FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of Class)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ____
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendments to this Form 10-K.
X
The aggregate market value
of the voting and non-voting common stock held by non-affiliates (for this
purpose only, the affiliates of the Registrant have been assumed to be the
executive officers, directors and two beneficial owners, related to the
Registrant's President, who each own more than 5% of the Registrant's stock) of
the Registrant, based on a per share price of $44.50 as of February 26, 2002,
was approximately $72,046,524 (common stock, $1.00 par value). As of February 26
2002, there were outstanding 2,034,007 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 18, 2002
are incorporated by reference into Part III of this report.
PART I
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 Company transacts business in a single industry of commercial banking. Aside from the Bank, the
Company has no other substantial assets. The Company conducts no business except for the provision of certain
management and operational services to the bank, the collection and dividends from the bank and the payment of
dividends to the Company's stockholders.
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 a total of 10 branch offices and one
mortgage operations center. 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 Company provides a broad range of financial products and services through its branch network in West
Michigan. While the Company's chief decision makers monitor the revenue streams of various products and
services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly,
all of the Company's operations are considered by Management to be aggregated in one reportable operating segment.
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 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 offices provide full service lobby and drive-thru services in the communities in which they
serve. Automatic teller machines are also provided at most locations. 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, Chicago 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. The source of repayment of approximately
24% of the loan portfolio is generated from cash flows from developers and owners of commercial real estate.
The Bank provides real estate, consumer and commercial loans to customers in its market. 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
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of repayment. Loan applications are accepted at all the Bank's offices and are
approved within the limits of each lending officer's authority. Secured loan requests in excess of $1,250,000 or
unsecured loan requests in excess of $400,000, are required to be presented to the Board of Directors or the
Executive Loan Committee for review and approval.
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.
Bank Competition
The Bank has eleven offices, one within each of the communities it serves. Within these communities,
its principal competitors are Comerica Bank, Bank One, Fifth-Third Bank, Flagstar Bank, National City Bank,
Huntington Bank, Standard Federal 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.
The financial services industry continues to be increasingly competitive. Principal methods of
competition include loan and deposit pricing and the 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 the Gramm-Leach-Bliley Act of 1999, which permits the combinations of banks, insurance companies,
and securities firms, and the increased use of internet banking, it is expected that competition may become more
intense. Management continues to evaluate the opportunities for the expansion of products and services and
additional branching opportunities.
The Bank's principal sources of revenue include interest on loans and investments, fees from the sale of
loans and insurance plans, investment products, deposit account fees, loan fees and other banking fees. The
sources of income for the three most recent years are as follows:
% of total revenue: 2001 2000 1999
----------------------------------------
Net interest revenue 78.8% 83.1% 82.5%
Fee based revenue 13.3% 15.2% 14.2%
Loan sales revenue 7.9% 1.7% 3.2%
Growth of Bank
As of December 31, 2001, the Registrant and subsidiaries had 172 full-time employees and 47 part time employees.
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
-2-
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 stockholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to the lending activities of the
Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans
secured by real property.
The Company
General. The Company is a bank holding company and, as such, is registered with, and subject to
regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the "BHCA"). Under the
BHCA, the Company is subject to periodic examination by the Federal Reserve Board, and is required to file with
the Federal Reserve Board periodic reports of its operations and such additional information as the Federal
Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do
so absent such policy. In addition, if the Commissioner deems the Bank's capital to be impaired, the
Commissioner may require the Bank to restore its capital by a special assessment upon the Company as the Bank's
sole shareholder. If the Company were to fail to pay any such assessment, the directors of the Bank would be
required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder
at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition by the Company of any voting
shares of any bank which would result in the Company's direct or indirect ownership or control of 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.
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. In addition, in certain such cases an
application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under
the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from engaging, either directly or
indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed
non-banking activity is one that the Federal Reserve Board has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Under current Federal Reserve Board
regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing,
securities brokerage, and consumer and commercial finance company operations. 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 holding company wishes to
engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be
required, depending upon the activities in which the company to be acquired is engaged, the size of the company
to be acquired and the financial and managerial condition of the acquiring bank holding company.
-3-
Eligible bank holding companies that elect to operate as financial holding companies may engage in, or
own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance
activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or
complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Bank Holding Company Act generally does not place
territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding
companies. While the Company believes it is eligible to elect to operate as a financial holding company, as of
the date of this filing, it has not applied for approval to operate as a financial holding company.
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
stockholders' 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.
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 stockholders is indirectly limited by statutory restrictions on the Bank's ability to pay
dividends described below. Further, in a 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 weaken 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.
The Bank
General. The Bank is a Michigan banking corporation, is a member of the Federal Reserve System and its
deposit accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a Federal Reserve System
member and a Michigan chartered bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Federal Reserve Board as its primary federal regulator and Commissioner, as the
chartering authority for Michigan banks. 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
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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. For several years, the BIF reserve ratio has been at or above the mandated ratio and
assessments have ranged from 0% of deposits for institutions in the lowest risk category to .27% of deposits in
the highest risk category. However, there is speculation that the reserve may fall below the mandated ratio
resulting in increased assessments beginning in the second half of 2002.
FICO Assessments. 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 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. From now until the maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the
FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than
0.025% of deposits.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to
fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank's
total assets, as reported to the Commissioner.
Capital Requirements. The Federal Reserve has established the following minimum capital standards for
state-chartered, 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 stockholders' 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.
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, 2001, the Bank's ratios exceeded minimum requirements for the well capitalized
category. (See "Liquidity and Capital Resources.")
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
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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 income after deducting its losses and bad
debts. A Michigan state bank may not declare or pay a dividend unless the bank will have surplus amounting to at
least 20% of its capital after the payment of the dividend.
As a member of the Federal Reserve System, the Bank is required by federal law to obtain the prior
approval of the Federal Reserve Board for the declaration or payment of a dividend, if the total of all dividends
declared by the Bank's Board of Directors in any year will exceed the total of (i) the Bank's retained net income
(as defined and interpreted by regulation) for that year plus (ii) the retained net income for the preceding two
years, less any required transfers to surplus. Federal law generally prohibits a depository institution from
making any capital distribution (including payment of a dividend) or paying any management fee to its holding
company if the depository institution would thereafter be undercapitalized. Further, federal regulatory agencies
can prohibit a banking institution or bank holding company from engaging in unsafe and unsound business practices
and could prohibit payment of dividends if such payment could be deemed an unsafe and unsound business practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on
any extensions of credit to the Company or its subsidiaries, on investments in the stock or other securities of
the Company or its subsidiaries and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers
and principal stockholders. 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.
Investments and Other Activities. Under federal law and regulations, Federal Reserve System member
banks and 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 regulations, also prohibits 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
bank's primary federal regulator 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 bank's primary federal regulator 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, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and
regulations promulgated thereunder, 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
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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.
Banks may establish interstate branch networks through acquisitions of
other banks. 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 only if specifically
authorized by state law.
Michigan 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 Michigan Office of Financial and
Insurance Services, Division of Financial Institutions, (1) acquisition of Michigan banks by FDIC-insured banks,
savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches
to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank
could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks,
savings banks or savings and loan associations located in other states having laws permitting such consolidation,
(4) establishment 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 a Michigan bank to establish a branch in such
jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
Item 2. Properties.
The Company and the Bank own and operate a total of 12 facilities in Michigan. The facilities are
located in Kent, Ottawa, and Allegan Counties. The individual properties are not materially significant to the
Company's or the Bank's business or to the consolidated financials.
With the exception of the potential remodeling of certain facilities to provide for the efficient use of
work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current
and anticipated needs.
During the fourth quarter of 2001 the Company purchased a facility in Byron Center to serve as the
company's mortgage operations center. Subject to regulatory approval, the Bank plans to open a branch in Wayland
late in 2002 and purchase an existing bank facility in Jenison, which is expected to open under the Byron Center
State Bank name in the summer of 2002.
Item 3. Legal Proceedings.
Due to the nature of its business, the Bank is subject to a number of legal actions. These legal
actions, whether pending or threatened, arise through the normal course of business and are not considered
unusual or material.
Item 4. Submission of Matters to Vote of Security Holders.
Not applicable.
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.
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The following table sets forth certain information with respect to the Company's officers (included for information purposes only) as of December 31, 2001:
| Name |
Age | Position with Company | Year Became an Officer |
| John A. Van Singel | 47 | President, Chief Executive Officer and Director of the Company and the Bank |
1976 |
| John Peterson | 53 | Executive Vice President and Director of the Company and the Bank |
1983 |
| James A. Luyk | 39 | Executive Vice President and Chief Financial Officer of the Company and the Bank |
2000 |
PART II
The following table sets forth the range of high and low sales prices of the Company's Common Stock during 2000 and through February 26, 2002, 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
=======================================================================================================
2000 High Low
- -------------------------------------------------------------------------------------------------------
First Quarter...................... $ 60.00 $ 55.00
- -------------------------------------------------------------------------------------------------------
Second Quarter..................... 69.00 56.50 $ .42
- -------------------------------------------------------------------------------------------------------
Third Quarter...................... 65.00 55.00
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Fourth Quarter..................... 61.00 52.00 $ .45
- -------------------------------------------------------------------------------------------------------
2001 High Low
- -------------------------------------------------------------------------------------------------------
First Quarter...................... $55.00 $50.00
- -------------------------------------------------------------------------------------------------------
Second Quarter..................... 49.50 46.00 $0.45
- -------------------------------------------------------------------------------------------------------
Third Quarter...................... 46.00 43.75
- -------------------------------------------------------------------------------------------------------
Fourth Quarter..................... 45.75 43.00 $0.48
- -------------------------------------------------------------------------------------------------------
2002 High Low
- -------------------------------------------------------------------------------------------------------
First Quarter...................... $44.75 $ 44.00
=======================================================================================================
The Company has approximately 1,050 holders of record of its common stock. The common stock is traded
as a "pink-sheet" company under the symbol "OKFC".
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
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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.
Item 6. Selected Financial Data.
