[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 (State of other jurisdiction of incorporation or organization) |
38-2817345 (I.R.S. Employer Identification No.) |
2445 84th Street, S.W., Byron Center, Michigan 49315
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 878-1591
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X .
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,040,780 shares of the Corporation’s Common Stock ($1 par value) were outstanding as of May 14, 2003.
INDEX
| Page Number(s) |
||
| Part I. | Financial Information (unaudited): |
|
|
Item 1. Consolidated Financial Statements Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures |
3-6 7-8 9-20 21 21 |
|
| Part II. | Other Information |
|
|
Item 6. Exhibits and Reports on Form 8-K |
22 |
|
| Signatures | 23 |
|
-2-
|
O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
CONSOLIDATED BALANCE SHEETS |
(Dollars in thousands)
March 31, December 31,
2003 2002
ASSETS (Unaudited)
-------------------- -------------------
Cash and due from banks.................................................. $10,473 $17,329
Federal funds sold....................................................... 36,052 39,675
------ ------
Cash and cash equivalents................................................ 46,525 57,004
Available-for-sale securities............................................ 89,963 81,125
Total Loans ............................................................. 366,807 377,567
Allowance for loan losses................................................ (8,467) (8,398)
------- -------
Net Loans................................................................ 358,340 369,169
Loans held for sale...................................................... 5,059 1,896
Accrued interest receivable.............................................. 3,096 2,908
Premises and equipment, net.............................................. 14,816 15,010
Restricted investments................................................... 2,900 2,900
Other assets............................................................. 7,725 7,460
----- -----
Total assets............................................................. $528,424 $537,472
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing......................................................... $335,813 $344,790
Non-interest bearing..................................................... 49,780 52,622
------ ------
Total deposits........................................................... 385,593 397,412
Securities sold under agreements to repurchase
and federal funds purchased............................................ 51,228 47,896
Borrowed funds........................................................... 35,000 35,000
Other liabilities........................................................ 3,776 4,558
----- -----
Total liabilities........................................................ 475,597 484,866
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized;
2,040,780 shares issued and outstanding ............................... 2,041 2,041
Additional paid-in capital............................................... 6,297 6,307
Retained earnings........................................................ 43,384 42,716
Accumulated other comprehensive income .................................. 1,384 1,868
Unallocated common stock held by ESOP.................................... (279) (326)
----- -----
Total stockholders' equity............................................... 52,827 52,606
------ ------
Total liabilities and stockholders' equity............................... $528,424 $537,472
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
-3-
|
O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF INCOME |
(Dollars in thousands except per share data) Three Months Ended March 31,
(Unaudited)
2003 2002
------------------ -------------------
Interest income
Interest and fees on loans............................................. $6,149 $7,437
Available-for-sale securities ......................................... 861 844
Restricted investments................................................. 41 43
Federal funds sold..................................................... 81 9
----- -----
Total interest income.................................................. 7,132 8,333
----- -----
Interest expense
Deposits .............................................................. 2,165 2,557
Borrowed funds......................................................... 445 572
Securities sold under agreements to repurchase......................... 160 161
----- -----
Total interest expense................................................. 2,770 3,290
----- -----
Net interest income.................................................... 4,362 5,043
Provision for loan losses ............................................. 525 600
----- -----
Net interest income after provision for
loan losses............................................................ 3,837 4,443
----- -----
Non-interest income
Service charges on deposit accounts.................................... 492 416
Net gain on sales of loans held for sale............................... 657 704
Amortization of mortgage servicing rights.............................. (398) (234)
Impairment of mortgage servicing rights................................ (75) -
Loan servicing fees.................................................... 156 102
Net gain on sales of available-for-sale securities..................... - 48
Insurance premiums..................................................... 405 333
Brokerage fees......................................................... 44 57
Other.................................................................. 58 52
----- -----
Total non-interest income 1,339 1,478
----- -----
Non-interest expenses
Salaries .............................................................. 1,845 1,817
Employee benefits...................................................... 584 505
Occupancy (net)........................................................ 302 292
Furniture and fixtures................................................. 271 254
Other.................................................................. 1,283 1,136
----- -----
Total non-interest expenses............................................ 4,285 4,004
----- -----
Income before federal income taxes..................................... 891 1,917
Federal income taxes .................................................. 220 553
----- -----
Net income............................................................. $671 $1,364
===== ======
Income per common share:
Basic.................................................................. $0.33 $0.67
===== ======
Diluted................................................................ $0.33 $0.67
===== ======
The accompanying notes are an integral part of these consolidated financial statements.
