Clarkston Financial Corporation
[LOGO]
15 South Main Street
Clarkston, Michigan 48346
April 2, 2001
Dear Shareholder:
We invite you to attend the 2001 Annual Meeting of Shareholders. This
year's meeting will be held on Tuesday, May 8, 2001, at 10:00 a.m., at Deer Lake
Racquet Club, 6167 White Lake Road, Clarkston, Michigan 48346.
Our audited financial statements are included in an appendix to this Proxy
Statement.
It is important that your shares are represented at the Annual Meeting.
Please carefully read the Notice of Annual Meeting and Proxy Statement. Whether
or not you expect to attend the Annual Meeting, please sign, date and return the
enclosed Proxy in the envelope provided at your earliest convenience.
Sincerely
/s/ David T. Harrison
David T. Harrison
Chief Executive Officer
and President
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 8, 2001
To Our Shareholders:
The Annual Meeting of Shareholders of Clarkston Financial Corporation will
be held at Deer Lake Racquet Club, 6167 White Lake Road, Clarkston, Michigan
48346, on Tuesday, May 8, 2001 at 10:00 A.M., local time, for the following
purposes:
1. To elect three directors, each to hold office for a three year term.
2. To transact such other business as may properly come before the
meeting or at any adjournment thereof.
Shareholders of record at the close of business March 15, 2001, will be
entitled to vote at the meeting or any adjournment thereof. Whether or not you
expect to be present in person at this meeting, you are urged to sign the
enclosed Proxy and return it promptly in the enclosed envelope. If you do attend
the meeting and wish to vote in person, you may do so even though you have
submitted a Proxy.
By order of the Board of Directors
/s/ Bruce H. McIntyre
Bruce H. McIntyre
Secretary
Dated: April 2, 2001
CLARKSTON FINANCIAL CORPORATION
15 South Main Street
Clarkston, Michigan 48346
------------------
PROXY STATEMENT
For the Annual Meeting of Shareholders
to be held May 8, 2001
------------------
SOLICITATION OF PROXIES FOR ANNUAL MEETING
This Proxy Statement is furnished to the Shareholders of Clarkston
Financial Corporation (the "Corporation") in connection with the solicitation by
the Board of Directors of proxies to be used at the Annual Meeting of
Shareholders which will be held at Deer Lake Racquet Club, 6167 White Lake Road,
Clarkston, Michigan 48346, May 8, 2001, at 10:00 A.M., local time.
The Annual Meeting is being held for the following purposes:
1. To elect three directors, each to hold office for a three year term.
2. To transact such other business as may properly come before the
meeting or at any adjournment thereof.
If a proxy in the form distributed by the Corporation's Board of Directors
is properly executed and returned to the Corporation, the shares represented by
the proxy will be voted at the Annual Meeting of Shareholders and at any
adjournment of that meeting. Where shareholders specify a choice, the proxy will
be voted as specified. If no choice is specified, the shares represented by the
proxy will be voted FOR the nominees named by the Board of Directors in the
proxy. Shares not voted at the meeting, whether by abstention, broker non-vote,
or otherwise, will not be treated as votes cast at the meeting. Votes cast at
the meeting and submitted by proxy will be tabulated by the Corporation's.
A proxy may be revoked prior to its exercise by delivering a written notice
of revocation to the secretary of the Corporation, executing and delivering a
proxy of a later date or attending the meeting and voting in person. Attendance
at the meeting does not automatically act to revoke a proxy.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On March 15, 2001, the record date for determination of shareholders
entitled to vote at the Annual Meeting, there were outstanding 1,026,012 shares
of common stock of the Corporation. Shares cannot be voted unless the
shareholder is present at the meeting or is represented by proxy. As of March
15, 2001, no person was known by management to be the beneficial owner of more
than 5% of the Company's common stock, except as follows:
Amount and Percent
Nature of of
Name and Address of Beneficial Common
Beneficial Owner Ownership Stock
-----------------------------------------------------------------------------------------------
Edwin L. Adler 122,239 (1) 11.9%
900 South Lake Angelus Shores
Lake Angelus, MI 48326
Marian Murvay 63,000 (2) 6.1%
1174 North Lake Angelus Road
Lake Angelus, MI 48326
(1) Mr. Adler owns 106,840 shares, has presently exercisable options to
purchase 4,399 shares and may be deemed beneficial owner of 11,000 shares
owned by his spouse.
(2) Based on information provided to the Company by Mrs. Marian Murvay.
ELECTION OF DIRECTORS
The Corporation's Articles of Incorporation provide for the division of the
Board of Directors into three classes of nearly equal size with staggered
three-year terms of office. The number of directors constituting the Board of
Directors is determined from time to time by the Board of Directors. The Board
is currently composed of eight members. Three persons have been nominated for
election to the Board, each to serve a three-year term expiring at the 2002
Annual Meeting of Shareholders. The Board has nominated Edwin L. Adler, David T.
Harrison, and John H. Welker, each of whom is an incumbent director.
Holders of common stock should complete the accompanying proxy. Unless
otherwise directed by a shareholder's proxy, it is intended that the votes cast
upon exercise of proxies in the form accompanying this statement will be in
favor of electing the nominees as directors for the terms indicated above. Each
of the nominees is presently serving as a director. The following pages of this
Proxy Statement contain more information about the nominees and other directors
of the Corporation.
Except for those persons nominated by the Board of Directors, no other
persons may be nominated for election at the 2001 Annual Meeting. The
Corporation's Articles of Incorporation require at least 60 days prior written
notice of any other proposed shareholder nomination and no such notice has been
received.
A plurality of the votes cast at the Annual Meeting is required to elect
the nominees as directors of the Corporation. As such, the three individuals who
receive this number of votes cast by the holders of the Corporation's common
stock will be elected as directors. Shares not voted at the meeting, whether by
abstention, broker non-vote, or otherwise, will not be treated as votes cast at
the meeting. Votes cast at the meeting and submitted by proxy will be tabulated
by the Corporation. If any nominee becomes unavailable for election due to
circumstances not now known, the accompanying proxy will be voted for such other
person to become a director as the Board of Directors selects.
The Board of Directors recommends a vote FOR the election of each of the
persons nominated by the Board.
2
INFORMATION ABOUT DIRECTORS
The content of the following table is based upon information as of March 1,
2001, furnished to the Corporation by the directors. As of March 1, 2001, there
were 1,026,012 issued and outstanding shares of common stock of the Corporation.
Amount and
Year First Nature of Percent of
Became a Beneficial Common
Age Director Ownership(1) Stock(2)
----- ---------- ------------ -----------
Nominees for Election as Directors for Terms Expiring
in 2004
Edwin L. Adler (a)(b) 63 1998 122,239 11.9%
David T. Harrison (b)(c) 58 1998 35,345 3.4%
John H. Welker (c) 61 1998 50,879 5.0%
Directors Whose Terms Expire in 2002
Louis D. Beer 56 1998 18,500 1.8%
William J. Clark 51 1998 12,436 1.2%
Directors Whose Terms Expire in 2003
Charles L. Fortinberry 45 1998 9,340 0.9%
Bruce H. McIntyre (a)(b) 71 1998 19,738 1.9%
Robert A. Olsen (b)(c) 56 1998 29,000 2.8%
(a) Member Audit Committee
(b) Member Executive Committee
(c) Member Personnel Committee
(1) Each director owns the shares directly and has sole voting and investment
power or shares voting and investment power with his or her spouse under
joint ownership. Includes shares of common stock that are issuable under
options exercisable within sixty days. The share ownership of the following
directors includes shares subject to options that are presently
exercisable: Mr. Harrison (2,240 shares); Mr. Adler (4,399 shares); Mr.
Beer (2,000 shares); Mr. Clark (1,161 shares); Mr. Fortinberry (1,640
shares); Mr. McIntyre (2,000 shares); Mr. Olsen (2,000 shares); and Mr.
Welker (3,799 shares).
(2) Calculated based on the number of shares outstanding plus 19,244 shares
with respect to which officers and directors have the right to acquire
beneficial ownership under stock options exercisable within 60 days.
3
David T. Harrison is the Chief Executive Officer, President and a director
of the Corporation and the Bank. Mr. Harrison has 31 years of experience in the
banking industry. Mr. Harrison was employed by First of America Bank from 1963
to 1991, and most recently served from 1989 to 1991 as Chief Executive Officer
and President of First of America Bank-Southeast, in Detroit, a Michigan banking
corporation that had over $4 billion in assets in 1991. Mr. Harrison has served
as Chief Executive Officer and President of Pinnacle Appraisal Group of
Clarkston, Michigan, from 1991 to the present. Mr. Harrison has also served as
Chief Executive Officer and President of Trophy Homes, a residential builder, of
Clarkston, Michigan, from 1995 to the present.
Edwin L. Adler is the Chairman and a director of the Corporation and the
Bank. Mr. Adler is a real estate investor. Until 1999 Mr. Adler was president of
Food Town Supermarkets, a chain of five stores in the Clarkston, Michigan area,
where he had been employed since 1963.
Louis D. Beer is a director of the Corporation and the Bank. Mr. Beer has
served since 1993 as the chairman of First Public Corporation, a real estate,
financial and business consulting firm located in Saginaw, Michigan.
William J. Clark is a director of the Corporation and the Bank. Mr. Clark
has served since October 1996 as the general manager of Coldwell Banker
Professionals, a real estate brokerage firm in Clarkston, Michigan. Mr. Clark
was employed by Clarkston Real Estate Services Inc. from 1989 through October
1996.
Charles L. Fortinberry is a director of the Corporation and the Bank. Mr.
