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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24118
OTTAWA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 38-3172166
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Central Avenue, Holland, Michigan 49423
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 393-7000
---------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days. YES X . NO .
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and asked
price of such stock on the Nasdaq National Market as of March 25, 1998, was
$139.9 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of March 25, 1998, there were issued and outstanding 5,311,911 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the year ended December 31, 1997. Part III of Form 10-K - Portions of the Proxy
Statement for the Annual Meeting of Stockholders for the year ended December 31,
1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ottawa Financial Corporation ("Ottawa Financial" and, with its
subsidiary, the "Corporation") was formed at the direction of Ottawa Savings
Bank, FSB ("Ottawa Savings" or the "Bank") in March 1994 for the purpose of
owning all of the outstanding stock of Ottawa Savings issued upon the conversion
of the Bank from the mutual to the stock form (the "Conversion"). On August 19,
1994, Ottawa Financial acquired all of the shares of the Bank in connection with
the completion of the Conversion. The Corporation's Common Stock is traded on
the Nasdaq National Market under the symbol "OFCP."
On February 13, 1996, the Company acquired AmeriBank Federal Savings
Bank ("AFSB"), a federally chartered savings bank headquartered in Muskegon,
Michigan, pursuant to which the Corporation acquired all of the outstanding
shares of common stock, including shares subject to options, of AFSB for
aggregate consideration of approximately $32.7 million in cash, converted
options and warrants. AFSB was thereupon merged into Ottawa Savings. The
acquisition was accounted for using the purchase method of accounting. During
the third quarter of 1996, Ottawa Savings changed its name to "AmeriBank."
Unless the context otherwise indicates, all references herein to the Corporation
include AmeriBank and its subsidiaries on a consolidated basis. See Notes 1 and
2 of the Notes to Consolidated Financial Statements in the Annual Report to
Shareholders attached hereto as Exhibit 13 (the "Annual Report").
AmeriBank is the only operating subsidiary of Ottawa Financial.
AmeriBank is a Michigan-chartered savings bank headquartered in Holland,
Michigan. Originally organized in 1888, the Bank converted to a federal savings
bank in 1988, changed its name in 1996 from Ottawa Savings Bank, FSB to
AmeriBank, and converted to a state-chartered savings bank in July 1997. Its
deposits are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). AmeriBank currently serves Allegan, Kent,
Muskegon, Newaygo, Oceana and Ottawa Counties in Western Michigan through its 26
retail banking offices. At December 31, 1997, the Corporation had total assets
of $885.8 million, deposits of $654.6 million and shareholders' equity of $76.4
million.
AmeriBank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Bank attracts retail deposits from the general
public and invests those funds primarily in first mortgages on owner-occupied,
one- to four-family residences. The Bank also originates first mortgages on
nonowner-occupied one- to four-family residences, construction, commercial and
multi-family real estate, commercial business and consumer loans. See "Lending
Activities."
The Bank's revenues are derived principally from interest on mortgage
and other loans and interest on investment securities.
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AmeriBank offers a variety of individual and commercial deposit
accounts having a wide range of interest rates and terms. The Bank's deposits
consist of passbook and statement savings accounts, interest and
non-interest-bearing checking accounts, and money market and certificate
accounts. The Bank also offers debit and credit cards as well as ATM services.
AmeriBank solicits deposits from its market area only, and has never used
brokers to obtain deposits.
AmeriBank organized an insurance subsidiary in 1997 called AmeriPlan
Financial Services, Inc. It is expected that the subsidiary will offer financial
services that include fixed and variable annuities, mutual funds, discount
brokerage services, life insurance products and financial planning.
The executive offices of the Corporation are located at 245 Central
Avenue, Holland, Michigan 49423. Its telephone number at that address is (616)
393-7000.
MARKET AREA
AmeriBank's market area of Allegan, Kent, Muskegon, Newaygo, Oceana and
Ottawa Counties located in western Michigan is diverse, consisting of two
mid-sized cities, Grand Rapids and Muskegon, Holland, the headquarters for the
Corporation, and rural areas. Grand Rapids is the second largest city in
Michigan and has a solid and diverse economic base. Holland, the largest city in
Ottawa County also has a solid and diverse economic base, which includes
tourism, office furniture, automotive components and assemblies, pharmaceutical,
transportation, equipment, candy, food and construction supplies. Companies
operating in the market area include Steelcase, Herman Miller, Amway, Haworth,
Prince, General Motors, Gerber, SPX, Donnelly, Foremost Insurance and Meijers,
Inc. Holland, situated on Lake Macatawa and Lake Michigan and Muskegon, situated
on Muskegon Lake and Lake Michigan, benefit from tourism and recreational
activities, which peak in the summer months.
Much of AmeriBank's success as a home lender has been due to its market
area's favorable population, housing and income demographics. While population
growth has generally been static in Michigan since 1980, as its manufacturing
base has declined, demographic trends in AmeriBank's market area reflect
above-average population growth, including population growth in AmeriBank's
market area of 6.7% since 1990. Income levels in the market area tend to
approximate state and national averages. Unemployment in the area at December
31, 1997 was approximately 2.7% versus 3.5% for the State of Michigan as a
whole.
LENDING ACTIVITIES
General. The Bank has historically originated 30 year, fixed-rate
mortgage loans secured by one- to four-family residences. Since 1978, however,
the Bank has emphasized the origination of adjustable rate residential mortgage
("ARM") loans, call option and balloon payment loans, which has dramatically
reduced its portfolio of long term fixed rate loans. Today the Bank continues to
sell its 30 year fixed rate mortgage loans through its mortgage banking
activities. These mortgage banking activities have generated income from the
sale of mortgages in the secondary market and have increased income from loan
servicing operations. Since the acquisition of AFSB in February 1996, the Bank
has generated a larger percentage of consumer loans, commercial business loans
and
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commercial real estate loans. The Bank continues to emphasize commercial and
multi-family real estate, and commercial business loans as well as consumer
loans which have higher yields than traditional one- to four-family loans. Most
of the current growth in the Bank's loan portfolio for 1997 was in commercial
business and consumer loans. Management's strategy has been to increase the
percentage of assets in its portfolio with shorter maturities or terms to
repricing, and in some cases higher yields, than traditional 30 years fixed rate
residential mortgage loans.
Loan officers and certain executive officers of the Bank have approval
authority on loans depending on type and amount. Loans greater than $500,000 but
less than $1.0 million require the approval of the Bank's Loan Committee
comprised of certain loan officers and executive officers. Loans greater than
$1.0 million must be approved by the Board of Directors.
At December 31, 1997, the maximum amount which the Bank could have
loaned to any one borrower and the borrower's related entities was approximately
$17.0 million. At such date, the Bank had no loans or groups of loans to related
borrowers with outstanding balances in excess of this amount.
The Bank's largest lending relationship to a single borrower or a
single group of related borrowers was a $14.0 million line of credit with an
outstanding balance as of December 31, 1997 of $10.0 million. The line of credit
is secured by a combination of publicly traded marketable securities and first
lien mortgages on single family residential properties which have been assigned
to the Bank. At December 31, 1997, the line of credit was performing in
accordance with its repayment terms.
The next largest relationship to a single borrower or a single group of
related borrowers totaled $8.4 million consisting of a number of loans, the
largest of which is a $3.0 million loan secured by two existing retail centers.
The relationship also includes a loan in the amount of $2.0 million secured by a
manufacturing building which the Bank is monitoring as a result of tenant
vacancy. At December 31, 1997, these loans were current and performing in
accordance with their terms. See "- Asset Quality--Other Loans of Concern."
At December 31, 1997, the Bank had approximately 30 other loans or
lending relationships to a single borrower or group of related borrowers with a
balance in excess of $1.0 million, all of which were performing in accordance
with their repayment terms at such date.
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Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................ $483,502 62.20% $516,935 69.59% $209,159 71.24%
Multi-family....................... 38,663 4.97 34,262 4.61 13,221 4.50
Commercial......................... 35,147 4.52 42,745 5.75 4,106 1.40
Construction or development........ 71,145 9.15 33,823 4.55 42,659 14.53
-------- ------- -------- ------- -------- ------
Total real estate loans......... 628,457 80.84 627,765 84.50 269,145 91.67
-------- ------- -------- ------- -------- ------
Other Loans:
Consumer Loans:
Automobile........................ 49,264 6.34 46,247 6.23 9,530 3.25
Home equity lines of credit....... 32,379 4.17 29,170 3.93 12,039 4.10
Home equity installment........... 22,905 2.95 19,247 2.59 --- ---
Home improvement.................. 676 .09 1,015 .14 373 .12
Deposit account................... 756 .09 887 .12 263 .09
Student........................... 21 --- 103 .01 85 .03
Other............................. 5,577 .72 3,443 .46 2,168 .74
-------- ------- -------- ------- -------- ------
Total consumer loans............ 111,578 14.36 100,112 13.48 24,458 8.33
Commercial business loans......... 37,322 4.80 14,996 2.02 --- ---
-------- ------- -------- ------- -------- ------
Total other loans............... 148,900 19.16 115,108 15.50 24,458 8.33
-------- ------- -------- ------ -------- ------
Total loans.................. 777,357 100.00% 742,873 100.00% 293,603 100.00%
====== ====== ======
Less:
Loans in process................... 25,787 22,956 14,861
Deferred fees and discounts........ 854 1,237 1,034
Allowance for losses............... 3,293 3,129 1,251
-------- -------- --------
Total loans receivable, net.. $747,423 $715,551 $276,457
======== ======== ========
<CAPTION>
December 31,
------------------------------------------------
1994 1993
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family................. $184,237 76.10% $170,678 78.30%
Multi-family....................... 9,200 3.80 11,159 5.12
Commercial......................... 4,903 2.02 7,169 3.29
Construction or development........ 20,420 8.44 12,534 5.75
--------- ------- -------- ------
Total real estate loans......... 218,760 90.36 201,540 92.46
--------- ------- -------- ------
Other Loans:
Consumer Loans:
Automobile........................ 4,515 1.86 1,757 0.81
Home equity lines of credit....... 10,060 4.16 7,130 3.27
Home equity installment........... --- --- --- ---
Home improvement.................. 294 .12 225 0.10
Deposit account................... 213 .09 194 0.09
Student........................... 7,067 2.92 6,705 3.08
Other............................. 1,180 .49 419 0.19
-------- ------- -------- ------
Total consumer loans............ 23,329 9.64 16,430 7.54
Commercial business loans......... --- --- --- ---
-------- ------- -------- ------
Total other loans............... 23,329 9.64 16,430 7.54
-------- ------- -------- ------
Total loans.................. 242,089 100.00% 217,970 100.00%
====== ======
Less:
Loans in process................... 9,110 5,109
Deferred fees and discounts........ 1,043 1,132
Allowance for losses............... 1,118 950
-------- --------
Total loans receivable, net.. $230,818 $210,779
======== ========
</TABLE>
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The following table shows the composition of the Bank's loan portfolio
by fixed and adjustable rate at the dates indicated. Call option loans are
presented as fixed rate loans.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $113,954 14.66% $108,747 14.64% $ 95,141 32.40%
Multi-family.............................. 27,187 3.50 15,937 2.14 3,163 1.08
Commercial................................ 25,558 3.29 27,108 3.65 1,347 .46
Construction or development............... 59,300 7.62 12,552 1.69 9,442 3.21
--------- ------- -------- ------ -------- ------
Total fixed-rate real estate loans..... 225,999 29.07 164,344 22.12 109,093 37.15
--------- ------- -------- ------ -------- ------
Commercial................................. 14,004 1.80 6,007 .81 --- ---
Consumer................................... 79,199 10.19 65,241 8.78 12,294 4.19
--------- ------- -------- ------ -------- ------
Total fixed-rate loans................. 319,202 41.06 235,592 31.71 121,387 41.34
Adjustable-Rate Loans
Real estate:
One- to four-family....................... 369,548 47.54 408,188 54.95 114,018 38.84
Multi-family.............................. 11,476 1.48 18,325 2.47 10,058 3.43
Commercial................................ 9,589 1.23 15,637 2.10 2,759 .94
Construction or development............... 11,845 1.52 21,271 2.86 33,217 11.31
--------- ------- -------- ------ -------- ------
Total adjustable-rate real estate loans 402,458 51.77 463,421 62.38 160,052 54.52
--------- ------- -------- ------ -------- ------
Commercial................................. 23,318 3.00 8,989 1.21
Consumer................................... 32,379 4.17 34,871 4.70 12,164 4.14
--------- ------- -------- ------ -------- ------
Total adjustable rate loans............ 458,155 58.94 507,281 68.29 172,216 58.66
--------- ------- -------- ------ -------- ------
Total loans........................ 777,357 100.00% 742,873 100.00% 293,603 100.00%
====== ====== ======
Less:
Loans in process........................... 25,787 22,956 14,861
Deferred fees and discounts................ 854 1,237 1,034
Allowance for loan losses.................. 3,293 3,129 1,251
--------- -------- --------
Total loans receivable, net..... $747,423 $715,551 $276,457
======== ======== ========
<CAPTION>
December 31,
------------------------------------------------
1994 1993
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 96,381 39.82% $111,275 51.05%
Multi-family.............................. 3,080 1.27 5,289 2.43
Commercial................................ 2,692 1.11 5,389 2.47
Construction or development............... 5,841 2.41 3,290 1.51
--------- ------- -------- ------
Total fixed-rate real estate loans..... 107,994 44.61 125,243 57.46
-------- ------- -------- ------
Commercial................................. --- --- --- ---
Consumer................................... 8,028 3.32 2,595 1.19
--------- ------- -------- ------
Total fixed-rate loans................. 116,022 47.93 127,838 58.65
Adjustable-Rate Loans
Real estate:
One- to four-family....................... 87,856 36.29 59,403 27.25
Multi-family.............................. 6,120 2.53 5,870 2.69
Commercial................................ 2,211 .91 1,780 .82
Construction or development............... 14,579 6.02 9,244 4.24
--------- ------- -------- ------
Total adjustable-rate real estate loans 110,766 45.75 76,297 35.00
--------- ------- -------- ------
Commercial.................................
Consumer................................... 15,301 6.32 13,835 6.35
--------- ------- -------- ------
Total adjustable rate loans............ 126,067 52.07 90,132 41.35
--------- -------- -------- ------
Total loans........................ 242,089 100.00% 217,970 100.00%
====== ======
Less:
Loans in process........................... 9,110 5,109
Deferred fees and discounts................ 1,043 1,132
Allowance for loan losses.................. 1,118 950
--------- --------
Total loans receivable, net..... $230,818 $210,779
======== ========
</TABLE>
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The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. Loans which have adjustable or
renegotiable interest rates and call option loans are shown as maturing in the
period during which the contract is due. The schedule does not reflect the
effects of possible prepayments, enforcement of due-on-sale, call option clauses
or the effect of the amortization of deferred loan fees.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------
Construction
Mortgage (1) or Development Commercial
------------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Periods Ending
December 31,
- --------------
<S> <C> <C> <C> <C> <C> <C>
1998(2).......................... $32,545 8.19% $59,058 8.14% $24,225 8.15%
1999 - 2002...................... 109,690 8.07 12,087 8.63 9,428 8.96
2003 and following............... 415,077 7.83 --- --- 3,669 8.08
-------- ------- -------
$557,312 7.90 $71,145 8.22 $37,322 8.35
======== ======= =======
<CAPTION>
Consumer Total
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
Due During
Periods Ending
December 31,
- --------------
<S> <C> <C> <C> <C>
1998(2).......................... $ 29,433 9.45% $145,261 8.50%
1999 - 2002...................... 66,075 9.56 197,280 8.62
2003 and following............... 16,070 9.36 434,816 7.84
-------- --------
$111,578 9.50 $777,357 8.16
======== ========
</TABLE>
- --------------
(1) Includes one- to four-family, multi-family and commercial real estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
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The total amount of loans due after December 31, 1998 which have fixed
or predetermined interest rates is $224.9 million while the total amount of
loans due after such date which have floating or adjustable interest rates is
$407.2 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
The Bank focused its residential lending program during 1997 on the
origination of loans secured by mortgages on owner-occupied, one- to four-family
residences. The Bank also originated loans secured by nonowner-occupied, one- to
four-family residences. At December 31, 1997, $483.5 million or 62.2% of the
Bank's gross loan portfolio consisted of end loans secured by one- to
four-family residences. Residential mortgage loan originations derive from a
number of sources, including advertising, direct solicitation, real estate
broker referrals, existing borrowers and depositors, builders and walk-in
customers. Loan applications are accepted at most of the Bank's offices.
The Bank emphasizes the origination of a variety of residential loans,
including conventional 15 and 30 year fixed-rate loans, call option loans and
ARM loans. While the substantial majority of these loans were secured by
properties in the Bank's market area, the Bank also purchased a number of loans
(approximately $6.0 million) secured by residential properties in southwest and
southeast Michigan and central Texas. Most of these loans were purchased from a
mortgage banking firm which has established a long term relationship with
AmeriBank. The historical loan losses incurred from these purchased loans have
been negligible.
The Bank's one- to four-family residential ARM loans are fully
amortizing loans with contractual maturities of up to 30 years. The Bank's ARM
loans generally carry interest rates which are reset to a stated margin over an
independent index, generally the one-, three- or five-year constant maturity
treasury index. Increases or decreases in the interest rate of the Bank's ARM
loans are generally limited to 2% annually with lifetime interest rate caps of
6% over the initial interest rate. The Bank's ARM loans may be convertible into
fixed-rate loans upon payment of a fee, do not contain prepayment penalties and
do not produce negative amortization. Initial interest rates offered on the
Bank's ARM loans may be below the fully indexed rate, although borrowers are
generally qualified at the fully indexed rate. At December 31, 1997, the total
balance of one- to four-family ARM loans was $369.5 million, or 47.5% of the
Bank's gross loan portfolio.
The Bank also offers fixed-rate mortgage loans to owner occupants with
maturities up to 30 years, which conform to secondary market standards. Interest
rates charged on these fixed-rate loans are priced on a daily basis according to
market conditions. These loans generally do not include prepayment penalties.
AmeriBank currently sells in the secondary market, long-term, conforming
fixed-rate loans with terms over 15 years it originates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" in the Annual Report.
The Bank offers one- to four-family residential mortgage loans to
nonowner- occupants. These loans are underwritten considering cash flows from
the subject property in addition to using the same criteria as owner-occupied,
one- to four-family residential loans, but are generally priced
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at higher rates than owner-occupied loans. Adjustable rates are offered on
nonowner-occupied one- to four-family residential loans, with terms of up to 30
years.
The Bank originates residential mortgage loans with loan-to-value
ratios of up to 97% for owner-occupied residential loans and up to 80% for
nonowner-occupied residential loans. For loans with loan-to-value ratios in
excess of 80%, AmeriBank requires private mortgage insurance in an amount
sufficient to reduce the Bank's exposure to 80% or less of the lower of the
appraised value or purchase price of the underlying collateral.
In underwriting one- to four-family residential real estate loans,
AmeriBank evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Properties securing one- to four-family
residential real estate loans made by AmeriBank are appraised by independent fee
appraisers. AmeriBank requires borrowers to obtain title insurance and fire,
property and, if necessary, flood insurance. Real estate loans originated by the
Bank contain a "due on sale" clause allowing the Bank to declare the unpaid
principal balance due and payable upon the sale of the security property. The
Bank generally enforces it's "due on sale" power to allow for faster repricing
and to reduce the duration of it's loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
In order to enhance the yield on its assets AmeriBank originates
permanent loans secured by multi-family and commercial real estate. At December
31, 1997, the Bank's multi-family and commercial real estate loan portfolio
totaled $73.8 million or 9.5% of the Bank's gross loan portfolio, compared to
$77.0 million and $17.3 million, or 10.4% and 5.9% of gross loans outstanding at
December 31, 1996 and 1995, respectively.
The Bank's permanent multi-family and commercial real estate loan
portfolio includes loans secured by apartment buildings, condominiums, small
office buildings, small business facilities, medical facilities and other
non-residential building properties, substantially all of which are located
within the Bank's primary market area.
Permanent multi-family and commercial real estate loans have a maximum
term of 25 years, and typically have terms of 20 years or less, for ARM and call
option loans, with fixed-rate loans having terms of 10 years or less.
Multi-family loans and commercial real estate loans are written in amounts of up
to 80% of the lesser of the appraised value of the property or the purchase
price, and borrowers are generally personally liable for all or part of the
indebtedness.
Appraisals on properties securing multi-family and commercial real
estate loans originated by the Bank are primarily performed by independent
appraisers designated by the Bank at the time the loan is made. All appraisals
on multi-family and commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures generally require
verification of the borrower's credit history, income and financial statements,
banking relationships, references, and historical and projected cash flows for
the property that indicate minimum debt service coverage ratios of 1.15% or
more.
