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, 1998
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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(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, 1999, was
$111.8 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, 1999, there were issued and outstanding 5,699,041 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, 1998. Part III of Form 10-K - Portions of the proxy
statement for the Annual Meeting of Stockholders for the year ended December 31,
1998.
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FORWARD-LOOKING STATEMENTS
Ottawa Financial Corporation, and its wholly-owned subsidiary,
AmeriBank, may from time to time make written or oral "forward-looking
statements", including statements contained in their filings with the Securities
and Exchange Commission ("SEC"). These forward-looking statements may be
included in this Annual Report on Form 10-K and the exhibits attached to it, in
Ottawa Financial's reports to stockholders and in other communications by the
company, which are made in good faith by us pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the U.S. economy in general and the strength of the local
economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
o the willingness of users to substitute competitors' products and services
for our products and services;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of Ottawa Financial or AmeriBank.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ottawa Financial Corporation is a holding company and the sole
shareholder of AmeriBank. In March 1994, AmeriBank converted from a mutual form
to a stock form of ownership. Ottawa Financial's common stock is traded on the
Nasdaq-Amex National Market under the symbol "OFCP."
On February 13, 1996, Ottawa Financial acquired AmeriBank Federal
Savings Bank, a federally chartered savings bank headquartered in Muskegon,
Michigan, pursuant to which Ottawa Financial acquired all of the outstanding
shares of common stock of AmeriBank Federal Savings Bank for approximately $32.7
million in cash, converted options and warrants. AmeriBank Federal Savings Bank
was then merged into AmeriBank.
AmeriBank is the only operating subsidiary of Ottawa Financial.
AmeriBank is a Michigan- chartered savings bank headquartered in Holland,
Michigan. Originally organized in 1888, as Ottawa Savings Bank, FSB, which
converted to a federal savings bank in 1988, we changed our name in 1996 from
Ottawa Savings Bank, FSB to AmeriBank, and converted to a state-chartered
savings bank in July 1997. Our deposits are insured up to the applicable limits
by the Federal Deposit Insurance Corporation ("FDIC"). We currently serve
Allegan, Kent, Muskegon, Newaygo, Oceana and Ottawa Counties in Western Michigan
through our 26 retail banking offices. At December 31, 1998, we had total assets
of $938.0 million, deposits of $693.6 million and shareholders' equity of $73.4
million.
We have been, and intend to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities we serve. We attract retail deposits from the general public
and invests those funds primarily in first mortgages on owner-occupied, one- to
four-family residences. We also originate nonowner-occupied one- to four-family
residences, construction, commercial and multi-family real estate.
Our revenues are derived principally from interest on loans and
investment securities.
We offer a variety of individual and commercial deposit accounts having
a wide range of interest rates and terms. Our deposits consist of passbook and
statement savings accounts, interest and non-interest-bearing checking accounts,
and money market and certificate accounts. We also offer debit and credit cards
as well as ATM services. We solicit deposits from our market area only, and have
never used brokers to obtain deposits.
Our executive offices are located at 245 Central Avenue, Holland,
Michigan 49423 and our telephone number at that address is (616) 393-7000.
3
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MARKET AREA
Our market area of Allegan, Kent, Muskegon, Newaygo, Oceana and Ottawa
Counties located in western Michigan is diverse. This area consists of three
mid-sized cities, Grand Rapids, Muskegon and Holland and rural areas. Our
headquarters are located in Holland, Michigan. 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, Johnson Controls, 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 our success as a mortgage and small business lender has been
due to our 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 our market area reflect
above-average population growth, including population growth in our market area
of 9.4% since 1990. Income levels in the market area tend to approximate state
and national averages. Unemployment in the area at December 31, 1998 was
approximately 2.4% versus 3.4% for the State of Michigan as a whole.
LENDING ACTIVITIES
GENERAL. We have historically originated 30 year, fixed-rate mortgage
loans secured by one- to four-family residences. Since 1978, however, we have
emphasized the origination of adjustable-rate residential mortgage loans, call
option and balloon payment loans, which has dramatically reduced our portfolio
of long term fixed rate loans. Today, we continue to sell fixed rate mortgage
loans with terms of 15 years or longer. These sales 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 AmeriBank
Federal Savings Bank in February 1996, we have generated a larger percentage of
commercial business loans, commercial real estate loans and consumer loans. We
continue 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 our loan
portfolio for 1997 and 1998 was in commercial real estate, commercial business
and consumer loans. Management's strategy has been to increase the percentage of
assets in our portfolio with shorter maturities or terms to repricing, and in
some cases higher yields, than traditional 30 year fixed rate residential
mortgage loans.
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Our loan officers and certain executive officers have approval
authority on loans depending on type and amount. Loans greater than $500,000 but
less than $1.5 million require the approval of our Loan Committee comprised of
certain loan officers and executive officers. Loans greater than $1.5 million
must be approved by the Board of Directors.
At December 31, 1998, the maximum amount that could have been loaned to
any one borrower and the borrower's related entities was approximately $15.5
million. At such date, we had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount.
Our 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, 1998 of $6.2 million. The line of credit is secured
by publicly traded marketable securities. At December 31, 1998, 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 $12.5 million consisting of a number of loans, the
largest of which is a $8.1 million loan secured by a multi-family housing
development. At December 31, 1998, the loans were current and performing in
accordance with their terms.
At December 31, 1998, we had 28 other loans or lending relationships to
a single borrower or group of related borrowers with a balance in excess of $2.5
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 our loan portfolio in dollar amounts and in
percentages as of the dates indicated. The dollar amounts and percentages were
calculated before deductions for loans in process, deferred fees and discounts
and allowance for losses.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family ........ $425,974 51.97% $483,502 62.20% $516,935 69.59% $209,159 71.24% $184,237 76.10%
Multi-family ............... 49,402 6.03 38,663 4.97 34,262 4.61 13,221 4.50 9,200 3.80
Commercial ................. 51,637 6.30 35,147 4.52 42,745 5.75 4,106 1.40 4,903 2.02
Construction or development 117,792 14.37 71,145 9.15 33,823 4.55 42,659 14.53 20,420 8.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans . 644,805 78.67 628,457 80.84 627,765 84.50 269,145 91.67 218,760 90.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Automobile ................ 62,778 7.66 49,264 6.34 46,247 6.23 9,530 3.25 4,515 1.86
Home equity lines of credit 30,178 3.68 32,379 4.17 29,170 3.93 12,039 4.10 10,060 4.16
Home equity installment ... 19,115 2.33 22,905 2.95 19,247 2.59 -- -- -- --
Student ................... -- -- 21 -- 103 .01 85 .03 7,067 2.92
Other ..................... 8,851 1.08 7,009 .90 5,345 .72 2,804 .95 1,687 .70
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans .... 120,922 14.75 111,578 14.36 100,112 13.48 24,458 8.33 23,329 9.64
Commercial business loans . 53,935 6.58 37,322 4.80 14,996 2.02 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans ....... 174,857 21.33 148,900 19.16 115,108 15.50 24,458 8.33 23,329 9.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans .......... 819,622 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00% 242,089 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process ........... 44,797 25,787 22,956 14,861 9,110
Deferred fees and discounts 1,272 854 1,237 1,034 1,043
Allowance for losses ....... 3,823 3,293 3,129 1,251 1,118
-------- -------- -------- -------- --------
Total loans receivable, net $769,770 $747,423 $715,551 $276,457 $230,818
======== ======== ======== ======== ========
</TABLE>
6
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The following table shows the composition of our loan portfolio by
fixed and adjustable rates at the dates indicated. Call option loans are
presented as fixed rate loans.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One- to four-family ............. $156,383 19.08% $113,954 14.66% $108,747 14.64% $ 95,141 32.40% $ 96,381 39.82%
Multi-family .................... 40,003 4.88 27,187 3.50 15,937 2.14 3,163 1.08 3,080 1.27
Commercial ...................... 47,792 5.83 25,558 3.29 27,108 3.65 1,347 .46 2,692 1.11
Construction or development ..... 92,188 11.25 59,300 7.62 12,552 1.69 9,442 3.21 5,841 2.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate real
estate loans ............... 336,366 41.04 225,999 29.07 164,344 22.12 109,093 37.15 107,994 44.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial ....................... 38,097 4.65 14,004 1.80 6,007 .81 -- -- -- --
Consumer ......................... 90,744 11.07 79,199 10.19 65,241 8.78 12,294 4.19 8,028 3.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans ....... 465,207 56.76 319,202 41.06 235,592 31.71 121,387 41.34 116,022 47.93
ADJUSTABLE-RATE LOANS
Real estate:
One- to four-family ............. 269,591 32.89 369,548 47.54 408,188 54.95 114,018 38.84 87,856 36.29
Multi-family .................... 9,399 1.15 11,476 1.48 18,325 2.47 10,058 3.43 6,120 2.53
Commercial ...................... 3,845 0.47 9,589 1.23 15,637 2.10 2,759 .94 2,211 .91
Construction or development ..... 25,604 3.12 11,845 1.52 21,271 2.86 33,217 11.31 14,579 6.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate real
estate loans................ 308,439 37.63 402,458 51.77 463,421 62.38 160,052 54.52 110,766 45.75
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial ....................... 15,838 1.93 23,318 3.00 8,989 1.21 -- -- -- --
Consumer ......................... 30,178 3.68 32,379 4.17 34,871 4.70 12,164 4.14 15,301 6.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable rate loans .. 354,455 43.24 458,155 58.94 507,281 68.29 172,216 58.66 126,067 52.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans .............. 819,662 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00% 242,089 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process ................. 44,797 25,787 22,956 14,861 9,110
Deferred fees and discounts ...... 1,272 854 1,237 1,034 1,043
Allowance for loan losses ........ 3,823 3,293 3,129 1,251 1,118
-------- -------- -------- -------- --------
Total loans receivable, net.... $769,770 $747,423 $715,551 $276,457 $230,818
======== ======== ======== ======== ========
</TABLE>
7
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The following table illustrates the interest rate sensitivity of our
loan portfolio at December 31, 1998. Loans that 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 Consumer Total
-------------------- ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Periods Ending December 31,
1999(2) .......... $ 41,233 7.99% $ 71,854 7.74% $ 25,022 7.74% $ 33,138 9.56% $171,247 7.77%
2000 - 2003 ...... 127,155 7.80 26,730 7.38 24,326 8.24 75,544 9.26 253,755 8.63
2004 and following 358,625 7.51 19,208 7.36 4,587 7.84 12,240 8.95 394,660 7.85
-------- --------
Totals ...... $527,013 7.62 $117,792 7.60 $ 53,935 7.97 $120,922 9.31 $819,662 8.07
======== ======== ======== ======== ========
</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, 1999 which have fixed
or predetermined interest rates is $236.9 million while the total amount of
loans due after such date which have floating or adjustable interest rates is
$411.5 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
During 1998, we focused our residential lending program on the
origination of loans secured by mortgages on owner-occupied, one- to four-family
residences. We also originated loans secured by nonowner-occupied, 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 AmeriBank's offices.
We emphasize the origination of a variety of residential loans,
including conventional 15 and 30 year fixed-rate loans and adjustable-rate
mortgage loans. The substantial majority of these loans were secured by
properties in our market area. In the past, we purchased loans 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 us. The historical loan losses
incurred from these purchased loans have been negligible. During 1998 we
purchased only $112,000 in loans due to the high volume of loan originations we
produced internally.
Our one- to four-family residential adjustable-rate mortgage loans are
fully amortizing loans with contractual maturities of up to 30 years. Our
adjustable-rate mortgage 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 our adjustable-rate mortgage loans are generally limited to 2%
annually with lifetime interest rate caps of 6% over the initial interest rate.
Our adjustable-rate mortgage 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 our adjustable-rate
mortgage loans may be below the fully indexed rate, although borrowers are
generally qualified at the fully indexed rate.
We also offer 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. We
currently sell in the secondary market, long-term, conforming fixed-rate loans
with terms of 15 years or greater which we originated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management" in the Annual Report to Stockholders attached as
Exhibit 13 to this Annual Report on Form 10-K.
We offer 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 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.
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We originate 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%, we
require private mortgage insurance in an amount sufficient to reduce our
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, we
evaluate 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 that we made are appraised by independent fee
appraisers. We require borrowers to obtain title insurance and fire, property
and, if necessary, flood insurance. We originate real estate loans that contain
a "due on sale" clause which allows us to declare the unpaid principal balance
due and payable upon the sale of the security property. We generally enforce our
"due on sale" power to allow for faster repricing and to reduce the duration of
our loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
In order to enhance the yield on our assets, we originate permanent
loans secured by multi-family and commercial real estate. Our 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 our 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
adjustable-rate mortgage 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 that we originate are primarily performed by independent appraisers
who we designate at the time the loan is made. Management reviews all appraisals
on multi-family and commercial real estate loans. In addition, our 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.
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 cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired. 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, cash flow from the project will be
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<PAGE>
reduced. At December 31, 1998, $879,000 or 0.87% 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
We make construction loans to individuals for the construction of their
residences. Construction loans are also made 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.
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 us, 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.
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. 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.
We also make 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.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from us, as well as referrals from existing customers and walk-in customers. As
part of the application process, the applicant must submit accurate plans,
specifications and costs of the project to be constructed or developed to us.
These 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, 1998, we had 25
construction and development loans in excess of $500,000, all but one of the
loans were current at such date. Our largest construction and development loan
at December 31, 1998, was a $8.1 million line of credit for the construction of
a multi-family housing development, of which $1.79 million 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
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commercial real estate loans and tend to be more sensitive to general economic
conditions than many other types of loans.
COMMERCIAL BUSINESS LENDING
Our commercial business lending portfolio contains loans with a variety
of purposes and security, including loans to finance operations and equipment.
Generally, our commercial business lending has been limited to borrowers
headquartered, or doing business, in our primary market area. Over the last
several years, management has focused on increasing our portfolio of commercial
business loans. These loans typically carry higher yields and shorter terms to
maturity than mortgage loans. Management intends to continue to increase the
size of our commercial business portfolio during 1999. At December 31, 1998, the
average outstanding loan balance in our commercial business loan portfolio was
$106,000, with the largest commercial business loan being a $14.0 million line
of credit with an outstanding balance at December 31, 1998 of $6.2 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
We originate 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, we have placed greater emphasis on consumer loans,
because of their attractive yields and shorter terms to maturity.
We originate automobile loans, our largest segment of consumer loans,
on both a direct and an indirect basis. Direct loans are made when we extend
credit directly to the borrower. Indirect loans are obtained when we purchase
loan contracts from retailers of goods or services which have extended credit to
their customers.
We began our indirect lending program in 1995 with selected automobile
dealers located in our lending area. Moreover, we acquired a $25.0 million
portfolio of mature, indirect automobile loans upon our acquisition of AmeriBank
Federal Savings Bank. At December 31, 1998, our automobile loan portfolio
totaled $62.8 million, of which $51.2 million were originated on an indirect
basis.