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
Income Statement Data:
Interest income $ 36,120 $ 33,172 $ 25,080 $ 21,134 $ 18,624
Interest expense 16,809 16,491 10,528 8,916 7,693
Net interest income 19,311 16,681 14,552 12,218 10,931
Provision for loan losses 3,025 3,120 1,250 400 50
Non-interest income 5,382 3,598 3,621 2,659 1,542
Non-interest expenses 14,008 12,057 10,603 7,334 5,782
Income before federal income taxes 7,660 5,102 6,320 7,144 6,641
Net income 6,016 3,970 4,529 5,076 4,626
Per Share Data (1):
Net income $2.96 $1.95 $2.23 $2.54 $2.30
Cash dividends declared (2) .93 .87 .82 1.18 1.55
Book Value 24.24 21.95 20.31 19.98 18.37
Weighted average shares outstanding 2,035 2,034 2,031 2,000 2,010
Balance Sheet Data at year end:
Total assets $500,782 $457,004 $376,073 $301,494 $243,088
Loans, net of unearned income 379,345 347,293 287,830 222,133 168,953
Allowance for loan losses 6,983 4,874 3,551 2,879 2,565
Deposits 358,954 338,153 254,166 217,291 184,700
Stockholders' equity 49,283 44,629 41,258 39,953 36,915
Ratios:
Tax equivalent net interest income
to average earning assets 4.40% 4.38% 4.89% 5.02% 5.24%
Return on average equity 12.64 9.37 11.08 13.28 13.08
Return on average assets 1.26 .96 1.38 1.90 2.03
Non-performing loans to total loans 1.41 .77 1.90 0.26 0.14
Efficiency ratio 56.28 58.79 58.62 48.48 45.15
Dividend payout ratio 31.58 44.55 36.97 46.30 67.35
Equity to asset ratio 9.84 9.77 10.97 13.25 15.19
Tier 1 leverage ratio 10.01 10.52 12.64 14.74 15.03
| (1) | As restated for a 2-for-1 common stock split effected in the form of a dividend in 1998. |
| (2) | Special dividends of $.50 per share and $1.00 per share were paid in 1998 and 1997, respectively. |
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
-9-
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.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The following financial review presents management's discussion and analysis of consolidated financial
condition and results of operations during the period of 1999 through 2001. The discussion should be read in
conjunction with the Company's consolidated financial statements and accompanying notes thereto.
Summary
Net income totaled $6.0 million in 2001, compared to $4.0 million and $4.5 million in 2000 and 1999,
respectively.
RESULTS OF OPERATIONS
Earnings Performance (in thousands, except per share data)
Year Ended December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Net income................................. $6,016 $3,970 $4,529
Per share of common stock................ $2.96 $1.95 $2.23
Earnings ratios:
Return on average assets................. 1.26% .96% 1.38%
Return on average equity................. 12.64% 9.37% 11.08%
Net income increased $2.0 million, or 52% in 2001. The increase is attributable to a refinancing boom
as a result of lower interest rates, which resulted in a significant increase in gains on loan sales, a 15%
growth in average earning assets in 2001 and the net interest margin improvement resulting from a shift in the
yield curve to a "normal" slope (short term rates are lower than long-term rates).
Net income declined approximately $.6 million, or 12% from 1999 to 2000. The decline is attributed to a
significant increase in the provision for loan losses, resulting from loan growth, an increase in net charge-offs
and additional provision to reflect the risk 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.
-10-
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:
Interest Yields and Costs (in thousands)
Year ended December 31,
2001 2000 1999
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets
Fed. funds sold $3,285 $140 4.26% $387 $25 6.35% $1,079 $53 4.91%
Securities:
Taxable 54,034 3,292 6.09% 44,770 3,017 6.74% 36,551 2,280 6.23%
Tax-exempt(3) 24,723 1,705 6.90% 23,491 1,601 6.82% 20,885 1,514 7.25%
Loans and leases(1)(2) 368,456 31,482 8.54% 322,166 28,972 8.99% 248,440 21,691 8.73%
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total earning assets/total
interest income 450,498 36,619 8.13% 390,814 33,615 8.59% 306,955 25,538 8.32%
------ ------ ------
Cash and due from banks 10,781 9,320 8,601
Unrealized gain 1,451 (1,099) 212
All other assets 21,635 18,331 14,968
Allowance for loan loss (5,563) (3,999) (2,936)
-------- -------- --------
Total assets $478,802 $413,367 $327,800
======== ======== ========
Liabilities and
Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts $98,001 $2,048 2.09% $89,052 $2,518 2.83% $83,740 $ 2,153 2.57%
Time 203,699 11,045 5.42% 159,326 9,370 5.88% 120,114 6,215 5.17%
Securities sold under
agreements to repurchase
and federal funds purchased 41,117 1,238 3.01% 41,876 2,268 5.42% 28,901 1,242 4.30%
Other Borrowed Money 39,054 2,478 6.34% 37,825 2,335 6.17% 15,342 918 5.98%
-------- ------ -------- ------ -------- ------
Total interest bearing
liabilities/ total
interest expense 381,871 16,809 4.40% 328,079 16,491 5.03% 248,097 10,528 4.25%
------ ------ ------
Non-interest bearing deposits 44,685 40,109 36,452
All other liabilities 4,638 2,797 2,369
Stockholders' Equity:
Accumulated other comprehensive
income 1,011 (725) 361
Common Stock, Paid-in Capital,
Retained Earnings 46,597 43,107 40,521
-------- -------- --------
Total liabilities and
stockholder's equity $478,802 $413,367 $327,800
======== ======== ========
Net interest income-FTE $19,810 $17,124 $15,010
======= ======= =======
Net Interest Margin as a
Percentage of Average Earning
Assets - FTE 4.40% 4.38% 4.89%
===== ===== =====
| (1) | Non-accrual loans and leases and loans held for sale have been included in the average loans and lease balances. Non-accrual loans were approximately $2,574,000, $2,468,000 and $352,000 in 2001, 2000 and 1999 respectively. |
| (2) | Interest on loans includes net origination fees totaling $256,932 in 2001, $165,791 in 2000 and $190,720 in 1999. |
| (3) | Interest income on tax-exempt securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 34%. |
Net interest income is the principal source of income for the Corporation. In the current year, tax equivalent net income increased $2,686,000 to $19,810,000, a 15.7% increase from 2000. The increase was a result of the growth of the Corporation's average earning assets, which grew 15.3% from a year earlier. The growth in earning assets was fueled by a 14.4% growth in average loan balances. The Bank's investment portfolio grew 15.4% over the prior year.
-11-
In 2001, the yield on total earning assets decreased 46 basis points, compared to a 63 basis point
decline in the total interest bearing liabilities cost of funds. Both the net interest spread and net interest
margin increased in 2001 due to lower interest rates and interest bearing liabilities repricing faster than
interest earning assets.
In 2000, the yield on total earning assets increased 27 basis points, compared to a 78 basis point
increase in the total interest bearing liabilities cost of funds.
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.
Management expects the declining trend in the fully taxable-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 does not expect the net
interest margin of the Bank to change significantly in 2002. However, there is no assurance regarding rates and
the Bank's net interest margin.
Change in Tax Equivalent Net Interest Income (in thousands)
2001 Compared to 2000 2000 Compared to 1999
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Increase (decrease) in interest income (1)
- ------------------------------------------
Federal funds sold........... $126 $(11) $115 $(44) $16 $(28)
Securities:
Taxable................... 584 (309) 275 554 183 737
Tax Exempt (2)............ 86 18 104 178 (91) 87
Loans (2).................... 4,001 (1,491) 2,510 6,628 653 7,281
Total interest income........ 4,797 (1,793) 3,004 7,316 761 8,077
Increase (decrease) in interest income (1)
- ------------------------------------------
Interest bearing deposits:
Savings/NOW Accounts...... 236 (706) (470) 150 215 365
Time...................... 2,449 (774) 1,675 2,306 849 3,155
Securities sold under
agreements to repurchase
and federal funds purchased (40) (990) (1,030) 703 323 1,026
Other Borrowed Money...... 77 66 143 1,387 30 1,417
Total Interest Expense.... 2,722 (2,404) 318 4,546 1,417 5,963
Net interest income (FTE).... $2,075 $611 $2,686 $2,770 $(656) $2,114
| (1) | 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. |
| (2) | Interest income on tax-exempt securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 34%. |
Interest from loans represents 86.0%, 86.2% and 84.9% of total interest income for 2001, 2000 and 1999,
respectively. Net interest income is strongly influenced by results of the Bank's lending activities.
Total interest expense increased 1.9% from 2000 to 2001 and also increased 56.6% from 1999 to 2000.
Cost of funds is 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.
Composition of Average Earning Assets and Interest Paying Liabilities
-12-
Year ended December 31,
-------------------------------------------------------
2001 2000 1999
---- ---- ----
As a percent of average earning assets
Loans..................................... 82% 82% 81%
Other earning assets...................... 18% 18% 19%
---- ---- ----
Average earning assets................. 100% 100% 100%
Savings and NOW accounts.................. 22% 23% 27%
Time deposits............................. 45% 41% 39%
Other borrowings.......................... 18% 20% 14%
---- ---- ----
Average interest bearing liabilities... 85% 84% 81%
Average earning asset ratio................. 94% 95% 94%
Free funds ratio............................ 15% 16% 19%
The table above 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 94% during the past three years. Non-earning assets include cash, fixed
assets and certain other assets.
The free funds ratio decreased 1% from 2000 to 2001 as a result of a lower stockholder's equity percent
to average earning assets and lower non-interest bearing deposits to average earning assets. The free funds ratio
decreased 3% from 1999 to 2000 as a result of a lower stockholder's equity percent to average earning assets and
lower non-interest bearing deposits to average earning assets.
Provision and Allowance for Loan Loss
The provision for loan losses charged to earnings was $3.0 million in 2001, which is slightly lower than
the $3.1 million for 2000, but is much higher than in past years. The recent increase in the provision is
attributed to loan growth, an increase in classified loans and a general weakness in the economy.
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.
