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FORM 10-K
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22461
O.A.K. FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2817345
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. __X__
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based on a per share price of $50.00 as of
February 26, 2001, was approximately $102,126,600 (common stock, $1.00 par
value). As of February 26 2001, there were outstanding 2,042,532 shares of the
Company's Common Stock ($1.00 par value).
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 26, 2001 are incorporated by reference into Part III of this
report.
Item 1. Business.
O.A.K. Financial Corporation (the "Company"), a Michigan business
corporation, is a one-bank holding company, which owns all of the outstanding
capital stock of Byron Center State Bank (the "Bank"), a Michigan banking
corporation. The Company was formed in 1988 for the purpose of acquiring all of
the common stock of the Bank in a shareholder approved reorganization, which
became effective October 13 of 1988.
The Bank was organized in 1921 as a Michigan banking corporation. The
principal executive offices of the Company and the Bank are located at 2445 84th
Street, S.W., Byron Center, Michigan 49315. The Bank's main office is located in
Byron Center and it serves other communities with branch offices in Allendale,
Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Jamestown, Moline and
Zeeland. The Bank's offices are located in Kent County, Ottawa County and the
northern portion of Allegan County.
The area in which the Bank's offices are located, which is basically south
and west of the city of Grand Rapids, has historically been rural in character
but now has a growing urban population as the Grand Rapids Metropolitan Area
expands south and west.
The Bank also owns a subsidiary, O.A.K. Financial Services, which offers
mutual fund products, securities brokerage services, retirement planning
services, investment management and advisory services. O.A.K. Financial Services
in turn owns Dornbush Insurance Agency which was acquired February 1, 1999.
Dornbush Insurance Agency sells property and casualty, life, disability and
long-term care insurance products. Beginning January 1, 2001 the Company and all
it's subsidiaries are provided staff resources through O.A.K. ELC, an employee
leasing company.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
personal banking services. These traditional consumer services include checking
accounts, savings accounts, certificates of deposit, commercial loans, real
estate loans, installment loans, traveler's checks, night depository, safe
deposit boxes and U.S. Savings Bonds. Currently, the Bank does not offer trust
services. The Bank maintains correspondent relationships with major banks in
Detroit and Grand Rapids, pursuant to which the Bank engages in federal funds
sale and purchase transactions, the clearance of checks and certain foreign
currency transactions. In addition, the Bank participates with other financial
institutions to fund certain large commercial loans which would exceed the
Bank's legal lending limit if made solely by the Bank.
The Bank's deposits are generated in the normal course of business, and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. No material portion of the Bank's loans is concentrated
within a single industry or group of related industries. As of December 31,
2000, the Bank's certificates of deposits of $100,000 or more constituted
approximately 29% of total deposit liabilities. The Bank's deposits originate
primarily from its service area, however, due to above average loan growth, the
Bank has recently relied more heavily on deposits from outside the Bank's market
area. The utilization of deposits outside the market area is a cost effective
source of funding when compared to increasing local market deposit rates.
The Bank's principal sources of revenue include interest on loans and
investments, fees from the sale of insurance plans, investment products, deposit
account fees, loan fees and other banking fees. As illustrated in the table
below, net interest income is the primary source of revenue for the Company. The
Company has set as a strategic objective to increase the percentage of revenue
produced from fee based sources in 2001.
% of total revenue: 2000 1999 1998
---------------------------------------------
Net interest revenue 83.1% 82.5% 83.3%
Fee based revenue 16.9% 17.5% 16.7%
Excluding security gains, fee based revenue increased 9.6% over 1999.
Service charges on deposits increased 67% in 2000 and 38% in 1999, reflecting
the banks ability to increase fee producing transaction income and improved
collection of assessed fees. As detailed in Table 6, gains from the sale of
loans declined significantly in 2000 and 1999 due to lower mortgage production,
resulting from higher interest rates.
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The Bank provides real estate, consumer and commercial loans to customers
in its market. Eighty percent (80%) of the Bank's loan portfolio is held in
fixed rate loans as of December 31, 2000. Most of these loans, approximately
86%, mature within five years of issuance. Approximately $39,590,000 of loans
(or 11% of the Bank's total loan portfolio) have fixed rates with maturities
exceeding five years. Of the Bank's interest-bearing deposits, 31.7% are held in
savings, NOW and MMDAs, all of which are variable rate products. Of the
$200,406,000 in certificates of deposit, approximately $162,164,000 mature
within one year, with the balance maturing within a five year period.
Requests to the Bank for credit are considered on the basis of
creditworthiness of each applicant, without consideration of race, color,
religion, national origin, sex, marital status, physical handicap, age, or the
receipt of income from public assistance programs. Consideration is given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved within the limits of each lending officer's authority. Loan requests in
excess of $1,000,000 are required to be presented to the Board of Directors or
the Executive Loan Committee for review and approval.
The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank regularly
sells fixed rate and conforming adjustable rate residential mortgages to the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). Those residential real
estate mortgage loan requests that do not meet Freddie Mac criteria are reviewed
by the Bank for approval and, if approved, are retained in the Bank's loan
portfolio. The Bank has the ability to purchase loans which meet its normal
credit standards.
The Bank's investment policy is considered by management to be generally
conservative. It provides for unlimited investment in U.S. government bonds,
with the maximum size of a single purchase limited to $3,000,000 and a maximum
maturity of fifteen years. Municipal bonds with an A rating or better may be
purchased to provide nontaxable income, with the maximum life of municipal bonds
limited to fifteen years. Nonrated bonds may be purchased from local communities
that are familiar to the Bank, with a maximum block size of a single purchase
limited to $250,000. Investments in states other than Michigan may not exceed
10% of the municipal portfolio, and investments in a single issuer may not
exceed 5% of equity capital. Mortgage backed securities, which are fully
collateralized by securities issued by government sponsored agencies, may be
purchased in block sizes of up to $3,000,000, provided the average life
expectancy does not exceed fifteen years.
In addition, certain collateralized mortgage obligations may be purchased
if their average life does not exceed five years. In addition to these
referenced thresholds affecting the acquisition of investment securities,
holdings of approved "non high-risk mortgage securities" are required to be
"stress tested" at least annually. The acquisition of "high-risk mortgage
securities" is prohibited. In no case may the Bank participate in such
activities as "gains trading," "when-issued" trading, "pair offs," corporate
settlement of government and agency securities, repositioning repurchase
agreements, and short sales. All securities dealers effecting transactions in
securities held or purchased by the Bank must be approved by the Bank's Board of
Directors.
Bank Competition
The Bank has eleven offices, one within each of the communities it serves.
See "Properties" below for more detail on these facilities. Within these
communities, its principal competitors are Comerica Bank, Bank One, Old Kent
Bank, Fifth-Third Bank, Flagstar Bank, National City Bank, Huntington Bank,
Michigan National Bank, Macatawa Bank, Mercantile Bank and United Bank of
Michigan. Each of these financial institutions, which are headquartered in
larger metropolitan areas, have significantly greater assets and financial
resources than the Company, with the exception of Macatawa Bank, Mercantile Bank
and United Bank of Michigan. Based on deposit information as of June 30, 2000,
the Bank holds approximately 2.3% of deposits in the Kent County market, 2.6% of
deposits in the Ottawa County market, and 8.1% of the deposits in the Allegan
County market. Information as to asset size of competitor financial institutions
is derived from publicly available reports filed by and with regulatory
agencies.
The financial services industry continues to be increasingly competitive.
Principal methods of competition include loan and deposit pricing, advertising
and marketing programs and the types and quality of services provided. The
deregulation of the financial service industry has led to increased competition
among banks and other financial institutions for a significant portion of funds
which traditionally, have been deposited with commercial banks. However, with
the enactment of recent legislation discussed under the caption "Supervision and
Regulation" and the increased use
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of internet banking, it is expected that competition may become more intense.
Management continues to evaluate the opportunities for the expansion of products
and services, such as trust services, and additional branching opportunities.
Bank mergers continue to re-shape the competitive landscape of the Company.
During 2000, Fifth-Third completed the acquisition of Ottawa Financial
Corporation, and its subsidiary Ameribank, and announced their intent to merge
with Old Kent Bank during the first-half of 2001. The mergers involving large
out-of-state banks have increased the competitive environment among community
banks, seeking to provide local bank service to West Michigan communities.
Growth of Bank
The following table sets forth certain financial information regarding the
growth of the Bank (and accordingly, excludes holding company data):
Balances as of December 31,
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(in thousands)
====================================================================================================================
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total Assets $456,490 $375,741 $299,882 $241,283 $216,755
Loans, Net of Unearned Income 347,760 288,330 222,133 168,953 45,069
Securities 73,437 62,818 54,734 59,988 57,302
Noninterest-Bearing Deposits 44,599 40,352 35,919 26,459 23,807
Interest-Bearing Deposits 293,593 215,160 181,789 158,244 146,442
Total Deposits 338,192 255,512 217,708 184,703 170,249
Stockholders' Equity 44,164 39,655 37,983 35,107 34,744
====================================================================================================================
The Main Office in Byron Center began in a small 600 square foot building
in 1921. It was expanded to 1,100 square feet in 1954. In 1965 the Bank moved
next door to a new 10,000 square foot building. In 1987 construction of another
new building of 30,000 square feet was begun. The Main Office moved to this
facility in 1988 and currently occupies this space. In 1999 the Main Office
added an 8,000 square foot addition to its facility. The Bank's first branch was
opened in 1963 when the bank refitted an old bank building in Jamestown. The
building was once a bank which closed during the Great Depression. The Bank's
next branch was opened in Cutlerville in 1972. The original 2,500 square foot
building was expanded with a 1,000 square foot addition in 1987. The Bank's Dorr
office was opened in 1986 at the site of the Hillcrest Mall. It is a 2,500
square foot facility with a 2,500 square foot storage basement. In 1991, the
Bank opened its branch in Hudsonville. The Bank maximized this site for future
expansion with a 10,000 square foot building. The Bank occupies 2,500 square
feet and plans to re-locate some of the insurance subsidiary staff to
approximately 2,550 square feet in early 2001. The remainder is rented, or
available to rent to various office use tenants. During 1995, the Bank purchased
and remodeled a former bank branch in Grandville. Also, the same year, the Bank
purchased from National City Bank a building and the deposits of its Moline
branch. Currently, the Bank operates three off-site ATMs.
The Bank opened three new branches in 1998 at: 10500 Chicago Drive in
Zeeland, Michigan, 6163 Lake Michigan Drive in Allendale, Michigan and 4601
134th Avenue, Suite C in Hamilton, Michigan. All of these facilities were
initially leased. In February 1999, the Kentwood, Michigan branch was opened for
business in a former bank building purchased from National City Bank. In August
1999, the Bank's Allendale branch was completed and opened at 5980 Lake Michigan
Drive in Allendale in a 10,000 square foot building owned by the Bank with the
Bank occupying 2,500 square feet and the remainder available to be used for
office tenant rental. In December 1999, the Bank moved its Hamilton Branch to a
newly completed 3,600 square foot facility owned by the Bank at 3614 M-40,
Hamilton, Michigan. In 2000, the bank completed construction and relocation of
the Zeeland staff from a temporary location in Zeeland to a new full service
banking facility.
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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 Office of Financial and Insurance Services
("Commissioner"), the Internal Revenue Service, and state taxing authorities.
The effect of such statutes, regulations and policies can be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services industry.
The GLB Act modifies many of the principal federal laws which regulate financial
institutions and sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers a more complete array of financial products and
services. Specifically, the GLB Act provides two new vehicles through which a
banking organization can engage in a variety of activities which, prior to the
Act, were not permitted. First, a bank holding company, meeting certain
requirements may elect to become a financial holding company ("FHC"). FHCs are
generally authorized to engage in all "financial activities" and, under certain
circumstances, to make equity investments in other companies (i.e., merchant
banking). In order to be eligible to elect to become a FHC, a bank holding
company and all of its depositary financial institutions must: (1) be "well
capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or
better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depositary financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a FHC or else the FHC will be subject to various restrictions. The
Federal Reserve Board will be the umbrella regulator of FHCs, but functional
regulation of a FHC's separately regulated subsidiaries will be conducted by
their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
-4-
The GLB Act also imposes several rules that are designed to protect the
privacy of the customers of financial institutions. For example, the GLB Act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Company and the Bank are also
subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a FHC.
The Company
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 holding
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,
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depending upon the activities in which the company to be acquired is engaged,
the size of the company to be acquired and the financial and managerial
condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among other
things, be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total average assets,
and (ii) a risk-based requirement expressed as a percentage of total
risk-weighted assets. The leverage capital requirement consists of a minimum
ratio of Tier 1 capital (which consists principally of shareholders' equity) to
total average assets of 3% for the most highly rated companies, with minimum
requirements of 4% to 5% for all others. The risk-based requirement consists of
a minimum ratio of total capital to total risk-weighted assets of 8%, of which
at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received by it in the form of dividends
paid by the Bank. Thus, the Company's ability to pay dividends to its
shareholders is indirectly limited by statutory restrictions on the Bank's
ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank -
Dividends." Further, the Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank holding
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
holding company's financial health, such as by borrowing. Additionally, the
Federal Reserve Board possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Similar enforcement powers over
the Bank are possessed by the FDIC. The "prompt corrective action" provisions of
federal law and regulation authorizes the Federal Reserve Board to restrict the
payment of dividends by the Company for an insured bank which fails to meet
specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution. The Company's Articles of Incorporation do not
authorize the issuance of preferred stock and there are no current plans to seek
such authorization.
-6-
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 assessment period of 2000, ranging from 0% of deposits for institutions in
the lowest risk category to .27% of deposits for institutions in the highest
risk category. The Bank's BIF insurance assessment based on risk classification
was 0% in 2000.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Michigan Assessments. Michigan banks are required to pay supervisory fees
to the Division of Financial Institutions ("DFI") of the Michigan Office of
Financial and Insurance Services ("OFIS") to fund the operations of the DFI. The
amount of supervisory fees paid by a bank is based upon the bank's total assets,
as reported to the DFI.
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. 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. The FICO assessments during 2000 were .02% of
deposits, or $53,385.
Capital Requirements. The Federal Reserve has established the following
minimum capital standards for state-chartered, FDIC-insured Federal Reserve
member banks, such as the Bank: a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total average assets of 3% for the most highly-rated
banks with minimum requirements of 4% to 5% for all others, and a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of shareholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, Federal Reserve 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.
-7-
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:
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
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
As of December 31, 2000, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the cumulative
dividends on preferred stock (should any such stock be issued and outstanding)
have been paid in full. The Bank's Articles of Incorporation do not authorize
the issuance of preferred stock and there are no current plans to seek such
authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment 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
-8-
loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal shareholders of the
Company, and to "related interests" of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon
which any person becoming a director or officer of the Company or one of its
subsidiaries or a principal shareholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the Federal Reserve).
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
-9-
bank, savings bank, or savings and loan association located in another state,
(ii) the acquisition by a Michigan-chartered bank of all or substantially all of
the assets of an FDIC-insured bank, savings bank or savings and loan association
located in another state, (iii) the consolidation of one or more
Michigan-chartered banks and FDIC-insured banks, savings banks or savings and
loan associations located in other states having laws permitting such
consolidation, with the resulting organization chartered by Michigan, (iv) the
establishment by a foreign bank, which has not previously designated any other
state as its home state under the International Banking Act of 1978, of branches
located in Michigan, and (v) the establishment or acquisition of branches in
Michigan by FDIC-insured banks located in other states, the District of Columbia
or U.S. territories or protectorates having laws permitting Michigan-chartered
banks to establish branches in such jurisdiction. Further, the Michigan Banking
Code permits, upon written notice to the Commissioner, (i) the acquisition by a
Michigan-chartered bank of one or more branches (not comprising all or
substantially all of the assets) of an FDIC-insured bank, savings bank or
savings and loan association located in another state, the District of Columbia,
or a U.S. territory or protectorate, (ii) the establishment by
Michigan-chartered banks of branches located in other states, the District of
Columbia, or U.S. territories or protectorates, and (iii) the consolidation of
one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states, with the resulting
organization chartered by one of such other states.
-10-
Item 2. Properties.
The Bank operates from eleven facilities, located in Kent, Ottawa and
Allegan Counties, Michigan. The Bank's main office is located at 2445 84th
Street, S.W., Byron Center, Michigan. This facility is a two story 30,000 square
foot building constructed in 1988 with an 8,000 square foot two story addition
completed in 1999 and is owned by the Bank. The Bank's branch offices in
Allendale, Dorr, Grand Rapids, Kentwood, Grandville, Hamilton, Hudsonville,
Jamestown, Moline and Zeeland are all single story facilities ranging in size
from 1,100 square feet to 10,000 square feet. The Bank owns its branch offices
in Allendale, Dorr, Grand Rapids, Kentwood, Grandville, Hamilton, Hudsonville,
Jamestown, Moline and Zeeland.
Item 3. Legal Proceedings.
Neither the Company nor the Bank is involved in any legal proceedings other
than routine litigation incidental to the ordinary conduct of the business of
the Bank, none of which would result in a material impact on the Company or the
Bank, individually or in the aggregate, in the event of an adverse outcome.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
-11-
Additional Item - Executive Officers
The Board of Directors appoints the executive officers of the Bank. There
are no family relationships among the officers and/or the directors of the
Company, or any arrangement or understanding between any officer and any other
person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the
Company's officers as of December 31, 2000:
Year Became
Name Age Position with Company an Officer
---- --- --------------------- ----------
John A. Van Singel 46 President, CEO and director of the Company and 1976
the Bank
John Peterson 52 Director of the Company and the Bank, 1983
Executive Vice President of the Bank
James A. Luyk(1) 38 Executive Vice President of the Bank 2000
Lois Smalligan 68 Director of the Company and the Bank, Vice 1975
President of the Bank
(1) During fiscal year 2000, James Luyk joined the Company as Executive
Vice-President and Chief Financial Officer. Mr. Luyk joined the Company
from Huntington National Bank, where he served most recently as
Regional Controller. Prior to Huntington, he served in various
financial positions with First Michigan Bank Corporation.
[INTENTIONALLY LEFT BLANK]
-12-
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
There is not an active market for the Company's Common Stock, and there is
no published information with respect to its market price. There are occasional
sales through brokers and direct sales by shareholders of which the Company's
management is aware. It is the understanding of the management of the Company
that over the last two years, the Company's Common Stock has sold at prices in
excess of book value. From January 1, 1999, through December 31, 2000, there
were, so far as the Company's management knows, 113 sales of shares of the
Company's Common Stock, involving a total of 37,950 shares. During this period,
the highest price known by management to be paid was $69.00 per share in the
second quarter of 2000, and the lowest price was $46.00 per share in the first
quarter of 1999. To the knowledge of management, the last sale of Common Stock
occurred on February 13, 2001, involving the sale of 100 shares at a price of
$51.00 per share.