Our 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
12
<PAGE>
value. These loans are written with fixed terms of up to 15 years, or up to ten
years with a call option after five years, and carry fixed rates of interest. We
also originate 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 our existing home equity line of
credit portfolio has an original 10 year term; however, we currently offer these
loans with adjustable rates, interest only payments and a term of five years. At
December 31, 1998, we had $19.1 million of home equity installment loans and
$30.2 million of home equity lines of credit outstanding, representing 2.3% and
3.7%, respectively, of our gross loan portfolio. At that date, we had $34.9
million of unused credit available under our home equity line of credit program.
The underwriting standards that we employ 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 laws, may limit the amount
which can be recovered on such loans. At December 31, 1998, $457,000 or 0.4% of
our 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 our staff of loan officers. Loan
applications are taken in most branch offices and then submitted to our
designated loan underwriters for approval.
We originate both adjustable-rate and fixed-rate loans; however, our
ability to originate loans is dependent upon the relative customer demand for
loans in our market. Demand is affected by the interest rate environment.
Currently, almost all fixed-rate residential mortgage loans with maturities of
15 years or greater are originated for sale to Freddie Mac with servicing rights
retained. These loans are originated to satisfy customer demand, generate
servicing fee income and are sold to achieve the goals of our asset/liability
management program. Borrowers are allowed to lock in an interest rate at the
date of application without a fee. We manage the volume of loans originated but
not closed by offsetting these loan commitments with forward commitments from
Freddie Mac when the volume of applications exceeds $6.0 million.
When loans are sold, we typically retain 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. We
receive a servicing fee for performing these functions. The
13
<PAGE>
servicing fee is recognized as income over the life of the loan. We serviced for
others mortgage loans that we originated and sold amounting to $227.9 million at
December 31, 1998.
We purchase real estate loans from selected sellers from time to time
to supplement our origination volume. We carefully review and underwrite all
loans to be purchased to insure that they meet our underwriting standards. We
did not purchase a significant amount of real estate loans during 1998.
In periods of economic uncertainty, our 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, our ability to sell loans may substantially decrease as potential
buyers, principally government agencies, reduce their purchasing activities.
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated. Fixed-rate and call option loans
that we modify are not reflected as new loan originations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations" in the Annual Report to Stockholders attached as Exhibit
13 to this Annual Report on Form 10-K.
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
(In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real estate:
one- to four-family ....................... $ 36,790 $ 57,043 $ 111,313
multi-family .............................. 685 1,710 37,261
commercial ................................ 371 -- 6,202
construction or development ............... 31,416 4,507 37,137
Commercial business .......................... 31,172 19,422 --
Consumer ..................................... 27,944 12,000 37,580
--------- --------- ---------
Total adjustable-rate ................. 128,378 94,682 229,493
--------- --------- ---------
FIXED-RATE:
Real estate:
one- to four-family ....................... 172,737 58,086 19,644
multi-family .............................. 15,386 7,251 6,575
commercial ................................ 19,396 5,836 1,094
construction or development ............... 76,892 31,877 6,554
Commercial business .......................... 21,168 8,798 --
Consumer ..................................... 61,126 38,775 35,320
--------- --------- ---------
Total fixed-rate ...................... 366,705 150,623 69,187
--------- --------- ---------
Total loans originated ................ 495,083 245,305 298,680
--------- --------- ---------
PURCHASES:
Real estate: one- to four-family ............. 112 6,039 27,027
Loans acquired in the acquisition of AmeriBank
Federal Savings Bank ......................... -- -- 294,700
--------- ---------
Total purchases ....................... 112 6,039 321,727
--------- --------- ---------
SALES:
Real estate: one- to four-family ............. 148,280 43,161 9,833
Consumer loans ............................... -- -- --
--------- ---------
Total loan sales ...................... 148,280 43,161 9,833
--------- --------- ---------
REPAYMENTS:
Principal repayments ......................... 344,526 179,735 161,303
--------- --------- ---------
Total reductions ...................... 492,806 222,896 171,136
--------- --------- ---------
Increase (decrease) in other items, net ...... 19,958 5,379 (10,176)
--------- --------- ---------
Net increase .......................... $ 22,347 $ 33,827 $ 439,095
========= ========= =========
</TABLE>
Due to the historically low interest rate environment during 1998, we
experienced a shift in customer demand from adjustable rate to fixed rate
products. Consistent with our asset/liability management policy, we sold a
substantial portion of our fixed rate products in the secondary market. In
addition, consistent with our strategic plan of achieving a more balanced loan
portfolio between residential mortgage, and consumer and commercial lending, we
focused our loan origination efforts towards originating consumer and commercial
loans.
15
<PAGE>
ASSET QUALITY
When a borrower fails to make a required payment on a loan, we attempt
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, we usually send a
default letter to the borrower and after 90 days, if the loan is still
delinquent, we institute appropriate action to foreclose on the property. If
foreclosed, the property is sold at public auction and may be purchased by us.
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. Our procedures for repossession and sale of consumer collateral are
subject to various requirements under Michigan consumer protection laws.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at December 31, 1998, in dollar amounts and as a percentage of
each category of our 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
30-89 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 . 87 $3,749 0.88% 17 $ 728 0.17% 104 $4,477 1.05%
Multi-family and commercial
real estate ................... -- -- -- 1 879 0.87 1 879 0.87
Construction or development ..... 2 262 0.22 3 630 0.53 5 892 0.75
Commercial business ............. 1 40 0.07 3 504 0.93 4 544 1.00
Consumer ........................ 62 620 0.51 46 457 0.38 108 1,077 0.89
---- ------ ---- ------ ----- ------
Total ....................... 152 $4,671 70 $3,198 222 $7,869
==== ====== ==== ====== ===== ======
</TABLE>
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Interest income on
loans accrues over the term of the loan 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, we have
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 our 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."
16
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ...................... $ 696 $ 917 $1,792 $ -- $ --
Multi-family and commercial real estate .. 879 -- -- -- --
Construction or development .............. 609 611 -- -- --
Commercial business ...................... 504 118 -- -- --
Consumer ................................. 446 434 331 -- --
------ ------ ------ ------ ------
Total ................................. 3,134 2,080 2,123 -- --
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family ...................... 32 98 132 1,317 922
Multi-family and commercial real estate .. -- 546 426 1,110 96
Construction or development ............. 21 -- -- -- --
Consumer ................................. 11 2 55 7 1
------ ------ ------ ------ ------
Total ................................. 64 646 613 2,434 1,019
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ...................... 656 276 39 296 164
Consumer loans ........................... 174 181 150 -- --
------ ------ ------ ------ ------
Total ................................. 830 457 189 296 164
------ ------ ------ ------ ------
Total non-performing assets ................ $4,028 $3,183 $2,925 $2,730 $1,183
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets ............................ 0.43% 0.36% 0.34% 0.74% 0.36%
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $209,000, none of which was included in
interest income.
NON-PERFORMING LOANS. At December 31, 1998, we had $3.2 million in
non-performing loans, which constituted 0.39% of our 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, 1998 totaled $879,000
and was secured by a multi-family real estate development. Based upon the
collateral value of property securing the loan and the strength of the
guarantor, loss of principal is not anticipated.
OTHER LOANS OF CONCERN. As of December 31, 1998, there were $3.3
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 eight commercial and multi-family loans,
the largest of which was a $2.0 million loan secured by a manufacturing plant.
We are monitoring this loan as a result of a tenant vacancy. The loan was
current on payments as of December 31, 1998. These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.
17
<PAGE>
As of December 31, 1998, 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. We established 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 we have had limited loan losses during
our 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 AmeriBank Federal
Savings Bank's unallocated portion of the allowance with our 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. Due to our continued emphasis in these lending portfolios,
the allowance allocations grew during 1998. The total allowance balance was
increased throughout 1998 in response to continued growth in our loan portfolio,
management's assessment of the risks inherent in the portfolio and charge-offs
credited against the allowance account during the year. 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 to Stockholders
attached as Exhibit 13 to this Annual Report on Form 10-K.
18
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ................ $ 3,293 $ 3,129 $ 1,251 $ 1,118 $ 950
Acquired from AmeriBank Federal Savings
Bank .......................................... -- -- 1,358 -- --
Charge-offs:
Consumer .................................... 576 615 134 28 2
Recoveries .................................... 176 119 90 1 --
------- ------- ------- ------- -------
Net charge-offs ............................... (400) (496) (44) (27) (2)
Additions charged to operations ............... 930 660 564 160 170
------- ------- ------- ------- -------
Balance at end of period ...................... $ 3,823 $ 3,293 $ 3,129 $ 1,251 $ 1,118
======= ======= ======= ======= =======
Percentage of net charge-offs during the period
to average loans outstanding during the period ---%(1) ---%(1) ---%(1) ---%(1) ---%(1)
======= ======= ======= ======= =======
Percentage of net charge-offs during the period
to average non-performing assets ............. 11.09% 16.25% ---%(1) ---%(1) ---%(1)
===== ===== ======= ======= =======
</TABLE>
- --------------
(1) Less than 1.00%.
19
<PAGE>
The distribution of our allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------ ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ....... $ 263 51.97% $ 289 62.20% $ 331 69.59% $ 166 71.24% $ 148 76.10%
Multi-family .............. 72 6.03 14 4.97 18 4.61 413 4.50 287 3.80
Commercial real estate .... 670 6.30 593 4.52 606 5.75 21 1.40 25 2.02
Construction or development 548 14.37 461 9.15 54 4.55 53 14.53 28 8.44
Commercial business ....... 568 6.58 289 4.80 150 2.02 -- -- -- --
Consumer .................. 1,193 14.75 1,024 14.36 777 13.48 143 8.33 62 9.64
Unallocated ............... 509 -- 623 -- 1,193 -- 455 -- 568 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................ $3,823 100.00% $3,293 100.00% $3,129 100.00% $1,251 100.00% $1,118 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
INVESTMENT ACTIVITIES
Generally, our investment policy is to invest funds among various
categories of investments and maturities based upon our asset/liability
management policies, concern for the highest investment quality, liquidity needs
and performance objectives. As market conditions change, we regularly
re-evaluate the marketable securities in our portfolio. The investment security
portfolio currently is composed of federal agency securities, collateralized
mortgage obligations, mortgage-backed securities, municipal bonds, corporate
debt securities and Federal Home Loan Bank stock.
At December 31, 1998, our 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, 1998, 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.
Securities
---------------------
Amortized Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
(Dollars in Thousands)
Due in one year or less ............. $ 5,542 $ 5,543 5.25%
Due after one year through five years 28,605 28,722 5.82
Due after five through 10 years ..... 107 106 7.33
------- ------- ----
34,254 34,371 5.72
Asset-backed debt securities(1) ..... 37,358 37,275 6.57
------- ------- ----
$71,612 $71,646 6.16
======= =======
- --------------------
(1) Consists of asset-backed Small Business Administration loans and
mortgage-backed securities.
Due to their variable payments, asset-backed securities are not
reported by a specific maturity grouping.
21
<PAGE>
The following table sets forth the composition of our securities
portfolio at the dates indicated. For additional information on our investment
and mortgage-backed securities, see Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached as Exhibit 13
to this Annual Report on Form 10-K.
December 31,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
Carrying Carrying Carrying
Value Value Value
-------- --------- ---------
(Dollars in Thousands)
Equity Securities ............ $ -- $ -- $ 296
------- ------- -------
Debt Securities:
Corporate .................. 8,176 2,010 11,353
Asset-backed Small Business
Administration loans ......... 10,731 15,232 12,816
Mortgage-backed ............ 26,544 13,203 17,773
Government and agency ...... 25,542 25,007 15,960
Municipal obligations ...... 653 1,856 4,708
------- ------- -------
Total debt securities .. 71,646 57,308 62,610
Federal Home Loan Bank Stock 11,782 7,308 6,958
------- ------- -------
Total securities ........ $83,428 $64,616 $69,864
======= ======= =======
SOURCES OF FUNDS
GENERAL. Our 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 Federal Home Loan Bank advances.
DEPOSITS. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our 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. Our High Performance
Checking Account Program offers a variety of checking accounts to customers.
These checking accounts increase our core deposits, provide the opportunity to
cross sell our other products and generate additional fee income; however, the
cost of servicing these accounts has increased our non-interest expense. We rely
primarily on advertising, competitive pricing policies and customer service to
attract and retain these deposits. We solicit deposits from our market area
only, and have 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. We offer a variety of deposit accounts which has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our 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 to Stockholders attached as Exhibit 13 to this Annual
Report
22
<PAGE>
on Form 10-K. Based on our experience, we believe that our savings, interest and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, our ability 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 our savings flows during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
-------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................................ $654,560 $622,492 $243,220
Deposits acquired from AmeriBank Federal Savings
Bank ........................................... -- -- 333,000
Net Deposits (Withdrawals) ..................... 14,081 6,373 23,462
Interest credited .............................. 24,991 25,695 22,810
-------- -------- --------
Ending balance ................................. $693,632 $654,560 $622,492
======== ======== ========
Net increase ................................... $ 39,072 $ 32,068 $379,272
======== ======== ========
Percent increase ............................... 5.97% 5.15% 155.94%
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs that we offered at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing ................. $ 40,813 5.88% $ 28,431 4.34% $ 25,487 4.09%
Savings accounts (1.74%(1)) ......... 54,475 7.85 60,143 9.19 64,987 10.44
NOW accounts and money market deposit
accounts (3.49%(1)) ................ 200,132 28.86 160,296 24.49 154,711 24.85
-------- ------ -------- ------ -------- ------
Total Non-certificates .............. 295,420 42.59 248,870 38.02 245,185 39.38
-------- ------ -------- ------ -------- ------
Certificates:
3.00-4.99% ....................... 26,539 3.83 9,612 1.47 25,807 4.15
5.00-6.99% ....................... 360,045 51.91 359,494 54.92 301,184 48.38
7.00-8.99% ....................... 11,241 1.62 36,109 5.52 49,651 7.98
9.00-10.99% ...................... 387 0.05 475 .07 665 .11
-------- ------ -------- ------ -------- ------
Total Certificates .................. 398,212 57.41 405,690 61.98 377,307 60.62
-------- ------ -------- ------ -------- ------
Total Deposits ...................... $693,632 100.00% $654,560 100.00% $622,492 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- ------------------
(1) At December 31, 1998.
23
<PAGE>
The following table shows rate and maturity information on our
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
3.00- 5.00- 7.00- 9.00- 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, 1999...................... $ 3,775 $113,615 $ 315 $ 89 $117,794 29.58%
June 30, 1999....................... 7,606 102,519 356 298 110,779 27.82
September 30, 1999.................. 5,503 63,197 100 --- 68,800 17.28
December 31, 1999................... 3,301 19,106 411 --- 22,818 5.73
March 31, 2000...................... 37 12,124 7,598 --- 19,759 4.96
June 30, 2000....................... 40 13,045 1,618 --- 14,703 3.69
September 30, 2000.................. 11 10,975 26 --- 11,012 2.77
December 31, 2000................... 3,332 4,419 191 --- 7,942 1.99
March 31, 2001...................... --- 4,163 222 --- 4,385 1.10
June 30, 2001....................... 1,198 2,377 85 --- 3,660 0.92
September 30, 2001.................. 1 1,590 2 --- 1,593 0.40
December 31, 2001................... 876 563 16 --- 1,455 0.36
Thereafter.......................... 859 12,352 301 --- 13,512 3.40
-------- -------- ------- ---- -------- ------
Total............................ $ 26,539 $360,045 $11,241 $387 $398,212 100.00%
======== ======== ======= ==== ======== ======
Percent of total................. 6.67% 90.42% 2.82% 0.09% 100.00%
==== ===== ==== ==== ======
</TABLE>
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of December 31, 1998.