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Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired. At December 31, 1997, $546,000 or .74% of the multi-family
and commercial real estate loan portfolio was non-performing. See "- Asset
Quality." There can be no assurance that delinquencies will not increase in the
future.
CONSTRUCTION AND DEVELOPMENT LENDING
The Bank makes construction loans to individuals for the construction
of their residences, as well as to builders and developers for the construction
of one- to four-family residences and the development of one- to four-family
lots, residential subdivisions, condominium developments and other commercial
developments. At December 31, 1997, the Bank had $71.1 million in construction
and development loans outstanding, representing 9.15% of the Bank's gross loan
portfolio.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates and terms which
match any one- to four-family loans then offered by the Bank, except that during
the construction phase, the borrower pays interest only. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At December 31, 1997,
approximately 51.5% of the Bank's construction loans were to borrowers intending
to live in the properties upon completion of construction.
Construction loans to builders of one- to four-family residences
generally require the payment of interest only for up to one year and either
have terms of up to 30 years with adjustable rates or with call options, or are
fixed rate loans of 15 years or less. These loans are structured to be assumed
by qualified borrowers as permanent loans. These loans may also provide for the
payment of loan fees from loan proceeds.
The Bank also makes loans to builders for the purpose of developing
one- to four-family lots and residential condominium projects. These loans
typically have terms of 36 months or less with maximum loan to value ratios of
80%. These loans may provide for the payment of loan fees from loan proceeds.
Loan principal is typically paid down as lots or units are sold. At December 31,
1997, the Bank had $22.0 million of development loans outstanding.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Bank, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Bank of accurate
plans, specifications and costs of the project to be constructed/developed.
These
10
<PAGE> 11
items are used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of current appraised value and/or the
cost of construction (land plus building). At December 31, 1997, the Bank had 12
construction and development loans in excess of $500,000, each of which was
current at such date. The Bank's largest construction and development loan at
December 31, 1997, was a $2.5 million line of credit for the construction of an
office building, of which $806,000 was outstanding.
Because of the uncertainties inherent in estimating development and
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. Construction and development loans to borrowers
other than owner-occupants also involve many of the same risks discussed above
regarding multi-family and commercial real estate loans and tend to be more
sensitive to general economic conditions than many other types of loans.
COMMERCIAL BUSINESS LENDING
At December 31, 1997, the Bank had $37.3 million in commercial business
loans outstanding, representing 4.8% of the Bank's total loan portfolio compared
to $15.0 million, or 2.0% of gross loans outstanding at December 31, 1996. The
Bank's commercial business lending portfolio contains loans with a variety of
purposes and security, including loans to finance operations and equipment.
Generally, the Bank's commercial business lending has been limited to borrowers
headquartered, or doing business, in the Bank's primary market area. Management
intends to continue to increase the size of its commercial business portfolio
during 1998. At December 31, 1997, the average outstanding loan amount in the
Bank's commercial business loan portfolio was $139,000, with the largest
commercial business loan being a $14.0 million line of credit with an
outstanding balance at December 31, 1997 of $10.0 million.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
CONSUMER LENDING
The Bank originates a variety of different types of consumer loans,
including automobile loans, home equity lines of credit and installment loans,
home improvement loans, deposit account loans and other loans for household and
personal purposes. Recently, AmeriBank has placed increasing emphasis on
consumer loans, because of their attractive yields and shorter terms to
maturity. At December 31, 1997, consumer loans totaled $111.6 million, or 14.4%
of gross loans
11
<PAGE> 12
outstanding, as compared to $100.1 million and $24.5 million, or 13.5% and 8.3%
of gross loans outstanding at December 31, 1996 and 1995, respectively.
The Bank originates automobile loans, its largest segment of consumer
loans, on both a direct and an indirect basis. Direct loans are made when the
Bank extends credit directly to the borrower. Indirect loans are obtained when
the Bank purchases loan contracts from retailers of goods or services which have
extended credit to their customers.
The Bank began its indirect lending program in 1995 with selected
automobile dealers located in the Bank's lending area. Moreover, the Bank
acquired a $25.0 million portfolio of mature, indirect automobile loans upon its
acquisition of AFSB. At December 31, 1997, the Bank's automobile loan portfolio
totaled $49.3 million (of which $38.5 million were originated on an indirect
basis), or 44.2% of the Bank's consumer loan portfolio and 6.3% of the Bank's
gross loan portfolio.
The Bank's home equity installment loans are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
generally will not exceed the greater of 90% of the appraised value of the
property or 90% of two times the Michigan real estate assessment value. These
loans are written with fixed terms of up to five years, or up to 10 years with a
call option after five years, and carry fixed rates of interest. The Bank also
originates home equity lines of credit utilizing the same underwriting standards
as for home equity installment loans. Home equity lines of credit are revolving
line of credit loans. The majority of the Bank's existing home equity line of
credit portfolio has a 10 year term; however, the Bank currently offers these
loans with adjustable rates, interest only payments and a term of five years. At
December 31, 1997, the Bank had $22.9 million of home equity installment loans
and $32.4 million of home equity lines of credit outstanding, representing 3.0%
and 4.2%, respectively, of the Bank's gross loan portfolio. At that date, the
Bank had $33.1 million of unused credit available under its home equity line of
credit program.
Prior to 1995, student loans represented a large component of the
consumer loan portfolio. During 1995, however, the Bank sold its entire student
loan portfolio and no longer originates such loans but participates in a
referral program with a third party lender.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency
12
<PAGE> 13
laws, may limit the amount which can be recovered on such loans. At December 31,
1997 $436,000 or .39% of the consumer loan portfolio was non-performing. There
can be no assurance that delinquencies will not increase in the future.
LOAN ORIGINATIONS, PURCHASES AND SALES
Real estate loans are originated by AmeriBank's staff of loan officers.
Loan applications are taken in most branch offices and then submitted to the
Bank's designated loan underwriters for approval.
The Bank originates both adjustable-rate and fixed-rate loans; however,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
Currently, almost all fixed-rate residential mortgage loans with maturities in
excess of 15 years are originated for sale to the Federal Home Loan Mortgage
Corporation (the "FHLMC") with servicing rights retained. These loans are
originated to satisfy customer demand, generate servicing fee income and are
sold to achieve the goals of the Bank's asset/liability management program.
Borrowers are allowed to lock in an interest rate at the date of application
without a fee. The Bank manages the volume of loans originated but not closed by
offsetting these loan commitments with forward commitments from the FHLMC when
the volume of applications exceeds $6.0 million.
When loans are sold, the Bank typically retains the responsibility for
collecting and remitting loan payments, making certain that real estate tax
payments are made on behalf of borrowers, and otherwise servicing the loans. The
Bank receives a servicing fee for performing these functions. The amount of
servicing fees received by the Bank varies but is generally calculated at 3/8ths
of 1% per annum for ARM loans, and 1/4th of 1% per annum for fixed-rate mortgage
loans based on the outstanding principal amount of the loans serviced. The
servicing fee is recognized as income over the life of the loan. The Bank
serviced for others mortgage loans that it originated and sold amounting to
$130.4 million at December 31, 1997.
The Bank purchases a limited amount of real estate loans from selected
sellers. The Bank carefully reviews and underwrites all loans to be purchased to
insure that they meet the Bank's underwriting standards. During 1997, the Bank
purchased a total of $6.0 million of one- to four-family mortgage loans secured
by residential properties in southwest and southeast Michigan and central Texas.
In periods of economic uncertainty, the Bank's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related fee income and operating
earnings. In addition, the Bank's ability to sell loans may substantially
decrease as potential buyers (principally government agencies) reduce their
purchasing activities.
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated. Fixed-rate and call
option loans modified by the Bank are not reflected as new loan originations.
During 1997, the Bank modified a total of $15 million of loans as compared to
$13.9 million and $4.1 million during 1996 and 1995, respectively. See
13
<PAGE> 14
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" in the Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C> <C>
Real estate:
one- to four-family............................. $ 57,043 $ 111,313 $ 42,455
multi-family.................................... 1,710 37,261 144
commercial...................................... --- 6,202 550
construction or development..................... 4,507 37,137 38,918
Commercial business................................ 19,422 --- ---
Consumer........................................... 12,000 37,580 10,097
--------- --------- --------
Total adjustable-rate....................... 94,682 229,493 92,164
--------- --------- --------
Fixed-rate:
----------
Real estate:
one- to four-family............................. 58,086 19,644 11,381
multi-family.................................... 7,251 6,575 4,038
commercial...................................... 5,836 1,094 ---
construction or development..................... 31,877 6,554 11,517
Commercial business................................ 8,798 --- ---
Consumer........................................... 38,775 35,320 11,683
--------- -------- --------
Total fixed-rate............................ 150,623 69,187 38,619
--------- -------- --------
Total loans originated...................... 245,305 298,680 130,783
--------- -------- --------
Purchases:
Real estate: one- to four-family................... 6,039 27,027 986
Loans acquired in AFSB acquisition................. --- 294,700 ---
--------- -------- --------
Total purchases............................. 6,039 321,727 986
--------- -------- --------
Sales:
Real estate: one- to four-family................... 43,161 9,833 4,707
Consumer loans..................................... --- --- 6,794
--------- -------- --------
Total loan sales............................ 43,161 9,833 11,501
--------- -------- --------
Repayments:
Principal repayments............................... 179,735 161,303 78,892
--------- -------- --------
Total reductions............................ 222,896 171,136 90,393
--------- -------- --------
Increase (decrease) in other items, net............ 5,379 ( 10,176) 4,263
--------- -------- --------
Net increase (decrease)..................... $ 33,827 $439,095 $ 45,639
========= ======== ========
</TABLE>
Due to the historically low interest rate environment during 1997 the
Bank experienced a shift in customer demand from adjustable rate to fixed rate
products. The Bank consistent with its asset/liability management policy sold a
substantial portion of its fixed rate product in the secondary market. In
addition, consistent with the Bank's strategic plan of achieving a more balanced
loan portfolio between residential mortgage, consumer and commercial lending,
the Bank focused its loans origination efforts towards originating consumer and
commercial loans.
14
<PAGE> 15
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, a late notice is sent for accounts 30 or more days
delinquent. If the delinquency is not cured by the 60th day, contact with the
borrower may be made by phone and by a second letter. Additional written and
oral contacts may be made with the borrower between 30 and 60 days after the due
date. If the delinquency continues for a period of 60 days, the Bank usually
sends a default letter to the borrower and after 90 days, if the loan is still
delinquent, institutes appropriate action to foreclose on the property. If
foreclosed, the property is sold at public auction and may be purchased by the
Bank. Delinquent consumer loans are handled in a generally similar manner,
except that initial contacts are made when the payment is 14 days past due and
appropriate action may be taken to collect any loan payment that is delinquent
for more than 30 days. The Bank's procedures for repossession and sale of
consumer collateral are subject to various requirements under Michigan consumer
protection laws. The Bank has not had significant experience with delinquent
loans.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1997, in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For: Total Delinquent
-------------------------------------------------------------
60-89 Days 90 Days and Over Loans
---------------------------- ----------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family residential.. 9 $ 319 .07% 16 $ 979 .20% 25 $1,298 .27%
Multi-family and Commercial
real estate.................... --- --- --- 1 548 .74 1 548 .74
Construction or development...... 3 326 .46 4 633 .89 7 959 1.35
Commercial business.............. 5 836 2.24 5 165 .44 10 1,001 2.68
Consumer......................... 5 62 .06 33 434 .39 38 496 .44
--- ------ ------ ------ --- ------
Total........................ 22 $1,543 59 $2,759 81 $4,302
=== ====== ====== ====== === ======
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Interest
income on loans is accrued over the term of the loans based upon the principal
outstanding, except where serious doubt exists as to the collectibility of a
loan, in which case the accrual of interest is discontinued For all years
presented,
15
<PAGE> 16
the Bank has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate or with a maturity less than that customary in the Bank's market).
Foreclosed assets include assets acquired in settlement of loans. The loan
amounts shown do not reflect reserves set up against such assets. See
"-Allowance for Loan Losses."
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family......................... $ 917 $1,792 $ --- $ --- $ ---
Construction development.................... 611 --- --- --- ---
Commercial business......................... 118 --- --- --- ---
Consumer.................................... 434 331 --- --- ---
------ ------ ------ ------ ------
Total.................................... 2,080 2,123 --- --- ---
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family......................... 98 132 1,317 922 505
Multi-family and commercial real estate..... 546 426 1,110 96 ---
Consumer.................................... 2 55 7 1 5
------ ------ ------ ------ ------
Total.................................... 646 613 2,434 1,019 510
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family......................... 276 39 296 164 274
Consumer loans.............................. 181 150
------- ------ ------ ------ ------
Total.................................... 457 189 296 164 274
------- ------ ------ ------ ------
Total non-performing assets................... $3,183 $2,923 $2,730 $1,183 $ 784
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets............................... .36% .34% .74% .36% .29%
=== === ==== === ===
</TABLE>
For the year ended December 31, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $136,000, none of which was included in
interest income.
Non-Performing Loans. At December 31, 1997, the Bank had $2.7 million
in non-performing loans, which constituted .35% of the Bank's gross loan
portfolio. Except as discussed immediately below, there were no non-accruing
loans or aggregate non-accruing loans-to-one-borrower in excess of $500,000.
The largest non-performing loan at December 31, 1997, totaled $501,000
and was secured by property operated as a bed and breakfast. The loan
subsequently was paid off and the Bank received full repayment of principal and
a substantial portion of interest due.
Other Loans of Concern. As of December 31, 1997, there were $3.0
million of other loans not included in the table or discussed above where known
information about the possible credit problems of borrowers caused management to
have doubts as to the ability of the borrower to comply with present loan
repayment terms. These loans consist of seven commercial and multi-family
loans, the largest of which was a $2.0 million loan secured by a manufacturing
plant. The
16
<PAGE> 17
Bank is monitoring this loan as a result of a tenant vacancy. The loan was
current on payments as of December 31, 1997. See "Lending Activities - General."
These loans have been considered by management in conjunction with the analysis
of the adequacy of the allowance for loan losses.
As of December 31, 1997, there were no other loans not included in the
table above or discussed under "Other Loans of Concern" where known information
about the possible credit problems of borrowers caused management to have doubts
as to the ability of the borrower to comply with present loan repayment terms
and which may result in disclosure of such loans in the future.
Allowance for Loan Losses. The Bank establishes an allowance for loan
losses based on a systematic analysis of risk factors in the loan portfolio.
This analysis includes evaluation of concentrations of credit, past loss
experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of the underlying collateral, loan commitments
outstanding, delinquencies, and other factors. Because the Bank has had limited
loan losses during its history, management also considers the loss experience of
similar portfolios in comparable lending markets. Management's analysis results
in establishment of allowance amounts by loan type, based on allocations by
quality classification. A portion of the allowance also consists of an
unallocated amount which increased substantially in 1996 due to the combination
of AFSB's unallocated portion of the allowance with the Bank's allowance. In
1997, the unallocated portion of the allowance decreased as management allocated
larger portions of the allowance to the higher risk consumer, construction and
other non-residential lending portfolios due to the increased emphasis on growth
in these portfolios. Although management believes it uses the best information
available to make such determinations, future adjustments to reserves may be
necessary and net income could be significantly affected if circumstances differ
substantially from the assumptions used in making the initial determinations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Provision for Loan Losses," in the Annual
Report.
17
<PAGE> 18
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..................... $3,129 $1,251 $1,118 $ 950 $ 500
Acquired from AFSB................................. --- 1,358 --- --- --
Charge-offs:
Consumer......................................... 615 134 28 2 ---
Recoveries......................................... 119 90 1 --- ---
------ ------ ------ ------- ------
Net charge-offs.................................... (496) (44) (27) (2) ---
Additions charged to operations.................... 660 564 160 170 450
------ ------ ------ ------- ------
Balance at end of period........................... $3,293 $3,129 $1,251 $ 1,118 $ 950
====== ====== ====== ======= ======
Ratio of net charge-offs during the period to
average loans outstanding during the period....... ---%(1) ---%(1) ---%(1) ---%(1) ---%
====== ===== ====== ======= ======
Ratio of net charge-offs during the period to
average non-performing assets..................... 16.25% ---%(1) ---%(1) ---%(1) ---%
====== ===== ====== ======= ======
</TABLE>
- --------------
(1) Less than 1.00%.
18
<PAGE> 19
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ------ ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................. $ 289 62.20% $ 331 69.59% $ 166 71.24%
Multi-family........................ 14 4.97 18 4.61 413 4.50
Commercial real estate.............. 593 4.52 606 5.75 21 1.40
Construction or development......... 461 9.15 54 4.55 53 14.53
Commercial business................. 289 4.80 150 2.02
Consumer............................ 1,024 14.36 777 13.48 143 8.33
Unallocated......................... 623 --- 1,193 --- 455 ---
------- ------ ------- ------ ------ ------
Total.......................... $ 3,293 100.00% $3,129 100.00% $1,251 100.00%
======= ====== ====== ====== ====== ======
<CAPTION>
December 31,
--------------------------------------------------
1994 1993
------------------- -------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ -------- ------ --------
<S> <C> <C> <C> <C>
One- to four-family................. $ 148 76.10% $ 114 78.30%
Multi-family........................ 287 3.80 257 5.12
Commercial real estate.............. 25 2.02 79 3.29
Construction or development......... 28 8.44 18 5.75
Commercial business.................
Consumer............................ 62 9.64 28 7.54
Unallocated......................... 568 --- 454 ---
------- ------ ------ ------
Total.......................... $ 1,118 100.00% $ 950 100.00%
======= ====== ====== ======
</TABLE>
19
<PAGE> 20
INVESTMENT ACTIVITIES
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability management policies, concern for the highest investment quality,
liquidity needs and performance objectives. As market conditions change, the
Bank regularly re-evaluates the marketable securities in its portfolio. The
investment security portfolio currently is composed of federal agency
securities, collateralized mortgage obligations, mortgage-backed securities,
municipal bond, corporate debt securities and Federal Home Loan Bank ("FHLB")
stock.
At December 31, 1997, the Bank's entire investment and mortgage-backed
securities portfolios were classified as available for sale. The amortized cost,
fair value and weighted average yield of securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Yields on tax exempt
obligations have been computed on a tax equivalent basis.
<TABLE>
<CAPTION>
Securities
------------------------------ Weighted
Amortized Cost Fair Value Average Yield
-------------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Due in one year or less.......................... $ 6,190 $ 6,164 5.34%
Due after one year through five years............ 17,547 17,617 6.73
Due after five through 10 years.................. 5,108 5,092 6.86
-------- -------- -----
28,845 28,873 6.45
Asset-backed debt securities(1).................. 28,369 28,435 7.58
------- ------- -----
$57,214 $57,308 7.01
======= =======
</TABLE>
- ------------------------
(1) Consists of asset-backed SBA loans and mortgage backed
securities.
Due to their variable payments, asset-backed securities are not
reported by a specific maturity grouping.
20
<PAGE> 21
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated. For additional information on the Bank's
investment and mortgage-backed securities, see Note 3 of the Notes to
Consolidated Financial Statements in the Annual Report.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Carrying Value Carrying Value Carrying Value
-------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Equity Securities:
Money-market funds................... $ --- $ --- $ 17,150
Mortgage-backed funds................ --- --- 2,574
Other................................ --- 296 270
------- --------- --------
Total equity securities............ --- 296 19,994
------- --------- --------
Debt Securities:
Corporate............................. 2,010 11,353 21,292
Asset-backed (SBA loans).............. 15,232 12,816 1,069
Mortgage-backed....................... 13,203 17,773 10,379
Government and Agency................. 25,007 15,960 12,030
Municipal obligations................. 1,856 4,708 ---
------- --------- --------
Total debt securities............. 57,308 62,610 44,770
FHLB Stock............................ 7,308 6,958 2,162
------- --------- --------
Total securities................... $64,616 $ 69,864 $ 66,926
======= ========= ========
</TABLE>
SOURCES OF FUNDS
General. The Bank's primary sources of funds are deposits, principal
and interest payments on loans, sales of loans, maturities of securities,
securities available for sale and borrowings, principally FHLB advances.