-4-
|
O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
(Dollars in thousands) Three Months Ended March 31,
(Unaudited)
2003 2002
------------------- -------------------
Shares of common stock issued and outstanding
Balance, beginning of period........................................... 2,041 2,041
Common stock issued.................................................... - -
----- -----
Balance, end of period................................................. 2,041 2,041
----- -----
Common stock
Balance, beginning of period........................................... $2,041 $2,041
Common stock issued.................................................... - -
----- -----
Balance, end of period................................................. 2,041 2,041
----- -----
Additional paid-in-capital
Balance, beginning of period........................................... 6,307 6,302
Allocation of ESOP shares.............................................. (10) (5)
------ ------
Balance, end of period................................................. 6,297 6,297
----- -----
Retained earnings
Balance, beginning of period........................................... 42,716 40,396
Unallocated ESOP shares................................................ - 8
Cash dividends......................................................... (3) -
Net income............................................................. 671 1,364
----- -----
Balance, end of period................................................. 43,384 41,768
------ ------
Accumulated other comprehensive (loss) income
Balance, beginning of period........................................... 1,868 916
Other comprehensive income (loss)...................................... (484) (64)
------ ------
Balance, end of period................................................. 1,384 852
----- -----
Unallocated common stock held by ESOP
Balance, beginning of period........................................... (326) (373)
Allocation of ESOP shares.............................................. 47 46
----- -----
Balance, end of period................................................. (279) (327)
------ ------
Total stockholders' equity............................................. $52,827 $50,631
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
-5-
|
O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Dollars in thousands) Three Months Ended March 31,
(Unaudited)
------------------------------------------
2003 2002
------------------ ------------------
Cash flows from operating activities
Net income........................................................... $671 $1,364
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization....................................... 276 238
Provision for loan losses........................................... 525 600
Proceeds from sales of loans held for sale.......................... 33,638 61,187
Originations of loans held for sale................................. (36,144) (54,798)
Net gain on sales of available-for-sale securities.................. - (48)
Net gain on sales of loans held for sale............................ (657) (704)
Net amortization of investment premiums............................. 178 94
Loss on sales of property and equipment............................. 8 9
Deferred federal income tax benefit................................. (273) (97)
Changes in operating assets and liabilities which (used) provided cash
Accrued interest receivable......................................... (188) (210)
Other assets........................................................ 8 (349)
Other liabilities................................................... (732) (378)
------- ------
Net cash (used in) provided by operating activities..................... (2,690) 6,908
------- -----
Cash flows from investing activities
Available-for-sale securities
Proceeds from maturities............................................ 5,539 7,030
Proceeds from sales................................................. - 1,258
Purchases........................................................... (15,052) (11,110)
Net decrease (increase) in loans held for investment.................. 10,303 (9,387)
Purchases of premises and equipment................................... (91) (1,245)
Proceeds from the sale of premises and equipment...................... 1 49
------- -------
Net cash provided by (used) in investing activities..................... 700 (13,405)
------- --------
Cash flows from financing activities
Net (decrease) increase in deposits................................... (11,820) 13,344
Net increase (decrease) in TT&L note.................................. - 4,595
Proceeds from FHLB borrowings......................................... - 4,000
Repayments of FHLB borrowings......................................... - (2,000)
Net other borrowed funds (repayments)................................. - (11)
Dividends paid........................................................ (3) -
Net increase (decrease) in securities sold under
agreements to repurchase and fed funds purchased..................... 3,332 (9,675)
------- --------
Net cash (used in) provided by financing activities .................... (8,491) 10,253
-------- -------
Net (decrease) increase in cash and cash equivalents ................... (10,481) 3,756
Cash and cash equivalents, beginning of period.......................... 57,004 12,052
------- -------
Cash and cash equivalents, end of period ............................... $46,525 $15,808
======= =======
Supplementary cash flows information
Interest paid......................................................... $2,972 $3,310
Income taxes paid..................................................... $5 $610
The accompanying notes are an integral part of these consolidated financial statements.
-6-
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2002.
All earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS 128). Basic earnings per share exclude any dilutive effect of stock options. The basic earnings per share for the Corporation is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share for the Corporation is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus the dilutive effect of outstanding employee stock options. The following table summarizes the number of shares used in the denominator of the basic and diluted earnings per share computations:
March 31, 2003 March 31, 2002
----------------- ------------------
Average shares outstanding 2,041 2,041
Average ESOP shares not committed to be released (6) (7)
----------------- ------------------
Shares outstanding for basic earnings per share 2,035 2,034
Dilutive shares from stock option plans - -
----------------- ------------------
Shares outstanding for dilutive earnings per share 2,035 2,034
----------------- ------------------
Three Months ended March 31,
----------------------------------------
2003 2002
----------------- ------------------
Net Income $671 $1,364
Net Change in unrealized gain on securities
available-for-sale, net of tax (484) (64)
----------------- ------------------
Comprehensive income $187 $1,300
================= ==================
The Corporation provides a broad range of financial products and services through its branch network in West Michigan. While the Corporation’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a corporate wide basis. Accordingly, all of the Corporation’s operations are considered by Management to be aggregated in one reportable operating segment.
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.
-7-
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 Corporation 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.
Impaired loans as of March 31, 2003 and December 31, 2002 were $23.6 million and $26.2 million, respectively. The allowance for impaired loans was $3.1 million and $3.1 million as of March 31, 2003 and December 31, 2002, respectively. Non-performing loans totaled $8.9 million at March 31, 2003 compared to $9.3 million at December 31, 2002.
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 on re-pricing GAP analysis, which is a traditional method of assessing interest rate risk. Recognizing that there is no single measure that absolutely measures current or future risk, management also relies on a simulation analysis to assess risk in dynamic interest rate environments.
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission.