The following table sets forth the range of high and low sales prices of
the Company's Common Stock during 1999 and through February 19, 2001, based on
information made available to the Company, as well as per share cash dividends
declared during those periods. Although management is not aware of any
transactions at higher or lower prices, there may have been transactions at
prices outside the ranges listed below:
Cash
----
Sales Prices Dividends Declared
------------ ------------------
====================================================================================================================
1999 High Low
---- ---- ---
First Quarter...................... $50.00 $46.00
Second Quarter..................... 60.00 50.00 $ .40
Third Quarter...................... 52.75 51.00
Fourth Quarter..................... 60.00 53.50 $ .42
2000 High Low
---- ---- ---
First Quarter...................... $60.00 $55.00
Second Quarter..................... 69.00 56.50 $ .42
Third Quarter...................... 65.00 55.00
Fourth Quarter..................... 61.00 52.00 $ .45
2001
----
First Quarter...................... $55.00 $50.00
====================================================================================================================
There are 4,000,000 shares of the Company's Common Stock authorized, of which
2,042,532 shares were issued and outstanding as of March 1, 2001. There were
approximately 1,069 shareholders of record, including trusts and shares jointly
owned, as of that date. Directors and officers of the Company hold options to
purchase a total of 20,234 shares of the Company's Common Stock. No other
warrants or options exist for the purchase of additional common stock of the
Company.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Cash dividends have been paid on a semi-annual
basis. In determining dividends, the Board of Directors considers the earnings,
capital requirements and financial condition of the Company and the Bank, along
with other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and the
Bank to pay dividends is subject to regulatory restrictions and requirements.
See the discussion under "Business-Supervision and Regulation" above.
-13-
Item 6. Selected Financial Data.
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------------------
================================================================================================================
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Interest income $ 33,172 $ 25,080 $ 21,134 $ 18,624 $ 17,502
Interest expense 16,491 10,528 8,916 7,693 7,181
Net interest income 16,681 14,552 12,218 10,931 10,321
Provision for loan losses 3,120 1,250 400 50 0
Noninterest income 3,385 3,088 2,455 1,476 1,062
Gains on sale of
available-for-sale securities 213 533 204 66 13
Noninterest expenses 12,057 10,603 7,334 5,782 5,169
Income before federal 5,102 6,320 7,144 6,641 6,227
income taxes
Net income 3,970 4,529 5,076 4,626 4,375
Per Share Data(1):
Net income $ 1.95 $ 2.23 $ 2.54 $ 2.30 $ 2.17
Cash dividends declared .87 .82 1.18 1.55 .47
Book Value 21.94 20.31 19.98 18.37 17.66
Weighted average shares
outstanding (2) 2,034 2,031 2,000 2,010 2,014
Balance Sheet Data at year end:
Total assets $ 457,004 $ 376,073 $ 301,494 $ 243,088 $ 217,527
Loans, net of unearned income 347,293 287,830 222,133 168,953 145,069
Allowance for loan losses 4,874 3,551 2,879 2,565 2,376
Deposits 338,153 254,166 217,291 184,700 170,221
Stockholders' equity 44,629 41,258 39,953 36,915 35,544
Ratios:
Tax equivalent net interest
income to average earning
assets 4.38% 4.89% 5.02% 5.24% 5.23%
Return on average equity 9.37 11.08 13.28 13.08 12.89
Return on average assets .96 1.38 1.90 2.03 2.03
Nonperforming loans to
total loans .77 1.90 0.26 0.14 0.82
Efficiency ratio 58.79 58.62 48.48 45.15 43.91
Dividend payout ratio 44.55 36.97 46.30 67.35 21.54
Equity to asset ratio 9.77 10.97 13.25 15.19 16.34
Tier 1 leverage ratio 10.52 12.64 14.74 15.03 15.97
================================================================================================================
(1) As restated for a 2-for-1 common stock split effected in the form of a
dividend in 1998.
(2) At year end in thousands.
-14-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following financial review presents management's discussion and
analysis of consolidated financial condition and results of operations during
the period of 1998 through 2000. The discussion should be read in conjunction
with the Company's consolidated financial statements and accompanying notes
thereto.
Summary
The Company has experienced exceptional growth in loans, deposits and
assets during the past three years. The Bank began to implement a plan to
leverage its capital more effectively by expanding into four new markets.
Additionally the Bank has increased the regular dividend in each of the five
years presented, as well as paying special dividends in 1997 and 1998. Future
payments of special dividends should not be expected.
In 1999 the Company purchased the Dornbush Insurance Agency to expand the
menu of financial products the Company could provide to customers and also
diversify the Company's revenue sources. To date, the insurance product revenue
is a relatively small part of the Company's total revenue, but is expected to
provide revenue growth opportunities in future years.
The recent expansion effort has temporarily suppressed earnings as the new
offices and staff have not reached optimal performance levels. Furthermore, the
recent loan growth combined with higher losses has required a significant
increase in the allowance for loan losses. Finally, the net interest margin has
come under pressure due to an inverted yield curve, overall higher interest
rates, and an increased reliance on more costly purchased funding.
Results of Operations
Table 1 Earnings Performance (in thousands, except per share data)
Year Ended December 31
---------------------------------------------
2000 1999 1998
---- ---- ----
Net income................................. $3,970 $4,529 $5,076
Per share of common stock................ $1.95 $2.23 $2.54
Earnings ratios:
Return on average assets................. .96% 1.38% 1.90%
Return on average equity................. 9.37% 11.08% 13.28%
Net income declined $559,000, or 12.3% in 2000. Most of the decrease is
attributable to an increase of $1,870,000 in the provision for loan losses.
Three factors contributed to the need for the increase in the provision for loan
losses. First, a substantial part of the increase was required as a result of
losses on loans originated by one relatively new loan officer who failed to
follow the Bank's established lending policies and procedures. The loan officer
has resigned from the Bank and controls have been strengthened to protect
against similar failures in the future. Second, during the year, greater than
normal loan growth contributed to the need for a larger than usual provision for
loan losses. Finally, an increase to the provision for loan losses was booked to
expense to increase the allowance for loan loss, to an amount that more
accurately reflects probable losses inherent in the portfolio.
Another contributing factor to the decline in profitability in 2000,
relates to both the increase in general interest rates during 1999 and 2000,
combined with a change in the slope of the yield curve from "normal" to
inverted. During much of 2000, it was more expensive for the bank to borrow
short-term funds than the yield on longer-term assets. As of early 2001, the
interest rate yield curve was still inverted, however, it has shifted toward a
"normal" slope.
-15-
The decline in earnings from 1998 to 1999 reflects the implementation of
the Bank's growth strategy. During the past three years, the Bank opened four
new branches and expanded its corporate operations. The start-up costs
associated with this strategy had an impact on short-term profitability. The
Bank is beginning recognize the benefits of this expansion phase.
[INTENTIONALLY LEFT BLANK]
-16-
Net Interest Income
The following schedule presents the average daily balances, interest income
(on a fully taxable equivalent basis) and interest expense and average rates
earned and paid for the Company's major categories of assets, liabilities, and
stockholders' equity for the periods indicated:
Table 2 - Interest Yields and Costs (in thousands)
Year ended December 31,
===============================================================================================================================
2000 1999 1998
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets
Fed. funds sold $ 387 $ 25 6.35% $ 1,079 $ 53 4.91% $ 375 $ 21 5.60%
Securities:
Taxable 44,770 3,017 6.74 36,551 2,280 6.23 38,030 2,410 6.34
Tax-exempt 23,491 1,601 6.82 20,885 1,514 7.25 19,442 1,497 7.70
Loans and leases(1)(2) 322,166 28,972 8.99 248,440 21,691 8.73 194,728 17,661 9.07
------- ------ ---- ------- ------ ---- ------- ------ ----
Total earning assets/total
interest income 390,814 33,615 8.59 306,955 25,538 8.32 252,575 21,589 8.55
Cash and due from banks 9,320 8,601 6.507
Unrealized gain (1,099) 212 1,085
All other assets 18,331 14,968 9,428
Allowance for loan loss (3,999) (2,936) (2,663)
------ ------ ------
Total assets $413,367 $327,800 $266,932
======== ======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $ 89,052 $ 2,518 2.83% $83,740 $2,153 2.57% $ 71,658 $ 2,027 2.83%
Time 159,326 9,370 5.88 120,114 6,215 5.17 98,870 5,547 5.61
Fed Funds Purchased 41,876 2,268 5.42 28,901 1,242 4.30 15,767 686 4.35
Other Borrowed Money 37,825 2,335 6.17 15,342 918 5.98 10,966 656 5.99
------ ----- ------ --- ------ ----
Total interest bearing
liabilities/ 328,079 16,491 5.03 248,097 10,528 4.25 197,261 8,916 4.52
------ ------ -----
total interest expense
Noninterest bearing deposits 40,109 36,452 29,324
All other liabilities 2,797 2,369 2,136
Stockholders' Equity:
Accumulated other comprehensive
income (725) 361 716
Common Stock, Paid-in Capital,
Retained Earnings 43,107 40,521 37,495
------ ------ ------
Total liabilities and
stockholders' equity $413,367 $327,800 $266,932
======== ======== ========
Interest spread $16,681 3.56% $14,552 4.07% $12,218 4.03%
------- ----- ------- ----- ------- -----
Net interest income-FTE $17,124 $15,010 $12,673
======= ======= =======
Net Interest Margin as a
Percentage of Average Earning 4.38% 4.89% 5.02%
===== ===== =====
Assets - FTE
===============================================================================================================================
(1) Nonaccrual loans and leases and loans held for sale have been included
in the average loans and lease balances.
(2) Interest on loans includes net origination fees totaling $165,791 in
2000, $190,720 in 1999 and $183,443 in 1998.
Net interest income is the principal source of income for the Corporation.
In the current year, tax equivalent net income increased $2,114,000 to
$17,124,000, a 14.1% increase from 1999. The increase was a result of the growth
of the Corporation's average earning assets which grew 27.3% from a year
earlier. The growth in earning assets was fueled by a 29.7% growth in average
loan balances. The Bank's investment portfolio grew 18.8% over the prior year.
-17-
Both the net interest spread and net interest margin were compressed in
2000 due to higher general interest rates and an increased reliance on purchased
funding. Purchased funding includes borrowings from the Federal Home Loan Bank
and brokered certificates from outside the Bank's market area. The Bank's
exceptional loan growth precipitated the need for purchased funding.
In 2000, the yield on total earning assets increased 27 basis points,
compared to a 78 basis point rise in the total interest bearing liabilities cost
of funds.
Management expects the declining trend in the fully tax equivalent (FTE)
net interest margin to continue because of fierce competition for deposits in
its local markets and shift of deposit funding sources from low cost funds to
higher cost funds. This is a result of high funding needs, increased local
competition, and increased sophistication of funds management by the Bank's
customers. Management expects the net interest margin of the Bank to benefit
from generally lower rates in 2001. However, there is no assurance rates will
decline or that the Bank's net interest margin will improve.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. In Table 2 and Table 3 the interest earned on investments and loans is
expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a federal income tax rate of 34%. Table 3
analyzes the reasons for the increases and decreases in interest income and
expense. The change in interest due to changes in both balance and rate has been
allocated between the factors in proportion to the relationship of the absolute
dollar amounts of change in each.
Table 3 - Change in Tax Equivalent Net Interest Income (in thousands)
2000 Compared to 1999 1999 Compared to 1998
------------------------------------- ------------------------------------
Amount of Amount of
Increase/(Decrease) Increase/(Decrease)
Due to Change In Due to Change In
------------------------------------- -------------------------------------
Net Net
Amount of Amount of
Average Increase/ Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ -------- ---------- ------ -------- ----------
Interest Income
Federal funds sold........... $ (44) $ 16 $ (28) $ 36 $ (4) $ 32
Securities:
Taxable................... 554 183 737 (92) (38) (130)
Tax Exempt................ 178 (91) 87 105 (88) 17
Loans........................ 6,628 653 7,281 4,689 (659) 4,030
----------- --------- --------- -------- --------- --------
Total interest income........ 7,316 761 8,077 4,738 (789) 3,949
----------- --------- --------- -------- --------- --------
Interest Expense
Interest bearing deposits:
Savings/NOW Accounts...... 150 215 365 310 (184) 126
Time...................... 2,306 849 3,155 1,098 (430) 668
Fed Funds Purchased....... 703 323 1,026 565 (9) 556
Other Borrowed Money...... 1,387 30 1,417 261 1 262
----------- --------- -------- ------- -------- --------
Total Interest Expense.... 4,546 1,417 5,963 2,234 (622) 1,612
----------- --------- --------- -------- -------- --------
Net interest income (FTE).... $ 2,770 $ (656) $ 2,114 $ 2,504 $ (167) $ 2,337
=========== ========= ========= ======== ========= ========
-18-
Interest from loans represents 86.2%, 84.9% and 81.8% of total interest
income for 2000, 1999 and 1998, respectively. Net interest income is strongly
influenced by results of the Bank's lending activities.
Total interest expense increased 56.6% from 1999 to 2000 and also increased
18.1% from 1998 to 1999: such variances are detailed in Table 3. Cost of funds
are influenced by economic conditions and activities of the Federal Reserve. The
Bank's asset/liability committee seeks to manage sources and uses of funds, and
to monitor the gap in maturities of these funds to maintain a steady net
interest margin in varying market conditions.
Table 4 - Composition of Average Earning Assets and Interest Paying Liabilities
Year ended December 31
-----------------------------------------
2000 1999 1998
---- ---- ----
As a percent of average earning assets
Loans..................................... 82% 81% 77%
Other earning assets...................... 18% 19% 23%
--- --- ---
Average earning assets................. 100% 100% 100%
Savings and NOW accounts.................. 27% 34% 36%
Time deposits............................. 49% 48% 50%
Other borrowings.......................... 24% 18% 14%
--- --- ---
Average interest bearing liabilities... 100% 100% 100%
Average earning asset ratio................. 95% 94% 95%
Table 4 illustrates the shift of earning assets into loans and the shift of
funding sources from lower cost savings and NOW accounts to higher costing time
and borrowed funds. The Bank has been able to maintain an earning asset ratio of
approximately 95% during the past three years. Non-earning assets include cash,
fixed assets and certain other assets.
Provision and Allowance for Loan Loss
The provision for loan losses reflects management's evaluation of the
adequacy of the allowance for loan losses. The allowance represents management's
assessment of probable losses inherent in the loan portfolio. The Bank allocates
the allowance to each loan category based on management's evaluation of relevant
risk factors such as past performance, collateral type, and economic conditions.
A specific reserve is determined for commercial loans over a specified amount
with certain risk characteristics.
Actual losses experienced in the future, could significantly vary from the
estimated allocation of the loan loss reserve. Changes in local and national
economic factors could significantly affect the adequacy of the allowance for
loan losses. While amounts are allocated to various portfolios as directed by
Statement of Financial Accounting Standards No. 114, the entire allowance for
loan losses is available to absorb losses from any portfolio segment.
The provision for loan losses charged to earnings was $3.1 million in 2000,
significantly higher than $1.3 million in 1999. The increase in the provision is
attributed to three sources. First, the Bank incurred a large loss on a single
commercial loan customer; second, a higher provision was required due to the
exceptional loan growth, and third a higher provision was recorded to increase
the allowance for loan loss ratio from 1.23% of total loans to 1.40% of total
loans. The increase in the loan loss ratio reflects the amount necessary for
probable losses inherent in the portfolio.
-19-
Table 5 - Noninterest Income (in thousands)
Year Ended December 31
----------------------------------------------------
2000 1999 1998
---- ---- ----
Service charges on deposit accounts ...... $ 1,353 $ 811 $ 588
Net gains on asset sales:
Loans................................... 344 600 1,367
Securities.............................. 213 533 204
Loan servicing fees....................... 153 148 184
Insurance premium revenue................. 961 1,043 0
Brokerage revenue......................... 310 322 166
Other..................................... 264 164 150
--- --- ---
Total noninterest income............. $3,598 $3,621 $2,659
====== ====== ======
Noninterest Income
Noninterest income consists of service charges on deposit accounts,
brokerage fees, insurance fees, service fees, gains on investment securities
available for sale and gains from loan sales to the Federal Home Loan Mortgage
Corporation (Freddie Mac) loans. The Bank retains the servicing rights on the
loans sold to Freddie Mac. Excluding the sale of assets, non-interest income
increased $553,000, or 22% over 1999. The increase was driven by a 67% increase
in service charges on deposits. This increase was a result of continued account
growth, fee increases and improved collection of certain assessed fees.
Non-interest income increased $962,000 or 36% for 1999 versus 1998. The increase
was due primarily to the February 1, 1999 merger with Dornbush Insurance Agency.
Table 6 Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
Year ended December 31
----------------------------------------------------
2000 1999 1998
---- ---- ----
Total Real estate mortgage loan
originations........................ $45,098 $65,668 $91,446
Real estate mortgage loan sales........... 20,224 44,764 72,075
Real estate mortgage loans servicing
rights sold........................... - - -
Net gains on the sale of real
estate mortgage loans................. 344 600 1,367
Net gains as a percent of real
estate mortgage loan sales............ 1.70% 1.34% 1.90%
Net gains on the sale of real estate mortgage loans totaled $344,000,
$600,000 and $1,367,000 in 2000, 1999 and 1998, respectively. The decreases are
a result of the less favorable interest rate environment which slowed new
mortgage loan business and caused a major slowdown in the refinance business.
The Bank sells the majority of its fixed-rate obligations. Such loans are sold
without recourse. The Bank retains servicing rights on real estate mortgage
loans sold.
-20-
Noninterest Expense
Table 7 - Noninterest Expense (in thousands)
Year ended December 31
--------------------------------------------------
2000 1999 1998
---- ---- ----
Salaries and employee benefits............ $ 6,650 $ 5,933 $3,918
Occupancy................................. 808 786 465
Equipment................................. 1,255 942 678
FDIC assessment........................... 53 32 28
Postage................................... 170 152 115
Printing and supplies..................... 321 286 268
Marketing................................. 334 233 213
Michigan Single Business Tax.............. 215 192 192
Other..................................... 2,251 2,047 1,457
----- ----- -----
Total noninterest expense............... $12,057 $10,603 $7,334
======= ======= ======
Non-interest expense increased $1,454,000 or 13.7% in 2000 compared to
1999. This follows a 44.6% increase in 1999 compared to 1998. The increases in
both 2000 and 1999 are generally the result of the overall expansion of the
Bank's business. The increase in 1999 includes the February 1,1999 merger with
Dornbush Insurance Agency which increased noninterest expenses $924,000 in 1999.