Fortinberry is an automobile dealer and is the president of Clarkston Motors,
Inc., where he has been employed since 1985.
Bruce H. McIntyre is the Secretary and a director of the Corporation and
the Bank. Mr. McIntyre has served as president of McIntyre Media, LLC, a media
consulting firm, since October 1996. From 1971 through September 1996, Mr.
McIntyre was employed by Capital Cities/ABC, Inc., most recently as vice
president of the publishing division. Mr. McIntyre was the publisher of the
Oakland Press from 1977 through February 1995.
Robert A. Olsen is a director of the Corporation and the Bank. Mr. Olsen is
the president of Planned Financial Services, Inc., where he has been employed
since 1974.
John H. Welker is a director of the Corporation and the Bank. Mr. Welker is
president of Numatics, Inc., where he has been employed since 1965. Numatics,
Inc. is a global developer and manufacturer of pneumatic components for
automated machinery used in various industries.
The Board of Directors had 12 meetings in 2000. The Corporation has no
nominating committee. All directors attended at least three-fourths of the
aggregate number of meetings of the Board and Board committees which they were
eligible to attend.
COMPENSATION OF DIRECTORS
Directors of the Corporation are not paid any cash compensation for Board
meetings or Committee meetings attended. The Corporation did not grant any Stock
options to directors during 2000.
A total of 78,375 shares of Common Stock have been reserved for issuance
under the Corporation's 1998 Founding Directors' Stock Option Plan, and the
Corporation to date has granted to its directors and organizers options to
purchase an aggregate of 64,150 shares.
4
AUDIT COMMITTEE REPORT
During 2000, the Audit Committee of the Board of Directors developed a
charter for the Audit Committee, which was approved by the full Board of
Directors on January 25, 2000. The complete text of the new charter is included
as Appendix B to this Proxy Statement. The Board of Directors has also examined
the composition of the Audit Committee in light of the rules of the National
Association of Securities Dealers, Inc. governing audit committees and has
confirmed that all members of the Audit Committee are "independent" within the
meaning of the those rules.
The Audit Committee has reviewed and discussed with management the
Company's audited financial statements as of and for the year ended December 31,
2000.
We have discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, Communications with Audit
Committees, as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
We have received and reviewed the written disclosures and the letter from
the independent auditors required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended, by the Independence Standards
Board, and have discussed with the auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Form 10-KSB for the year ended December 31, 2000.
Heather Coats* Bruce H. McIntyre Dennis Ritter* John H. Welker
*Directors of Clarkston State Bank.
5
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Corporation to
its Chief Executive Officer (the "Named Executive") for services rendered to the
Corporation during 1998, 1999, and 2000. No other executive officers of the
Corporation or the Bank received annual compensation in excess of $100,000
during 1998, 1999, or 2000.
Summary Compensation Table
Long Term
Annual Compensation Compensation
-------------------------------- ------------
Other All Other
Annual Securities Compen-
Compen Underlying sation
Name and Principal Position Year Salary Sation($) Options(#) --------
- --------------------------- ---- ------- --------- -----------
David T. Harrison . . . . . . . . . . . . . . . 2000 $100,000 $0 0 $0
President and 1999 $100,000 $0 0 $0
Chief Executive Officer 1998 $ 16,666 $0 7,606 $0
Option Grants in 2000. No stock options were granted during 2000 to the
Named Executive or to any other officers or directors of the Corporation.
Year-End Options Values. Shown below is information with respect to
unexercised options to purchase shares of the Corporation's Common Stock granted
under the Option Plans to the Named Executive and the value of unexercised
options at December 31, 2000. The Named Executive did not exercise any stock
options during 2000.
Number of Shares Subject to Value of Unexercised
Unexercised Options Held In-the-Money Options at
at December 31, 2000 December 31, 2000(1)
---------------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
David T. Harrison...................... 2,240 5,366 $0 $0
Chief Executive Officer
and President
- -------------------------------------------------------------------------------------------------------------------
(1) The value of unexercised options reflects the market value of the
Corporation's Common Stock from the date of grant through December 31, 2000
(when the closing price of the Corporation's Common Stock was $5.875 per
share). Mr. Harrison's stock options have an adjusted exercise price of
$9.09 per share and were not in-the-money at December 31, 2000. Value
actually realized upon exercise by the Named Executive will depend on the
value of the Corporation's Common Stock at the time of exercise.
Benefits. The Corporation provides group health insurance benefits and
supplemental unemployment benefits to its regular employees, including executive
officers.
6
Security Ownership of Management. The following table shows, as of March 1,
2001, the number of shares beneficially owned by the Named Executive identified
in the executive compensation tables of this proxy statement and by all
Directors and Executive Officers as a group. Except as described in the notes
following the table, the following persons have sole voting and dispositive
power as to all of their respective shares.
Amount and Nature of Percent of Common
Name Beneficial Ownership Stock
- -------------------------------------------------------------------------------------------------------------------
David T. Harrison.............................................. 35,345 3.4%
Chief Executive Officer
And President
All Executive Officers and Directors as a Group
(eight persons).............................................. 297,477 30.0%
TRANSACTIONS INVOLVING MANAGEMENT
The Bank is leasing a building in downtown Clarkston, Michigan for use as
the Bank's main office and the Corporation's headquarters. The Bank leases the
building from a limited liability company wholly owned by Messrs. Harrison,
Adler, Beer, Clark, Fortinberry, McIntyre, Olsen and Welker, each of whom is a
director of the Corporation and the Bank. Management of the Corporation believes
that the terms of the lease are no less favorable to the Corporation than could
be obtained from non-affiliated parties.
During 1998, organizers of the Corporation and the Bank loaned
approximately $415,000 in aggregate amount to the Corporation to cover
organizational expenses of the Bank and the Corporation. Interest was payable on
the loans at the rate of 5.0% per annum. These loans were repaid in full in
December 1998.
Directors and officers of the Corporation and their associates were
customers of, and had transactions with, the Corporation's subsidiary Bank in
the ordinary course of business during 2000. All loans and commitments to
officers and directors were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve an unusual risk of collectibility or present other unfavorable features.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Corporation have been examined
by Plante & Moran, LLP, independent certified public accountants. A
representative of Plante & Moran, LLP is expected to be present at the annual
meeting to respond to appropriate questions. It is anticipated that the
Corporation's Audit Committee will select the Corporation's auditors before the
end of this calendar year.
7
PRINCIPAL ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees billed to the Company for
the fiscal year ended December 31, 2000 by the Company's principal accounting
firm, Plante & Moran, LLP:
Audit Fees................................................... $29,817
Financial Information Systems
Design and Implementation Fees............................ $ 2,871
All Other Fees............................................... $27,496
-------
Total Fees................................................ $60,184
=======
The Audit Committee considered whether the provision of services described
above under "All Other Fees" is compatible with maintaining the principal
accountant's independence.
SHAREHOLDER PROPOSALS -- 2002 ANNUAL MEETING
Any proposal of a shareholder intended to be presented for action at the
2002 annual meeting of the Corporation must be received by the Corporation at 15
South Main Street, Clarkston, Michigan 48346, not later than January 1, 2002, if
the shareholder wishes the proposal to be included in the Corporation's proxy
materials for that meeting.
AVAILABILITY OF 10-KSB ANNUAL REPORT
An annual report on Form 10-KSB to the Securities and Exchange Commission
for the year ended December 31, 2000, will be provided free to shareholders upon
written request. Write to Clarkston Financial Corporation, Attention: David T.
Harrison, 15 South Main Street, Clarkston, Michigan 48346. The Form 10-KSB and
certain other periodic filings are filed with the Securities and Exchange
Commission (the "Commission"). The Commission maintains an Internet web site
that contains reports and other information regarding companies, including the
Corporation, that file electronically. The Commission's web site address is
http:\\www.sec.gov.
MISCELLANEOUS
The management is not aware of any other matter to be presented for action
at the meeting. However, if any such other matter is properly presented for
action, it is the intention of the persons named in the accompanying form of
proxy to vote thereon in accordance with their best judgment.
The cost of soliciting proxies in the accompanying form will be borne by
the Corporation. In addition to solicitation by mail, proxies may be solicited
in person, or by telephone or telegraph, by regular employees of the
Corporation.
By order of the Board of Directors
/s/ Bruce H. McIntyre
April 2, 2001. Bruce H. McIntyre
Secretary
8
APPENDIX A
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................A-2
Independent Auditors Report.................................................A-14
Consolidated Financial Statements
Consolidated Balance Sheet............................................A-15
Consolidated Statement of Operations..................................A-16
Consolidated Statement of Changes in Shareholders' Equity.............A-17
Consolidated Statement of Cash Flows..................................A-18
Notes to Consolidated Financial Statements............................A-19
A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Corporation and the Bank.
This section should be read in conjunction with the consolidated financial
statements and the supplemental financial data contained elsewhere in this
Appendix.
Overview
Clarkston Financial Corporation (the "Company") is a Michigan corporation
incorporated on May 18, 1998. The Company is the bank holding company for
Clarkston State Bank (the "Bank"). The Bank commenced operations on January 4,
1999. The Bank is a Michigan chartered bank with depository accounts insured by
the Federal Deposit Insurance Corporation. The Bank provides a full range of
commercial and consumer banking services, primarily in Clarkston, Michigan and
the surrounding market area primarily located in north Oakland County, Michigan.
The Company's plan of operation has been to establish its management team
within the first year of its operations and to grow in a prudent manner,
primarily by providing prompt, quality service. Management believes that it has
been successful in establishing a management team that can administer the
Company's growth in such a manner.