-8-
On October 4, 2002, O.A.K. Financial Corporation (Company) and Byron Center State Bank (Bank) entered into a Written Agreement with the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Services. The Written Agreement addresses issues including management and asset quality. While the Written Agreement is in effect, the Company and the Bank will need prior regulatory approval to pay dividends, add new directors, employ new senior executive officers, and to pay certain severance or related compensation. The Company also agrees that, without prior regulatory approval, it will not incur debt or redeem any stock. At March 31, 2003, Bank management reports compliance with all the provisions of the written agreement.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
O.A.K. Financial Corporation (the “Corporation”) is a single bank holding company which owns O.A.K. ELC and Byron Center State Bank (the “Bank”). O.A.K. ELC is an employee leasing company that leases employees to Byron Center State Bank, O.A.K. Financial Services and Dornbush Insurance Agency. The Bank has eleven banking offices serving eleven communities in Kent, Ottawa and Allegan Counties. The Bank 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 sells property and casualty, life, disability and long-term care insurance products.
The following is management’s discussion and analysis of the factors that influenced O.A.K. Financial Corporation’s financial performance. The discussion should be read in conjunction with the Corporation’s 2002 annual report on Form 10-K and the audited financial statements and notes contained therein.
The financial services industry is highly regulated. Furthermore, the nature of the financial services industry is such that, other than described below, the use of estimates and management judgment are not likely to present a material risk to the financial statements. In cases where estimates or management judgment are required, internal controls and processes are established to provide assurance that such estimates and management judgments are materially correct to the best of management’s knowledge.
Allowance for loan losses — Accounting for loan classifications, accrual status, and determination of the allowance for loan losses is based on regulatory guidance. This guidance includes, but is not limited to, generally accepted accounting principles, the uniform retail credit classification and account management policy issued by the Federal Financial Institutions Examination Council, and the joint policy statement on the allowance for loan losses methodologies, issued by the Federal Financial Institutions Examination Council, Federal Deposit Insurance Corporation, and various other regulatory agencies. Accordingly, the allowance for loan losses includes a reserve calculation based on an evaluation of loans determined to be impaired, risk ratings, historical losses, loans past due, and other subjective factors.
Commercial loan rating system and identification of impaired loans – The Company has a defined risk rating system that is designed to assess the risk of individual loans and overall risk of the commercial loan portfolio. The system assigns a risk weighting to factors such as cash flow, collateral, financial condition, operating performance, repayment history, management, and strength of the industry. An assessment of risk is performed as a part of the loan approval process as well as periodic updates based on the circumstances of the individual loan. The Company employs both internal and external loan review services to assess risk ratings.
Originated mortgage-servicing rights (“OMSR”) — The Company records the original “OMSR” based on market data. The “OMSR” is amortized over the shorter of seven years or actual loan repayment of the underlying mortgages. Additionally, an independent third party valuation is performed to determine potential impairment of the “OMSR” as a result of changes in interest rates and expected future loan repayment speeds. Significant changes in interest rates or repayment speeds could have a significant impact of the carrying value of the mortgage servicing assets.
-9-
Total assets decreased $9 million, 1.7% to $528 million from December 31, 2002 to March 31, 2003. The significant changes were a decrease in net loans receivable of $11 million, a 2.9% decrease of which the commercial loan portfolio decreased $6 million and the installment loan portfolio decreased $5 million. The decrease in loans is the result of increased competition and steps that management has taken to improve credit quality. Deposits decreased $12 million, 3.0% to $386 million; interest-bearing deposits decreased $9 million and non-interest bearing deposits decreased $3 million. The significant change in the interest bearing deposits came from a decrease in time deposits of $8 million. Time deposits $100,000 or greater decreased $1 million and time deposits under $100,000 decreased $3 million. Brokered time deposits decreased $4 million from December 31, 2002 to March 31,2003. The decrease in deposits is mainly the result of increased competition and the low interest rate environment.
The Corporation maintains a diversified securities portfolio, which includes obligations of government sponsored agencies, securities issued by states and political subdivisions, corporate securities, and mortgage-backed securities. The primary objective of the Corporation’s investing activities is to provide for safety of the principal invested, as a source of liquidity and management of exposure to changes in interest rates.
All of the Corporation’s securities are classified as held-for-sale. The Corporation’s total holdings increased $9 million from December 31, 2002 to March 31, 2003.
Amortized Fair Amount
Cost Value Pledged
Securities available-for-sale ---- ----- -------
March 31, 2003........................... $87,876 $89,963 $86,504
December 31, 2002........................ $78,297 $81,125 $74,672
The majority of the securities are pledged to secure borrowed funds from the Federal Home Loan Bank, and securities sold under agreements to repurchase and other purposes as required or permitted by law. Pledged securities totaling $15 million at March 31, 2003 and $13 million at December 31, 2002 were available as additional liquidity.