<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.............................. $105,014 $ 96,105 $79,902 $72,445 $353,466
Certificates of deposit of
$100,000 or more........................... 12,780 14,674 11,716 5,576 44,746
-------- -------- ------- ------- --------
Total certificates of deposit............... $117,794 $110,779 $91,618 $78,021 $398,212
======== ======== ======= ======= ========
</TABLE>
BORROWINGS. Our other available sources of funds include advances from
the Federal Home Loan Bank of Indianapolis and other borrowings. As a member of
the Federal Home Loan Bank of Indianapolis, we are required to own capital stock
in the Federal Home Loan Bank and are authorized to apply for advances from the
Federal Home Loan Bank. Each Federal Home Loan Bank credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The
Federal Home Loan Bank of Indianapolis may prescribe the acceptable uses for
these advances, as well as limitations on the size of the advances and repayment
provisions.
24
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We have borrowed funds from the Federal Home Loan Bank 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,
we have used putable advances to reduce our cost of borrowing. A putable advance
provides us with a low fixed interest rate in exchange for the Federal Home Loan
Bank to have the option to convert the advance before maturity on any given
conversion date to an adjustable rate advance of predetermined index for the
remaining term to maturity. Of the $160.0 million of advances outstanding at
December 31, 1998, $106.0 million were fixed term and rate and $54.0 million
were putable advances. We utilize Federal Home Loan Bank advances as part of our
asset/liability management strategy in order to cost effectively extend the
maturity of our liabilities. We are subject to a fee if we prepay the advance.
At December 31, 1998, we had $160.0 million of advances from the
Federal Home Loan Bank of Indianapolis and the capacity to borrow up to $314.0
million; however, the current Board policy limits our borrowing capacity to
$235.0 million. For additional information on our borrowings and maturities, see
Note 9 of the Notes to Consolidated Financial Statements contained in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
The following table sets forth the maximum month-end balance and
average balance of Federal Home Loan Bank advances for the periods indicated.
Year Ended December 31,
----------------------------------
1998 1997 1996
------- -------- --------
(In Thousands)
DURING THE PERIODS:
Maximum Balance:
- ----------------
Federal Home Loan Bank advances........ $169,768 $145,458 $139,170
Average Balance:
- ----------------
Federal Home Loan Bank advances........ $160,533 $140,746 $ 94,269
The following table sets forth the end of period interest rates and
balances at the dates indicated:
December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Federal Home Loan Bank advances....... $160,268 $145,458 $139,170
Weighted average interest rate of
Federal Home Loan Bank advances....... 5.91% 5.98% 5.87%
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SUBSIDIARY AND OTHER ACTIVITIES
AmeriBank has two wholly-owned service corporation subsidiaries: OS
Services, Inc. and AmeriPlan Financial Services, Inc. At December 31, 1998,
AmeriBank's investment in its service corporations totaled $1.4 million.
OS Services, Inc. invests in the 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 that 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. AmeriBank, through OS Services
has an equity investment in the partnerships totaling $858,000. In addition,
Ottawa Financial received $327,000 in tax credits during 1998 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. AmeriPlan's gross revenues from sales of these products and services
amounted to $597,000. The subsidiaries of AmeriBank generated net income of
$368,000 during 1998.
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 U.S.
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 Federal Home Loan Bank of Indianapolis
and is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System. As the savings and loan holding company of AmeriBank,
Ottawa Financial also is subject to federal regulation and oversight by the
Office of Thrift Supervision.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. AmeriBank is a member
of the Savings Association Insurance Fund, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC. 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 Savings Association Insurance
Fund or the Bank Insurance Fund. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the Office of
Thrift Supervision an opportunity to take action, and may terminate deposit
insurance if it determines that an 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 insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
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a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At December 31, 1998, we were
classified as a well-capitalized institution and was not subject to any
assessment. See Note 12 of Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on
Form 10-K.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund-insured institutions
and Bank Insurance Fund-insured institutions are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. In 1998, this amount was equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund-insured institutions paid an assessment equal
to about 1.50 basis points for each $100 in domestic deposits. The savings
institutions assessment is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund- insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
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 4% 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% 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
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risk-weighting systems, all of the 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, 1998, AmeriBank's ratio of Tier 1 capital of total
assets was 6.3%, its ratio of Tier 1 capital to risk-weighted assets was 9.6%
and its ratio of total capital to risk-weighted assets was 10.3%. At December
31, 1998, AmeriBank was classified as "well capitalized" under FDIC regulations.
DIVIDEND LIMITATIONS. AmeriBank 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 AmeriBank at the time of its conversion to stock form. AmeriBank's
earnings 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
AmeriBank on the amount of earnings removed from the reserves for such
distributions.
Under FDIC regulation, AmeriBank is prohibited from making any capital
distributions if after making the distribution, AmeriBank 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, 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 Community
Reinvestment Act requires the FDIC, in connection with the examination of
AmeriBank, to assess the institution's record of meeting the credit needs of its
community and to take this record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by AmeriBank.
An unsatisfactory rating may be used as the basis for the denial of an
application by the Office of Thrift Supervision. AmeriBank was examined for
Community Reinvestment Act compliance in November 1996 and received a rating of
"satisfactory."
HOLDING COMPANY REGULATION. Ottawa Financial is a unitary savings and
loan holding company subject to regulatory oversight by the Office of Thrift
Supervision. Ottawa Financial is required to register and file reports with and
is subject to regulation and examination by the Office of Thrift Supervision. In
addition, the Office of Thrift Supervision has enforcement authority over Ottawa
Financial and its non-savings association subsidiaries which also permits the
Office of Thrift Supervision 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, Ottawa Financial
generally is not subject to activity restrictions. If Ottawa Financial acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities
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of Ottawa Financial and any of its subsidiaries other than AmeriBank or any
other Savings Association Insurance Fund insured savings institution, would
generally become subject to additional restrictions.
FEDERAL SECURITIES LAW. The stock of Ottawa Financial is registered
with the SEC under the Securities Exchange Act of 1934, as amended. Ottawa
Financial is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934, as amended.
Ottawa Financial stock held by persons who are affiliates, generally
including executive officers, directors and 10% stockholders of Ottawa Financial
may not be resold without registration or unless sold in accordance with certain
resale restrictions. If Ottawa Financial meets specified current public
information requirements, each affiliate of Ottawa Financial is able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of Indianapolis, which is one of 12 regional Federal Home Loan Banks that
administers the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It makes loans to members in accordance with
policies and procedures, established by the board of directors of the Federal
Home Loan Bank, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the Federal Home Loan Bank are required to be
fully secured by sufficient collateral as determined by the Federal Home Loan
Bank. In addition, all long-term advances must be used for residential home
financing.
As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Indianapolis. At December 31, 1998, we had $11.8
million in Federal Home Loan Bank stock, which was in compliance with this
requirement. We receive dividends on our Federal Home Loan Bank stock. Over the
past five calendar years, these dividends have averaged 8.5% and were 8.0% for
the calendar year 1998. For the year ended December 31, 1998, the Federal Home
Loan Bank of Indianapolis paid us dividends totaling $777,000.
MICHIGAN BANKING LAW. Effective July 1, 1996, the Michigan Legislature
enacted the Michigan Savings Bank Act. In several respects, the Michigan Savings
Bank Act contains provisions similar to the Michigan Banking Code of 1969.
Pursuant to the Michigan Savings Bank Act, AmeriBank has converted its charter
from that of a federal savings bank to that of a Michigan savings bank.
As a state-chartered savings bank, AmeriBank is subject to the Michigan
Savings Bank Act and the regulations of the Michigan Financial Institutions
Bureau adopted thereunder, as well as other applicable provisions of Michigan
law. AmeriBank derives its lending and investment powers
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<PAGE>
from the Michigan Savings Bank Act, and is subject to periodic examination and
reporting requirements by the Financial Institutions Bureau. The Michigan
Savings Bank Act further regulates many of the internal operating affairs of
AmeriBank, 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
Michigan Savings Bank Act, AmeriBank 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 institutions that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code, had been permitted to establish reserves for bad
debts and to make annual additions which may, within specified formula limits,
be taken as a deduction 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," which are generally
loans secured by improved real estate, was computed under either the experience
method or the percentage of taxable income method.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method was 8%. This percentage 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 institutions to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally, which is approximately 31.3%
assuming the maximum percentage bad debt deduction.
In addition to the regular income tax, corporations, including savings
institutions, 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 institutions, were also subject to
an environmental tax equal to .12% of the excess of alternative minimum taxable
income for the taxable year, which is 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 institution'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 institution's supplemental reserves
for losses on loans , such reserves for losses on loans may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a
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shareholder, including distributions on redemption, dissolution or liquidation,
or for any other purpose except to absorb bad debt losses. As of December 31,
1998, our supplemental reserves for losses on loans for tax purposes totaled
approximately $12.3 million.
Ottawa Financial and its subsidiaries file consolidated federal income
tax returns on a calendar year basis using the accrual method of accounting.
Savings institutions, 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 institution
members of the consolidated group that are functionally related to the
activities of the savings institution member.
We have been audited by the Internal Revenue Service ("IRS") with
respect to consolidated federal income tax returns for 1990 through 1993. We are
currently undergoing an audit by the IRS with respect to the consolidated
federal income tax return for 1995. 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 that we have merged with, would not result in a
deficiency which could have a material adverse effect on our financial
condition.
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," which 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, Ottawa Financial 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. Ottawa Financial is
also subject to an annual franchise tax imposed by the State of Delaware.
COMPETITION
We face strong competition in originating loans and attracting
deposits. 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 us for consumer loan business.
We attract all of our deposits through AmeriBank's branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is
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principally from other savings institutions, commercial banks, credit unions,
mutual funds and insurance companies. We compete 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
AmeriBank's 26 locations.
Our six county market area has a strong base of financial institutions
and several of those competitors are much larger than we are in terms of total
deposits and number of branches. The largest commercial banks operating in the
market area are National City, Old Kent, Huntington Bank, NBD Bank and Michigan
National Bank. Despite the presence of significant competition, we have
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 our local orientation.
EMPLOYEES
At December 31, 1998, we had a total of 310 employees, including 91
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers our employee relations to be good.
EXECUTIVE OFFICERS OF OTTAWA FINANCIAL
DOUGLAS J. IVERSON. Mr. Iverson, age 49, was appointed, effective
January 1, 1999, Chief Executive Officer and Vice Chairman of the Boards of
Ottawa Financial and AmeriBank. Previously, he served as Executive Vice
President, Secretary and Chief Operating Officer of Ottawa Financial and
President and Secretary of AmeriBank. Mr. Iverson joined AmeriBank in 1972, and
has served in numerous capacities during such tenure.
RONALD L. HAAN. Mr. Haan, age 45, was appointed, effective January 1,
1999, President and Chief Operating Officer of Ottawa Financial and AmeriBank.
Previously, he served as Senior Vice President and Assistant Secretary of Ottawa
Financial and Executive Vice President and Assistant Secretary of AmeriBank. Mr.
Haan also serves as a director of Ottawa Financial and AmeriBank. Before joining
Ottawa Financial in February 1996, he was employed in 1989 as Executive Vice
President of AmeriBank Federal Savings Bank and in February 1990 was appointed
Chief Financial Officer. In December 1990, Mr. Haan was elected President, Chief
Administrative Officer and a director of AmeriBank Federal Savings Bank. Prior
to his employment at AmeriBank Federal Savings Bank, Mr. Haan was employed by
MetroBanc Federal Savings Bank of Grand Rapids, Michigan, from 1978 to 1987 as
Vice President, and from 1987 to 1989 at Comerica Bank, Grand Rapids, Michigan,
as Vice President and Regional Manager.
JON W. SWETS. Mr. Swets, age 33, is Vice President and Chief Financial
Officer of Ottawa Financial and Senior Vice President-Chief Financial Officer of
AmeriBank. He joined Ottawa Financial and AmeriBank in these capacities in
November 1996. Prior to joining Ottawa Financial and AmeriBank, Mr. Swets was a
Senior Manager with Crowe, Chizek and Company LLP, a large
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public accounting firm. Mr. Swets joined Crowe, Chizek and Company LLP as a
staff accountant in June 1987.
ITEM 2. PROPERTIES
Our operations are conducted through AmeriBank's main office and 25
branches, including a "drive-up" facility. At December 31, 1998, we owned
AmeriBank's main office and 23 of its branch offices; the remaining two branch
offices and the land on which they are situated were leased. As of December 31,
1998, the net book value of our investment in premises, equipment and
leaseholds, excluding computer equipment, was approximately $13.6 million.
We maintain 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 Ottawa Financial at December 31, 1998 was $1.6 million.
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ITEM 3. LEGAL PROCEEDINGS
Ottawa Financial 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 our counsel representing us in the
proceedings, that the resolution of these proceedings should not have a material
effect on our results of operations. See Note 11 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached as Exhibit 13
to this Annual Report on Form 10-K.
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,
1998.
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, 1998 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, 1998 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, 1998 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The section entitled "Management Discussion of Financial Condition and
Results of Operations - Asset/Liability Management" of the attached Annual
Report to Stockholders for year ended December 31, 1998 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, 1998 is
incorporated herein by reference.
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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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information concerning directors of Ottawa Financial is incorporated
herein by reference from the definitive proxy statement for the Annual Meeting
of Shareholders to be held in April 1999, 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 Ottawa Financial is set
forth under the caption "Executive Officers of Ottawa Financial" contained in
Part I of this Form 10-K.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires Ottawa Financial's directors
and executive officers, and persons who own more than 10% of a registered class
of Ottawa Financial'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 Ottawa Financial. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish Ottawa Financial with
copies of all Section 16(a) forms they file.
To Ottawa Financial's knowledge, based solely on a review of the copies
of such reports furnished to Ottawa Financial and written representations that
no other reports were required during the fiscal year ended December 31, 1998,
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 definitive proxy statement for the Annual Meeting of
Shareholders to be held in April 1999, 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.
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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 definitive proxy
statement for the Annual Meeting of Shareholders to be held in April 1999,
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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in April 1999, 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.
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, 1998 and
1997.
3. Consolidated Statements of Income for the Years ended December 31,
1998, 1997 and 1996.
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows for the Years ended December
31, 1998, 1997 and 1996.
6. Consolidated Statements of Comprehensive Income for the Years ended
December 31, 1998, 1997 and 1996.
7. Notes to Consolidated Financial Statements.
8. Ottawa Financial Corporation Quarterly Financial Data.
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(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. Ottawa Financial filed a Current Report on Form 8-K dated
November 13, 1998, containing a press release announcing the
retirement of Gordon L. Grevengoed as Vice Chairman of the
Board and President and Chief Executive Officer ("CEO") of
Ottawa Financial and AmeriBank. The press release also
announced the appointment of Douglas J. Iverson as CEO and
Vice Chairman of the Boards of Ottawa Financial and AmeriBank
and Ronald L. Haan as President and Chief Operating Officer of
Ottawa Financial and AmeriBank.