On April 6, 1999, the Bank entered into an agreement with The State Bank of
Fenton, Michigan, to acquire certain assets and assume certain deposit
liabilities with respect to The State Bank's branch office located in the Farmer
Jack's grocery store at 6555 Sashabaw Road, Clarkston, Michigan. This
transaction was consummated on July 16, 1999 and added $1.8 million in deposits
to the Bank's totals. A deposit premium of 9.24% of deposits (as finally
adjusted) was paid to The State Bank for these deposits, along with $17,000 for
various fixed assets and equipment. The Bank leases the branch space from Farmer
Jack's at a rental rate of $2,750 per month under a lease which runs until July
2002.
Financial Condition
Summary. Total assets of the Corporation increased to $60.2 million at
December 31, 2000, from $33.3 million at December 31, 1999. The increase in
assets is primarily attributable to the Bank continuing to attract customer
deposits The year 2000 was the Company's second full year of operations, and the
number of deposit accounts increased to approximately 3,888 accounts at December
31, 2000 from 2,695 at December 31, 1999. Management attributes the strong
growth in deposits to quality customer service and the desire of customers to
deal with a local bank. The Company anticipates that the Bank's assets will
continue to increase during 2001, which will be the Bank's third full year of
operations. However, management does not believe that the rate of increase will
be as rapid as it has been during the first two years of operation.
A-2
Cash and Cash Equivalents. Cash and cash equivalents, which include federal
funds sold and short-term investments, increased $0.9 million, or 38% to $3.4
million at December 31, 2000, from $2.5 million at December 31, 1999. The
increase was the result of the increase in deposits that did not get transferred
to the investment and loan portfolios in the last two weeks of 2000.
Securities. The Bank classifies as Held to Maturity most securities with a
maturity date of two years or more from date of purchase. Securities held to
maturity were $21.3 million at December 31, 2000, compared to $9.6 million at
December 31, 1999. All other securities are classified as Available for Sale.
Securities available for sale were $9.0 million at December 31, 2000, compared
to $9.3 million at December 31, 1999. The increase is the result of the
investment of customer deposits that have been obtained since December 31, 1999.
The securities may be sold to meet the Bank's liquidity needs. The primary
objective of the Company's investing activities is to provide for the safety of
the principal invested. Secondary considerations include earnings, liquidity and
overall exposure to changes in interest rates. Excluding those holdings of the
investment portfolio in U.S. Treasury and U.S. Government Agency Securities,
there were no investments in securities of any one issuer which exceeded 10% of
shareholders' equity.
Maturing (Dollars in Thousands) For Year Ended December 31, 2000
Due Within One to Five Five to Ten After Ten
One Year Years Years Years Totals
------------- -------------- -------------- --------------- --------------
Gross
Amor- Unreal- Est. Est. Est. Est. Est.
tized ized Market Avg. Market Avg. Market Avg. Market Avg. Market Avg.
Cost (Loss) Value Yield Value Yield Value Yield Value Yield Value Yield
Available for Sale
U.S. Government
Agencies $836 ($ 1) 6.97% $ 89 6.99% $835 6.97%
Obligations of state and
Political subdivisions $746
975 1 $ 976 6.34% 976 6.34%
Corporate securities
Backed by letters of
Credit 6,530 0 6,530 6.88% 6,530 6.88%
Corporate 647 1 150 6.00% 498 7.50% 648 7.15%
---- --- ----- ----- ------ ----- ---- ----- ------ -----
Total Available for Sale $8,988 $ 1 $7,656 6.81% $1,244 7.18% $ 89 6.99% $8,789 6.95%
Hold To maturity;
U.S. Government
Agencies $21,244 ($24) $ 406 7.33 $10,118 6.88% $2,816 7.81% $7,880 7.36% $21,220 7.18%
Corporate 98 (2) 96 7.05% 96 7.05%
--- ----- ---- ------- ----- ------ ----- ------ ----- ------- -----
Total Hold to Maturity $21,342 (26) $ 406 7.33 $10,214 6.88% $2,816 7.81% $7,880 7.36% $21,316 7.17%
Securities Available for Sale Portfolio (in thousands)
Year Ended December 31
2000 1999
---- ----
U. S. Treasury and U.S. Government Agencies.................. $ 836 $1,313
Michigan municipal bonds..................................... 975 1,198
Corporate.................................................... 7,177 6,805
------- -------
$8,988 $ 9,316
======= =======
A-3
The Loan Portfolio. The majority of loans are made to businesses in the
form of commercial loans and real estate mortgages. As of December 31, 2000
commercial loans account for approximately 63% of the Bank's total loan
portfolio, residential mortgages accounts for 15% of the portfolio, and consumer
loans account for 22% of the portfolio.
Loan Portfolio Composition (in thousands)
Year Ended December 31
----------------------
2000 1999
---- ----
Amount % Amount %
Commercial............................. $16,100 63% $ 5,936 53%
Residential Real Estate................ 3,955 15 2,529 22
Consumer............................... 5,707 22 2,798 25
------- ---- ------ ----
Total Loans....................... 25,762 100% 11,263 100%
------- ===== ------ =====
Less:
Allowance for Loan Losses........... (379) (140)
------- -------
Total Loans Receivable, Net............ $25,383 $11,123
======= =======
Maturities and Sensitivities of Loans to Changes in Interest Rates (in
thousands of dollars)
The following table shows the amount of total loans outstanding as of
December 31, 2000 which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
Maturing
---------------------------------------------------------------------
After one but
Within one Year Within five years After five years Total
--------------- ----------------- ---------------- -----
Commercial........................ $7,697 $ 7,572 $ 831 $16,100
Residential Real Estate........... 328 2,810 817 3,955
Consumer ......................... 1,184 4,251 272 5,707
----- ------- -------- -------
Totals...................... $9,209 14,633 $1,920 25,762
------ ------- -------- -------
Allowance for Loan Losses......... 379 (379)
-------
Total Loans Receivable, Net....... $8,830 $14,633 $1,920 $25,383
======= ======= ====== =======
A-4
Below is a schedule of the loan amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
Interest Sensitivity
-----------------------------------------------
(in thousands of dollars)
Fixed Rate Variable Rate Total
---------- ------------- -----
Due within 3 months................................. $ 30 $2,201 $2,231
Due after 3 months within 1 year.................... 976 6,002 6,978
Due after one but within five years................. 11,068 3,565 14,633
Due after five years................................ 1,920 0 1,920
------- ------- -------
Total............................................... $13,994 $11,768 $25,762
Allowance for Loan Losses........................... 379
-------
Total Loans Receivable, Net......................... $25,383
=======
Nonperforming Assets. There are no nonperforming loans as of December 31,
2000. Management believes that the allowance for loan losses is adequate for the
lending portfolio. Loan performance is reviewed regularly by external loan
review specialists, loan officers, and senior management. When reasonable doubt
exists concerning collectibility of interest or principal, the loan will be
placed in nonaccrual status. Any interest previously accrued but not collected
at that time will be reversed and charged against current earnings. As of
December 31, 2000 there were no other material interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies, which, if implemented, would have a material impact on the
Corporation's liquidity, capital or operations.
Loan Loss Experience (in thousands)
The following is a summary of loan balances at the end of the period and
their daily average balances, changes in the allowance for possible loan losses
arising from loans charged off and recoveries on loans previously charged off,
and additions to the allowance which have been expensed.
December 31 December 31
2000 1999
---- ----
Loans:
Average daily balance of loans for the year....................... $ 18,040 $ 4,707
Amount of loans outstanding at end of period...................... 25,762 11,263
Allowance for loan losses:
Balance at beginning of year...................................... 140 0
Additions to allowances charged to operations..................... 243 142
Net charge offs................................................... 4 2
-------- ---------
Balance at end of year....................................... $ 379 $ 140
======== =========
Ratios:
Net charge offs to loans outstanding at year-end.................. .02% .02%
Allowance for loan losses to loans outstanding at year end........ 1.47% 1.24%
A-5
Allocation of the Allowance for Loan Losses
The allowance for loan losses as of December 31, 2000, was $379,000
representing approximately 1.47% of gross loans outstanding and at December 31,
1999, was $140,000 representing approximately 1.24% of gross loans outstanding.
The Bank has not experienced any material credit losses in the two years of
operations ended December 31, 2000. The allowance for loan losses is maintained
at a level management feels is adequate to absorb losses inherent in the loan
portfolio. Management prepares an evaluation which is based upon a continuous
review of the Bank's loan portfolio, the Bank's and industry's historical loan
loss experience, known and inherent risks included in the loan portfolio,
composition of loans, growth of the portfolio and current economic conditions.
The allowance for loan losses is analyzed quarterly by management. In so doing,
management assigns a portion of the allowance to the entire portfolio by loan
type and to specific credits that have been identified as problem loans and
reviews past loss experience. The local economy and particular concentrations
are considered, as well as a number of other factors.
Year Ended December 31
----------------------
2000 1999
--------------------------- -------------------------
% of each % of each
Category category
Allowance to total Allowance to total
Amount loans Amount loans
--------- ---------- --------- ---------
Commercial................................... $237 .92% $74 .66%
Real estate mortgages........................ 58 .22 32 .28
Consumer..................................... 84 .33 34 .30
Unallocated.................................. 0 0 0 0
--- ---- ---- -----
Total................................... 379 1.47% $140 1.24%
==== ===== ==== ======
The above allocations are not intended to imply limitations on usage of the
allowance. The entire allowance is available for any future loans without regard
to loan type.
Deposits. Deposits are gathered from the communities the Bank serves.