The Bank’s largest concentration of loans is to businesses in the form of commercial loans and real estate mortgages. The loan portfolio mix at March 31, 2003 consists of 56% commercial real estate, 18% residential real estate, 13% commercial and 13% consumer installment. 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. In an effort to mitigate the exposure to changes in interest rates, most of the residential real estate loans are sold to the Federal Home Loan Mortgage Corporation (“FHLMC”). However, the Bank retains servicing rights on substantially all such loans sold. At March 31, 2003 and December 31, 2002, the Bank was servicing loans for FHLMC totaling $254 million and $259 million respectively. The percentage of consumer loans as a percent of total loans is expected to decline. The Bank has taken steps to improve consumer credit quality that will result in a decline in indirect consumer lending. Indirect consumer loans declined from $31 million at December 31, 2002 to $27 million at March 31, 2003. It is likely that the indirect consumer loan portfolio will continue to shrink throughout the year. The commercial real estate loan portfolio declined $6 million from December 31, 2002 to March 31, 2003. This was the result of increased competition in the local market and steps taken to improve commercial credit quality.
-10-
March 31, 2003 December 31, 2002
-------------- -----------------
Amount % Amount %
------ - ------ -
Commercial Real Estate.................... $203,125 56 $209,174 55
Residential Real Estate................... 66,503 18 65,322 17
Commercial................................ 49,173 13 49,913 13
Consumer.................................. 48,006 13 53,158 15
------ -- ------ --
Total loans............................ $366,807 100% $377,567 100%
======== ==== ======== ====
The lending policy of the Bank was written to reduce credit risk, enhance earnings and guide the lending officers in making credit decisions. 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 also appointed a loan review officer who monitors the credit quality of the loan portfolio independent of the loan approval process. The loan review officer submits periodic reviews 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 of loans that reflect any unusual risk concentration, that are not disclosed as a separate category.
The low interest rate environment resulted in a significant amount of re-financing during 2002 and this trend has continued through the first quarter of 2003. Consumers refinanced mortgage loans to lock in the lower interest rates. Management does not expect this abnormally high volume to continue. For discussion regarding interest rate risk exposure and management of this risk see the “Interest Rate Risk” and “Asset/Liability Gap Position” sections.
March 31, 2003 December 31, 2002
-------------- -----------------
Non-accrual loans............................................ $7,944 $8,290
90 days or more past due & still accruing.................... 971 1,018
----- -----
Total Non-performing Loans.............................. 8,915 9,308
Other real estate............................................ - -
----- -----
Total Non-performing Assets.............................. $8,915 $9,308
====== ======
As a percentage of portfolio loans
Non-performing loans.................................... 2.43% 2.47%
Non-performing assets................................... 2.43% 2.47%
Allowance for loan losses............................... 2.31% 2.22%
Allowance for loan losses as a % of non-performing loans..... 95% 90%
Non-performing 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 and other real estate, which has been acquired primarily through foreclosure and is awaiting disposition. Loans, including loans considered impaired under SFAS 118, are generally placed on a non-accrual 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.
Total non-performing assets declined 4% to $8.9 million at March 31, 2003 from $9.3 million at December 31, 2002. The allowance for loan loss is 95% of the total non-performing loans as of March 31, 2003. Management believes that the allowance for loan losses is adequate for these loans and the remainder of the portfolio. As of March 31, 2003, there were no other interest bearing assets which required classification.
During 2002, management, with the assistance of outside consultants, conducted a complete and comprehensive review process of lending processes and procedures. The outcomes include an improved workflow, improvement in processes and procedures, standardization of loan quality assessment, and improvement in the management of non-performing credits. These changes should improve asset quality subject to general economic conditions, which continue to show signs of weakness.
-11-
For the Three Months Ended March 31,
------------------------------------
2003 2002
---- ----
Balance at beginning of period................................... $8,398 6,983
Loans charged off................................................ (610) (347)
Recoveries of loans previously charged off....................... 154 56
Additions to allowance charged to operations..................... 525 600
------ ------
Balance at end of period.................................... $8,467 $7,292
====== ======
Net loans charged off to average loans outstanding............... .50% .30%
For the three month period ended March 31, 2003 versus the same period in 2002, net loans charged off increased 57%. The decreased provision for loan losses charged to operations, reflects the decline in the loan portfolio and the probable losses inherent in the portfolio. The majority of loan charge offs, during the first three months of 2003, are from the commercial loan portfolio and the consumer indirect loan portfolio.
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 impaired loans, reviews past loss experience, the local economy and a number of other factors.
March 31, 2003 December 31, 2002
-------------- -----------------
Allowance % of total Allowance % of total
Amount allowance Amount allowance
------ --------- ------ ---------
Commercial................. $6,291 74% $5,817 69%
Real estate mortgages...... 331 4 382 5
Consumer................... 1,516 18 1,871 22
Subjective................. 329 4 328 4
------ --- ------ ---
Total.................... $8,467 100% $8,398 100%
====== ==== ====== ====
In determining the adequacy of the allowance for loan losses, management determines (i) a specific allocation for loans when a loss is probable, (ii) allocation based on credit risk rating for individual commercial loans, (iii) allocation based principally on historical losses for various categories of loans, and (iv) subjective factors including local and general economic factors and trends. Management’s assessment of a slow down in economic activity, increase in unemployment, sustained decline in business spending, and increase in non-performing loans is reflected in the recent increase in the allowance for loan losses as a percent of total loans.
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.