The increased level of non-interest expense is both a result of, and necessary
to achieve the Bank's aggressive growth plan. During the past two years the
Bank's assets have increased over 51%. The growth of non-interest expense
includes four new banking offices, expansion of the corporate offices, and
affiliation with the Dornbush Insurance Agency.
Provision for Income Taxes
The provision for income taxes was $1,132,000 in 2000 compared with
$1,791,000 in 1999, and $2,068,000 in 1998. The Company's effective tax rate
approximated 22% in 2000, 28% in 1999 and 29% in 1998. The decrease in the
effective tax rate for the year 2000 was a result of a valuation allowance that
started to reverse in 2000 and will continue through year 2001.
Financial Condition --Summary
During 2000, total assets increased 22% to $457,004,000, deposits increased
33% to $338,153,000 and loans increased 21% to $347,293,000. The Bank is
emphasizing relationship banking and has competed aggressively to obtain
deposits and loans. A discussion of changes in balance sheet amounts by major
categories follows:
The Loan Portfolio
The majority of loans are made to businesses in the form of commercial
loans and real estate mortgages. The Bank's consumer lending activity includes
direct consumer loans, indirect consumer loans, home equity loans, unsecured
lines of credit and residential real estate loans. Although most of the
residential real estate loans are sold to the Federal Home Loan Mortgage
Corporation("FHLMC"), the Bank retains servicing rights on substantially all
such loans sold. At December 31, 2000 and 1999, the Bank was servicing loans for
FHLMC totalling $147,566,000 and $147,956,000, respectively. The loan portfolio
mix at December 31,2000 consists of 48% commercial real estate, 15% residential
real estate, 19% commercial and 18% consumer installment. Consumer installment
loans as a percentage of the loan portfolio have increased recently as a result
of the Bank's indirect lending program, substantially all are vehicle loans.
-21-
Table 8 - Loan Portfolio Composition (in thousands)
Year ended December 31
------------------------------------------------------------------------
2000 1999 1998
Amount % Amount % Amount %
------ - ------ - ------ -
Commercial Real Estate.................... $ 165,978 48 $140,648 49 $ 114,248 51
Residential Real Estate................... 53,644 15 41,985 15 36,554 17
Other Commercial.......................... 64,511 19 58,793 20 40,825 18
Installment............................... 63,160 18 46,404 16 30,506 14
-------- -- ------ -- ------ --
Total loans............................ 347,293 100% 287,830 100% 222,133 100%
==== ==== ====
Less:
Allowance for Loan Losses................ (4,874) (3,551) (2,879)
------- ------- -------
Total Loans Receivable, Net............... $342,419 $284,279 $219,254
======== ======== ========
The lending policy of the Bank was written to reduce credit risk, enhance
earnings and guide the lending officers in making credit decisions. There are 8
levels in the loan authorization procedure for secured loans depending on the
dollar amount of the loan request.
$2,400,001 to $6,000,000 Board of Directors
$1,000,001 to $2,400,000 Executive Loan Committee
0 to $1,000,000 Loan Committee
0 to $ 300,000 Class 1 Lender
0 to $ 200,000 Class 2 Lender
0 to $ 75,000 Class 3 Lender
0 to $ 30,000 Class 4 Lender
Student Loans Only Class 5 Lender
The Board of Directors of the Bank approves the loan authority for each
lender and has appointed a Chief Lending Officer who is responsible for the
supervision of the lending activities of the Bank. The Board has appointed a
loan review officer who monitors the credit quality of the loan portfolio
independent of the loan approval process. Periodic reviews are submitted by the
loan review officer to the Chief Lending Officer and these reviews are submitted
to the Audit/Compliance Committee on a quarterly basis. The Bank has no foreign
loans and there were no concentrations greater than 10% of total loans that are
not disclosed as a separate category in Table 8.
Loan quality is demonstrated by the ratios of non-performing loans and
charge offs as a percentage of the loan portfolio. As referenced in more detail
in Table 10 below, the Bank's ratio of non-performing loans to total loans at
December 31, 2000 was .77% compared to 1.90% in 1999. The December 31, 1999
ratio was significantly higher than the historical average and the Bank does not
expect this high of a percentage in the future.
-22-
Table 9 Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of
December 31, 2000 which, based on scheduled maturity dates, are due in the
periods indicated.
Maturing
--------------------------------------------------------------------------
(in thousands of dollars)
After one but
Within one Year within five years After five years Total
--------------- ----------------- ---------------- -----
Residential Real Estate........... $15,606 $22,831 $ 15,207 $ 53,644
Installment....................... 2,736 44,874 15,550 63,160
Commercial Real Estate............ 32,561 117,265 16,152 165,978
Other Commercial.................. 36,001 26,320 2,190 64,511
------ ------ ----- ------
Totals..................... $86,904 $211,290 $49,099 347,293
======= ======== =======
Allowance for Loan Losses......... (4,874)
-------
Total Loans Receivable, Net....... $342,419
========
Below is a schedule of the amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
Interest Sensitivity
------------------------------------------------------
(in thousands of dollars)
Fixed Rate Variable Rate Total
---------- ------------- -----
Due within 3 months................................. $14,376 $70,437 $ 84,813
Due after 3 months within 1 year.................... 12,992 - 12,992
Due after one but within five years................. 209,898 - 209,898
Due after five years................................ 39,590 - 39,590
------ ------- --------
Total............................................... $276,856 $70,437 347,293
======== =======
Allowance for loan losses........................... (4,874)
---------
Total loans receivable, net......................... $342,419
=========
Table 10 - Nonperforming Assets (in thousands)
December 31
------------------------------------------
2000 1999 1998
---- ---- ----
Nonaccrual loans............................................. $2,535 $2,471 $353
90 days or more past due & still accruing.................... 151 3,003 217
--- ----- ---
Total nonperforming loans................................ 2,686 5,474 570
Other real estate............................................ - - 116
------ ------ ---
Total nonperforming assets............................... $2,686 $5,474 $686
====== ====== ====
Nonperforming loans as a percent of total loans.............. .77% 1.90% 0.26%
Nonperforming assets as a percent of total loans............. .77% 1.90% 0.31%
Allowance for loan losses as a % of non-performing loans...... 181% 65% 505%
-23-
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, collateral for loans which have been in-substance foreclosed, and
other real estate which has been acquired primarily through foreclosure and is
awaiting disposition. Loans, including loans considered impaired under SFAS No.
118, are generally placed on a nonaccrual basis when principal or interest is
past due 90 days or more and when, in the opinion of management, full collection
of principal and interest is unlikely.
The allowance for loan losses is 181% of the total non-performing loans as
of December 31, 2000. Management believes that the allowance for loan losses is
adequate for these loans and the remainder of the lending portfolio. As of
December 31, 2000 there were no other interest bearing assets which required
classification. Management is not aware of any recommendations by regulatory
agencies, which if implemented, would have a material impact on the Company's
liquidity, capital or results of operations.
The table below presents the interest income that would have been earned on
non-performing loans outstanding at December 31, 2000, 1999 and 1998 had those
loans been accruing interest in accordance with the original terms of the loan
agreement (pro forma interest) and the amount of interest income actually
included in net interest income for those years.
Table 11 - Foregone Interest on Non-Performing Loans
For the Year Ended December 31
(in thousands)
---------------------------------------------------------------------------------------------
2000 1999 1998
Non-accrual Restructured Non-accrual Restructured Non-accrual Restructured
Pro forma interest $ 284 $ 372 $ 139 $ - $ 33 $ -
Interest earned 146 372 108 - 32 -
----- ----- ----- ----- ----- -----
Foregone interest income $ 138 $ - $ 31 $ - $ 1 $ -
===== ===== ===== ===== ===== =====
Table 12 - Loan Loss Experience (in thousands)
The following is a summary of loan balances (excluding loans held for sale)
at the end of each period and their daily average balances, changes in the
allowance for the loan losses arising from loans charged off and recoveries on
loans previously charged off, and additions to the allowance which have been
expensed.
For the year ended December 31, 2000, both the dollar amount of loans
charged off as uncollectable, and the amount charged against earnings as
additions to the allowance for loan losses increased substantially. The increase
in loans charged off as uncollectable was significantly affected by losses on
commercial loans. A significant portion of the commercial loan losses resulted
from loans originated by a relatively new loan officer who failed to follow the
Bank's established lending policies and procedures. The loan officer has
resigned from the Bank and controls have been strengthened to reduce the
likelihood of similar losses in the future. The provision for loan losses
charged against earnings increased $1,870,000, or approximately 150% over 1999.
This significant increase is the result of the commercial loan losses referenced
above, the strong loan growth in 2000, and an additional provision to increase
the level of the allowance for loan losses from 1.23% to 1.40% of total loan
balances. The higher level of the allowance reflects probable losses inherent in
the portfolio. The average daily balance of loans increased approximately 65%
during the past two years. Starting in the 2nd quarter of 1998 the bank
aggressively targeted the indirect consumer loan market, primarily auto loans.
The program has increased the consumer loan portfolio balance substantially and
has raised the net charge off percentage. Consumer loan net charge-offs declined
$71,000 in 2000 compared to 1999. Net charge-offs in the Real Estate portfolio
continue to be very low.
-24-
Year Ended December 31
---------------------------------------------
2000 1999 1998
---- ---- ----
Loans:
Average daily balance of loans for the year................. $321,579 $245,349 $190,472
Amount of loans outstanding at end of period................ $347,293 $287,830 $222,133
Allowance for loan losses
Balance at beginning of year................................ $3,551 $2,879 $2,565
Loans charged off:
Real estate............................................... 1 - -
Commercial................................................ 1,400 45 90
Consumer.................................................. 642 625 117
-------- -------- --------
Total charge-offs..................................... 2,043 670 207
Recoveries of loans previously charged off
Real estate............................................... - - -
Commercial................................................ 90 24 33
Consumer.................................................. 156 68 88
-------- -------- --------
Total recoveries...................................... 246 92 121
-------- -------- --------
Net charge-offs............................................. (1,797) (578) (86)
Additions to allowance charged to operations................ 3,120 1,250 400
-------- -------- --------
Balance at end of year................................ $4,874 $3,551 $ 2,879
======== ======== ========
Ratios:
Net charge-offs as a percent of average loans............... .56% .24% .05%
Allowance for loan losses to loans outstanding at year end.. 1.40% 1.23% 1.30%
Table 13 - Allocation of the Allowance for Loan Losses
The allowance for loan losses is analyzed quarterly by management. In so
doing, management assigns a portion of the allowance to specific credits that
have been identified as problem loans and reviews past loss experience. The
local economy and particular concentrations are considered, as well as a number
of other factors.
Year ended December 31
-----------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
% of each % of each % of each
category category category
Allowance to total Allowance to total Allowance to total
Amount loans Amount loans Amount loans
--------- ------- -------- -------- -------- -------
Commercial................. $3,849 66.4% $2,723 69.3% $2,175 69.8%
Real estate mortgages...... 107 15.4 151 14.6 310 16.5
Consumer................... 863 18.2 637 16.1 378 13.7
Unallocated................ 55 .0 40 .0 16 .0
------ ----- ------ ----- ------ -----
Total.................... $4,874 100.0% $3,551 100.0% $2,879 100.0%
====== ====== ====== ====== ====== ======
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type. Management has provided additions to the allowance for loan losses
to support the 2000 loan growth and to replenish the allowance for unusually
high charge-offs of commercial loans. Investment Securities
-25-
Securities are purchased and classified as "available-for-sale." These
securities may be sold to meet the Bank's liquidity needs or to improve the
quality of the investment portfolio. The primary objective of the Company's
investing activities is to provide for safety of the principal invested.
Secondary considerations include earnings, liquidity, and the overall exposure
to changes in interest rates. The Company's net holdings of investment
securities increased $10.8 million in 2000 and increased $7.3 million in 1999.
The mortgage backed securities are issues of the Federal Home Loan Mortgage
Corporation, GNMA and FNMA which pay monthly amortized principal and interest
payments.
Table 14 - Available-for-Sale Securities Portfolio
Year Ended December 31
2000 1999 1998
---- ---- ----
U. S. Treasury and U.S. Government Agencies.................. $47,784 $37,578 $32,453
State and political subdivisions............................. 25,615 23,201 21,007
Other........................................................ 1,047 871 2,887
----- ------- -----
$74,446 $61,650 $56,347
======= ======= =======
Excluding those holdings of the investment portfolio in U.S. Treasury and
U.S. Government Agency Securities, there were no investments in securities of
any one issuer which exceeded 10% of shareholders' equity.
Table 15 - Schedule of Maturities of Investment Securities and Weighted Average
Yields
The following is a schedule of maturities and their weighted average yield
of each category of investment securities as of December 31, 2000. The weighted
average interest rates have been computed on a fully taxable equivalent basis,
based on amortized cost. The rates shown on securities issued by states and
political subdivisions are stated on a taxable equivalent basis using a 34% tax
rate.
Maturing
-------------------------------------------------------------------------------------------------
(Dollars n Thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
Fair Avg. Fair Avg. Fair Avg. Fair Avg. Fair Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Available for Sale:
U.S. Treasury
and U.S.
Government
Agencies....... $ 95 6.61% $27,589 7.07% $15,260 6.95% $4,840 7.46% $ - -
States and
Political
Subdivisions... 1,274 8.81% 6,926 7.81% 13,217 7.40% 4,198 7.60% - -
Other Securities - - - - - - - - 1,047 3.16%
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
$1,369 8.66% $34,515 7.14% $28,477 7.16% $9,038 7.53% $1,047 3.16%
====== ===== ======= ===== ======= ===== ====== ===== ====== =====
Deposits
Deposits are gathered from the communities the Bank serves. Recently the
Bank has emphasized relationship marketing to reinforce the core nature of its
deposit base.
-26-
Table 16 indicates a relatively stable base of deposits spread over the
Bank's product lines. Average total deposits grew 20% from 1999 to 2000 and grew
20% from 1998 to 1999. The increase in 2000 resulted primarily from gaining
market share in the Bank's market areas and the use of brokered time deposits
outside the banks market area.
The Bank is continually enhancing its deposit products. In addition to
relationship pricing the Bank has instituted telephone and personal computer
banking as new alternatives to customer access. The Bank operates thirteen
automated teller machines, three of which are off-site.
Table 16 - Average Daily Deposits (in thousands)
Average for the Year
-------------------------------------------------------------------------------------
2000 1999 1998
Amount % of Assets Amount % of Assets Amount % of Assets
------ ----------- ----- ----------- ------ -----------
Noninterest bearing demand........ $40,109 10% $36,452 11% $ 29,324 11%
NOW accounts...................... 21,554 5 18,038 6 15,352 6
MMDA/Savings ..................... 67,498 16 65,702 20 56,306 21
Time - negotiable brokered........ 18,241 5 - - - -
Time.............................. 141,085 34 120,114 37 98,870 37
------- -- ------- --- ------ ---
Total Deposits................. $288,487 70% $240,306 73% $199,852 75%
======== === ======== === ======== ===
The recent surge in loan growth and lending opportunities has resulted in
the Banks' need to rely on funding sources outside its local market. The use of
such funding sources is monitored very closely to provide the lowest cost
funding available to the Bank. As illustrated in Table 17, brokered time
deposits are more expensive than traditional sources of funding.
Table 17 - Average Deposit Balances
The following table sets forth the average deposit balances and the
weighted average rates paid thereon:
Average for the Year
-------------------------------------------------------------------------------
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Noninterest bearing demand......... $40,109 $36,452 $ 29,324
NOW Accounts....................... 21,554 2.41% 18,038 2.19% 15,352 2.45%
MMDA/Savings....................... 67,498 2.96 65,702 2.68 56,306
2.93
Time - negotiable brokered......... 18,241 6.91 - - - -
Time............................... 141,085 5.75 120,114 5.17 98,870 5.61
------- ------- ------- ------ ------ ----
Total Deposits.................. $288,487 4.12% $240,306 3.48% $199,852 3.79%
======== ======== ========
At December 31,2000, the Bank had approximately $52,915,000 in brokered time
deposits.
Table 18 - Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 2000:
Amount
------
Three months or less........................... $46,733
Over 3 months through 6 months................. 34,533
Over 6 months through 1 year................... 6,816
Over 1 year.................................... 11,196
------
$99,278
-27-
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 meet the needs of its customers. The Bank offers business
and consumer checking accounts, regular and money market savings accounts, and
certificates of deposit having many options in their terms.
Market Risk
The Bank complements its stable core deposit base with alternate sources of
funds, which includes advances from the Federal Home Loan Bank, and jumbo
certificates of deposit from outside its market area. Management evaluates the
funding needs and makes a decision based on current interest rates and terms
whether to fund internally or from alternate sources. To date, the Bank has not
employed the use of derivative financial instruments in managing the risk of
changes in interest rates.
Capital
A financial institution's capital ratio is looked upon by the regulators
and the public as an indication of its soundness. Table 19 summarizes the
Company's regulatory capital and its capital ratios. Also shown are the capital
requirements established by the regulatory agencies for adequately and
well-capitalized institutions. The Bank's strong capital ratio puts it in the
best classification on which the FDIC bases its assessment charge.
In 2000, the Company paid cash dividends totaling $1,768,647, approximately
45% of earnings. The higher percentage was the result of lower earnings in 2000
and not a change in the dividend policy. In 1999, the Company paid cash
dividends totaling $1,674,256, approximately 37% of earnings. Special cash
dividends were paid in 1998, resulting in the Company paying cash dividends
totaling $2,350,000, approximately 46% of earnings. The Company remains in all
the top regulatory categories for adequately and well-capitalized institutions
after paying such dividends.
Table 19 - Capital Resources (in thousands)
Regulatory Requirements December 31
Adequately Well ---------------------------------------
Capitalized Capitalized 2000 1999 1998
---- ---- ----
Tier 1 capital.................. $43,499 $41,183 $39,232
Tier 2 capital.................. 4,765 3,551 2,879
------- ------- ------
Total qualifying capital...... $48,264 $44,734 $42,111
======= ======= =======
Tier 1 leverage ratio........... 4% 5% 10.52% 12.64% 14.74%
Tier 1 risk-based capital....... 4% 6% 11.41% 13.07% 16.02%
Total risk-based capital........ 8% 10% 12.67% 14.19% 17.20%
Interest Rate Risk
The primary components of the balance sheet are interest-earning assets,
which are funded by interest-bearing liabilities. The differences in cash flows
of these rate sensitive assets and liabilities, combined with shifts, or changes
in the overall market yield curve result in interest rate risk. Interest rate
risk is the change in net interest income due to interest rate changes. Interest
rate risk is inherent to banking and cannot be eliminated.
The Asset and Liability Management Committee (ALCO) is responsible for
overseeing the financial management of net interest income, liquidity,
investment activities, and other related activities. In regard to interest rate
risk, management has relied most heavily on re-pricing GAP analysis, which is a
traditional method of assessing interest rate risk. Recognizing that there is no
single measure that adequately measures current or future risk, management is
beginning to rely more heavily on a simulation analysis.