Deposits. AmeriBank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, interest and non-interest-bearing checking accounts,
money market checking and savings accounts, and certificates of deposit. The
Bank's High Performance Checking Account Program offers a variety of checking
accounts to customers. These checking accounts increase the Bank's core
deposits, provide the opportunity to cross sell other Bank products and generate
additional fee income; however, the cost of servicing these accounts has
increased the Bank's non-interest expense. The Bank relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. AmeriBank solicits deposits from its market area only,
and has never used brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the
21
<PAGE> 22
pricing of its deposits in keeping with its asset/liability management,
profitability and growth objectives. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset/Liability Management"
in the Annual Report. Based on its experience, the Bank believes that its
savings, interest and non-interest-bearing checking accounts are relatively
stable sources of deposits. However, the ability of the Bank to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance...................................... $622,492 $243,220 $231,321
Deposits acquired from AFSB.......................... --- 333,000 ---
Net Deposits (Withdrawals)........................... 6,373 23,462 5,061
Interest credited.................................... 25,695 22,810 6,838
--------- --------- ---------
Ending balance....................................... $654,560 $622,492 $243,220
======== ======== ========
Net increase......................................... $ 32,068 $379,272 $ 11,899
========= ======== =========
Percent increase..................................... 5.15% 155.94% 5.14%
==== ====== ====
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996 1995
--------------- -------------------------------- ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:
Noninterest-bearing............................... $ 28,431 4.34% $ 25,487 4.09% $ 12,262 5.04%
Savings accounts (2.06%(1))....................... 60,143 9.19 64,987 10.44 46,470 19.12
NOW Accounts and money market deposit
accounts (3.84%(1)).............................. 160,296 24.49 154,711 24.85 46,986 19.31
-------- ------- -------- ------ -------- ------
Total Non-Certificates............................ 248,870 38.02 245,185 39.38 105,718 43.47
-------- ------- -------- ------ -------- ------
Certificates:
3.00 - 4.99%.................................. 9,612 1.47 25,807 4.15 12,276 5.05
5.00 - 6.99%.................................. 359,494 54.92 301,184 48.38 111,298 45.76
7.00 - 8.99%.................................. 36,109 5.52 49,651 7.98 13,818 5.68
9.00 - 10.99%................................. 475 .07 665 .11 110 .04
-------- ------- -------- ------ -------- ------
Total Certificates................................ 405,690 61.98 377,307 60.62 137,502 56.53
-------- ------- -------- ------ -------- ------
Total Deposits.................................... $654,560 100.00% $622,492 100.00% $243,220 100.00%
======== ======= ======== ====== ======== ======
</TABLE>
- ----------
(1) At December 31, 1997.
22
<PAGE> 23
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
3.00- 5.00- 7.00- 9.00% to Percent
4.99% 6.99% 8.99% 10.99% Total of Total
------- ------- ------- -------- ------- ----------
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998...................... $7,098 $ 64,381 $ 1,015 $ 11 $ 72,505 17.87%
June 30, 1998....................... 621 84,944 6,945 --- 92,510 22.80
September 30, 1998.................. 1,254 46,890 9,170 --- 57,314 14.13
December 31, 1998................... 134 20,410 7,658 42 28,244 6.96
March 31, 1999...................... 279 44,732 324 147 45,482 11.21
June 30, 1999....................... 151 47,336 351 275 48,113 11.86
September 30, 1999.................. --- 6,063 124 --- 6,187 1.53
December 31, 1999................... 75 13,755 412 --- 14,242 3.51
March 31, 2000...................... --- 5,846 7,683 --- 13,529 3.33
June 30, 2000....................... --- 6,905 1,628 --- 8,533 2.10
September 30, 2000.................. --- 4,003 33 --- 4,036 1.00
December 31, 2000................... --- 2,967 198 --- 3,165 .78
Thereafter.......................... --- 11,262 568 --- 11,830 2.92
------ -------- ------- ---- -------- ------
Total............................ $9,612 $359,494 $36,109 $475 $405,690 100.00%
====== ======== ======= ==== ======== ======
Percent of total................. 2.37% 88.61% 8.90% .12% 100.00%
==== ===== ==== === ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............................. $63,741 $79,011 $78,152 $140,448 $361,352
Certificates of deposit of
$100,000 or more........................... 8,764 13,499 7,406 14,669 44,338
------- ------- ------- -------- --------
Total certificates of deposit............... $72,505 $92,510 $85,558 $155,117 $405,690 (1)
======= ======= ======= ======== ========
</TABLE>
- ---------------
(1) Includes $5.12 million of deposits from governmental and other public
entities.
BORROWINGS. AmeriBank's other available sources of funds include
advances from the FHLB of Indianapolis and other borrowings. As a member of the
FHLB of Indianapolis, the Bank is required to own capital stock in the FHLB and
is authorized to apply for advances from the FHLB. Each FHLB credit program has
its own interest rate, which may be fixed or variable, and range of
23
<PAGE> 24
maturities. The FHLB of Indianapolis may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
The Bank has borrowed funds from the FHLB of Indianapolis primarily
under its fixed-rate lending programs, with terms requiring monthly interest
payments and principal payments due upon maturity. To a lesser extent, the Bank
has obtained variable rate FHLB advances. The Bank utilizes FHLB advances as
part of its asset/liability management strategy in order to cost effectively
extend the maturity of its liabilities. The Bank is subject to a prepayment fee
if the advance is prepaid by the Bank.
At December 31, 1997, the Corporation had $145.5 million of advances
from the FHLB of Indianapolis and the capacity to borrow up to $340.0 million;
however, the current Board policy limits the Bank's borrowing capacity to $175.0
million. For additional information on the Bank's borrowings and maturities
thereof, see Note 9 of the Notes to Consolidated Financial Statements contained
in the Annual Report.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
DURING THE PERIODS:
Maximum Balance:
FHLB advances............................ $145,458 $139,170 $43,241
Average Balance:
FHLB advances............................ $140,746 $ 94,269 $18,251
</TABLE>
The following table sets forth the end of period interest rates and
balances at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances......................................... $145,458 $139,170 $43,241
Weighted average interest rate of FHLB advances....... 5.98% 5.87% 6.15%
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
Prior to December 1997, AmeriBank had two wholly-owned service
corporation subsidiaries: OS Services, Inc. ("OS Services") and Midwest
Investment Services, Inc. ("Midwest"). As of December 31, 1997, Midwest was
merged into OS Services due to the similar nature of their
24
<PAGE> 25
operations. In addition, during December 1997, a new subsidiary,
AmeriPlan Financial Services, Inc. ("AmeriPlan") was established. At December
31, 1997, AmeriBank's investment in its service corporations totaled $1.4
million.
OS Services invests in stock of MMLIC Life Insurance Company, a
subsidiary of the Minnesota Mutual Life Insurance Company, St. Paul, Minnesota.
In addition, OS Services invests in limited partnerships which are involved in
developing and providing affordable housing. The partnerships also provide
investors with low income housing tax credits available under Section 42 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Bank, through OS
Services, has an equity investment in the partnerships totaling $969,000. In
addition, the Corporation received $250,000 in tax credits during 1997 as a
result of these activities. AmeriPlan's operations consist of offering
investment products, including mutual funds and annuities, as well as discount
brokerage services. The subsidiaries of the Bank generated net income of
$252,000 during 1997.
REGULATION
General. AmeriBank is a state chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, AmeriBank is subject to broad regulation
and oversight by the Michigan Financial Institution Bureau and the FDIC
extending to all its operations. AmeriBank is a member of the FHLB of
Indianapolis and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of AmeriBank, the Corporation also is subject
to federal regulation and oversight by the Office of Thrift Supervision ("OTS").
The purpose of the regulation of the Corporation and other holding companies is
to protect subsidiary savings associations. AmeriBank is a member of the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
(the "BIF") are the two deposit insurance funds administered by the FDIC, and
the deposits of AmeriBank are insured by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over AmeriBank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Insurance of Accounts and Regulation by the FDIC. AmeriBank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed
25
<PAGE> 26
insurance premiums based upon their level of capital and supervisory evaluation.
The current assessment rates range from zero to .27% of deposits. Risk
classification of all insured institutions is made by the FDIC semi-annually.
Institutions that are well-capitalized and have a high supervisory rating are
subject to the lowest assessment rate. At December 31, 1997, the Bank met the
capital requirement of a "well capitalized" institution and was not subject to
any assessment. See Note 12 of Notes to Consolidated Financial Statements in the
Annual Report.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. These premiums are also subject to change in future periods.
Prior to the enactment of the legislation recapitalizing the SAIF, a
portion of the SAIF assessment imposed on savings associations was used to repay
obligations issued by a federally chartered corporation to provide financing for
resolving the thrift crisis in the 1980s. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.7 basis points assessment
on SAIF deposits and 1.5 basis points assessment on BIF deposits until BIF
insured institutions participate fully in the assessment.
Capital Requirements. Under FDIC regulations, state-charted banks that
are not members of the Federal Reserve System ("State nonmember banks") are
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total assets of 3%, if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has well-
diversified risk, including not undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and in general is considered a
strong banking organization, rated composite 1 under the Uniform Financial
Institutions Rating System (the CAMEL rating system) established by the Federal
Financial Institutions Examination Council. For all but the most highly rated
institutions meeting the conditions set forth above, the minimum leverage
capital ratio is 3% plus an additional cushion amount of at least 100 to 200
basis points, consisting of a ratio of Tier 1 capital to total assets of not
less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain purchased mortgage servicing rights and purchased credit
card relationships), minus identified losses and minus investments in securities
subsidiaries.
In addition to the leverage ratios, State nonmember banks must maintain
a minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least four percentage points must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items, which include allowances for loan losses in an amount of up to
1.25%
26
<PAGE> 27
of risk-weighted assets, perpetual preferred stock that does not qualify as Tier
1 capital and long-term preferred stock with an original maturity of at least 20
years and certain other capital instruments. The includable amount of Tier 2
capital cannot exceed a bank's Tier 1 capital. Qualifying total capital is
further reduced by the amount of the bank's investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks,
investments in securities subsidiaries and certain other deductions. Under the
FDIC risk-weighting systems, all of bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories. The aggregate dollar amount of each category
is multiplied by the risk weight assigned to that category. The sum of these
weighted values equals the bank's risk-weighted assets.
At December 31, 1997, the Bank's ratio of Tier 1 capital of total
assets was 6.8%, its ratio of Tier 1 capital to risk-weighted assets was 10.7%
and its ratio of total capital to risk-weighted assets was 11.3%.
Prompt Corrective Regulatory Action. Federal banking regulators must
take prompt corrective action in the event an FDIC-insured institution fails to
meet certain minimum capital requirements. An institution is assigned to one of
the following five capital categories:
* Well Capitalized--Total risk-based capital ration of 10% or
greater, Tier 1 risk based capital ratio of 6% or greater,
leverage ratio of 5% or greater, and no written FDIC directive
or order requiring the maintenance of specific levels of
capital;
* Adequately Capitalized--Total risk-based capital ratio of 8%
or greater, Tier 1 risk- based capital ratio of 4% or greater,
and leverage ratio of 4% or greater (or 3% or greater if the
institution's composite rating under the FDIC's supervisory
rating system is 1);
* Undercapitalized--Total risk-based capital ratio of less than
8%, or Tier 1 risk-based capital ratio of less than 4%, or
leverage ratio of less than 4% (or less than 3% if the
institution's composite rating under the FDIC's supervisory
rating system is 1);
* Significantly Undercapitalized--Total risk-based capital ratio
of less than 6%, or Tier 1 risk-based capital ratio of less
than 3% or leverage ratio of less than 3%; and
* Critically Undercapitalized--Ratio of tangible equity to total
assets of 2% or less.
An "undercapitalized institution" generally is (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
restrictions on asset growth and other activities, possible replacement of
directors and officers, and restrictions
27
<PAGE> 28
on capital distributions by any bank holding company controlling the
institution. Any company controlling the institution may also be required to
divest the institution. The senior executive officers of such an institution may
not receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt, with certain exceptions. If an institution's ratio of
tangible capital to total assets falls below a level established by the
appropriate federal banking regulator, which may not be less than 2% of total
assets nor more than 65% of the minimum tangible capital level otherwise
required (the "critical capital level"), the institution is subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. At December 31, 1997, the Bank was classified as "well
capitalized" under the FDIC's regulations.
Dividend Limitations. The Bank may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. The Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would
create federal tax liabilities.
Under FDIC regulation, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with the examination of AmeriBank's, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the FDIC, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in November 1996 and received a rating of "satisfactory."
28
<PAGE> 29
Holding Company Regulation. The Corporation is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, the
Corporation is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Corporation and its non-savings association subsidiaries
which also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions. If the Corporation acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of the
Corporation and any of its subsidiaries (other than AmeriBank or any other
SAIF-insured savings association) would become subject to such restrictions
unless such other associations each qualify as a QTL and were acquired in a
supervisory acquisition.
The Corporation must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Corporation is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Corporation is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Corporation stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Corporation may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If the Corporation meets specified current public information
requirements, each affiliate of the Corporation is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1997, AmeriBank was in compliance with these
reserve requirements.
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. AmeriBank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
29
<PAGE> 30
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, AmeriBank is required to purchase and maintain stock in
the FHLB of Indianapolis. At December 31, 1997, AmeriBank had $1.3 million in
FHLB stock, which was in compliance with this requirement. AmeriBank receives
dividends on its FHLB stock. Over the past five calendar years such dividends
have averaged 8.7% and were 8.0% for the calendar year 1997. For the year ended
December 31, 1997, dividends paid by the FHLB of Indianapolis to AmeriBank
totaled $577,000.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of AmeriBank's FHLB stock may result in a corresponding
reduction in AmeriBank's capital.
Michigan Banking Law. Effective July 1, 1996, the Michigan Legislature
enacted the Michigan Savings Bank Act (the "MSBA"). In several respects, the
MSBA contains provisions similar to the Michigan Banking Code of 1969. Pursuant
to the MSBA, the Bank has converted its charter from that of a federal savings
bank to that of a Michigan savings bank.
As a state-chartered savings bank, the Bank is subject to the MSBA and
the regulations of the Michigan Financial Institutions Bureau adopted
thereunder, as well as other applicable provisions of Michigan law. The Bank
derives its lending and investment powers from the MSBA, and is subject to
periodic examination and reporting requirements by the Financial Institutions
Bureau. The MSBA further regulates many of the internal operating affairs of the
Bank, including the activities of the board of directors and the noticing and
conduct of the annual shareholder meetings.
In order to maintain its qualification as a savings bank under the
MSBA, the Bank must maintain at least 50% of its total assets, as measured by
monthly averages calculated at the close of each calendar month, in at least 9
months of the immediately preceding 12 months, in certain consumer related
assets, including residential single and multi-family loans, home equity loans,
stock issued by a federal home loan bank, loans to small businesses and loans
for personal, family, household or education purposes.
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction
30
<PAGE> 31
in computing taxable income for federal income tax purposes. The amount of the
bad debt reserve deduction for "non-qualifying loans" was computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) was
computed under either the experience method or the percentage of taxable income
method (based on an annual election). Under the experience method, the bad debt
reserve deduction was an amount determined under a formula based generally upon
the bad debts actually sustained by the savings association over a period of six
years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to .12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder
31
<PAGE> 32
(including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). As of December 31, 1997, the
Bank's Excess for tax purposes totaled approximately $12.3 million.
The Corporation and its subsidiaries file consolidated federal income
tax returns on a calendar year basis using the accrual method of accounting.
Savings associations, such as AmeriBank, that file federal income tax returns as
part of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
The Corporation and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns for 1990 through
1993. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Corporation or the Bank) would not result in a deficiency which
could have a material adverse effect on the financial condition of the
Corporation and its consolidated subsidiaries.
Michigan Taxation. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings bank
or a savings and loan institution less deposits owed to the federal or Michigan
state governments, their agencies or certain other financial institutions. This
tax has been repealed effective January 1, 1998. The State of Michigan also
imposes a "Single Business Tax." The Single Business Tax is a value-added type
of tax and is for the privilege of doing business in the State of Michigan. The
major components of the Single Business Tax base are compensation, depreciation
and federal taxable income, as increased by net operating loss carry forwards,
if any, utilized in arriving at federal taxable income, and decreased by the
cost of acquisition of tangible assets during the year. The tax rate is 2.30% of
the Michigan adjusted tax base.
Delaware Taxation. As a Delaware holding company, the Corporation is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Corporation is
also subject to an annual franchise tax imposed by the State of Delaware.
COMPETITION
The Bank faces strong competition in originating loans and attracting
deposits. That competition comes from other commercial banks, other savings
institutions, credit unions, mortgage banking companies and other non-bank
financial services companies including insurance companies and investment firms.
Finance companies compete with the Bank for consumer loan business.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is
32
<PAGE> 33
principally from other savings institutions, commercial banks, credit unions,
mutual funds and insurance companies. The Bank competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges. Automated teller machine facilities are also available at most of
the Bank's 26 locations.
The Bank's six county market area has a strong base of financial
institutions and several of those competitors are much larger than AmeriBank in
terms of total deposits and number of branches. The largest commercial banks
operating in the market area are First of America, Old Kent Bank, Huntington
Bank, NBD and Michigan National Bank. Despite the presence of significant
competition, AmeriBank has demonstrated the ability to sustain positive deposit
growth rates during the past year. Growth of deposits can be attributed to a
strong local economy, customer loyalty and the local orientation of the Bank.
EMPLOYEES
At December 31, 1997, the Bank had a total of 316 employees, including
95 part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
EXECUTIVE OFFICERS OF THE CORPORATION AND THE BANK WHO ARE NOT DIRECTORS
JON W. SWETS. Mr. Swets, age 32, is Vice President and Treasurer of the
Corporation and Senior Vice President-Chief Financial Officer of the Bank. He
joined the Corporation and the Bank in these capacities in November 1996. Prior
to joining the Company and the Bank, Mr. Swets was a Senior Manager with Crowe,
Chizek and Company LLP, a large public accounting firm. Mr. Swets joined Crowe,
Chizek and Company LLP as a staff accountant in June 1987.
ITEM 2. PROPERTIES
The Corporation's operations are conducted through its main office and
25 branches (including a "drive-up" facility). At December 31, 1997, the
Corporation owned its main office and 24 of its branch offices; the remaining
branch office and the land on which it is situated were leased. As of December
31, 1997, the net book value of the Corporation's investment in premises,
equipment and leaseholds, excluding computer equipment, was approximately $13.3
million.
The Corporation maintains an on-line data base of depositor and
borrower customer information. The net book value of the data processing and
computer equipment and software utilized by the Corporation at December 31, 1997
was $1.7 million.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved as plaintiff or defendant in various legal
actions arising in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the
33
<PAGE> 34
Corporation in the proceedings, that the resolution of these proceedings should
not have a material effect on the Corporation's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The section entitled "Shareholder Information - Market" of the
attached Annual Report to Stockholders for year ended December 31, 1997 is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Selected Consolidated Financial Information"
of the attached Annual Report to Stockholders for year ended December 31, 1997
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the attached Annual Report to
Stockholders for year ended December 31, 1997 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management" of the
attached Annual Report to Stockholders for year ended December 31, 1997 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The section entitled "Consolidated Financial Statements" of the
attached Annual Report to Stockholders for year ended December 31, 1997 is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
34
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held in April 1998, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Executive Officers
Information concerning executive officers of the Corporation is set
forth under the caption "Executive Officers" contained in Part I of this Form
10-K.
Compliance with Section 16(a)
Section 16(a) of the Exchange Act requires the Corporation's directors
and executive officers, and persons who own more than 10% of a registered class
of the Corporation's equity securities, to file with the SEC reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Corporation. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish the Corporation with
copies of all Section 16(a) forms they file.
To the Corporation's knowledge, based solely on a review of the copies
of such reports furnished to the Corporation and written representations that no
other reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held in April 1998, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held in April 1998, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Shareholder
35
<PAGE> 36
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are included under Part II, Item 8
of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Statements of Balance Sheet at December 31, 1997 and
1996.
3. Consolidated Statements of Income for the Years ended December 31,
1997, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements
7. Ottawa Financial Corporation Quarterly Financial Data
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
(3) Exhibits:
See Index to Exhibits
(b) Reports on Form 8-K:
1. The Corporation filed a Current Report on Form 8-K dated
October 2, 1997, containing a press release announcing the
adjustments to its outstanding warrants as a result of the
Corporation's recently declared 10% stock dividend.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OTTAWA FINANCIAL CORPORATION
Date: March 27, 1998 By: /s/ Gordon L. Grevengoed
----------------------------- -------------------------------
Gordon L. Grevengoed, President and
and Chief Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Gordon H. Cunningham Date: March 30, 1998
-------------------------------------- --------------
Gordon H. Cunningham,
Chairman of the Board
By: /s/ Gordon L. Grevengoed Date: March 30, 1998
--------------------------------------- --------------
Gordon L. Grevengoed, President
Chief Executive Officer and Director
By: /s/ Douglas J. Iverson Date: March 30, 1998
------------------------------------------ --------------
Douglas J. Iverson, Executive Vice
President, Chief Operating Officer,
Secretary and Director
By: /s/ Ronald L. Haan Date: March 30, 1998
------------------------------------------ --------------
Ronald L. Haan, Senior Vice
President, Assistant Secretary and
Director
By: /s/ Brian W. Koop Date: March 30, 1998
------------------------------------------ --------------
Brian W. Koop, Director
<PAGE> 38
By: /s/ Leon E. Koop Date: March 30, 1998
----------------------------------------- --------------
Leon E. Koop, Director
By: /s/ Ronald J. Bieke Date: March 30, 1998
----------------------------------------- --------------
Ronald J. Bieke, Director
By: /s/ B. Patrick Donnelly, III Date: March 30, 1998
------------------------------------------ --------------
B. Patrick Donnelly, III, Director
By: /s/ Robert D. Kolk Date: March 30, 1998
------------------------------------------ --------------
Robert D. Kolk, Director
By: /s/ G.W. Haworth Date: March 30, 1998
----------------------------------------- --------------
G.W. Haworth, Director
By: /s/ Jon Swets Date: March 30, 1998
-------------------------------------------- --------------
Jon Swets, Vice President -
Finance and Treasurer (Principal
Financial and Accounting Officer)
<PAGE> 39
INDEX TO EXHIBITS
Exhibit
Number Document
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession, filed on August 11, 1995 as an exhibit to the
Registrant's Report on Form 8-K (File No. 0-24118), is
incorporated herein by reference.