Non-interest Income
Non-interest Income (in thousands) Year Ended December 31,
--------------------------------------------------
2001 2000 1999
---- ---- ----
Service charges on deposit accounts ...... $1,574 $1,353 $811
Net gains on asset sales:
Loans.................................. 1,924 344 600
Securities............................. 300 213 533
Loan servicing fees....................... 25 153 148
Insurance premium revenue................. 1,007 961 1,043
Brokerage revenue......................... 304 310 322
Other..................................... 248 264 164
------ ------ ------
Total non-interest income............ $5,382 $3,598 $3,621
====== ====== ======
Non-interest 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 ("FHLMC") loans. The Bank retains the servicing rights on the loans sold to FHLMC. Excluding the sale
-13-
of assets, non-interest income increased $117,000, or 4% over 2000. The increase was driven by a 16% increase in service charges on deposits. This increase was a result of continued account growth and fee increases. Non-interest income, excluding the sale of assets, increased $553,000 or 22% for 2000 versus 1999. The increase was due primarily to a 67% increase in service charges on deposits.
Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
Year ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Total Real estate mortgage loan originations $136,626 $45,098 $65,668
Real estate mortgage loan sales 105,682 20,224 44,764
Real estate mortgage loans servicing rights sold - - -
Net gains on the sale of real estate mortgage loans 1,924 344 600
Net gains as a percent of real estate mortgage loan sales 1.82% 1.70% 1.34%
Net gains on the sale of real estate mortgage loans totaled $1,924,000, $344,000 and $600,000 in 2001, 2000 and 1999, respectively. The sharp increase in gains on sale of real estate loans are a result of lower interest rates and are not expected to continue indefinitely. Net gains on the sale of loans are generally a function of the volume of loans sold. The volume of loans sold is dependant upon the Bank's ability to originate loans, which is particularly sensitive to the absolute level of interest rates. Net gains on the sale of real estate mortgage loans are also dependant upon economic and competitive factors as well as management's ability to effectively manage the Bank's exposure to changes in interest rates. The Bank intends to aggressively market its services in the real estate area. The servicing portfolio increased $47,348,000 or 32% from 2000 to 2001 and $4,457,000 or 3% from 1999 to 2000.
Realized Gains and Losses on the Sale of Securities (in thousands)
Year ended December 31,
---------------------------------------------------------
Proceeds Gains Losses Net
-------- ----- ------ ---
2001......................... $4,131 $301 $1 $300
2000......................... 969 218 5 213
1999......................... 3,313 533 - 533
Non-interest Expense
Non-interest expense increased $1,951,000 or 16.2% in 2001 compared to 2000. The Company's salary
expense increased 14.5%, or $786,000 during 2001 compared to a year earlier. The increase includes the addition
of several key management positions. Employee benefit's increased 22.7%, or $280,000 during 2001 compared to a
year earlier. The Company's medical plan is self-insured, there were higher medical claims and more employees
enrolled in the plan. Other non-interest expenses increased 34.4%, or $794,000 during 2001 compared to 2000. The
increase includes a write-down on ORE of $195,000, higher telephone, software, and lending costs due to growth.
Non-interest expense increased $1,454,000 or 13.7% in 2000 compared to 1999. Employee benefit expense
increased $250,000 or 25.4% as a result of higher medical claims. Excluding the employee benefit expense, the
increase in non-interest expense is a result of the overall expansion on the Company's business.
-14-
Non-interest Expense (in thousands) Year ended December 31,
---------------------------------------------------------
2001 2000 1999
---- ---- ----
Salaries.................................. $6,202 $5,416 $4,949
Employee benefits......................... 1,514 1,234 984
Occupancy................................. 1,016 918 881
Equipment................................. 1,064 1,145 847
Postage................................... 190 170 152
Printing and supplies..................... 394 321 286
Marketing................................. 350 334 233
Michigan Single Business Tax.............. 180 215 192
Other..................................... 3,098 2,304 2,079
------- ------- -------
Total non-interest expense.............. $14,008 $12,057 $10,603
======= ======= =======
The increased level of non-interest expense is both a result of, and necessary to achieve the Company's
aggressive growth plan. During the past three years the Company's assets have increased over 33%. The growth of
non-interest expense includes four new banking offices, expansion of the corporate offices, and acquisition of
the Dornbush Insurance Agency.
Provision for Income Taxes
The provision for income taxes was $1,644,000 in 2001 compared with $1,132,000 in 2000, and $1,791,000
in 1999. The Company's effective tax rate approximated 22% in 2000 and 28% in 1999. 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.
The provision for income taxes was lowered by $439,000, $260,000 and $20,000 in 2001, 2000 and 1999,
respectively, as a result of the Company's utilization of a valuation allowance from earlier periods. As of
December 31, 2001 the valuation allowance is zero. Excluding the valuation allowance credit, the provision for
income taxes would have been $2,083,000 and 27.2% in 2001, $1,392,000 and 27.3% in 2000 and $1,811,000 and 28.7%
in 1999.
FINANCIAL CONDITION
Summary
During 2001, total assets increased 10% to $500,782,000, deposits increased 6% to $358,954,000 and loans
increased 9% to $379,345,000. In recent years, loan growth has exceeded deposit growth. As a result, the Bank
has increased its usage of brokered CD's and other borrowings to meet the Bank's funding needs. A discussion of
changes in balance sheet amounts by major categories follows:
Securities
The Bank 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 Company'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 Company's securities are classified as held-for-sale. The Company's total holdings increased
$4.6 million in 2001.
Amortized Fair Amount
Securities available-for-sale Cost Value Pledged
December 31, 2001 $77,692 $79,080 $78,106
December 31, 2000 73,713 74,446 72,356
-15-
Excluding holdings of U.S. Government Agency Securities, there were no investments in securities of any
one issuer, which exceeded 10% of stockholders' equity. The majority of the securities are pledged to secure
borrowing arrangements for Federal Home Loan Bank borrowings and securities sold under agreements to repurchase
or for other purposes as required or permitted by law.
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, 2001. 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 in thousands)
Investments With
Due Within One to Five to After No Contractual
One Year Five Years Ten Years Ten Years Maturity
-------- ---------- --------- --------- --------
Fair Avg. Fair Avg. Fair Avg. Fair Avg. Fair Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- ------ ------- ------- ------- -------
Available for Sale:
Mortgage-backed
securities......... $4,493 5.34% $31,966 5.36% $10,166 4.87% $6,624 3.92% $ - -
States and
Political
Subdivisions....... 2,293 8.48% 8,092 7.47% 11,677 7.37% 2,795 7.71% - -
Other Securities... - - - - - - - - 974 7.74%
------ ----- ------- ----- ------- ----- ------ ----- ---- -----
$6,786 5.34% $40,058 5.78% $21,843 6.35% $9,419 5.04% $974 7.74%
====== ===== ======= ===== ======= ===== ====== ===== ==== =====
The Loan Portfolio
The Bank's largest concentration of loans is 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. 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 December 31, 2001 and 2000, the Bank was servicing loans for FHLMC totaling $194,914,000 and
$147,566,000, respectively. The loan portfolio mix at December 31,2001 consists of 52% commercial real estate,
13% residential real estate, 16% commercial and 19% consumer installment.
All loans are originated centrally at the Bank's main office in Byron Center, Michigan. In addition to
the communities served by the Bank's branches, principal lending markets include nearby communities and
metropolitan areas. Subject to established underwriting criteria, 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.
Loan Portfolio
Composition (in thousands)
Year ended December 31
------------------------------------------------
2001 2000
---- ----
Amount % Amount %
------ - ------ -
Commercial Real Estate.................... $196,864 52 $165,978 48
Residential Real Estate................... 49,961 13 53,644 15
Commercial................................ 60,667 16 64,511 19
Consumer.................................. 71,853 19 63,160 18
-------- ---- -------- ----
Total loans............................ $379,345 100% $347,293 100%
======== ==== ======== ====
The lending policy of the Bank was written to reduce credit risk, enhance earnings and guide the lending officers in making credit decisions.
-16-
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 greater than 10% of total loans that are not disclosed as a separate category.
The low interest rate environment resulted in a significant amount of re-financing during 2001.
Consumers refinanced mortgage loans to lock in the lower interest rates. This activity increased gains on sales
of loans held for sale by over 450% from the previous year. The Company does not expect this abnormally high
volume to continue. During the last half of 2001, the Company experienced a significant amount of fixed rate
commercial loan re-financing. A significant number of these customers re-financed from higher fixed interest
rates to lower variable interest rates. For discussion regarding interest rate risk exposure and management of
this risk see the "Interest Rate Risk" and "Asset/Liability Gap Position" sections.
Non-performing Assets
Non-performing Assets (in thousands) December 31,
--------------------------------------------------
2001 2000 1999
---- ---- ----
Non-accrual loans............................................ $2,285 $2,535 $2,471
90 days or more past due & still accruing.................... 2,961 151 3,003
------ ------ ------
Total non-performing loans.............................. 5,246 2,686 5,474
Other real estate....................................... 120 - -
------ ------ ------
Total non-performing assets.................................. $5,366 $2,686 $5,474
====== ====== ======
As a percentage of portfolio loans
Non-performing loans.................................... 1.38% .77% 1.90%
Non-performing assets................................... 1.41% .77% 1.90%
Allowance for loan losses............................... 1.84% 1.40% 1.23%
Allowance for loan losses as a % of non-performing loans..... 133% 181% 65%
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 No. 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.
The Bank's ratio of non-performing loans to total loans at December 31, 2001 was 1.38% compared to .77%
in 2000. The increase is due to the increase in loans 90 days or more past due.
Subsequent to year-end, approximately $2.9 million in loans, previously reported as 90 days or more past
due and still accruing, were classified as non-accrual.
Total non-performing loans and assets remain considerably higher than last year. Approximately 72% of
the non-accrual loans are made to one group of commercial customers. Total non-performing assets decreased
$805,000 from the third quarter of 2001. The allowance for loan losses is 133% of the total non-performing loans
as of December 31, 2001. Management believes that the allowance for loan losses is adequate for these loans and
the remainder of the lending portfolio. As of December 31, 2001 there were no other interest bearing assets,
which required classification.
Management, with the assistance of outside consultants, is conducting a complete and comprehensive
review of the lending process. The expected outcomes include an improvement in workflow, improvement in
processes and procedures, standardization of loan quality assessment, and improvement in the management of
non-performing credits.
-17-
The table below presents the interest income that would have been earned on non-performing loans
outstanding at December 31, 2001, 2000 and 1999 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.
Foregone Interest on Non-Performing Loans
For the Year Ended December 31
(in thousands)
--------------------------------------------------------------
2001 2000
---- ----
Non-accrual Restructured Non-accrual Restructured
Pro forma interest $ 232 $ 551 $ 284 $ 372
Interest earned 29 551 146 372
----- ----- ----- -----
Foregone interest income $ 203 $ - $ 138 $ -
===== ===== ===== =====
Loan Loss
Experience
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.
