Item 1. Business.
O.A.K. Financial Corporation (the "Company"), a Michigan business corporation, is a one bank holding company, which owns all of the outstanding capital stock of Byron Center State Bank (the "Bank"), a Michigan banking corporation. The Company was formed in 1988 for the purpose of acquiring all of the common stock of the Bank in a shareholder approved reorganization, which became effective October 13 of 1988.
The Bank was originally organized in 1921 as a Michigan banking corporation. As of December 31, 1999, the Bank had approximately 159 full-time and part-time employees. None of the Bank's employees are subject to collective bargaining agreements. The Company does not directly employ any personnel. 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 othe communities with branch offices in Allendale, Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Jamestown, Moline and Zeeland. The Bank's offices are located in Kent County, Ottawa County and the northern portion of Allegan County.
The area in which the Bank's offices are located, which is basically south and west of the city of Grand Rapids, has historically been rural in character but now has a growing urban population as the Grand Rapids Metropolitan Area expands south and west. The populations of the cities in which the Banks offices are located are approximately as follows: Byron Center - 1,000; Dorr - 1,450; Grand Rapids - 189,125; Grandville - 16,500; Hudsonville - 6,170; Jamestown - 300; Moline - 800; Hamilton - 600; Zeeland - 6,000; Allendale - 9,600.
The Bank also owns a subsidiary, O.A.K. Financial Services, which is responsible for mutual fund products and securities brokerage services and also offers retirement planning services and provides 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.
Bank Services
The Bank is a full service bank offering a wide range of commercial and personal banking services. These traditional consumer services include checking accounts, savings accounts, certificates of deposit, commercial loans, real estate loans, installment loans, collections, traveler's checks, night depository, safe deposit boxes and U.S. Savings Bonds. Currently, the Bank does not offer trust services. The Bank maintains correspondent relationships with major banks in Detroit and Grand Rapids, pursuant to which the Bank engages in federal funds sale and purchase transactions, the clearance of checks and certain foreign currency transactions. In addition, the Bank participates with other financial institutions to fund certain large commercial loans which would exceed the Bank's legal lending limit if made solely by the Bank.
The Bank's deposits are generated in the normal course of business, and the loss of any one depositor would not have a materially adverse effect on the business of the Bank. No material portion of the Bank's loans is concentrated within a single industry or group of related industries. As of December 31, 1999, the Bank's certificates of deposits of $100,000 or more constituted approximately 13% of total deposit liabilities. The Bank's deposits originate primarily from its service area, and the Bank does, on a very limited basis, obtain large deposits from outside this area.
The Bank's principal sources of revenue are interest and fees on loans and interest on investment securities. Interest and fees on loans constituted approximately 75.5% and 74.1% of total revenues for the years ended December 31, 1999, and December 31, 1998, respectively. Interest on investment securities, including short-term investments, restricted investments and federal funds sold, constituted approximately 11.9% and 14.7% of total revenues in 1999 and 1998. Revenues were also generated from deposit service charges, sales of loans and securities and other financial service fees.
The Bank provides real estate, consumer and commercial loans to customers in its market. Eighty percent (80%) of the Bank's loan portfolio is held in fixed rate loans as of December 31, 1999. Most of these loans, approximately 86.6%, mature within five years of issuance. Approximately $30,805,000 of loans (or 10.7% of the Bank's total loan portfolio) have fixed rates with maturities exceeding five years. Of the Bank's interest-bearing deposits,
41.4% are held in savings, NOW and MMDAs, all of which are variable rate products. Of the $126,125,000 in certificates, approximately $96,124,000 mature within one year, with the balance maturing within a five year period.
Requests to the Bank for credit are considered on the basis of credit worthiness of each applicant, without consideration of race, color, religion, national origin, sex, marital status, physical handicap, age, or the receipt of income from public assistance programs. Consideration is given to the applicant's capacity for repayment, collateral, capital and alternative sources of repayment. Loan applications are accepted at all the Bank's offices and are approved within the limits of each lending officer's authority. Loan requests in excess of $1,000,000 are required to be presented to the Board of Directors or the Executive Committee of the Board for review and approval.
As described in more detail in Table 20 on page 30, the Bank's ratio of rate sensitive assets to rate sensitive liabilities as of December 31, 1999, was a 17% positive gap, compared to a 20 % positive gap at December 31, 1998. As indicated on page 30, the entire balance of savings, NOW, and MMDAs are not categorized as 0 to 3 months, although they are variable rate products. Some of these balances are core deposits which are not considered rate sensitive based on the Bank's historical experiences.
The Bank sells participations in commercial loans to other financial institutions approved by the Bank, for the purpose of meeting legal lending limit requirements or loan concentration considerations. The Bank has also sold student loans and regularly sells fixed rate and conforming adjustable rate residential mortgages to the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Those residential real estate mortgage loan requests that do not meet Freddie Mac criteria are reviewed by the Bank for approval and, if approved, are retained in the Bank's loan portfolio. The Bank has the ability to purchase loans which meet its normal credit standards.
The Bank's investment policy is considered to be generally conservative. It provides for unlimited investment in U.S. government bonds, with the maximum size of a single purchase limited to $3,000,000 and a maximum maturity of fifteen years. Municipal bonds with an A rating or better may be purchased to provide nontaxable income, with the maximum life of municipal bonds limited to ten years. Nonrated bonds may be purchased from local communities that are familiar to the Bank, with a maximum block size of a single purchase limited to $250,000. Investments in states other than Michigan may not exceed 10% of the municipal portfolio, and investments in a single issuer may not exceed 5% of equity capital. Mortgage backed securities, which are fully collateralized by securities issued by government sponsored agencies, may be purchased in block sizes of up to $3,000,000, provided the average life expectancy does not exceed ten years.
In addition, certain collateralized mortgage obligations may be purchased if their average life does not exceed five years. In addition to these referenced thresholds affecting the acquisition of investment securities, holdings of approved "non high-risk mortgage securities" are required to be "stress tested" at least annually. The acquisition of "high-risk mortgage securities" is prohibited. In no case may the Bank participate in such activities as "gains trading," "when-issued" trading, "pair offs," corporate settlement of government and agency securities, repositioning repurchase agreements, and short sales. All securities dealers effecting transactions in securities held or purchased by the Bank must be approved by the Bank's Board of Directors.
Bank Competition
The Bank has ten offices, one within each of the communities it serves. See "Properties" below for more detail on these facilities. Within these communities, its principal competitors are Comerica Bank, Bank One, Old Kent Bank, Ameribank, Flagstar Bank, National City Bank, Huntington Bank, Michigan National 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 United Bank of Michigan. Based on deposit information as of June 30, 1999, the Bank holds approximately 2.7% of deposits in the Kent County market, 2.2% of deposits in the Ottawa County market, and 6.6% of the deposits in the Allegan County market. Information as to asset size of competitor financial institutions is derived from publicly available reports filed by and with regulatory agencies.
The financial services industry continues to be increasingly competitive. Principal methods of competition include loan and deposit pricing, advertising and marketing programs and the types and quality of services provided.
The deregulation of the financial service industry has led to increased competition among banks and other financial institutions for a significant portion of funds which have traditionally been deposited with commercial banks. Competition within the Bank's markets has been relatively stable within the past several years. However, with the enactment of recent legislation discussed under the caption "Supervision and Regulation" 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, such as trust services, and additional branching opportunities.
Growth of Bank
The following table sets forth certain financial information regarding the growth of the Bank (and accordingly, excludes holding company data):
The Main Office in Byron Center began in a small 600 square foot building in 1921. It was expanded to 1,100 square feet in 1954. In 1965 the Bank moved next door to a new 10,000 square foot building. In 1987 construction of another new building of 30,000 square feet was begun. The Main Office moved to this facility in 1988 and currently occupies this space. In 1999 the Main Office added an 8,000 square foot addition to its facility. The Bank's first branch was opened in 1963 when the bank refitted an old bank building in Jamestown. The building was once a bank which closed during the Great Depression. The Bank's next branch was opened in Cutlerville in 1972. The original 2,500 square foot building was expanded with a 1,000 square foot addition in 1987. The Bank's Dorr office was opened in 1986 at the site of the Hillcrest Mall. It is a 2,500 square foot facility with a 2,500 square foot storage basement. In 1991, the Bank opened its branch in Hudsonville. The Bank maximized this sit for future expansion with a 10,000 square foot building. The Bank occupies 2,500 square feet while the remainder is rented to various office use tenants. During 1995, the Bank purchased and remodeled a former bank branch in Grandville. Also, the same year, the Bank purchased from National City Bank a building and the deposits of its Moline branch. Currently, the Bank operates three off-site ATMs.