3(i) Registrant's Certificate of Incorporation as currently in
effect, filed on March 18, 1994 as an exhibit to Registrant's
Registration Statement on Form S-1 (File No. 33-76600), is
incorporated herein by reference.
3(ii) Registrant's Bylaws, as amended and as currently in effect,
filed as an exhibit to the Registrant's Report on Form 10-Q
for the quarterly period ended March 31, 1997 (File No.
0-24118), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on March 18,
1994 as an exhibit to Registrant's Registration Statement on
Form S-1 (File No. 33-76600), is incorporated herein by
reference.
10.1 Employment Agreements between the Registrant's operating
subsidiary and Gordon L. Grevengoed and Douglas J. Iverson,
filed on March 18, 1994 as an exhibit to Registrant's
Registration Statement on Form S-1 (File No. 33-76600), are
incorporated herein by reference.
10.2 Employment Agreement between the Registrant's operating
subsidiary and Ronald L. Haan, filed as an exhibit to the
Registrant's Report on Form 10-K for the year ended December
31, 1995 (File No. 0-24118), is incorporated herein by
reference.
10.3 Registrant's Employee Stock Ownership Plan, filed on March 18,
1994 as an exhibit to Registrant's Registration Statement on
Form S-1 (File No. 33-76600), is incorporated herein by
reference.
10.4 Registrant's 1995 Stock Option and Incentive Plan, filed as an
exhibit to the Registrant's Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-24118), is incorporated
herein by reference.
10.5 Registrant's Recognition and Retention Plan, filed as an
exhibit to the Registrant's Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-24118), is incorporated
herein by reference.
11 Statement re: computation of per share earnings
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
(Dollars in Thousands)
EARNINGS PER COMMON SHARE
<S> <C>
Net Income available to common shareholders $ 7,527
===========
Weighted average common shares outstanding 5,150,401
===========
EARNINGS PER COMMON SHARE $1.46
=====
EARNINGS PER COMMON SHARE ASSUMING DILUTION
Net Income available to common shareholders $ 7,527
===========
Weighted average common shares outstanding 5,150,401
Add: Dilutive effects of assumed exercises of stock options and warrants 458,659
-----------
Weighted average common and dilutive potential common shares outstanding 5,609,060
===========
EARNINGS PER COMMON SHARE ASSUMING DILUTION $1.34
=====
</TABLE>
<PAGE> 1
EXHIBIT 13
OTTAWA FINANCIAL CORPORATION
1997 Report to Shareholders
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following financial data does not purport to be complete and is
qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein.
<TABLE>
<CAPTION>
December 31
1997 1996 (1) 1995 1994 1993
---------------------------------------------------------------------
(Dollars In Thousands except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 885,817 $ 848,306 $ 370,305 $ 328,461 $ 266,555
Loans receivable, net 747,423 715,551 276,457 230,818 210,779
Securities 64,616 69,864 66,926 73,577 36,554
Deposits 654,560 622,492 243,220 231,321 221,865
Federal Home Loan Bank advances 145,458 139,170 43,241 13,579 14,181
Shareholders' Equity 76,363 76,917 79,560 78,593 26,527
Selected Operations Data:
Total interest income $ 64,726 $ 54,669 $ 25,579 $ 20,799 $ 20,253
Total interest expense 37,704 30,531 11,321 9,182 9,900
--------- --------- --------- --------- ---------
Net interest income 27,022 24,138 14,258 11,617 10,353
Provision for loan losses 660 564 160 170 450
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 26,362 23,574 14,098 11,447 9,903
Service charges and other fees 3,356 3,043 2,219 1,870 1,817
Gain on sales of loans 370 140 309 110 701
Other noninterest income (loss) 420 145 (435) (121) 135
--------- --------- --------- --------- ---------
Total noninterest income 4,146 3,328 2,093 1,859 2,653
Total noninterest expense (2) 18,708 21,844 10,651 8,999 7,885
--------- --------- --------- --------- ---------
Income before federal income tax expense and
cumulative effect of change in accounting principle 11,800 5,058 5,540 4,307 4,671
Income tax expense 4,273 1,964 1,911 1,308 1,550
--------- --------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle 7,527 3,094 3,629 2,999 3,121
Cumulative effect of change in accounting principle -- -- -- -- (183)
--------- --------- --------- --------- ---------
Net income $ 7,527 $ 3,094 $ 3,629 $ 2,999 $ 2,938
========= ========= ========= ========= =========
Earnings per Common Share (3) $ 1.46 $ .56 $ .63 $ .23 NA
========= ========= ========= ========= =========
Earnings per Common Share Assuming Dilution (3) $ 1.34 $ .54 $ .63 $ .23 NA
========= ========= ========= ========= =========
Cash dividends declared per common share(3) $ .36 $ .31 $ .28 $ .06 NA
========= ========= ========= ========= =========
</TABLE>
(1) Significant variation from prior years due primarily to the
acquisition of AFSB, in February 1996 (see Note 2 of the Notes
to the Consolidated Financial Statements).
(2) Noninterest expense for 1996 includes the one-time SAIF
assessment of $3.5 million (see Note 17 of the Notes to the
Consolidated Financial Statements).
(3) Weighted average common shares outstanding for 1997, 1996,
1995 and 1994 were 5,150,401, 5,552,911, 5,746,453 and
5,745,697, respectively. Weighted average common and dilutive
potential common shares outstanding for 1997, 1996, 1995 and
1994 were 5,609,060, 5,685,567, 5,781,256 and 5,745,697,
respectively All. Share and per share information has been
retroactively adjusted to reflect the 10% stock dividend paid
on September 30, 1997, and the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share.
<PAGE> 3
<TABLE>
<CAPTION>
December 31
1997 1996 1995 1994 1993
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets .87% .41% 1.08% 1.03% 1.11%
SAIF adjusted (2) .72
Average interest rate spread during period 3.01 3.08 3.31 3.53 3.76
Net interest margin (1) 3.37 3.50 4.44 4.17 4.16
Ratio of operating expense to average total assets 2.15 3.06 3.16 3.14 2.97
SAIF adjusted (2) 2.56
Efficiency (3) 61.13 79.56 65.14 66.78 60.63
SAIF adjusted (2) 66.75
Return on equity 9.93 3.93 4.62 6.38 11.65
SAIF adjusted (2) 6.83
Quality Ratios:
Non-performing assets to total assets at end of period 0.36 0.36 0.76 0.36 0.29
Allowance for loan losses to non-performing loans 118.62 109.89 51.38 109.78 186.28
Allowance for loan losses to total loans receivable, net 0.44 0.44 0.45 0.48 0.45
Capital Ratios:
Equity to total assets at end of period 8.62 9.07 21.48 23.92 9.95
Average equity to average assets 8.73 9.09 22.62 16.15 9.50
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.07x 1.10x 1.32x 1.19x 1.10x
Number of full service offices 26 26 13 13 10
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Indicated ratios have been revised to remove the impact of the
one-time SAIF assessment of $3.5 million expensed in 1996 (see
Note 17 of the Notes to Consolidated Financial Statements).
(3) Ratio of non-interest expense to the total of net interest income
before provision for loan losses and noninterest income.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read in conjunction
with the consolidated financial statements contained herein. This discussion
provides information about the consolidated financial condition and results of
operations of Ottawa Financial Corporation ("Company") and its wholly-owned
subsidiary, AmeriBank ("Bank").
GENERAL
1997 was the first full year of performance for the Company after its
acquisition of AmeriBank, Federal Savings Bank ("AFSB") in early 1996. Through
the acquisition of AFSB, the Company attained geographic expansion, product
diversification and expertise that, as anticipated, have had a very positive
impact on financial performance. In addition, the Company has better leveraged
its capital thereby improving return on equity and enhancing shareholder value.
Return on equity further improved in 1997 as the Company continued its
capital leveraging efforts both through additional asset growth and capital
management. As intended, assets grew at a reduced pace in 1997 compared to 1996
to continue to allow organized absorption of the growth. While assets continued
to grow, the Company was successful at maintaining its capital at a consistent
level through its stock repurchase program. Net income for the year improved
significantly compared to the prior year due primarily to the asset growth and
improvements in efficiency.
The Company, through its subsidiary, AmeriBank, serves Western Michigan
through 26 retail banking offices. The principal business of the Bank consists
of attracting retail deposits from the general public and investing those funds
in various types of loans including both owner-occupied and non-owner occupied
one- to four-family residential mortgage, construction, commercial, multi-family
real estate and consumer loans.
FINANCIAL CONDITION
The Company's total assets increased to $885.8 million at December 31,
1997 from $848.3 million at the same date in 1996. Most of this growth was in
loans which was funded primarily from the growth in deposits and, to a lesser
extent, from the proceeds received from the call and maturity of securities and
the increase in Federal Home Loan Bank Advances.
Securities decreased to $57.3 million at December 31, 1997 from $62.9
million at December 31, 1996. The decrease in securities was due primarily to
run-off through call and maturity, which was used to both replenish the
securities and fund loan portfolio growth.
Net loans receivable increased to $747.4 million at December 31, 1997,
from $715.6 million at December 31, 1996. Most of this growth was in new
originations of commercial and consumer loans. The total of non-real estate
commercial loans and consumer loans increased as a percent of total loans from
16% at the end of 1996 to 20% at the end of 1997. The experience in commercial
lending gained from AFSB has been instrumental in achieving the commercial loan
growth. Furthermore, the volume of residential mortgage loans originated for
sale increased from $9.8 million for the year ended December 31, 1996 to $45.4
million for 1997, resulting from a change in the method of pricing mortgage
loans to be sold. The Company moved from rate commitments based upon a sixty day
delivery period to a thirty day delivery period to Freddie Mac, resulting in
more competitive rates being offered to customers.
While the pace of loan growth during 1997 was not as significant as
that experienced during 1996, the increase in both net loans receivable and
origination of loans for sale reflects a continued healthy loan demand in
<PAGE> 5
the Bank's market area. The Bank was well-positioned with its loan products to
capitalize on this demand. The growth was achieved while maintaining rates
consistent with competitors and maintaining credit quality standards.
Deposits increased to $654.6 million at December 31, 1997 from $622.5
million at December 31, 1996. The primary area of growth was in certificates of
deposit and, to a lesser extent, money market savings accounts, all within the
Bank's market area. Most of the certificate of deposit growth was generated
through 10 to 24 month maturity products. The terms of the Bank's money market
accounts are unique and well-suited to the needs of the customers. As such,
these products have continued to experience healthy growth.
Federal Home Loan Bank ("FHLB") advances increased to $145.5 million at
December 31, 1997 from $139.2 million at December 31, 1996. The proceeds of
these advances, as well as the internal deposit growth discussed above, were
used to fund the loan portfolio growth.
The primary change in total shareholders' equity relates to the
offsetting of net income for the twelve months ended December 31 1997, by
quarterly cash dividends declared and additional repurchases of the Company's
outstanding shares of common stock. During 1997, 436,975 shares were repurchased
at an average price of $20.21 per share, which both completed the repurchase
plan approved in December 1996 and began a new repurchase plan approved in June
1997. Management believes that stock repurchases are an important part of
capital management and will use it as a supplement to asset growth in achieving
its desired capital levels as long as it is deemed to be accretive to the
Company's financial performance and does not jeopardize safe and sound capital
levels. As such, stock repurchase activity may diminish if growth in assets
increases.
On August 28, 1997, the Company declared a 10% stock dividend, paid on
September 30, 1997, which was the first stock dividend declared by the Company.
The stock dividend was paid from the Company's treasury shares and was accounted
for at the market value of $25.00 per share on the record date. The balance of
treasury shares was reduced at cost using the average cost method. The Company
has not reduced the amount of the cash dividends as a result of the stock
dividend. All share and per share amounts have been retroactively adjusted to
reflect this stock dividend.
RESULTS OF OPERATIONS
Comparison of 1997 to 1996
Net income. Net income for 1997 was $7.5 million, compared to $3.1
million for 1996. The results of operations for 1996 include the one-time SAIF
assessment of $3.5 million relating to legislation signed into law on September
30, 1996 to recapitalize the Savings Association Insurance Fund ("SAIF"). Net
income for the year ended December 31, 1996, without the SAIF assessment, would
have been $5.4 million. On a SAIF adjusted basis, net income increased $2.1
million, or 39%, for the year ended December 31, 1997 compared to 1996. This
increase was achieved primarily through growth in net interest income and to a
lesser extent in improvements in efficiency.
Earnings per common share assuming dilution ("EPS") for 1997 was $1.34
compared to $.54 for the prior year. If the effect of the one-time SAIF
assessment was removed from earnings, EPS would have been $.95 for 1996. On a
SAIF adjusted basis, EPS increased 41% for the year ended December 31, 1997
compared to 1996. In addition to the improvement in net interest income, EPS was
positively impacted by the Company's stock repurchase activity.
In 1996 the Company introduced a measure it refers to as "cash" or
"tangible" earnings per share. Due to significant differences in methods of
accounting for business combinations, the concept of cash or tangible earnings
per share provides comparability between companies using different methods.
Amortization of goodwill and core deposit intangibles, which are non-cash
components of net income, are added back to earnings in computing cash or
tangible earnings per share. Further, Employee Stock Ownership Plan ("ESOP") and
Management Recognition Plan ("MRP") expenses are added back as these items also
do not involve actual current period cash outflow. Cash
<PAGE> 6
or tangible earnings per share also serves as an alternative measure for
determining the rate of growth in regulatory (tangible) capital. Since the
amortization of goodwill, core deposit intangibles, ESOP and MRP does not reduce
tangible capital, these items are added back to earnings in evaluating tangible
capital growth. The Company's "cash" or "tangible" earnings per share assuming
dilution under this method was $1.74 for the year ended December 31, 1997,
compared to a SAIF adjusted tangible EPS of $1.09 for 1996, showing a 60%
improvement. The calculations of cash or tangible earnings per share were
specifically formulated by the Company and may not be comparable to similarly
titled measures reported by other companies. This measure is not intended to
reflect cash flow per share.
Net income for the year ended December 31, 1997 yielded a return on
average equity ("ROE") of 9.93%, representing a 45% improvement over the SAIF
adjusted ROE achieved for the same period in 1996 of 6.83%. The increase in the
ROE is primarily attributable to the improved earnings resulting from the
positive impact of capital leveraging experienced during 1996 and 1997. The
capital leveraging was achieved mostly through growth in assets and, to a lesser
extent, through the stock repurchase activity.
Net Interest Income. The Company's net income is primarily dependent
upon net interest income. Net interest income is a function of the difference
("margin") between the average yield earned on loans and investment securities
and the average rate paid on deposits and other borrowings, as well as relative
amounts of such assets and liabilities. The interest margin is affected by
economic and competitive factors that influence interest rates, loan demand and
deposit flows.
Net interest income increased $2.9 million on a tax equivalent basis
for the year ended December 31, 1997 as compared to the same period in 1996. The
increase in net interest income is attributable to the positive impact of volume
increases caused by the AFSB acquisition and internal growth experienced during
1996 and 1997. While net interest income increased, there was a decline in the
net interest spread, from 3.08% to 3.01%, and net interest margin, from 3.50% to
3.37%, for the year ended December 31, 1997 compared to the same period in 1996,
respectively. The yield on total interest-earning assets improved primarily due
to an increase in the loan portfolio as a percent of total interest-earning
assets, as well as a general rise in the rates of interest-earning assets.
Offsetting this improvement in the yield on interest-earning assets was the
increase in the cost of interest-bearing liabilities, resulting in a decline in
the net interest spread. The cost of interest-bearing liabilities increased
primarily due to an increase in FHLB advances as a percent of total
interest-bearing liabilities and, to a lesser extent, a shift in mix from lower
costing demand deposit and savings accounts to higher costing money market
demand and savings accounts, as well as a general rise in the rates of
interest-bearing liabilities. The reduction in net interest margin was partially
the result of this spread decline, but also the result of the Company becoming
more leveraged through acquisition and internal growth. This increase in
leveraging is reflected in the ratio of average interest-earnings assets to
average interest-bearing liabilities, which declined to 1.07x for the twelve
months ended December 31, 1997 compared to 1.10x for the same period in 1996.
Management's strategy during 1998 will be to continue to grow the
Bank's loan portfolio and alter the composition to increase the Bank's
percentage of higher yielding commercial and consumer loans in relation to the
total loan portfolio. It is anticipated this shift may have a positive impact to
net interest income and the overall yield on interest-earning assets, but may
also result in additional provisions for loan losses as a result of the greater
inherent risks associated with commercial and consumer lending compared to
residential mortgage lending. Interest rate spreads on the growth likely will
tighten due to the current interest rate environment and the cost of funding
sources.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables present for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. All average balances are daily average
balances.
<PAGE> 7
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) (2) $732,927 $59,994 8.19 % $605,563 $49,036 8.10 %
Securities (2) 56,635 3,787 6.68 75,850 5,037 6.64
Other interest-earning assets 15,754 1,071 6.80 11,378 733 6.44
-------- ------- -------- -------
Total interest-earning assets (1) 805,316 64,852 8.05 692,791 54,806 7.91
Interest-Bearing Liabilities:
Demand and NOW deposits 149,909 5,823 3.89 127,574 4,518 3.54
Savings deposits 65,678 1,551 2.37 68,590 1,735 2.53
Certificate accounts 393,757 22,024 5.61 341,795 18,803 5.50
FHLB advances 140,746 8,293 5.91 94,269 5,451 5.78
Other interest-bearing
liabilities 184 13 7.07 248 24 9.68
-------- -- -------- -------
Total interest- bearing liabilities 750,274 37,704 5.04 632,476 30,531 4.83
------- -------- -------
Net interest income $27,148 $24,275
======= =======
Net interest rate spread 3.01 % 3.08 %
==== ====
Net earning assets $55,042 $60,315
======== ========
Net yield on average
interest-earning assets 3.37 % 3.50 %
==== ====
Average interest-earning
assets to average interest-
bearing liabilities 1.07 x 1.10 x
==== ====
<CAPTION>
Year Ended December 31
--------------------------------------
1995
--------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) (2) $249,742 $ 20,827 8.35 %
Securities (2) 64,320 4,259 6.56
Other interest-earning assets 6,631 493 7.43
-------- --------
Total interest-earning assets (1) 320,693 25,579 7.96
Interest-Bearing Liabilities:
Demand and NOW deposits 44,641 1,169 2.62
Savings deposits 47,451 1,165 2.46
Certificate accounts 132,349 7,705 5.82
FHLB advances 18,251 1,234 6.76
Other interest-bearing
liabilities 557 48 8.71
-------- --------
Total interest- bearing liabilities 243,249 11,321 4.65
-------- --------
Net interest income
$14,258
=======
Net interest rate spread 3.31 %
====
Net earning assets $77,444
=======
Net yield on average
interest-earning assets 4.44 %
====
Average interest-earning
assets to average interest-
bearing liabilities 1.32 x
====
</TABLE>
- -----------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
(2) Tax-exempt interest on loans and securities has been converted to a
fully-taxable equivalent basis.