Allowance for Loan Losses (dollars in thousands)
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Balance at beginning of year................................ $4,874 $3,551 $2,879
Charge-offs:
Commercial............................................... (363) (1,400) (45)
Real estate-mortgages.................................... - (1) -
Consumer................................................. (816) (642) (625)
------ ------ ------
(1,179) (2,043) (670)
------ ------ ------
Recoveries:
Commercial............................................... 36 90 24
Real estate-mortgages.................................... - - -
Consumer................................................. 227 156 68
------ ------ ------
263 246 92
------ ------ ------
Net charge-offs............................................. (916) (1,797) (578)
Additions to allowance charged to operations................ 3,025 3,120 1,250
------ ------ ------
Balance at end of year...................................... $6,983 $4,874 $3,551
====== ====== ======
Net charge-offs as a percent of average loans............... .25% .56% .24%
For the year ended December 31, 2001 versus 2000, net loans charged off decreased from .56% of total loans outstanding to .25%. During the year ended December 31, 2001, management added $3,025,000 to the loan loss provision and had net charge-offs of $916,000, increasing the allowance for loan losses to 1.84% from 1.40% from a year ago. The provision for loan losses charged against earnings decreased $95,000, or approximately 3% from a year ago. 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. During the second quarter of 2001, the consumer loan
-18-
policy was changed from charging off the entire loan
balance of repossessed assets and subsequent recovery upon sale, to charging off the net uncollectable balance
after collateral liquidation. Consumer loan charge-offs increased $103,000 in 2001 compared to 2000. Net
charge-offs in the Real Estate portfolio continue to be very low.
Allocation of the Allowance for Loan Losses (dollars in thousands)
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, reviews past loss
experience, the local economy and a number of other factors.
Year ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Allowance % of total Allowance % of total Allowance % of total
Amount allowance Amount allowance Amount allowance
------ --------- ------ --------- ------ ---------
Commercial................. $4,908 70% $3,849 79% $2,723 77%
Real estate mortgages...... 100 2 107 2 151 4
Consumer................... 1,273 18 863 18 637 18
Unallocated................ 702 10 55 1 40 1
------ ---- ------ ---- ------ ----
Total.................... $6,983 100% $4,874 100% $3,551 100%
====== ==== ====== ==== ====== ====
In addition to specific reserves assigned to individual loans, management uses an eight point rating
system to assign risk ratings to all commercial loans. A pre-determined loss allocation is assigned to loans in
each risk-rating category. Residential real-estate and consumer loans are assigned a loss allocation on a
"pooled" basis, which represents historical losses and management judgment.
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 2001 loan growth, to replenish the allowance for charge-offs during
the year and for the increase of non-performing loans.
Deposits
Average total deposits grew 20% from 2000 to 2001 and grew 20% from 1999 to 2000. The increase in 2001
resulted primarily from gaining market share in the Bank's market areas and the use of brokered time deposits
outside the banks market area.
Deposits are gathered from the communities the Bank serves. Increasing core deposits is a key element
of the Bank's strategic plan for calendar year 2002. 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. Additionally, a Company wide training program, to educate every
employee on the new products has been implemented. The Bank has also introduced online banking as a new
alternative for customer access.
Average Daily
Deposits (dollars in thousands)
Average for the Year
--------------------------------------------------------
2001 2000
Amount % Amount %
------ - ------ -
Non-interest bearing demand....... $44,685 13% $40,109 14%
NOW accounts...................... 29,164 8 21,554 8
MMDA/Savings ..................... 68,837 20 67,498 23
Time - negotiable brokered........ 51,699 15 18,241 6
Time.............................. 152,000 44 141,085 49
-------- ---- -------- ----
Total Deposits................. $346,385 100% $288,487 100%
======== ==== ======== ====
-19-
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.
Average
Deposit Balances (dollars in thousands)
The following table sets forth the average deposit balances and the weighted average rates paid thereon:
Average for the Year
--------------------------------------------------------
2001 2000
---- ----
Average Average Average Average
Balance Rate Balance Rate
------- ------ ------- ------
Non-interest bearing demand........ $44,685 $40,109
NOW Accounts....................... 29,164 2.00% 21,554 2.41%
MMDA/Savings....................... 68,837 2.13 67,498 2.96
Time - negotiable brokered......... 51,699 5.91 18,241 6.91
Time............................... 152,000 5.26 141,085 5.75
-------- ----- -------- -----
Total Deposits.................. $346,385 3.78% $288,487 4.12%
======== ===== ======== =====
At December 31,2001, the Bank had approximately $56,010,000 in brokered time deposits.
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, 2001:
Amount
------
Three months or less........................... $22,835
Over 3 months through 12 months................ 26,919
Over 1 year through 3 years................... 28,811
Over 3 years................................... 25,451
--------
$104,016
========
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.
Repurchase Agreements, Federal Funds Purchased and Borrowed Funds (dollars in thousands)
December 31, 2001 December 31, 2000
----------------------------------------- ----------------------------------------
Average Average Average Average Average Average
Balance Maturity Rate Balance Maturity Rate
----------- ---------- ----------- ----------- ----------- ----------
Repurchase agreements $38,885 1 day 2.93% $28,976 1 day 6.17%
FHLB Borrowings 37,110 66 months 6.48 36,019 67 months 6.39
Federal funds purchased 2,543 1 day 4.17 12,899 1 day 4.98
Treasury tax & loan note 1,799 1 day 3.45 1,622 1 day 6.04
Other borrowings 143 61 months 6.81 168 73 months 6.57
----------- ----------- ----------- ---------
$78,538 4.63% $77,894 5.77%
=========== =========== =========== =========
-20-
LIQUIDITY AND CAPITAL RESOURCES
Capital
Capital provides the foundation for future growth and expansion. The major component of capital is
stockholders' equity. Stockholders' equity was $49.3 million as of December 31, 2001, an increase of $4.7
million, or 10.5% from a year ago. The increase is primarily from the retention of earnings.
In 2001, the Company paid cash dividends totaling $1,899,554, approximately 32% of earnings. The lower
percentage was the result of higher earnings in 2001 and not a change in the dividend policy. In 2000 the
Company paid cash dividends totaling $1,768,647, approximately 45% of earnings. In 1999, the Company paid cash
dividends totaling $1,674,256, approximately 37% of earnings.
Under the regulatory "risk-based capital guidelines in effect for both banks and bank holding companies,
minimum capital levels are based upon perceived risk in the Company's various asset categories. These guidelines
assign risk weights to on-balance sheet and off-balance sheet categories in arriving at total risk-adjusted
assets. Regulatory capital is divided by the computed total of risk adjusted assets to arrive at the minimum
levels prescribed by the Federal Reserve Board as of December 31, 2001, as shown in the table below:
Capital
Resources (in thousands)
Regulatory Requirements December 31,
-----------------------------
Adequately Well
Capitalized Capitalized 2001 2000
---- ----
Tier 1 capital.................. $47,761 $43,499
Tier 2 capital.................. 5,099 4,765
------- -------
Total qualifying capital...... $52,860 $48,264
======= =======
Tier 1 leverage ratio........... 4% 5% 10.01% 10.52%
Tier 1 risk-based capital....... 4% 6% 11.90% 11.41%
Total risk-based capital........ 8% 10% 13.17% 12.67%
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 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.
-21-
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of December 31, 2001, which based on
scheduled maturity dates, are due in the periods indicated.
Maturing
(in thousands)
-----------------------------------------------------------------------------
After one but
Within one Year within five years After five years Total
Residential Real Estate........... $15,589 25,613 8,759 49,961
Installment....................... 2,524 45,313 24,016 71,853
Commercial Real Estate............ 47,101 140,688 9,075 196,864
Other Commercial.................. 31,870 26,523 2,274 60,667
------- -------- ------- --------
Totals..................... $97,084 $238,137 $44,124 $379,345
======= ======== =======
Allowance for Loan Losses......... (6,983)
--------
Total Loans Receivable, Net....... $372,362
========
Below is a schedule of the amounts maturing or re-pricing, which are classified according to their sensitivity to changes in interest rates.
Interest Sensitivity
(in thousands)
-----------------------------------------------------------
Fixed Rate Variable Rate Total
---------- ------------- -----
Due within 3 months................................. $17,057 $103,124 $120,181
Due after 3 months within 1 year.................... 17,691 - 17,691
Due after one but within five years................. 199,314 - 199,314
Due after five years................................ 42,159 - 42,159
-------- -------- --------
Total............................................... $276,221 $103,124 $379,345
======== ========
Allowance for loan losses........................... (6,983)
--------
Total loans receivable, net......................... $372,362
========
-22-
Asset/Liability Gap Position (in thousands)
December 31, 2001
---------------------------------------------------------------------
0-3 4-12 1-5 5+
Months Months Years Years Total
------ ------ ----- ----- -----
Interest earning assets:
Fed Funds Sold....................... $ 0 $ 0 $ 0 $ 0 $ 0
Loans................................ 134,322 40,017 177,533 27,473 379,345
Securities (including restricted
investments)...................... 42,459 3,659 13,853 22,009 81,980
Loans held for sale.................. 11,456 - - - 11,456
-------- -------- -------- ------- --------
Total interest earning assets........ $188,237 $43,676 $191,386 $49,482 $472,781
======== ======== ======== ======= ========
Interest bearing liabilities:
Savings & NOW........................ $31,323 $ 8,253 $44,017 $23,843 107,436
Time................................. 43,106 76,723 75,165 8,201 203,195
-------- -------- -------- ------- --------
Total deposits....................... 74,429 84,976 119,182 32,044 310,631
Other borrowings..................... 54,076 4,000 12,200 17,800 88,076
-------- -------- -------- ------- --------
Total interest bearing liabilities.. $128,505 $88,976 $131,382 $49,844 $398,707
======== ======== ======== ======= ========
Rate sensitivity gap and ratios:
Gap for period....................... 59,732 (45,300) 60,004 (362)
Cumulative gap....................... 59,732 14,432 74,436 74,074
Period gap ratio..................... 1.46 .49 1.46 .99
Cumulative gap ratio................. 1.46 1.07 1.21 1.19
Gap /Total Earning assets
Period............................... 31.7% (103.7)% 31.4% (0.7)%
Cumulative........................... 31.7% 6.2% 17.6% 15.7%
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 31,2001 the cumulative one year gap position was asset sensitive, approximately 6.2% of
earning assets. The table above reflects that the Bank has an asset repricing gap of $59,732,000 at 3 months and
an asset repricing gap of $14,432,000 at one year. The Bank'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
recognizes that GAP analysis alone is not a reliable measure of interest rate risk. Management is comfortable
with the Bank'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 Bank.