-28-
The Bank's one year GAP at the end of the year was .82. This measurement
indicates that the bank's net interest income would most likely rise if general
interest rate fall and that the net interest income would decline if rates rise.
Management is comfortable with the banks current GAP position and interest rate
exposure, but will continue to invest in assets and fund liabilities with the
intent of moving the GAP position to a more neutral position. To accomplish
this, the bank will seek to invest short-term re-pricing assets such as floating
rate securities and loans, and will extend liability maturities.
The Bank's interest rate simulation model indicates that 3% of the banks
net interest income is at risk to a 100 basis point change in market interest
rates. Simulations models are useful tools, but require numerous assumptions
that have a significant impact on the measured interest rate risk. The use of a
simulation model is relatively new at the Bank and changes in the assumptions
could impact the results. Simulation models require the ability to accurately
predict customer behavior to interest rate changes, changes in the competitive
environment, and other economic factors.
The Bank does not currently, nor does it have plans to, use derivatives to
assist in the management of interest risk.
Liquidity
Liquidity management is also a significant responsibility of the ALCO. The
objective of liquidity management is to ensure the availability of funds to meet
the demands of depositors and borrowers. The primary sources of liquidity
included the repayment of customer loans, maturity of and repayment of Bank
investments, deposits, and borrowings. The Bank also has at its disposal the
ability to borrow funds from other banks, borrow funds from the Federal Home
Loan Bank, and purchase brokered certificates of deposits from outside the
Bank's market area. Advances from the Federal Home Loan Bank increased by $6.8
million and the use of brokered certificates of deposit increased by $52.9
million.
The Bank's liquidity ratio at the end of the year was 8.7%, which is
considered adequate by management.
[INTENTIONALLY LEFT BLANK]
-29-
Table 20 - Asset/Liability Gap Position (in thousands)
December 31, 2000
---------------------------------------------------------------------
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Interest earning assets:
Fed Funds Sold....................... $ 6,000 $ - $ - $ - $ 6,000
Loans................................ 96,525 53,916 190,565 6,287 347,293
Securities (including restricted
investments) 21,071 4,397 13,339 38,349 77,156
Loans held for sale.................. 726 - - - 726
-------- -------- -------- ------- --------
Total interest earning assets........ $124,322 $58,313 $203,904 $44,636 $431,175
======== ======= ======== ======= ========
Interest bearing liabilities:
Savings & NOW........................ $15,497 $ - $ - $77,690 $93,187
Time................................. 63,410 98,755 38,241 - 200,406
-------- -------- -------- ------- -------
-
Total deposits....................... 78,907 98,755 38,241 77,690 293,593
Other borrowings..................... 37,724 8,000 8,166 16,800 70,690
-------- -------- -------- ------- --------
Total interest bearing liabilities.. $116,631 $106,755 $46,407 $94,490 $364,283
======== ======== ======== ======= ========
Rate sensitivity gap and ratios:
Gap for period $..................... 7,691 (48,442) 157,497 (49,854)
Cumulative gap $..................... 7,691 (40,751) 116,746 66,892
Period gap ratio..................... 1.07 .55 4.39 .47
Cumulative gap ratio................. 1.07 .82 1.43 1.18
Gap /Total Earning assets
Period............................... 1.8% (11.2)% 36.5% (11.6)%
Cumulative........................... 1.8% (9.5)% 27.1% 15.5%
The asset/liability gap reflects the scheduled repayment and maturities of
the Banks' loans and investments. Management has made a number of assumptions to
improve the usefulness of the gap analysis and to manage interest rate risk. The
assumptions include, but are not limited to, prepayments on loans, repayment
speeds on certain investment securities, and the likelihood of certain call and
put features on financial instruments being exercised. Also, savings and NOW
accounts, which have a variable interest rate, are treated as not immediately
sensitive to changes in interest rates, based on the Bank's historical
experience and future intentions.
As of December 31,2000 the cumulative one year gap position was liability
sensitive, approximately 9.5% of earning assets. Management regularly reviews
the asset liability gap position and other available information to manage the
overall interest rate risk of the Bank.
Impact of Inflation
The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Bank than inflation. Although influenced by inflation,
changes in rates do not necessarily move in either the same magnitude or
direction as changes in the price of goods and services. Inflation does impact
the growth of total assets, creating a need to increase equity capital at a
higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
-30-
Selected Quarterly Financial Data (Unaudited):
(in thousands, except per share data)
Three Months Ended
March 31 June 30 September 31 December 31
Year Ending December 31, 2000
Total Assets $ 396,913 $ 416,548 $ 429,146 $ 457,004
Net Interest Income 4,030 4,148 4,260 4,243
Provision for loan losses 330 470 400 1,920
Net Income 994 1,258 1,397 321
Earnings per Share .49 .62 .68 .16
Book Value per Share 20.64 20.72 21.89 21.95
Return on average assets 1.04% 1.24% 1.31% .26%
Return on Shareholders' equity 9.61% 12.03% 12.83% 3.02%
Efficiency Ratio 63.97% 55.21% 56.38% 59.95%
Year Ending December 31, 1999
Total Assets $ 307,893 $ 317,942 $344,016 $ 376,073
Net Interest Income 3,358 3,555 3,705 3,934
Provision for loan losses 150 150 250 700
Net Income 1,256 1,219 1,134 920
Earnings per Share .63 .60 .56 .44
Book Value per Share 20.17 19.96 20.38 20.31
Return on total assets 1.68% 1.56% 1.34% .95%
Return on Shareholders' equity 12.71% 12.12% 10.99% 8.51%
Efficiency Ratio 53.88% 61.33% 62.06% 57.28%
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words; "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Recent Legislation
Reference is made to the "Supervision and Regulation - Recent Legislation"
section of Item 1 which notes the potential competitive impact of the GLB Act on
the Company.
-31-
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps, or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Company. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to manage the inherent risk while at the same time
maximize income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a simulation model. The Company has no market risk
sensitive instruments held for trading purposes.
-32-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
O.A.K. FINANCIAL CORPORATION | TABLE OF CONTENTS
AND SUBSIDIARY |
- --------------------------------------------------------------------------------
PAGE
Independent Auditors' Report 34
Consolidated Financial Statements
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Comprehensive Income 37
Consolidated Statements of Changes in Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40-56
-33-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
O.A.K. Financial Corporation and Subsidiary
Byron Center, Michigan
We have audited the accompanying consolidated balance sheets of O.A.K. Financial
Corporation and Subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of O.A.K. Financial Corporation's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O.A.K. Financial
Corporation and Subsidiary as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Rehmann Robson, P.C.
Grand Rapids, Michigan
January 26, 2001
-34-
O.A.K. FINANCIAL CORPORATION | CONSOLIDATED BALANCE SHEETS
AND SUBSIDIARY |
- --------------------------------------------------------------------------------
December 31
ASSETS 2000 1999
Cash and due from banks $ 10,759,837 $ 10,054,389
Federal funds sold 6,000,000 -
---------- ----------
Cash and cash equivalents 16,759,837 10,054,389
Available-for-sale securities - amortized cost of
$73,712,745 ($62,592,629 - 1999) 74,446,393 61,649,881
Loans receivable, net 342,419,431 284,279,189
Loans held for sale 725,857 632,038
Accrued interest receivable 3,445,573 2,716,837
Premises and equipment, net 12,293,881 10,618,570
Restricted investments 2,710,000 2,000,000
Other assets 4,202,688 4,121,705
---------- ----------
Total assets $ 457,003,660 $ 376,072,609
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing $ 293,593,320 $ 215,159,729
Noninterest bearing 44,559,923 39,006,319
Total deposits 338,153,243 254,166,048
Borrowed funds 38,455,955 54,405,599
Securities sold under agreements to repurchase 32,233,984 24,424,351
Other liabilities 3,531,662 1,819,097
Total liabilities 412,374,844 334,815,095
------------ -----------
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized,
2,041,775 shares issued and outstanding 2,041,775 2,041,775
Additional paid-in capital 6,265,446 6,259,681
Retained earnings 36,280,076 34,078,585
Accumulated other comprehensive income (loss) 483,869 (622,527)
Unallocated common stock held by ESOP (442,350) (500,000)
--------- ---------
Total stockholders' equity 44,628,816 41,257,514
----------- ----------
Total liabilities and stockholders' equity $ 457,003,660 $ 376,072,609
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-35-
O.A.K. FINANCIAL CORPORATION | CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY |
- --------------------------------------------------------------------------------
Year Ended December 31
2000 1999 1998
-------------- -------------- -------------
Interest income
Loans $ 28,942,504 $ 21,656,573 $ 17,629,417
Available-for-sale securities 4,003,757 3,264,615 3,396,933
Restricted investments 201,369 106,473 88,281
Federal funds sold 24,589 52,644 19,827
------- ------- ------
Total interest income 33,172,219 25,080,305 21,134,458
----------- ----------- ----------
Interest expense
Deposits 11,888,486 8,368,069 7,574,458
Borrowed funds 3,159,406 1,327,843 849,088
Securities sold under agreements to repurchase 1,442,904 832,353 492,626
---------- -------- -------
Total interest expense 16,490,796 10,528,265 8,916,172
----------- ---------- ---------
Net interest income 16,681,423 14,552,040 12,218,286
Provision for loan losses 3,120,000 1,250,000 400,000
----------- ----------- -----------
Net interest income after provision for
loan losses 13,561,423 13,302,040 11,818,286
----------- ----------- ----------
Noninterest income
Service charges 1,353,040 811,369 587,786
Net gain on sales of loans held for sale 344,111 599,935 1,367,075
Loan servicing fees 152,639 148,042 183,735
Net gain on sales of availiable-for-sale securities 213,287 532,915 204,076
Insurance premiums 960,907 1,042,618 -
Brokerage fees 310,318 321,615 165,801
Other 263,701 164,311 150,832
-------- -------- -------
Total noninterest income 3,598,003 3,620,805 2,659,305
---------- ---------- ----------
Noninterest expenses
Salaries and employee benefits 6,650,057 5,933,049 3,917,992
Occupancy 807,960 785,886 465,271
Furniture and fixtures 1,255,318 941,788 678,055
Printing and supplies 321,191 286,216 267,682
Other 3,022,762 2,655,883 2,005,072
----------- ----------- ----------
Total noninterest expenses 12,057,288 10,602,852 7,334,072
----------- ----------- ------------
Income before federal income taxes 5,102,138 6,319,993 7,143,519
Federal income taxes 1,132,000 1,791,000 2,068,000
---------- ----------- ---------
Net income $ 3,970,138 $ 4,528,993 $ 5,075,519
=========== ============ ===========
Net income per share of common
stock (basic and diluted) $1.95 $2.23 $2.54
===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
O.A.K. FINANCIAL CORPORATION | CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY | COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Year Ended December 31
2000 1999 1998
-------------- ---------------- -----------------
Other comprehensive income (loss)
Unrealized gains (losses) on available-
for-sale securities arising during the year $ 1,889,683 $ (2,742,692) $ 676,764
Reclassification adjustment for realized
gains included in net income 213,287 532,915 204,076
----------- ---------- ----------
Comprehensive income (loss)
before income taxes 1,676,396 (3,275,607) 472,688
Income taxes (benefit) related to
comprehensive income 570,000 (751,000) 160,000
----------- ----------- -----------
Other comprehensive income (loss) 1,106,396 (1,458,777) 312,688
Net income 3,970,138 4,528,993 5,075,519
-----------
Comprehensive income $ 5,076,534 $ 3,070,216 $ 5,388,207
----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
-37-
O.A.K. FINANCIAL CORPORATION | CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY | CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Year Ended December 31
2000 1999 1998
------------------- ------------------ ------------------
Shares of common stock issued and outstanding
Balance, beginning of year 2,041,775 2,000,000 1,000,000
Common stock dividends - - 1,000,000
Common stock issued - 13,000 -
Issuance of common stock for business combination - 28,775 -
---------- ---------- ----------
Balance, end of year 2,041,775 2,041,775 2,000,000
========== ========== ==========
Common stock
Balance, beginning of year $ 2,041,775 $ 2,000,000 $ 1,000,000
Common stock dividends - - 1,000,000
Common stock issued - 13,000 -
Issuance of common stock for business combination - 28,775 -
----------- ---------- ----------
Balance, end of year 2,041,775 2,041,775 2,000,000
----------- ---------- ----------
Additional paid-in-capital
Balance, beginning of year 6,259,681 5,622,680 5,622,680
Issuance of common stock - 637,001 -
Allocation of ESOP shares 5,765 - -
----------- ---------- ----------
Balance, end of year 6,265,446 6,259,681 5,622,680
Retained earnings
Balance, beginning of year 34,078,585 31,494,055 29,768,536
Accumulated deficit in business combination - (270,207) -
Net income 3,970,138 4,528,993 5,075,519
Common stock dividends - - (1,000,000)
Cash dividends (1,768,647) (1,674,256) (2,350,000)
---------- ---------- ----------
Balance, end of year 36,280,076 34,078,585 31,494,055
----------- ---------- ----------
Accumulated other comprehensive (loss) income
Balance, beginning of year (622,527) 836,250 523,562
Other comprehensive income (loss) 1,106,396 (1,458,777) 312,688
--------- --------- ---------
Balance, end of year 483,869 (622,527) 836,250
--------- --------- ---------
Unallocated common stock held by ESOP
Balance, beginning of year (500,000) - -
Unearned ESOP compensation - (500,000) -
Allocation of ESOP shares 57,650 - -
---------- --------- --------
Balance, end of year (442,350) (500,000) -
---------- --------- --------
Total stockholders' equity $44,628,816 $41,257,514 $39,952,985
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-38-
O.A.K. FINANCIAL CORPORATION | CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY | CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended December 31
2000 1999 1998
----------------- ----------------- -----------------
Cash flows from operating activities
Net income $ 3,970,138 $ 4,528,993 $ 5,075,519
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,108,809 916,515 553,789
Provision for loan losses 3,120,000 1,250,000 400,000
Proceeds from sales of loans held 45,364,562 73,442,003
for sale 20,568,196
Originations of loans held for sale (20,317,904) (40,716,703) (75,409,274)
Net gain on sales of available-for-sale
securities
(213,287) (532,915) (204,076)
Net gain on sales of loans held for sale (344,111) (599,935) (1,367,075)
Net amortization of investment premiums 112,885 163,506 203,231
(Gain) loss on sales of property and equipment (65,500) 7,769 -
Deferred income taxes (benefit) (743,000) (85,000) 121,000
Changes in operating assets and liabilities
which (used) provided cash
Accrued interest receivable (728,736) (690,652) (513,039)
Other assets 179,631 (186,327) (1,034,556)
Other liabilities 1,688,352 (304,994) 487,860
----------- --------- ----------
Net cash provided by operating activities 8,335,473 9,114,819 1,755,382
----------- --------- ----------
Cash flows from investing activities
Available-for-sale securities
Proceeds from maturities 8,331,637 11,425,763 11,773,936
Proceeds from sales 968,939 3,313,371 2,213,374
Purchases (20,320,276) (23,146,715) (8,163,135)
Purchases of restricted investments (710,000) (736,100) (65,300)
Net increase in loans held for investment (61,260,242) (66,275,365) (53,266,174)
Purchases of premises and equipment (2,874,735) (4,361,920) (3,111,510)
Proceeds from the sale of premises and equipment 156,115 11,858 -
----------- ----------- -----------
Net cash used in investing activities (75,708,562) (79,769,108) (50,618,809)
----------- ----------- -----------
Cash flows from financing activities
Net increase in deposits 83,987,195 36,875,241 32,590,479
Net borrowed funds (repayments) (15,949,644) 26,393,132 16,452,803
Net increase in securities sold under agreements
to repurchase 7,809,633 10,051,047 5,715,721
Dividends paid (1,768,647) (1,674,256) (2,350,000)
Proceeds from issuance of common stock - 150,001 -
Net cash provided by financing activities 74,078,537 71,795,165 52,409,003
----------- ----------- -----------
Net increase in cash and cash equivalents 6,705,448 1,140,876 3,545,576
Cash and cash equivalents, beginning of year 10,054,389 8,913,513 5,367,937
------------ ------------ ------------
Cash and cash equivalents, end of year $ 16,759,837 $ 10,054,389 $ 8,913,513
============ ============ ============
Supplementary cash flows information
Interest paid $ 15,762,060 $ 10,320,794 $ 8,838,116
Income taxes paid 1,869,167 1,948,430 1,795,773
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - O.A.K. Financial Corporation (the "Corporation") through its wholly
owned subsidiary, Byron Center State Bank (the "Bank") provides a variety of
financial services to individuals and businesses in the western Michigan area
through its eleven branches located in Byron Center, Jamestown, Cutlerville,
Hudsonville, Grandville, Moline, Dorr, Hamilton, Allendale, Zeeland and
Kentwood. Active competition, principally from other commercial banks and credit
unions, exists in all of the Bank's principal markets. The Bank's results of
operations can be significantly affected by changes in interest rates or changes
in the local economic environment.
The Bank's primary deposit products are interest and noninterest bearing
checking accounts, savings accounts and time deposits and its primary lending
products are commercial loans, real estate mortgages, and consumer loans. Note 3
further describes the types of lending the Bank engages in and Note 6 provides
additional information on deposits. Note 2 discusses the types of securities the
Corporation invests in.
The Bank is a state chartered bank and a member of the Federal Reserve Bank
("FRB"). Deposits are insured by the Federal Deposit Insurance Corporation's
("FDIC") Bank Insurance Fund. The Bank is subject to the regulations and
supervision of the FDIC, the FRB and the Michigan Office of Financial
Institutions and Insurance Services ("OFIS") and undergoes periodic examinations
by these regulatory authorities (see Note 12).
Business Combination - Effective February 1, 1999, the Corporation issued 28,775
shares of its common stock in exchange for all of the outstanding common stock
of Dornbush Insurance Agency, Inc. (DIA) based on a conversion ratio of .719475
shares of the Corporation's common stock. DIA, now a wholly-owned subsidiary of
the Bank, operates in the general insurance agency business and sells life,
health, property and casualty insurance. The merger has been accounted for as a
pooling of interests. Due to the insignificance of the financial statements of
DIA, the Corporation's consolidated financial statements have not been restated
for all periods prior to the business combination to reflect the financial
position and results of operations of DIA, and pro-forma financial information
has not been disclosed.
Use of Estimates - In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated balance sheet and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The material estimate that is particularly
susceptible to significant change in the near term relates to the determination
of the allowance for loan losses.
Accounting Policies - The accounting policies used in the preparation of the
accompanying consolidated financial statements conform to predominant banking
industry practices and are based on generally accepted accounting principles.