<PAGE> 8
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31
1997 vs. 1996 1996 vs. 1995
-------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Total Increase Due To Total Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 10,420 $ 538 $ 10,958 $ 28,795 $ (586) $ 28,209
Securities (1,285) 35 (1,250) 766 12 778
Other interest-earning assets 296 42 338 295 (55) 240
-------- -------- -------- -------- -------- --------
Total interest-earning assets 9,431 615 10,046 29,856 (629) 29,227
Interest-bearing liabilities:
Demand and NOW deposits $ 840 $ 465 $ 1,305 $ 2,815 $ 534 $ 3,349
Savings deposits (72) (112) (184) 534 36 570
Certificate accounts 2,902 319 3,221 11,498 (400) 11,098
FHLB advances 2,737 105 2,842 4,369 (152) 4,217
Other interest-bearing liabilities (5) (6) (11) (31) 7 (24)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 6,402 771 7,173 19,185 25 19,210
-------- -------- -------- -------- -------- --------
Net interest income $ 3,029 $ (156) $ 2,873 $ 10,671 $ (604) $ 10,017
======== ======== ======== ======== ======== ========
</TABLE>
Provision for Loan Losses. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
The provision was $660,000 and $564,000 for 1997 and 1996, respectively. The
Company's ratio of non-performing assets, consisting of loans 90 days or more
delinquent and foreclosed assets, to total assets was .36% as of both December
31, 1997 and 1996. The Company's ratio of allowance for loan losses to total
loans receivable was .44% as of both December 31, 1997 and 1996. The increase in
provision was primarily for the purpose of growing the allowance for loan loss
balance to keep pace with loan growth as the credit risk profile of the
Company's loan portfolio has not changed dramatically. The Company anticipates
that it will increase its allowance for loan loss balance in future periods to
prepare for the higher risk of loss associated with management's intention to
continue to increase the commercial and consumer loan portfolios.
<PAGE> 9
The allowance is maintained by management at a level considered
adequate to cover possible loans that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates, which are subject to change over time. Although
the level of non-performing assets is considered in establishing the allowance
for loan losses balance, variations in non-performing loans have not been
meaningful based on the Company's past loss experience and, as such, have not
had a significant impact on the overall level of the allowance for loan losses.
The Company maintains its allowance for loan losses at a level which it
considered to be adequate to provide for potential losses, however, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of its allowance for loan
losses is subject to review by the Financial Institutions Bureau ("FIB") and the
Federal Deposit Insurance Corporation (the "FDIC") as part of their examination
process, which may require the establishment of additional general or specific
allowances based upon their judgment of the information available to them at the
time of their examination.
Non Interest Income. Non interest income for 1997 was $4.1 million
compared to $3.3 million for 1996. The increase is primarily attributable to an
increase in deposit account service fees. During the third quarter of 1997, fee
structures were modified to achieve more consistency between AmeriBank and AFSB.
The primary areas of change related to assessing fees on savings accounts that
fell below a minimum balance and checking accounts for which cancelled checks
were returned to customers with monthly bank statements. Due to the nature of
the fee assessments, customer behavior may change and the level of fee income
may diminish from 1997. The increase in deposit account service fees was
complimented by increases in gains on sales of mortgage loans and gains on sales
of equity securities.
Non Interest Expense. Non interest expense decreased from $21.8 million
for 1996 to $18.7 million for 1997. The decrease in non-interest expense was due
to the one-time SAIF assessment in 1996, as well as decreases in FDIC deposit
insurance, data processing and professional services, offset by an increase in
compensation and benefits.
Legislation was signed into law on September 30, 1996, to recapitalize
the Savings Association Insurance Fund, requiring the Bank to pay a one-time
special assessment of $3.5 million. The decrease in the FDIC deposit insurance
reflects the lower charge of 6.5 cents per $100 of domestic deposits in 1997
versus the 23 cents per $100 of domestic deposits in 1996. The 6.5 cent
assessment in 1997 is entirely for debt service of the Financing Corporation
(FICO), established to help pay for the costs of the 1988 recapitalization of
the industry, as the Company's rate of deposit insurance assessment was zero for
1997.
The Company underwent an electronic data processing ("EDP") conversion
in 1996. The new EDP system is more technologically advanced, thereby
positioning the Company to better meet the needs of its customers. The EDP
conversion itself required substantial outside consulting services, resulting in
approximately $400,000 of non-recurring expenses during 1996. During 1997, the
Company has experienced economies of operations reflected in lower levels of
data processing and other noninterest expenses and experienced cost savings as a
result of reduced contracted services.
The increase in compensation and benefits is due in part to a greater
number of full-time equivalent employees and an increase in ESOP expense
attributable to the higher market price of the Company's stock during 1997.
The Company's efficiency ratio, defined generally as noninterest
expense divided by the sum of net interest income and noninterest income,
decreased from a SAIF adjusted ratio of 66.75% for the year ended December 31,
1996, to 61.13% for the same period in 1997. This ratio demonstrates that the
Company's ability to generate revenues on its noninterest expense dollars has
improved.
<PAGE> 10
Income Tax Expense. Income tax expense for 1997 was $4.3 million
compared to $2.0 million for 1996. The higher federal tax expense is primarily
due to a higher level of pre-tax income and to a lesser extent, a full twelve
months of goodwill amortization, which is not deductible for tax purposes, in
1997 compared to ten and one half months of amortization in 1996 based upon the
date of the merger consummation.
Year 2000 Readiness. Management has devoted substantial effort to
analyzing and preparing for the readiness of its computer applications for the
Year 2000. A Year 2000 Action Plan has been developed by the Bank's Technology
Committee which outlines the Bank's process for preparing itself for Year 2000
issues. The more significant components of this action plan are as follows:
- Statement of purpose of action plan
- Identify areas of risk in software, internal hardware, service provider
systems, large commercial borrowers and vendor contracts
- Perform initial testing
- Establish preliminary budget based on initial testing
- Establish priority order and time-line
- Complete comprehensive testing
- Develop contingency plan
- Obtain third party review of Year 2000 readiness
Significant progress has been made during 1997 in identifying areas of
risk and initially gauging the level of risk by obtaining third party
certifications from software vendors and performing initial testing of both
hardware and software. Management feels its largest area of risk is with the
service bureau that provides data processing for the Bank's most significant
computer system applications. Management actively monitors the service bureau's
Year 2000 progress and testing. For all areas, test facilities are being
established in 1998 to accomplish the more comprehensive testing.
It is expected that the largest expenditure relative to Year 2000
readiness will be in the man-hours required to verify system compliance and
correct deficiencies. Based upon currently available information, management
presently anticipates that the costs of addressing the Year 2000 will not have a
significantly adverse impact on the Company's future financial condition and
results of operations. The costs associated with Year 2000 readiness are based
on management's best estimates. There can be no guarantee that these estimates
will be achieved and actual results could differ from those anticipated.
Specific factors that might cause differences include, but are not limited to,
the ability of other companies on which the Company's systems rely to modify or
convert their systems to be Year 2000 compliant, the ability to locate and
correct all relevant computer codes, and similar uncertainties. As testing
continues and more progress is made, management will continuously assess the
materiality of its Year 2000 costs.
Comparison of 1996 to 1995
Net income. Net income for 1996 was $3.1 million, compared to $3.6
million for 1995. The results of operations include the impact of AFSB since the
close of the acquisition on February 13, 1996. The acquisition resulted in
significant earnings growth, however, the increase was more than offset by the
one-time SAIF assessment of $3.5 million to cause the overall decrease in net
income. Net income, without the SAIF assessment, would have been $5.4 million
for 1996, an increase of $1.8 million over 1995.
Additionally, the net effect of the amortization of the purchase
accounting adjustments and goodwill that was generated in the acquisition of
AFSB had a small positive impact on the net income for the year ended December
31, 1996. The most significant purchase accounting adjustment relates to
deposits, for which an increase in value of approximately $3.9 million was
recorded. This adjustment is being amortized over approximately 4.5 years,
resulting in a positive impact to income through the year 2000. Offsetting this
positive impact to income is
<PAGE> 11
the amortization of goodwill which is being amortized using the straight-line
method over a period of 15 years. The net overall effect was an increase to
income, after taxes, during 1996 and a decrease to income, after taxes,
thereafter. The increase to net income for 1996 was $39,000.
EPS for 1996 was $.54 compared to $.63 for the prior year. If the
effect of the one-time SAIF assessment was removed from earnings, EPS would have
been $.95 for 1996. The Company's "cash" or "tangible" earnings per share was
$.75 for the year ended December 31, 1996, compared to $.77 for 1995.
Net Interest Income. Net interest income increased $10.0 million on a
tax equivalent basis for the year ended December 31, 1996 as compared to 1995,
reflecting increased income as a result of the acquisition of AFSB and internal
growth, partially offset by increased interest expense on deposits and
borrowings as a result of increases in balances and the cost associated with
such liabilities since the acquisition. The net interest margin decreased from
4.44% for the year ended December 31, 1995 to 3.50% for the year ended December
31, 1996. The reduction in net interest margin was primarily the result of the
liquidation of interest-earning securities to fund the acquisition of AFSB and
the lower net interest margin of the AFSB portfolio, which had a net interest
margin of 2.62% at December 31, 1995. The acquisition of AFSB decreased the
percentage of total average interest-earning assets to total average
interest-bearing liabilities to 110% at December 31, 1996 from 132% at December
31, 1995. This decrease also contributed to the decline in net interest margin.
Provision for Loan Losses. The provision was $564,000 and $160,000 for
1996 and 1995, respectively. The increase in provision was primarily for the
purpose of growing the allowance for loan loss balance to keep pace with loan
growth. The ratio of allowance to total loans was .44% and .45% as of December
31, 1996, and 1995, respectively. Since most of the loan portfolio growth in
1996 was in one-to-four family residential mortgages, the risk profile of the
Bank's portfolio did not change dramatically, therefore provisions to merely
keep pace with loan growth were appropriate.
Non Interest Income. Non interest income for 1996 was $3.3 million
compared to $2.1 million for 1995. The overall increase was primarily due to the
contribution to non-interest income from the acquisition of AFSB. AFSB's
non-interest income was generally lower than the Bank's due to the composition
of AFSB's deposit portfolio for generating service charge income. As such,
deposit service charges did not increase at a ratio consistent with the increase
in deposits from acquisition.
Non Interest Expense. Non interest expense increased from $10.7 million
for 1995 to $21.8 million for 1996. The increase in non-interest expense was due
to the one-time SAIF assessment, the addition of non-interest expenses of AFSB,
an increase in compensation and benefit expenses primarily related to the ESOP
and the MRP, amortization of acquisition intangibles of $1.1 million, and
general increases in other expenses. There was very little overlap of market
areas served by AFSB versus the Bank. As such, the opportunity for merger
related cost savings was limited. However, the advantage of a contiguous market
merger is the opportunity for growth in the respective markets, which the Bank
achieved during 1996.
The one-time special SAIF assessment significantly affected the
Company's efficiency ratio. This ratio for the year ended December 31, 1996 was
79.56%. After removing the impact of the SAIF assessment, the efficiency ratio
for the same period was 66.75%. Consistent with the concept of "cash earnings
per share," if the non-cash item goodwill amortization was removed from
non-interest expense, SAIF and goodwill adjusted efficiency would be 62.82% for
the year ended December 31, 1996, showing improvement over the prior year ratio
of 65.14% computed on the same basis.
Increased costs were experienced as a result of the Company's
electronic data processing ("EDP") conversion in 1996. In addition, the EDP
conversion itself required substantial outside consulting services. A portion of
the increase in professional services in 1996 from 1995 relates to the support
required in the EDP conversion. The outside consulting cost for the conversion
is a non-recurring expense.
<PAGE> 12
Income Tax Expense. Income tax expense for 1996 was $2.0 million
compared to $1.9 million for 1995. The effective tax rate for 1996 was 38.8%
compared to 34.5% for 1995. The primary reason for the increase in effective
rate was due to the amortization of goodwill, which is not deductible for tax
purposes.
ASSET/LIABILITY MANAGEMENT
The Company's balance sheet consists of investments in interest-earning
assets (primarily loans and investment securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). Such financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans which are originated and held
for sale, all of the financial instruments of the Company are for other than
trading purposes.
The Bank is subject to interest rate risk to the extent that its
interest-bearing liabilities with short and intermediate-term maturities reprice
more rapidly, or on a different basis, than its interest-earning assets.
Management works to reduce its exposure to interest rate risk. Significant
effort has been made to reduce the duration and average life of the Bank's
interest-earning assets. The Bank continues to emphasize adjustable rate
mortgages and is attempting to grow its consumer and commercial portfolios which
are shorter term in nature than the mortgage portfolio. In addition, all
long-term, fixed rate mortgages are underwritten in accordance with Federal Home
Loan Mortgage Corporation ("FHLMC") guidelines thereby allowing the flexibility
of sale of the assets into the secondary market. Currently all 30-year fixed
rate loans are sold as they are originated. With its funding sources, management
has attempted to reduce the impact of interest rate changes by emphasizing
non-interest bearing products, longer term certificates of deposit and use of
fixed rate, term advances from the FHLB.
Management measures the Bank's interest rate risk by computing
estimated changes in net interest income and the net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. The Bank's exposure to
interest rates is reviewed on a quarterly basis by senior management and the
Board of Directors. Exposure to interest rate risk is measured with the use of
interest rate sensitivity analysis to determine the change in NPV in the event
of hypothetical changes in interest rates. If estimated changes to NPV and net
interest income are not within the limits established by the Board, the Board
may direct management to adjust the Bank's asset and liability mix to bring
interest rate risk within Board approved limits.
NPV represents the market value of portfolio equity and is equal to the
market value of assets minus the market value of liabilities, with adjustments
made for off-balance sheet items. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of sudden and sustained 1% to 4%
increases and decreases in market interest rates. The Bank's Board of Directors
has adopted an interest rate risk policy which establishes maximum decreases in
NPV in the event of sudden and sustained 1% to 4% increases or decreases in
market interest rates. The table below presents the Bank's projected change in
NPV and net interest income ("NII") for the various rate shock levels at
December 31, 1997.
<PAGE> 13
<TABLE>
<CAPTION>
Net Portfolio Value Net Interest Income
------------------- --------------------
Change in
Interest Rate Board Limit $ Amount % Change $ Amount % Change
(Basis Points) % Change in NPV in NPV in NII in NII
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 -50 % $42,260 -48 % $17,370 -31 %
+300 -40 54,990 -33 19,803 -22
+200 -35 64,479 -21 21,699 -14
+100 -30 73,263 -11 23,518 -7
0 --- 81,958 --- 25,286 ---
-100 -10 90,649 11 27,101 7
-200 -15 96,085 17 28,488 13
-300 -20 106,833 30 29,521 17
-400 -40 115,250 41 29,823 18
</TABLE>
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, the Bank does not experience a significant rise
in market value for these loans because borrowers prepay at relatively high
rates. The value of the Bank's deposits and borrowings changes in approximately
the same proportion in rising or falling rate scenarios.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, expected
rates of prepayments on loans, decay rates of deposits and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of a significant interest rate increase.
In addition, the above table may not properly reflect the impact of
general interest rate movements on the Company's net interest income because the
repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Company's control.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are deposits, principal and
interest payments on loans, sale of loans, maturities of securities, securities
available for sale and borrowings, primarily FHLB advances. The Bank has
classified all of the securities held in portfolio as available for sale,
thereby increasing the Bank's flexibility with respect to such securities. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and loan prepayments are more influenced by interest rates,
general economic conditions and competition.
Liquidity management is both a daily and long-term responsibility of
management. The Bank maintains a level of liquidity consistent with management's
assessment of expected loan demand, loan sales, deposit flows, yields available
on interest-earning deposits and investment securities, and the objectives of
its
<PAGE> 14
asset/liability management program. Excess liquidity is invested generally in
interest-earning overnight deposits of the FHLB of Indianapolis. Other
investments include U.S. Treasury and federal agency securities, collateralized
mortgage obligations, mortgage and other asset-backed securities, municipal
bonds and corporate debt securities. When overnight deposits with the FHLB are
drawn to low levels to maintain liquidity, management will generally borrow
funds through the FHLB's advances program instead of selling its investment
securities.
Advances from the FHLB of Indianapolis increased only $6.3 million
during 1997 while assets grew by $37.5 million. As such, deposits were the
primary source of funds for this asset growth and there was very little pressure
on liquidity. FHLB advances totaled $145.5 million as of December 31, 1997. A
substantial portion of these advances will come due in 1998. The Bank may choose
to renew or pay off these advances depending upon its liquidity needs at that
time.
The Company also has a need for, and sources of, liquidity. Dividends
from the Bank are its primary source of liquidity, subject to certain regulatory
constraints (see Note 13 of the Notes to Consolidated Financial Statements). The
Company has modest operating costs and the dividends paid on common stock are
discretionary.
The Bank is subject to three capital to asset requirements in
accordance with OTS regulations. See Note 12 of the Notes to Consolidated
Financial Statements for information on the Bank's capital requirements.
ACCOUNTING AND REGULATORY STANDARDS
For accounting standards, see "Future Accounting Changes" in Note 1 of
the Notes to Consolidated Financial Statements.
