subsidiary file a consolidated federal income
tax return. The Corporation has net operating loss carryforwards totaling
approximately $567,000 generated during the period from May 18, 1998
(inception) through December 31, 1999 that are available to reduce future
taxable income through the year ending December 31, 2019. The deferred tax
asset generated by that loss carryforward has been offset with a valuation
allowance since the Corporation does not have a history of earnings.
Deferred income taxes are provided for the temporary differences between
the financial reporting bases and the tax bases of the Corporation's assets
and liabilities. The source of such temporary differences consists
primarily of net operating loss carryforwards and the nondeductible portion
of loan loss reserve.
The temporary differences that comprise deferred tax assets and liabilities
at December 31, 1999 and 1998 are as follows:
<TABLE>
1999 1998
<S> <C> <C>
Deferred tax assets:
Bad debts $ 44 $ -
Net operating loss 193 -
Organization and preopening costs 33 50
Unrealized loss on securities available for sale 7 -
---- -----
Total deferred tax assets 277 50
Valuation allowance for deferred tax assets (274) (50)
Deferred tax liabilities:
Depreciation 2 -
Accretion on investment securities 1 -
---- -----
Total deferred tax liabilities 3 -
---- -----
Net deferred tax asset $ - $ -
==== =====
</TABLE>
A-24
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 8 - Related Parties
Notes Payable - Notes payable totaling $415,000 were advanced from and
repaid to the Corporation's organizers during the period ended December 31,
1999. 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.
Operating Lease - 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 certain of the members of
the Board of Directors of the Corporation and its bank subsidiary. The
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, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 60,495
2001 61,980
2002 61,980
2003 46,485
</TABLE>
Note 9 - Restriction on Dividends or Dividends from Banking Subsidiary
Unless prior regulatory approval is obtained, banking regulations limit the
amount of dividends that the Corporation's banking subsidiary can declare
to current year net profits, as defined in the Federal Reserve Act, and
retained net profits from prior years. There were no dividends declared or
paid by the Bank to the holding company during 1999 or 1998.
Note 10 - 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 23,750 shares of common stock.
Under the 1998 Founding Directors Stock Option Plan ("Director Plan"), the
Corporation may grant options for up to 71,250 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 (contingent options) under
both plans vest on an accelerated basis upon 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.
A-25
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 10 - Stock-based Compensation (Continued)
The following table summarizes stock option transactions for both plans and
the related average exercise prices for the years ended December 31, 1999
and 1998:
<TABLE>
1999 1998
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Options outstanding - Beginning of period 58,318 $ 10.00 - $ -
Options granted - - 58,318 10.00
Options exercised - - - -
Options expired - - - -
------ ------- ------ -------
Options outstanding - End of period 58,318 $ 10.00 58,318 $ 10.00
====== ======= ====== =======
</TABLE>
The following table shows summary information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
Stock Options Outstanding Stock Options Exercisable
----------------------------------------------------------------------- -----------------------------
Weighted
Average Weighted Number of Weighted
Range of Number of Remaining Average Shares Average
Exercise Prices Shares Contractual Life Exercise Price Exerciseable Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Contingent $ 10.00 29,160 8.9 years $ 10.00 - $ 10.00
Noncontingent 10.00 29,158 8.9 years 10.00 5,830 10.00
</TABLE>
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 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 noncontingent 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):
A-26
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
1999 1998
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net loss $ (604) $ (635) $ (149) $ (153)
Net loss per common share - Basic
and fully diluted (0.64) (0.67) (0.96) (0.99)
</TABLE>
Note 11 - Financial Instruments
Fair Values of Financial Instruments - The carrying amounts and estimated
fair values of the Corporation's financial instruments are presented below.
Certain assets, the most significant being premises and equipment, do not
meet the definition of a financial instrument and are excluded from this
disclosure. Similarly, deposit base and other customer relationship
intangibles are not considered financial instruments and are not discussed
below. Accordingly, this fair value information is not intended to, and
does not, represent the Corporation's underlying value. Many of the assets
and liabilities subject to the disclosure requirements are not actively
traded, requiring fair values to be estimated by management. These
estimates necessarily involve the use of judgment about a wide variety of
factors, including, but not limited to, relevancy of market prices of
comparable instruments, expected future cash flows and appropriate discount
rates.