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.
-23-
Changes in Market Value of Portfolio Equity and Net Interest Income (dollars in thousands)
Market Value of
Change in Interest Rates Portfolio Percent Net Interest Percent
Equity(1) Change Income(2) Change
------------------- --------------- ----------------- --------------
300 basis point rise $32,250 (37.4)% $23,630 6.4%
200 basis point rise 38,331 (25.6) 23,122 4.1
100 basis point rise 45,551 (11.6) 22,650 2.0
Base rate 51,509 - 22,206 -
100 basis point decline 55,062 6.9 21,247 (4.3)
200 basis point decline 58,883 14.3 20,082 (9.6)
300 basis point decline 62,925 22.2 18,440 (16.7)
| (1) | Simulation analyses calculate the change in the net present value of the Company'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 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 include 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 $1.2 million and the use of brokered
certificates of deposit increased by $3.1 million in 2001 compared to 2000.
Net cash flows from operating activities declined significantly in 2001 to $2.8 million cash used from
$8.3 million provided in 2000. The decline was almost completely attributable to an increase in
loans-held-for-sale at December 31, 2001. This increase reflects the significant number of mortgage closings in
the closing days of December, 2001.
Cash flows from financing activities reflect an increase in both the purchases and proceeds of
available-for-sale securities. The sharp decline in interest rates has resulted in an increase of principal
repayments on mortgage-backed securities. The increased cash flows were re-invested in similar securities. Net
loan growth declined from $61 million in 2000 to $33 million in 2001. This decline reflects the economic slow
down and tightening of credit standards on consumer loans.
The $38 million decline in cash flows from financing activities reflects the lower funding needs
resulting from the decline in net loan growth explained above. During 2001, brokered time deposits increased
$3.1 million compared to an increase of $52.9 million in 2000.
Next years cash flow from operations and other borrowings are expected to be adequate to meet the needs
of the Company.
-24-
Impact of Inflation
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, 2001
- ------------------------------------------------------------------------------------------------------------
Total Assets $470,007 $475,573 $489,473 500,782
- ------------------------------------------------------------------------------------------------------------
Net Interest Income 4,285 4,662 5,018 5,346
- ------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 525 610 565 1,325
- ------------------------------------------------------------------------------------------------------------
Net Income 1,244 1,455 1,848 1,469
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Earnings per Share .61 .72 .90 .73
- ------------------------------------------------------------------------------------------------------------
Book Value per Share 22.86 23.12 24.10 24.24
- ------------------------------------------------------------------------------------------------------------
Return on Average Assets 1.09% 1.24% 1.51% 1.17%
- ------------------------------------------------------------------------------------------------------------
Return on Stockholders' Equity 11.06% 12.41% 15.25% 11.71%
- ------------------------------------------------------------------------------------------------------------
Efficiency Ratio 57.97% 56.15% 51.38% 57.41%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
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 Stockholders' Equity 9.61% 12.03% 12.83% 3.02%
- ------------------------------------------------------------------------------------------------------------
Efficiency Ratio 63.97% 55.21% 56.38% 59.95%
- ------------------------------------------------------------------------------------------------------------
-25-
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
(See "Market Risk" from Item 7). 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.
-26-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
TABLE OF CONTENTS |
| PAGE | |
| Independent Auditors' Reports | 28 |
| Consolidated Financial Statements | |
| Consolidated Balance Sheets | 30 |
| Consolidated Statements of Income | 31 |
| Consolidated Statements of Comprehensive Income | 32 |
| Consolidated Statements of Changes in Stockholders' Equity | 33 |
| Consolidated Statements of Cash Flows | 34 |
| Notes to Consolidated Financial Statements | 35-51 |
-27-
Independent Auditor's Report
To the Board of Directors and Stockholders
O.A.K Financial Corporation and Subsidiaries
We have audited the
accompanying consolidated balance sheet of O.A.K Financial Corporation and
Subsidiaries as of December 31, 2001 and the related consolidated statements of
income, comprehensive income, changes in stockholders’ equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Corporation’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in
accordance with 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 audit provide a reasonable
basis for our opinion.
In our opinion, the 2001
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of O.A.K Financial
Corporation and Subsidiaries as of December 31, 2001 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
-28-
INDEPENDENT AUDITORS' REPORT
-29-
| O.A.K. FINANCIAL CORPORATION AND SUBDISIARY |
CONSOLIDATED BALANCE SHEETS |
December 31,
-------------------------------------------
ASSETS 2001 2000
-------------------- --------------------
Cash and due from banks $12,051,503 $10,759,837
Federal funds sold - 6,000,000
------------ ------------
Cash and cash equivalents 12,051,503 16,759,837
Available-for-sale securities 79,080,306 74,446,393
Total Loans 379,345,186 347,293,451
Allowance for loan losses (6,982,779) (4,874,020)
------------ ------------
Net Loans 372,362,407 342,419,431
Loans held for sale 11,456,287 725,857
Accrued interest receivable 3,484,633 3,445,573
Premises and equipment, net 12,586,367 12,293,881
Restricted investments 2,900,000 2,710,000
Other assets 6,860,483 4,202,688
------------ ------------
Total assets $500,781,986 $457,003,660
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing $310,631,041 $293,593,320
Non-interest bearing 48,322,935 44,559,923
------------ ------------
Total deposits 358,953,976 338,153,243
Securities sold under agreements to repurchase and
federal funds purchased 51,162,712 32,233,984
Borrowed funds 37,036,681 38,455,955
Other liabilities 4,345,794 3,531,662
------------ ------------
Total liabilities 451,499,163 412,374,844
Stockholders' equity
Common stock, $1 par value; 4,000,000 shares authorized,
shares issued and outstanding: 2,040,532 at December 31,
2001 and 2,041,775 at December 31, 2000 2,040,532 2,041,775
Additional paid-in capital 6,302,538 6,265,446
Retained earnings 40,396,147 36,280,076
Accumulated other comprehensive income 916,256 483,869
Unallocated common stock held by ESOP (372,650) (442,350)
------------ ------------
Total stockholders' equity 49,282,823 44,628,816
------------ ------------
Total liabilities and stockholders' equity $500,781,986 $ 457,003,660
============ =============
The accompanying notes are an integral part of these consolidated financial statements.
-30-
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
AND SUBSIDIARY
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
------------ -------------- --------------
Interest income
Loans $31,447,999 $28,942,504 $21,656,573
Available-for-sale securities 4,335,313 4,003,757 3,264,615
Restricted investments 196,963 201,369 106,473
Federal funds sold 139,476 24,589 52,644
----------- ----------- -----------
Total interest income 36,119,751 33,172,219 25,080,305
----------- ----------- ----------- =========== =========== ===========
Interest expense
Deposits 13,092,938 11,888,486 8,368,069
Borrowed funds 2,583,850 3,159,406 1,327,843
Securities sold under agreements to repurchase 1,132,235 1,442,904 832,353
----------- ----------- -----------
Total interest expense 16,809,023 16,490,796 10,528,265
----------- ----------- -----------
Net interest income 19,310,728 16,681,423 14,552,040
Provision for loan losses 3,025,000 3,120,000 1,250,000
----------- ----------- -----------
Net interest income after provision for
loan losses 16,285,728 13,561,423 13,302,040
----------- ----------- -----------
Non-interest income
Service charges 1,573,933 1,353,040 811,369
Net gain on sales of loans held for sale 1,924,467 344,111 599,935
Loan servicing fees 25,281 152,639 148,042
Net gain on sales of available-for-sale securities 300,090 213,287 532,915
Insurance premiums 1,007,243 960,907 1,042,618
Brokerage fees 303,695 310,318 321,615
Other 247,185 263,701 164,311
----------- ----------- -----------
Total non-interest income 5,381,894 3,598,003 3,620,805
----------- ----------- -----------
Non-interest expenses
Salaries 6,201,895 5,416,446 4,948,945
Employee benefits 1,513,834 1,233,611 984,104
Occupancy 1,015,564 918,782 880,846
Furniture and fixtures 1,063,756 1,144,496 846,828
Other 4,212,948 3,343,953 2,942,129
----------- ----------- -----------
Total non-interest expenses 14,007,997 12,057,288 10,602,852
----------- ----------- -----------
Income before federal income taxes 7,659,625 5,102,138 6,319,993
Federal income taxes 1,644,000 1,132,000 1,791,000
----------- ----------- -----------
Net income $6,015,625 $3,970,138 $4,528,993
=========== =========== ===========
Income per common share:
Basic $2.96 $1.95 $2.23
===== ===== =====
Diluted $2.96 $1.95 $2.23
===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements.
-31-
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31
--------------------------------------------------------
2001 2000 1999
-------------- ---------------- -----------------
Other comprehensive income (loss)
Unrealized gains (losses) on available-
for-sale securities arising during the year $955,477 $1,889,683 $(1,676,862)
Reclassification adjustment for realized
gains included in net income 300,090 213,287 532,915
--------- ---------- ------------
Other comprehensive income (loss)
before income taxes 655,387 1,676,396 (2,209,777)
Income taxes (benefit) related to
other comprehensive income 223,000 570,000 (751,000)
--------- ---------- ------------
Other comprehensive income (loss) 432,387 1,106,396 (1,458,777)
Net income 6,015,625 3,970,138 4,528,993
--------- ---------- ------------
Comprehensive income $6,448,012 $5,076,534 $3,070,216
--------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial statements.