- - - - - - - - - - - -
When used in this Annual Report, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties -
including, changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical performance and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
<PAGE> 15
OTTAWA FINANCIAL CORPORATION
Holland, Michigan
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS .................................. II-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - December 31, 1997 and 1996 ...... II-3
CONSOLIDATED STATEMENTS OF INCOME for the
years ended December 31, 1997, 1996 and 1995 ................. II-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY for the years ended December 31, 1997, 1996 and 1995 .. II-5
CONSOLIDATED STATEMENTS OF CASH FLOWS for
the years ended December 31, 1997, 1996 and 1995 ............. II-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................... II-10
</TABLE>
II-1
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ottawa Financial Corporation
Holland, Michigan
We have audited the accompanying consolidated balance sheets of Ottawa
Financial Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ottawa Financial
Corporation as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 20, 1998
II-2
<PAGE> 17
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
(Dollars in thousands except share data)
ASSETS
Cash and due from financial institutions $ 25,437 $ 20,253
Interest-bearing demand deposits in other
financial institutions 7,087 2,548
----------- -----------
Total cash and cash equivalents 32,524 22,801
Securities available for sale 57,308 62,906
Loans held for sale 1,955
Loans receivable, net of allowance for loan losses of
$3,293 in 1997 and $3,129 in 1996 747,423 715,551
Federal Home Loan Bank stock 7,308 6,958
Accrued interest receivable
Loans 3,859 3,893
Securities 669 798
Premises and equipment, net 15,030 14,534
Acquisition intangibles 14,248 15,474
Other assets 5,493 5,391
----------- -----------
Total assets $ 885,817 $ 848,306
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 654,560 $622,492
Federal funds purchased 2,000
Federal Home Loan Bank advances 145,458 139,170
Advances from borrowers for taxes or insurance 917 270
Accrued expenses and other liabilities 8,519 7,457
----------- -----------
Total liabilities 809,454 771,389
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, $.01 par value: 5,000,000 shares
authorized, none outstanding
Common stock, $.01 par value: 10,000,000 shares
authorized; 6,012,997 and 5,962,534 issued 60 60
at December 31, 1997 and 1996
Additional paid-in capital 67,381 61,049
Retained earnings, substantially restricted 23,386 32,672
Net unrealized gain (loss) on securities available for sale,
net of tax of $32 and $(41) for December 31,
1997 and 1996, respectively 62 (79)
Employee Stock Ownership Plan (ESOP)
(unallocated shares) (2,323) (2,806)
Management recognition and retention plan (MRP)
(unearned shares) (1,502) (1,977)
Less cost of common stock in treasury - 699,913 and 782,866
shares at December 31, 1997 and 1996, respectively (10,701) (12,002)
----------- -----------
Total shareholders' equity 76,363 76,917
----------- -----------
Total liabilities and shareholders' equity $ 885,817 $ 848,306
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
II-3
<PAGE> 18
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands except share data)
<S> <C> <C> <C>
Interest income
Loans $ 59,948 $ 48,991 $ 20,827
Securities 3,707 4,945 4,259
Other 1,071 733 493
--------- ---------- -----------
64,726 54,669 25,579
Interest expense
Deposits 29,398 25,056 10,038
Federal Home Loan Bank advances 8,293 5,451 1,234
Other 13 24 49
--------- ---------- -----------
37,704 30,531 11,321
--------- ---------- -----------
NET INTEREST INCOME 27,022 24,138 14,258
Provision for loan losses 660 564 160
--------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 26,362 23,574 14,098
Noninterest income
Service charges and other fees 3,039 2,755 2,047
Mortgage servicing fees 317 287 172
Gain on sale of mortgage loans 370 141 71
Gain on sale of student loans 238
Gain (loss) on securities 143 5 (398)
Other 277 140 (37)
--------- ---------- -----------
4,146 3,328 2,093
Noninterest expense
Compensation and benefits 10,356 8,945 5,439
Occupancy 1,316 1,112 688
Furniture, fixtures and equipment 1,056 781 596
Advertising 276 364 148
FDIC deposit insurance premium 324 1,235 534
SAIF assessment 3,510
State single business tax 357 338 222
Data processing 891 939 604
Deposit account ancillary 359 489 658
Professional services 379 697 191
Acquisition intangibles amortization 1,226 1,081
Other 2,168 2,353 1,571
--------- ---------- -----------
18,708 21,844 10,651
--------- ---------- -----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 11,800 5,058 5,540
Federal income tax expense 4,273 1,964 1,911
--------- ---------- -----------
NET INCOME $ 7,527 $ 3,094 $ 3,629
========= ========== ===========
Earnings per common share $ 1.46 $ .56 $ .63
====== ====== =======
Earnings per common share assuming
dilution $ 1.34 $ .54 $ .63
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
II-4
<PAGE> 19
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Additional Available
Common Paid-in Retained for Sale,
Stock Capital Earnings Net of Tax
------ ---------- -------------- --------------
(Dollars in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 $ 57 $ 54,804 $ 29,248 $ (1,715)
Net income for the year ended
December 31, 1995 3,629
49,749 shares committed to be
released under employee stock
ownership plan 194
Issuance of 201,213 shares of
common stock for management
recognition plan 2 2,664
Shares earned under management
recognition and retention plan
Acquisition of 306,000 treasury
shares, at cost (Note 13)
Cash dividend - $.28 per share (1,600)
Change in unrealized gain (loss)
on securities available for
sale, net of tax of ($654) 2,106
------ ---------- ------------ ------------
BALANCE - DECEMBER 31, 1995 59 57,662 31,277 391
</TABLE>
<TABLE>
<CAPTION>
Unallocated Total
ESOP Unearned Treasury Shareholders'
Shares MRP Shares Stock Equity
-------------- ---------- -------- -------------
(Dollars in thousands except share data)
<S> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1995 $ (3,799) $ 78,595
Net income for the year ended
December 31, 1995 3,629
49,749 shares committed to be
released under employee stock
ownership plan 497 691
Issuance of 201,213 shares of
common stock for management
recognition plan $ (2,666)
Shares earned under management
recognition and retention plan 355 355
Acquisition of 306,000 treasury
shares, at cost (Note 13) $ (4,215) (4,215)
Cash dividend - $.28 per share (1,600)
Change in unrealized gain (loss)
on securities available for
sale, net of tax of ($654) 2,106
---------- ---------- -------- ----------
BALANCE - DECEMBER 31, 1995 (3,302) (2,311) (4,215) 79,561
</TABLE>
(Continued)
II-5
<PAGE> 20
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Additional Available
Common Paid-in Retained for Sale,
Stock Capital Earnings Net of Tax
------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
125,696 shares issued upon
exercise of stock options 1 507
49,607 shares committed to be released
under employee stock ownership plan 332
Issuance of 15,000 shares of common
stock for management recognition plan 242
Shares earned under management
recognition and retention plan
Acquisition of 476,866 treasury
shares, at cost (Note 13)
Cash dividend - $.31 per share (1,699)
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $242 (470)
------ ---------- -------- --------------
BALANCE - DECEMBER 31, 1996 60 61,049 32,672 (79)
</TABLE>
<TABLE>
<CAPTION>
Unallocated Total
ESOP Unearned Treasury Shareholders'
Shares MRP Shares Stock Equity
----------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
125,696 shares issued upon
exercise of stock options 508
49,607 shares committed to be released
under employee stock ownership plan 496 828
Issuance of 15,000 shares of common
stock for management recognition plan (242)
Shares earned under management
recognition and retention plan 576 576
Acquisition of 476,866 treasury
shares, at cost (Note 13) (7,787) (7,787)
Cash dividend - $.31 per share (1,699)
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $242 (470)
----------- ---------- -------- -------------
BALANCE - DECEMBER 31, 1996 (2,806) (1,977) (12,002) 76,917
</TABLE>
(Continued)
II-6
<PAGE> 21
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Additional Available
Common Paid-in Retained for Sale,
Stock Capital Earnings Net of Tax
------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Net income for the year ended
December 31, 1997 7,527
22,367 shares issued upon
exercise of stock options 258
30,430 shares issued upon
exercise of stock warrants 502
51,907 shares committed to be released
under employee stock ownership plan 654
Issuance of 9,418 shares of common
stock for management recognition plan 249
Shares earned under management
recognition and retention plan
11,752 shares forfeited under management
recognition and retention plan (152)
Acquisition of 436,975 treasury
shares, at cost (Note 13)
Cash dividend - $.36 per share (1,858)
10% Stock dividend 4,821 (14,955)
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $73 141
------ ---------- -------- --------------
BALANCE - DECEMBER 31, 1997 $ 60 $ 67,381 $23,386 $ 62
====== ========== ======== ==============
</TABLE>
<TABLE>
<CAPTION>
Unallocated Total
ESOP Unearned Treasury Shareholders'
Shares MRP Shares Stock Equity
----------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Net income for the year ended
December 31, 1997 7,527
22,367 shares issued upon
exercise of stock options 258
30,430 shares issued upon
exercise of stock warrants 502
51,907 shares committed to be released
under employee stock ownership plan 483 1,137
Issuance of 9,418 shares of common
stock for management recognition plan (249)
Shares earned under management
recognition and retention plan 572 572
11,752 shares forfeited under management
recognition and retention plan 152
Acquisition of 436,975 treasury
shares, at cost (Note 13) (8,833) (8,833)
Cash dividend - $.36 per share (1,858)
10% Stock dividend 10,134
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $73 141
-------- ----------- -------- ----------
BALANCE - DECEMBER 31, 1997 $ (2,323) $ (1,502) $(10,701) $ 76,363
======== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
II-7
<PAGE> 22
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $7,527 $3,094 $3,629
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 1,079 844 445
Net amortization of security premiums
and discounts 314 332 (7)
Amortization of intangible assets 1,226 1,081
Provision for loan losses 660 564 160
Other than temporary loss on securities
available for sale 267
(Gain) loss on sales of securities (143) (5) 131
Loss on limited partnership investment 82 112 67
ESOP expense 1,137 828 691
MRP expense 572 576 355
Origination of loans for sale (45,354) (9,833) (4,707)
Proceeds from sales of loans originated
for sale 43,531 9,973 4,778
Gain on sales of loans (370) (140) (309)
Changes in assets and liabilities
Other assets (94) (302) (1,139)
Other liabilities 1,062 775 211
-------- ---------- --------
Net cash from operating activities 11,229 7,899 4,572
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of AFSB (23,534)
Purchases of securities available for sale (30,092) (14,016) (21,731)
Proceeds from calls and maturities of
securities available for sale 26,381 27,789 13,580
Proceeds from sales of securities
available for sale 2,324 25,371 11,509
Purchases of securities held to maturity (634)
Proceeds from calls and maturities of
securities held to maturity 5,151
Purchases of FHLB stock (350) (3,112) (130)
Principal payments on mortgage-backed
certificates 7,028 4,191 1,210
Purchases of loans (6,039) (27,027) (986)
Proceeds from sales of student loans 7,032
Loan originations and principal
payments on loans (26,255) (117,970) (51,810)
Premises and equipment expenditures, net (1,575) (2,985) (1,580)
-------- ---------- --------
Net cash used in investing activities (28,578) (131,293) (38,389)
</TABLE>
(Continued)
II-8
<PAGE> 23
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $32,068 $46,248 $11,898
Net increase (decrease) in
Federal funds purchased (2,000) 2,000
Proceeds from FHLB advances 67,000 112,500 38,000
Repayment of FHLB advances (60,712) (21,461) (8,338)
Net increase (decrease) in advances from
borrowers for taxes and insurance 647 18 (819)
Proceeds from exercise of stock options 258 508
Proceeds from exercise of stock warrants 502
Cash dividends paid (1,858) (1,699) (1,600)
Purchase of treasury shares (8,833) (7,787) (4,215)
-------- --------- -------
Net cash from financing activities 27,072 130,327 34,926
-------- --------- -------
Net change in cash and cash equivalents 9,723 6,933 1,109
Cash and cash equivalents at beginning of year 22,801 15,868 14,759
-------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $32,524 $22,801 $15,868
======== ========= =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $37,289 $29,194 $11,102
Income taxes 3,167 1,766 1,911
</TABLE>
During 1995, securities with a carrying value of $6,562 and a fair value of
$6,560 were transferred from securities held to maturity to securities
available for sale.
See accompanying notes to consolidated financial statements.
II-9
<PAGE> 24
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: Ottawa Financial
Corporation (the "Company") was organized as a thrift holding company in August
1994 to be the sole shareholder of Ottawa Savings Bank, FSB. During the third
quarter of 1996, Ottawa Savings Bank, FSB's name was changed to AmeriBank (the
"Bank"). The Bank is the sole shareholder of O.S. Services, Inc., Midwest
Investment Services and AmeriPlan Financial Services, Inc. The consolidated
financial statements include the accounts of the Company, the Bank and the
Bank's wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. The Bank's primary
services include accepting deposits and making commercial, mortgage and
installment loans at its 26 retail banking offices (including one drive-up
facility) in Ottawa, Muskegon, Kent, Oceana, Newaygo and Allegan counties in
the Western part of Michigan's lower peninsula. Substantially all of the
Company's revenue arises from lending and investment activities. The
operations of O.S. Services and Midwest Investment Services include investing
in the stock of MMLIC Life Insurance Company and participating as a limited
partner in affordable housing projects. O.S. Services and Midwest Investment
Services were merged effective December 31, 1997. The name of the combined
organization is O.S. Services, Inc., and the operations remain the same as
before the merger. AmeriPlan Financial Services was established in December
1997. Its operations consist of sales of investment products, including mutual
funds and annuities and offering discount brokerage services.
Use of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amount of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The primary estimates incorporated into the
Company's consolidated financial statements which are particularly susceptible
to change in the near term include the allowance for loan losses, the
realization of deferred tax assets, the determination and carrying value of
certain financial instruments, the determination and carrying value of impaired
loans, the determination of other-than-temporary reductions in the fair value
of securities, and the evaluation of impairment of mortgage servicing assets.
Concentration of Credit Risk: Loans are granted to, and deposits are obtained
from, customers primarily in the Western Michigan area as described above.
Substantially all loans are secured by specific items of collateral, including
residential real estate, commercial real estate and consumer assets. Other
financial instruments which potentially subject the Company to concentrations
of credit risk include deposit accounts in other financial institutions.
Consolidated Statements of Cash Flows: For purposes of the consolidated
statements of cash flows, cash equivalents include demand balances with
financial institutions and Federal funds sold for one-day periods. Cash flows
are reported net for short-term investment, loan and deposit transactions, and
short-term borrowings.
(Continued)
II-10
<PAGE> 25
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Available for Sale: Securities available for sale consist of those
securities which might be sold prior to maturity due to changes in interest
rates, prepayment risks, yield and availability of alternative investments,
liquidity needs or other factors. Securities classified as available for sale
are reported at their fair value and the related unrealized holding gain or
loss is reported, net of related income tax, as a separate component of
shareholders' equity, until realized.
Declines in the fair value of individual securities below cost, considered by
management to be other than temporary, are charged to earnings as a realized
loss.
Premiums and discounts on securities available for sale are recognized in
interest income using the level-yield method over the estimated life of the
security. Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Securities Held to Maturity: Securities for which management has the positive
intent and the Company has the ability to hold to maturity are reported at
cost, adjusted for premiums and discounts that are recognized in interest
income using the level-yield method over the period to maturity.
Loan Income: Interest on loans is accrued over the term of the loans based
upon the principal outstanding, using the interest method. Management reviews
loans delinquent 90 days or more to determine if the interest accrual should be
discontinued and the loan considered impaired. Under SFAS No. 114 as amended
by SFAS No. 118, the carrying values of impaired loans are periodically
adjusted to reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such. Other
cash payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the passage
of time are reported as adjustments to the provision for loan losses.
For loans originated for portfolio, loan fees are deferred, net of certain
direct loan origination costs. The net amount deferred is reported in the
consolidated balance sheets as a reduction of loans and is recognized as
interest income over the contractual term of the loan using the level-yield
method.
(Continued)
II-11
<PAGE> 26
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities: Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or estimated aggregate
market value. Net unrealized losses are recognized in a valuation allowance by
charges to income. Mortgage loans are sold into the secondary market at market
prices, which includes consideration for normal servicing fees. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS No. 122).
The Statement requires capitalizing the rights to service originated or
purchased mortgage loans. Prior to the adoption of SFAS No. 122, loan
servicing fees were recognized when received and the related costs were
recognized when incurred. Beginning in 1996, the total cost of mortgage loans
purchased or originated with the intent to sell is allocated between the loan
servicing right and the mortgage loan without servicing, based on their
relative fair values. The capitalized cost of loan servicing rights is
amortized in proportion to, and over the period of, estimated net future
servicing revenue. The effect of adopting this Statement was not material to
the Company's consolidated financial position or results of operations during
1996.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the underlying
serviced loans, such as loan type, term and note rate. Impairment represents
the excess of cost of an individual mortgage servicing rights stratum over its
fair value, and is recognized through a valuation allowance.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, including impaired loans discussed below, the whole
allowance is available for any loan charge-offs that occur. Loans are charged
off in whole or in part when management's estimate of the undiscounted cash
flows from the loan are less than the recorded investment in the loan, although
collection efforts may continue and future recoveries may occur.
(Continued)
II-12
<PAGE> 27
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Loans are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that all principal and
interest amounts will not be collected according to the original terms of the
loan.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and related components are depreciated
using the straight-line method with useful lives ranging from 10 to 40 years
and furniture and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years. Maintenance and repairs are charged
to expense and improvements are capitalized. The cost and accumulated
depreciation applicable to assets retired or otherwise disposed of are
eliminated from the accounts and the gain or loss on disposition is included in
noninterest income or expense. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Real Estate Owned: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. Revenue and
expenses from operations of real estate owned is included in other noninterest
expense.
(Continued)
II-13
<PAGE> 28
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquisition Intangibles: Goodwill is the excess of purchase price over
identified net assets in business acquisitions. Goodwill is expensed on the
straight-line method over 15 years. Identified intangibles represent the value
of depositor relationships purchased and is expensed on the straight-line
method over 15 years. Goodwill and identified intangibles are assessed for
impairment based on estimated undiscounted cash flows, and written down if
necessary.
Income Taxes: Income tax expense is based on the amount of taxes due on the
tax return plus the change in deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, using enacted tax rates, adjusted for
allowances made for uncertainty regarding the realization of net tax assets.
Retirement Plans: The Company sponsors noncontributory defined benefit pension
and defined contribution profit sharing plans. The plans cover all employees
who have met certain age and service requirements. Benefits from the defined
benefit pension plan are based on years of service and the employee's
compensation. The funding policy for the defined benefit pension plan is to
contribute the minimum funding requirement calculated by consulting actuaries.
Profit sharing plan contributions are charged to expense annually.
Employee Stock Ownership Plan: The Employee Stock Ownership Plan (ESOP) is
accounted for in accordance with AICPA Statement of Position 93-6. The cost of
shares issued to the ESOP but not yet allocated to participants are presented
in the consolidated balance sheet as a reduction of shareholders' equity.
Compensation expense is recorded based on the market price of the shares as
they are committed to be released for allocation to participant accounts. The
difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to paid in capital. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are reflected as a reduction of debt and
accrued interest.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered
outstanding.
Preferred Stock: The Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Company that the Board does not approve, it
might be possible for the Board to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. The Board of Directors has no present plans for the
issuance of any preferred stock.
(Continued)
II-14
<PAGE> 29
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Earnings per common share and Earnings per common share
assuming dilution were computed under the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which was adopted
retroactively beginning the fourth quarter of 1997. All prior amounts have
been restated to be comparable. Amounts reported as Earnings per Common Share
reflect the earnings available to common shareholders for the year divided by
the weighted average number of common shares outstanding during the year.
Common shares outstanding includes issued shares less shares held in the
treasury and unallocated shares held by the ESOP. Earnings per Common Share
Assuming Dilution includes the shares that would be outstanding assuming
exercise of dilutive stock options and warrants. All share and per share
information has been retroactively adjusted to reflect the 10% stock dividend
paid on September 30, 1997.
Future Accounting Changes: New accounting standards have been issued which
will require future reporting of comprehensive income (net income plus changes
in holding gain and losses on available for sale securities) and may require
redetermination of industry segment financial information.
Reclassifications: Certain amounts on the 1996 and 1995 consolidated financial
statements have been reclassified to conform with the 1997 presentation.
(Continued)
II-15
<PAGE> 30
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION
On February 13, 1996, the Company completed the acquisition of AmeriBank
Federal Savings Bank ("AFSB"), a federal savings bank headquartered in
Muskegon, Michigan. Under the terms of this transaction, the Company acquired
all of the outstanding stock of AFSB in exchange for approximately $30.4
million in cash and warrants to acquire 623,200 shares of Company stock at
$15.91 per share. The value of the warrants was determined to be approximately
$555,000. Further, options to acquire AFSB stock were converted to options to
acquire Company stock. The value of these options for purposes of determining
the total cost to the Company for the merger transaction was approximately $1.8
million. Accordingly, the total cost of the transaction considering cash,
warrants, and converted options was approximately $32.7 million.
The acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the estimated fair values at the date
of acquisition. The excess of the purchase price over the fair values of the
net assets acquired was approximately $14.1 million and has been recorded as
goodwill, which is being amortized on a straight-line basis over 15 years. The
purchase accounting adjustments are being amortized under various methods and
over the lives of the corresponding assets and liabilities.
In conjunction with the acquisition, the fair values of significant assets and
liabilities assumed were as follows, stated in thousands of dollars:
<TABLE>
<S> <C>
Cash acquired net of cash paid for acquisition $ (23,534)
Securities 42,629
Loans 294,699
Premises and equipment 6,756
Acquisition intangibles 16,555
Deposits (333,024)
Other borrowings (4,890)
</TABLE>
The consolidated statements of income reflect the operating results of AFSB
since the effective date of the acquisition. The following table presents
unaudited pro forma information as if the acquisition of AFSB had occurred at
the beginning of both 1996 and 1995. The pro forma information includes
adjustments for lost interest on funds paid to consummate the acquisition, the
amortization of intangibles arising from the transaction, the elimination of
acquisition related expenses, and the related income tax effects. The pro
forma financial information is not necessarily indicative of the results of
operations as they would have been had the transactions been effected on the
assumed dates.
(Continued)
II-16
<PAGE> 31
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACQUISITION (Continued)
<TABLE>
<CAPTION>
1996 1995
---- ----
(Unaudited, Dollars in thousands except share data)
<S> <C> <C>
Interest income $ 57,609 $ 48,444
Interest expense 32,332 25,624
------------- -------------
NET INTEREST INCOME 25,277 22,820
Provision for loan losses 700 460
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,577 22,360
Noninterest income 3,408 3,015
Noninterest expense 22,782 18,312
------------- -------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 5,203 7,063
Federal income tax expense 2,050 2,664
------------- -------------
NET INCOME $ 3,153 $ 4,399
============= =============
Pro forma earnings per common share $.57 $.70
==== ====
Pro forma earnings per common share assuming dilution .55 .69
==== ====
</TABLE>
In connection with the acquisition, the Company entered into an employment
agreement with one of its officers. For more information regarding the
employment agreement, see Note 12. Further, AFSB options rolled over into
163,402 options to acquire Company stock at a price equivalent to the original
AFSB exercise price, additional options to purchase 45,635 shares of common
stock were awarded and an additional 16,500 shares of common stock were awarded
under the Management Recognition Plan. For more discussion regarding the stock
options and awards, see Note 15.
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividend paid on September 30, 1997.
(Continued)
II-17
<PAGE> 32
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES
The amortized cost and fair values of securities available for sale at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997
- ----
Debt securities
Obligations of U.S. Government
corporations and agencies $ 24,999 $ 65 $ 57 $ 25,007
Municipal obligations 1,846 12 2 1,856
Corporate 2,000 10 2,010
Asset-backed 28,369 169 103 28,435
--------- ----------- ----------- ---------
$ 57,214 $ 256 $ 162 $ 57,308
========= =========== =========== =========
</TABLE>
(Continued)
II-18
<PAGE> 33
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1996
- ----
Equity securities $ 167 $ 129 $ 296
Debt securities
Obligations of U.S. Government
corporations and agencies 16,002 39 $ 81 15,960
Municipal obligations 4,666 43 2 4,707
Corporate 11,354 22 23 11,353
Asset-backed 30,837 83 330 30,590
--------- ----------- ----------- -------
62,859 187 436 62,610
--------- ----------- ----------- -------
$ 63,026 $ 316 $ 436 $62,906
========= =========== =========== =======
</TABLE>
The amortized cost and fair value of securities available for sale at December
31, 1997, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
------------------------
Amortized Fair
Cost Value
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 6,190 $ 6,164
Due after one year through five years 17,547 17,617
Due after five through ten years 5,108 5,092
----------- -----------
28,845 28,873
Asset-backed debt securities 28,369 28,435
----------- -----------
$ 57,214 $ 57,308
=========== ===========
</TABLE>
Because of their variable payments, asset-backed securities are not reported by
a specific maturity grouping.
Proceeds from sales of securities available for sale were $2,324,000 in 1997.
Losses of $11,000 and gains of $154,000 were realized on these sales. Proceeds
from sales of securities available for sale were $25,371,000 in 1996. Losses
of $21,000 and gains of $26,000 were realized on these sales. Proceeds from
sales of securities available for sale were $11,509,000 in 1995. Losses of
$137,000 and gains of $6,000 were realized on these sales.