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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 30, 1999 By: /s/ Douglas J. Iverson
---------------------- ----------------------------
Douglas J. Iverson
Vice Chairman of the Board
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/ Douglas J. Iverson By: /s/ Gordon H. Cunningham
-------------------------------------- ----------------------------
Douglas J. Iverson, Vice Chairman of Gordon H. Cunningham,
the Board and Chief Executive Officer Chairman of the Board
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 30, 1999 Date: March 30, 1999
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By: /s/ Ronald L. Haan By: /s/ Gordon L. Grevengoed
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Ronald L. Haan, President and Director Gordon L. Grevengoed,
Director
Date: March 30, 1999 Date: March 30, 1999
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By: /s/ Leon E. Koops By: /s/ Brian W. Koop
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Leon E. Koops, Director Brian W. Koop, Director
Date: March 30, 1999 Date: March 30, 1999
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By: /s/ Ronald J. Bieke By: /s/ B. Patrick Donnelly, III
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Ronald J. Bieke, Director B. Patrick Donnelly, III,
Director
Date: March 30, 1999 Date: March 30, 1999
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By: /s/ Robert D. Kolk By: /s/ G. W. Haworth
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Robert D. Kolk, Director G. W. Haworth, Director
Date: March 30, 1999 Date: March 30, 1999
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By: /s/ Jon W. Swets
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Jon W. Swets, Vice President and
Chief Financial Officer (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
Date: March 30, 1999
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INDEX TO EXHIBITS
Exhibit
Number Document
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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 Amended and Restated Bylaws, as amended and as
currently in effect.
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 Agreement between the Registrant's operating
subsidiary 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), is 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)
OTTAWA FINANCIAL CORPORATION
AMENDED AND RESTATED BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. ANNUAL MEETING.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. SPECIAL MEETINGS.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. NOTICE OF MEETINGS.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. QUORUM.
At any meeting of the stockholders, the holders of at least one-third of
all of the shares of the stock entitled to vote at the
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meeting, present in person or by proxy, shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is required,
a majority of the shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. ORGANIZATION.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chief Executive Officer of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. CONDUCT OF BUSINESS.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than ninety (90)
days prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than twenty days, or delayed by more than sixty days from such anniversary
date, notice by the stockholder to be timely must be so delivered not later than
the close of business on the later of the 90th day prior to such annual meeting
or the 10th
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day following the day on which notice of the date of the annual meeting was
mailed or public announcement of the date of such meeting is first made. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the Corporation's books, of the stockholder who proposed such
business, (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in these
By-laws to the contrary, no business shall be brought before or conducted at an
annual meeting except in accordance with the provisions of this Section 6(b).
The officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 6(b) and, if he should so determine, he shall so
declare to the meeting and any such business so determined to be not properly
brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than 100 days' notice of the date of the meeting is
first given or made to stockholders, by public announcement or mail, notice by
the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or public announcement was first made. Such stockholder's
notice shall set forth (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as
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a director if elected); and (ii) as to the stockholder giving the notice: (x)
the name and address, as they appear on the Corporation's books, of such
stockholder and (y) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder. At the request of the
Board of Directors, any person nominated by the Board of Directors for election
as a director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the provisions of this Section
6(c). The officer of the Corporation or other person presiding at the meeting
shall, if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he or she should so determine, he or she
shall so declare to the meeting and the defective nomination shall be
disregarded.
Section 7. PROXIES AND VOTING.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. STOCK LIST.
The officer who has charge of the stock transfer books of the Corporation
shall prepare and make, in the time and manner required
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by applicable law, a list of stockholders entitled to vote and shall make such
list available for such purposes, at such places, at such times and to such
persons as required by applicable law. The stock transfer books shall be the
only evidence as to the identity of the stockholders entitled to examine the
stock transfer books or to vote in person or by proxy at any meeting of
stockholders.
Section 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. INSPECTORS OF ELECTION
The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more persons as inspectors of election, to act at the meeting or
any adjournment thereof and make a written report thereof, in accordance with
applicable law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. GENERAL POWERS, NUMBER AND TERM OF OFFICE.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors shall be as
provided for in the Certificate of Incorporation. The Board of Directors shall
annually elect a Chairman of the Board and a President from among its members,
and may elect one or more Vice Chairmen. The Board shall designate, when
present, either the Chairman or Vice Chairman of the Board or the President to
preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding
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annual meeting of stockholders after their election, with each director to hold
office until his or her successor shall have been duly elected and qualified.
No person 75 years of age shall be eligible for election, reelection,
appointment, or reappointment to the Board of the Corporation. No Director shall
serve as such beyond the annual meeting of the Corporation in the year which the
Director becomes 75. A Director's term will be adjusted, if necessary, to expire
in the year the Director turns 75. This age limitation does not apply to
Directors who have served on the Board of Directors of Ottawa Savings Bank, FSB
since 1990 or to an Emeritus Director.
Section 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS.
Subject to the rights of the holders of any class or series of preferred
stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires, and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. REGULAR MEETINGS.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the Chief Executive Officer and shall be held at such place, on such date,
and at such time as they or he or she shall fix. Notice of the place, date, and
time of each such special meeting shall be given to each director by whom it is
not waived by mailing written notice not less than five (5) days before the
meeting or by telegraphing or telexing or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
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Section 5. QUORUM.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. CONDUCT OF BUSINESS.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. POWERS.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon any
other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
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(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these By-laws, for the management of the Corporation's business and affairs.
Section 9. COMPENSATION OF DIRECTORS.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. QUALIFICATIONS OF DIRECTORS.
Any member of the Board of Directors shall, in order to qualify to stand
for election or to continue to serve as a director, be domiciled in, have a
principal residence in or have his or her primary place of business located in
any county in which the Corporation or any of its subsidiaries has an office.
ARTICLE III
COMMITTEES
Section 1. COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designated the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by
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unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of the absent or disqualified member.
Section 2. CONDUCT OF BUSINESS.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. NOMINATING COMMITTEE.
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the Chief
Executive Officer if, and only so long as, the Chief Executive Officer remains
in office as a member of the Board of Directors. The Nominating Committee shall
have authority (a) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii)
of Article I of these By-laws in order to determine compliance with such By-law
and (b) to recommend to the Whole Board nominees for election to the Board of
Directors to replace those directors whose terms expire at the annual meeting of
stockholders next ensuing.
ARTICLE IV
OFFICERS
Section 1. GENERALLY.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a President, a Chief Executive
Officer (if not the President), a Secretary and a Treasurer and from time to
time may choose such other officers as it may deem proper. The Chief Executive
Officer shall be chosen from among the directors. Any number of offices may be
held by the same person.
(b) The term of office of all officers shall be until the next
annual election of officers and until their respective successors are chosen,
but any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the Board
of Directors.
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(c) All officers chosen by the Board of Directors shall each have
such powers and duties as generally pertain to their respective offices, subject
to the specific provisions of this Article IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. VICE CHAIRMAN OF THE BOARD.
A Vice Chairman of the Board shall be the Chief Executive Officer and,
subject to the control of the Board of Directors, shall have general power over
the management and oversight of the administration and operation of the
Corporation's business and general supervisory power and authority over its
policies and affairs. He shall see that all orders and resolutions of the Board
of Directors and of any committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his absence, by such officer or other person as is chosen at the meeting.
The Secretary or, in his absence, the General Counsel of the Corporation or such
officer as has been designated by the Board of Directors or, in his absence,
such officer or other person as is chosen by the person presiding, shall act as
secretary of each such meeting.
Section 3. PRESIDENT.
The President shall be the Chief Operating Officer and subject to the
control of the Board of Directors, shall have all powers and perform all duties
as are commonly incident of the office of chief operating officer and shall have
such other powers and perform such other duties as from time may be assigned or
delegated to him by the Board of Directors or a Vice Chairman of the Board. The
President shall, unless otherwise provided in these By-laws or by resolution of
the Board of Directors, perform the duties and exercise the powers of the Chief
Executive Officer in the event such office shall remain vacant or in the event
of the Chief Executive Officer's absence or disability.
Section 4. VICE PRESIDENT.
The Vice President or Vice Presidents, if any, shall perform the duties of
the President in his absence or during his disability to act. In addition, the
Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman or Vice Chairman of the Board or the President.
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Section 5. SECRETARY.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman or Vice Chairman of the
Board or the President.
Section 6. TREASURER.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. He shall sign or countersign such instruments as require his
signature, shall perform all such duties and have all such powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned to him by the Board of Directors, the Chairman or Vice Chairman of the
Board or the President, and may be required to give bond, payable by the
Corporation, for the faithful performance of his duties in such sum and with
such surety as may be required by the Board of Directors.
Section 7. ASSISTANT SECRETARIES AND OTHER OFFICERS.
The Board of Directors may appoint one or more assistant secretaries and
one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman or Vice Chairman of the Board or the President.
Section 8. ACTION WITH RESPECT TO SECURITIES OF OTHER
CORPORATIONS
Unless otherwise directed by the Board of Directors, the Chief Executive
Officer or any officer of the Corporation authorized by the Chief Executive
Officer shall have power to vote and otherwise act on behalf of the Corporation,
in person or by proxy, at any meeting of stockholders of or with respect to any
action of stockholders of any other corporation in which this Corporation may
hold securities and otherwise to exercise any and all rights and powers which
this Corporation may possess by reason of its ownership of securities in such
other Corporation.
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ARTICLE V
STOCK
Section 1. CERTIFICATES OF STOCK.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chief Executive Officer, the President (if not
the Chief Executive Officer) or a Vice President, and by the Secretary or an
Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the
number of shares owned by him or her. Any or all of the signatures on the
certificate may be by facsimile.
Section 2. TRANSFERS OF STOCK.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. RECORD DATE.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
12
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. REGULATIONS.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. NOTICES.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. WAIVERS.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
13
<PAGE>
ARTICLE VII
MISCELLANEOUS
Section 1. FACSIMILE SIGNATURES.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. CORPORATE SEAL.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. FISCAL YEAR.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. TIME PERIODS.
In applying any provision of these By-laws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
14
<PAGE>
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
15
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Year Ended
December 31, 1998
----------------------
(Dollars in Thousands
except per share data)
<S> <C>
EARNINGS PER COMMON SHARE
Net Income available to common shareholders $ 8,668
==========
Weighted average common shares outstanding 5,436,541
EARNINGS PER COMMON SHARE $ 1.59
==========
EARNINGS PER COMMON SHARE ASSUMING DILUTION
Net Income available to common shareholders $ 8,668
==========
Weighted average common shares outstanding 5,436,541
Add: Dilutive effects of assumed exercises of stock options and warrants 591,308
Weighted average common and dilutive potential common shares outstanding 6,027,849
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 1.44
==========
</TABLE>
1998
Ottawa Financial Corporation / Ameribank
Report To Shareholders
[COVER PHOTO: CURRENTLY UNDER CONSTRUCTION IN MUSKEGON IS THE MERCY HEALTH
PAVILION WHICH WILL HOUSE MEDICAL OFFICES. MERCY HOSPITAL WILL LEASE THE
FACILITY FOR WHICH FINANCING IS BEING PROVIDED BY AMERIBANK. REVIEWING THE
PROJECT'S PROGRESS ARE FROM LEFT TO RIGHT, WILLIAM FETTIS AND DENNY CHERETTE OF
INVESTMENT PROPERTY ASSOCIATES AND LEE PANKRATZ, AMERIBANK'S CHIEF LENDING
OFFICER.]
<PAGE>
Our Mission: Leadership Through Service
AmeriBank, a wholly-owned subsidiary of Ottawa Financial Corporation, is a
financial service organization offering a broad line of financial products and
services. AmeriBank delivers value to its shareholders, customers, employees and
the communities it serves through superior quality products and services,
visionary leadership, strong employee relations, solid performance and
profitable growth.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Ottawa Financial Corporation Officers Branch Office and ATM Locations Grand Rapids
Gordon H. Cunningham Holland/Zeeland Downtown Grand Rapids
Chairman of the Board, Attorney 190 Monroe Avenue, NW
Downtown Holland 616-559-1712
Douglas J. Iverson 245 Central Avenue
Vice Chairman and CEO 616-393-7141 Alpine (ATM)
3320 Alpine Avenue, NW
Ronald L. Haan Beechwood (ATM) 616-785-1000
President, COO and Secretary 180 Douglas Avenue
616-393-7180 Breton (ATM)
Jon W. Swets 2609 Breton Avenue, SE
Chief Financial Officer and Assistant Secretary Downtown Holland Drive-In (ATM) 616-956-7110
10 East 9th Street
616-393-7104 Byron Center (ATM)
2384 84th Street, SW
Ottawa Financial Corporation Board of Directors Downtown Zeeland 616-878-1573
146 East Main Street
Gordon H. Cunningham 616-772-2191 Cascade (ATM)
Chairman of the Board 6750 Cascade Road, SE
Attorney & Partner Hamilton (ATM) 616-949-5515
Cunningham Dalman, P.C. 4672 Pine Street
616-751-5101 Cutlerville (ATM)
Douglas J. Iverson 675 68th Street, SW
Vice Chairman and CEO Hudsonville (ATM) 616-827-1400
AmeriBank 2855 Port Sheldon Street, SW
616-669-4400 Grandville (ATM)
Ronald L. Haan 4495 Wilson Avenue, SW
President, COO and Secretary South Washington (ATM) 616-531-0700
AmeriBank 1000 South Washington Avenue
616-393-7065 Jenison (ATM)
Ronald J. Bieke 600 Baldwin Drive, SW
President West Ottawa (ATM) 616-457-3350
Arcadia BIDCO Corporation 392 136th Street
616-393-7103 Kentwood (ATM)
B. Patrick Donnelly, III 5300 Kalamazoo Avenue, SE
President Zeeland West (ATM) 616-281-5200
Productive Solutions, LLC 523 West Main Street
616-772-4800 Muskegon/North Lakeshore
Gordon L. Grevengoed
Retired Vice Chairman of the Board and CEO ATM Only Locations Downtown Muskegon
AmeriBank 880 First Street
Westshore Mall 616-726-4461
G. W. Haworth 12231 James Street, Holland
Founding Chairman Fremont (ATM)
Haworth, Inc. Hope College 211 W. Main Street
DeWitt Center, Holland 616-924-5600
Robert D. Kolk
President Haworth Inc. Grand Haven (ATM)
Mechanical Transplanter Co. Member Center, Holland 1600 S. Beacon Boulevard
616-846-1350
Brian Koop
Vice President and Senior Executive Hart (ATM)
JCI Institute 424 State Street
616-873-5607
Leon E. Koops
President North Muskegon (ATM)
Hamilton Distributing Company 621 Dykstra Road
616-744-4731
Roosevelt Park (ATM)
3145 Henry Street
616-759-3000
Terrace Street Drive-In (ATM)
877 Terrace Street
616-722-1371
Whitehall (ATM)
211 South Mears Avenue
616-894-5635
Ottawa Financial Corporation
245 Central Avenue
Holland, Michigan 49423
www.AmeriBank.net
</TABLE>
<PAGE>
AmeriBank
---------------------------
Ottawa Financial Corporation
<PAGE>
TABLE OF CONTENTS
Our Mission: Leadership Through Service, Inside Front Cover
Letter To Our Shareholders, page 2
Commercial Banking: Consistent Approach Defines Success, page 4
Branch Banking: Expanding Services, Building Strong Relationships, page 6
Residential Mortgages: Realizing Gains in a Challenging Environment, page 8
AmeriPlan: A First Year Success Story, page 10
Gordon L. Grevengoed: A Tribute, page 12
Financial Charts, page 13
Selected Consolidated Financial Information, page 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 16
Report of Independent Auditors, page 28
Consolidated Balance Sheets, page 29
Consolidated Statements of Income, page 30
Consolidated Statements of Changes in Shareholders' Equity, page 31
Consolidated Statements of Cash Flows, page 32
Consolidated Statements of Comprehensive Income, page 33
Notes to Consolidated Financial Statements, page 34
Quarterly Financial Information, page 51
Shareholder Information, page 52
Officers and Directors, Inside Back Cover
Branch Office and ATM Locations, Inside Back Cover
Cover photo: Currently under construction in Muskegon is the Mercy Health
Pavilion which will house medical offices. Mercy Hospital will lease the
facility for which financing is being provided by AmeriBank. Reviewing the
project's progress are from left to right, William Fettis and Denny Cherette of
Investment Property Associates and Lee Pankratz, AmeriBank's Chief Lending
Officer.