-32-
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------------
2001 2000 1999
------------- -------------- -------------
Shares of common stock issued and outstanding
Balance, beginning of year 2,041,775 2,041,775 2,000,000
Common stock forfeitures (2,000) - -
Common stock issued 757 - 13,000
Issuance of common stock for business combination - - 28,775
---------- ---------- ----------
Balance, end of year 2,040,532 2,041,775 2,041,775
========== ========== ==========
Common stock
Balance, beginning of year $2,041,775 $2,041,775 $2,000,000
Common stock forfeitures (2,000) - -
Common stock issued 757 - 13,000
Issuance of common stock for business combination - - 28,775
---------- ---------- ----------
Balance, end of year 2,040,532 2,041,775 2,041,775
---------- ---------- ----------
Additional paid-in-capital
Balance, beginning of year 6,265,446 6,259,681 5,622,680
Issuance of common stock 37,092 - 637,001
Allocation of ESOP shares - 5,765 -
---------- ---------- ----------
Balance, end of year 6,302,538 6,265,446 6,259,681
---------- ---------- ----------
Retained earnings
Balance, beginning of year 36,280,076 34,078,585 31,494,055
Accumulated deficit in business combination - - (270,207)
Net income 6,015,625 3,970,138 4,528,993
Cash dividends (1,899,554) (1,768,647) (1,674,256)
---------- ---------- ----------
Balance, end of year 40,396,147 36,280,076 34,078,585
---------- ---------- ----------
Accumulated other comprehensive (loss) income
Balance, beginning of year 483,869 (622,527) 836,250
Other comprehensive income (loss) 432,387 1,106,396 (1,458,777)
---------- ---------- ----------
Balance, end of year 916,256 483,869 (622,527)
---------- ---------- ----------
Unallocated common stock held by ESOP
Balance, beginning of year (442,350) (500,000) -
Unearned ESOP compensation - - (500,000)
Allocation of ESOP shares 69,700 57,650 -
---------- ---------- ----------
Balance, end of year (372,650) (442,350) (500,000)
---------- ---------- ----------
Total stockholders' equity $49,282,823 $44,628,816 $41,257,514
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
-33-
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF
AND SUBSIDIARY CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
-------------- ------------- --------------
Cash flows from operating activities
Net income $6,015,625 $3,970,138 $4,528,993
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,048,634 1,108,809 916,515
Provision for loan losses 3,025,000 3,120,000 1,250,000
Proceeds from sales of loans held for sale 107,606,050 20,568,196 45,364,562
Originations of loans held for sale (116,412,013) (20,317,904) (40,716,703)
Net gain on sales of available-for-sale securities (300,090) (213,287) (532,915)
Net gain on sales of loans held for sale (1,924,467) (344,111) (599,935)
Net amortization of investment premiums 177,358 112,885 163,506
(Gain) loss on sales of property and equipment 8,475 (65,500) 7,769
Deferred income taxes (benefit) (905,000) (743,000) (85,000)
Changes in operating assets and liabilities
which (used) provided cash
Accrued interest receivable (39,060) (728,736) (690,652)
Other assets (1,977,795) 179,631 (186,327)
Other liabilities 883,832 1,688,352 (304,994)
---------- ----------- ----------
Net cash (used in) provided by operating activities (2,793,451) 8,335,473 9,114,819
---------- ----------- ----------
Cash flows from investing activities
Available-for-sale securities
Proceeds from maturities 29,648,233 8,331,637 11,425,763
Proceeds from sales 4,130,670 968,939 3,313,371
Purchases (37,634,697) (20,320,276) (23,146,715)
Purchases of restricted investments (190,000) (710,000) (736,100)
Net increase in loans held for investment (32,967,976) (61,260,242) (66,275,365)
Purchases of premises and equipment (2,090,988) (2,874,735) (4,361,920)
Proceeds from the sale of premises and equipment 741,393 156,115 11,858
---------- ----------- ----------
Net cash used in investing activities (38,363,365) (75,708,562) (79,769,108)
---------- ----------- ----------
Cash flows from financing activities
Net increase in deposits 20,800,733 83,987,195 36,875,241
Net (decrease) increase in TT&L note (2,576,782) (509,820) 2,447,197
Proceeds from FHLB borrowings 15,400,000 22,800,000 20,000,000
Repayments of FHLB borrowings (14,200,000) (16,000,000) (4,000,000)
Net other borrowed funds (repayments) (42,492) (39,824) (54,065)
Net increase (decrease) in securities sold under
agreements to repurchase and fed funds purchased 18,928,728 (14,390,367) 18,051,047
Dividends paid (1,899,554) (1,768,647) (1,674,256)
Proceeds from issuance of common stock - - 150,001
Proceeds from stock options exercised 37,849 - -
---------- ----------- ----------
Net cash provided by financing activities 36,448,482 74,078,537 71,795,165
---------- ----------- ----------
Net increase in cash and cash equivalents (4,708,334) 6,705,448 1,140,876
Cash and cash equivalents, beginning of year 16,759,837 10,054,389 8,913,513
---------- ----------- ----------
Cash and cash equivalents, end of year $12,051,503 $16,759,837 $10,054,389
=========== =========== ===========
Supplementary cash flows information
Interest paid $17,195,069 $15,762,060 $10,320,794
Income taxes paid 2,740,000 1,869,167 1,948,430
The accompanying notes are an integral part of these consolidated financial statements.
-34-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED 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).
Use of Estimates - In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States, 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. Material estimates particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and deferred tax assets.
Accounting Policies - The accounting policies used in the preparation of the accompanying consolidated
financial statements conform to predominant banking industry practices. 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. 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 are recorded at their estimated fair value. Net unrealized appreciation
and depreciation, net of the effect of deferred income taxes is reported 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.
-35-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Loans Held for Investment and Related Income
Loans 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 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 non-accrual, 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 ("OMSR") 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. Servicing assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such
as interest rates and terms. Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment
is recognized through a decrease in carrying value.
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.
-36-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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.
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
2,035,000 in 2001, 2,034,000 in 2000 and 2,031,000 in 1999 and the assumed exercise of the outstanding stock
options were not considered in the calculation of diluted earnings per share because their effect was
anti-dilutive.
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.
-37-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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
2001 Cost Gains Losses Value
----------------- ---------------- --------------- ---------------
Mortgage-backed securities $52,577,876 $731,739 $60,197 $53,249,418
States and political subdivisions 24,234,969 660,464 38,647 24,856,786
Other 879,198 106,640 11,736 974,102
----------------- ---------------- --------------- ---------------
Total $77,692,043 $1,498,843 $110,580 $79,080,306
================= ================ =============== ===============
2000
U.S. government and
federal agency $10,430,632 $ 1,295 $ 77,550 $10,354,377
Mortgage-backed securities 37,305,026 286,161 161,428 37,429,759
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
================= ================ =============== ================
The amortized cost and fair value of available-for-sale securities by contractual maturity at December 31, 2001 is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---------------- ----------------
Due in one year or less $2,268,217 $2,293,352
Due after one year through five years 7,820,079 8,091,473
Due after five years through ten years 12,307,319 12,650,963
Due after ten years 2,718,551 2,795,099
---------------- ----------------
Subtotal 25,114,166 25,830,887
Mortgage-backed securities 52,577,877 53,249,419
---------------- ----------------
Total $77,692,043 $79,080,306
================ ================
-38-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Investment income from taxable and nontaxable securities for the years ended December 31, is as follows:
2001 2000 1999
---------------- -------------- ---------------
Taxable $3,095,141 $2,815,554 $2,173,429
Nontaxable 1,240,172 1,188,203 1,091,186
---------------- -------------- ---------------
Total $4,335,313 $4,003,757 $3,264,615
================ ============== ===============
The gross gains and gross losses realized on sales for the years ended December 31 are as follows:
2001 2000 1999
------------- ------------- -------------
Gross realized gains $301,458 $217,785 $532,915
Gross realized losses (1,368) (4,498) -
------------- ------------- -------------
Net realized gain on sales of
available-for-sale securities $300,090 $213,287 $532,915
============= ============= =============
The tax provision, applicable to these net realized gains, amounted to approximately $102,000, $73,000
and $181,000 during 2001, 2000 and 1999, respectively.
Investment securities with carrying values of approximately $78,106,000 and $72,356,000 at December 31,
2001 and 2000, respectively, were pledged to secure borrowing arrangements disclosed in notes 7 and 8 or for
other purposes as required or permitted by law.
3. LOANS
Major loan classifications at December 31 are as follows:
2001 2000
----------------- -----------------
Commercial real estate $196,863,957 $165,977,721
Residential real estate 49,960,794 53,644,229
Commercial 60,667,282 64,511,214
Consumer 71,853,153 63,160,287
----------------- -----------------
Total loans receivable 379,345,186 347,293,451
Less allowance for loan losses 6,982,779 4,874,020
----------------- -----------------
Loans receivable, net $372,362,407 $342,419,431
================= =================
At December 31, 2001, scheduled maturities of loans with fixed rates of interest are as follows:
One year or less $34,747,893
One to five years 199,314,510
Over five years 42,158,653
------------------
Total $276,221,056
==================
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, 2001 and 2000, approximated $199,000,000 and $152,000,000, respectively; such loans are not included in the accompanying consolidated balance sheets.
-39-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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:
2001 2000 1999
----------------- ---------------- ----------------
Balance, beginning of year $1,223,808 $1,215,373 $ 918,093
Mortgage servicing rights capitalized 1,162,497 223,465 491,995
Amortization (444,780) (215,030) (194,715)
---------------- ---------------- ----------------
Balance, end of year $1,941,525 $1,223,808 $1,215,373
================ ================ ================
The following is a summary of information pertaining to impaired loans as of December 31:
2001 2000
----------------- ----------------
Impaired loans without a valuation allowance $324,952 $ -
Impaired loans with a valuation allowance 8,484,210 2,685,702
----------------- ----------------
Total impaired loans $8,809,162 $2,685,702
================= ================
Valuation allowance related to impaired loans $1,622,659 $699,334
================= ================
2001 2000 1999
------------- ------------- --------------
Average investment in impaired loans $8,731,084 $2,618,756 $1,607,204
Interest income recognized on impaired loans
(no interest income was recognized on the cash
basis) $580,298 $172,775 $151,414
All payments applied to impaired loans are recorded as a reduction in principal balance, when the
impaired loan is in non-accrual status.