<TABLE>
1999 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets
Cash and short-term investments $ 2,467 $ 2,467 $ 8,442 $ 8,442
Securities 18,898 18,804 - -
Loans 11,123 10,995 - -
Accrued interest receivable 256 256 - -
Liabilities
Noninterest-bearing deposits 2,671 2,671 - -
Interest-bearing deposits 22,595 22,531 - -
Accrued interest payable 78 78 - -
</TABLE>
The terms and short-term nature of certain assets and liabilities result in
their carrying amount approximating fair value. These include cash and due
from banks, interest-bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, customers' acceptance
liabilities, short-term borrowings and bank acceptance outstanding. The
following methods and assumptions were used by the Bank to estimate the
fair values of the remaining classes of financial instruments.
Securities are valued based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
A-27
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 11 - Financial Instruments (Continued)
For variable rate loans that reprice frequently, fair values are based on
carrying amounts, as adjusted for estimated credit losses. The fair values
for other loans are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
The fair values of demand deposits, savings accounts and money market
deposits are, by definition, equal to the amount payable on demand. The
fair values of fixed rate time deposits are estimated by discounting cash
flows using interest rates currently being offered on certificates with
similar maturities.
The fair value of loan commitments and standby letters of credit, valued on
the basis of fees currently charged for commitments for similar loan terms
to new borrowers with similar credit profiles, is not considered material.
Off-balance-sheet Risk - The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and financial guarantees. These instruments
involve, to varying degrees, elements of credit and interest rate risk that
are not recognized in the statement of financial condition.
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Fees from issuing these
commitments to extend credit are recognized over the period to maturity.
Since a portion of the commitments is expected to expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of customers.
Exposure to credit loss in the event of nonperformance by others, in the
form of standby letters of credit, is represented by the contractual
notional amount of those items. The Bank generally requires collateral to
support such financial instruments in excess of the contractual notional
amount of those instruments.
The Bank has outstanding loan origination commitments aggregating
$6,294,000 at December 31, 1999, on which loans of $2,393,000 were
outstanding at year end and included in the balance sheet. There were no
standby letters of credit outstanding as of December 31, 1999.
A-28
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 12 - Regulatory Matters
The Corporation and its bank subsidiary 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 financial statements. Under capital adequacy
guidelines and the regulatory framework, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices.
For 1999, since the Bank is considered a de novo or start-up bank, the
minimum total capital ratio is 8.0 percent. As of December 31, 1999, the
most recent notification from the FDIC categorized the bank as
well-capitalized under the regulatory framework. The regulations define
well-capitalized levels of total capital, Tier 1 and Tier 1 leverage as
10.0 percent, 6.0 percent and 5.0 percent, respectively. There are no
conditions or events since that notification that management believes have
changed the Bank's capital category.
<TABLE>
For Capital To be Well-
Actual Adequacy Puuposes capitalized
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital
(to risk-weighted assets) $ 7,799 32.31% $ 1,931 8.00% $ 2,414 10.00%
Tier I capital
(to risk-weighted assets) $ 7,659 38.73% $ 966 4.00% $ 1,448 6.00%
Tier I capital
(to average assets) $ 7,659 38.39% $ 798 4.00% $ 998 5.00%
As of December 31, 1998:
Total capital
(to risk-weighted assets) $ 8,607 438.98% $ 157 8.00% $ 196 10.00%
Tier I capital
(to risk-weighted assets) $ 8,607 438.98% $ 78 4.00% $ 118 6.00%
Tier I capital
(to average assets) $ 8,607 319.13% $ 108 4.00% $ 135 5.00%
</TABLE>
A-29
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 13 - 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.