-12-
The following table sets forth the deposit balances and the portfolio mix thereon:
March 31, 2003 December 31, 2002
-------------- -----------------
Balance % Balance %
------- - ------- -
Non-interest bearing demand ................ $49,779 13% $52,622 13%
NOW accounts ............................... 40,182 10 41,875 11
MMDA/Savings ............................... 99,092 26 98,870 25
Time - negotiable brokered ................. 49,171 13 53,259 13
Time ....................................... 147,369 38 150,786 38
-------- --- -------- ---
Total Deposits ......................... $385,593 100% $397,412 100%
======== ==== ======== ====
Total deposits decreased $11.8 million from $397 million at December 31, 2002 to $386 million at March 31, 2003. Non-interest bearing deposits declined $2.8 million, NOW, MMDA and savings deposits declined $1.5 million and time deposits decreased $7.5 million. The decrease in time deposits includes brokered CD’s, which decreased $4.1 million, time deposits under $100,000, which decreased $2.6 million and time deposits greater than $100,000, which decreased $.8 million. Due to an increase in local deposits, that has occurred over the past 12 months, the Bank was able to reduce its use of brokered time deposits. The average cost of funds for brokered deposits is at least 30 basis points higher than local deposits. The Bank’s plan of decreasing dependence on brokered deposits will lower the average cost of funds.
Deposits are gathered from the communities the Bank serves. Increasing core deposits is a key element of the Bank’s strategic plan. The checking and savings product mix has also been realigned to reward customers with special values if they maintain at least two accounts with the Bank. This is designed to improve the level of core deposits. Uncertainties in the equity markets have brought some deposits in the Bank, but the largest percentage of growth has been from acquiring more of existing customers’ relationships. The Bank expects this trend to continue. Additionally, a Company wide training program, to educate every employee on new products, has been implemented. The Bank has also introduced internet banking as a new alternative for customer access.
The use of alternative funding sources such as fed funds, brokered certificates and FHLB advances supplement the Bank’s core deposits and also is an integral component of the Bank’s asset/liability management effort. Borrowed funds, from the Federal Home Loan Bank, were $34 million at both December 31, 2002 and March 31, 2003.
Net income equaled $.7 million for the three months ended March 31, 2003, compared to $1.4 million for the same period in 2002. This is a 49% decrease from the same period in 2002. The decrease from the comparable period in 2002 is the result of a declining trend in net interest margin due to the low interest rate environment, a decrease in net mortgage banking activities and an increase in non-interest expense.
For the Three Months Ended March 31,
--------------------------------------------
2003 2002
---- ----
Net Income.................................. $671 $1,364
Per Share................................. $0.33 $0.67
Earnings ratios:
Return on average assets.................. 0.51% 1.08%
Return on average equity.................. 5.17% 11.03%
-13-
The following schedule presents the average daily balances, interest income on a fully taxable equivalent basis (“FTE”) and interest expense and average rates earned and paid for the Corporation’s major categories of assets, liabilities, and stockholders’ equity for the periods indicated:
For the Three Months Ended March 31,
--------------------------------------------
2003 2002
---- ----
Average earning assets...................... $493,971 $480,272
Tax equivalent net interest income.......... 4,477 5,174
As a percentage of average earning assets:
Tax equivalent interest income............ 5.95% 7.07%
Interest expense.......................... 2.63% 3.25%
----- -----
Interest spread........................... 3.32% 3.82%
Tax equivalent net interest income........ 3.68% 4.37%
Average earning assets as a percentage of
average assets.............................. 92.8% 93.2%
Net interest income is the principal source of income for the Corporation. Tax equivalent net interest income decreased $681,000 to $4,362,000 for the first quarter of 2003, a 13% decrease from the same period in 2002, of which $331,000 was due to a decline in volume and $366,000 was due to a decline in interest rates.
In the first quarter of 2003, the yield on total earning assets decreased 112 basis points, compared to the same period in 2002. This compares to a 62 basis point decline in the total interest bearing liabilities cost of funds. Both the net interest spread and net interest margin decreased for the first quarter of 2003 compared to the same period in 2002. The compression is a result of significant commercial loan refinancing from long-term fixed rates to short-term variable rates and an increase in the dollar amount of loans for which the Bank stopped accruing interest, combined with the lowest interest rates in 40 years, which compressed the Corporation’s net interest margin.
Management expects continued pressure on the fully taxable-equivalent (FTE) net interest margin, because of fierce competition for deposits in its local markets, increased sophistication of funds management by the Corporation’s customers and the low interest rate environment. There is no assurance regarding rates and the Corporation’s net interest margin.
The provision for loan losses charged to earnings was $525,000 in the first quarter of 2003, which is slightly lower than the $600,000 for the first quarter of 2002. The decrease in the provision reflects the recent changes that management has made in an effort to improve credit quality.
Management has taken significant steps to improve underwriting standards and loan administration and has decided to exit the indirect consumer loan business. These changes should improve asset quality subject to general economic conditions, which continue to show signs of overall weakness.