Deposits increased $26.1 million or 103% to $51.4 million at December 31,
2000,compared to $25.3 million at December 31, 1999. This was primarily as a
result of deposits being obtained from new customers of the Bank.
Average Daily Deposits (in thousands)
The following table sets forth the average deposit balances and the
weighted average rates paid thereon.
Average for the Year Average for the Year
-------------------- --------------------
2000 1999
---- ----
Amount Average Rate Amount Average Rate
------ ------------ ------ ------------
Noninterest bearing demand........... $ 5,150 0% $ 1,320 0%
MMDA/Savings......................... 10,371 4.04% 5,940 3.16%
Time................................. 19,910 6.24% 4,513 5.43%
--------- ----- -------- -----
Total Deposits.................... $35,431 4.69% $11,773 3.67%
A-6
Maturity Distribution of Time Deposits of $100,000 Or More
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 2000 and December 31, 1999:
Year Ended Year Ended
December 31, 2000 December 31, 1999
Amount Amount
------ ------
Three months or less........................ $ 8,617 $1,153
Over 3 months through 1 year................ 19,633 2,484
Over 1 year................................. 5,631 202
-------- ------
$33,881 $3,839
======== ======
The Bank operates in a very competitive environment. Management monitors
rates at other financial institutions in the area to ascertain that its rates
are competitive with the market. Management also attempts to offer a wide
variety of products to meets the needs of its customers. The Bank offers
business and consumer checking accounts, regular and money market savings
accounts, and certificates having many options in their terms.
Premises and Equipment. Bank premises and equipment were $437,000 at
December 31, 2000 and $337,000 at December 31, 1999.
Accumulated Deficit. As of December 31, 2000, the Company had an
accumulated deficit of $335,000. The accumulated deficit is primarily the result
of losses incurred in starting the bank and in the first two years of
operations. The Company had net income of $418,000 in 2000 and accumulated
deficit of $753,000 as of December 31, 1999 of operations, including the impact
of provisions for loan losses which totaled $243,000 in 2000 and $142,000 in
1999.
A-7
Results of Operations
Summary of Results. The Company earned a net profit of $418,000 in 2000,
which was the Company's second full year of operations. The Company incurred a
net loss of $604,000 in 1999, the Company's first full year of operations. The
retained deficit and 1999 net losses are primarily the result of costs of
opening the Bank's office, wages paid to employees, and fees and expenses
incurred in forming the Company and applying for regulatory approvals.
Significant ongoing additions to loan loss reserves also contributed to net
losses in 1999 as the Bank increased its loan portfolio. Management believes
that the expenditures made in 1998 and 1999 have created the infrastructure and
laid the foundation for future growth and profitability in subsequent years.
Performance Ratios (in thousands, except per share data).
Year Ended December 31
----------------------
2000 1999
---- ----
Net Profit (loss) $418 $(604)
Weighted average number of shares outstanding 943 941
Basic Profit (loss) per share $ .44 $(.64)
Earnings (Loss) ratios:
Return on average assets......................... 1.01% (3.03%)
Return on average equity......................... 5.36% (7.60%)
Average equity to average assets................. 18.10% 39.90%
Dividend payout ratio............................ 0 0
A-8
Net Interest Income. The following schedule presents the average daily
balances, interest income and interest expense and average rates earned and paid
for the Corporation's major categories of assets, liabilities, and stockholders'
equity for the periods indicated:
2000 1999
----------------------------------- ---------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets:
Short term investments 2,017 126 6.25% 3,028 168 5.23%
Securities:
Taxable 21,823 1,525 7.00% 10,297 575 5.58%
Tax-exempt 290 21 7.15% 633 37 5.85%
Loans 18,040 1,635 9.17% 4,707 401 8.52%
Total earning assets/total interest income 42,170 3,307 7.84% 18,665 1,181 6.26%
Cash and due from banks 1,083 601
Unrealized Gain (Loss) (14) (22)
All other assets 780 563
Allowance for loan loss (208) (60)
------- ------ ----- ------- ------ ------
Total assets 43,811 3,307 7.55% 19,950 1,181 5.92%
Liabilities and Stockholders' Equity
Interest bearing deposits:
MMDA, Savings/NOW accounts 10,371 419 4.04% 5,940 187 3.15%
Time 19,910 1,242 6.24% 4,513 245 5.43%
Fed Funds Purchased
Other Borrowed Money
Total interest bearing
liabilities/total interest expense 30,281 1,661 5.49% 10,453 432 4.13%
Noninterest bearing deposits 5,150 1,320
All other liabilities 430 257
Stockholders' Equity:
Unrealized Holding Gain (Loss) 0 (34)
Common Stock, Surplus, Retained
Earnings 7,950 7,954
Total liabilities and stockholders' equity 43,811 1,661 3.79% 19,950 432 2.17%
Interest spread 1,646 749
Net interest income -FTE 1,646 749
Net Interest Margin as a Percentage of
Average Earning Assets-FTE 42,170 1,646 3.90% 18,846 749 3.97%
A-9
Rate/Volume Analysis of Net Interest Income. The following schedule
presents the dollar amount of changes in interest income and interest expense
for major components of earning assets and interest-bearing liabilities,
distinguishing between changes related to outstanding balances and changes due
to interest rates.
Years Ended December 31, 2000 vs 1999
- ------------------------ ---------------------------------------------
(in thousands) Increase (Decrease) Due to
Interest Income Volume Rate Mix Total
- --------------- ------ ---- --- -----
Taxable Securities $ 643 $146 $161 $ 950
Tax-Exempt Securities (20) 8 (4) (16)
Loans 1,136 31 67 1,214
Short Term Investments (53) 31 (20) (42)
------ ----- ------ -------
Total Interest Income 1,706 216 204 2,126
------ ----- ------ -------
Interest Expenses
NOWs, MMDAs and Savings $140 $ 53 $ 39 $ 232
Time Deposits and IRAs 836 37 124 997
Fed Funds Borrowed 0 0 0 0
Other Borrowings 0 0 0 0
----- ----- ----- ------
Total Interest Expense 976 90 163 1,229
----- ----- ----- ------
Net Interest Income $ 730 $ 126 $ 41 $ 897
===== ===== ===== ======
Composition of Average Earning Assets and Interest Paying Liabilities
Year Ended Year Ended
December 31, 2000 December 31, 1999
As a percent of average earning assets
Loans............................................. $ 18,040 42.8% $ 4,707 25.0%
Other earning assets.............................. 24,130 57.2% 14,138 75.0%
------ ------ -------- -----
Average earning assets......................... $ 42,170 100.0% $ 18,845 100.0%
======== ====== ======== ======
As a percent of average interest bearing liabilities
Savings and DDA accounts.......................... 10,371 34.2% 5,940 56.8%
Time deposits..................................... 19,910 65.8% 4,513 43.2%
Other borrowings.................................. 0 0% 0 0%
------- ------ ------- ------
Average interest bearing liabilities........... $30,281 100.0% $10,453 100.0%
======= ====== ======= ======
Earning asset ratio................................. 96.8% 95.1%
Allowance for Loan Losses. The Corporation had an allowance for loan losses
of approximately 1.47% and 1.24% of total loans at December 31, 2000 and 1999,
respectively. The provision for loan losses for the year ended December 31, 2000
and 1999 was $379,000 and $140,000, respectively. This amount was provided as a
result of the increase in the total loan portfolio. Management considers it
prudent during the
A-10
first years of operations to provide for loan losses at a level which is
consistent with levels maintained by banks with similar loan portfolios.
Management will continue to monitor its loan loss performance and adjust its
loan loss reserve to more closely align itself to its own history of loss
experience.
Non-Interest Income. Non-interest income for the year ended December 31,
2000 and 1999 were $266,000 and $45,000, respectively, consisting primarily of
service fees on loan and deposit accounts.
Non-Interest Expense. Non-interest expense for the year ended December 31,
2000, was $1.4 million and December 31, 1999, was $1.3 million. The main
components of non-interest expense were salaries and benefits which totaled
$658,000 for the year ended December 31, 2000 and $553,000 for the year ended
December 31, 1999. Other significant components of non-interest expense
consisted of occupancy and equipment expenses, data processing fees, supplies
and marketing expenses.
Liquidity and Capital Resources
The Company obtained its initial equity capital in an initial public
offering of its common stock in November, 1998. The Company's plan of operation
for the next twelve months does not contemplate the need to raise additional
capital during that period. Management believes that its current capital and
liquidity will provide the Company with adequate capital to support its expected
level of deposit and loan growth and to otherwise meet its cash and capital
requirements for at least the next two or three years.
Capital Resources at December 31, 2000 (in thousands)
Tier 1
Leverage Tier 1 Total Risk-Based
Ratio Capital Ratio Capital Ratio
----- ------------- -------------
Minimum regulatory requirement for
Capital adequacy..................... 4.0% 4.0% 8.0%
Well capitalized regulatory level...... 5.0% 6.0% 10.0%
Consolidated........................... 15.0% 20.3% 16.3%
Bank................................... 15.0% 20.3% 16.3%
The following table shows the dollar amounts by which the Company's capital (on
a consolidated basis) exceeds current regulatory requirements on a dollar amount
basis:
Total
Tier 1 Tier 1 Risk-Based
Leverage Capital Capital
(in thousands of dollars)
Capital balances at December 31, 2000
Required regulatory capital......................... $2,409 $2,409 $4,818
Capital in excess of regulatory minimums............ 5,716 5,716 3,686
------ ----- -----
Actual capital balances................................ $8,125 $8,125 $8,504
====== ====== ======
The Company's sources of liquidity include loan payments by borrowers,
maturity and sales of securities available for sale, growth of deposits and
deposit equivalents, federal funds sold, and the issuance of common stock.