The Bank opened three new branches in 1998 at 10500 Chicago Drive in Zeeland, Michigan, 6163 Lake Michigan Drive in Allendale, Michigan and 4601 134th Avenue, Suite C in Hamilton, Michigan. All of these facilities were initially leased. In February 1999, the Kentwood, Michigan branch was opened for business in a former bank building purchased from National City Bank. In August 1999, the Bank's Allendale branch was completed and opened at 5980 Lake Michigan Drive in Allendale in a 10,000 squar foot building owned by the Bank with the Bank occupying 2,500 square feet and the remainder to be used for rental to office use tenants. In December 1999, the Bank moved its Hamilton Branch to a newly completed 3,600 square foot facility owned by the Bank at 3614 M-40, Hamilton, Michigan.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting the Company and the Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on the Company, the Bank and the business of the Company and the Bank.
General
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC, the Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds, the depositors of the Bank, and the public, rather than shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to the lending activities of the Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") represents a pivotal point in the history of the financial services industry. The GLB Act modifies many of the principal federal laws which regulate financial institutions and sweeps away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banking organizations, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. Specifically, the GLB Act provides two new vehicles through which a banking organization can engage in a variety of activities which, prior to the Act, were not permitted. First, a bank holding company meeting certain requirements may elect to become a financial holding company ("FHC"). FHCs are generally authorized to engage in all "financial activities" and, under certain circumstances, to make equity investments in other companies (i.e., merchant banking). In order to be eligible to elect to become a FHC, a bank holding company and all of its depositary financial institutions must: (1) be "well capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or better in their most recent Community Reinvestment Act examination. Both the bank holding company and all of its depositary financial institutions must also continue to satisfy these requirements after the bank holding company elects to become a FHC or else the FHC will be subject to various restrictions. The Federal Reserve Board will be the umbrella regulator of FHCs, but functional regulation of a FHC's separately regulated subsidiaries will be conducted by their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank, so long as otherwise allowable under its state's law), which satisfies certain requirements, may own a new type of subsidiary called a financial subsidiary ("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the activities that FHCs are authorized to engage in. In order to be eligible to own a FS, a bank must satisfy the three requirements noted above, plus several additional requirements.
The GLB Act also imposes several rules that are designed to protect the privacy of the customers of financial institutions. For example, the GLB Act requires financial institutions to annually adopt and disseminate a privacy policy and prohibits financial institutions from disclosing certain customer information to "non-affiliated third parties" for certain uses. All financial institutions, regardless of whether they elect to utilize FHCs or FSs, are subject to the GLB Act's privacy provisions. The Company and the Bank are also subject to certain state laws that deal with the use and distribution of non-public personal information. In addition to its privacy provisions, the GLB Act also contains various other provisions that apply to banking organizations, regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase competition in its business and is evaluating the desirability of electing to become a FHC. The Company believes that it is qualified to elect FHC status but has not yet decided to do so.
The Company
General. The Company is a bank holding company and, as such, is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. In addition, if the Commissioner deems the Bank's capital to be impaired, the Commissioner may require the Bank to restore its capital by a special assessment upon the Company as the Bank's sole shareholder. If the Company were to fail to pay any such assessment, the directors of the Bank would be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition by the Company of any voting shares of any bank which would result in the Company's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the Company with another bank company, will require the prior written approval of the Federal Reserve Board under the BHCA. In acting on such applications, the Federal Reserve Board must consider various statutory factors, including among others, the effect of the proposed transaction on competition in relevant geographic and product markets, and each party's financial condition, managerial resources, and record of performance under the Community Reinvestment Act. Effective September 29, 1995, bank holding companies may acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring company and all of its insured depository institution affiliates.
The merger or consolidation of an existing bank subsidiary of the Company with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under current Federal Reserve Board regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. As a result of recent amendments to the BHCA, well-capitalized and well-managed bank holding companies may engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve Board, provided that written notice of the new activity is
given to the Federal Reserve Board within 10 business days after the activity is commenced. If a bank company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the acquisition of a going concern) in a non-banking activity, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the bank company, and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of the bank company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders' equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, Federal Reserve Board regulations provide that additional capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securitie trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. The Federal Reserve Board has not advised the Company of any specific minimum Tier 1 Capital leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the Bank. Most of the Company's revenues are received by it in the form of dividends paid by the Bank. Thus, the Company's ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on the Bank's ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank - Dividends." Further, the Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies. In the policy statement, the Federal Reserve Board expressed its view that a bank company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weakened the bank company's financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over the Bank are possessed by the FDIC. The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by the Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Company, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Company'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 and its deposit accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a BIF-insured Michigan chartered bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the BIF. These agencies and the federal and state laws applicable to the Bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. Accordingly, the FDIC established the schedule of BIF insurance assessments for the first semi-annual assessment period of 1999, ranging from 0% of deposits for institutions in the lowest risk category to .27% of deposits for institutions in the highest risk category. For 1999, the Bank paid $31,989 in BIF insurance assessments, representing a premium of .01%.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution or its directors have engaged or are engaging in unsafe or unsound practices, or have violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC, or if the institution is in an unsafe or unsound condition to continue operations. The FDIC may also suspend deposit insurance temporarily durin the hearing process for a permanent termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank's total assets, as reported to the Commissioner.
FICO Assessments. Pursuant to federal legislation enacted September 30, 1996, the Bank, as a member of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund (the "SAIF") which insures the deposits of thrift institutions. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of FICO assessments made against SAIF members. Currently, SAIF members pay FICO assessments at a rate equal to approximately 0.063% of deposits while BIF members pay FICO assessments at a rate equal to approximately 0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC-insured non-member banks, such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, FDIC regulations provide that higher
capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
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:
As of December 31, 1999, each of the Bank's ratios exceeded minimum requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock. The Bank may not pay dividends except out of net profits after deducting its losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend. If the Bank has a surplus less than the amount of its capital, it may not declare or pay any dividend until an amount equal to at least 10% of net profits for the preceding one-half year (in the case of quarterly or semi-annual dividends) or full-year (in the case of annual dividends) has been transferred to surplus. A Michigan state bank may, with the approval of the Commissioner, by vote of shareholders owning 2/3 of the stock eligible to vote increase its capital stock by a declaration of a stock dividend, provided that after the increase the bank's surplus equals at least 20% of its capital stock, as increased. The Bank may not declare or pay any dividend until the cumulative dividends on preferred stock (should any such stock be issued and outstanding) have been paid in full. The Bank's Articles of Incorporation do not authorize the issuance of preferred stock and there are no current plans to seek such authorization.
Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment
of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by the Bank, if such payment is determined, by reason of the financial condition of the Bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company or its subsidiaries, on investments in the stock or other securities of the Company or its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company, and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution will be responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. Failure to submit an acceptable compliance plan, or failure to adhere to a compliance plan that has been accepted by the appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of types of loans to individuals. In making these loans, the Bank is subject to State usury and regulatory laws and to various federal statutes, such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals (including the approval of the Commissioner and the FDIC).
Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by IBBEA only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of interstate branching authority by enacting appropriate legislation prior to June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner, (i) the acquisition of all or substantially all of the assets of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and loan association located in another state, (ii) the acquisition by a Michigan-chartered bank of all or substantially all of the assets of an FDIC-insured bank, savings bank or savings and loan association located in another state, (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, with the resulting organization chartered by Michigan, (iv) the establishment by a foreign bank, which has not previously designated any other state as its home state under the International Banking Act of 1978, of branches located in Michigan, and (v) the establishment or acquisition of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting Michigan-chartered banks to establish branches in such jurisdiction. Further, the Michigan Banking Code permits, upon written notice to the Commissioner, (i) the acquisition by a Michigan-chartered bank of one or more branches (not comprising all or substantially all of th assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state, the District of Columbia, or a U.S. territory or protectorate, (ii) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, and (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states, with the resulting organization chartered by one of such other states.
Item 2.
Item 2. Properties.
The Bank operates from eleven facilities, located in seven communities, in Kent, Ottawa and Allegan Counties, Michigan. The Bank's main office is located at 2445 84th Street, S.W., Byron Center, Michigan. This facility is a two story 30,000 square foot building constructed in 1988 with an 8,000 square foot two story addition completed in 1999 and is owned by the Bank. The Bank's branch offices in Allendale, Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Jamestown, Moline and Zeeland ar all single story facilities ranging in size from 1,100 square feet to 10,000 square feet. The Bank owns its branch offices in Allendale, Dorr, Grand Rapids, Grandville, Hamilton, Hudsonville, Kentwood and Moline. The Bank leases the facilities occupied by the Zeeland branch. The Bank is in the process of construction of its Zeeland office at 9581 Riley, Zeeland, Michigan which is scheduled to open the middle of June 2000.