(Continued)
II-19
<PAGE> 34
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SECURITIES (Continued)
A charge of $267,000 was recorded in 1995 to recognize other-than-temporary
losses on investments in certain mutual funds which held asset-backed
securities. These funds were classified as available for sale.
In accordance with the FASB Special Report, A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities, securities held to maturity with a carrying value of $6,562,000,
fair value of $6,560,000, unrealized gain of $13,000 and unrealized loss of
$14,000 were transferred to the available for sale classification on November
30, 1995. The transfer increased shareholders' equity by $1,000, which is net
of the related deferred tax asset of $584. The reclassification was made to
provide greater flexibility in managing liquidity and interest rate risk.
NOTE 4 - LOANS
<TABLE>
<CAPTION>
Loans are classified as follows at December 31:
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 483,502 $ 516,935
Secured by other properties 73,810 77,008
Construction loans 71,145 33,823
--------- ----------
628,457 627,766
Less
Undisbursed portion of construction loans (25,787) (22,956)
Deferred fees and discounts (854) (1,238)
--------- ----------
601,816 603,572
Commercial loans
Principal balances 37,322 14,996
Consumer and other loans
Principal balances
Student loans 21 103
Home equity and second mortgage 55,960 49,396
Other 55,597 50,613
--------- ----------
111,578 100,112
--------- ----------
750,716 718,680
Allowance for loan losses (3,293) (3,129)
--------- ----------
$ 747,423 $ 715,551
========= ==========
</TABLE>
(Continued)
II-20
<PAGE> 35
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance - beginning of year $ 3,129 $ 1,251 $ 1,118
Acquired balance 1,358
Provision 660 564 160
Recoveries 119 90 1
Loans charged-off (615) (134) (28)
----------- ----------- --------
Balance - end of year $ 3,293 $ 3,129 $ 1,251
=========== =========== ========
</TABLE>
Information regarding impaired loans is as follows for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average investment in impaired loans $ 1,354 $ 1,612 $ 415
Interest income recognized on impaired loans
including interest income recognized on cash basis 104 46 35
Interest income recognized on impaired loans on cash basis 4 5 --
</TABLE>
Information regarding impaired loans at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance of impaired loans $ 1,942 $ 1,173
Less portion for which no allowance for
loan losses is allocated (490) (492)
------------ ----------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 1,452 $ 681
============ ==========
Portion of allowance for loan losses allocated
to the impaired loan balance $ 346 $ 185
</TABLE>
(Continued)
II-21
<PAGE> 36
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SECONDARY MORTGAGE MARKET ACTIVITIES
The following summarizes the Company's secondary mortgage market activities:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans originated for resale $ 45,354 $ 9,833 $ 4,707
Proceeds from sales of loans
originated for resale 43,531 9,973 4,778
Gain on sales of mortgage loans 370 140 71
Mortgage loans serviced for others,
principally the Federal Home Loan
Mortgage Corporation 130,431 102,685 54,000
Custodial escrow balances maintained
in connection with the foregoing loan
servicing 238 230 480
Mortgage servicing fees 317 287 172
</TABLE>
The carrying value of mortgage servicing rights, which approximates fair value,
was $650,000 at December 31, 1997.
Following is an analysis of the activity, in thousands, for mortgage servicing
rights for 1997 and 1996:
<TABLE>
<S> <C>
Balance at January 1, 1996 $ 0
Additions (acquired and originated) 489
Amortization (32)
---------------
Balance at December 31, 1996 $ 457
---------------
Additions 237
Amortization (44)
---------------
Balance at December 31, 1997 $ 650
===============
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Land $ 3,675 $ 3,656
Buildings and improvements 11,336 10,210
Furniture and equipment 6,150 6,152
-------- -----------
21,161 20,018
Accumulated depreciation (6,131) (5,484)
-------- -----------
$ 15,030 $ 14,534
======== ===========
</TABLE>
(Continued)
II-22
<PAGE> 37
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Noninterest-bearing $ 28,431 $ 25,487
NOW accounts and MMDAs 160,296 154,711
Passbook and statement savings 60,143 64,987
Certificates of deposit 405,690 377,307
--------------- ---------
$ 654,560 $ 622,492
=============== =========
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit, in
thousands, are as follows:
<TABLE>
<S> <C>
1998 $ 250,574
1999 114,024
2000 29,262
2001 3,798
2002 and thereafter 8,032
--------------------
$ 405,690
====================
</TABLE>
The aggregate amount of demand, time and certificates of deposit with balances
of $100,000 or more was approximately $78,138,000 and $71,956,000 at December
31, 1997 and 1996, respectively.
NOTE 9 - BORROWINGS
Advances from the Federal Home Loan Bank of Indianapolis, collateralized by
mortgage loans under a blanket collateral agreement and Federal Home Loan Bank
stock, consist of the following at December 31:
<TABLE>
<CAPTION>
Advance Range of Range of
Principal Terms Amount Maturities Interest Rates
--------------- ------- ---------- --------------
(Dollars in thousands)
1997
-----
<S> <C> <C> <C>
Single-maturity fixed rate advances $ 96,500 February 1998 to 4.97% to 7.30%
December 2007
Putable advances 18,000 May 2000 to 5.55% to 5.90%
December 2002
Short-term variable rate advances 25,000 March 1998 to 5.72% to 5.88%
July 1998
Amortizable mortgage advances 5,958 June 1999 to 6.82% to 7.16%
------------------ May 2000
$ 145,458
==================
<CAPTION>
1996
-----
<S> <C> <C> <C>
Single-maturity fixed rate advances $ 81,500 December 1997 to 4.97% to 7.30%
August 2000
Short-term variable rate advances 51,000 January 1997 to 5.32% to 5.56%
November 1997
Amortizable mortgage advances 6,670 June 1999 to 6.82% to 7.16%
May 2000
------------------
$ 139,170
==================
</TABLE>
(Continued)
II-23
<PAGE> 38
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWINGS (Continued)
Maturities of advances outstanding, in thousands, at December 31, 1997 are as
follows for the next five years:
<TABLE>
<S> <C>
1998 $ 70,500
1999 33,656
2000 19,302
2001 0
2002 17,000
2003 and thereafter 5,000
----------
$ 145,458
==========
</TABLE>
Through February 20, 1998, an additional $16 million was borrowed from the
FHLB. Certain of the advances are subject to prepayment penalties according to
the provisions and conditions of the credit policy of the Federal Home Loan
Bank.
At December 31, 1997, the Company also had an unused line of credit with a
major bank totaling $15 million.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a 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 consist of standby letters of credit, commitments
to make loans and fund loans in process. The Company's exposure to credit loss
in the event of nonperformance by the other party to these financial
instruments is represented by the contractual amount of these instruments. The
Company follows the same credit policy to make such commitments as is followed
for those loans recorded in the financial statements.
The contract amounts of these financial instruments are as follows at December
31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk
Commitments to make loans $23,844 $12,540
Unused consumer lines of credit 33,729 33,748
Unused commercial lines of credit 9,930 7,551
Loans in process 25,787 24,886
Letters of credit 5,110 1,056
</TABLE>
Since certain commitments to make loans and fund loans in process expire
without being used, the amount does not necessarily represent future cash
commitments. Commitment periods are generally for 30 to 120 days.
Approximately 43% and 69% of commitments to make loans and to fund loans in
process were made at fixed rates as of December 31, 1997 and 1996,
respectively. Rate ranges for these fixed rate commitments were 6.00% to 10.5%
and 6.125% to 10.5% as of December 31, 1997 and 1996, respectively. Lines of
credit are issued at variable market rates. No losses are anticipated as a
result of these transactions.
(Continued)
II-24
<PAGE> 39
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with three of its officers.
Under the terms of those agreements, certain events leading to separation from
the Company could result in cash payments aggregating approximately $1,958,000.
The Company and the Bank periodically become defendants in certain claims and
legal actions arising in the ordinary course of business. Currently, there are
no matters which are expected to have a material adverse effect on the
consolidated financial position of the Company.
NOTE 12 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS
Effective July 25, 1997, AmeriBank, the Company's wholly-owned subsidiary,
completed its conversion to a Michigan chartered savings bank. As a state
chartered savings bank, AmeriBank's primary regulators are the Financial
Institutions Bureau of Michigan and the Federal Deposit Insurance Corporation.
The Bank is subject to regulatory capital requirements administered by these
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments
by regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to Risk-
Weighted Assets
------------------ Tier 1 Capital
Total Tier 1 to Average Assets
-------- -------- -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
(Continued)
II-25
<PAGE> 40
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL
REQUIREMENTS (Continued)
As a result of the Bank's charter change, the 1997 and 1996 regulatory capital
levels are based upon the Federal Deposit Insurance Corporation and Office of
Thrift Supervision guidelines, respectively. At year end, the Bank's actual
capital levels (in millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk weighted assets) $62.2 11.3% $43.9 8.0% $54.8 10.0%
Tier 1 capital (to risk weighted assets) 58.9 10.7 21.9 4.0 32.9 6.0
Tier 1 capital (to average total assets) 58.9 6.8 34.5 4.0 43.4 5.0
1996
- ----
Total capital (to risk weighted assets) $54.3 10.4% $41.8 8.0% $52.3 10.0%
Tier 1 capital (to risk weighted assets) 51.2 9.8 20.9 4.0 31.4 6.0
Tier 1 capital (to adjusted total assets) 51.2 6.2 33.2 4.0 41.5 5.0
Tangible capital (to adjusted
total assets) 51.2 6.2 12.5 1.5 N/A
</TABLE>
The Bank at year-end 1997 and 1996 was categorized as well capitalized.
During 1995, the Bank made a capital distribution to the Company in the amount
of $15,000,000. This distribution was made primarily to allow the Company to
fund the acquisition discussed in Note 2 and stock repurchase transactions
discussed in Note 14. During 1996 and 1997, the Bank made capital
distributions to the Company in the amount of $2,449,000 and $4,000,000,
respectively. These distributions were made primarily to allow the Company to
pay dividends and fund the stock repurchase transactions discussed in Note 13.
The distributions were within the guidelines described above.
At the time of conversion to a stock association, a liquidation account of
$26,527,000 was established which is equal to the Bank's total net worth as of
the date of the latest audited balance sheet appearing in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Bank after
the conversion. The liquidation account is to be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases do not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
(Continued)
II-26
<PAGE> 41
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK REPURCHASE PROGRAMS
During 1995, the Company received regulatory approval to repurchase up to
861,153 shares of its common stock. During 1996 and 1995, 524,553 and 336,600
shares were repurchased at an average price of $14.85 and $12.52, respectively.
In 1996 and 1997, the Company received regulatory approval to repurchase up to
284,860 and 270,570 shares, respectively, of its common stock. Through
December 31, 1996, no shares were repurchased under these approvals. During
1997, 436,975 shares were repurchased at an average price of $20.21. The
repurchase approval expires on June 12, 1998. Subsequent to December 31, 1997,
and through February 20, 1998, the Company repurchased 64,000 shares at an
average price of $30.24.
Repurchased shares are treated as treasury shares and are available for general
corporate purposes, including issuance in connection with stock based
compensation and warrant plans.
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividend paid on September 30, 1997.
NOTE 14 - STOCK WARRANT PLAN
In connection with the acquisition of AFSB on February 13, 1996, the Company
issued 566,546 warrants to the former AFSB shareholders. Prior to the 10%
stock dividend paid on September 30, 1997, each warrant entitled the holder to
purchase one share of the Company's common stock at an exercise price of
$17.50. Effective September 30, 1997, each warrant allows the holder to
purchase 1.1 shares of common stock at a price of $15.91 per share reflecting a
proportionate adjustment as a result of the 10% stock dividend. All warrants
were exercisable immediately upon issue and expire on February 13, 1999.
No warrants were exercised during 1996. During 1997, 31,555 shares of the
Company's common stock were issued upon the exercise of 28,687 warrants. At
December 31, 1997, 537,859 warrants were exercisable.
NOTE 15 - STOCK-BASED COMPENSATION PLANS
As part of the conversion from a federally chartered mutual savings bank to a
federally chartered stock savings bank, an employee stock ownership plan
("ESOP") was established for the benefit of substantially all employees. The
ESOP borrowed $4,222,050 from the Company and used those funds to acquire
464,426 shares of the Company's stock at $9.09 per share. Participants become
fully vested in allocated shares after five years of credited service and may
receive their distribution in the form of cash or stock.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest payments made by the ESOP on the loan. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Company's discretionary contributions to the ESOP and earnings
on ESOP assets. Principal payments are scheduled to occur in even quarterly
amounts over a ten-year period. However, in the event contributions exceed the
minimum debt service requirements, additional principal payments will be made.
For purposes of the following disclosure, all share and per share information
has been retroactively adjusted to reflect the 10% stock dividend paid on
September 30, 1997. During 1997, 1996 and 1995, 51,907, 54,568 and 54,724
shares of stock with a fair value of $21.90, $15.17 and $12.63 per share were
committed to be released, resulting in ESOP compensation expense of $1,137,000,
$828,000 and $691,000, respectively. Shares held by the ESOP at December 31
are as follows:
(Continued)
II-27
<PAGE> 42
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Allocated shares 207,641 155,734 101,166
Unallocated shares 256,785 308,692 363,260
------- ----------- -----------
Total ESOP shares 464,426 464,426 464,426
======= =========== ===========
Fair value of unallocated shares $8,731 $4,717 $5,160
======= =========== ===========
</TABLE>
(Continued)
II-28
<PAGE> 43
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK-BASED COMPENSATION PLANS (Continued)
A stock option and incentive plan ("SOP") and management recognition plan
("MRP") were authorized by the shareholders at the April 25, 1995, annual
meeting. The MRP is a restricted stock award plan. The SOP and MRP are
administered by a Committee of Directors of the Company. This Committee
selects recipients and terms of awards pursuant to the Plan. Total shares made
available under the SOP and MRP are 922,405 and 247,308, respectively, as
adjusted for the 10% stock dividend.
MRP awards vest in five equal annual installments, subject to the continuous
employment of the recipients as defined under such plans. SOP options vest in
five equal annual installments and expire ten years from the date of grant. No
compensation expense is being recognized in connection with the grant of the
options for which the exercise prices equal the Company's stock price at the
dates of grant. Compensation expense for the MRP is based upon market price at
the date of grant and is recognized on a prorata basis over the vesting period
of the awards. Compensation cost charged against income for the MRP was
$572,000, $576,000 and $355,000 for 1997, 1996 and 1995, respectively. The
unamortized unearned compensation value of the MRP is shown as a reduction to
shareholders' equity in the accompanying consolidated balance sheets.
Statement of Financial Accounting Standards No. 123, which became effective for
1996, requires pro forma disclosures for companies that do not adopt its fair
value accounting method for stock-based employee compensation. Accordingly,
the following pro forma information presents net income, earnings per common
share and earnings per common share assuming dilution had the fair value method
been used to measure compensation cost for the SOP. In future years, the pro
forma effect of not applying this standard is expected to increase as
additional options are granted. The compensation cost charged against income
for the MRP is the same as if the provisions of FAS No. 123 had been applied.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands except share data)
<S> <C> <C> <C>
Net income as reported $7,527 $3,094 $3,629
Pro forma net income 7,150 2,783 3,441
Earnings per common share as reported 1.46 .56 .63
Pro forma earnings per common share 1.39 .50 .59
Earning per common share assuming dilution as reported 1.34 .54 .63
Pro forma earnings per common share assuming dilution 1.29 .50 .59
</TABLE>
The fair values of SOP options granted during 1997, 1996, and 1995 were
estimated using the following weighted-average assumptions.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.27% 5.78% 7.01%
Expected life 10 Years 10 Years 10 Years
Expected volatility of stock price 6.00% 4.00% 4.00%
Expected dividends 1.97% 2.23% 2.43%
</TABLE>
(Continued)
II-29
<PAGE> 44
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK-BASED COMPENSATION PLANS (Continued)
Information pursuant to the SOP at December 31 is as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Range of Average
Number Average Exercise Fair Value
of Options Exercise Price Price of Grants
---------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of 1995
Granted 502,158 $ 11.99 $3.45
-------
Outstanding, end of 1995 502,158 11.99
Granted 113,835 $ 14.74 $3.50
Conversion of AFSB options 163,403 3.93
Exercised (138,266) 3.71
Forfeited (3,751) 11.99
---------
Outstanding, end of 1996 637,379 $ 12.27 $4.37- $14.89
Granted 82,585 20.54 $6.01
Exercised (24,032) 10.74
Forfeited (25,152) 12.37
--------
Outstanding, end of 1997 670,780 $ 13.28 $4.37-$29.13
</TABLE>
SOP options exercisable at year-end are as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Options Price
------------- ----------
<S> <C> <C>
1996 122,164 $10.89
1997 221,289 11.51
</TABLE>
No options were vested at December 31, 1995.
At year-end 1997, the weighted average remaining life of options outstanding
was 7.91 years.
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividend paid on September 30, 1997.
(Continued)
II-30
<PAGE> 45
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PENSION PLANS
The Company sponsors two noncontributory defined benefit pension plans, one for
the Bank and one for AFSB, covering substantially all employees.
The following sets forth the funded status and amounts recognized in the
consolidated financial statements at December 31, 1995 for the Bank plan and
December 31, 1996 and 1997 for the Bank plan and the AFSB plan combined
(subsequent to the acquisition discussed in Note 2). The information reflects
the curtailment of the Bank plan on January 1, 1994 and the AFSB plan on
December 31, 1995, which had no material effect on the Company's results of
operations.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Actuarial present value of benefit obligations
Accumulated benefit obligation $(3,947) $(4,077) $(1,318)
======== ======= =======
Projected benefit obligation for service
rendered to date $(3,947) $(4,077) $(1,318)
Plan assets at fair value 5,923 5,467 1,355
-------- ------- -------
Excess of plan assets over projected
benefit obligation 1,976 1,390 37
Unrecognized net (gain) loss (405) 48 119
-------- ------- -------
Prepaid pension asset $ 1,571 $1,438 $ 156
======== ======= =======
Net pension cost included in operations, including
the effects of curtailment, consisted of the
following components
Interest cost on projected benefit obligation $ 280 $ 274 $ 89
Actual return on plan assets (878) (663) (93)
Net amortization and deferral 466 270 (12)
-------- ------- -------
Net pension income $ (132) $ (119) $ (16)
======== ======= =======
</TABLE>
(Continued)
II-31
<PAGE> 46
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PENSION PLANS (Continued)
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.00% for all years presented.
The expected long-term rate of return on assets was 8.25% for 1997 and 1996 and
8.00% for 1995. As a result of the plan curtailments, all accumulated benefits
under the plans are vested and no further benefits arising from service to the
Bank will accrue.
The plan assets of the Bank's plan are invested in a group annuity fund at a
major life insurance company. The plan assets of AFSB's plan are invested in
U.S. Government and corporate bonds and listed stocks.
The Company maintains a 401(k) plan covering substantially all employees.
Employees who are 21 years and older and who have completed one year of service
are eligible. Employees may elect to contribute to the plan from 1% to 15% of
their salary subject to a statutory maximum amount. Prior to establishing the
ESOP, the Company paid a 25% matching contribution on employee contributions
that did not exceed 4% of their compensation. Employees become 100% vested in
the Company's matching contribution after five years of service.
(Continued)
II-32
<PAGE> 47
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SAIF ASSESSMENT
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund (SAIF), requiring the Bank to pay a one-time
special assessment of $3,510,000. This amount is reflected in noninterest
expense in the 1996 consolidated statement of income.
NOTE 18 - FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense $ 3,961 $ 1,674 $ 1,837
Deferred tax expense (benefit) 312 290 74
------------ ------------- ---------
$ 4,273 $ 1,964 $ 1,911
============ ============= =========
</TABLE>
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
==== ==== ====
Tax expense at statutory rate $ 4,012 $ 1,720 $ 1,884
Low-income housing credit (239) (150) (150)
ESOP 227 113 66
Tax-exempt interest (84) (63)
Goodwill amortization 319 279
Change in deferred tax asset
valuation allowance (60) 186
Other 98 65 (75)
---------- ---------- -----------
$4,273 $1,964 $1,911
========== ========== ===========
</TABLE>
(Continued)
II-33
<PAGE> 48
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FEDERAL INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>>
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 163 $ 160
Management recognition plan restricted stock 89 91
ESOP 42 25
Capital loss carryforward 126 186
Unrealized loss on available for sale securities 41
Accrued expenses 22 59
Allowance for loan losses 59 8
Nonaccrual loan interest 66 20
Other 64 43
----------- -----------
631 633
Deferred tax liabilities
Depreciation (578) (552)
Pension (394) (427)
Purchase accounting adjustment (692) (380)
FHLB stock dividends (68) (68)
Mortgage servicing rights (86) (8)
Unrealized gain on available for sale securities (32)
Other (76) (48)
----------- -----------
(1,926) (1,483)
Valuation allowance for deferred tax assets (126) (186)
----------- -----------
Net deferred tax liability $ (1,421) $ (1,036)
=========== ===========
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits relating to
such assets will not be realized. Management established a valuation allowance
for the benefits associated with the losses on mutual fund securities at
December 31, 1996, since such losses were capital in nature and could only be
realized through offsetting capital gains. Sources of capital gains were not
available at either December 31, 1997 or 1996.