The principles which materially affect the determination of the Corporation's
consolidated financial position or results of operations are summarized as
follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are sold for a one-day period. The
Corporation maintains deposit accounts in various financial institutions which
generally exceed FDIC insured limits or are not insured. Management believes the
Corporation is not exposed to any significant interest rate or other financial
risk as a result of these deposits.
Available-For-Sale Securities
Available-for-sale securities consist of bonds, notes and debentures not
classified as held-to-maturity securities and are recorded at their estimated
fair value. Unrealized appreciation and depreciation, net of the effect of
deferred income taxes, on available-for-sale securities are reported as a net
amount in other comprehensive income. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity. Declines
in the fair value of securities below cost that are determined to be other than
temporary are reflected in earnings as realized losses. Gains or losses on the
sale of available-for-sale securities are determined using the specific
identification method.
Loans Held for Investment and Related Income
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding unpaid
principal balances adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans. Interest on loans is accrued
over the term of the loan based on the principal amount outstanding. The accrual
of interest on impaired loans is discontinued when, in the opinion of
management, the borrower may be unable to meet payments as scheduled. When the
-40-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
accrual of interest is discontinued, all uncollected accrued interest is
reversed. Interest income on such loans is recognized only to the extent cash
payment is received. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured. For impaired loans not classified as nonaccrual,
interest income continues to be accrued over the term of the loan based on the
principal amount outstanding.
Loan origination fees, net of certain direct loan origination costs, are
deferred and recognized as an adjustment of the related loan yield using the
interest method.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Gains
and losses on sales of such loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the unpaid
principal balance of the loans sold, adjusted for any yield differential,
servicing fees and servicing costs applicable to future years. Net unrealized
losses are recognized in a valuation allowance by charges to income.
The Bank currently retains servicing on all loans originated and sold into the
secondary market. Originated mortgage servicing rights ("OMRS") retained are
recognized for loans sold by allocating total costs incurred between the loan
and the servicing rights based on their relative fair values. The mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net future servicing revenue. The expected period of the estimated net
servicing income is based, in part, on the expected prepayment rate of the
underlying mortgage. The carrying value of the mortgage servicing rights is
periodically evaluated for impairment.
Loan administration fees earned for servicing loans for others are generally
calculated based on the outstanding principal balances for the loans serviced
and are recorded as revenue when received.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of the loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
held for sale and initially recorded at fair value at the date of foreclosure
less estimated cost to sell, thereby establishing a new cost basis. Subsequent
to foreclosure, valuations are periodically performed by management and the real
estate is recorded at the lower of carrying amount or fair value less costs to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
-41-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Credit Related Financial Instruments
In the ordinary course of business, the Bank has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and accelerated methods
based upon the useful lives of related assets which generally range from 5 to
approximately 40 years. Maintenance, repairs and minor alterations are charged
to current operations as expenditures occur and major improvements are
capitalized. Management annually reviews these assets to determine whether
carrying values have been impaired.
Net Income Per Share
Net income per share of common stock is calculated on the basis of the weighted
average number of common shares outstanding including shares allocated under the
employee stock ownership plan, which was approximately 2,034,000 in 2000,
2,031,000 in 1999 and 2,000,000 in 1998. The effect of the assumed issuance of
the performance based incentive share awards and the assumed exercise of the
outstanding stock options had no effect in the calculation of net income per
share assuming dilution.
Federal Income Taxes
Federal income taxes are provided for the tax effects of transactions reported
in the consolidated financial statements and consist of the taxes currently due
plus deferred taxes. Deferred income taxes are recognized for temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred income
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets or
liabilities are recorded or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
As changes in income tax laws or rates are enacted, deferred income tax assets
and liabilities are adjusted through the provision for income taxes.
The Corporation and its subsidiary file a consolidated federal income tax return
on a calendar year basis.
Restricted Investments
The Bank is a member of the Federal Home Loan Bank System and is required to
invest in capital stock of the Federal Home Loan Bank of Indianapolis ("FHLB").
The amount of the required investment is determined and adjusted annually by the
FHLB. The investment is carried at cost plus the value assigned to stock
dividends.
The Bank is also a member of the Federal Reserve Bank System. The amount of the
required investment is determined by the FRB at the time the Bank becomes a
member. The amount of the investment may be adjusted thereafter and is carried
at cost.
New Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, for an entity that has not adopted Statement No. 133
before June 15, 2000. This statement shall be adopted concurrently with
Statement No. 133. These statements require companies to record derivatives on
the balance sheet as assets and liabilities measured at fair value. The
accounting for changes in value of derivatives will depend upon the use of
derivatives and whether they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 with earlier applications allowed and is to be applied
prospectively. The Corporation does not use interest rate swaps or other
derivatives in its management of risk and accordingly this statement is not
expected to have a material impact on financial position or results of
operations.
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FASB issued Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. The statement is generally
effective for transfers of financial assets occurring after March 31, 2001, and
is effective for disclosures about securitizations and for reclassifications and
disclosure about collateral in financial statements for fiscal years ending
after December 15, 2000. Statement No. 140, provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities and criteria for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. It is not expected that
adoption of this Statement will have a material impact on the Corporation's
financial position or results of operations.
2. AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair
value of investment securities, all of which are classified as
available-for-sale as of December 31, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
---- ---------------- ------------------ ---------------- ----------------
U.S. government and
federal agency $47,735,658 $287,456 $238,978 $47,784,136
States and political subdivisions 25,188,019 486,964 60,352 25,614,631
Other 789,068 265,675 7,117 1,047,626
---------------- ------------------ ---------------- ----------------
Total $73,712,745 $1,040,095 $306,447 $74,446,393
================ ================== ================ ================
1999
----
U.S. government and
federal agency $38,328,604 $ 55,647 $ 805,829 $37,578,422
States and political subdivisions 23,393,327 162,987 355,553 23,200,761
Other 870,698 - - 870,698
---------------- ------------------ ---------------- ----------------
Total $62,592,629 $ 218,634 $1,161,382 $61,649,881
================ ================== ================ ================
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2000 is shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---------------- ----------------
Due in one year or less $1,267,964 $1,273,330
Due after one year through five years 14,014,263 14,130,157
Due after five years through ten years 20,358,927 20,793,876
Due after ten years 5,958,216 6,046,769
---------------- ----------------
Subtotal 41,599,370 42,244,132
Mortgage-backed securities 32,113,375 32,202,261
---------------- ----------------
Total $73,712,745 $74,446,393
================ ================
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
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Investment income from taxable and nontaxable securities for the years ended
December 31, is as follows:
2000 1999 1998
---------------- -------------- ---------------
Taxable $2,815,554 $2,173,429 $2,322,330
Nontaxable 1,188,203 1,091,186 1,074,603
---------------- -------------- ---------------
Total $4,003,757 $3,264,615 $3,396,933
================ ============== ===============
The gross gains and gross losses realized on sales for the years ended December
31 are as follows:
2000 1999 1998
------------- ------------- -------------
Gross realized gains $217,785 $532,915 $231,259
Gross realized losses (4,498) - (27,183)
------------- ------------- -----------
Net realized gain on sales of
available-for-sale securities $213,287 $532,915 $204,076
============= ============ ===========
The tax provision applicable to these net realized gains amounted to
approximately $73,000, $181,000 and $69,000 during 2000, 1999 and 1998,
respectively.
Investment securities with carrying values of approximately $72,356,000 and
$53,069,000 at December 31, 2000 and 1999, respectively, were pledged to secure
public deposits or for other purposes as required or permitted by law.
3. LOANS
The Bank grants commercial, consumer and residential loans to customers
primarily in a fifteen mile radius of its branches which are located south and
west of Grand Rapids, Michigan. Substantially all of the consumer and
residential loans are secured by various items of property, while commercial
loans are secured primarily by business assets and personal guarantees; a
portion of loans are unsecured. The source of repayment of approximately 20% of
the loan portfolio is generated from cash flows from developers and owners of
commercial real estate.
Major loan classifications at December 31 are as follows:
2000 1999
----------------- -----------------
Commercial real estate $165,977,721 $140,647,468
Residential real estate 53,644,229 41,985,097
Commercial 64,511,214 58,792,864
Consumer 63,160,287 46,404,313
----------------- -----------------
Total loans receivable, net of deferred loan
fees of $128,117 ($135,189 - 1999) 347,293,451 287,829,742
Less allowance for loan losses 4,874,020 3,550,553
----------------- -----------------
Loans receivable, net $342,419,431 $284,279,189
================= =================
At December 31, 2000, scheduled maturities of loans with fixed rates of interest
are as follows:
One year or less $27,368,854
One to five years 209,897,521
Over five years 39,590,349
------------------
Total $276,856,724
==================
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Variable rate loans in the amount of $70,436,727 at December 31, 2000 reprice
quarterly or more frequently.
The Bank services loans for others which generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and taxing authorities, and processing foreclosures. Loans being serviced for
others as of December 31, 2000, 1999 and 1998, approximated $152,000,000,
$146,000,000 and $127,000,000, respectively; such loans are not included in the
accompanying consolidated balance sheets.
The following table summarizes mortgage servicing rights capitalized and
amortized and the fair value of mortgage servicing rights included in other
assets in the accompanying consolidated balance sheets as of December 31:
2000 1999 1998
----------------- ---------------- -------------
Balance, beginning of year $1,215,373 $ 918,093 $213,827
Mortgage servicing rights capitalized 223,465 491,995 798,975
Amortization (215,030) (194,715) (94,709)
----------------- ---------------- -------------
Balance, end of year $1,223,808 $1,215,373 $918,093
================= ================ =============
Information regarding impaired loans is as follows for the year ended December
31:
2000 1999 1998
------------------ ----------------- ----------------
Balance of impaired loans at year-end $2,685,702 $5,474,469 $570,280
Allowance for loan losses allocated
to the impaired loan balance 699,334 401,467 202,021
Average investment in impaired loans 2,618,756 1,607,204 445,645
Interest income recognized on
impaired loans (no interest
income was recognized on the
cash basis) 172,775 151,414 44,818
No additional funds are committed to be advanced in connection with impaired
loans.
4. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses for the
years ended December 31:
2000 1999 1998
------------------ --------------- ---------------
Balance, beginning of year $3,550,553 $2,879,376 $2,565,430
Provision for loan losses 3,120,000 1,250,000 400,000
Recoveries 245,826 91,451 121,382
Loans charged off (2,042,359) (670,274) (207,436)
---------------- --------------- --------------
Balance, end of year $4,874,020 $3,550,553 $2,879,376
================ =============== ===============
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
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5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
2000 1999
----------------- ----------------
Land $2,130,069 $2,164,869
Buildings and improvements 10,118,577 8,206,963
Furniture and equipment 5,769,263 4,924,288
----------------- ----------------
Total premises and equipment 18,017,909 15,296,120
Less accumulated depreciation 5,724,028 4,677,550
----------------- ----------------
Premises and equipment, net $12,293,881 $10,618,570
================= ================
6. DEPOSITS
The following is a summary of the distribution of deposits at December 31:
2000 1999
----------------- -----------------
Interest bearing
NOW accounts $25,669,232 $19,812,110
Savings 37,072,247 38,760,645
Money market demand 30,445,440 30,461,552
Time, $100,000 and over 99,277,916 32,610,542
Other time 101,128,485 93,514,880
----------------- -----------------
Total interest bearing 293,593,320 215,159,729
Noninterest bearing demand 44,559,923 39,006,319
----------------- -----------------
Total deposits $338,153,243 $254,166,048
================= =================
At December 31, 2000, scheduled maturities of time deposits are as follows:
2001 $162,164,137
2002 24,828,790
2003 4,778,240
2004 3,643,848
2005 4,991,386
-----------------
Total time deposits $200,406,401
=================
Interest expense on time deposits issued in denominations of $100,000 or more
was approximately $3,874,000 in 2000, $1,365,000 in 1999 and $721,000 in 1998.
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
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7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following obligations:
2000 1999
----------------- -----------------
Federal Home Loan Bank advances $34,800,000 $28,000,000
Treasury tax and loan note option 3,490,180 4,000,000
Federal funds purchased - 22,200,000
Other borrowings 165,775 205,599
----------------- -----------------
Total borrowed funds $38,455,955 $54,405,599
================= =================
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1-to-4 family whole mortgage loans and U.S. government agency
securities with a combined carrying value of approximately $40,869,000 and
$39,898,000 at December 31, 2000 and 1999, respectively.
The Treasury Tax and Loan Note option is collateralized by U.S. government
agency securities with a carrying value of approximately $6,314,000 and
$2,714,000 at December 31, 2000 and 1999, respectively. The Treasury Tax and
Loan Note option is a daily borrowing with the Federal Reserve Bank, due on
demand at 25 basis points below the national federal fund interest rate (6.00%
at December 31, 2000).
The Federal Home Loan Bank advances at December 31, 2000 and 1999 and their
contractual maturities are as follows:
Rate at
December 31 2000 1999
----------------- --------------- ---------------
Putable fixed rate advances:
July 10, 2000 6.20% $ - $2,000,000
September 25, 2000 6.05% - 2,000,000
December 13, 2000 6.26% - 4,000,000
January 22, 2001 5.57% 2,000,000 2,000,000
May 4, 2001 5.96% 2,000,000 2,000,000
September 24, 2001 6.26% 2,000,000 2,000,000
November 2, 2001 6.36% 2,000,000 2,000,000
December 12, 2001 6.37% 2,000,000 -
March 13, 2002 6.44% 2,000,000 -
May 1, 2002 6.44% 2,000,000 2,000,000
December 12, 2002 6.23% 2,000,000 -
August 21, 2003 5.73% 2,000,000 2,000,000
March 24, 2010 Putable Advance 5.99% 8,500,000 -
April 12, 2010 Putable Advance 5.99% 5,000,000 -
June 23, 2010 Putable Advance 5.99% 3,300,000 -
--------------- ---------------
Short-term variable rate advances: 34,800,000 20,000,000
January 31, 2000 4.05% - 6,000,000
July 12, 2000 5.13% - 2,000,000
--------------- ---------------
$34,800,000 $28,000,000
=============== ===============
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 2000 and 1999
mature within one day from the transaction date and have an average interest
rate of 5.03% and 4.29%, respectively. The U.S. government agency securities
underlying the agreements have a carrying value and a fair value of
approximately $43,847,000 and $29,049,000 at December 31, 2000 and 1999,
respectively. Such securities remain under the control of the Bank. The maximum
amount outstanding at any month end during the years ended December 31, 2000 and
1999 was $36,045,000 and $28,965,000, respectively; the daily average balance
was $28,976,000 and $21,221,000, respectively.
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
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9. FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended December 31 consists
of:
2000 1999 1998
------------------ ----------------- ----------------
Current $1,875,000 $1,876,000 $1,947,000
Deferred (benefit) (743,000) (85,000) 121,000
------------------ ------------------ ----------------
Federal income tax expense $1,132,000 $1,791,000 $2,068,000
================== ================= ================
A reconciliation between federal income tax expense and the amount computed by
applying the statutory federal income tax rate of 34% to income before taxes for
the years ended December 31, is as follows:
2000 1999 1998
------------------ ---------------- --------------
Statutory rate applied to income
before income taxes $1,734,727 $2,148,798 $2,428,756
Effect of tax-exempt interest
income (354,990) (341,898) (387,285)
Change in valuation allowance (260,000) (20,000) -
Other - net 12,263 4,100 26,529
------------------ --------------- --------------
Federal income tax expense $1,132,000 $1,791,000 $2,068,000
================== =============== ==============
The net deferred income tax asset as of December 31, is comprised of the tax
effect of the following temporary differences:
2000 1999
--------------- ---------------
Deferred tax assets
Allowance for loan losses $1,555,000 $1,106,000
Deferred compensation plan 301,000 264,000
Deferred loan fees 1,000 2,000
--------------- ---------------
Total deferred tax assets 1,857,000 1,372,000
Valuation allowance (439,000) (699,000)
--------------- ---------------
Net deferred tax assets 1,418,000 673,000
--------------- ---------------
Deferred tax liabilities
Depreciation (73,000) (74,000)
Discount accretion (31,000) (31,000)
Loan servicing rights (416,000) (413,000)
--------------- ---------------
Total deferred tax liabilities (520,000) (518,000)
--------------- ---------------
Net deferred tax assets entering into the determination
of the provision for federal income taxes 898,000 155,000
Additional deferred tax (liability) asset related to
other comprehensive income (249,000) 321,000
--------------- ---------------
Net deferred tax asset included in other assets
on the accompanying consolidated balance sheets $ 649,000 $ 476,000
=============== ===============
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10. RELATED PARTY TRANSACTIONS
Loans
Certain directors, executive officers and their related interests were loan
customers of the Bank. All such loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions and do not represent more than a normal risk of
collectibility or present other unfavorable features. The total loans
outstanding to these customers aggregated approximately $4,577,000 and
$5,282,000 at December 31, 2000 and 1999, respectively; new loans and repayments
during 2000 were approximately $5,136,000 and $5,841,000, respectively.
Deposits
Deposits of Bank directors, executive officers and their related interests were
approximately $2,273,000 and $1,863,000 at December 31, 2000 and 1999,
respectively.
11. OFF-BALANCE SHEET ACTIVITIES
The Bank is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve to varying degrees elements of credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheets. The Bank
follows the same credit policy to make such commitments, including collateral as
is followed for those loans recorded in the consolidated financial statements;
no significant losses are anticipated as a result of these commitments.
The Bank's exposure to credit loss is represented by the contractual amount of
these commitments. The Bank follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At December 31, 2000 and 1999, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
-------------------------------------
2000 1999
---------------- ----------------
Commitments to grant loans $29,949,000 $22,056,000
Unfunded commitments under lines of credit 82,352,000 82,005,000
Commercial and standby letters of credit 3,406,000 2,506,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Bank, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Bank is committed; a portion are unsecured.
Commercial and standby letters-of-credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank generally holds collateral supporting those commitments if deemed
necessary.
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- --------------------------------------------------------------------------------
12. REGULATORY MATTERS
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by its primary regulator, the FRB.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by the FRB, that if undertaken, could
have a direct material effect on the Corporation's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the their assets,
liabilities, capital and certain off-balance-sheet items as defined in the
regulations and calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measurements established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total capital and Tier 1 capital to risk
weighted assets and Tier 1 capital to average assets. Management believes, as of
December 31, 2000, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject. As of December 31, 2000 the most recent
notification from the FRB categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the most recent notification that management believes
has changed the Bank's category. The Corporation's and the Bank's actual capital
amounts and ratios as of December 31, 2000 and 1999 are also presented in the
table.