Item 3.
Item 3. Legal Proceedings.
Neither the Company nor the Bank is involved in any legal proceedings other than routine litigation incidental to the ordinary conduct of the business of the Bank, none of which would result in a material impact on the Company or the Bank, individually or in the aggregate, in the event of an adverse outcome.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of 1999.
Additional Item - Executive Officers
Executive officers of the Company are appointed annually by the Board of Directors. There are no family relationships among the officers and/or the directors of the Company, or any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.
The following table sets forth certain information with respect to the Company's officers as of December 31, 1999:
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PART II
Item 5.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.
There is no active market for the Company's Common Stock, and there is no published information with respect to its market price. There are occasional sales through brokers and direct sales by shareholders of which the Company's management is aware. It is the understanding of the management of the Company that over the last two years, the Company's Common Stock has sold at prices in excess of book value. From January 1, 1998, through December 31, 1999, there were, so far as the Company's management knows, 79 sales of shares of the Company's Common Stock, involving a total of 34,888 shares. The price was reported to management in only a few of these transactions, and management has no way of confirming the prices which were reported. During this period, the highest price known by management to be paid was $60.00 per share in the second and fourth quarters of 1999 and the first quarter of 2000, and the lowest price was $32.00 per share in the third quarter of 1998. To the knowledge of management, the last sale of Common Stock occurred on February 4, 2000, involving the sale of 200 shares at a price of $58.00 per share. The per share information has been adjusted for the July 1, 1998, 2-for 1 stock split in the form of a dividend.
The following table sets forth the range of high and low sales prices of the Company's Common Stock during 1998 and through February 10, 2000, 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:
(1) A special dividend of $.50 per share.
On May 7, 1998, the Board of Directors declared a 2-for-1 split of the Corporation's common stock with an effective date of July 1, 1998 by means of a one-for-one stock dividend to shareholders of record on June 1, 1998. All references to per share amounts and prices of the shares have been restated to give retroactive effect to the stock split.
There are 4,000,000 shares of the Company's Common Stock authorized, of which 2,041,775 shares were issued and outstanding as of February 29, 2000. There were approximately 817 shareholders of record, including trusts and shares jointly owned, as of that date. Directors and officers of the Company hold options to purchase a total of 11,750 shares of the Company's Common Stock. No other warrants or options exist for the purchase of additional common stock of the Company.
The holders of the Company's Common Stock are entitled to dividends when, as and if declared by the Board of Directors of the Company out of funds legally available for that purpose. Cash dividends have been paid on a semi-annual basis. In determining dividends, the Board of Directors considers the earnings, capital requirements and financial condition of the Company and the Bank, along with other relevant factors. The Company's principal source of funds for cash dividends is the dividends pai 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.
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Item 6.
Item 6. Selected Financial Data.
(1) At year end in thousands. (2) As restated for a 2-for-1 common stock split effected in the form of a dividend in 1998.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
The following financial review presents management's discussion and analysis of consolidated financial condition and results of operations during the period of 1997 through 1999. The discussion should be read in conjunction with the Company's consolidated financial statements and accompanying notes thereto.
Summary
The Company and its subsidiary bank, Byron Center State Bank ("Bank"), consistently have been ranked as a high performance community bank by various bank rating companies. The Company's equity to asset ratio of 10.97% as of December 31, 1999, makes it one of the stronger capitalized community banks in the State of Michigan.
To achieve this status, the Company has relied on years of continuous improvements in a culture that emphasizes quality assets, managed in an efficient manner so as to minimize the cost of overhead. Technology has also been a key component to the Company' success and will remain an important tool that will help management deliver more services and manage more assets at a lower cost to support these functions.
The Company has a surplus of capital. The Board of Directors has made it a priority to make more efficient use of capital by re-leveraging capital through aggressive yet careful growth. This is expected to be accomplished through competitive, cost effective products and services, efficiently delivered without compromising the Bank's risk and underwriting standards. The asset growth of the Company in 1999 was 24.74%. This growth was a result of existing branches cross-selling products to existing customers and targeting non-bank customers who are in the Company's market area. The Company's four newest branches, Kentwood, Hamilton, Zeeland and Allendale are positioning themselves to be the largest contributors to the growth in year 2000. The Company has increased its regular cash dividend pay-out ratio over the years from 15% in 1993 to 37% in 1999, although there can be no assurance that the Company will maintain comparable pay-out ratios in the future.
Results of Operations
Table 1 Earnings Performance (in thousands, except per share data)
Net income decreased 10.78% in 1999 as a result of the implementation of the growth strategy that originated from the Board of Directors. During the last two years as a part of this strategy, the Bank opened four new branches and expanded its corporate operations. The start-up and on-going expenses of these new operations prior to attaining full income generation potential were a major reason for the Company's decline in overall profitability and in earnings as a percent of assets and average equity. The expense in 1999 for the growth strategy is expected to enhance future years' profitability and growth.
The Bank's net interest margin (on a fully taxable equivalent ["FTE"] basis) is well above peers. Management actively manages the pricing of assets and funding costs of the liabilities. The net interest margin-FTE decreased .13% from 5.02% in 1998 to 4.89% in 1999. The Company's strategy with the four new branches and existing branches is to grow the Company's business with approximately the same percentage mix of deposits as is reflected in Table 16.
The Bank has had and expects to continue t have success at gathering local retail interest bearing deposits which are less expensive than national wholesale interest bearing deposits.
The loan portfolio increased 29.6% from $222,133,000 in 1998 to $287,830,000 in 1999. The loan growth was funded by the $36,875,000 increase in deposits and a $36,704,000 increase in borrowed funds and securities sold under agreements to repurchase. The majority of the growth was fixed rate loans with a maturity of 5 years or less. This growth required additional provisions to be allocated to the allowance for loan losses. The highest percentage growth in the overall loan portfolio was the consumer loan portfolio (52%), which was the result of the Bank's indirect lending program, mostly automobile loans. Indirect lending loans have a higher credit risk than direct lending loans. Consumer loan net charge-offs increased $528,000 in 1999 compared to 1998. The increased indirect loan charge-offs resulted in additional provisions being allocated to the allowance for loan losses. Real estate mortgage loan originations decreased 28% from $91,446,000 in 1998 to $65,668,000 in 1999. This resulted in a $27,311,000 decrease in real estate mortgage loan sales. In turn this lower volume was a result of a higher interest rate environment and a slowdown in the refinance business. The net gains on the sale of real estate mortgage loans decreased $767,000 (56%).
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Net Interest Income
The following schedule presents the average daily balances, interest income (on a fully taxable equivalent basis) and interest expense and average rates earned and paid for the Company's major categories of assets, liabilities, and stockholders' equity for the periods indicated:
Table 2 - Interest Yields and Costs (in thousands)
(1) Average nonaccrual loans were not significant during the years indicated, and for purposes of the computations above, are included in the average daily loan balances. (2) Interest on loans includes net origination fees totaling $190,720 in 1999, $183,443 in 1998 and $249,067 in 1997.
Net interest income is the principal source of income for the Corporation. In the current year, tax equivalent net income increased $2,326,000 to $15,000,000 a 18.35% increase from the same period in 1998. The increase was a result of the growth of the Corporation, average earning assets grew 21.53%, listed below are the details of the major
components that made up the increase. The major factors for the increase in net interest income were the loan portfolio balance averaged 27.58% ($53,712,000) higher in 1999 compared to 1998 and non-interest bearing deposits averaged 24.30% ($7,128,000) higher in 1999 compared to 1998. Non-deposit funding averaged 65.50% ($17,510,000) higher in 1999 compared to 1998. The Corporation used non-deposit funding to support the asset growth because of the lower interest cost of funds. The fully taxable equivalent ("FTE") net interest margin decreased .13% from 5.02% in 1998 to 4.89% in 1999. Management expects the declining trend in FTE net interes margin to continue because of fierce competition for deposits in its local markets and because of the upward pressure on costs of funds from increases in the Federal Fund rates. Management aggressively sought after the lowest cost of funding in 1999 increasing its borrowings from the FHLB and increasing the Treasury Tax and Loan borrowing limit.