Liquidity management involves the ability to meet the cash flow requirements of
the Company's customers. These customers may be either borrowers with credit
needs or depositors wanting to withdraw funds.
A-11
Asset Liability Management and Market Risk Analysis
Asset liability management aids the Company in maintaining liquidity while
maintaining a balance between interest earning assets and interest bearing
liabilities. Management of interest rate sensitivity attempts to avoid widely
varying net interest margins and to achieve consistent net interest income
through periods of changing interest rates. Management monitors the Company's
exposure to interest rate changes using a GAP analysis.
Asset/Liability Gap Position For the Year Ended December 31, 2000 (in thousands)
1 to 3 4 to 12 1 to 5 Over 5
Month Months Years Years Total
----- ------ ----- ----- -----
Interest-Earning Assets
Federal Funds sold $ 2,550 $ 0 $ 0 $ 0 $ 2,550
Investment securities 8,989 405 10,249 10,662 30,305
Loans - by maturity 9,303 1,987 14,472 0 25,762
------- ------ ------- ------- -------
Total interest-earning assets 20,842 2,392 24,721 10,662 58,617
Interest Bearing Liabilities
DDA and Money Market 1,940 3,056 6,173 588 11,757
Savings accounts 348 870 4,348 231 5,797
Certificates of deposit 8,616 19,633 5,631 0 33,880
------- ------ ------ ---- ------
Total interest-bearing Liabilities 10,904 23,559 16,152 819 51,434
Rate sensitivity gap and ratios:
Gap for period 9,938 (21,167) 8,569 9,843 7,183
Cumulative gap 9,938 (11,229) (2,660) 7,183 7,183
Percentage of cumulative gap
to total assets 16.50% (18.65%) (4.42%) 11.93% 11.93%
Other variables besides interest rate changes may have an impact on the
financial condition of the Bank including, but not limited to, growth of the
company, structure of the balance sheet, and economic and competitive factors.
A-12
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
A-13
Independent Auditor's Report
To the Board of Directors and Stockholders
Clarkston Financial Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Clarkston
Financial Corporation and subsidiary as of December 31, 2000 and 1999 and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clarkston Financial Corporation and subsidiary as of December 31, 2000 and 1999
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Plante & Moran, LLP
Auburn Hills, Michigan
January 29, 2001
A-14
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
(000s omitted)
December 31
---------------------
2000 1999
-------- --------
Assets
Cash and cash equivalents:
Cash and due from banks $862 $867
Federal funds sold 2,550 1,600
-------- --------
Total cash and cash equivalents 3,412 2,467
Securities held to maturity (Note 2) 21,342 9,604
Securities available for sale (Note 2) 8,989 9,294
Loans (Note 3) 25,762 11,263
Allowance for possible loan losses (Note 4) (379) (140)
-------- --------
Net loans 25,383 11,123
Bank premises and equipment (Note 5) 282 337
Interest receivable 457 256
Deferred tax asset 190 -
Other assets 165 185
-------- --------
Total assets $60,220 $33,266
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $6,598 $2,671
Interest-bearing (Note 6) 44,810 22,595
-------- --------
Total deposits 51,408 25,266
Interest payable and other liabilities 534 163
-------- --------
Total liabilities 51,942 25,429
Stockholders' Equity
Common stock - No par value:
Authorized - 10,000,000 shares
Issued and outstanding - 1,026,012 shares at December 31, 2000
and 1999 4,306 4,306
Paid-in capital 4,306 4,306
Accumulated deficit (335) (753)
Accumulated other comprehensive income (loss) 1 (22)
-------- --------
Total stockholders' equity 8,278 7,837
-------- --------
Total liabilities and stockholders' equity $60,220 $33,266
======== ========
See Notes to Consolidated Financial Statements.
A-15
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Operations
(000s omitted, except per share data)
Year Ended December 31
----------------------
2000 1999
-------- --------
Interest Income
Interest and fees on loans $1,652 $401
Interest on investment securities:
Taxable securities 1,472 575
Tax-exempt securities 73 37
Interest on federal funds sold 126 168
-------- --------
Total interest income 3,323 1,181
Interest Expense - Deposits 1,661 432
-------- --------
Net Interest Income 1,662 749
Provision for Possible Loan Losses (Note 4) 243 142
-------- --------
Net Interest Income After Provision for Possible Loan Losses 1,419 607
Other Operating Income (Loss)
Service fees on loan and deposit accounts 227 81
Loss on sale of securities (9) (48)
Other 7 12
-------- --------
Total other operating income 225 45
Other Operating Expenses
Salaries and employee benefits 658 553
Occupancy 271 219
Advertising 124 127
Outside processing 100 98
Professional fees 99 72
Supplies 27 35
Other 137 152
-------- --------
Total other operating expenses 1,416 1,256
Income (Loss) - Before income taxes 228 (604)
Income Taxes (Benefit) (Note 7) (190) -
-------- --------
Net Income (Loss) $418 $(604)
======== ========
Basic and Fully Diluted Income (Loss) per
Share of Common Stock
(Note 14) $0.41 $(0.58)
======== ========
See Notes to Consolidated Financial Statements.
A-16
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
(000s omitted, except per share data)
Accumulated
Other Total
Common Paid-in Accumulated Comprehensive Stockholders'
Stock Capital Deficit Income (Loss) Equity
------- ------- ------------ ------------- -------------
Balance - January 1, 1999 $ 4,378 $ 4,378 $ (149) $ - $ 8,607
Purchase of outstanding common stock (72) (72) - - (144)
Comprehensive loss:
Net loss - - (604) - (604)
Change in unrealized loss on securities
available for sale - - - (22) (22)
------
Net comprehensive loss (626)
------ ------ ----- ----- ------
Balance - December 31, 1999 4,306 4,306 (753) (22) 7,837
Comprehensive income:
Net income - - 418 - 418
Stock split (Note 11) - - - - -
Change in unrealized loss on securities
available for sale - - - 23 23
------
Net comprehensive income 441
------- ------- ------ ------- -------
Balance - December 31, 2000 $ 4,306 $ 4,306 $ (335) $ 1 $ 8,278
======= ======= ====== ======= =======
Book value per share is $8.07 and $7.64 at December 31, 2000 and 1999,
respectively.
See Notes to Consolidated Financial Statements.
A-17
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
(000s omitted)
Year Ended December 31
----------------------
2000 1999
--------- --------
Cash Flows from Operating Activities
Net income (loss) $418 $(604)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 111 91
Provision for loan losses 243 142
Accretion of securities (29) -
Deferred taxes (190) -
Loss on sale of available-for-sale securities 9 48
Increase in interest receivable (201) (256)
Increase in other assets 3 (195)
Increase in interest payable and other liabilities 371 37
-------- --------
Net cash provided by (used in) operating activities 735 (737)
Cash Flows from Investing Activities
Purchase of securities available for sale (8,356) (18,663)
Proceeds from sale of available-for-sale securities 8,675 6,742
Proceeds from maturities of held-to-maturity securities 2,113 2,557
Purchase of held-to-maturity investment securities (13,822) (9,604)
Premises and equipment expenditures (39) (127)
Net increase in loans (14,503) (11,265)
-------- --------
Net cash used in investing activities (25,932) (30,360)
Cash Flows from Financing Activities
Net increase in time deposits 3,693 11,406
Net increase in other deposits 22,449 13,860
Purchase of outstanding common stock - (144)
-------- --------
Net cash provided by financing activities 26,142 25,122
Net Increase (Decrease) in Cash and Cash Equivalents 945 (5,975)
Cash and Cash Equivalents - Beginning of year 2,467 8,442
-------- --------
Cash and Cash Equivalents - End of year $3,412 $2,467
======== ========
Supplemental Disclosure of Cash Flow
Information - Cash paid for
Interest $1,471 $354
Taxes - -
See Notes to Consolidated Financial Statements.
A-18
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Clarkston Financial Corporation
and subsidiary conform to generally accepted accounting principles.
Management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates and assumptions.
Principles of Consolidation - The consolidated financial statements include
the accounts of Clarkston Financial Corporation (the "Corporation") and its
wholly owned subsidiary, Clarkston State Bank (the "Bank"). All significant
intercompany transactions are eliminated in consolidation.
Nature of Operations - Clarkston State Bank was formed during December 1998
for the purpose of conducting full-service commercial and consumer banking
and other financial products and services to Michigan communities in
Oakland County. Banking operations commenced on January 4, 1999.
Securities - Held-to-maturity securities are those securities that
management has the ability and positive intent to hold to maturity.
Held-to-maturity securities are recorded at cost, adjusted for amortization
of premium and accretion of discount.
Securities classified as available for sale are securities management had
identified that may be sold in the future to meet the Bank's investment
objectives of quality, liquidity and yield and to avoid significant market
value deterioration. Available-for-sale securities are recorded at fair
value with unrealized gains and losses, net of income taxes, reported as a
component of other comprehensive income in stockholders' equity.
Gains or losses on the sale of securities are computed on the adjusted cost
of the specific security.
Loan Interest and Fee Income - Loans are generally reported at the
principal amount outstanding, net of unearned income. Nonrefundable loan
origination and certain direct loan origination costs are deferred and
included in interest income over the term of the related loan as a yield
adjustment.
A-19
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (Continued)
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when,
in the opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due. Upon such discontinuance,
all unpaid interest accrued during the current year is reversed and all
other unpaid interest is charged to allowance for possible loan losses.