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------- ------ ------ ------
(Dollars in thousands)
As of December 31, 2000
Total capital to risk
weighted assets
Consolidated $48,264 12.67% $30,494 8.0% $ N/A N/A%
Bank 47,963 12.60 30,453 8.0 38,066 10.0
Tier 1 capital to risk
weighted assets
Consolidated 43,499 11.41 15,247 4.0 N/A N/A
Bank 43,205 11.35 15,227 4.0 22,840 6.0
Tier 1 capital to
average assets
Consolidated 43,499 10.52 16,542 4.0 N/A N/A
Bank 43,205 10.48 16,489 4.0 20,611 5.0
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Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ --------- ------ ------- -----
(Dollars in thousands)
As of December 31, 1999
Total capital to risk
weighted assets
Consolidated $44,734 14.19% $25,216 8.0% $ N/A N/A%
Bank 43,131 13.70 25,190 8.0 31,164 10.0
Tier 1 capital to risk
weighted assets
Consolidated 41,183 13.07 12,608 4.0 N/A N/A
Bank 39,580 12.57 12,595 4.0 18,893 6.0
Tier 1 capital to
average assets
Consolidated 41,183 12.64 13,038 4.0 N/A N/A
Bank 39,580 12.15 13,027 4.0 16,284 5.0
The Bank is required to deposit certain amounts with the Federal Reserve Bank.
These reserve balances vary depending upon the level of certain customer
deposits in the Bank. At December 31, 2000 and 1999, those required reserve
balances were $3,215,000 and $2,711,000, respectively.
The Bank is also subject to limitations under the Federal Reserve Act on the
amount of loans or advances that can be extended to the Corporation and
dividends that can be paid to the Corporation. The total amount of dividends
which may be paid at any date is generally limited to the retained earnings of
the Bank, and loans or advances are limited to 10 percent of the Bank's capital
stock and surplus on a secured basis. Approval is needed if total dividends
declared in any calendar year exceed the retained "net profit" (as defined in
the Federal Reserve Act) of that year plus the retained "net profit" of the
preceding two years. The amount that was not subject to this restriction is
approximately $9,508,000 at January 1, 2001. In addition, dividends paid by the
Bank to the Corporation would be prohibited if the effect thereof would cause
the Bank's capital to be reduced below applicable minimum capital requirements.
13. EMPLOYEE BENEFIT PLANS
401(k), Profit Sharing and Employee Stock Ownership Plan (ESOP) - The Bank
maintains a qualified 401(k) Profit Sharing and Employee Stock Ownership Plan
(the "Plan") for substantially all employees. Under the 401(k) feature of the
Plan, employees may make voluntary contributions based on a percentage of
covered compensation. The Bank, at the discretion of the Board of Directors, may
make matching contributions and/or a profit sharing contribution. The Bank's
matching and profit sharing contributions were $247,373, $200,332 and $240,200
for 2000, 1999 and 1998, respectively.
The 401(k) and Profit Sharing Plan was amended as of January 29, 1999 to include
the ESOP. Under the guidelines of the amended Plan, any employee who has
attained the age of 21 and has completed six months of employment is eligible to
participate in the ESOP. The ESOP borrowed $500,000 from the Corporation to
purchase 10,000 shares of O.A.K. Financial Corporation's common stock at a price
of $50 per share. The loan is collateralized by the unearned shares of common
stock purchased by the ESOP; interest is charged at 7.5%. The loan will be
repaid over a period of 10 years principally from the portion of the Bank's
discretionary contribution and with any dividends received on the unallocated
shares of common stock. Shares purchased by the ESOP are held in suspense until
allocated among Plan participants as the loan is repaid. Contributions to the
ESOP were $60,050 and $63,415 during 2000 and 1999, respectively.
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Contributions to the ESOP and shares released from suspense proportional to the
repayment of the ESOP loan are allocated among Plan participants on the basis of
compensation in the year of allocation. Benefits are vested as the participant
accumulates years of service with the Bank. A participant becomes 20% vested
after three years of service and is 100% vested after seven years of credited
service. Prior to the seven years of credited service, a person who terminates
employment for reasons other than death, normal retirement or disability will
receive only their vested portion of the ESOP benefit. Forfeitures are
reallocated among remaining participating employees in the same proportion as
contributions. Benefits are payable in stock or cash upon termination of
employment. The Bank's contributions to the ESOP are not fixed, so benefits
under the ESOP cannot be estimated. ESOP participants receive distributions from
their ESOP accounts only upon termination of service.
For the year ended December 31, 2000, 1,201 common shares with a fair value of
$55 per share, were committed to be released. No shares have been allocated as
of that date; these shares were allocated on February 2, 2001. The fair value of
unearned shares at December 31, 2000 was $442,350.
For the year ended December 31, 1999, 1,153 common shares with an average fair
value of $50 per share, were committed to be released. No shares have been
allocated as of that date; these shares were allocated on February 3, 2000. The
fair value of unearned shares at December 31, 1999 was $550,000.
Stock Compensation and Stock Option Plans - A Stock Compensation Plan was
established as of January 28, 1999 to enable key employees to participate in the
future growth and profitability of the Corporation by offering them incentive
compensation through the issuance of stock options, which are vested based on
achievement of performance goals.
Performance option awards are earned and vested at the rate of 10% per year and
become exercisable after the first anniversary of the award date. The option
exercise price is at least 100% of the market value of the common stock at the
grant date. During 2000, 9,627 performance options were awarded at an average
weighted fair value of $55 per share totaling $529,485. During 1999, 9,250
performance options were awarded at an average weighted fair value of $50 per
share totaling $462,500.
The Company also has a Stock Option Plan for non-employee directors in addition
to the Stock Compensation plan for key employees. During 2000 and 1999, 2,500
options were awarded each year at an average weighted fair value of $55 and $50
per share, respectively.
The following tables summarize information about stock option transactions:
2000 1999
------------------------------- -------------------------------
Average Average
Option Option
Shares Price Shares Price
-------------- -------------- ------------- --------------
Outstanding, beginning of year 11,750 $50.00 - $ -
Granted 12,127 55.00 11,750 50.00
Exercised - - - -
Forfeited/expired (1,393) (52.72) - -
-------------- -------------- ------------- --------------
Outstanding, end of year 22,484 52.53 11,750 50.00
============== ============== ============= ==============
Exercisable, end of year 11,114 $50.00 - $ -
============== ============== ============= ==============
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O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
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- --------------------------------------------------------------------------------
Options Outstanding
------------------------------------------ Number of
Number Wgt. Avg. Options
Exercise Outstanding Remaining Exercisable
Price Dec. 31, 2000 Contractual Life Dec. 31, 2000
------------------ ----------------- --------------------- -----------------
$50 11,114 8.1 years 11,114
55 11,370 9.0 -
----------------- --------------------- -----------------
Total 22,484 8.6 years 11,114
================= ===================== =================
All options expire 10 years after the date of the grant; 147,516 shares are
reserved for future issuance under the Stock Compensation Plan and 30,000 shares
are reserved for future issuance under the Stock Option Plan for non-employee
directors.
The Corporation has elected to apply the provisions of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" and,
accordingly, stock options do not constitute compensation expense in the
determination of net income. Had stock compensation expense been determined
pursuant to the methodology provided in
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" there would have been no proforma effect on the consolidated
results of operations.
Deferred Compensation - The Bank sponsors a deferred compensation plan for all
directors who wish to participate. The cost of the plan was $179,000, $204,000
and $152,000 in 2000, 1999 and 1998, respectively. The accrued benefit
obligation for this plan was $820,952 and $775,707 as of December 31, 2000 and
1999, respectively, and is included in other liabilities. The Bank has purchased
life insurance policies on participating directors.
14. CONTINGENCIES
The Bank is party to litigation arising in the normal course of business. In the
opinion of management, based on consultation with legal counsel, liabilities
from such litigation, if any, would not have a material effect on the
Corporation's consolidated financial statements.
As a result of acquiring real estate from foreclosure proceedings, the Bank is
subject to potential claims and possible legal proceedings involving
environmental matters. No such claims have been asserted at December 31, 2000.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. The fair values of certain financial instruments and all
nonfinancial instruments are excluded from disclosure. These include, among
other elements, the estimated earning power of core deposit accounts, the
trained work force, customer goodwill and similar items. Accordingly, the
aggregate fair values are not necessarily indicative of the underlying value of
the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value disclosures for financial instruments.
Cash and Cash Equivalents - The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate those assets' fair
values.
-53-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investment Securities - Fair values for investment securities are generally
based on quoted market prices.
Restricted Investments - The carrying value of Federal Home Loan Bank stock and
Federal Reserve Bank stock approximates fair value based on the redemption
provisions of the Federal Home Loan Bank and the Federal Reserve Bank.
Loans Receivable - For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values approximate carrying values. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to
estimate the effect of declines, if any, in the credit quality of borrowers
since the loans were originated. Fair values for impaired loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Loans Held for Sale - The fair value of loans held for sale, including the fair
value of associated mortgage servicing rights, is estimated based on the present
value of estimated future cash flows of the loan and related servicing rights
using a discount rate commensurate with the risks associated with the respective
financial instruments.
Deposit Liabilities - The fair values for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts) which have no
stated maturity are, by definition, equal to the amount payable on demand.
Approximately 41% and 50% of the Bank's deposits at December 31, 2000 and 1999,
respectively have fair values equal to carrying values. The carrying amounts for
variable rate certificates of deposit and other variable rate time deposits
approximate their fair values at the reporting date. Fair values for fixed rate
time deposits and other time deposits with stated maturities are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities to a schedule of aggregated
expected monthly maturities.
Securities Sold Under Agreements to Repurchase Fair value approximates the
carrying value since the majority of these instruments were entered into at our
near December 31, 2000 and 1999.
Borrowed Funds - The carrying amounts of federal funds purchased, treasury tax
and loan note options, and variable rate advances approximate their fair values.
The fair values of the Corporation's long-term borrowings are estimated using
discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments - Commitments to extend credit were evaluated and
fair value was estimated using the fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the present credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. As the Bank does not charge fees for
lending commitments, it is not practicable to estimate the fair value of these
instruments.
-54-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The estimated fair values of the Bank's financial instruments at December 31,
are as follows:
Carrying Fair
2000 Amount Value
---- --------------- --------------
Financial assets
Cash and cash equivalents $ 16,759,837 $ 16,759,837
Available-for-sale securities 74,446,393 74,446,393
Loans receivable, net 342,419,431 340,881,056
Loans held for sale 725,857 725,857
Accrued interest receivable 3,445,573 3,445,573
Restricted investments 2,710,000 2,710,000
Financial liabilities
Deposits 338,153,243 338,538,491
Borrowed funds 38,455,955 39,314,326
Securities sold under agreements
to repurchase 32,233,984 32,233,984
Other liabilities 3,531,662 3,531,662
1999
----
Financial assets
Cash and cash equivalents $ 10,054,389 $ 10,054,389
Available-for-sale securities 61,649,881 61,649,881
Loans receivable, net 284,279,189 282,255,966
Loans held for sale 632,038 632,038
Accrued interest receivable 2,716,837 2,716,837
Restricted investments 2,000,000 2,000,000
Financial liabilities
Deposits 254,166,048 254,105,180
Borrowed funds 54,405,599 54,230,776
Securities sold under agreements
to repurchase 24,424,351 24,424,351
Other liabilities 1,819,097 1,819,097
16. O.A.K. FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
The following summarizes parent company only condensed balance sheets as of
December 31, 2000 and 1999 and the related condensed statements of income and
cash flows for each of the three years in the period ended December 31, 2000,
1999 and 1998:
Condensed Balance Sheets
2000 1999
----------------- ----------------
Assets
Cash $ 38,517 $ 1,346,061
Investment in subsidiary 44,164,309 39,655,037
Available-for-sale securities 1,008,952 832,023
-------------- ---------------
Total assets $45,211,778 $41,833,121
============== ===============
Other borrowed funds $ 467,031 $ 500,000
Other liabilities 115,931 75,607
Stockholders' equity 44,628,816 41,257,514
-------------- ---------------
Total liabilities and stockholders' equity $ 45,211,778 $41,833,121
============== ===============
-55-
O.A.K. FINANCIAL CORPORATION | NOTES TO CONSOLIDATED
AND SUBSIDIARY | FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Condensed Statements of Income
2000 1999 1998
-------------- --------------- --------------
Income
Dividends from subsidiary $325,000 $ 816,710 $2,362,500
Interest from available-for-sale securities 24,076 36,045 59,065
Net realized gain on sale of
available-for-sale securities 215,785 507,134 209,722
-------------- --------------- --------------
Total income 564,861 1,359,889 2,631,287
Other expenses 167,599 202,937 119,307
-------------- --------------- --------------
Income before equity in undistributed net
income of subsidiary 397,262 1,156,952 2,511,980
Equity in undistributed net income of
subsidiary 3,572,876 3,372,041 2,563,539
-------------- --------------- --------------
Net income $3,970,138 $4,528,993 $5,075,519
============== =============== ==============
Condensed Statements of Cash Flows
2000 1999 1998
-------------- --------------- --------------
Cash flows from operating activities
Net income $3,970,138 $4,528,993 $5,075,519
Adjustments to reconcile net income
to net cash provided by operating
activities
Net gain on available-for-sale securities (215,785) (507,134) -
Undistributed earnings of subsidiary (3,572,876) (3,372,041) (2,563,539)
Changes in other liabilities (47,305) 15,685 59,922
-------------- --------------- --------------
Net cash provided by operating
activities 134,172 665,503 2,571,902
-------------- --------------- --------------
Cash flows from investing activities
Available-for-sale securities
Proceeds from sales 594,959 1,287,854 204,823
Purchases (298,474) - (12,500)
-------------- --------------- --------------
Net cash provided by investing
activities 296,485 1,287,854 192,323
-------------- --------------- --------------
Cash flows from financing activities
Repayment of long-term debt (32,969) - -
Proceeds from allocation of ESOP 63,415 - -
Proceeds from common stock issued - 650,001 -
Dividends paid (1,768,647) (1,674,256) (2,350,000)
-------------- --------------- --------------
Net cash used in financing activities (1,738,201) (1,024,255) (2,350,000)
-------------- --------------- --------------
Net (decrease) increase in cash and cash
equivalents (1,307,544) 929,102 414,225
Cash and cash equivalents, beginning
of year 1,346,061 416,959 2,734
-------------- --------------- --------------
Cash and cash equivalents, end of year $ 38,517 $1,346,061 $ 416,959
============== =============== ==============
-56-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Change in Registrant's Certifying Accountant.
--------------------------------------------
On December 30, 2000, the Registrant dismissed Rehmann Robson, P.C. as the
Registrant's principal accountants, effective upon completion of their report
with respect to the Registrant's financial statements for the year ended
December 31, 2000. The former accountants' reports on the Registrant's financial
statements for the past two years ended December 31, 1999 and December 31, 2000
did not contain any adverse opinion or disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to change accountants was recommended and approved by the Audit
Committee of the Registrant and by its Board of Directors. During the
Registrant's two most recent fiscal years and subsequent interim periods,
preceding the dismissal, there were no disagreements with the former accountants
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of the former accountants, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report. No "reportable events" as defined in Item 304(a)(1)(v) occurred within
the Registrant's two most recent fiscal years and any subsequent interim periods
preceding the former accountants dismissal.
On January 8, 2001, the Registrant engaged Plante & Moran LLP as its
principal accountants to audit the Registrant's financial statements for the
year ending December 31, 2001. During the Registrant's two most recent fiscal
years and any subsequent interim period prior to engaging the new accountants,
the Registrant did not consult with the newly engaged accountants regarding any
of the matters described in Item 304(a)(2)(i) or (ii).
The letter of the former accountants required by Items 304(a)(3) was filed
as Exhibit 16 to the Registrant's Report on Form 8-K reporting the change in
certifying accountant and that letter is incorporated by reference in this
Report on Form 10-K.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The information with respect to Directors and Nominees of the Registrant,
set forth under the caption "Information About Directors and Nominees" on pages
3 through 4 of the Company's definitive proxy statement, as filed with the
Commission and dated March 20, 2001, relating to the April 26, 2001 Annual
Meeting of Shareholders, is incorporated herein by reference.
Executive Officers
The information called for by this item is contained in Part I of this Form
10-K Report.
Item 11. Executive Compensation.
The information set forth under the caption "Executive Compensation
Summary" on pages 6 and 7 of the Company's definitive proxy statement, as filed
with the Commission and dated March 20, 2001, relating to the April 26, 2001
Annual Meeting of Shareholders, is incorporated herein by reference. Information
under the caption "Committee Report on Executive Compensation" on page 5 of the
definitive proxy statement is not incorporated by reference herein and is not
deemed to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Voting Securities and
Beneficial Ownership of Management" on pages 2 and 3 of the Company's definitive
proxy statement, as filed with the Commission and dated March 20, 2001, relating
to the April 26, 2001 Annual Meeting of Shareholders, is incorporated herein by
reference.
-57-
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" on page
7 of the Company's definitive proxy statement, as filed with the Commission and
dated March 20, 2001, relating to the April 26, 2001 Annual Meeting of
Shareholders, is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 2000 and 1999
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for each of the
Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
On January 8, 2001, the Registrant filed an 8-K report reflecting a change
in Registrant's Certifying Accountants. This change is described in Item 9 of
this Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 9, 2001.
O.A.K. FINANCIAL CORPORATION
/s/ John A. Van Singel
John A. Van Singel
President, Chief Executive Officer
(Principal Executive Officer)
/s/ James A. Luyk
James A. Luyk
Executive Vice President
(Chief Financial Officer)
-58-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each director of the Registrant,
whose signature appears below, hereby appoints David G. Van Solkema and John A.
Van Singel, and each of them severally, as his or her attorney-in-fact, to sign
in his or her name and on his or her behalf, as a director of the Registrant,
and to file with the Commission any and all Amendments to this Report on Form
10-K.
Signature Date
--------- ----
/s/ Robert Deppe March 7, 2001
Robert Deppe
/s/ Norm Fifelski March 7, 2001
Norman Fifelski
/s/ Dellvan Hoezee March 7, 2001
Dellvan Hoezee
/s/ John Peterson March 7, 2001
John Peterson
/s/ Lois Smalligan March 7, 2001
Lois Smalligan
/s/ John A. Van Singel March 7, 2001
John A. Van Singel
/s/ David Van Solkema March 7, 2001
David Van Solkema
__________________________________ March 7, 2001
Gerald Williams
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the
applicable assigned number:
Exhibit
Number
10 Director Deferred Compensation Plan
21 Subsidiaries of Registrant
The following exhibits, indexed according to the applicable assigned
number, were previously filed by the Registrant and are incorporated by
reference in this Form 10-K Annual Report.
Exhibit
Number
3.1 Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 10, as amended.
-59-
3.2 Amendment to the Articles of Incorporation of Registrant filed April
28, 1998, increasing authorized shares of common stock from 2,000,000
to 4,000,000 shares, incorporated by reference to Exhibit 3 of
Registrant's Report on Form 10-K for the year ended December 31, 1998.