OTTAWA FINANCIAL CORPORATION 1
<PAGE>
[PICTURE OF DOUGLAS J. IVERSON, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER OTTAWA
FINANCIAL CORPORATION]
Letter to our Shareholders
Dear Shareholders:
1998 was a year of strong financial performance for Ottawa Financial
Corporation. Our record earnings of $8.7 million for the year resulted in an 18%
improvement in earnings per share. We remain committed to the enhancement of
shareholder value. That commitment defines our strategic initiatives and
determines the products we provide, the services we offer and the people we
employ.
During 1998, we focused on expanding our business banking services and
promised to develop as a full financial service company. We have made
significant progress in both areas. We increased our commercial loan portfolio
by $71.1 million, representing 45% growth. We expanded our deposit customer base
by $39.0 million, with the largest increase in commercial deposit accounts. In
addition, our investment subsidiary contributed $597,000 in gross revenues to
noninterest income during the year. Our qualified staff, along with our new
commercial banking product lines such as account analysis, zero balance
accounts, sweep accounts and direct deposit-ACH origination, contributed heavily
to achieving these goals.
Our focus for 1999 is on the bottom line. Our goals for this upcoming year
include continuing to grow the loan portfolio. Our attention will be on the
higher yielding commercial and consumer lines of business. In addition, we are
analyzing opportunities for enhancing noninterest income, as well as evaluating
and implementing new initiatives for containing costs and improving
efficiencies. We are pleased about providing automated underwriting to our
mortgage banking customers and look forward to complete implementation of this
service in 1999. We are confident this technology will improve efficiencies in
our mortgage loan origination.
2 OTTAWA FINANCIAL CORPORATION
<PAGE>
We have a strong loyalty to the local markets we serve and are excited to
introduce AmeriBank as the first co-sponsor of the Grand Rapids and Holland area
Parade of Homes. Historically, these parades combined have attracted over 30,000
individuals, builders, developers and realtors from Western Michigan. We are
encouraged that this opportunity will increase our presence in our market areas
and will enable us to attract new, and strengthen existing, customer
relationships.
As a financial service company, our operations are dependent on technology.
We have been committed to implementing the latest advances in technology, when
cost justified, for the benefit of our customers and internal efficiencies. With
the dependency on technology has come an intense public interest in preparing
for the year 2000, sometimes called Y2K. Our Y2K plan is on schedule and we have
been successfully preparing and testing all systems and affected areas in order
to provide a smooth transition into the year 2000.
It is with great admiration for his professional talents and personal
accomplishments that I wish to thank Gordon L. Grevengoed for his 42 years of
leadership and loyalty. Mr. Grevengoed, Vice Chairman, President and CEO
announced his retirement in November 1998. While Mr. Grevengoed will be leaving
the management of the company, we are pleased that he will be continuing to
assist in defining the direction of the corporation and the bank through his
service as a member of the Board of Directors. As a personal friend and
colleague, I would like to wish Gordon health and happiness in his well-deserved
retirement.
I am fortunate to be working along side of Ronald L. Haan, President and COO,
who is a highly talented and experienced financial executive. Both Ron and I, in
our newly appointed positions, are surrounded by a qualified management team.
This key group of gifted individuals will be instrumental in guiding your
company into the next millennium and delivering on our promise to improve
shareholder value.
On behalf of the Corporation, I would like to thank our employees for their
hard work and dedicated service, our customers for their loyalty and support,
and our shareholders for their allegiance and continued confidence. We are
committed to building shareholder value through continuous improvement in our
operations and look forward to an exciting year ahead.
Sincerely,
/s/ Douglas J. Iverson
Douglas J. Iverson
Vice Chairman and Chief Executive Officer
Ottawa Financial Corporation
OTTAWA FINANCIAL CORPORATION 3
<PAGE>
LEADERSHIP THROUGH SERVICE
[PICTURE OF MICHAEL WEBSTER, SENIOR VICE PRESIDENT, COMMERCIAL LENDING --
CAPTION: AMERIBANK HAS DEVELOPED A REPUTATION IN THE AREA OF COMMERCIAL REAL
ESTATE, CONSTRUCTION, AND DEVELOPMENT LENDING BY SERVING THIS MARKET
CONSISTENTLY SINCE 1990.
-- MICHAEL WEBSTER
SENIOR VICE PRESIDENT,
COMMERCIAL LENDING]
COMMERCIAL BANKING:
CONSISTENT APPROACH DEFINES SUCCESS
Consistency. In a word, it captures the essence of AmeriBank's commercial
banking division. Whether describing service offerings, relationship building,
or caliber of staff, consistency is key to our continuing success in commercial
and business banking.
1998 was an outstanding year on all fronts. Our pledge to introduce a variety
of non-lending commercial products and services was fulfilled enabling AmeriBank
to better meet the present and future needs of our customers. The addition of
more sophisticated cash management services such as sweep accounts, business
credit cards, bank courier service and others aided in attracting new commercial
customers.
Cash management services go hand-in-hand with commercial lending which also
saw significant growth in 1998. Total outstanding commercial business and real
estate loans rose from $157 million to $228 million--an increase of 45 percent.
This portfolio includes commercial real estate, construction and development
loans, multi-family real estate loans, industrial real estate loans, equipment
and commercial vehicle loans and operating lines of credit. In addition, letters
of credit to support purchases, as well as taxable and tax-free bond issuances
are offered. Even with strong growth, asset quality has not diminished. The
findings of our independent loan review confirm that asset quality continues to
be very high.
A long-range goal is to restructure our loan portfolio evenly between
commercial, residential mortgage and consumer loans. Whereas commercial loans
represented 21 percent of our total loan portfolio at year-end 1997, they now
comprise 29 percent. This represents remarkable progress toward our goal which
will allow the bank to increase earnings at a comfortable level of risk.
Commercial lending, in particular, has benefited greatly from a consistent
approach. Michael Webster, Senior Vice President of Commercial Lending, says
AmeriBank has built a name for itself in the area of commercial real estate,
construction and development lending by serving this market consistently since
1990. "It's a lending discipline that takes longer to understand and properly
administer than others. We have seasoned professionals and we've been able to
attract additional talent because of our solid reputation."
These qualities have not gone unnoticed, particularly during this time of
bank mega-mergers. Says Webster, "We're dependable and consistent in a market
that hasn't seen much consistency."
In 1999, the commercial division will focus on growing its loan portfolio,
adding experienced lenders and delivering top-quality service to an expanding
customer base.
4 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PAGE 5 -- PICTURE]
<PAGE>
[PICTURE OF JIM STUCK, GRANDVILLE BRANCH MANAGER --
CAPTION: PROVIDING QUALITY SERVICE IS ROOTED IN THE DEVELOPMENT OF STRONG
RELATIONSHIPS. AMERIBANK'S BRANCH BANKS FOCUS ON DEVELOPING CLOSE TIES WITH THE
PEOPLE AND COMMUNITIES THEY SERVE.
-- JIM STUCK
GRANDVILLE BRANCH MANAGER]
BRANCH BANKING:
EXPANDING SERVICES, BUILDING
STRONG RELATIONSHIPS
Today's consumers are seeking better and faster ways of meeting the demands of
daily living. Increasingly, technology is providing the solutions. At AmeriBank,
we continue to harness the power and ease of technological advances for the
benefit of our customers.
During the second quarter of 1998, we introduced AmeriCall 24TM. This
automated telephone service provides an extremely efficient way for AmeriBank
customers to access their accounts anytime, anywhere. Customers are able to
retrieve useful account and banking information as well as complete common
banking transactions such as transfers, advances, and payments. AmeriCall 24TM
has proven to be very popular for many of our customers. The volume of
transactions has steadily increased each month, with well over 1800 transactions
now received daily.
Fulfilling customer expectations through new and different products and
services tailored to their future needs will continue to be one of our corporate
objectives. Likewise, we continue to focus on the quality of service provided
and the building of relationships. Our slogan, "Friendly. Local. Smart."
summarizes these benefits.
These attributes come to life annually in a community service project called
StoryBook Christmas. Bank staff and customers pull together to collect thousands
of new and gently used books for distribution to West Michigan organizations who
then distribute them to children in need. During the 1998 holiday season,
AmeriBank's 26 branches collected over 8,700 books.
In Grand Rapids, the pediatric unit at St. Mary's Hospital received over 500
books--a portion of the books that were collected by the Grandville and Cascade
branch offices. "Our staff, customers and people from the community have all
supported this program with their enthusiasm and their contributions," Jim
Stuck, manager of AmeriBank's Grandville branch said. "We are pleased to be able
to help the kids by making their stay in the hospital a little more pleasant by
offering them a choice of books."
In all, more than 20 groups and organizations receive books collected during
the program. Storybook Christmas fulfills a need in our community while
strengthening the bond between customers and staff.
6 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PAGE 7 -- PICTURE]
<PAGE>
[PICTURE OF CINDY MATTHEWS, MUSKEGON BRANCH MANAGER --
CAPTION: AMERIBANK'S MUSKEGON BRANCH HAD ITS BEST YEAR EVER IN WRITING
RESIDENTIAL MORTGAGES, CONTRIBUTING TO THE BANK'S RECORD-SETTING YEAR.
-- CINDY MATTHEWS
MUSKEGON BRANCH MANAGER]
RESIDENTIAL MORTGAGES:
REALIZING GAINS IN A CHALLENGING ENVIRONMENT
Our residential mortgage division saw record activity in 1998. We originated
$258 million in new loans. In addition, $2.4 million in gains on sales of
mortgage loans were generated from secondary market operations, representing a
significant increase in this type of noninterest income.
While the bank realized record loan activity, sales of those loans actually
caused the bank's outstanding residential mortgage portfolio to decline by 12
percent. This small decrease contributed favorably to the restructuring of our
loan portfolio which has as its goal, a more even distribution between
residential mortgage, consumer, and commercial loans. We made significant
progress toward this long-term goal in 1998. As a result of the residential
mortgage activities noted here, our total loan portfolio is now more evenly
balanced.
These results were largely affected by our low-rate environment and a highly
competitive marketplace characterized by a variety of loan options. To offset
these market forces, specialized expertise has been added to the Corporation's
staff to develop the consumer and commercial loan portfolios and other lines of
fee-generating business consistent with the Corporation's strategic plan.
During the second quarter, we saw the addition of a new title insurance
subsidiary which will complement our residential mortgage program. This new
subsidiary is expected to offer competitive title insurance products to our loan
customers while adding revenue to our bottom line.
Over the years, we have worked to build asset quality in our commercial and
consumer loan portfolio. The findings of our most recent, independent loan
review confirm that AmeriBank has been able to maintain a high level of asset
quality in the face of increasing loan activity. We are proud of this
achievement and pledge to continue to increase our portfolio with high quality
assets.
8 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PAGE 9 -- PICTURE]
<PAGE>
[PICTURE OF DON VANDENBRINK, AMERIBANK FINANCIAL PLANNER --
CAPTION: AMERIPLAN HAS BEEN SUCCESSFUL NOT ONLY IN MEETING THE NEEDS OF EXISTING
BANK CUSTOMERS BUT ALSO IN ATTRACTING NEW CUSTOMERS. FORTY-FIVE PERCENT OF
AMERIPLAN'S BUSINESS IN 1998 CAME FROM NEW CUSTOMERS.
-- DON VANDENBRINK
AMERIBANK FINANCIAL PLANNER]
AMERIPLAN:
A FIRST YEAR SUCCESS STORY
Our evolution into a financial service organization offering a broad line of
financial products and services remained on target with the successful
introduction of AmeriPlan Financial Services, Inc. This new subsidiary--which
completed its first full year--assists customers with personal, long-term
financial planning and offers alternative investment products and services.
AmeriPlan met its first-year sales goals resulting in significant increases
in non-interest fee income for the Corporation. AmeriPlan attained profitability
during 1998 and contributed a total of $597,000 in gross revenues. The majority
of sales were mutual funds and annuities. Two additional services were added
late in the year. Long-term care insurance and wrap accounts are now available.
AmeriPlan's introduction has been met with strong interest among existing
customers and also has served as a magnet attracting new customers to the
Corporation. Don VandenBrink, financial planner serving the Holland area, says
45 percent of AmeriPlan's business came from new customers, resulting in a whole
new revenue source for the bank. VandenBrink attributes the positive response to
several factors including a high level of trust between customer and provider,
the ever increasing need for non-traditional bank products, and also
convenience. "Customers often comment that it is so great having one location
where they can have all of their financial needs met," says VandenBrink.
These accomplishments were consistent with our stated goals of attracting new
bank relationships, strengthening existing bank relationships and growing
non-interest fee income. AmeriPlan services are offered through three registered
individuals each serving one of the Bank's three primary regions: Grand Rapids,
Holland and Muskegon.
During 1999, AmeriPlan will continue to build on its client base while
offering a high level of customer service. To achieve this, additional staff
members will be added in the support area. We are extremely optimistic about our
future as a financial services organization and AmeriPlan's continued success.
10 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PAGE 11 -- PICTURE]
<PAGE>
GORDON L. GREVENGOED: A TRIBUTE
In November 1998, Ottawa Financial Corporation announced the retirement of
Gordon L. Grevengoed, Vice Chairman, President and CEO. Grevengoed, who
continues to serve on the boards of both the Corporation and the Bank, says he
is very pleased to be leaving the management of the company in the hands of Doug
Iverson, Vice-Chairman and CEO, and Ron Haan, President and COO. "We are very
fortunate to have two very talented individuals to lead the company as we move
into the new millennium. Both men are experienced, extremely gifted and are well
regarded in their communities and in the financial arena."
Grevengoed joined Ottawa Savings and Loan Association in Holland in 1956. One
of five employees at the time, he worked as a teller and took loan applications.