Net interest income is the difference between interest earned on loans, securities, and other earning assets and interest paid on deposits and borrowed funds. In Table 2 and Table 3 the interest earned on investments and loans is expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is increased to an amount comparable to interest subject to federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is base on a federal income tax rate of 34%. Table 3 analyzes the reasons for the increases and decreases in interest income and expense. The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
Table 3 - Change in Tax Equivalent Net Interest Income (in thousands)
The Company's commitment to reinvesting in the communities it serves is evident in its ratios of loans to assets and loans to deposits, which are generally greater than the comparable ratios of the Company's peers. This in turn translates into above peer net interest margin. (Based on FFIEC iniform bank performance report.)
Net interest income as a percent of total interest FTE was 58.7%, 58.7%, and 59.6% for 1999, 1998 and 1997, respectively. Net interest margin was 4.89%, 5.02% and 5.24% for the same years.
Interest from loans represents 84.9%, 81.8% and 78.3% of total interest income for 1999, 1998 and 1997, respectively. Net interest income is strongly influenced by results of the Bank's lending activities. Total interest expense increased 18.2% from 1998 to 1999 and also increased 15.9% from 1997 to 1998: such variances are detailed in Table 3. Cost of funds are influenced by economic conditions and activities of the Federal Reserve. The Bank's asset/liability committee seeks to manage sources and uses of funds, and to monitor the gap in maturities of these funds to maintain a steady net interest margin in varying market conditions.
Table 4 - Composition of Average Earning Assets and Interest Paying Liabilities
Table 5 - Noninterest Income (in thousands)
Noninterest Income
Noninterest income consists of service charges on deposit accounts, service fees, gains on investment securities available for sale and gains from sales of Federal Home Loan Mortgage Corporation (Freddie Mac) loans. The Corporation retains the servicing rights of these loans. Non-interest income increased $962,000 or 36% for 1999 versus 1998. The increase was due primarily to the February 1, 1999 merger with Dornbush Insurance Agency, as a result of which insurance premium revenue of $1,043,00 is included in 1999 non-interest income. Other increases in non-
interest income include a $223,000 (38%) increase in service charges on deposit accounts, due to the deposit growth during the year. Net gain on securities sales increased $329,000 (161%) and brokerage revenue increased $156,000 (94%) in 1999 versus 1998. The brokerage revenue increase was due to increased sales volume. Net gains on loan sales decreased $767,000 (56%), a direct result of the interest rate increases during the year resulting in the slowdown of customers refinancing higher interest rate mortgages.
Table 6 Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
Net gains on the sale of real estate mortgage loans totaled $600,000, $1,367,000 and $414,000 in 1999, 1998 and 1997, respectively. The decrease from 1998 to 1999 of $767,000 was a result of the less favorable interest rate environment which slowed new mortgage loan business and caused a major slowdown in the refinance business. The increase from 1997 to 1998 of $953,000 was a result of a more favorable interest rate environment. The Bank sells the majority of its fixed-rate obligations. Such loans are sold without recourse. The Bank retains servicing rights on real estate mortgage loans sold.
Noninterest Expense
Table 7 - Noninterest Expense (in thousands)
Table 7 lists the Bank's most significant noninterest expenses.
Non-interest expense increased $3,268,000 (45%) for 1999 versus 1998. This increase is due in part to the February 1,1999 merger with Dornbush Insurance Agency which incurred noninterest expenses totaling $924,000 in 1999. Increases in non-interest expense include a $2,015,000 increase (51%) in salaries and employee benefits of which $640,000 (32%) relate to the Dornbush Insurance Agency merger. Occupancy expense increased $585,000 (51%) in 1999 versus 1998. The majority of these increases are all related to the four new branch locations that were opened in late 1998 and early 1999 and the addition to the main office. Staffing the new branches and additional support at the corporate office for the new branches and growth from existing branches were the two primary factors for the salary and employee benefit expense increase.
Non-interest expense increased $1,552,000 (27%) for 1998 versus 1997. Salaries and employee benefits increased $890,000 to $3,918,000, a 29% increase which was the major factor for the increase in non-interest expense. The increase was primarily due to staffing three new branches.
Financial Condition --Summary
During 1999, total assets increased 25% to $376,072,609, deposits increased 17% to $254,166,048 and loans increased 30% to $284,279,189. The Bank is emphasizing relationship banking and has competed aggressively to obtain deposits and loans. A discussion of changes in balance sheet amounts by major categories follows:
The Loan Portfolio
The loan personnel of the Bank are committed to making quality loans that produce a competitive rate of return for the Bank and also serve the community by providing funds for home purchases, business purposes, and consumer needs. It is management's intent to maintain a loan to deposit ratio of at least 80%, enabling the Company to earn the highest interest rates available on loans. Loan demand in the Bank's service area is expected to remain strong to achieve that goal.
The majority of loans are made to businesses in the form of commercial loans and real estate mortgages. The Bank's consumer mortgage activity is substantial; however, only a small portion of these loans are retained for the Bank's own portfolio. The Bank does retain servicing rights on substantially all such sold loans. Over the past eight years the Bank has built a servicing portfolio of over $140,000,000 with the Federal Home Loan Mortgage Corporation ("FHLMC"). At December 31, 1999 and 1998, the Bank was servicing loans of $147,956,000 and $126,651,000, respectively, which relate primarily to residential mortgages originated by the Bank. The Bank originated $65,668,000 (652 loans) and $91,446,000 (1,073 loans) in mortgage loans in 1999 and 1998, respectively, and sold to FHLMC $44,764,000 (513 loans) in 1999 and $72,075,000 (872 loans) in 1998. Repayments and early payoffs were $19,520,000 in 1999 and $17,768,000 in 1998.
The loan portfolio mix at December 31, 1999 consists of 49% commercial real estate, 15% residential real estate, 20% commercial and 16% consumer installment. Consumer installment loans as a percentage of the loan portfolio have doubled in the last two years as a result of the Bank's indirect lending program, substantially all are vehicle loans. The growth rate of the lending portfolio was 31.5% from 1997 to 1998 and 29.7% from 1998 to 1999.
Nearly 80% of loans are placed within the area the Bank designates as its market for purposes of regulatory Community Reinvestment Act ("CRA") compliance. Nearly all loans are placed within the metropolitan area of Grand Rapids and surrounding communities.
Table 8 - Loan Portfolio Composition (in thousands)
The lending policy of the Bank was written to reduce credit risk, enhance earnings and guide the lending officers in making credit decisions. There are 8 levels in the loan authorization procedure depending on the dollar amount of the loan request.
$2,000,001 to $6,000,000 Board of Directors $1,000,001 to $2,000,000 Executive Loan Committee 0 to $1,000,000 Loan Committee 0 to $ 300,000 Class 1 Lender 0 to $ 200,000 Class 2 Lender 0 to $ 75,000 Class 3 Lender 0 to $ 30,000 Class 4 Lender Student Loans Only Class 5 Lender
The class of lender is approved by the Bank's Board of Directors. The Board of Directors 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. Periodic reviews are submitted by the loan review officer to the Chief Lending Officer and these reviews are submitted to the Audit/Compliance Committee on a quarterly basis. The Bank has no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in Table 8.
The extent of loan quality is demonstrated by the ratios of nonperforming loans and charge offs as a percentage of the loan portfolio. As referenced in more detail in Table 10 below, the Bank's ratio of nonperforming loans to total loans at December 31, 1999 was 1.90% compared to .26% in 1998. The December 31, 1999 ratio is significantly higher than the historical average and the Bank does not expect this high of a percentage in the future.
Table 9 Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of total loans outstanding as of December 31, 1999 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Below is a schedule of the amounts maturing or repricing which are classified according to their sensitivity to changes in interest rates.
Table 10 - Nonperforming Assets (in thousands)
Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, collateral for loans which have been in-substance foreclosed, and other real estate which has been acquired primarily through foreclosure and is awaiting disposition. Loans including loans considered impaired under SFAS No. 118, are generally placed on a nonaccrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely. Three commercial real estate loans account for $4,528,256 of the nonperforming loans. Although these three loans are delinquent, the bank is fully collateralized as to each of them. Nevertheless, a slightly larger than normal reserve portion has been allocated to these specific assets. On February 20, 2000 the nonaccrual status and delinquency were fully resolved as to $4,189,886 of these assets.
Nonperforming loans equal 154% of the Bank's allowance for loan losses as of December 31,1999; management believes that the allowance for loan losses is adequate for these loans and the remainder of the lending portfolio. As of December 31, 1999 there were no other interest bearing assets which required classification. Management is not aware of any recommendations by regulatory agencies, which if implemented, would have a material impact on the Company's liquidity, capital or results of operations.
The table below presents the interest income that would have been earned on non-performing loans outstanding at December 31, 1999, 1998, and 1997 had those loans been accruing interest in accordance with the original terms of the loan agreement (pro forma interest) and the amount of interest income actually included in net interest income for those years.