Interest accruals are generally resumed when all delinquent principal and
interest have been brought current or the loan becomes both well-secured
and in the process of collection.
Allowance for Possible Loan Losses - The allowance for possible loan losses
is maintained at a level considered by management to be adequate to absorb
losses inherent in existing loans and loan commitments. The adequacy of the
allowance is based on evaluations that take into consideration such factors
as prior loss experience, changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific
impaired or problem loans and commitments, and current and anticipated
economic conditions that may affect the borrower's ability to pay.
A portion of the total allowance for loan losses is related to impaired
loans. A loan is impaired when it is probable that the creditor will be
unable to collect all principal and interest amounts due according to the
established terms of the loan agreement. Loans that have been placed on
nonaccrual status or renegotiated in a troubled debt restructuring are
considered to be impaired. The allowance for loan losses for an impaired
loan is recorded at the amount by which the outstanding recorded principal
balance exceeds the fair value of the collateral and available cash flow on
the impaired loan. For a loan that is not collateral-dependent, the
allowance for loan losses is recorded at the amount by which the
outstanding recorded principal balance exceeds the current best estimate of
the future cash flows on the loan, discounted at the loan's effective
interest rate.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation, computed on the
straight-line method, is charged to operations over the estimated useful
lives of the properties. Leasehold improvements are amortized over the
terms of their respective leases or the estimated useful lives of the
improvements, whichever is shorter.
A-20
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 1 - Summary of Significant Accounting Policies (Continued)
Intangible Assets - Intangible assets totaling $182,000 consist entirely of
deposit intangibles acquired in a branch acquisition completed during 1999.
Amortization is calculated on a straight-line basis over the estimated
asset life of eight years.
Earnings per Share - Basic earnings per share are based on the weighted
average number of shares outstanding during each period. Fully diluted
earnings per share are based on the weighted average shares outstanding,
assuming the exercise of the dilutive stock options. All potential dilutive
securities have been excluded from the computation in 2000 and 1999 because
their effect would be antidilutive.
Book Value per Share - Book value per share represents total stockholders'
equity divided by the total number of shares outstanding at the end of each
period.
Stock Options - The Corporation has two stock option plans (see Note 10).
Options granted to directors and key employees are accounted for using the
intrinsic value method, under which compensation expense is recorded at the
amount by which the market price of the underlying stock at grant date
exceeds the exercise price of an option. Under the Corporation's plans, the
exercise price on all options granted equals or exceeds the fair value of
the stock at the grant date. Accordingly, no compensation cost is recorded
as a result of stock option awards under the plan.
Other Comprehensive Income - Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized
gains and losses on available-for-sale securities, are reported as a direct
adjustment to the equity section of the balance sheet. Such items, along
with net income, are considered components of comprehensive income. At
December 31, 2000 and 1999, accumulated other comprehensive income consists
solely of unrealized gains (losses) on available-for-sale securities.
Derivative Instruments and Hedging Activities - Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"), was adopted by the Bank effective for the
year 2000. SFAS 133 requires all derivative instruments to be recorded on
the balance sheet at estimated fair value. Changes in the fair value of
derivative instruments are to be recorded each period either
A-21
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, on
the type of hedge transaction. Adoption of SFAS 133 had no effect on the
consolidated financial position or results of operations.
Recent Accounting Pronouncements - In November 2000, the FASB issued
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities ("SFAS 140"). It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures. The
impact of SFAS 140 as of December 31, 2000 was not material to the
consolidated financial statements.
Reclassifications - Certain prior year amounts have been reclassified to
conform to current year presentation.
A-22
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 2 - Securities
The amortized cost and estimated market value of securities are as follows
at December 31, 2000 and 1999 (000s omitted):
2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
---------- ---------- ---------- ------------
Held-to-maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 21,244 $ 71 $ 95 $ 21,220
Corporate securities 98 - 2 96
-------- ------ ------ --------
Total $ 21,342 $ 71 $ 97 $ 21,316
======== ====== ====== ========
Available-for-sale securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 836 $ 2 $ 3 $ 835
Obligations of state and political subdivisions 975 2 1 976
Corporate securities backed by letters of
credit 6,530 - - 6,530
Corporate securities 647 1 - 648
-------- ------ ------ -------
Total $ 8,988 $ 5 $ 4 $ 8,989
======== ====== ====== =======
A-23
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 2 - Securities (Continued)
1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
-------- ---------- ---------- ------------
Held-to-maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,507 $ - $ 91 $ 9,416
Corporate securities 97 - 3 94
------- ------ ------ -------
Total $ 9,604 $ - $ 94 $ 9,510
======= ====== ====== =======
Available-for-sale securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 1,313 $ - $ 2 $ 1,311
Obligations of state and political subdivisions 1,198 - 10 1,188
Corporate securities backed by letters of
credit 6,130 - - 6,130
Corporate securities 675 - 10 665
------- ------ ------ -------
Total $ 9,316 $ - $ 22 $ 9,294
======= ====== ====== =======
The amortized cost and estimated market value of held-to-maturity
securities at December 31, 2000, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties (000s omitted):
Held to Maturity Available for Sale
--------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---------- ------------ ---------- ------------
Due in one year or less $ 405 $ 406 $ 7,655 $ 7,656
Due in one year through five years 10,247 10,214 1,244 1,244
Due after five years through ten years 2,797 2,816 - -
Due after ten years 7,893 7,880 89 89
-------- -------- ------- -------
Total $ 21,342 $ 21,316 $ 8,988 $ 8,989
======== ======== ======= =======
A-24
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 2 - Securities (Continued)
Securities having a carrying value of $6,772,000 and $1,060,000 (market
value of $6,726,000 and $1,052,000) were pledged at December 31, 2000 and
1999, respectively, to secure public deposits, repurchase agreements and
for other purposes required by law.
Proceeds from the sale of available-for-sale securities were $8,675,000 and
$6,742,000 in 2000 and 1999, respectively. Gross gains of $1,000 and $0 and
gross losses of $10,000 and $48,000 were recognized on those sales in 2000
and 1999, respectively.
Note 3 - Loans
Major categories of loans included in the portfolio at December 31, 2000
and 1999 are as follows (000s omitted):
2000 1999
-------- ---------
Commercial $ 16,100 $ 5,936
Residential mortgage 3,955 2,529
Consumer 5,707 2,798
-------- --------
Total $ 25,762 $ 11,263
======== ========
Certain directors of the Corporation and the Bank, including their
associates, were loan customers of the subsidiary bank during 2000 and
1999. Such loans were made in the ordinary course of business and do not
involve more than a normal risk of collectibility. The outstanding loan
balance for these persons at December 31, 2000 and 1999 totaled $1,308,000
and $1,146,000, respectively. During 2000, $1,041,000 of new loans were
made and repayments totaled $879,000. The total unused commitments for
these loans totaled $1,146,000 at December 31, 2000.
A-25
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 3 - Loans (Continued)
Final loan maturities and rate sensitivity of the loan portfolio at
December 31, 2000 are as follows (000s omitted):
Within One One to Five After Five
Year Years Years Total
------- -------- ------- --------
Commercial $ 7,697 $ 7,572 $ 831 $ 16,100
Mortgage 328 2,810 817 3,955
Consumer 1,184 4,251 272 5,707
------- -------- ------- --------
Total $ 9,209 $ 14,633 $ 1,920 $ 25,762
======= ======== ======= ========
Loans at fixed interest rates $ 1,006 $ 11,068 $ 1,920 $ 13,994
Loans at variable interest rates 8,203 3,565 - 11,768
------- -------- ------- --------
Total $ 9,209 $ 14,633 $ 1,920 $ 25,762
======= ======== ======= ========
Note 4 - Allowance for Possible Loan Losses
A summary of the activity in the allowance for possible loan losses (ALL)
is as follows (000s omitted):
2000 1999
------ ------
Balance - Beginning of year $ 140 $ -
Provision charged to operations 243 142
Loan losses (10) (2)
Loan loss recoveries 6 -
------ ------
Balance - End of year $ 379 $ 140
====== ======
As a percent of total loans 1.47% 1.24%
====== ======
The Bank considers all nonaccrual and reduced-rate loans (with the
exception of residential mortgages and consumer loans) to be impaired.
There are no such loans outstanding as of December 31, 2000.
A-26
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 5 - Bank Premises and Equipment
The following is a summary of Bank premises and equipment for the years
ended December 31, 2000 and 1999 (000s omitted):
2000 1999
----- -----
Building improvements $ 69 $ 68
Furniture and equipment 372 351
Additions in process 17 -
----- -----
Total Bank premises and equipment 458 419
Less accumulated depreciation 176 82
----- -----
Net carrying amount $ 282 $ 337
===== =====
Note 6 - Deposits
The following is a summary of interest-bearing deposit accounts at December
31, 2000 and 1999 (000s omitted):
2000 1999
-------- --------
Interest checking $ 1,635 $ 3,111
Savings 5,796 6,170
Money market 3,524 1,908
Time:
$100,000 and over 15,480 3,839
Under $100,000 18,375 7,567
-------- --------
Total interest-bearing deposits $ 44,810 $ 22,595
======== ========
The remaining maturities of certificates of deposit outstanding at December
31, 2000 are as follows (000s omitted):
Under $100,000
$100,000 and Over
-------- --------
2001 $ 14,330 $ 14,030
2002 4,045 1,450
-------- --------
Total $ 18,375 $ 15,480
======== ========
A-27
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 7 - Income Taxes
The Corporation and the Bank file a consolidated federal income tax return.