The condensed balance sheet as of December 31, 1999 and 1998 (with 000s
omitted) is as follows:
<TABLE>
1999 1998
<S> <C> <C>
Assets
Cash on deposit with correspondent bank $ - $ 31
Receivable from subsidiary bank 27 229
Investment in subsidiary bank 7,832 8,387
------ ------
Total assets $ 7,859 $ 8,647
======= =======
Liabilities - Accounts payable $ - $ 40
Stockholders' Equity
Common stock 4,306 4,378
Capital surplus 4,306 4,378
Retained earnings (753) (149)
----- -----
Total stockholders' equity 7,859 8,607
------ -----
Total liabilities and stockholders' equity $ 7,859 $ 8,647
======= =======
</TABLE>
A-30
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 13 - Parent-only Condensed Financial Information (Continued)
The condensed statement of operations for the year ended December 31, 1999
and the period from May 18, 1998 (inception) to December 31, 1998 (000s
omitted) is as follows:
<TABLE>
1999 1998
<S> <C> <C>
Operating Income $ - $ 21
Operating Expenses 49 60
------ -----
Loss - Before income taxes and equity in undistributed
loss of subsidiary (49) (39)
Provision for Income Taxes - -
------ -----
Loss - Before equity in undistributed loss of subsidiary (49) (39)
Equity in Undistributed Loss of Subsidiary (555) (110)
------ ------
Net Loss $ (604) $ (149)
====== ======
</TABLE>
A-31
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 13 - Parent-only Condensed Financial Information (Continued)
The condensed statement of cash flows for the year ended December 31, 1999
and the period from May 18, 1998 (inception) to December 31, 1998 (000s
omitted) is as follows:
<TABLE>
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (604) $ (149)
Adjustments to reconcile net loss to net cash from
operating activities:
Equity in undistributed loss of subsidiary 555 110
Decrease (increase) in receivable from
subsidiary bank 202 (229)
Increase (decrease) in accounts payable (40) 40
------ -----
Net cash provided by (used in)
operating activities 113 (228)
Cash Flows from Investing Activities - Investment
in common stock of bank subsidiary - (8,497)
Cash Flows from Financing Activities
Payment for stock repurchase (144) -
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 (used in)
financing activities (144) 8,756
------ ------
Net Increase (Decrease) in Cash and Cash
Equivalents (31) 31
Cash and Cash Equivalents - Beginning of year 31 -
------ ------
Cash and Cash Equivalents - End of year $ - $ 31
====== ======
</TABLE>
A-32
<PAGE>
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 14 - 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 year ended December 31, 1999 and the
period from May 18, 1998 (inception) to December 31, 1998 is as follows:
<TABLE>
1999 1998
<S> <C> <C>
Net loss $ (604) $ (149)
Weighted average number of shares outstanding
for period 941 155
Net loss per common share $ (0.64) $ (0.96)
</TABLE>
A-33
<PAGE>
SHAREHOLDER INFORMATION
Notice of Annual Meeting
The Company's Annual Meeting of Shareholders will be held at 10:00 a.m. on
May 9, 2000, 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, 1999: Raymond James 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
Terry Wolf, 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
Heather Coats, Director of 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
Lee McNew, Director of the Bank
Robert A. Olsen, Director of the Company and the Bank
Dennis Ritter, Director of the Bank
Ken Rogers, Director of the Bank
Ted J. Simon, Director of the Bank
John H. Welker, Director of the Company and the Bank
<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
27, 2000, on our audit of the consolidated financial statements for the year
ended December 31, 1999, and for the period from May 18, 1998 (inception)
through December 31, 1998, which report is included in this Annual report on
form 10-KSB.
/s/ PLANTE & MORAN, LLP
March 28, 2000
Troy, Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information from SEC Form 10-KSB and is
qualified in its entirety by reference to such financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 867,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,294,000
<INVESTMENTS-CARRYING> 18,898,000
<INVESTMENTS-MARKET> 18,804,000
<LOANS> 11,263,000
<ALLOWANCE> (140,000)
<TOTAL-ASSETS> 33,266,000
<DEPOSITS> 25,266,000
<SHORT-TERM> 11,449,000
<LIABILITIES-OTHER> 163,000
<LONG-TERM> 0
0
0
<COMMON> 8,612,000
<OTHER-SE> (775,000)
<TOTAL-LIABILITIES-AND-EQUITY> 33,266,000
<INTEREST-LOAN> 401,000
<INTEREST-INVEST> 780,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,181,000
<INTEREST-DEPOSIT> 432,000
<INTEREST-EXPENSE> 432,000
<INTEREST-INCOME-NET> 749,000
<LOAN-LOSSES> 142,000
<SECURITIES-GAINS> (48,000)
<EXPENSE-OTHER> 1,256,000
<INCOME-PRETAX> (604,000)
<INCOME-PRE-EXTRAORDINARY> (604,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (604,000)
<EPS-BASIC> (.64)
<EPS-DILUTED> (.64)
<YIELD-ACTUAL> 3.97
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 2,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (140,000)
<ALLOWANCE-DOMESTIC> (140,000)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