Table 11 - Foregone Interest on Non-Performing Loans
Table 12 - Loan Loss Experience (in thousands)
The following is a summary of loan balances (excluding loans held for sale) at the end of each period and their daily average balances, changes in the allowance for the loan losses arising from loans charged off and recoveries on loans previously charged off, and additions to the allowance which have been expensed.
Starting in the 2nd quarter of 1998 the bank aggressively targeted the indirect consumer loan market, primarily auto loans. The program has increased the consumer loan portfolio balance substantially and has raised the net charge off percentage. Indirect lending results in higher credit risk then does direct lending. Consumer loan net charge-offs increased $528,000 in 1999 compared to 1998. The increased indirect loan charge-offs resulted in additional provisions being allocated to the allowance for loan losses. Management will continue to monitor the results and make changes to the program as needed.
Table 13 - Allocation of the Allowance for Loan Losses
The allowance for loan losses is analyzed quarterly by management. In so doing, management assigns a portion of the allowance to specific credits that have been identified as problem loans and reviews past loss experience. The local economy and particular concentrations are considered, as well as a number of other factors.
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 1999 loan growth and to replenish the allowance for unusually high charge-offs of consumer loans.
Investment Securities
Securities are purchased and classified as "available-for-sale." These securities may be sold to meet the Bank's liquidity needs or to improve the quality of the investment portfolio. The primary objective of the Company's investing activities is to provide for safety of the principal invested. Secondary considerations include earnings, liquidity, and the overall exposure to changes in interest rates. The Company's net holdings of investment securities increased $7.3 million in 1999 and decreased $5.4 million in 1998. The mortgage backed securities are issues of the Federal Home Loan Mortgage Corporation, GNMA and FNMA which pay monthly amortized principal and interest payments.
Table 14 - Available-for-Sale Securities Portfolio
Excluding those holdings of the investment portfolio in U.S. Treasury and U.S. Government Agency Securities, there were no investments in securities of any one issuer which exceeded 10% of shareholders' equity.
Table 15 - Schedule of Maturities of Investment Securities and Weighted Average Yields
The following is a schedule of maturities and their weighted average yield of each category of investment securities as of December 31, 1999. 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.
Deposits
Deposits are gathered from the communities the Bank serves. Recently the Bank has emphasized relationship marketing to reinforce the core nature of its deposit base.
Table 16 indicates a relatively stable base of deposits spread over the Bank's product lines. Average total deposits grew 20.2% from 1998 to 1999 and grew 13.0% from 1997 to 1998. The increase in 1999 resulted primarily from gaining market share in the Bank's market areas.
The Bank is continually enhancing its deposit products. In addition to relationship pricing the Bank has instituted telephone and personal computer banking as new alternatives to customer access. The Bank operates twelve automated teller machines, three of which are off-site.
Table 16 - Average Daily Deposits (in thousands)
Table 17 - Average Deposit Balances
The following table sets forth the average deposit balances and the weighted average rates paid thereon:
Table 18 - Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity as of December 31, 1999:
The Bank operates in a very competitive environment. Management monitors rates at other financial institutions in the area to ascertain that its rates are competitive with the market. Management also attempts to offer a wide variety of products to meets the needs of its customers. The Bank offers business and consumer checking accounts, regular and money market savings accounts, and certificates having many options in their terms.
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 on a very limited basis, jumbo certificates of deposit from outside its market area. Management evaluates the funding needs and makes a decision based on current interest rates and terms whether to fund internally or from alternate sources. To date, the Bank has not employed the use of derivative financial instruments in managing the risk of changes in interest rates.
Capital
A financial institution's capital ratio is looked upon by the regulators and the public as an indication of its soundness. Table 19 summarizes the Company's regulatory capital and its capital ratios. Also shown are the capital requirements established by the regulatory agencies for adequately and well-capitalized institutions. The Bank's strong capital ratio puts it in the best classification on which the FDIC bases its assessment charge. As capital ratios continue to increase, management is challenged to find ways to effectively invest and administer the Bank's resources.
In 1999, the Company paid cash dividends totaling $1,674,256, approximately 37% of earnings. Special cash dividends were paid in each of the two prior years. In 1998 the Company paid cash dividends totaling $2,350,000, approximately 46% of earnings. In 1997, the Company paid cash dividends totaling $3,115,620, approximately 67% of earnings. The Company remains in all the top regulatory categories for adequately and well-capitalized institutions after paying such dividends.
Table 19 - Capital Resources (in thousands)
Asset/Liability Management
The Bank's Asset/Liability Management committee ("ALCO") meets regularly to evaluate the Bank's interest rate sensitivity position, address issues of liquidity, and review the interest margin, analyzing causes for changes in net interest income. During 1999 the Bank's one year gap position averaged a negative gap.
Management was able to influence the gap by selling fixed rate mortgages, investments/sales of available-for-sale securities that met the criteria that filled the gap position decided by the Asset/Liability Committee.
The Company's sources of liquidity include principal payments received on loans, maturing investment securities, sale of securities held in the "available-for-sale" designation, customer deposits, borrowings from the Federal Home Loan Bank of Indianapolis, other bank borrowings, Federal Funds and the issuance of common stock. The Company has ready access to significant sources of liquidity on an almost immediate basis. Management anticipates no difficulty in maintaining liquidity at levels necessary to conduct the Bank's day-to-day business activity.
Table 20 - Asset/Liability Gap Position (in thousands)
The savings and NOW accounts are categorized in the above table based upon the Bank's historical experience.
Impact of Inflation
The majority of assets and liabilities of financial institutions are monetary in nature. Generally, changes in interest rates have a more significant impact on earnings of the Bank than inflation. Although influenced by inflation, changes in rates do not necessarily move in either the same magnitude or direction as changes in the price of goods and services. Inflation does impact the growth of total assets, creating a need to increase equity capital at a higher rate to maintain an adequate equity to assets ratio, which in turn reduces the amount of earnings available for cash dividends.
Year 2000
Because many computerized systems use only two digits to record the year in date fields (for example, the year 1998 is recorded as 98), such systems may not be able to accurately process dates ending in the year 2000 and after. The effects of the issue will vary from system to system and may adversely affect the ability of a financial institution's operations as well as its ability to prepare consolidated financial statements.
Company management developed and the Board of Directors approved a comprehensive Year 2000 Compliance Plan. The Company had an internal task force to assess Year 2000 compliance by the Company, its vendors, and major commercial loan customers. In addition, the Bank asked commercial borrowers about Year 2000 compliance as part of the loan application and review process.
To date, the Company has not experienced any Year 2000 compliance problems. Although considered unlikely, unanticipated problems, including problems associated with non-compliant third parties, could still occur.
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 Abelieve," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiaries include, but are not limite to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.
Recent Legislation
Reference is made to the "Supervision and Regulation - Recent Legislation" section of Item 1 which notes the potential competitive impact of the GLB Act on the Company.
ITEM 7A:
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The Company currently does not enter into futures, forwards, swaps, or options. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize 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. It appears the Company's market risk is reasonable at this time.
Item 8.
Item 8. Financial Statements and Supplementary Data.
O.A.K. FINANCIAL CORPORATION TABLE OF CONTENTS AND SUBSIDIARY - --------------------------------------------------------------------------------
PAGE
Independent Auditors' Report 34
Consolidated Financial Statements
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Comprehensive Income 37
Consolidated Statements of Changes in Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40-56
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders O.A.K. Financial Corporation and Subsidiary Byron Center, Michigan
We have audited the accompanying consolidated balance sheets of O.A.K. Financial Corporation and Subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of O.A.K. Financial Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of O.A.K. Financial Corporation and Subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/Rehmann Robson, P.C.
Grand Rapids, Michigan January 28, 2000
O.A.K. FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS AND SUBSIDIARY - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND SUBSIDIARY - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF AND SUBSIDIARY COMPREHENSIVE INCOME - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF AND SUBSIDIARY CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
O.A.K. FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF AND SUBSIDIARY CASH FLOWS - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - O.A.K. Financial Corporation (the "Corporation") through its wholly owned subsidiary, Byron Center State Bank (the "Bank") provides a variety of financial services to individuals and businesses in the southern portion of the greater Grand Rapids, Michigan area through its ten branches located in Byron Center, Jamestown, Cutlerville, Hudsonville, Grandville, Moline, Dorr, Hamilton, Allendale and Zeeland. Active competition, principally from other commercial banks and credit unions, exists in al 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 Deposit Insurance Corporation's ("FDIC") Bank Insurance Fund. The Bank is subject to the regulations and supervision of the FDIC, Federal Reserve Bank and the Financial Institutions Bureau and undergoes periodic examinations by these regulatory authorities (see Note 12).