Non-interest income consists of service charges on deposit accounts, insurance fees, brokerage fees, service fees, gains on investment securities available for sale, gains from loan sales to the Federal Home Loan Mortgage Corporation (FHLMC) loans. The Bank retains the servicing rights on the loans sold to FHLMC. Non-interest income decreased $139,000 or 9% for the three-month period ended March 31, 2003 versus the same period for 2002. The decrease was due to a $164,000 increase in the amortization of mortgage servicing rights and a $75,000 impairment of mortgage servicing rights. This increase in amortization and impairment is a direct result of a low interest rate
-14-
environment, which caused a significant increase in the mortgage refinance business. The Bank anticipates lower volume in mortgage activity for the remainder of the year. Loan servicing fees increased $54,000, or 53% for the first quarter of 2003, versus the same period in 2002. This increase is the result of the increase that occurred during 2002, in the number of loans that the Bank was servicing for FHLMC. Service charges on deposit accounts increased $76,000, a 18% increase for the three-month period ended March 31, 2003 versus 2002. This increase was a result of continued growth in the number of new accounts and a change in the service charge structure. Insurance revenue increased 22%, or $72,000. This increase was a result of profit-sharing revenue and continued growth in the number of new insurance customers.
For the Three Months Ended March 31,
-------------------------------------------
2003 2002
---- ----
Salaries ............................................. $1,845 $1,817
Employee benefits .................................... 584 505
Occupancy ............................................ 302 292
Equipment ............................................ 271 254
Data processing & software ........................... 269 218
Legal & professional ................................. 153 121
Printing and supplies ............................. 119 113
Marketing ............................................ 94 100
Other ................................................ 648 584
------ ------
Total non-interest expense ...................... $4,285 $4,004
====== ======
Non-interest expense increased $281,000 or 7% for the three-month period ended March 31, 2003 versus 2002. The Corporation’s employee benefits expense increased $79,000, or 16% for the three-month period ended March 31, 2003 versus 2002. The increase reflects rising costs in medical insurance plans, a higher number of medical claims and more employees enrolled in the plan. Data processing & software expense increased $51,000, or 23% for the three-month period ended March 31, 2003, versus 2002. The increase is a result of the introduction of internet banking, upgrades to the Bank’s lending software and increasing costs for software support. Legal & Professional fees increased 26%, or $32,000. The increase is a result of outside audit and other consulting expense. Other expenses increased 11%, or $64,000 for the three-month period ended March 31, 2003 versus 2002. The increase in other non-interest expense is largely due to an increase in FDIC fees due to issues discussed under Bank Regulatory Matters.
The provision for income taxes was $220,000, which equates to an effective tax rate of 25% for the three month period ended March 31, 2003 compared to $553,000, effective tax rate of 29% in 2002. The decrease in the effective tax rate for the three-month period ended March 31, 2003 is a result of reduced income being offset by tax-exempt income. This difference between the Corporation’s effective tax rate and statutory tax rate is largely due to investment interest income that is exempt from federal taxation. Tax-exempt income, net of nondeductible interest expense totaled $238,000 and $279,000 for periods ended March 31, 2003 and 2002, respectively.
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 Corporation 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.
-15-
The capital of the Corporation consists of common stock, additional paid-in capital, retained earnings and accumulated other comprehensive income. For the three-month period ended March 31, 2003 total shareholders’ equity increased $221,000, which includes a $484,000 decrease of accumulated other comprehensive income.
There are minimum risk based capital regulatory guidelines placed on the Corporation’s capital by The Federal Reserve Board. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation’s ratios at March 31, 2003:
Regulatory Requirements
Adequately Well
Capitalized Capitalized March 31, 2003 December 31, 2002
----------- ----------- -------------- -----------------
Tier 1 capital..................... $50,857 $50,138
Tier 2 capital...................... 4,992 5,144
------- -------
Total qualifying capital............ $55,849 $55,282
======= =======
Ratio of capital to total assets
Tier 1 leverage ratio............... 4% 5% 9.53% 9.40%
Tier 1 risk-based capital........... 4% 6% 12.97% 12.44%
Total risk-based capital............ 8% 10% 14.24% 13.71%
As of March 31, 2003
------------------------------------------------------------------------
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Interest earning assets:
Fed Funds Sold....................... $36,052 $ - $ - $ - $ 36,052
Loans................................ 167,213 27,423 123,150 49,021 366,807
Securities (including restricted
investments)...................... 38,976 3,657 31,929 18,301 92,863
Loans held for sale.................. 5,059 - - - 5,059
------- ------- ------- ------- -------
Total interest earning assets........ $247,300 $31,080 $155,079 $67,322 $500,781
======== ======= ======== ======= ========
Interest bearing liabilities:
Savings & NOW........................ $74,975 $6,576 $35,072 $22,650 $139,273
Time................................. 47,812 61,001 84,666 3,061 196,540
------- ------- ------- ------- -------
Total interest bearing deposits...... 122,787 67,577 119,738 25,711 335,813
Other borrowings..................... 53,228 - 16,200 16,800 86,228
------- ------- ------- ------- -------
Total interest bearing liabilities.. $176,015 $67,577 $135,938 $42,511 $422,041
======== ======= ======== ======= ========
Rate sensitivity gap and ratios:
Gap for period....................... 71,285 (36,497) 19,141 24,811
Cumulative gap....................... 71,285 34,788 53,929 78,740
Period gap ratio..................... 1.40 0.46 1.14 1.58
Cumulative gap ratio................. 1.40 1.14 1.14 1.19
Gap /Total Earning assets
Period............................... 14.2% (7.3%) 3.8% 5.0%
Cumulative........................... 14.2% 6.9% 10.8% 15.7%
-16-
The asset/liability gap reflects the scheduled repayment and maturities of the Corporation’s 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 Corporation’s historical experience and future intentions. Management attempts to reflect the sensitivity of assets and liabilities, however, customer behavior in different rate and economic environments in not entirely predictable. As such, interest rate risk cannot be eliminated.