In reflecting on his 42 years in banking, he noted that it has been change that
has added excitement to his work. Change may be an understatement. From it's
humble beginnings as a single branch, Ottawa Savings Bank grew to 13 branches
and 190 employees before its merger in February 1996 with AmeriBank. Grevengoed
orchestrated the merger which combined Ottawa Savings Bank and AmeriBank under
the parent company, Ottawa Financial Corporation. Since then, under Grevengoed's
capable leadership, AmeriBank has grown to include 326 employees and 26 bank
locations in 6 west Michigan counties. Assets have appreciated by more than 32
percent to almost a billion dollars.
Grevengoed says his immediate retirement plans call for spending more time
with his wife Marilyn, their fourteen grandchildren, doing Christian service
work and playing golf and tennis. He said he knows he will have plenty of
opportunities to stay involved in the community, but he plans to take his time
deciding just what he will do.
12 OTTAWA FINANCIAL CORPORATION
<PAGE>
FINANCIAL CHARTS
[BAR GRAPH: [BAR GRAPH: [BAR GRAPH:
RETURN ON EQUITY EARNINGS PER SHARE NET INTEREST MARGIN
PERCENTAGE DOLLARS PER SHARE PERCENTAGE
1994 - 6.38 1994* - .21 1994 - 4.17
1995 - 4.62 1995 - .57 1995 - 4.44
1996*- 6.83 1996**- .86 1996 - 3.50
1997 - 9.93 1997 - 1.22 1997 - 3.37
1998 - 11.49 1998 - 1.44 1998 - 3.26]
*ADJUSTED TO REMOVE ALL PER SHARE INFORMATION
THE IMPACT OF THE HAS BEEN ADJUSTED TO
ONE-TIME SAIF REFLECT THE 10% STOCK
ASSESSMENT.] DIVIDENDS PAID ON AUGUST 31,
1998 AND SEPTEMBER 30, 1997
*BASED UPON EARNINGS
SUBSEQUENT TO STOCK
CONVERSION IN AUGUST 1994.
**ADJUSTED TO REMOVE THE
IMPACT OF THE ONE-TIME SAIF
ASSESSMENT.]
[BAR GRAPH: [BAR GRAPH: [BAR GRAPH:
TOTAL ASSETS RETURN ON ASSETS NON-PERFORMING
MILLIONS OF DOLLARS PERCENTAGE ASSETS TO TOTAL
ASSETS
PERCENTAGE
1994 - 328 1994 - 1.03 1994 - .36
1995 - 370 1995 - 1.08 1995 - .76
1996 - 848 1996*- .72 1996 - .36
1997 - 886 1997 - .87 1997 - .36
1998 - 938] 1998 - .94 1998 - .43]
*ADJUSTED TO REMOVE THE IMPACT
OF THE ONE-TIME SAIF ASSESSMENT.]
OTTAWA FINANCIAL CORPORATION 13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
The following financial data summarizes more detailed financial
information disclosed throughout this report.
<TABLE>
<CAPTION>
December 31, 1998 1997 1996(1) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 938,030 $ 885,817 $ 848,306 $ 370,305 $ 328,461
Loans receivable, net 769,770 747,423 715,551 276,457 230,818
Securities and Federal Home Loan Bank stock 83,428 64,616 69,864 66,926 73,577
Deposits 693,632 654,560 622,492 243,220 231,321
Federal Home Loan Bank advances 160,268 145,458 139,170 43,241 13,579
Shareholders' Equity 73,407 76,363 76,917 79,560 78,593
Selected Operations Data:
Total interest income $ 67,904 $ 64,726 $ 54,669 $ 25,579 $ 20,799
Total interest expense 40,012 37,704 30,531 11,321 9,182
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 27,892 27,022 24,138 14,258 11,617
Provision for loan losses 930 660 564 160 170
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 26,962 26,362 23,574 14,098 11,447
Service charges and other fees 4,749 3,356 3,042 2,219 1,870
Gain on sales of loans 2,398 370 141 309 110
Other noninterest income (loss) 664 420 145 (435) (121)
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,811 4,146 3,328 2,093 1,859
Total noninterest expense(2) 21,092 18,708 21,844 10,651 8,999
- -----------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 13,681 11,800 5,058 5,540 4,307
Income tax expense 5,013 4,273 1,964 1,911 1,308
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094 $ 3,629 $ 2,999
===================================================================================================================================
Basic earnings per common share(3) $ 1.59 $ 1.33 $ .51 $ .57 $ .21
===================================================================================================================================
Diluted earnings per common share(3) $ 1.44 $ 1.22 $ .49 $ .57 $ .21
===================================================================================================================================
Cash dividends declared per common share(3) $ .39 $ .33 $ .28 $ .25 $ .05
===================================================================================================================================
</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 1998, 1997, 1996, 1995 and
1994 were 5,436,541, 5,665,441, 6,108,202, 6,321,098 and 6,320,267
respectively. Weighted average common and dilutive potential common shares
outstanding for 1998, 1997, 1996, 1995 and 1994 were 6,027,849, 6,169,966,
6,254,124, 6,359,382 and 6,320,267, respectively. All share and per share
information has been retroactively adjusted to reflect the 10% stock
dividends paid on August 31, 1998 and September 30, 1997, and the adoption
of Statement of Financial Accounting Standards No. 128, Earnings per Share.
14 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets .94% .87% .41% 1.08% 1.03%
SAIF adjusted(2) .72
Average interest rate spread during period 2.89 3.01 3.08 3.31 3.53
Net interest margin(1) 3.26 3.37 3.50 4.44 4.17
Ratio of operating expense to
average total assets 2.28 2.15 3.06 3.16 3.14
SAIF adjusted(2) 2.56
Efficiency(3) 63.19 61.13 79.56 65.14 66.78
SAIF adjusted(2) 66.75
Return on equity 11.49 9.93 3.93 4.62 6.38
SAIF adjusted(2) 6.83
Quality Ratios:
Non-performing assets to
total assets at end of period 0.43 0.36 0.36 0.76 0.36
Allowance for loan losses to
non-performing loans 119.51 118.62 109.89 51.38 109.78
Allowance for loan losses to
total loans receivable, net 0.49 0.44 0.44 0.45 0.48
Capital Ratios:
Equity to total assets at end of period 7.83 8.62 9.07 21.48 23.92
Average equity to average assets 8.15 8.73 9.09 22.62 16.15
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.08x 1.07x 1.10x 1.32x 1.19x
Number of full service offices 26 26 26 13 13
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Ratio is 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 noninterest expense to the total of net interest income before
provision for loan losses and noninterest income net of gains and losses on
sales of assets.
OTTAWA FINANCIAL CORPORATION 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read with the consolidated
financial statements attached. The financial statements reflect the consolidated
financial condition and results of operations of Ottawa Financial Corporation
and its wholly-owned subsidiary, AmeriBank.
General
Ottawa Financial Corporation recorded recorded earnings in 1998. Improvements in
net interest income and noninterest income contributed heavily to the growth in
earnings. Our focus on developing our business banking services, as well as
healthy loan demand in our market area, enabled us to increase the commercial
business and real estate loan portfolio. This portfolio, which includes
commercial real estate loans, construction and development loans, multi-family
real estate loans, industrial real estate loans, equipment and commercial
vehicle loans, and operating lines of credit grew by $71.1 million, representing
a 45% growth rate.
The recent mergers in our local market area and our promise to become a full
financial service company have enabled us to expand and diversify our customer
base. Deposits are up $39.0 million from 1997, with the largest increase in
commercial deposit accounts. Through our 26 retail banking offices in Western
Michigan, we began offering a number of new products and services during 1998.
These included special services for our business banking customers such as
account analysis, zero balance accounts, sweep accounts and direct deposit-ACH
origination; title insurance to our loan customers through our new title
insurance subsidiary; as well as "AmeriCall 24" for all of our deposit
customers.
Our new subsidiary, AmeriPlan Financial Services, Inc., assists customers
with their personal financial planning and offers a variety of investment and
insurance products. We have added specialized expertise to our staff to develop
this new line of fee generating business consistent with our strategic plan. The
benefit of this investment in resources is reflected in the growth in fee income
on sales of mutual funds and annuities. This investment subsidiary has
contributed $597,000 in gross revenues to noninterest income during 1998.
Financial Condition
Total assets increased to $938.0 million at December 31, 1998 from $885.8
million at December 31, 1997. Loans and securities experienced the most growth.
Proceeds received from the growth in deposits and FHLB advances funded the
increase in assets.
Securities increased to $71.6 million at December 31, 1998 from $57.3 million
at December 31, 1997. As interest rates declined during the year, a large
portion of our agency securities were called by the issuers. With these proceeds
and other funding sources, we invested in non-callable agency securities and
adjustable rate securities. We invested in non-callable agency securities to
reduce the risk of having to reinvest in lower yielding securities during a
falling interest rate environment as a result of the issuers exercising their
call option and invested in adjustable rate securities to manage interest rate
risk.
Net loans receivable increased to $769.8 million at December 31, 1998 from
$747.4 million at December 31, 1997. The commercial business and commercial real
estate portfolio grew by 45%, while the consumer portfolio grew by 8%. Our focus
on the development of our commercial and business banking services, as well as
healthy loan demand in our market area, provided for this growth.
The one-to-four family mortgage loan portfolio decreased by 12% during 1998
even though the volume of loans originated increased dramatically. The volume of
residential mortgage loans originated for sale increased from $45.4 million in
1997 to $151.4 million in 1998. We achieved this growth from the significant
increase in refinancing activity resulting from the decline in mortgage interest
rates during 1998, as well a change in our method of pricing mortgage loans to
be sold. During the third quarter of 1997, we offered more competitive rates to
our customers by implementing more sophisticated pricing tools. We sell almost
16 OTTAWA FINANCIAL CORPORATION
<PAGE>
all of our 15 and 30 year term fixed rate mortgage production and retain for our
portfolio adjustable rate mortgage production. A significant portion of our
adjustable portfolio refinanced to fixed rate during 1998. We then sold these
fixed rate loans causing the overall decrease in our mortgage portfolio.
The increase in both net loans receivable and origination of loans for sale
reflects the continued healthy loan demand in our market area. We were well
positioned with our loan products to capitalize on this demand. The growth was
achieved while maintaining rates consistent with our competitors and maintaining
credit quality standards.
Deposits increased to $693.6 million at December 31, 1998 from $654.6 million
at December 31, 1997. Business checking and money market savings accounts
experienced the most growth. The growth in these areas compensated for a decline
in certificates of deposit of $7.5 million. Much of the longer term certificates
of deposit that matured during the year did not roll over into new certificate
of deposit accounts likely due to the low interest rate environment. Due to the
low rates being offered on wholesale funding sources, we increased our use of
Federal Home Loan Bank advances in funding the growth in the loan and security
portfolios.
The primary components of growth in shareholders' equity for 1998 related to
net income, as well as proceeds received from the exercise of stock options and
warrants. These increases were more than offset by quarterly cash dividends
declared and additional repurchases of the Corporation's outstanding shares of
common stock. During 1998, we repurchased 551,495 shares of common stock at an
average price of $24.73 per share. Stock repurchases are an important part of
our capital management and are used to supplement asset growth in achieving our
desired capital levels. We will continue to repurchase stock as long as it
positively affects our financial performance and does not jeopardize safe and
sound capital levels. As such, stock repurchase activity may diminish if growth
in assets continues.
As of December 31, 1998, 444,431 outstanding warrant certificates were
exercisable into 537,762 shares of Ottawa's common stock. At the exercise price
of $14.46 per share, this would have resulted in proceeds of $7.8 million. After
careful consideration and evaluation, the management and Board of Directors of
Ottawa Financial Corporation determined it was in the best interests of the
Company to make an exchange offer for the outstanding warrants. We offered to
exchange for each outstanding warrant, at the holder's option, either .44 shares
of common stock or $10.03 in cash. The purpose of the exchange was to reduce the
amount of cash received and the number of shares of common stock that could be
issued pursuant to an exercise of the warrants. We believed we had adequate
capital for our current and foreseeable operations and did not believe we could
adequately leverage the funds that would be received upon exercise of the
warrants in a manner consistent with our business objectives. We determined that
the offer to exchange the warrants for common stock or cash would limit the
receipt of excess capital and the number of shares issuable upon exercise of the
warrants and best utilize our capital base to maximize value to our
shareholders. As of January 26, 1999, the expiration date of the exchange offer,
we accepted tenders for approximately 86% of our outstanding warrants. In
connection with this exchange, we issued 164,181 shares of Ottawa Financial
Corporation common stock and paid $90,130 in cash. The remaining 14% of the
warrants were exercised by the date of the warrant plan expiration, resulting in
additional capital of $900,000.
On August 31, 1998, we paid a 10% stock dividend, the second stock dividend
declared by the corporation. We have 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 the stock dividends paid on August
31, 1998 and September 30, 1997.
OTTAWA FINANCIAL CORPORATION 17
<PAGE>
Results of Operations
Comparison of 1998 to 1997
Net income. Net income for 1998 was $8.7 million, or $1.44 per diluted common
share, compared to $7.5 million, or $1.22 per diluted common share for 1997.
Diluted earnings per share increased $.22, or 18%, for the year ended December
31, 1998 compared to 1997. The growth in noninterest income and, to a lesser
extent, the increase in net interest income provided the improvement in
earnings. Increases in the provision for loan losses and noninterest expenses
partially offset the improvements in earnings.
In 1996, we introduced a measure we refer 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 and Management Recognition Plan
expenses are added back as these items also do not involve actual current period
cash outflow. Cash 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 and core deposit intangibles and expenses
related to the Employee Stock Ownership Plan and Management Recognition Plan do
not reduce tangible capital, these items are added back to earnings in
evaluating tangible capital growth. Our diluted cash or tangible earnings per
share under this method was $1.83 for the year ended December 31, 1998, compared
to $1.58 for 1997, showing a 16% improvement. Since we specifically formulated
the calculations for cash or tangible earnings per share, the calculations may
not be comparable to similarly titled measures reported by other companies. This
measure is not intended to reflect cash flow per share.
Return on equity for 1998 was 11.49% compared to 9.93% for 1997. The 16%
improvement in return on equity was primarily attributable to the improved
earnings. In addition, our stock buyback activity also positively impacted
return on equity.
Net Interest Income. Our net income is primarily dependent upon net interest
income. Net interest income is a function of the difference, or 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 these
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 $811,000 on a tax equivalent basis for the year
ended December 31, 1998 as compared to the same period in 1997. The volume
increases in interest-earning assets caused by internal growth experienced in
1998 and late 1997 increased net interest income. Despite the significant
decline in general market interest rates during 1998, the yield on total
interest-earnings assets experienced only a slight decline. This is attributable
to the change in the composition of our loan portfolio to higher yielding
commercial loans during 1998. The stable composition of our interest-bearing
liabilities, accompanied by the offsetting affects of the general decline in the
cost of deposits compared to the small increase in the cost of Federal Home Loan
Bank advances, resulted in a minor decline in the cost of interest-bearing
liabilities. Together, the decline in the yield on interest-earning assets,
offset with the small decline in the cost of interest-bearing liabilities,
resulted in a decline in the net interest spread from 3.01% in 1997 to 2.89% in
1998. While the rates on deposit accounts have generally decreased since 1997,
the cost of certificate of deposit accounts increased to 5.67% for 1998 compared
to 5.61% for 1997. This increase in cost of certificates of deposit is almost
entirely due to the decrease in amortization of the purchase accounting
adjustment relative to certificate accounts obtained in the acquisition of the
former AmeriBank, FSB in early 1996. Amortization of this purchase accounting
adjustment was an offset to interest expense. The reduction in net interest
margin from 3.37% in 1997 to 3.26% in 1998 is primarily attributable to the
spread decline discussed above.