Business Combination - Effective February 1, 1999, the Corporation issued 28,775 shares of its common stock in exchange for all of the outstanding common stock of Dornbush Insurance Company, Inc. (DIC) based on a conversion ratio of .719475 shares of the Corporation's common stock. DIC, now a wholly-owned subsidiary of the Bank, operates in the general insurance agency business and sells life, health, property and casualty insurance. The merger has been accounted for as a pooling of interests. Due to the insignificance of the financial statements of DIC, the Corporation's consolidated financial statements have not been restated for all periods prior to the business combination to reflect the financial position and results of operations of DIC, and pro-forma financial information has not been disclosed.
Use of Estimates - In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
Accounting Policies - The accounting policies used in the preparation of the accompanying consolidated financial statements conform to predominant banking industry practices and are based on generally accepted accounting principles. The principles which materially affect the determination of the Corporation's consolidated financial position or results of operations are summarized as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for a one-day period. The Corporation maintains deposit accounts in various financial institutions which generally exceed FDIC insured limits or are not insured. Management believes the Corporation is not exposed to any significant interest rate or other financial risk as a result of these deposits.
Available-For-Sale Securities
Available-for-sale securities consist of bonds, notes and debentures not classified as held-to-maturity securities and recorded at their estimated fair value. Unrealized appreciation and depreciation, net of the effect of deferred income taxes, on available-for-sale securities are reported as a net amount in other comprehensive income. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of securities below cost that are determined to be other than temporary are reflected in earnings as realized losses. Gains or losses on the sale of available-for-sale securities are determined using the specific identification method.
Loans Held for Investment and Related Income
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest on loans is accrued over the term of the loan based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in the opinion of management, the borrower may be unable to meet payments as scheduled. When the
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
accrual of interest is discontinued, all uncollected accrued interest is reversed. Interest income on such loans is recognized only to the extent cash payment is received. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Gains and losses on sales of such loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the unpaid principal balance of the loans sold, adjusted for any yield differential, servicing fees and servicing costs applicable to future years. Net unrealized losses are recognized in a valuation allowance by charges to income.
The Bank currently retains servicing on all loans originated and sold into the secondary market. Originated mortgage servicing rights ("OMRS") retained are recognized for loans sold by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. The mortgage servicing rights are amortized in proportion to, and over the period of, estimated net future servicing revenue. The expected period of the estimated net servicing income is based, in part, on the expected prepayment rate of the underlying mortgage. The carrying value of the mortgage servicing rights is periodically evaluated for impairment.
Loan administration fees earned for servicing loans for others are generally calculated based on the outstanding principal balances for the loans serviced and are recorded as revenue when received.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and initially recorded at fair value at the date of foreclosure less estimated cost to sell, thereby establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the real estate is recorded at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses fro foreclosed assets.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Credit Related Financial Instruments
In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both the straight-line and accelerated methods based upon the useful lives of related assets which generally range from 5 to approximately 40 years. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized. Management annually reviews these assets to determine whether carrying values have been impaired.
Net Income Per Share
Net income per share of common stock is calculated on the basis of the weighted average number of common shares outstanding, which was approximately 2,031,000 in 1999, 2,000,000 in 1998 and 2,010,000 in 1997. The effect of the assumed issuance of the performance based incentive share awards and the assumed exercise of the outstanding stock options had no effect in the calculation of net income per share assuming dilution.
Federal Income Taxes
Federal income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of the taxes currently due plus deferred taxes. Deferred income taxes are recognized for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recorded or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As changes in income tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes.
The Corporation and its subsidiary file a consolidated federal income tax return on a calendar year basis.
Restricted Investments
The Bank is a member of the Federal Home Loan Bank System and is required to invest in capital stock of the Federal Home Loan Bank of Indianapolis ("FHLB"). The amount of the required investment is determined and adjusted annually by the FHLB. The investment is carried at cost plus the value assigned to stock dividends.
The Bank is also a member of the Federal Reserve Bank System ("FRB"). 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.
Reclassifications
Certain amounts as originally reported in the 1998 and 1997 consolidated financial statements have been reclassified to conform with the 1999 presentation.
New Accounting Standards
The Financial Accounting Standards Board adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS #133") in June 1998. SFAS #133 requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting for changes in value of derivatives will depend upon the use of derivatives and whether they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 with earlier applications allowed and is to be applied prospectively. The Corporation does not use interest rate swaps or other derivatives in its management of risk and accordingly this statement is not expected to have a material impact on the Corporation's financial statements.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
2. AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized appreciation, gross unrealized depreciation and fair value of investment securities, all of which are classified as available-for-sale as of December 31, are as follows:
The amortized cost and fair value of available-for-sale securities by contractual maturity at December 31, 1999 is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment income from taxable and nontaxable securities for the years ended December 31, is as follows:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Proceeds from sales of available-for-sale securities during 1999, 1998 and 1997 were $3,313,371, $2,213,374 and $7,445,638, respectively. The gross gains and gross losses realized on sales for the years ended December 31 are as follows:
The tax provision applicable to these net realized gains amounted to approximately $181,000, $69,000 and $23,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Investment securities with carrying values of approximately $53,069,000 and $34,943,000 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.
3. LOANS
The Bank grants commercial, consumer and residential loans to customers primarily in a fifteen mile radius of its branches which are located south of Grand Rapids, Michigan. Substantially all of the consumer and residential loans are secured by various items of property, while commercial loans are secured primarily by business assets and personal guarantees; a portion of loans are unsecured. The source of repayment of approximately 20% of the loan portfolio is generated from cash flows from developers an owners of commercial real estate.
Major loan classifications at December 31 are as follows:
At December 31, 1999, scheduled maturities of loans with fixed rates of interest are as follows:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Variable rate loans in the amount of $57,668,712 at December 31, 1999 reprice quarterly or more frequently.
The Bank services loans for others which generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and taxing authorities, and processing foreclosures. Loans being serviced as of December 31, 1999, 1998 and 1997, approximated $146,000,000, $127,000,000 and $93,000,000, respectively; such loans are not included in the accompanying consolidated balance sheets.
The following table summarizes mortgage servicing rights capitalized and amortized and the fair value of mortgage servicing rights included in other assets in the accompanying consolidated balance sheets as of December 31:
Information regarding impaired loans is as follows for the year ended December 31:
No additional funds are committed to be advanced in connection with impaired loans.
4. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of changes in the allowance for loan losses for the years ended December 31:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
6. DEPOSITS
The following is a summary of the distribution of deposits at December 31:
At December 31, 1999, scheduled maturities of time deposits are as follows:
Interest expense on time deposits issued in denominations of $100,000 or more was approximately $1,365,000 in 1999, $721,000 in 1998 and $520,000 in 1997.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
7. BORROWED FUNDS
Borrowed funds at December 31, consist of the following obligations:
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 $39,898,000 and $12,749,000 at December 31, 1999 and 1998, respectively.
The Treasury Tax and Loan Note option is collateralized by U.S. government agency securities with a carrying value of approximately $4,521,000 and $2,714,000 at December 31, 1999 and 1998, respectively. The Treasury Tax and Loan Note option is a daily borrowing with the Federal Reserve Bank, due on demand at 25 basis points below the national federal fund interest rate (5.50% at December 31, 1999).
The Federal Home Loan Bank advances at December 31, 1999 and 1998 and their contractual maturities are as follows:
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31, 1999 and 1998 mature within one day from the transaction date and have an average interest rate of 4.29% and 3.0%, respectively. The U.S. government agency securities underlying the agreements have a carrying value and a fair value of approximately $29,049,000 and $19,480,000 at December 31, 1999 and 1998, respectively. Such securities remain under the control of the Bank. The maximum amount outstanding at any month end during the years ended December 31, 1999 and 1998 was $28,965,000 and $17,272,000, respectively; the daily average balance was $21,221,000 and $12,195,000, respectively.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
9. FEDERAL INCOME TAXES
The provision for federal income taxes for the years ended December 31 consists of:
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:
The net deferred income tax asset (liability) as of December 31, is comprised of the tax effect of the following temporary differences:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY 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 $5,282,000 and $6,420,000 at December 31, 1999 and 1998, respectively; new loans and repayments during 1999 were approximately $2,626,000 and $3,764,000, respectively.
Deposits
Deposits of Bank directors, executive officers and their related interests were approximately $1,863,000 and $1,004,000 at December 31, 1999 and 1998, 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, 1999 and 1998, the following financial instruments were outstanding whose contract amounts represent credit risk:
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 are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.