3.3 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1
of the Registrant's Registration Statement on Form 10, as amended.
4 Form of Registrant's Stock Certificate are incorporated by reference
to Exhibit 3.1 of the Registrant's Registration Statement on Form 10,
as amended.
10.1 1999 Stock Compensation Plan, incorporated by reference to Appendix A
to the Registrant's Definitive Proxy Statement filed with respect to
its April 22, 1999 annual meeting of shareholders.
10.2 Nonemployee Directors' Stock Option Plan, incorporated by reference to
Appendix A to the Registrant's Definitive Proxy Statement filed with
respect to its April 22, 1999 annual meeting of shareholders.
10.3 1988 Director Deferred Compensation Plan is incorporated by reference
to Exhibit 10 of the Registrant's Registration Statement on Form 10,
as amended.
16 Letter of former accountants required by Item 304(a)(3) of Regulation
S-K is incorporated by reference to Exhibit 16 of the Registrant's
Report on Form 8-K dated December 30, 2000.
-60-
EXHIBIT 10 - FORM OF DIRECTOR DEFERRED COMPENSATION PLAN
DEFERRED COMPENSATION AGREEMENT
THIS DEFERRED COMPENSATION AGREEMENT dated this __________ day of
_________________ by and between BYRON CENTER STATE BANK, hereinafter the
"Company", and __________________________________, hereinafter the "Director".
RECITALS
WHEREAS, Director is a director of the Company; and
WHEREAS, the services of Director and Director's experience and the
knowledge of the affairs of the Company are extremely valuable to the Company;
and
WHEREAS, the Company desires that Director remain in its service, wishes to
continue to receive the benefit of Director's knowledge and experience, and is
willing to offer Director an incentive in the form of deferred compensation.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Duties and Compensation. Director shall remain a director of the Company
with Director's duties, compensation and terms of employment in that capacity to
be such as may be determined from time to time by the Board of Directors until
such service is terminated by either the Company or Director. If Director
remains as a director of the Company until retirement, Director shall further be
entitled to such amounts of deferred compensation as are provided hereinafter.
2. Deferred Compensation Account.
(a) In lieu of paying the Director an annual retainer for services as
a director of the Company, the Company shall each year credit as deferred
compensation to an account for Director's benefit an amount equal to the
amount of the annual retainer which would otherwise be payable to the
Director for service as a director of the Company for the following twelve
months. The Company shall maintain the account on its records and
designated as the Deferred Compensation Account for Director. Director
shall be informed in writing by the Company of the amount of deferred
compensation, and the time as of which such deferred compensation is
credited to Director's Deferred Compensation Account. Any amounts of
deferred compensation credited to Director's Deferred Compensation Account
may be kept in cash or invested and reinvested in mutual funds, stocks,
bonds, securities, a policy or policies of life insurance on Director's
life, or any other assets, or such amount may be used by the Company in
connection with the operation of its business, as may be determined by the
Board of Directors of the Company.
(b) As an investment for Director's Deferred Compensation Account, the
Board of Directors may direct the Company to purchase a policy of life
insurance on the life of Director. In the event that such a life insurance
policy is purchased for purposes of this Agreement, the Company shall be
the applicant, owner and beneficiary of the policy. The Company shall have
all rights under the policy and all incidents of ownership under the
policy.
3. Payment of Deferred Compensation at Retirement. Upon Director's
retirement, the Company shall pay Director deferred compensation in equal annual
installments for 15 years certain, an amount determined to be the greater of (a)
or (b) as follows:
(a) One-fifteenth (1/15) of the amount credited to Director's Deferred
Compensation Account, if any, upon the date Director retires.
-61-
(b) The sum of the following:
(i) An amount equal to one-fifteenth (1/15) of the cash value, if
any, on the date Director retires of any insurance policy purchased by
the Company on Director's life as an investment for purposes of this
Deferred Compensation Agreement; plus
(ii) An amount equal to the increase, if any, in cash value, from
the policy anniversary date in the year of retirement to the policy
anniversary date following the year of retirement.
4. Commencement of Deferred Compensation Payments. Deferred Compensation
payments shall commence at retirement of the Director. Normal retirement shall
be age 65.
At the request of the Director and subject to approval of the Board of
Directors, retirement of the Director can commence at an age other than 65.
The amount of such payments will be determined in accordance with the
formula in paragraph 3, as of the date the Director actually retires.
Postponing or accelerating the normal retirement age under this paragraph
is subject to the sole and absolute discretion of the Board of Directors. The
Director shall not participate in any way in the Board's decision as to any such
postponement or acceleration. Once the Director attains normal retirement age,
or is granted early retirement by the Board of Directors of the Company,
benefits will not be subject to a risk of forfeiture.
5. Payment of Deferred Compensation In Event of Director's Total And
Permanent Disability. In the event of Director's total and permanent disability
prior to commencement of payments provided under paragraphs 3 or 4, the Company
shall pay Director the deferred compensation in the same amount and the same
manner and schedule as set forth in paragraphs 3 and 4 when the Director attains
normal retirement age.
6. Payment of Death Benefit In Lieu Of Deferred Compensation. In the event
of Director's death when Director has not begun receiving payments of deferred
compensation under paragraphs 3 or 4, the Company shall pay Director's
designated beneficiary a death benefit, in lieu of deferred compensation, in an
amount determined to be the greater of (a) or (b) as follows:
(a) The amount credited to Director's Deferred Compensation Account,
if any, upon the date of Director's death.
(b) An amount equal to 10 percent of the death benefit, if any,
received by the Company as a result of Director's death from any insurance
policy purchased by the Company on Director's life as an investment for
purposes of this Deferred Compensation Agreement, payable each year for 10
years.
Payment under this paragraph shall commence within 6 months following the
date of the Director's death. Payment of this benefit shall be in lieu of
deferred compensation benefits described in paragraphs 3 and 4. Payment under
this paragraph will constitute complete and total satisfaction of the
obligations of the Company provided under this Agreement.
7. Payment of Deferred Compensation In Event of Director's Death When
Director Has Begun Receiving Payments Under Paragraphs 3 or 4. In the event of
Director's death when Director has begun receiving payments under paragraphs 3
or 4, the Company shall pay Director's designated beneficiary the remaining
annual deferred compensation payments, if any, to complete the 15 year certain
requirement.
Any payments becoming due to the Director's designated beneficiary shall be
made in the same amount and at the same time as would have been paid to the
Director, until the Company has paid a total of 15 annual installments to the
Director and/or the Director's designated beneficiary.
-62-
8. No Duplication of Deferred Compensation. Deferred compensation shall not
be paid to Director, or to his designated beneficiary, under greater than one of
the following paragraphs of the Agreement: 3, 4, 6 and 7.
9. Designated Beneficiary. For purposes of this Agreement, the designated
beneficiary shall be as provided on Exhibit "A" attached to this Agreement.
Director may change the designated beneficiary by notice in writing to the
Company at any time. If the designated beneficiary shall die after commencement
of payments to the designated beneficiary, remaining payments, if any, shall be
paid to the estate of the designated beneficiary.
10. Prohibition Against Assignment. Except as otherwise expressly provided
herein, Director agrees on behalf of himself and on behalf of his personal
representatives, heirs, legatees, distributees and any other person or persons
claiming any benefits under him by virtue of this Agreement, that this Agreement
and the rights, interests and benefits hereunder shall not be assigned,
transferred, pledged or hypothecated in any way by Director or any personal
representative, heir, legatee, distributee or other person claiming under
Director by virtue of this Agreement and shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge or
hypothecation or other disposition of the Agreement or of such rights, interests
and benefits contrary to the foregoing provisions, or the levy of any attachment
or similar process thereupon, shall be null and void and without effect and the
Company shall have no further liability hereunder.
11. Notices and Elections. Any notice or election to be given hereunder
shall be sent by certified mail, return receipt requested, to the Company at its
registered office and to Director at such address as is carried on the records
of the Company. Either party may change the address to which notices are to be
addressed by notice in writing given to the other in accordance with the terms
hereof. The effective date of any such notice shall be the date of mailing, as
determined by postmark.
12. Funds. Nothing contained in this Agreement and no action taken pursuant
to the provisions of this Agreement shall create or be construed to create a
trust of any kind, a fund, or fiduciary relationship between the Company and the
Director, his designated beneficiary or any other person. Any funds, including
all investments and any life insurance policies, used to determine payment under
the Agreement shall be a part of the general funds and assets of the Company and
subject to the claims of the Company's general creditors and no person other
than the Company shall by virtue of the provisions of this Agreement have any
right, interest, or title in such funds. To the extent that any person acquires
a right to receive payments from the Company under this Agreement, such right
shall be not greater than the right of any unsecured general creditor of the
Company. Benefits provided by this Agreement are separate from and unrelated to
the proceeds or value of any insurance policy purchased by the Company to
informally fund this Agreement. Director shall not have any present right or
interest in, nor any deferred claim to, or beneficial ownership of, any
insurance policy held by the Company with respect to this Agreement.
13. Acceleration of Benefits. At the discretion of the Board of Directors
of the Company acting without any participation by the Director, the Company
shall retain the right to accelerate the payment of any benefits remaining due
to the Director or the Director's designated beneficiaries under this agreement.
Any acceleration of benefits shall be discounted at an interest rate equal to
the "Federal Funds Rate" which shall be the mean of the high and low rates
quoted for Federal Funds in the "Money Rates" column of The Wall Street Journal
for the business day preceding the date on which the Company notifies the
Director or the Director's designated beneficiaries of the Company's intention
to accelerate payment. Any such payment will constitute complete and total
satisfaction of the obligations of the Company provided under this Agreement.
14. Effect Upon Director Relationship. Nothing in this Agreement shall be
construed as granting Director the right to be continued as a director of the
Company, or as a limitation on the right of the Company to terminate the service
of Director at any time.
15. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successor of the Company and any such successor shall be deemed
substituted for the Company under the terms of this Agreement. As used in this
agreement, the term "successor" shall include any person, firm, corporation, or
other business entity which at any time, whether by merger, purchase or
otherwise, acquires all or substantially all of the assets or business of the
Company.
-63-
16. Governing Law. This Agreement shall be interpreted, construed,
enforced, and performed in accordance with the laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
DIRECTOR: COMPANY:
_________________________ By: _____________________________
Its _________________________
-64-
EXHIBIT "A"
DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION FOR
--------------------------------
In the event of my death, my primary beneficiary shall be:
________________________________________________________
In the event my primary beneficiary predeceases me my contingent beneficiary
shall be:
________________________________________________________
__________________________________ _________________________________
Print Witness Name Print Director Name
__________________________________ _________________________________
Witness Signature Director Signature
Date:_______________________
-65-
Exhibit 21 - Subsidiaries of Registrant - 100% Owned
Byron Center State Bank
2445 84th Street, S.W.
Byron Center, MI 49315
O.A.K. Financial Services, Inc. (100% owned subsidiary of Byron
Center State Bank)
2445 84th Street, S.W.
Byron Center, MI 49315
Dornbush Insurance Agency, Inc. (100% owned subsidiary of O.A.K.
Financial Services, Inc.)
5445 32nd Avenue
Hudsonville, MI 49426
-66-
O.A.K. FINANCIAL CORPORATION
2445 84th Street, S.W.
Byron Center, Michigan 49315
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 26, 2001
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of O.A.K. Financial Corporation (the "Corporation"), a Michigan
corporation, will be held on April 26, 2001, at 9:00 a.m., at the Byron Township
Hall, 8085 Byron Center, S.W., Byron Center, Michigan, for the following
purposes:
1. To elect three directors, each to hold office for a 3-year term.
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed March 12, 2001, as the record date for the
determination of shareholders entitled to notice of and to vote at the meeting
or any adjournment thereof.
By order of the Board of Directors,
/s/ John A. Van Singel, Secretary
Your vote is important. Even if you plan to attend the meeting, please
date and sign the enclosed proxy form, indicate your choice with
respect to the matters to be voted upon, and return it promptly in the
enclosed envelope. Note that if the stock is held in more than one
name, all parties must sign the proxy form.
Dated: March 20, 2001
O.A.K. FINANCIAL CORPORATION
2445 84th Street, S.W.
Byron Center, Michigan 49315
PROXY STATEMENT
This Proxy Statement and the enclosed proxy are furnished in connection
with the solicitation of proxies by the Board of Directors of O.A.K. Financial
Corporation (the "Corporation"), a Michigan bank holding company, to be voted at
the Annual Meeting of Shareholders of the Corporation to be held on Thursday,
April 26, 2001, at 9:00 a.m., at the Byron Township Hall, 8085 Byron Center,
S.W., Byron Center, Michigan, or at any adjournment or adjournments thereof, for
the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders and in this Proxy Statement.
VOTING AT THE MEETING
This Proxy Statement has been mailed on or about March 20, 2001, to all
holders of record of common stock of the Corporation as of the record date. The
Board of Directors of the Corporation has fixed the close of business on March
12, 2001, as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting of Shareholders and any adjournment
thereof.
The Corporation has only one class of capital stock authorized, which is
common stock of the par value of $1.00 per share. There are presently 2,042,532
shares of common stock of the Corporation outstanding. Each outstanding share
will entitle the holder thereof to one vote on each separate matter presented
for vote at the meeting. The inspectors of the meeting, who are appointed by the
Corporation, count votes cast at the meeting and submitted by proxy.
If a Proxy in the enclosed form is properly executed and returned to the
Corporation, the shares represented by the Proxy will be voted at the Annual
Meeting and any adjournment thereof. If a shareholder specifies 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 election of all of the nominees
named in the Proxy Statement and for the proposals, if any, set forth in this
Proxy Statement, and in accordance with the judgment of the persons named as
proxies with respect to any other matter which may come before the meeting. A
proxy may be revoked before exercise by notifying the Secretary of the
Corporation in writing or in open meeting, by submitting a proxy of a later
date, or attending the meeting and voting in person. All shareholders are
encouraged to date and sign the enclosed proxy form, indicate your choice with
respect to the matters to be voted upon, and return it to the Corporation.
ELECTION OF DIRECTORS
The Articles of Incorporation of the Corporation authorize the Board of
Directors to establish the size of the Board. The Board of Directors has
established the size of the Board for 2001 at eight (8) persons with the
authority to increase to nine (9) persons. The Articles of Incorporation also
provide for the division of the Board of Directors into three (3) classes of
nearly equal size with staggered 3-year terms of office. Three people have been
nominated by the Board of Directors for election to the Board to serve a
three-year term expiring at the 2004 Annual Meeting of Shareholders. The Board
has nominated Norman Fifelski, Dellvan Hoezee and Robert Deppe each for a 3-year
term. All of the nominees are incumbent directors previously elected by the
Corporation's shareholders.
Unless otherwise directed by a shareholder's proxy, the persons named as
proxy holders in the accompanying proxy will vote for the nominees named above.
In the event any of such nominees shall become unavailable, which is not
anticipated, the Board of Directors in its discretion may designate substitute
nominees, in which event the enclosed proxy will be voted for such substitute
nominees. Proxies cannot be voted for a greater number of persons than the
number of nominees named.
Except for those persons nominated by the Board of Directors, no other
persons may be nominated for election at the 2001 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.
-1-
A plurality of the votes cast at the meeting is required to elect the
nominees as directors of the Corporation. As such, individuals who receive the
largest number of votes cast at the meeting will be elected as directors. Shares
not voted at the meeting, whether by abstention, broker nonvote, or otherwise,
will not be treated as votes cast at the meeting.
The Board of Directors recommends a vote FOR the election of all the
persons nominated by the Board.
VOTING SECURITIES AND BENEFICIAL OWNERSHIP OF MANAGEMENT
At March 12, 2001, the Corporation had outstanding 2,042,532 shares of
common stock, par value $1.00 per share. Shareholders are entitled to one vote
for each full share of common stock registered in their names at the close of
business on March 12, 2001, the record date fixed by the Board of Directors. The
inspectors of the meeting, who are appointed by the Corporation, count votes
cast at the meeting and submitted by proxy.
As of March 12, 2001, no person was known by management to be the
beneficial owner of more than 5% of the outstanding common stock of the
Corporation except as follows:
- ---------------------------------------------------------------------------------------------------------
Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
- ---------------------------------------------------------------------------------------------------------
Charles Andringa 113,532 5.6%
2807 Bridgeside Drive
Caledonia, MI 49316
- ---------------------------------------------------------------------------------------------------------
Willard and Jane Van Singel (1) 277,969 (1) 13.61%
8977 Lindsey Lane, S.W.
Byron Center, MI 49315
- ---------------------------------------------------------------------------------------------------------
(1) Willard and Jane Van Singel are husband and wife. Of the shares shown
above, Mr. Van Singel has sole voting and investment power with respect to
120,629 shares (5.91%) and Mrs. Van Singel has sole voting and investment
power with respect to 110,000 shares (5.39%). Mr. & Mrs. Van Singel own
47,340 shares (2.3%) jointly and share voting and investment power with
certain of their adult children.
The information in the following table sets forth the beneficial ownership
of the Corporation's common stock by each of the executive officers listed in
the Summary Compensation Table presented later and by all directors and
executive officers as a group.
- --------------------------------------------------------------------------------------------------------------------
Person Amount and Nature of Approximate
Beneficial Ownership Percent of Class
- --------------------------------------------------------------------------------------------------------------------
John A. Van Singel............................. 49,678 (1)(2) 2.43%
- --------------------------------------------------------------------------------------------------------------------
John Peterson.................................. 2,261 (2) *%
- --------------------------------------------------------------------------------------------------------------------
All executive officers and directors as a 138,265 (2)(3) 6.77%
group (consisting of 15 persons).........
- --------------------------------------------------------------------------------------------------------------------
*Less than one percent
(1) Includes 9,706 shares owned by Mr. Van Singel's minor children and 19,482
shares owned jointly by Mr. Van Singel with his parents, Willard and Jane
Van Singel.
(2) Includes shares subject to stock options exercisable within 60 days as
follows: Mr. Van Singel - 4,000; Mr. Peterson - 2,008; and all executive
officers and directors as a group - 19,541.
(3) Included for informational purposes are 20,546 shares to which officers and
directors disclaim beneficial ownership.
-2-
INFORMATION ABOUT DIRECTORS AND DIRECTOR NOMINEES
The following information relating to the principal occupation or
employment has been furnished to the Corporation by the respective directors and
director nominees. Each of those persons has been engaged in the occupations
stated below for more than 5 years.
====================================================================================================================
Nominee for Election as Director for Term Expiring in 2004
- --------------------------------------------------------------------------------------------------------------------
Amount and Nature
of Beneficial
Director of Ownership Approximate
Age Corporation Since 3/12/01(1) (6) Percent of Class
- --------------------------------------------------------------------------------------------------------------------
Norman Fifelski........................... 55 1988 4,699 *
Owner, Hillcrest Foods and Fuel
- --------------------------------------------------------------------------------------------------------------------
Dellvan Hoezee............................ 66 1991 7,138 (5) *
President, Hudsonville Creamery
- --------------------------------------------------------------------------------------------------------------------
Robert Deppe.............................. 40 1997 1,388 *
President, Robert Deppe Building
and Development Inc.