The Corporation has net operating loss carryforwards totaling approximately
$240,000 generated during the period from May 18, 1998 (inception) through
December 31, 2000 that are available to reduce future taxable income
through the year ending December 31, 2019. Based on the growth of the Bank,
management has determined that it is now more likely than not that the
benefit of these loss carryforwards will be realized. In 1999, the deferred
tax asset generated by loss carryforwards was offset with a valuation
allowance.
Deferred income taxes are provided for the temporary differences between
the financial reporting bases and the tax bases of the Corporation's assets
and liabilities. The source of such temporary differences consists
primarily of net operating loss carryforwards and the nondeductible portion
of loan loss reserve.
The temporary differences that comprise deferred tax assets and liabilities
at December 31, 2000 and 1999 are as follows (000s omitted):
2000 1999
------- -------
Deferred tax assets:
Bad debts $ 115 $ 44
Net operating loss 81 193
Organization and preopening costs 24 33
Unrealized loss on securities available for sale - 7
------- -------
Total deferred tax assets 220 277
Valuation allowance for deferred tax assets - (274)
Deferred tax liabilities:
Unrealized gain on securities available for sale (1) -
Depreciation (13) (2)
Accretion on investment securities (16) (1)
------- -------
Total deferred tax liabilities (30) (3)
------- -------
Net deferred tax asset $ 190 $ -
======= =======
A-28
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 8 - Related Parties
Operating Lease - The Bank entered into a lease for its main operating
facility under a noncancelable lease expiring on October 1, 2003. The
facility was leased from an entity owned by certain members of the Board of
Directors of the Corporation and the Bank. The lease payment obligation is
$5,000 per month through December 1, 2000 and $5,250 per month thereafter.
The Bank is responsible for all taxes, utilities and maintenance costs for
the facility.
The annual future minimum lease payments required under the noncancelable
operating lease as of December 31, 2000 are as follows:
2001 $ 63,000
2002 63,000
2003 47,250
Note 9 - Restriction on Dividends or Dividends from Banking Subsidiary
Unless prior regulatory approval is obtained, banking regulations limit the
amount of dividends that the Corporation's banking subsidiary can declare
to current year net profits, as defined in the Federal Reserve Act, and
retained net profits from prior years. There were no dividends declared or
paid by the Bank to the holding company during 2000 or 1999.
Note 10 - Stock-based Compensation
The Corporation has two stock-based compensation plans. Under the
employees' Stock Compensation Plan ("Employee Plan"), the Corporation may
grant options to key employees for up to 26,125 shares of common stock.
Under the 1998 Founding Directors Stock Option Plan ("Director Plan"), the
Corporation may grant options for up to 78,375 shares of common stock.
Under both plans, there is a minimum vesting period of between one to three
years before the options may be exercised, and all options expire 10 years
after the date of their grant. Certain options (contingent options) under
both plans vest on an accelerated basis upon the achievement of various
future financial and operational goals. All such options vest 9.5 years
after the date of grant regardless of achievement of future goals. Under
both plans, the exercise price of each option equals the market price of
the Corporation's common stock on the date of grant.
A-29
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 10 - Stock-based Compensation (Continued)
The following table summarizes stock option transactions for both plans and
the related average exercise prices for the years ended December 31, 2000
and 1999:
2000 1999
------------------------------ -----------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- --------------
Options Outstanding - Beginning of year 64,150 $ 9.09 64,150 $ 9.09
Options granted - Employee Plan 2,200 5.00 - -
Options exercised - - - -
Options expired - - - -
------- --------
Options Outstanding - End of year 66,350 8.96 64,150 9.09
======= ========
The following table shows summary information about fixed stock options
outstanding at December 31, 2000:
Stock Options Outstanding Stock Options Exercisable
-------------------------------------------------------------------- ------------------------------
Weighted
Average Weighted Number of Weighted
Range of Number of Remaining Average Shares Average
Exercise Prices Shares Contractual Life Exercise Price Exerciseable Exercise Price
--------------- --------- ---------------- -------------- ------------ --------------
Contingent $ 9.09 32,076 7.9 years $ 9.09 4,009 $ 9.09
Noncontingent 5.00 - 9.09 34,274 7.9 years 8.83 12,830 9.09
The Corporation has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, but applies the intrinsic value
method to account for its plan. The Corporation has estimated fair value of
the options granted in 2000 at $2.34 per share, using a "minimum value"
concept. The value was calculated using an assumed interest rate of 6.5
percent and estimated life of 5.0 years.
If the Corporation had elected to recognize compensation costs for the
plans based on the fair value of awards at the grant date, net income
(loss) per share on a pro forma basis would have been as follows (000s
omitted, except per share data):
A-30
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
2000 1999
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net income (loss) $ 418 $ 396 $ (604) $ (635)
Net income (loss) per common
share - Basic and fully diluted 0.41 0.39 (0.58) (0.61)
Note 11 - Common Stock
In October 2000, the Corporation declared an 11 for 10 stock split. The
Corporation issued the additional shares of common stock to its
stockholders for the purpose of effecting a reduction in the unit price of
the shares and obtaining a wider distribution and improved marketability of
the shares. The additional shares issued were not intended to be a
distribution of earnings. All applicable per share amounts for periods
presented have been retroactively adjusted to reflect the transaction.
A-31
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 12 - Financial Instruments
Fair Values of Financial Instruments - The carrying amounts and estimated
fair values of the Corporation's financial instruments are presented below.
Certain assets, the most significant being premises and equipment, do not
meet the definition of a financial instrument and are excluded from this
disclosure. Similarly, deposit base and other customer relationship
intangibles are not considered financial instruments and are not discussed
below. Accordingly, this fair value information is not intended to, and
does not, represent the Corporation's underlying value. Many of the assets
and liabilities subject to the disclosure requirements are not actively
traded, requiring fair values to be estimated by management. These
estimates necessarily involve the use of judgment about a wide variety of
factors, including, but not limited to, relevancy of market prices of
comparable instruments, expected future cash flows and appropriate discount
rates.
2000 1999
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ---------
Assets
Cash and short-term investments $ 3,412 $ 3,412 $ 2,467 $ 2,467
Securities 30,331 30,305 18,898 18,804
Loans 25,383 25,190 11,123 10,995
Accrued interest receivable 457 457 256 256
Liabilities
Noninterest-bearing deposits 6,598 6,598 2,671 2,671
Interest-bearing deposits 44,810 44,675 22,595 22,531
Accrued interest payable 268 268 78 78
The terms and short-term nature of certain assets and liabilities result in
their carrying amount approximating fair value. These include cash and due
from banks, interest-bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, customers' acceptance
liabilities, short-term borrowings, and bank acceptance outstanding. The
following methods and assumptions were used by the Bank to estimate the
fair values of the remaining classes of financial instruments.
A-32
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 12 - Financial Instruments (Continued)
Securities are valued based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
For variable rate loans that reprice frequently, fair values are based on
carrying amounts, as adjusted for estimated credit losses. The fair values
for other loans are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
The fair values of demand deposits, savings accounts, and money market
deposits are, by definition, equal to the amount payable on demand. The
fair values of fixed rate time deposits are estimated by discounting cash
flows using interest rates currently being offered on certificates with
similar maturities.
The fair value of loan commitments and standby letters of credit, valued on
the basis of fees currently charged for commitments for similar loan terms
to new borrowers with similar credit profiles, is not considered material.
Off-balance-sheet Risk - The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and financial guarantees. These instruments
involve, to varying degrees, elements of credit and interest rate risk that
are not recognized in the statement of financial condition.
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Fees from issuing these
commitments to extend credit are recognized over the period to maturity.
Since a portion of the commitments is expected to expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
A-33
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 12 - Financial Instruments (Continued)
The amount of collateral obtained upon extension of credit is based on
management's credit evaluation of customers.
Exposure to credit loss in the event of nonperformance by others, in the
form of standby letters of credit, is represented by the contractual
notional amount of those items. The Bank generally requires collateral to
support such financial instruments in excess of the contractual notional
amount of those instruments.
The Bank had loan commitments and standby letters of credit totaling
$14,040,000 and $6,294,000 at December 31, 2000 and 1999, respectively, on
which loans of $7,568,000 and $2,393,000, respectively, were outstanding at
year end and included in the Bank's consolidated balance sheet.
Note 13 - Regulatory Matters
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
discretionary actions by regulators that could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.
Since the Bank is considered a de novo or start-up bank, the minimum total
capital ratio for 2000 is 8.0 percent. As of December 31, 2000, the most
recent notification from the FDIC categorized the Bank as well-capitalized
under the regulatory framework.
A-34
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 13 - Regulatory Matters (Continued)
The regulations define well-capitalized levels of total capital, tier 1,
and tier 1 leverage as 10.0 percent, 6.0 percent, and 5.0 percent,
respectively. There are no conditions or events since that notification
that management believes have changed the Bank's capital category.