4. ALLOWANCE
FOR LOAN LOSSES
The following is an
analysis of changes in the allowance for loan losses for the years
ended December 31:
2001 2000 1999
----------------- ----------------- ----------------
Balance, beginning of year $4,874,020 $3,550,553 $2,879,376
Provision for loan losses 3,025,000 3,120,000 1,250,000
Recoveries 262,859 245,826 91,451
Loans charged off (1,179,100) (2,042,359) (670,274)
------------------ ----------------- ----------------
Balance, end of year 6,982,779 $4,874,020 $3,550,553
================== ================= ================
-40-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
5. PREMISES
AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
2001 2000
----------------- ----------------
Land $2,555,231 $2,130,069
Buildings and improvements 10,599,636 10,118,577
Furniture and equipment 5,955,322 5,769,263
----------------- ----------------
Total premises and equipment 19,110,189 18,017,909
Less accumulated depreciation 6,523,822 5,724,028
----------------- ----------------
Premises and equipment, net $12,586,367 $12,293,881
================= ================
6. DEPOSITS
The following is a summary of the distribution of time deposits at December 31:
2001 2000
----------------- -----------------
Time, $100,000 and over $48,005,633 $46,362,916
Other time 99,179,615 101,128,485
Brokered time deposits, $100,000 and over 56,010,000 52,915,000
----------------- -----------------
Total interest bearing $203,195,248 $200,406,401
================= =================
At December 31, 2001, scheduled maturities of time deposits are as follows:
2002 $119,837,204
2003 29,089,076
2004 22,328,082
2005 16,173,614
2006 7,574,272
2007 4,097,000
2008 1,000,000
2009 2,096,000
2010 1,000,000
-----------------
Total time deposits $203,195,248
=================
Interest expense on time deposits issued in denominations of $100,000 or more was approximately $5,566,310 in 2001, $3,874,000 in 2000 and $1,365,000 in 1999.
-41-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following obligations:
2001 2000
----------------- -----------------
Federal Home Loan Bank advances $36,000,000 $34,800,000
Treasury tax and loan note 913,398 3,490,180
Other borrowings 123,283 165,775
----------------- -----------------
Total borrowed funds $37,036,681 $38,455,955
================= =================
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
$47,071,000 and $40,869,000 at December 31, 2001 and 2000, respectively; the maximum outstanding at any month end
was $40,000,000 and $39,800,000, respectively; the average daily balance was $37,110,000 and $36,019,000,
respectively; the average interest rate was 6.48% and 6.17% respectively.
The Treasury Tax and Loan Note is collateralized by U.S. government agency securities with a carrying
value of approximately $5,353,000 and $6,314,000 at December 31, 2001 and 2000, respectively. The Treasury Tax
and Loan Note is a daily borrowing with the Federal Reserve Bank, due on demand at 25 basis points below the
national federal fund interest rate (1.75% at December 31, 2001). The Treasury Tax and Loan Note had a carrying
value and fair value as of December 31, 2001 and 2000 of $913,398 and $3,490,180, respectively; the maximum
outstanding at any month end was $4,022,000 and $4,541,000, respectively; the average daily balance was
$1,799,000 and $1,622,000, respectively; the average interest rate was 3.45% and 3.80% respectively.
The Federal Home Loan Bank
advances at December 31, 2001 and their contractual maturities are as follows:
2001
---------------
Fixed rate advances:
Due in 2002 6,000,000
Due in 2003 1,000,000
Due in 2004 8,200,000
Due in 2005 1,000,000
Due in 2006 2,000,000
Due in 2007 1,000,000
Due in 2010 16,800,000
---------------
Total long-term debt $36,000,000
===============
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
Securities sold under agreements to repurchase at December 31, 2001 and 2000 mature within one day from
the transaction date and have an average interest rate of 2.94% and 5.03%, respectively. The U.S. government
agency securities underlying the agreements have a carrying value and a fair value of approximately $51,484,000
and $43,847,000 at December 31, 2001 and 2000, respectively. Such securities remain under the control of the
Bank. The maximum amount outstanding at any month end during the years ended December 31, 2001 and 2000 was
$44,580,000 and $36,045,000, respectively; the daily average balance was $38,574,000 and $28,976,000,
respectively.
Federal Funds Purchased had a carrying value and fair value as of December 31, 2001 and 2000 of
$10,150,000 and $0, respectively; the maximum outstanding at any month end was $12,200,000 and $24,000,000,
respectively; the average daily balance was $2,543,000 and $12,899,000, respectively; the average interest rate
was 4.17% and 6.39% respectively.
-42-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
9. FEDERAL
INCOME TAXES
The provision for federal
income taxes for the years ended December 31 consists of:
2001 2000 1999
------------------ ----------------- ----------------
Current $2,549,000 $1,875,000 $1,876,000
Deferred (benefit) (905,000) (743,000) (85,000)
------------------ ----------------- ----------------
Federal income tax expense $1,644,000 $1,132,000 $1,791,000
================== ================= ================
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:
2001 2000 1999
------------------ ---------------- ----------------
Statutory rate applied to income
before income taxes $2,604,000 $1,734,727 $2,148,798
Effect of tax-exempt interest
income (407,000) (354,990) (341,898)
Change in valuation allowance
(439,000) (260,000) (20,000)
Other - net (114,000) 12,263 4,100
------------------ ---------------- ----------------
Federal income tax expense $1,644,000 $1,132,000 $1,791,000
================== ================ ================
The net deferred income tax asset as of December 31, is comprised of the tax effect of the following temporary differences:
2001 2000
--------------- ---------------
Deferred tax assets
Allowance for loan losses $2,106,000 $1,555,000
Deferred compensation plan 465,000 301,000
Deferred loan fees 108,000 1,000
--------------- ---------------
Total deferred tax assets 2,679,000 1,857,000
Valuation allowance - (439,000)
--------------- ---------------
Net deferred tax assets 2,679,000 1,418,000
--------------- ---------------
Deferred tax liabilities
Depreciation (165,000) (73,000)
Discount accretion (20,000) (31,000)
Other (31,000) -
Loan servicing rights (660,000) (416,000)
--------------- ---------------
Total deferred tax liabilities (876,000) (520,000)
--------------- ---------------
Net deferred tax assets entering into the determination
of the provision for federal income taxes 1,803,000 898,000
Additional deferred tax (liability) asset related to
other comprehensive income (472,000) (249,000)
--------------- ---------------
Net deferred tax asset included in other assets
on the accompanying consolidated balance sheets $1,331,000 $ 649,000
=============== ===============
-43-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
10. RELATED
PARTY TRANSACTIONS
Loans
Certain directors, executive officers and their related interests were loan customers of the Bank. All
such loans were made on substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions and do not represent more than a normal risk of
collectibility or present other unfavorable features. The total loans outstanding to these customers aggregated
approximately $8,122,000 and $4,577,000 at December 31, 2001 and 2000, respectively; new loans and repayments
during 2001 were approximately $5,202,000 and $1,657,000, 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, 2001 and 2000, the following financial instruments were outstanding whose contract
amounts represent credit risk:
Contract Amount
-------------------------------------
2001 2000
---------------- ----------------
Commitments to grant loans $33,871,000 $29,949,000
Unfunded commitments under lines of credit 87,712,000 82,352,000
Commercial and standby letters of credit 4,471,000 3,406,000
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.
-44-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
12. REGULATORY
MATTERS
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by its primary regulator, the 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, 2001, 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, 2001 and 2000 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, 2001
Total capital to risk
weighted assets
Consolidated $52,860 13.17% $32,120 8.0% $ N/A N/A%
Bank 52,173 13.01 32,082 8.0 40,102 10.0
Tier 1 capital to risk
weighted assets
Consolidated 47,761 11.90% 16,060 4.0 N/A N/A
Bank 47,137 11.76 16,041 4.0 24,061 6.0
Tier 1 capital to
average assets
Consolidated 47,761 10.01% 19,130 4.0 N/A N/A
Bank 47,137 9.87 19,103 4.0 23,877 5.0
-45-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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
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, 2001 and 2000, those
required reserve balances were $4,851,000 and $3,215,000, 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 $10,776,000 at January 1, 2002. 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
The Corporation maintains a 401(k) covering substantially all employees. The Corporation matches
employee contributions to the 401(k) up to a maximum of 2% of employees' eligible wages.
The Corporation maintains a Profit Sharing Plan covering substantially all employees. The Corporation's
contribution to the profit sharing plan is based on defined performance targets established annually by the board
of directors.
The Corporation maintains an internally leveraged Employee Stock Ownership Plan (ESOP) covering
substantially all employees. The Corporation makes annual contributions equal to at least the ESOP's debt
service less dividends received by the ESOP. The original loan will be repaid over a period of 10 years. The
dividends on the allocated shares are distributed to participants and the dividends on the unallocated shares are
used to pay debt service. The ESOP shares initially were pledged as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to active participants. The shares pledged as
collateral are reported as unallocated common stock held by the ESOP in the equity section of the balance sheet.
As shares are released they become outstanding for earnings per share computations.
-46-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
2001 2000 1999
---------------- ----------------- -----------------
Allocated shares 2,547 1,153 -
Shares released for allocation 928 1,394 1,153
Unreleased shares 6,525 7,453 8,847
---------------- ----------------- -----------------
Total ESOP shares 10,000 10,000 10,000
================ ================= =================
The total Corporation contributions to the 401(k) match, profit sharing plan and ESOP were $345,062,
$319,367 and $274,035 for 2001, 2000 and 1999, respectively.
Stock Compensation and Stock Option Plans - The Corporation maintains stock option plans for
non-employee directors (the Director's Plan) and employees and officers of the Corporation and its' subsidiaries
(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. During 2001, 13,400
options were awarded with an exercise price of $50.00 per share. During 2000, 12,127 options were awarded with
an exercise price of $55.00 per share.
The following tables summarize information about stock option transactions:
2001 2000 1999
---------------------- ------------------------ ----------------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- --------- ---------
Outstanding, beginning of year 22,484 $52.53 11,750 $50.00 - $ -
Granted 13,400 50.00 12,127 55.00 11,750 50.00
Exercised (757) 50.00 - - - -
Forfeited/expired (732) 50.00 (1,393) (52.72) - -
---------- ---------- ---------- --------- -------- ---------
Outstanding, end of year 34,395 51.65 22,484 52.53 11,750 50.00
========== ========== ========== ========= ======== =========
Exercisable, end of year 21,727 $52.62 11,114 $50.00 - $ -
========== ========== ========== ========= ======== =========
Options Outstanding
-------------------------------------- Number of
Number Wgt. Avg. Options
Exercise Outstanding Remaining Exercisable
Price Dec. 31, 2001 Contractual Life Dec. 31, 2001
------------------ ----------------- ------------------- ------------------
$50 23,025 8.2 years 10,357
$55 11,370 8.0 years 11,370
------------ ------------------- ------------------
Total 34,395 8.1 years 21,727
============ =================== ==================
-47-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All options expire 10 years after the date of the grant; 137,848 shares are reserved for future issuance
under the Stock Compensation Plan and 27,000 shares are reserved for future issuance under the Stock Option Plan
for non-employee directors.