During 1997, new tax law was established regarding thrift bad debt reserves.
Under the new rules, recapture of a portion of the tax bad debt reserve is
required. Beginning with the 1998 tax year, the Company will include an
additional $520,000 per year for six years in its taxable income. These new
rules had no impact on the consolidated financial statements as accounting
provisions have required recording deferred taxes for the amounts to be
recaptured.
Retained earnings at December 31, 1997 and 1996 includes approximately $8.8
million for which no federal income tax liability has been recorded. This
amount represents an allocation of income to bad debt deductions for tax
purposes alone. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments from carryback of net operating losses would
create income for tax purposes only, which would be subject to current tax.
The unrecorded deferred tax liability on the above amount at December 31, 1997
and 1996 was approximately $3.0 million.
(Continued)
II-34
<PAGE> 49
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the Earnings per common
share and Earnings per common share assuming dilution is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--- ----- ----
<S> <C> <C> <C>
(Dollars in thousands except share data)
EARNINGS PER COMMON SHARE
Net Income available to
common shareholders $7,527 $3,094 $3,629
====== ====== ======
Weighted average common
shares outstanding 5,150,401 5,552,911 5,746,453
========= ========= =========
EARNINGS PER COMMON SHARE $1.46 $.56 $.63
===== ===== ====
EARNINGS PER COMMON SHARE
ASSUMING DILUTION
Net Income available to
common shareholders $7,527 $3,094 $3,629
====== ====== ======
Weighted average common
shares outstanding 5,150,401 5,552,911 5,746,453
Add: Dilutive effects of assumed
exercises of stock options and
warrants 458,659 132,656 34,803
------- ------- ------
Weighted average common and
dilutive potential common shares
outstanding 5,609,060 5,685,567 5,781,256
========= ========= =========
EARNINGS PER COMMON SHARE
ASSUMING DILUTION $ 1.34 $ .54 $ .63
========= ====== =======
</TABLE>
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividend paid on September 30, 1997.
(Continued)
II-35
<PAGE> 50
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and cash equivalents
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values for securities are based on quoted market prices or dealer quotes.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments.
Federal Home Loan Bank stock
The carrying amount of this stock is a reasonable estimate of fair value.
Loans
The fair value of fixed and variable rate loans is principally estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. Prepayment speeds are assumed in projecting future cash
flows based upon the current interest rate environment and recent actual
prepayment history. The carrying value of the allowance for loan losses is a
reasonable estimate of fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
Accrued interest receivable and payable
For these items, the carrying amount is a reasonable estimate of fair value.
Federal Home Loan Bank advances
The fair values for these advances are determined by discounting cash flows
using rates currently offered for advances of similar remaining maturities.
(Continued)
II-36
<PAGE> 51
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Federal Funds purchased
For these short term instruments, the carrying amount is a reasonable estimate
of fair value.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
commitments was immaterial at the reporting dates presented.
The estimated fair values of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6
------- -------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash
equivalents $32,524 $32,524 $22,801 $22,801
Securities available
for sale 57,308 57,308 62,906 62,906
Federal Home Loan
Bank stock 7,308 7,308 6,958 6,958
Loans held for sale 1,955 1,955 -- --
Loans, net 747,423 754,092 715,551 718,363
Accrued interest
receivable 4,528 4,528 4,691 4,691
Financial liabilities
Deposits 654,560 655,796 622,492 625,170
Federal funds purchased -- -- 2,000 2,000
Federal Home Loan
Bank advances 145,458 145,494 139,170 138,824
Accrued interest payable 2,442 2,442 2,027 2,027
</TABLE>
(Continued)
II-37
<PAGE> 52
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Ottawa Financial Corporation at December 31:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,406 $ 1,087
Securities available for sale 6,218
Accrued interest receivable 75
Loans receivable from Employee Stock Ownership Plan 2,533 2,955
Investment in subsidiary bank 72,634 66,873
Other assets 176 90
----------- -----------
Total assets $ 76,749 $ 77,298
=========== ===========
LIABILITIES
Other liabilities $ 386 $ 381
SHAREHOLDERS' EQUITY 76,363 76,917
----------- -----------
Total liabilities and shareholders' equity $ 76,749 $ 77,298
=========== ===========
</TABLE>
(Continued)
II-38
<PAGE> 53
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF INCOME, FOR THE YEARS:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest and dividend income
Securities $ 175 $ 807 $ 2,064
Loan to Employee Stock Ownership Plan 210 243 274
Dividends from subsidiary bank 4,000 2,449 15,000
------------ --------- --------
4,385 3,499 17,338
Net gain on sale of securities 151 270
Operating expenses 769 737 673
------------ --------- --------
INCOME BEFORE FEDERAL INCOME TAXES AND
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY BANK 3,767 3,032 16,665
Federal income tax expense (benefit) (88) 198 562
------------ --------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY BANK 3,855 2,834 16,103
Equity in undistributed (excess distributed)
earnings of subsidiary bank 3,672 260 (12,474)
------------ --------- --------
NET INCOME $ 7,527 $ 3,094 $ 3,629
============ ========= ========
</TABLE>
(Continued)
II-39
<PAGE> 54
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS, FOR THE YEARS:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,527 $ 3,094 $ 3,629
Adjustments to reconcile net income to
cash provided by operations
Equity in income of subsidiary bank (7,672) (2,709) (2,526)
Net accretion of securities discounts (12) (17) (146)
Net gain on sale of securities (151) (270)
Change in
Interest receivable 75 305 110
Other assets (86) 322 (417)
Other liabilities 68 270 40
-------- -------- --------
Net cash provided by operating activities (251) 995 690
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (18,413)
Proceeds from sales of securities available
for sale 5,884 36,118
Proceeds from calls and maturities of
securities available for sale 307 1,064 8,174
Principal reduction of ESOP note receivable 422 422 422
Contribution to subsidiary bank (112) (108) (123)
Cash paid in the acquisition of AFSB (30,943)
Cash dividends received from subsidiary bank 4,000 2,449 15,000
-------- -------- -------
Net cash used in investing activities 10,501 9,002 5,060
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares (8,833) (7,787) (4,215)
Proceeds from exercise of stock options 258 508
Proceeds from exercise of stock warrants 502
Cash dividends paid (1,858) (1,699) (1,600)
-------- -------- --------
Net cash from financing activities (9,931) (8,978) (5,815)
-------- -------- --------
Net change in cash 319 1,019 (65)
Cash at beginning of period 1,087 68 133
-------- -------- --------
CASH AT END OF PERIOD $ 1,406 $1,087 $ 68
======== ======== ========
</TABLE>
II-40
<PAGE> 55
OTTAWA FINANCIAL CORPORATION
QUARTERLY FINANCIAL DATA
Unaudited
The following is a summary of selected unaudited quarterly results of operations
for the years ended December 31, 1997, and 1996. In the opinion of management,
all adjustments necessary for a fair presentation of such financial data have
been included. All such adjustments are of a normal recurring nature.
<TABLE>
<CAPTION>
QUARTER ENDED
- ---------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data (3)) March 31(1) June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Net interest income $ 6,553 $ 6,915 $ 6,784 $ 6,770
Provision for loan losses 150 150 180 180
Non-interest income 721 1,037 942 1,446
Non-interest expense 4,424 4,678 4,727 4,879
Income before income taxes 2,701 3,124 2,819 3,156
Net income 1,716 1,962 1,730 2,119
Earnings per Common Share .32 .38 .34 .42
Earnings per Common Share Assuming Dilution .31 .36 .31 .37
1996
Net interest income $ 4,983 $ 6,158 $ 6,500 $ 6,498
Provision for loan losses 114 150 150 150
Non-interest income 919 902 756 750
Non-interest expense 3,765 4,523 8,650(2) 4,906
Income before income taxes 2,023 2,387 (1,544) 2,192
Net income 1,296 1,456 (1,136) 1,477
Earnings per Common Share .23 .26 (.21) .27
Earnings per Common Share Assuming Dilution .22 .25 (.20) .27
</TABLE>
(1) For the quarter ended March 31, 1996, there was significant
variation from prior quarters due to the acquisition of AFSB in
February 1996. This and subsequent quarters reflect results of the
combined organization.
(2) Reflects the one-time SAIF assessment of $3.51 million expensed as
of September 30, 1996 (see Note 17 of the Notes to the Consolidated
Financial Statements).
(3) All per share information has been retroactively adjusted to reflect
the 10% stock dividend paid on September 30, 1997 and the effects of
SFAS No. 128.
<PAGE> 56
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
245 Central Avenue
Holland, MI 49423-3298
MARKET
Ottawa Financial Corporation's common stock is traded on the Nasdaq
National Market under the symbol "OFCP." Total shares outstanding as of December
31, 1997, were 5,313,084. The high and low bid quotations for the common stock
as reported on the Nasdaq as well as dividends declared per share, were as
follows.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DIVIDENDS
<S> <C> <C> <C>
March 31, 1996 $15.227 $14.091 $.07
June 30, 1996 $15.000 $14.659 $.07
September 30, 1996 $15.000 $14.545 $.08
December 31, 1996 $15.682 $14.545 $.08
March 31, 1997 $18.977 $15.341 $.08
June 30, 1997 $20.682 $18.636 $.09
September 30, 1997 $27.125 $20.453 $.09
December 31, 1997 $34.000 $26.000 $.10
</TABLE>
The information set forth in the table above was provided by The Nasdaq
Stock Market. Such information reflects interdealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
The Board of Directors intends to continue the payment of quarterly
cash dividends, dependent upon the results of operations and financial condition
of the Company and other factors. Restrictions on dividend payments are
described in Note 12 of the Notes to Consolidated Financial Statements.
As of March 12, 1998, the Company had approximately 2,194 shareholders
of record and 5,304,141 shares outstanding of common stock.
ANNUAL REPORT ON FORM 10-K
A copy of Ottawa Financial Corporation's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, may be obtained without
charge upon written request to Douglas J. Iverson, Executive Vice President and
Secretary, Ottawa Financial Corporation, 245 Central Avenue, Holland, MI
49423-3298 or by calling (616) 393-7002.
REGISTRAR/TRANSFER AGENT GENERAL COUNSEL
Registrar and Transfer Company Cunningham Dalman, PC
Cranford, NJ Holland, MI
SPECIAL COUNSEL INDEPENDENT AUDITOR
Silver, Freedman & Taff, LLP Crowe, Chizek and Company LLP
Washington, DC Grand Rapids, MI
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
Ottawa Financial AmeriBank 100% Federal
Corporation
AmeriBank OS Services, Inc. 100% Michigan
AmeriBank AmeriPlan Financial 100% Michigan
Services, Inc.
</TABLE>
The financial statements of Ottawa Financial Corporation are
consolidated with those of its subsidiaries.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements (File Nos. 333-1350 and 333-4242) of Ottawa Financial Corporation on
Form S-8 and in the Registration Statement (File No.333-4950) of Ottawa
Financial Corporation on form S-3 of our report dated February 20, 1998, on the
financial statements of Ottawa Financial Corporation as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
which report is included in the Company's 1997 Annual Report on Form 10-K filed
pursuant to the Securities Exchange Act of 1934, as amended.
/s/ Crowe, Chizek and Company LLP
-----------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS ANNUAL REPORT
ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 25,437
<INT-BEARING-DEPOSITS> 7,087
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,955
<INVESTMENTS-HELD-FOR-SALE> 57,308
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 750,716
<ALLOWANCE> 3,293
<TOTAL-ASSETS> 885,817
<DEPOSITS> 654,560
<SHORT-TERM> 70,500
<LIABILITIES-OTHER> 9,436
<LONG-TERM> 74,958
0
0
<COMMON> 60
<OTHER-SE> 76,303
<TOTAL-LIABILITIES-AND-EQUITY> 885,817
<INTEREST-LOAN> 59,948
<INTEREST-INVEST> 3,707
<INTEREST-OTHER> 1,071
<INTEREST-TOTAL> 64,726
<INTEREST-DEPOSIT> 29,398
<INTEREST-EXPENSE> 8,306
<INTEREST-INCOME-NET> 27,022
<LOAN-LOSSES> 660
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 18,708
<INCOME-PRETAX> 11,800
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,527
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 3.37
<LOANS-NON> 2,080
<LOANS-PAST> 646
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129
<CHARGE-OFFS> 615
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 3,293
<ALLOWANCE-DOMESTIC> 2,837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 456
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,482
<INT-BEARING-DEPOSITS> 4,230
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,012
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 743,345
<ALLOWANCE> 3,230
<TOTAL-ASSETS> 866,966
<DEPOSITS> 642,008
<SHORT-TERM> 64,223
<LIABILITIES-OTHER> 10,264
<LONG-TERM> 74,735
0
0
<COMMON> 60
<OTHER-SE> 75,676
<TOTAL-LIABILITIES-AND-EQUITY> 866,966
<INTEREST-LOAN> 44,694
<INTEREST-INVEST> 2,770
<INTEREST-OTHER> 734
<INTEREST-TOTAL> 48,198
<INTEREST-DEPOSIT> 21,755
<INTEREST-EXPENSE> 27,946
<INTEREST-INCOME-NET> 20,252
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 13,828
<INCOME-PRETAX> 8,644
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,408
<EPS-PRIMARY> .96
<EPS-DILUTED> .87
<YIELD-ACTUAL> 3.39
<LOANS-NON> 2,091
<LOANS-PAST> 684
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129
<CHARGE-OFFS> 470
<RECOVERIES> 91
<ALLOWANCE-CLOSE> 3,230
<ALLOWANCE-DOMESTIC> 2,816
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 414
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 25,696
<INT-BEARING-DEPOSITS> 2,430
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,041
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 735,003
<ALLOWANCE> 3,094
<TOTAL-ASSETS> 861,334
<DEPOSITS> 636,221
<SHORT-TERM> 53,223
<LIABILITIES-OTHER> 10,958
<LONG-TERM> 85,735
0
0
<COMMON> 60
<OTHER-SE> 75,137
<TOTAL-LIABILITIES-AND-EQUITY> 861,334
<INTEREST-LOAN> 29,444
<INTEREST-INVEST> 1,927
<INTEREST-OTHER> 474
<INTEREST-TOTAL> 31,845
<INTEREST-DEPOSIT> 14,280
<INTEREST-EXPENSE> 18,377
<INTEREST-INCOME-NET> 13,468
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 151
<EXPENSE-OTHER> 9,101
<INCOME-PRETAX> 5,825
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,678
<EPS-PRIMARY> .71
<EPS-DILUTED> .69
<YIELD-ACTUAL> 3.39
<LOANS-NON> 1,339
<LOANS-PAST> 1,334
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129
<CHARGE-OFFS> 375
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 3,093
<ALLOWANCE-DOMESTIC> 2,696
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,346
<INT-BEARING-DEPOSITS> 17,156
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,255
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 725,677
<ALLOWANCE> 3,030
<TOTAL-ASSETS> 858,934
<DEPOSITS> 635,969
<SHORT-TERM> 51,000
<LIABILITIES-OTHER> 10,848
<LONG-TERM> 85,170
0
0
<COMMON> 60
<OTHER-SE> 75,887
<TOTAL-LIABILITIES-AND-EQUITY> 858,934
<INTEREST-LOAN> 14,457
<INTEREST-INVEST> 962
<INTEREST-OTHER> 204
<INTEREST-TOTAL> 15,622
<INTEREST-DEPOSIT> 7,053
<INTEREST-EXPENSE> 9,069
<INTEREST-INCOME-NET> 6,553
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 64
<EXPENSE-OTHER> 4,424
<INCOME-PRETAX> 2,701
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,716
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 3.32
<LOANS-NON> 1,391
<LOANS-PAST> 1,127
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129
<CHARGE-OFFS> 264
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 3,030
<ALLOWANCE-DOMESTIC> 2,336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 694
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS ANNUAL REPORT
ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,253
<INT-BEARING-DEPOSITS> 2,548
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,906
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 718,679
<ALLOWANCE> 3,129
<TOTAL-ASSETS> 848,306
<DEPOSITS> 622,492
<SHORT-TERM> 62,000
<LIABILITIES-OTHER> 7,728
<LONG-TERM> 79,170
0
0
<COMMON> 60
<OTHER-SE> 76,856
<TOTAL-LIABILITIES-AND-EQUITY> 848,306
<INTEREST-LOAN> 48,991
<INTEREST-INVEST> 4,945
<INTEREST-OTHER> 733
<INTEREST-TOTAL> 54,669
<INTEREST-DEPOSIT> 25,056
<INTEREST-EXPENSE> 5,475
<INTEREST-INCOME-NET> 24,138
<LOAN-LOSSES> 564
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 21,844
<INCOME-PRETAX> 5,058
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,094
<EPS-PRIMARY> .56
<EPS-DILUTED> .54
<YIELD-ACTUAL> 3.50
<LOANS-NON> 2,123
<LOANS-PAST> 613
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,251
<CHARGE-OFFS> 134
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 3,129
<ALLOWANCE-DOMESTIC> 1,936
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,193
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,204
<INT-BEARING-DEPOSITS> 4,782
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,641
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 687,752
<ALLOWANCE> 3,024
<TOTAL-ASSETS> 827,275
<DEPOSITS> 615,586
<SHORT-TERM> 42,712
<LIABILITIES-OTHER> 13,668
<LONG-TERM> 79,958
0
0
<COMMON> 60
<OTHER-SE> 75,291
<TOTAL-LIABILITIES-AND-EQUITY> 827,275
<INTEREST-LOAN> 34,766
<INTEREST-INVEST> 3,906
<INTEREST-OTHER> 546
<INTEREST-TOTAL> 39,218
<INTEREST-DEPOSIT> 17,976
<INTEREST-EXPENSE> 3,602
<INTEREST-INCOME-NET> 17,640
<LOAN-LOSSES> 414
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 16,918
<INCOME-PRETAX> 2,865
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,617
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 3.57
<LOANS-NON> 1,447
<LOANS-PAST> 1,174
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,251
<CHARGE-OFFS> 46
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 3,024
<ALLOWANCE-DOMESTIC> 1,760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,264
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,979
<INT-BEARING-DEPOSITS> 2,089
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,241
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 644,954
<ALLOWANCE> 2,866
<TOTAL-ASSETS> 782,145
<DEPOSITS> 601,747
<SHORT-TERM> 29,712
<LIABILITIES-OTHER> 10,388
<LONG-TERM> 59,958
0
0
<COMMON> 60
<OTHER-SE> 80,279
<TOTAL-LIABILITIES-AND-EQUITY> 782,144
<INTEREST-LOAN> 21,383
<INTEREST-INVEST> 2,478
<INTEREST-OTHER> 368
<INTEREST-TOTAL> 24,229
<INTEREST-DEPOSIT> 11,080
<INTEREST-EXPENSE> 2,009
<INTEREST-INCOME-NET> 11,140
<LOAN-LOSSES> 264
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 8,268
<INCOME-PRETAX> 4,410
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,752
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.63
<LOANS-NON> 1,005
<LOANS-PAST> 556
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,251
<CHARGE-OFFS> 32
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2,866
<ALLOWANCE-DOMESTIC> 1,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,085
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS FINANCIAL INFORMATION FROM THE
CORPORATION'S INTERIM CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,899
<INT-BEARING-DEPOSITS> 3,783
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86,089
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 597,044
<ALLOWANCE> 2,713
<TOTAL-ASSETS> 745,381
<DEPOSITS> 583,140
<SHORT-TERM> 10,572
<LIABILITIES-OTHER> 9,709
<LONG-TERM> 60,669
0
0
<COMMON> 58
<OTHER-SE> 81,233
<TOTAL-LIABILITIES-AND-EQUITY> 745,381
<INTEREST-LOAN> 8,933
<INTEREST-INVEST> 1,268
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 10,324
<INTEREST-DEPOSIT> 4,508
<INTEREST-EXPENSE> 834
<INTEREST-INCOME-NET> 4,982
<LOAN-LOSSES> 114
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,765
<INCOME-PRETAX> 2,023
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,296
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
<YIELD-ACTUAL> 3.79
<LOANS-NON> 1,835
<LOANS-PAST> 683
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,251
<CHARGE-OFFS> 16
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 2,713
<ALLOWANCE-DOMESTIC> 1,693
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,020
</TABLE>