For Capital To be Well-
Actual Adequacy Purposes Capitalized
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- --------- ------- -------- --------
As of December 31, 2000:
Total risk-based capital
(to risk-weighted assets) $ 8,504 21.21% $ 3,208 8.00% $ 4,009 10.00%
Tier I capital
(to risk-weighted assets) $ 8,125 20.27% $ 1,604 4.00% $ 2,405 6.00%
Tier I capital
(to average assets) $ 8,125 15.03% $ 2,163 4.00% $ 2,704 5.00%
As of December 31, 1999:
Total risk-based capital
(to risk-weighted assets) $ 7,799 32.31% $ 1,931 8.00% $ 2,414 10.00%
Tier I capital
(to risk-weighted assets) $ 7,659 31.73% $ 966 4.00% $ 1,448 6.00%
Tier I capital
(to average assets) $ 7,659 38.39% $ 798 4.00% $ 998 5.00%
Note 14 - Parent-only Condensed Financial Information
The condensed financial information that follows presents the financial
condition of Clarkston Financial Corporation (the "Parent Company"), along
with the results of its operations and its cash flows. The Parent Company
has recorded its investments in its subsidiary at cost plus its share of
the undistributed earnings of its subsidiary since inception. The Parent
Company recognizes dividends from its subsidiary as revenue and
undistributed earnings of its subsidiary as other income. The Parent
Company financial information should be read in conjunction with the
Corporation's consolidated financial statements.
A-35
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 14 - Parent-only Condensed Financial Information (Continued)
The condensed balance sheet as of December 31, 2000 and 1999 (with 000s
omitted) is as follows:
2000 1999
------ -------
Assets
Cash on deposit with correspondent bank $ 1 $ -
Receivable from the Bank - 27
Investment in the Bank 8,276 7,832
------- -------
Total assets $ 8,277 $ 7,859
======= =======
Liabilities - Accounts payable $ - $ -
Stockholders' Equity
Common stock 4,306 4,306
Capital surplus 4,306 4,306
Retained earnings (335) (753)
------- -------
Total stockholders' equity 8,277 7,859
------- -------
Total liabilities and stockholders' equity $ 8,277 $ 7,859
======= =======
A-36
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Note 14 - Parent-only Condensed Financial Information (Continued)
The condensed statement of operations for the years ended December 31, 2000
and 1999 (000s omitted) is as follows:
2000 1999
-------- --------
Operating Income $ - $ -
Operating Expenses 26 49
-------- --------
Loss - Before income taxes and equity in undistributed
income (loss) of subsidiary (26) (49)
Provision for Income Taxes - -
-------- --------
Loss - Before equity in undistributed income (loss) of subsidiary (26) (49)
Equity in Undistributed Income (Loss) of Subsidiary 444 (555)
-------- --------
Net Income (Loss) $ 418 $ (604)
======== ========
The condensed statement of cash flows for the years ended December 31, 2000
and 1999 (000s omitted) is as follows:
2000 1999
------ -------
Cash Flows from Operating Activities
Net income (loss) $ 418 $ (604)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Equity in undistributed (income) loss of subsidiary (444) 555
Decrease in receivable from subsidiary 27 202
Decrease in accounts payable - (40)
------ -------
Net cash provided by operating activities 1 113
Cash Flows from Financing Activities - Payment for
stock repurchase - (144)
------ -------
Net Increase (Decrease) in Cash and Cash Equivalents 1 (31)
Cash and Cash Equivalents - Beginning of year - 31
------ -------
Cash and Cash Equivalents - End of year $ 1 $ -
====== =======
A-37
Clarkston Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note 15 - Earnings (Loss) per Share
Earnings (loss) per share data is the amount of earnings (loss) for the
period available to each share of common stock outstanding during the
reporting period. All potential dilutive securities have been excluded from
the computation because their effect would be antidilutive. The calculation
of earnings (loss) per share for the years ended December 31, 2000 and 1999
is as follows:
2000 1999
------- -------
Net income (loss) $ 418 $ (604)
Weighted average number of shares outstanding
for year 1,026 1,037
Net income (loss) per common share $ 0.41 $ (0.58)
A-38
APPENDIX B
AUDIT COMMITTEE CHARTER
Organization
There shall be a committee of the board of directors to be known as the audit
committee. The audit committee shall be composed of directors who are
independent of management of the bank and are free of any relationship that, in
the opinion of the board of directors, would interfere with their exercise of
independent judgement as a committee member.
Statement of Policy
The audit committee shall provide assistance to the board of directors enabling
it to fulfill its responsibilities to the shareholders, potential shareholders,
and investment community relating to corporate accounting, reporting practices
of the corporation, and the quality and integrity of the financial reports of
the company. In so doing, it is the responsibility of the audit committee to
maintain free and open means of communication between the directors, the
independent auditors, and the financial management of the company.
Authority
The audit committee's direct reporting responsibility shall be to the Board of
Directors of the company.
The audit committee shall have the power to conduct or authorize investigations
into any matters within the committee's scope of responsibility. The committee
shall be empowered to retain independent counsel, accountants, or others to
assist it in the conduct of any investigation.
Meetings
The committee shall meet at least four times annually, or more frequently as
circumstances require. As part of its job to foster open communications, the
committee should meet at least annually with management, the independent
auditors and the manager of the financial staff in separate executive sessions
to discuss any matters that the committee or each of these groups believe should
be discussed privately.
Responsibilities
In carrying out its responsibilities the audit committee believes its policies
and procedures should remain flexible, in order to react to changing conditions
and to ensure their fellow directors and shareholders that the accounting and
reporting practices of the company are in accordance with all requirements and
are of the highest quality.
In carrying out these responsibilities, the audit committee will:
B-1
o Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the bank. This responsibility
shall also include consideration of the fees to be charged by said
auditors. This responsibility shall also include firing the auditors.
o Meet with the independent auditors and financial management of the company
to review the scope of the proposed audit for the current year and the
audit procedures to be utilized and, at the conclusion thereof, review such
audit including any comments or recommendations of the independent
auditors.
o Review with the independent auditors and financial and accounting personnel
the adequacy and effectiveness of the accounting and financial controls of
the bank and elicit any recommendations of the improvement of such internal
control procedures or particular areas where new or more detailed controls
or procedures are desirable. Particular emphasis should be given to the
adequacy of such internal controls to expose any payments, transactions or
procedures that might be deemed illegal or otherwise improper. Further, the
committee periodically should review company policy statements to determine
their adherence to the code of conduct.
o Review the internal audit function, even if performed by an external
auditor, the audit plan for the coming year and the coordination of such
plans with the independent auditors and regulators.
o Receive prior to each meeting a summary of findings from completed internal
audits and a progress report on the proposed internal audit plan with
explanation for any deviations from the original plan. The committee should
also receive progress reports from management on the implementation of
programs or procedures recommended in prior audits.
o Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content of
the financial statements to be presented to the shareholders. Any changes
in accounting principles should be reviewed.
o Provide sufficient opportunity for the internal and independent auditors to
meet with the members of the audit committee without members of management
present. Among the items to be discussed in these meetings are the
independent auditors' evaluations of the company's financial accounting
personnel and the cooperation that the independent auditors and regulators
received during the course of their work.
o Review personnel and back-up systems planning for the accounting and
financial control functions within the bank at least annually.
o Submit the minutes of all meetings of the audit committee to, or discuss
the matters discussed at each committee meeting with, the board of
directors.
B-2
o Investigate any matter brought to its attention within the scope of its
duties, with the power to retain outside counsel for this purpose if, in
its judgement, that is appropriate.
o Review with the independent auditors all financial policies and procedures
established by management as well as the internal control systems in place
to audit and monitor such policies.
o Inquire of management and the external auditors concerning any and all
significant risks or exposures and assess the steps management has taken to
minimize such risk to the company.
o Review with the banks general counsel any legal matters that could have a
significant impact on the bank's financial statements.
o Consider the accounting and financial reporting decisions made by
management and the financial staff and attempt to determine the
appropriateness of those decisions. Assessing the ability of the financial
staff by reviewing decisions that weren't guided by policies, procedures or
accounting standards is considered an essential aspect of the audit
committee's role.
o Consider and review with management the following issues:
1. Significant findings made during the year and management's response
thereto.
2. Any difficulties encountered in the course of the audits conducted by
either the independent auditor or the regulators.
3. The implementations of recommendations made by independent auditors
and regulators.
4. Review policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the independent
accountant.
5. Review legal and regulatory matters that may have a material impact on
the financial statements related to company compliance policies and
programs and reports received from regulators.
Membership
The membership of the audit committee shall consist of at least four independent
members of the board of directors who shall serve at the pleasure of said board.
Audit committee members and the committee chairman shall be designated by the
full board of directors. Committee membership shall rotate among board members
no more frequently than every four years.
The duties and responsibilities of a member of the audit committee are in
addition to those duties set out for a member of the board of directors.
B-3
SHAREHOLDER INFORMATION
Notice of Annual Meeting
The Company's Annual Meeting of Shareholders will be held at 10:00 a.m. on
May 8, 2001, at Deer Lake Racquet Club, 6167 White Lake Road, Clarkston,
Michigan 48346.
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company serves as transfer agent and
registrar of the Company's Common Stock. Their address is 2 Broadway, 19th
Floor, New York, New York 10004 (telephone 212-509-4000).
Market Makers
The Company had two market makers at December 31, 2000: Raymond James and
Hilliard Lyons.
EXECUTIVE OFFICERS AND DIRECTORS
Executive Officers:
David T. Harrison, President and Chief Executive Officer of the Company
and the Bank
Bruce H. McIntyre, Secretary of the Company
Directors:
Edwin L. Adler, Director of the Company and the Bank
Louis D. Beer, Director of the Company and the Bank
William J. Clark, Director of the Company and the Bank
Heather Coats, Director of the Bank
Charles L. Fortinberry, Director of the Company and the Bank
David T. Harrison, Director of the Company and the Bank
Bruce H. McIntyre, Director of the Company and the Bank
Lee McNew, Director of the Bank
Robert A. Olsen, Director of the Company and the Bank
Dennis Ritter, Director of the Bank
Ken Rogers, Director of the Bank
Ted J. Simon, Director of the Bank
John H. Welker, Director of the Company and the Bank
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