As of March 31, 2003 the cumulative one-year gap position was asset sensitive, approximately 6.9% of total earning assets. The table above reflects that the Corporation has an asset repricing gap of $71 million at 3 months and an asset repricing gap of $35 million at one year. The Corporation's gap position indicates that within one year, the net interest margin should decrease if interest rates decline and increase if interest rates rise. Management is comfortable with the Corporation's current GAP position and interest rate exposure and will continue to invest in assets and fund liabilities with the intent of maintaining a neutral GAP position. Management regularly reviews the asset liability gap position and other available information to manage the overall interest rate risk of the Corporation.
The Bank complements its stable core deposit base with alternate sources of funds, which includes advances from the Federal Home Loan Bank, and brokered 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.
Market Value of
Change in Interest Rates Portfolio Percent Net Interest Percent
Equity(1) Change Income(2) Change
------------------- ---------------- ----------------- --------------
300 basis point rise $26,957 -33.9% $18,440 11.0%
200 basis point rise 31,470 -22.8% 17,854 7.4%
100 basis point rise 36,104 -11.4% 17,255 3.8%
Base rate 40,766 - 16,620 -
100 basis point decline 45,236 11.0% 15,761 -5.2%
200 basis point decline 50,454 23.8% 13,845 -16.7%
300 basis point decline 58,123 42.6% 11,657 -29.9%
| (1) | Simulation analyses calculate the change in the net present value of the Corporation’s assets and liabilities, under parallel shifts in interest rates, by discounting the estimated future cash flows. |
| (2) | Simulation analyses calculate the change in net interest income, under parallel shifts in interest rates over the next 12 months, based on a static balance sheet. |
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 Corporation and changes in the assumptions could impact the results. Simulation models require the ability to accurately predict customer reaction to interest rate changes, changes in the competitive environment, and other economic factors.
-17-
Liquidity management is a significant responsibility of the Asset and Liability Management Committee (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 include the repayment of customer loans, maturity of and repayment of Corporation 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. The use of brokered certificates of deposit decreased by $4.1 million from December 31, 2002 to March 31, 2003.
Cash and cash equivalents equaled 9% of total assets as of March 31, 2003 versus 3% as of March 31, 2002. Net cash used in operations was $2.7 million for the three-month period ended March 31, 2003, compared to the $6.9 million that was provided by operations for the three-month period ended March 31, 2002. Investing activities provided $.7 million during the first quarter of 2003, versus $13.4 that was used in investing activities during the first quarter of 2002. Financing activities used $8.5 million during the three-month period ended March 31, 2003, compared to $10.3 million that was provided by financing activities during the three-month period ended March 31, 2002. The accumulated effect of the Corporation’s operating, investing and financing activities was a $10.5 million decrease in cash and cash equivalents during the three-month period ended March 31, 2003, compared to a $3.8 million increase in cash and cash equivalents during the three month period ended March 31, 2002. The Corporation’s liquidity is considered adequate by management.
The Company’s primary source of liquidity includes deposit growth, asset sales and ability to borrow funds. At year-end the Company had unused federal funds borrowing capacity of $33 million as well as access to the brokered deposit market.
Management expects to utilize, in part, the current liquidity by investing in other interest-earning assets such as loans and securities. Management also expects to utilize some of the current liquidity to reduce brokered deposits and borrowings at the Federal Home Loan Bank. Overall liquidity is significantly determined by deposit and loan growth in addition to borrowing and security investment activity.
Payments Due by Period
----------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 year years years years
----- ------ ----- ----- -----
Debt $42,598 $2,494 $15,873 $5,125 $19,106
------- ------ ------- ------ -------
Total contractual cash obligations $42,598 $2,494 $15,873 $5,125 $19,106
The debt obligations consist entirely of fixed rate advances from the Federal Home Loan Bank that were purchased to fund growth in the loan portfolio. Payments of the advances include monthly interest payments and principal payments that are due upon maturity.
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After 5
Committed 1 year years years years
--------- ------ ----- ----- -----
Lines of credit $53,880 $49,050 $3,289 $1,525 $16
Standby letters of credit 5,279 4,953 314 12 -
Other commercial commitments 10,575 10,575 - - -
------- ------- ------- ------- -------
Total commercial commitments $69,734 $64,578 $3,603 $1,537 $16
All of the commercial commitments are underwritten using the commercial loan underwriting guidelines.