Statement of Financial Accounting Standards (SFAS) No. 123, 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.
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:
2001 2000 1999
------------- ------------- ------------
Net Income As Reported 6,015 3,970 4,529
Pro Forma 5,939 3,858 4,421
Earnings Per Share As Reported 2.96 1.95 2.23
Pro Forma 2.92 1.89 2.18
Earnings Per Share - assuming dilution As Reported 2.96 1.95 2.23
Pro Forma 2.92 1.89 2.18
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:
2001 2000 1999
------------------- ------------------- ------------------
Dividend yield 1.97% 1.66% 1.45%
Expected life 9 years 9 years 9 years
Expected volatility 4.80% 3.49% 3.49%
Risk-free interest rate 5.07% 5.12% 6.45%
Weighted-average fair value per share of options
granted during the year $16.77 $13.44 $9.63
Deferred Compensation - The Bank sponsors a deferred compensation plan for all directors who wish to
participate. The cost of the plan was $197,000, $179,000 and $204,000 in 2001, 2000 and 1999, respectively. The
accrued benefit obligation for this plan was $1,368,208 and $820,952 as of December 31, 2001 and 2000,
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, 2001.
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.
-48-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The following methods and assumptions were used by the Corporation in estimating the fair value
disclosures for financial instruments.
Cash and Cash Equivalents - The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents approximate those assets' fair values.
Investment Securities - Fair values for investment securities are generally based on quoted market
prices.
Restricted Investments - The carrying value of Federal Home Loan Bank stock and Federal Reserve Bank
stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank and the Federal
Reserve Bank.
Loans Receivable - For variable rate loans that reprice frequently and with no significant change in
credit risk, fair values approximate carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines, if
any, in the credit quality of borrowers since the loans were originated. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Loans Held for Sale - The fair value of loans held for sale 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.
Accrued Interest Receivable - The carrying amounts reported in the consolidated balance sheets for
accrued interest receivable approximate those assets' fair values.
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 43% and 41% of the Bank's deposits at December 31, 2001 and 2000,
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, 2001 and 2000.
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.
Other Liabilities - The carrying amounts reported in the consolidated balance sheets for other
liabilities approximate those liabilities' fair values.
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.
-49-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Carrying Fair
2001 Amount Value
---------------- ----------------
Financial assets
Cash and cash equivalents $12,051,503 $12,051,503
Available-for-sale securities 79,080,306 79,080,306
Loans receivable, net 372,362,407 382,060,017
Loans held for sale 11,456,287 11,456,287
Accrued interest receivable 3,484,633 3,484,633
Restricted investments 2,900,000 2,900,000
Financial liabilities
Deposits 358,953,976 361,121,027
Borrowed funds 37,036,681 38,963,337
Securities sold under agreements
to repurchase and federal funds purchased 51,162,712 51,162,712
Other liabilities 4,345,794 4,345,794
2000
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
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, 2001 and 2000
and the related condensed statements of income and cash flows for each of the three years in the period ended
December 31, 2001, 2000 and 1999:
Condensed Balance Sheets
2001 2000
----------------- ----------------
Assets
Cash $146,458 $38,517
Investment in subsidiary 48,658,458 44,164,309
Available-for-sale securities 914,399 1,008,952
----------------- ----------------
Total assets $49,719,315 $45,211,778
================= ================
Other borrowed funds $372,650 $467,031
Other liabilities 63,842 115,931
Stockholders' equity 49,282,823 44,628,816
----------------- ----------------
Total liabilities and stockholders' equity $49,719,315 $45,211,778
================= ================
-50-
| O.A.K. FINANCIAL CORPORATION AND SUBSIDIARY |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Condensed Statements of Income
2001 2000 1999
------------------ ----------------- ----------------
Income
Dividends from subsidiary $1,972,000 $325,000 $816,710
Interest from available-for-sale securities 20,669 24,076 36,045
Net realized gain on sale of
available-for-sale securities 204,485 215,785 507,134
------------------ ----------------- ----------------
Total income 2,197,154 564,861 1,359,889
Other expenses 137,927 167,599 202,937
------------------ ----------------- ----------------
Income before equity in undistributed net
income of subsidiary 2,059,227 397,262 1,156,952
Equity in undistributed net income of
subsidiary 3,956,398 3,572,876 3,372,041
------------------ ----------------- ----------------
Net income $6,015,625 $3,970,138 $4,528,993
================== ================= ================
Condensed Statements of Cash Flows
2001 2000 1999
-------------- ------------- --------------
Cash flows from operating activities
Net income $6,015,625 $3,970,138 $4,528,993
Adjustments to reconcile net income
to net cash provided by operating
activities
Net gain on available-for-sale securities (204,485) (215,785) (507,134)
Undistributed earnings of subsidiary (3,956,398) (3,572,876) (3,372,041)
Changes in other liabilities 12,922 (47,305) 15,685
------------- --------------- --------------
Net cash provided by operating
activities 1,867,664 134,172 665,503
------------- --------------- --------------
Cash flows from investing activities
Available-for-sale securities
Proceeds from sales 709,018 594,959 1,287,854
Purchases (572,705) (298,474) -
------------- --------------- --------------
Net cash provided by investing
activities 136,313 296,485 1,287,854
------------- --------------- --------------
Cash flows from financing activities
Repayment of long-term debt (94,381) (32,969) -
Proceeds from allocation of ESOP 60,050 63,415 -
Proceeds from common stock issued - - 650,001
Proceeds from stock options exercised 37,849 - -
Dividends paid (1,899,554) (1,768,647) (1,674,256)
------------- --------------- --------------
Net cash used in financing activities (1,896,036) (1,738,201) (1,024,255)
------------- --------------- --------------
Net (decrease) increase in cash and cash
equivalents 107,941 1,307,544 929,102
Cash and cash equivalents, beginning
of year 38,517 1,346,061 416,959
------------- --------------- --------------
Cash and cash equivalents, end of year $146,458 $38,517 $1,346,061
============= =============== ==============
-51-
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 25, 2002, relating to the April 18, 2002 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, 7 and 8 of the
Company's definitive proxy statement, as filed with the Commission and dated March 25, 2002, relating to the
April 18, 2002 Annual Meeting of Shareholders, is incorporated herein by reference. Information under the
caption "Committee Report on Executive Compensation" on pages 5 and 6 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Voting Securities and Beneficial Ownership of Management"
on pages 2 and 3 of the Company's definitive proxy statement, as filed with the Commission and dated March 25,
2002, relating to the April 18, 2002 Annual Meeting of Shareholders, is incorporated herein by reference.
-52-
Item 13.
Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" on page 6 of the Company's definitive
proxy statement, as filed with the Commission and dated March 25, 2002, relating to the April 18, 2002 Annual
Meeting of Shareholders, is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
-53-
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 8, 2002.
| 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) |
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 John A. Van Singel and James A. Luyk, 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 Robert Deppe |
March 8, 2002 |
| /s/ Norm Fifelski Norman Fifelski |
March 8, 2002 |
| /s/ Dellvan Hoezee Dellvan Hoezee |
March 8, 2002 |
| /s/ John Peterson John Peterson |
March 8, 2002 |
| /s/ Lois Smalligan Lois Smalligan |
March 8, 2002 |
| /s/ John A. Van Singel John A. Van Singel |
March 8, 2002 |
| /s/ David Van Solkema David Van Solkema |
March 8, 2002 |
|
Gerald Williams |
March 8, 2002 |
-54-
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable assigned number:
| Exhibit Number |
|
| 10 | Income Protection Agreement between the Registrant and James Luyk |
| 21 | Subsidiaries of Registrant |
| Exhibit Number |
|
| 3.1 | Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form 10, as amended. |
| 3.2 | Amendment to the Articles of Incorporation of Registrant filed April 28, 1998, increasing authorized shares of common stock from 2,000,000 to 4,000,000 shares, incorporated by reference to Exhibit 3 of Registrant's Report on Form 10-K for the year ended December 31, 1998. |
| 3.3 | Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form 10, as amended. |
| 4 | Form of Registrant's Stock Certificate are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form 10, as amended. |
| 10.1 | 1999 Stock Compensation Plan, incorporated by reference to Appendix A to the Registrant's Definitive Proxy Statement filed with respect to its April 22, 1999 annual meeting of shareholders. |
| 10.2 | Nonemployee Directors' Stock Option Plan, incorporated by reference to Appendix A to the Registrant's Definitive Proxy Statement filed with respect to its April 22, 1999 annual meeting of shareholders. |
| 10.3 | 1988 Director Deferred Compensation Plan is incorporated by reference to Exhibit 10 of the Registrant's Registration Statement on Form 10, as amended. |
| 10.4 | Director Deferred Compensation Plan is incorporated by reference to Exhibit 10 of the Registrant's Report on Form 10-K for the year ended December 31, 2000. |
| 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. |
-55-
EXHIBIT 10 - FORM OF INCOME PROTECTION AGREEMENT PLAN
INCOME PROTECTION AGREEMENT
This Agreement is made on the dates shown below by O.A.K. Financial Corporation, and James Luyk ("Employee").
Statement of Facts
Employee is employed by O.A.K. Financial Corporation / Byron Center State Bank, and is presently engaged in employment as its Chief Financial Officer. O.A.K. Financial Corporation desires to retain Mr. Luyk as a productive employee, and therefore desires to provide him with certain assurances that his income will be protected in the event of a change in the corporate control of O.A.K. Financial Corporation
Agreement
In consideration of the facts stated above and the mutual promises of the parties, it is agreed as follows:
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| O.A.K. Financial Corporation By: /s/ John A. Van Singel Title: President Date: October 19, 2000 |
/s/ James Luyk James Luyk Date: October 19, 2000 |
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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
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