18 OTTAWA FINANCIAL CORPORATION
<PAGE>
Our strategy during 1999 will be to continue to grow the loan portfolio and
alter the composition to increase our percentage of higher yielding commercial
and consumer loans in relation to the total loan portfolio. It is anticipated
this shift may continue to have a positive impact on 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
This table presents the amount of interest income from average interest-earning
assets and the yields earned on those assets, as well as the interest expense on
average interest-bearing liabilities and the rates paid on those liabilities.
All average balances are daily average balances.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average
Out- Interest Out- Interest Out- Interest
standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)(2) $778,282 $62,687 8.05% $732,927 $59,994 8.19% $605,563 $49,036 8.10%
Securities(2) 60,513 3,859 6.38 56,635 3,787 6.68 75,850 5,037 6.64
Other interest-earning assets 19,119 1,425 7.46 15,754 1,071 6.80 11,378 733 6.44
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets(1) 857,914 67,971 7.92 805,316 64,852 8.05 692,791 54,806 7.91
Interest-Bearing Liabilities:
Demand and NOW deposits 173,322 6,517 3.76 149,909 5,823 3.89 127,574 4,518 3.54
Savings deposits 59,485 1,125 1.89 65,678 1,551 2.37 68,590 1,735 2.53
Certificate accounts 401,026 22,741 5.67 393,757 22,024 5.61 341,795 18,803 5.50
FHLB advances 160,533 9,591 5.97 140,746 8,293 5.91 94,269 5,451 5.78
Other interest-bearing liabilities 663 38 5.73 184 13 7.07 248 24 9.68
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 795,029 40,012 5.03 750,274 37,704 5.04 632,476 30,531 4.83
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $27,959 $27,148 $24,275
=============================================================================================================================
Net interest rate spread 2.89% 3.01% 3.08%
=============================================================================================================================
Net earning assets $62,885 $55,042 $60,315
=============================================================================================================================
Net yield on average
interest-earning assets 3.26% 3.37% 3.50%
=============================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 1.08x 1.07x 1.10x
=============================================================================================================================
</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.
OTTAWA FINANCIAL CORPORATION 19
<PAGE>
Rate/Volume Analysis of Net Interest Income
This 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). 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 1998 vs. 1997 1997 vs. 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total Increase (Decrease) (Decrease) Total Increase
Due To Volume Due To Rate (Decrease) Due To Volume Due To Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 3,632 $ (940) $ 2,692 $ 10,420 $ 538 $ 10,958
Securities 222 (150) 72 (1,285) 35 (1,250)
Other interest-earning assets 244 111 355 296 42 338
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,098 (979) 3,119 9,431 615 10,046
Interest-bearing liabilities:
Demand and NOW deposits $ 873 $ (179) $ 694 $ 840 $ 465 $ 1,305
Savings deposits (137) (289) (426) (72) (112) (184)
Certificate accounts 410 307 717 2,902 319 3,221
FHLB advances 1,181 117 1,298 2,737 105 2,842
Other interest-bearing liabilities 27 (2) 25 (5) (6) (11)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,354 (46) 2,308 6,402 771 7,173
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,744 $ (933) $ 811 $ 3,029 $ (156) $ 2,873
==================================================================================================================================
</TABLE>
Provision for Loan Losses. Management's periodic analysis of the adequacy of the
allowance for loan losses determines the provision for loan losses. The
provision was $930,000 in 1998 compared to $660,000 in 1997. The ratio of
non-performing assets, consisting of loans 90 days or more delinquent and
foreclosed assets, to total assets was .43% as of December 31, 1998 compared to
.36% as of December 31, 1997. The ratio of the allowance for loan losses to
total loans receivable was .49% as of December 31, 1998 compared to .44% as of
December 31, 1997. The increase in the provision was primarily for the purpose
of growing the allowance for loan loss balance to keep pace with loan growth.
The increase was also in response to the shift in the mix of the loan portfolio
from mortgage loans to commercial and consumer loans and the higher risk of loss
associated with these loans. We anticipate we will increase the allowance for
loan loss balance in future periods as we continue to increase these commercial
and consumer loan portfolios.
We maintain the allowance for loan losses 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. Although the level
20 OTTAWA FINANCIAL CORPORATION
<PAGE>
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 our past loss experience and, as such, have not had a significant
impact on the overall level of the allowance for loan losses.
While we consider the allowance for loan losses to be adequate to provide for
potential losses, 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 Financial Institutions Bureau and
the Federal Deposit Insurance Corporation review the allowance for loan losses
as part of their examination process. These regulatory agencies may require
additional general or specific allowances based upon their judgement of the
information available to them at the time of their examination.
Noninterest Income. Noninterest income for 1998 was $7.8 million compared to
$4.1 million for 1997. Increased sales and realizations of gains on sales of
mortgage loans, along with fees on sales of mutual funds and annuities, have
significantly increased noninterest income. In addition, increases in deposit
account service fees contributed to the growth in noninterest income. During the
third quarter of 1997, we modified deposit fee structures to achieve more
consistency between AmeriBank and AFSB. Savings accounts that fell below a
minimum balance and checking accounts that had cancelled checks returned to
customers with monthly bank statements were assessed fees.
Noninterest Expense. Noninterest expense increased to $21.1 million for 1998
compared to $18.7 million for 1997. Employee related costs, a portion of which
relates to the increased expense of the Employee Stock Ownership Plan due to the
higher market value of our stock, increased noninterest expense. Further, we
added specialized expertise to our staff to develop the commercial and consumer
loan portfolios and other lines of fee generating business consistent with our
strategic plan. The benefits of these investments in resources have been
reflected in the growth in the commercial business and real estate loan
portfolio and the increases in fee income on sales of mutual funds and
annuities.
Income Tax Expense. The increase in the income tax expense from $4.3 million in
1997 to $5.0 million in 1998 is due to the higher pre-tax income for the year.
Year 2000 Issue. The year 2000 ("Y2K") issue relates to the inability of
computer systems to recognize the year 2000. Processing problems could result
from existing computer programs and systems misinterpreting the year 2000 as the
year 1900. The financial institutions industry could be significantly impacted
by the Y2K issue due to our dependence on technology and date-sensitive data. If
systems cannot identify the year 2000, calculations that rely on date field
information, such as interest, payment or due dates and other operating
functions, could create incorrect information. We may be unable to process
transactions, prepare statements or engage in similar normal business
activities. Similarly, a failure to properly address the Y2K issue could
negatively impact our ability to interact with our suppliers and creditors, as
well as to adequately assess the creditworthiness of our borrowers. Therefore,
if not adequately addressed, the Y2K issue could have a significant adverse
impact on our operations and, in turn, our financial condition and results of
operations.
Financial institution regulators are increasing their focus on Y2K compliance
issues. The Federal Financial Institutions Examination council issued several
statements on Y2K Project Management Awareness. These statements require us to
examine the potential impact of the Y2K issue on our customers, suppliers and
borrowers. These statements also require us to assess our exposure, measure our
risk and prepare a plan to address the Y2K issue.
Our Y2K assessment began in late 1997 when an action plan was developed and
approved by our Board of Directors. We created a "Y2K Task Force" to work with
associates corporate-wide to prepare for Y2K. This task force has identified all
areas that may be affected by the coming millenium. These areas include (i)
OTTAWA FINANCIAL CORPORATION 21
<PAGE>
information technology systems, such as our data processor and other proprietary
and vendor supported business applications (ii) non-information technology
systems, such as facilities and related building services, for example,
utilities, security systems, general business equipment and non-computer office
equipment; and (iii) business relationships, for example, borrowers and
suppliers. Our Computer and Network Department, as well as our Technology
Committee, have been testing our information and non-information technology
systems to assess Y2K compliance. If an area is not validated as Y2K compliant,
then updates are made to become Y2K compliant.
The phases of our Y2K plan and the status of completion are discussed below.
1. Awareness: We defined the Y2K problem and identified the resources to perform
compliance work. We formed a Y2K task force and developed a strategy for
identifying areas that may be affected by Y2K. We completed this phase in
September 1997.
2. Assessment: We evaluated the complexity of the Y2K issue and detailed the
effort necessary to address the issues. This phase identified all areas that
may be affected by the Y2K date change. We went beyond obvious information
systems such as hardware, software, networks and automated teller machines
and included environmental systems that are dependent on embedded microchips,
such as security systems, elevators and vaults. We categorized items into
three main areas: mission critical, non-mission critical and miscellaneous.
We then assigned all items identified to individuals throughout the
Corporation. We completed this phase in June 1998.
3. Renovation: This phase included code enhancements, hardware and software
upgrades, system replacements, vendor certifications and other similar
changes. We prioritized this work based on information gathered during the
assessment phase. Where we rely on third party vendors, we obtained
certifications verifying Y2K compliance. Where certifications could not be
obtained, alternative options were identified for all important banking
functions. We completed this phase in December 1998.
4. Validation: We are testing the incremental changes to hardware and software
components. In addition to testing the upgraded components, we are verifying
connections with other systems. We are establishing controls to assure
effective and timely completion of all hardware and software testing prior to
final implementation. As with the renovation phase, we will continue
discussions with vendors regarding the success of their validation efforts.
We expect to complete this phase by March 31, 1999.
5. Implementation: We will certify systems as Y2K compliant. For any system
failing certification, we will assess the effect on our operations and
implement our contingency plans. Any mission-critical system that is
potentially non-compliant will be immediately resolved. In addition, this
phase will ensure that any new systems or subsequent changes to verified
systems are Y2K compliant. We expect to complete this phase by June 30, 1999.
We are expensing all costs associated with required system changes as they
occur. These costs are being funded through operating cash flows. We estimate
the total cost of our Y2K conversion project will be $350,000, net of income
taxes. We do not expect significant increases in future data processing costs
relating to Y2K compliance.
The software program that processes and tracks customer account information
is the most significant component of our computer system. This software is the
ITI Premier Financial Information System that is used by 3,500 banks across the
country and has been certified as Y2K compliant. This is relatively new software
that was written to include four digits for the year calculations and therefore
does not require its language to be rewritten. An outside service bureau runs
this software for us. Since we are in the process of converting to a new service
bureau, we have not yet completed the Y2K compliance testing on our network.
22 OTTAWA FINANCIAL CORPORATION
<PAGE>
However, the service bureau itself is certified as Y2K compliant and has
verified compliance for other clients it services. We expect to complete the
testing on our network by March 31, 1999.
While our Y2K readiness process is proceeding according to plan, as a
precaution, we developed a contingency plan for each of our mission critical
systems during the assessment phase. Since most of our mission critical systems
are dependent on third party vendors or service providers, our contingency plan
is to select a new vendor or service provider and convert to their system. We
have secured alternative sources or services for mission critical areas for
which we did not receive a satisfactory response by January 31, 1999. We will
seek alternative sources or services for non-mission critical areas for which we
do not receive a satisfactory response by June 30, 1999. We also developed
contingency plans in the event of physical disaster including power outage
and/or telecommunication system outages. We assigned responsibilities regarding
final preparation to individuals within each department. In addition, we
identified a centralized location to accomplish communications and data
processing under various disaster conditions.
Comparison of 1997 to 1996
Net income. Net income for 1997 was $7.5 million compared to $3.1 million for
1996. The one-time assessment of $3.5 million to recapitalize the Savings
Association Insurance Fund is included in net income for 1996. Net income for
1996 would have been $5.4 million without this assessment. Growth in net
interest income and improvements in efficiency contributed to the increase in
net income.
Diluted earnings per share for 1997 was $1.22 compared to $.49 for the prior
year. Diluted earnings per share would have been $.86 for 1996 if the effect of
the $3.5 million assessment was removed from earnings. The improvement in net
interest income and Ottawa's stock repurchase activity positively impacted
earnings per share. Our tangible earnings per share was $1.58 for 1997, compared
to a tangible earnings per share of $.99 for 1996, as adjusted for the effect of
the special Savings Association Insurance Fund assessment.
Return on equity increased from 6.83% in 1996 to 9.93% in 1997. The improved
earnings resulting from the growth in assets in 1996 and 1997, along with our
stock repurchases, increased return on equity.
Net Interest Income. Net interest income increased $2.9 million on a tax
equivalent basis for the year ended December 31, 1997 compared to the same
period in 1996. Volume increases resulting from the AFSB acquisition and
internal growth experienced during 1996 and 1997 increased net interest income.
While net interest income increased, the net interest spread declined from 3.08%
in 1996 to 3.01% in 1997. The 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, improved the yield on interest-earning assets. The
increase in Federal Home Loan Bank advances as a percent of total
interest-bearing liabilities, 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,
increased the cost of interest-bearing liabilities. The improvement in the yield
on interest-earning assets, however, was more than offset by the increase in the
cost of interest-bearing liabilities, resulting in a decline in the net interest
spread. This spread decline, along with Ottawa becoming more leveraged through
acquisition and internal growth, reduced net interest margin from 3.50% in 1996
to 3.37% in 1997. The ratio of average interest-earnings assets to average
interest-bearing liabilities, which declined from 1.10x in 1996 to 1.07x in
1997, illustrates our increase in leveraging.
OTTAWA FINANCIAL CORPORATION 23
<PAGE>
Provision for Loan Losses. The provision for loan losses was $660,000 for 1997
and $564,000 for 1996. The 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 ratio of allowance for loan losses to total
loans receivable was .44% as of both December 31, 1997 and 1996. While the risk
profile of the loan portfolio did not change dramatically, we increased the
provision so the allowance for loan loss balance kept pace with the loan growth.
Noninterest Income. Noninterest income increased from $3.3 million in 1996 to
$4.1 million in 1997. Enhancements in deposit account service fees that were
implemented during the third quarter of 1997 to achieve more consistency in fee
structures between AmeriBank and AFSB improved noninterest income. 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.
Noninterest Expense. Noninterest expense decreased from $21.8 million for 1996
to $18.7 million for 1997. The one-time SAIF assessment in 1996 of $3.5 million,
as well as declines in FDIC deposit insurance, data processing and professional
services, decreased noninterest expense. Increases in compensation and benefits
partially offset these decreases.
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund, requiring us 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.
We underwent an electronic data processing conversion in 1996. The conversion
itself required substantial outside consulting services, resulting in
approximately $400,000 of non-recurring expenses during 1996. During 1997, we
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.
A greater number of full-time equivalent employees and an increase in
employee stock ownership plan expense attributable to the higher market price of
our stock during 1997 increased compensation and benefits.
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.
Asset/Liability Management; Market Risk Analysis
The 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. These financial instruments have varying
levels of sensitivity to changes in market interest rates, resulting in market
risk. Other than loans that are originated and held for sale, all of our
financial instruments are for other than trading purposes. We are subject to
interest rate risk to the extent that our interest-bearing liabilities with
short and intermediate-term maturities reprice more rapidly, or on a different
basis, than our interest-earning assets.