-18-
Stock Compensation and Stock Option Plans (dollars in thousands, except per share data)
The Corporation maintains stock option plans for non-employee directors (the Director’s Plan) and employees and officers of the Corporation and its subsidiary (the Employees’ Plan). The stock compensation plans were established in 1999, and authorize the issue of up to 165,000 options under the Employees’ Plan and up to 35,000 options under the Directors’ Plan.
Options under both plans 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. No options have been awarded in 2003. During 2002, 14,747 options were awarded with an exercise price of $44.50 per share.
The following tables summarize information about stock option transactions:
March 31, 2003 March 31, 2002
-------------------------------- -------------------------------
Average Average
Option Option
Shares Price Shares Price
------------- --------------- ------------- --------------
Outstanding, beginning of period.. 44,130 $49.62 34,395 $51.65
Granted........................... - - 14,747 44.50
Exercised......................... - - - -
Forfeited/expired................. (6,000) 51.67 - -
------------- --------------- ------------- --------------
Outstanding, end of period........ 38,130 49.30 49,142 49.51
============= =============== ============= ==============
Exercisable, end of period........ 38,130 $49.30 34,395 $51.65
============= =============== ============= ==============
Options Outstanding Number of
------------------ -- -------------------
Number Wgt. Avg. Options
Exercise Outstanding Remaining Exercisable
Price Mar. 31, 2003 Contractual Life Mar. 31, 2003
-------------------- ------------------ ------------------- ------------------
$44.50 12,400 8.85 years 12,400
$50.00 17,458 7.02 years 17,458
$55.00 8,272 6.75 years 8,272
------------------ ------------------- ------------------
Total 38,130 7.56 years 38,130
================== =================== ==================
All options expire 10 years after the date of the grant; 137,113 shares are reserved for future issuance under the Employee Stock Compensation Plan and 24,000 shares are reserved for future issuance under the Stock Option Plan for non-employee directors.
Statement of Financial Accounting Standards (SFAS) No. 123, as amended by (SFAS) No. 148, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.
-19-
Had compensation costs for the Corporation’s stock option plan been determined based on fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB 123, the Corporation’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
March 31, March 31,
2003 2002
------------- -------------
Net Income As Reported $671 $1,364
Pro Forma $712 $1,345
Earnings Per Share As Reported $0.33 $0.67
Pro Forma $0.35 $0.66
Earnings Per Share - assuming dilution As Reported $0.33 $0.67
Pro Forma $0.35 $0.66
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
March 31, March 31,
2003 2002
------------- -------------
Dividend yield................................................... - 1.71%
Expected life.................................................... - 9 years
Expected volatility.............................................. - 4.96%
Risk-free interest rate.......................................... - 3.83%
Weighted-average fair value per share of options granted during the
year......................................................... - $9.63
-20-
A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps, or options. However, the Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised.
The Corporation’s exposure to market risk is reviewed on a regular basis by the Asset and Liability Management Committee (See “Market Risk”). 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 Corporation has no market risk sensitive instruments held for trading purposes.
The Corporation’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the filing date of this Form 10-Q Quarterly Report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Corporation’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the company would be made known to them by others within the company, particularly during the period in which this Form 10-Q Quarterly Report was being prepared.
There were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions were taken.
-21-
PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings - None |
| Item 2. | Changes in Securities and Use of Proceeds - None |
| Item 3. | Defaults Upon Senior Securities - None |
| Item 4. | Submission of Matters to a Vote of Security Holders - None |
| Item 5. | Other Information - None |
| Item 6. | Exhibits and Reports on 8-K |
| (a) | Exhibits |
||
| 99.1 | Certificate of the Chief Executive Officer of O.A.K. Financial
Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
||
| 99.2 | Certificate of Chief Financial Officer of O.A.K. Financial Corporation pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
||
| (b) | Reports on Form 8K - None |
||
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, to be signed on its behalf by the undersigned thereunto duly authorized.
|
O.A.K. FINANCIAL CORPORATION /s/ Patrick K. Gill Patrick K. Gill (Chief Executive Officer) /s/ James A. Luyk James A. Luyk (Chief Financial Officer) |
Date: May 15, 2003
-23-
CERTIFICATIONS
I, Patrick K. Gill, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of O.A.K. Financial Corporation; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003
|
/s/ Patrick K. Gill Patrick K. Gill Chief Executive Officer |
-24-
I, James A. Luyk, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of O.A.K. Financial Corporation; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003
|
/s/ James A. Luyk James A. Luyk (Chief Financial Officer) |
-25-
EXHIBIT INDEX
| Exhibit | Description |
| 99.1 | Certificate of the Chief Executive Officer of O.A.K. Financial Corporation pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.2 | Certificate of the Chief Financial Officer of O.A.K. Financial Corporation pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
-26-
I, Patrick K. Gill, Chief Executive Officer of O.A.K. Financial Corporation certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of O.A.K. Financial Corporation.
Dated: May 15, 2003
|
/s/ Patrick K. Gill Patrick K. Gill Chief Executive Officer |
-27-
I, James A. Luyk, Chief Financial Officer of O.A.K. Financial Corporation certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of O.A.K. Financial Corporation.
Dated: May 15, 2003
|
/s/ James A. Luyk James A. Luyk Chief Financial Officer |
-28-