- --------------------------------------------------------------------------------------------------------------------
Directors Whose Terms Expire in 2003
- --------------------------------------------------------------------------------------------------------------------
John Peterson............................. 52 1999 2,261 *
Executive Vice President,
Byron Center State Bank
- --------------------------------------------------------------------------------------------------------------------
David Van Solkema......................... 59 1988 3,672 *
President, Jobbers Warehouse
Service, Inc.
(an auto parts distributor)
- --------------------------------------------------------------------------------------------------------------------
Gerald Williams........................... 68 1988 12,030 (4) *
President, Dorr Farm Products
(Farm equipment retailer)
- --------------------------------------------------------------------------------------------------------------------
Directors Whose Terms Expire in 2002
- --------------------------------------------------------------------------------------------------------------------
Lois Smalligan............................ 68 1988 44,932 (2) 2.20%
Vice President and Mortgage Loan
Officer, Byron Center State Bank
- --------------------------------------------------------------------------------------------------------------------
John A. Van Singel........................ 46 1988 49,678 (3) 2.43%
President, Byron Center State Bank
====================================================================================================================
*Represents less than one percent
(1) This information is based upon the Corporation's records as of March 12,
2001, and information supplied by the persons listed above. The number of
shares stated in this column includes shares owned of record by the
shareholder and shares, which, under federal securities regulations, are
deemed to be beneficially owned by the shareholder, including shares
subject to stock options exercisable within 60 days. Unless otherwise
indicated below, the persons named in the table have sole voting and sole
investment power or share voting and investment power with their respective
spouses, with respect to all shares beneficially owned.
(2) Includes 11,656 shares owned by Ms. Smalligan's husband and 20,546 shares
owned by Ms. Smalligan's children and grandchild, as to which she disclaims
beneficial ownership.
(3) Includes 9,706 shares owned by Mr. Van Singel's minor children and 19,482
shares owned jointly by Mr. Van Singel with his parents, Willard and Jane
Van Singel.
(4) 10,030 of these shares are owned by Mr. Williams' wife.
(5) Includes 3,160 shares owned by Hudsonville Creamery & Ice Cream Co., a
corporation in which Mr. Hoezee owns a one-third interest.
(6) Includes shares held in ESOP as follows: Mr. Van Singel 70 shares, Mr.
Peterson 35 shares, and Ms. Smalligan 26 shares.
-3-
Director Compensation
Directors of the Corporation and the Bank are paid an annual retainer fee
of $10,000 for their service on both boards. No compensation is paid for
attendance at Corporation or Bank Board or committee meetings; although
discretionary bonuses were paid to each non-employee director amounting to
$2,000, $2,500 and $8,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. During 2000, the Board of Directors of the Corporation and the
Bank held a total of 24 regular meetings. Various committees of the Board held
meetings as needed. Each director attended at least 75% of the total number of
meetings of the Board of Directors and meetings of committees on which they
served.
In 1988, the Bank adopted a deferred compensation plan for directors that
provide for benefit payments to the participant and his or her family upon
retirement or death. All of the Corporation's directors, except for Messrs.
Deppe and Peterson, are participants in this plan. This plan allowed for the
deferral of director fees in return for the payment of certain defined benefits
payable upon termination of one's service as a director of the Bank. The cost of
this plan was $109,670, $109,670 and $109,670 in 2000, 1999 and 1998,
respectively. The total accrued liability of the Bank under this plan was
$820,952 as of December 31, 2000. The Bank has purchased life insurance policies
on the lives of the participating directors with the Bank as the owner and
beneficiary. The life insurance policies will be used to fund the benefits under
the plan. The cash surrender value of the policies was $1,131,351 as of December
31, 2000. As of January 1, 1997, no further deferrals of directors' fees may be
made under this plan.
In 1998, the Bank adopted a new deferred compensation plan for directors.
The plan permits the Board to defer the payment of fees for service on the
Board. Fees, which are deferred, are credited to the deferred compensation
accounts of the individual participating directors and invested in a manner
determined by the board. The Board is authorized to direct the Bank to purchase
policies of life insurance on the life of participating directors as one of the
investment vehicles under the plan. If a life insurance policy is purchased with
respect to a participating director's life, the Bank is the owner and
beneficiary of the policy. Upon a director's retirement, the cash value of the
policy is paid out to the director in annual installments over a period of
fifteen years. If a participating director dies before beginning to receive
payments, the Bank will pay a beneficiary designated by the director a death
benefit in lieu of deferred compensation in an amount equal to the greater of
the amount of fees credited to the director's deferred compensation account or
an amount payable each year for ten years equal to ten percent of the death
benefit, if any, received by the Bank as a result of the director's death from
any insurance policy purchased by the Bank on the director's life as an
investment for purposes of the deferred compensation plan. The cost of this plan
was $68,994, $93,989, and $42,000 in 2000, 1999 and 1998 respectively. The cash
surrender value and liability of this plan are both $169,926.
On January 28, 1999, the Board of Directors adopted the O.A.K. Financial
Corporation 1999 Directors' Stock Option Plan, which was approved by the
Corporation's shareholders at the April 22, 1999 Annual Meeting. On February 18,
1999, stock options to purchase 500 shares were granted to each non-employee
director. On January 21, 2000, stock options to purchase an additional 500
shares were granted to each nonemployee director.
Audit Committee
The Audit Committee, comprised of Messrs. Fifelski, Hoezee and Williams,
met on four occasions during 2000. Each of the members of the Audit Committee is
"independent" as defined in Rule 4200(a) of the NASD Listing Standards. Its
primary duties and responsibilities include annually recommending to the Board
of Directors an independent public accounting firm to be appointed auditors of
the Corporation and the Bank, reviewing the scope and fees for the audit,
reviewing all the reports received from the independent certified public
accountants, reviewing the activities of, and coordinating matters, with the
internal auditing department. The Corporation's Board of Directors has not
adopted an Audit Committee Charter.
Audit Committee Report
We have reviewed and discussed with management the Corporation's audited
financial statements as of and for the year ended December 31, 2000.
-4-
We have discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, Communication with Audit
Committees, as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from
the independent auditors required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended, by the Independence Standards
Board, and have discussed with the auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Corporation's Form 10-K for the year ended December 31, 2000.
Respectfully submitted, Norman Fifelski, Dellvan Hoezee and Gerald
Williams.
COMPENSATION OF EXECUTIVE OFFICERS
Committee Report on Executive Compensation
Decisions on the compensation of the Corporation's executive officers are
made by the Board's nonemployee directors consisting of Messrs. Deppe, Fifelski,
Hoezee, Van Solkema and Williams. To ensure this Committee's independence, the
Board of Directors has, from time to time, used outside consultants to assist
the Committee in its deliberations. This Committee report addresses the
Corporation's compensation policies and programs for the year ended December 31,
2000.
Base Salary - Excluding consideration of other relevant factors, which may
include individual performance, experience, expertise and tenure, the Board
intends to maintain the base salaries of the Corporation's executive officers
and senior managers within peer group levels.
Annually, the Committee establishes a base wage for the President and Chief
Executive Officer, Mr. Van Singel, and for Mr. Peterson and Ms. Smalligan. The
Committee's determination is based upon compensation levels established by the
Corporation's peers and evaluations by consultants.
The base salaries of all other executive officers are established by the
Corporation's President and Chief Executive Officer.
Annual Cash Incentive - To provide performance incentives and to compensate
for lower base salary, the strategy provides for annual cash awards that are
payable if the Corporation and the Byron Center State Bank meet or exceed annual
performance objectives established by the Board of Directors.
Long-Term Incentives - To align the interests of its executive officers and
senior managers with the Corporation's shareholders, the compensation strategy
includes the 1999 Stock Compensation Plan ("1999 Stock Plan") and a qualified
employee stock ownership and 401(K) plan. During 2000, 9,627 incentive stock
options were granted to a total of fourteen executives of the Corporation. The
number of shares subject to each option was based upon the position and a
discretionary assessment of the performance of each grantee. The options awarded
in 2000 vest after one year. The 1999 Stock Plan also allows the Corporation to
issue restricted stock to officers and employees of the Corporation and its
subsidiaries. However, no shares of restricted stock were awarded in 2000.
Respectfully submitted, Robert Deppe, Norman Fifelski, Dellvan Hoezee,
David Van Solkema, Gerald Williams
-5-
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth the compensation paid by the Bank during the
last three years to its Chief Executive Officer and during the past year to its
Executive Vice President. There are no employees of the Corporation; all
personnel are employed by the Bank. No other executive officers of the
Corporation or the Bank received annual compensation in excess of $100,000
during this period.
Long -Term
Annual Compensation Compensation
--------------------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
--------------------------- ---- ------ ----- ------ ---------------
John Van Singel, President and 2000 $180,000 $38,250 2,000 $13,110
Chief Executive Officer 1999 170,000 45,000 2,000 15,174
1998 160,000 45,000 0 15,306
John Peterson, Executive 2000 $98,000 $14,250 1,002 $7,164
Vice President 1999 93,000 17,500 1,006 12,819
1998 87,000 14,000 0 10,349
(1) The amount set forth in this column includes (a) Bank contributions to
the Bank's Profit Sharing Plan of $9,350, $10,200 and $12,750 for Mr.
Van Singel for 2000, 1999 and 1998, respectively, Bank contributions of
$5,390, $7,791 and $9,148 for Mr. Peterson for 2000, 1999 and 1998,
respectively, (b) Bank contributions to 401(k) plan as a matching
contribution of $3,600, $4,818, and $2,400 for Mr. Van Singel for 2000,
1999, 1998, respectively, Bank contributions of $1,470, $2,272 and
$1,045 for Mr. Peterson for 2000, 1999 and 1998 respectively, and (c)
the dollar value of premiums paid by the Bank for term life insurance
on behalf of Mr. Van Singel and Mr. Peterson.
The Corporation and the Bank maintain the 1999 Stock Compensation Plan.
They also maintain the Employee Stock Ownership Plan implemented in January 1999
as a part of the Corporation's 401(k) Profit Sharing Plan. The Bank maintains a
bonus plan, whereby cash bonuses are paid to employees if the Bank exceeds
certain predetermined levels of earnings established each year by the Board of
Directors.
Stock options are believed to help align the interests of employees with
the interests of shareholders by promoting stock ownership by employees and by
rewarding them for appreciation in the price of the Corporation's stock. Stock
options granted and outstanding during 2000 were granted under the 1999 Stock
Compensation Plan.
The following table sets forth information concerning stock options granted
to and retained by the named executive officers of the Corporation during 2000.
None of the named officers exercised stock options during 2000:
EXECUTIVE OPTION GRANTS IN LAST FISCAL YEAR
Percent of Potential Realizable Value at
Total Assumed Annual Rates of
Number of Options Stock Appreciation
Shares Granted to for Option Term
Underlying Employees -----------------------
Options in Fiscal Exercise Expiration
Granted Year Price Date 5% 10%
--------- ------ ------ ------ -- ---
John A. Van Singel 2,000 20.8% $55.00 1/13/2010 $69,178 $175,312
John Peterson 1,002 10.4% $55.00 1/13/2010 $34,658 $87,831
-6-
The per share exercise price of each option is equal to the market value of
the common stock on the date each option was granted. All outstanding options
were granted for a term of ten years. Options terminate, subject to certain
limited exercise provisions, in the event of death, retirement, or other
termination of employment. No option is exercisable until twelve months after
the date of grant.
YEAR END OPTION VALUES
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Year end Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
John A. Van Singel 2,000/2,000 $10,000/0
John Peterson 1,006/1,002 $5,030/0
The per share exercise price of each option is equal to the market value of
the common stock on the date each option was granted. The unexercisable options
noted above became exercisable as of February 2001.
CERTAIN TRANSACTIONS
Certain directors and officers of the Corporation have had and are expected
to have in the future, transactions with the Bank, or have been directors or
officers of corporations, or members of partnerships, which have had and are
expected to have in the future, transactions with the Bank. All such
transactions with officers and directors, either directly or indirectly, have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and these transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features. All such future transactions, including transactions with
principal shareholders and other Corporation affiliates, will be made in the
ordinary course of business, on terms no less favorable to the Corporation than
with other customers, and will be subject to approval by a majority of the
Corporation's independent, outside disinterested directors.
-7-
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Corporation's common stock with
that of the cumulative total return on the MG Group Index and the NASDAQ Stock
Market Index for the five year period ended December 31,2000. The MG Group Index
is an index composed of 90 banks and bank holding companies located in the
Midwest and published by Media General Financial Services. The following
information is based on an investment of $100, on December 31, 1995, in the
Corporation's common stock, the MG Group Index, and the NASDAQ Stock Market
Index, with dividends reinvested. There has been limited trading in the
Corporation's Common Stock and the Corporation's common stock does not trade on
any stock exchange. Accordingly, the returns reflected in the following graph
and table are based on sale prices of the Corporation's stock of which
management is aware. There may have been sales at higher or lower prices of
which management is not aware.
[GRAPHIC OMITTED]
- -------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------
O.A.K. Financial 100 120.04 149.22 223.10 249.27 253.12
- -------------------------------------------------------------------------------------------------------------------
MG Group Index 100 133.59 228.03 252.99 209.94 255.66
- -------------------------------------------------------------------------------------------------------------------
NASDAQ Market Index 100 124.27 152.00 214.39 378.12 237.66
- -------------------------------------------------------------------------------------------------------------------
Source: Media General Financial Services, Richmond, Virginia
-8-
COMPLIANCE WITH SECTION 16 REPORTING
The rules of the Securities and Exchange Commission require that the
Corporation disclose late filings of reports of stock ownership (and changes in
stock ownership) by its directors, executive officers and beneficial owners of
more than 10% of the Corporation's common stock. Based solely on its review of
the copies of such reports received by it, and written representations from
certain reporting persons, the Corporation believes that during the year ended
December 31, 2000, its directors, executive officers and beneficial owners of
more than 10% of the Corporation's common stock have complied with all filing
requirements applicable to them.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of the Corporation for the year ended December 31,
2000 have been audited by Rehmann Robson PC, independent certified public
accountants. Representatives of Rehmann Robson PC are not expected to be at the
Annual Meeting of Shareholders
The Corporation has dismissed Rehmann Robson PC ("Rehmann Robson") as its
principal accountants, effective upon completion of their report with respect to
the Corporation's financial statements for the year ended December 31, 2000.
Rehmann Robson reports on the Corporation's financial statements for the past
two years ended December 31, 1999 and December 31, 2000, did not contain any
adverse opinion or disclaimer of opinion nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. The decision to change
accountants was recommended and approved by the Audit Committee of the
Corporation and by its Board of Directors. During the Corporation's two most
recent fiscal years, there were no disagreements with Rehmann Robson on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which disagreements, if not resolved to the
satisfaction of Rehmann Robson, would have caused them to make reference to the
subject matter of the disagreement in connection with their report.
On January 8, 2001, the Corporation engaged Plante & Moran LLP as its
principal accountants to audit the Corporation's financial statements for the
year ending December 31, 2001. Representatives of Plante & Moran LLP are not
expected to be at the Annual Meeting.
Audit Fees
Aggregate fees billed for professional services rendered for the audit of
the Corporation's annual consolidated financial statements for the fiscal year
ended December 31, 2000 and the review of financial statements included in
Corporation's Forms 10-K filed with the Securities and Exchange Commission for
that fiscal year were: $48,000.
Financial Information System Design and Implementation Fees
No professional services were rendered by Rehmann Robson PC for the year
ended December 31, 2000, with respect to, directly or indirectly, operating, or
supervising the operation of, the Corporation's information systems or managing
the Corporation's local area network or designing or implementing a hardware or
software system that aggregates source data underlying the financial statements
or generates information that is significant to the Corporation's financial
statements taken as a whole.
All Other Fees
The aggregate fees billed for services rendered by Rehmann Robson PC for
services not covered under the two preceding captions totaled $92,108, which
includes loan review, internal audit support and a cost segregation recovery
analysis.
The Corporation's Audit Committee has concluded that the provision of
services covered under the caption All Other Fees is compatible with Rehmann
Robson PC maintaining their independence. None of the hours expended on Rehmann
Robson's engagement to audit the Corporation's consolidated financial statements
for the year ended December 31, 2000, were attributed to work performed by
persons other than Rehmann Robson's full-time, permanent employees.
-9-
SHAREHOLDER PROPOSALS
No shareholder may present a proposal for consideration at the 2002 Annual
Meeting of Shareholders unless notice is given not later than February 18, 2002
to the Corporation in compliance with Article XI of the Corporation's Articles
of Incorporation stating the shareholder's intention to do so. Any shareholder
proposal to be considered by the Corporation for inclusion in the 2002 Annual
Meeting of Shareholders proxy materials must be received by the Corporation no
later than November 20, 2001.
OTHER BUSINESS
The Board of Directors is not aware of any matter to be presented for
action at the meeting, other than the matters set forth herein. If any other
business should come before the meeting, the proxy will be voted in respect
thereof in accordance with the best judgment of the persons authorized therein,
and discretionary authority to do so is included in the proxy. The cost of
soliciting proxies will be borne by the Corporation. In addition to solicitation
by mail, officers and other employees of the Corporation and its subsidiaries
may solicit proxies by telephone or in person, without compensation other than
their regular compensation.
The Annual Report on Form 10-K of the Corporation for 2000 is included with
this Proxy Statement. Copies of the report will also be available for all
shareholders attending the Annual Meeting. The Form 10-K 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,
which file electronically. The Commission's web site address is
http:\\www.sec.gov.
Shareholders are urged to sign and return the enclosed proxy in the
enclosed envelope. A prompt response will be helpful and appreciated.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ John A. Van Singel
John A. Van Singel
Secretary
-10-
O.A.K. Financial Corporation This Proxy is solicited
2445 84th Street, S.W. on behalf of the
Byron Center, Michigan 49315 Board of Directors
PROXY
The undersigned hereby appoints David Van Solkema and John Van Singel as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock of O.A.K. Financial Corporation held of record by the undersigned on March
12, 2001, at the annual meeting of shareholders to be held April 26, 2001, and
at any adjournment thereof.
1. In the election of three directors, each to be elected for a term expiring
in 2004
[ ] FOR the nominee listed below [ ] WITHHOLD AUTHORITY
to vote for the nominee listed below
Norman Fifelski - Dellvan Hoezee - Robert Deppe
(INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list above.)
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted FOR all nominees listed in Proposal 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
_____________________________________ __________________________________
Signature Signature if held jointly
Dated: __________________, 2001
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.