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.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY 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 Federal Reserve Bank ("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, 1999, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999 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, 1999 and 1998 are als presented in the table.
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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, 1999 and 1998, those required reserve balances were $2,711,000 and $1,737,000, 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 $6,019,000 at January 1, 2000. In addition, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements.
13. EMPLOYEE BENEFIT PLANS
401(k), Profit Sharing and Employee Stock Ownership Plan (ESOP) - The Bank maintains a 401(k) Profit Sharing and Employee Stock Ownership Plan (the "Plan") for substantially all employees. Under the 401(k) feature of the Plan, employees may make voluntary contributions based on a percentage of covered compensation. The Bank, at the discretion of the Board of Directors, may make matching contributions and/or a profit sharing contribution. The Bank's matching and profit sharing contributions were $200,332 $240,200 and $203,055 for 1999, 1998 and 1997, respectively.
The 401(k) and Profit Sharing Plan was amended as of January 29, 1999 to include the ESOP. Under the guidelines of the amended Plan, any employee who has attained the age of 21 and has completed six months of employment is eligible to participate in the ESOP. The ESOP borrowed $500,000 from the Company to purchase 10,000 shares of O.A.K. Financial Corporation's common stock at a price of $50 per share. The loan is collateralized by the unearned shares of common stock purchased by the ESOP; interest is charged at 7.5%. The loan will be repaid over a period of 10 years principally from the portion of the Bank's discretionary contribution and with any dividends received on the unallocated shares of common stock. Shares purchased by the ESOP are held in suspense until allocated among Plan participants as the loan is repaid. Contributions to the ESOP were $63,415 during the year ended December 31, 1999.
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Contributions to the ESOP and shares released from suspense proportional to the repayment of the ESOP loan are allocated among Plan participants on the basis of compensation in the year of allocation. Benefits are vested as the participant accumulates years of service with the Bank. A participant becomes 20% vested after three years of service and is 100% vested after seven years of credited service. Prior to the seven years of credited service, a person who terminates employment for reasons other than death, normal retirement or disability will receive only their vested portion of the ESOP benefit. Forfeitures are reallocated among remaining participating employees in the same proportion as contributions. Benefits are payable in stock or cash upon termination of employment. The Bank's contributions to the ESOP are not fixed, so benefits under the ESOP cannot be estimated. ESOP participants receive distributions from their ESOP accounts only upon termination of service.
For the year ended December 31, 1999, 1,153 common shares with an average fair value of $55 per share, were committed to be released. No shares have been allocated as of that date. The fair value of unearned shares at December 31, 1999 was $550,000.
Stock Compensation and Stock Option Plans - A Stock Compensation Plan was established as of January 28, 1999 to enable key employees to participate in the future growth and profitability of the Corporation by offering them incentive compensation through the issuance of stock options and performance share awards, which are vested based on achievement of performance goals.
Performance share awards are earned and vested at the rate of 10% per year and become exercisable after the first anniversary of the award date. The option exercise price is at least 100% of the market value of the common stock at the grant date. During 1999, 9,250 performance shares were awarded at an average weighted fair value of $50 per share totaling $462,500.
The Company also has a Stock Option Plan for non-employee directors in addition to the Stock Compensation plan for key employees.
The following table summarizes information about stock option transactions:
Under the terms of the Plans none of the options were exercisable at December 31, 1999.
All options expire 10 years after the date of the grant; 155,750 shares are reserved for future issuance under the Stock Compensation Plan and 32,500 shares are reserved for future issuance under the Stock Option Plan for non-employee directors.
The Corporation has elected to apply the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and, accordingly, stock options do not constitute compensation expense in the determination of net income. Had stock compensation expense been determined pursuant to the methodology provided in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" there would have been no proforma effect on the consolidated results of operations.
Deferred Compensation - The Bank sponsors a deferred compensation plan for all directors who wish to participate. The cost of the plan was $204,000, $152,000 and $109,000 in 1999, 1998 and 1997, respectively. The accrued benefit obligation for this plan was $775,707 and $717,578 as of December 31, 1999 and 1998, respectively, and is included in other liabilities. The Bank has purchased life insurance policies on participating directors.
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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, 1999.
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 ar not necessarily indicative of the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating the fair value disclosures for financial instruments.
Cash and Cash Equivalents - The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets' fair values.
Investment Securities - Fair values for investment securities are generally based on quoted market prices.
Restricted Investments - The carrying value of Federal Home Loan Bank stock and Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank and the Federal Reserve Bank.
Loans Receivable - For variable rate loans that reprice frequently and with no significant change in credit risk, fair values approximate carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines, if any, in the credit quality of borrowers since the loans were originated. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Loans Held for Sale - The fair value of loans held for sale, including the fair value of associated mortgage servicing rights, is estimated based on the present value of estimated future cash flows of the loan and related servicing rights using a discount rate commensurate with the risks associated with the respective financial instruments.
Deposit Liabilities - The fair values for demand deposits (e.g., interest and noninterest checking, passbook savings, and money market accounts) which have no stated maturity are, by definition, equal to the amount payable on demand. Approximately 65% and 53% of the Bank's deposits at December 31, 1999 and 1998, 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.
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
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, 1999 and 1998.
Borrowed Funds - The carrying amounts of federal funds purchased, treasury tax and loan note options, and variable rate advances approximate their fair values. The fair values of the Corporation's long-term borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet Instruments - Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. As the Bank does not charge fees for lending commitments, it is not practicable to estimate the fair value of these instruments.
The estimated fair values of the Bank's financial instruments at December 31, are as follows:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
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, 1999 and 1998 and the related condensed statements of income and cash flows for each of the three years in the period ended December 31, 1999:
O.A.K. FINANCIAL CORPORATION NOTES TO CONSOLIDATED AND SUBSIDIARY FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
Item 10.
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 4 through 5 of the Company's definitive proxy statement, as filed with the Commission and dated March 17, 2000, relating to the April 27, 2000 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.
Item 11. Executive Compensation.
The information set forth under the caption "Executive Compensation Summary" on page 6 of the Company's definitive proxy statement, as filed with the Commission and dated March 17, 2000, relating to the April 27, 2000 Annual Meeting of Shareholders, is incorporated herein by reference. Information under the caption "Committee Report on Executive Compensation" on page 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.
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 page 3 of the Company's definitive proxy statement, as filed with the Commission and dated March 17, 2000, relating to the April 27, 2000 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Transactions" on page 7 of the Company's definitive proxy statement, as filed with the Commission and dated March 17, 2000, relating to the April 27, 2000 Annual Meeting of Shareholders, is incorporated herein by reference.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.
(a) 1. Financial Statements
Independent Auditors' Report Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for each of the Years Ended December 31, 1998, 1998 and 1997 Notes to Consolidated Financial Statements
2. Financial Statement Schedules Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final page of this report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 9, 2000.
O.A.K. FINANCIAL CORPORATION
/s/ John A. Van Singel John A. Van Singel President, Chief Executive Officer (Principal Executive Officer)
/s/ Martin R. Braun Martin R. Braun Vice President (Principal Financial and Accounting 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 David G. Van Solkema and John A. Van Singel, and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.
Signature Date
/s/ Robert Deppe March 9, 2000 Robert Deppe
/s/ Norm Fifelski March 9, 2000 Norman Fifelski
/s/ Dellvan Hoezee March 9, 2000 Dellvan Hoezee
/s/ John Peterson March 9, 2000 John Peterson
/s/ Lois Smalligan March 9, 2000 Lois Smalligan
/s/ John A. Van Singel March 9, 2000 John A. Van Singel
/s/ David Van Solkema March 9, 2000 David Van Solkema
____________________________ March 9, 2000 Gerald Williams
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable assigned number:
Exhibit Number - ------
10 Director Deferred Compensation Plan
21 Subsidiaries of Registrant
27 Financial Data Schedule
The following exhibits, indexed according to the applicable assigned number, were previously filed by the Registrant and are incorporated by reference in this Form 10-K Annual Report.
Exhibit Number - ------
3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form 10, as amended.
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.
EXHIBIT 10 - FORM OF DIRECTOR DEFERRED COMPENSATION PLAN
DEFERRED COMPENSATION AGREEMENT
THIS DEFERRED COMPENSATION AGREEMENT dated this __________ day of _________________ by and between BYRON CENTER STATE BANK, hereinafter the "Company", and __________________________________, hereinafter the "Director".
RECITALS
WHEREAS, Director is a director of the Company; and
WHEREAS, the services of Director and Director's experience and the knowledge of the affairs of the Company are extremely valuable to the Company; and
WHEREAS, the Company desires that Director remain in its service, wishes to continue to receive the benefit of Director's knowledge and experience, and is willing to offer Director an incentive in the form of deferred compensation.
AGREEMENT
NOW, THEREFORE, the parties hereto agree as follows:
1. Duties and Compensation. Director shall remain a director of the Company with Director's duties, compensation and terms of employment in that capacity to be such as may be determined from time to time by the Board of Directors until such service is terminated by either the Company or Director. If Director remains as a director of the Company until retirement, Director shall further be entitled to such amounts of deferred compensation as are provided hereinafter.
2. Deferred Compensation Account.
(a) In lieu of paying the Director an annual retainer for services as a director of the Company, the Company shall each year credit as deferred compensation to an account for Director's benefit an amount equal to the amount of the annual retainer which would otherwise be payable to the Director for service as a director of the Company for the following twelve months. The Company shall maintain the account on its records and designated as the Deferred Compensation Account for Director. Director shall be informed in writing by the Company of the amount of deferred compensation, and the time as of which such deferred compensation is credited to Director's Deferred Compensation Account. Any amounts of deferred compensation credited to Director's Deferred Compensation Account may be kept in cash or invested and reinvested in mutual funds, stocks, bonds, securities, a policy or policies of life insurance on Director's life, or any other assets, or such amount may be used by th Company in connection with the operation of its business, as may be determined by the Board of Directors of the Company.
(b) As an investment for Director's Deferred Compensation Account, the Board of Directors may direct the Company to purchase a policy of life insurance on the life of Director. In the event that such a life insurance policy is purchased for purposes of this Agreement, the Company shall be the applicant, owner and beneficiary of the policy. The Company shall have all rights under the policy and all incidents of ownership under the policy.
3. Payment of Deferred Compensation at Retirement. Upon Director's retirement, the Company shall pay Director deferred compensation in equal annual installments for 15 years certain, an amount determined to be the greater of (a) or (b) as follows:
(a) One-fifteenth (1/15) of the amount credited to Director's Deferred Compensation Account, if any, upon the date Director retires.
(b) The sum of the following:
(i) An amount equal to one-fifteenth (1/15) of the cash value, if any, on the date Director retires of any insurance policy purchased by the Company on Director's life as an investment for purposes of this Deferred Compensation Agreement; plus
(ii) An amount equal to the increase, if any, in cash value, from the policy anniversary date in the year of retirement to the policy anniversary date following the year of retirement.
4. Commencement of Deferred Compensation Payments. Deferred Compensation payments shall commence at retirement of the Director. Normal retirement shall be age 65.
At the request of the Director and subject to approval of the Board of Directors, retirement of the Director can commence at an age other than 65.
The amount of such payments will be determined in accordance with the formula in paragraph 3, as of the date the Director actually retires.
Postponing or accelerating the normal retirement age under this paragraph is subject to the sole and absolute discretion of the Board of Directors. The Director shall not participate in any way in the Board's decision as to any such postponement or acceleration. Once the Director attains normal retirement age, or is granted early retirement by the Board of Directors of the Company, benefits will not be subject to a risk of forfeiture.
5. Payment of Deferred Compensation In Event of Director's Total And Permanent Disability. In the event of Director's total and permanent disability prior to commencement of payments provided under paragraphs 3 or 4, the Company shall pay Director the deferred compensation in the same amount and the same manner and schedule as set forth in paragraphs 3 and 4 when the Director attains normal retirement age.
6. Payment of Death Benefit In Lieu Of Deferred Compensation. In the event of Director's death when Director has not begun receiving payments of deferred compensation under paragraphs 3 or 4, the Company shall pay Director's designated beneficiary a death benefit, in lieu of deferred compensation, in an amount determined to be the greater of (a) or (b) as follows:
(a) The amount credited to Director's Deferred Compensation Account, if any, upon the date of Director's death.
(b) An amount equal to 10 percent of the death benefit, if any, received by the Company as a result of Director's death from any insurance policy purchased by the Company on Director's life as an investment for purposes of this Deferred Compensation Agreement, payable each year for 10 years.
Payment under this paragraph shall commence within 6 months following the date of the Director's death. Payment of this benefit shall be in lieu of deferred compensation benefits described in paragraphs 3 and 4. Payment under this paragraph will constitute complete and total satisfaction of the obligations of the Company provided under this Agreement.
7. Payment of Deferred Compensation In Event of Director's Death When Director Has Begun Receiving Payments Under Paragraphs 3 or 4. In the event of Director's death when Director has begun receiving payments under paragraphs 3 or 4, the Company shall pay Director's designated beneficiary the remaining annual deferred compensation payments, if any, to complete the 15 year certain requirement.
Any payments becoming due to the Director's designated beneficiary shall be made in the same amount and at the same time as would have been paid to the Director, until the Company has paid a total of 15 annual installments to the Director and/or the Director's designated beneficiary.
8. No Duplication of Deferred Compensation. Deferred compensation shall not be paid to Director, or to his designated beneficiary, under greater than one of the following paragraphs of the Agreement: 3, 4, 6 and 7.
9. Designated Beneficiary. For purposes of this Agreement, the designated beneficiary shall be as provided on Exhibit "A" attached to this Agreement. Director may change the designated beneficiary by notice in writing to the Company at any time. If the designated beneficiary shall die after commencement of payments to the designated beneficiary, remaining payments, if any, shall be paid to the estate of the designated beneficiary.
10. Prohibition Against Assignment. Except as otherwise expressly provided herein, Director agrees on behalf of himself and on behalf of his personal representatives, heirs, legatees, distributees and any other person or persons claiming any benefits under him by virtue of this Agreement, that this Agreement and the rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by Director or any personal representative, heir, legatee, distributee or other person claiming under Director by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or hypothecation or other disposition of the Agreement or of such rights, interests and benefits contrary to the foregoing provisions, or the levy of any attachment or similar process thereupon, shall be null and void and without effect and the Company shall have no further liability hereunder.
11. Notices and Elections. Any notice or election to be given hereunder shall be sent by certified mail, return receipt requested, to the Company at its registered office and to Director at such address as is carried on the records of the Company. Either party may change the address to which notices are to be addressed by notice in writing given to the other in accordance with the terms hereof. The effective date of any such notice shall be the date of mailing, as determined by postmark.
12. Funds. Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, a fund, or fiduciary relationship between the Company and the Director, his designated beneficiary or any other person. Any funds, including all investments and any life insurance policies, used to determine payment under the Agreement shall be a part of the general funds and assets of the Company and subject to the claims of the Company's general creditors and no person other than the Company shall by virtue of the provisions of this Agreement have any right, interest, or title in such funds. To the extent that any person acquires a right to receive payments from the Company under this Agreement, such right shall be not greater than the right of any unsecured general creditor of the Company. Benefits provided by this Agreement are separate from and unrelated to the proceeds or value of any insurance policy purchased by the Company to informally fund this Agreement. Director shall not have any present right or interest in, nor any deferred claim to, or beneficial ownership of, any insurance policy held by the Company with respect to this Agreement.
13. Acceleration of Benefits. At the discretion of the Board of Directors of the Company acting without any participation by the Director, the Company shall retain the right to accelerate the payment of any benefits remaining due to the Director or the Director's designated beneficiaries under this agreement. Any acceleration of benefits shall be discounted at an interest rate equal to the "Federal Funds Rate" which shall be the mean of the high and low rates quoted for Federal Funds in th "Money Rates" column of The Wall Street Journal for the business day preceding the date on which the Company notifies the Director or the Director's designated beneficiaries of the Company=s intention to accelerate payment. Any such payment will constitute complete and total satisfaction of the obligations of the Company provided under this Agreement.
14. Effect Upon Director Relationship. Nothing in this Agreement shall be construed as granting Director the right to be continued as a director of the Company, or as a limitation on the right of the Company to terminate the service of Director at any time.
15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successor of the Company and any such successor shall be deemed substituted for the Company under the terms of this Agreement. As used in this agreement, the term "successor" shall include any person, firm, corporation, or other business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or business of the Company.
16. Governing Law. This Agreement shall be interpreted, construed, enforced, and performed in accordance with the laws of the State of Michigan.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above.
DIRECTOR: COMPANY:
___________________________ By: ____________________________________
Its _________________________________
EXHIBIT "A"
DEFERRED COMPENSATION AGREEMENT
BENEFICIARY DESIGNATION FOR
--------------------------------
In the event of my death, my primary beneficiary shall be:
____________________________________________________________
In the event my primary beneficiary predeceases me my contingent beneficiary shall be:
____________________________________________________________
__________________________________ ________________________________ Print Witness Name Print Director Name
__________________________________ ________________________________ Witness Signature Director Signature
Date:___________________________
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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