Senior management and the Board of Directors review the Bank's exposure to
interest rate risk on a quarterly basis. We measure interest rate risk by
computing estimated changes in net interest income and the net portfolio value
of cash flows from assets, liabilities and off-balance sheet items within a
range of assumed changes in market interest rates. If estimated changes to net
portfolio value 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.
24 OTTAWA FINANCIAL CORPORATION
<PAGE>
Net portfolio value represents the market value of 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 3%
increases and decreases in market interest rates. The following tables set forth
the change in AmeriBank's net portfolio value and net interest income at
December 31, 1998 and 1997, based on internal assumptions, that would occur upon
an immediate change in interest rates, with no effect given to any steps that
management might take to counteract that change.
<TABLE>
<CAPTION>
December 31, 1998: Net Portfolio Value Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NPV % Change in NPV
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+300 $ 38,798 -48% $ 20,275 -27%
+200 52,011 -30 23,040 -18
+100 63,218 -15 25,532 -9
0 74,187 -- 27,965 --
-100 84,511 14 30,309 8
-200 89,599 21 31,886 14
-300 99,922 35 33,440 20
December 31, 1997: Net Portfolio Value Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NPV % Change in NPV
- ----------------------------------------------------------------------------------------------------------------------
+300 $ 54,990 -33% $ 19,803 -22%
+200 64,479 -21 21,699 -14
+100 73,263 -11 23,518 -7
0 81,958 -- 25,286 --
-100 90,649 11 27,101 7
-200 96,085 17 28,488 13
-300 106,833 30 29,521 17
</TABLE>
As illustrated in the table, net portfolio value is more sensitive to rising
rates than declining rates. This occurs because, as rates rise, the market value
of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, we do not experience a significant rise in
market value for these loans because borrowers prepay at relatively high rates.
The value of our deposits and borrowings changes in approximately the same
proportion in rising or falling rate scenarios.
The results for the 300 basis point interest rate shocks are monitored
primarily to assist in identifying trends in our interest rate risk profile. We
feel that a sudden and sustained change in interest rates of 300 basis points is
not a realistic event. Therefore we focus on managing, to acceptable levels, the
change in NPV for the 100 and 200 basis point interest rate shocks both up and
down.
The table shows there has been an increase in sensitivity to a rise in
interest rates from 1997 to 1998. At an increase in interest rates of 200 basis
points, net portfolio value decreases by 30% as of December 31, 1998 compared to
a 21% decrease as of December 31, 1997. Approximately one-third of the increase
in sensitivity relates to the decrease in our equity from December 31, 1997 to
December 31, 1998. As equity decreases through continued capital management, the
percent change in NPV increases for the same dollar amount change in NPV. The
OTTAWA FINANCIAL CORPORATION 25
<PAGE>
other reasons for the increase in sensitivity relate to the loan and deposit
portfolio mix changes during the year. A significant portion of our adjustable
rate mortgage loan portfolio refinanced into fixed rate loans causing an
increase in our interest rate risk in a rising rate environment. Further, the
weighted average maturity of our certificate of deposit portfolio decreased
during 1998. This change in maturity structure also causes an increase in our
interest rate risk in a rising rate environment.
To decrease our exposure to interest rate risk, we are trying to reduce the
duration and average life of our interest-earning assets. To achieve this goal,
we are emphasizing adjustable rate mortgage loans and growing our consumer and
commercial business portfolios which are shorter term in nature than the
mortgage portfolio. In addition, we are underwriting all long-term, fixed rate
mortgages in accordance with Federal Home Loan Mortgage Corporation guidelines
which allows us the flexibility of selling these assets into the secondary
market. We are currently selling all 30- and 15-year fixed-rate mortgage loans
as they are originated. With our funding sources, we are attempting to reduce
the impact of interest rate changes by emphasizing non-interest bearing products
and using longer term fixed rate advances from the Federal Home Loan Bank.
As with any method of measuring interest rate risk, the above table
inherently has shortcomings. 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 before 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 that restrict changes in interest rates on a short-term
basis and over the life of the asset. When there is a change in interest rates,
expected rates of prepayments on loans, decay rates of deposits and early
withdrawals from certificates could likely differ from those assumed in 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 our net interest income because the repricing of
certain categories of assets and liabilities are influenced by competitive and
other pressures beyond our control.
Liquidity and Capital Resources
AmeriBank's principal sources of funds are deposits; borrowings, primarily
Federal Home Loan Bank advances; principal and interest payments on loans; sales
of loans; and maturities and sales of securities. We have classified all
securities held in portfolio as available for sale, which increases our
liquidity flexibility. 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.
We view liquidity management to be both a daily and long-term responsibility.
We maintain a level of liquidity consistent with our assessment of expected loan
demand, loan sales, deposit flows, yields available on interest-earning deposits
and investment securities, and the objectives of our asset/liability management
program. We generally invest excess liquidity in interest-earning overnight
deposits of the Federal Home Loan Bank 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 Federal Home Loan
Bank are drawn to low levels to maintain liquidity, we will generally borrow
funds through the Federal Home Loan Bank's advances program instead of selling
our investment securities.
Advances from the Federal Home Loan Bank of Indianapolis increased only $14.8
million during 1998 while assets grew by $52.2 million. Deposits were the
primary source of funds for this asset growth and there was very little pressure
on liquidity. Federal Home Loan Bank advances totaled $160.3 million as of
December 31, 1998. Approximately $61.4 million of these advances come due in
1999. We may choose to renew or pay off these advances depending upon our
liquidity needs at that time.
26 OTTAWA FINANCIAL CORPORATION
<PAGE>
Ottawa also has a need for, and sources of, liquidity. Dividends from
AmeriBank are its primary source of liquidity, subject to certain regulatory
constraints (see Note 13 of the Notes to Consolidated Financial Statements).
Ottawa has modest operating costs and the dividends paid on common stock are
discretionary.
AmeriBank is subject to three capital to asset requirements as discussed in
Note 12 of the Consolidated Financial Statements.
Accounting and Regulatory Standards
For accounting standards, see "Future Accounting Changes" in Note 1 of the Notes
to Consolidated Financial Statements.
Disclosure Regarding Forward-Looking Statements
We may from time to time make written or oral "forward-looking statements."
These forward-looking statements may be contained in this Annual Report to
Shareholders, in our filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-K and its exhibits, and in other
communications by us, which are made in good faith pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan", and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties. The following factors,
many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength of
the local economies in which we conduct our operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
o the willingness of users to substitute competitors' products and services
for our products and services;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of Ottawa or AmeriBank.
OTTAWA FINANCIAL CORPORATION 27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ottawa Financial Corporation
[EMBLEM] Holland, Michigan
CROWE CHIZEK We have audited the accompanying consolidated balance sheets of
Ottawa Financial Corporation as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in
shareholders' equity, cash flows and comprehensive income for
each of the three years in the period ended December 31, 1998.
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, 1998
and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 26, 1999
28 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from financial institutions $ 20,437 $ 25,437
Interest-bearing demand deposits in other financial institutions 21,788 7,087
- ---------------------------------------------------------------------------------------------
Total cash and cash equivalents 42,225 32,524
Securities available for sale 71,646 57,308
Loans held for sale 3,375 1,955
Loans receivable, net 769,770 747,423
Federal Home Loan Bank stock 11,782 7,308
Premises and equipment, net 15,200 15,030
Acquisition intangibles 13,032 14,248
Other assets 11,000 10,021
- ---------------------------------------------------------------------------------------------
Total assets $ 938,030 $ 885,817
=============================================================================================
Liabilities and Shareholders' Equity
Deposits $ 693,632 $ 654,560
Federal Home Loan Bank advances 160,268 145,458
Accrued expenses and other liabilities 10,723 9,436
- ---------------------------------------------------------------------------------------------
Total liabilities 864,623 809,454
Commitments and contingent liabilities
Shareholders' equity
Preferred stock
Common stock 62 60
Additional paid-in capital 73,177 67,381
Retained earnings, substantially restricted 15,363 23,386
Net unrealized gain (loss) on securities available for sale 23 62
Employee Stock Ownership Plan (1,886) (2,323)
Management Recognition and Retention Plan (712) (1,502)
Less cost of common stock in treasury (12,620) (10,701)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 73,407 76,363
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 938,030 $ 885,817
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 62,646 $ 59,948 $ 48,991
Securities 3,833 3,707 4,945
Other 1,425 1,071 733
- -------------------------------------------------------------------------------------------
67,904 64,726 54,669
Interest expense
Deposits 30,383 29,398 25,056
Federal Home Loan Bank advances 9,591 8,293 5,451
Other 38 13 24
- -------------------------------------------------------------------------------------------
40,012 37,704 30,531
- -------------------------------------------------------------------------------------------
Net interest income 27,892 27,022 24,138
Provision for loan losses 930 660 564
- -------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 26,962 26,362 23,574
Noninterest income
Service charges and other fees 4,400 3,039 2,755
Mortgage servicing fees 349 317 287
Gain on sale of mortgage loans 2,398 370 141
Gain (loss) on securities (24) 143 5
Other 688 277 140
- -------------------------------------------------------------------------------------------
7,811 4,146 3,328
Noninterest expense
Compensation and benefits 11,521 10,356 8,945
Occupancy 1,550 1,316 1,112
Furniture, fixtures and equipment 1,241 1,056 781
Advertising 275 276 364
FDIC deposit insurance premium 400 324 1,235
SAIF assessment 3,510
State single business tax 517 357 338
Data processing 1,130 891 939
Professional services 495 379 697
Acquisition intangibles amortization 1,216 1,226 1,081
Other 2,747 2,527 2,842
- -------------------------------------------------------------------------------------------
21,092 18,708 21,844
- -------------------------------------------------------------------------------------------
Income before federal income tax expense 13,681 11,800 5,058
Federal income tax expense 5,013 4,273 1,964
- -------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094
Earnings per common share
===========================================================================================
Basic $ 1.59 $ 1.33 $ .51
===========================================================================================
Diluted $ 1.44 $ 1.22 $ .49
===========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
30 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Net Unrealized
Gain (Loss) Unallocated
on Securities Employee Unearned
Additional Available Stock Management
Common Paid-in Retained for Sale, Ownership Recognition
Years ended December 31, 1998, 1997 and 1996 Stock Capital Earnings Net of Tax Plan Shares Plan Shares
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 $ 59 $ 57,662 $ 31,277 $ 391 $ (3,302) $ (2,311)
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
152,093 shares issued upon
exercise of stock options 1 507
60,024 shares committed to be released
under employee stock ownership plan 332 496
Issuance of 18,150 shares of common
stock for management recognition plan 242 (242)
Shares earned under management
recognition and retention plan 576
Acquisition of 577,008 treasury
shares, at cost
Cash dividend - $.28 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) (2,806) (1,977)
Net income for the year ended
December 31, 1997 7,527
26,435 shares issued upon
exercise of stock options 258
34,711 shares issued upon
exercise of stock warrants 502
57,098 shares committed to be released
under employee stock ownership plan 654 483
Issuance of 10,580 shares of common
stock for management recognition plan 249 (249)
Shares earned under management
recognition and retention plan 572
13,840 shares forfeited under management
recognition and retention plan (152) 152
Acquisition of 480,673 treasury
shares, at cost
Cash dividend - $.33 per share (1,858)
10% Stock dividend 4,821 (14,955)
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $73 141
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 60 67,381 23,386 62 (2,323) (1,502)
Net income for the year ended
December 31, 1998 8,668
56,750 shares issued upon
exercise of stock options 1 491
113,048 shares issued upon
exercise of stock warrants 1 1,634
54,233 shares committed to be released
under employee stock ownership plan 909 437
Shares earned under management
recognition and retention plan 509
14,074 shares forfeited under management
recognition and retention plan (293) 12 281
Acquisition of 551,495 treasury
shares, at cost
Cash dividend - $.39 per share (2,113)
10% Stock dividend 2,869 (14,590)
Tax benefit of equity deductions 186
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $(21) (39)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ 62 $ 73,177 $ 15,363 $ 23 $ (1,886) $ (712)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OTTAWA FINANCIAL CORPORATION 31
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (cont'd)
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Total
Treasury Shareholders'
Years ended December 31, 1998, 1997 and 1996 Stock Equity
- -----------------------------------------------------------------------------
Balance - December 31, 1995 $ (4,215) $ 79,561
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
152,093 shares issued upon
exercise of stock options 508
60,024 shares committed to be released
under employee stock ownership plan 828
Issuance of 18,150 shares of common
stock for management recognition plan
Shares earned under management
recognition and retention plan 576
Acquisition of 577,008 treasury
shares, at cost (7,787) (7,787)
Cash dividend - $.28 per share (1,699)
Change in unrealized gain (loss) on securities
available for sale, net of tax of $242 (470)
- ------------------------------------------------------------------------------
Balance - December 31, 1996 (12,002) 76,917
Net income for the year ended
December 31, 1997 7,527
26,435 shares issued upon
exercise of stock options 258
34,711 shares issued upon
exercise of stock warrants 502
57,098 shares committed to be released
under employee stock ownership plan 1,137
Issuance of 10,580 shares of common
stock for management recognition plan
Shares earned under management
recognition and retention plan 572
13,840 shares forfeited under management
recognition and retention plan
Acquisition of 480,673 treasury
shares, at cost (8,833) (8,833)
Cash dividend - $.33 per share (1,858)
10% Stock dividend 10,134
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $73 141
- ------------------------------------------------------------------------------
Balance - December 31, 1997 (10,701) 76,363
Net income for the year ended
December 31, 1998 8,668
56,750 shares issued upon
exercise of stock options 492
113,048 shares issued upon
exercise of stock warrants 1,635
54,233 shares committed to be released
under employee stock ownership plan 1,346
Shares earned under management
recognition and retention plan 509
14,074 shares forfeited under management
recognition and retention plan
Acquisition of 551,495 treasury
shares, at cost (13,640) (13,640)
Cash dividend - $.39 per share (2,113)
10% Stock dividend 11,721
Tax benefit of equity deductions 186
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $(21) (39)
- ------------------------------------------------------------------------------
Balance - December 31, 1998 $ (12,620) $ 73,407
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 31A
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,668 $ 7,527 $ 3,094
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,209 1,079 844
Net amortization of security premiums and discounts 418 314 332
Amortization of intangible assets 1,216 1,226 1,081
Provision for loan losses 930 660 564
(Gain) loss on sales of securities 24 (143) (5)
Loss on limited partnership investment 332 82 112
ESOP expense 1,346 1,137 828
MRP expense 509 572 576
Origination of loans for sale (151,356) (45,354) (9,833)
Proceeds from sales of loans originated for sale 150,678 43,531 9,973
Gain on sales of loans (2,398) (370) (140)
Changes in assets and liabilities
Other assets (1,286) (94) (302)
Other liabilities 1,473 1,709 793
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 11,763 11,876 7,917
Cash flows from investing activities
Acquisition of AFSB (23,534)
Activity in available-for-sale securities
Purchases (59,110) (30,092) (14,016)
Maturities, prepayments and calls 40,301 33,409 31,980
Sales 3,965 2,324 25,371
Purchases of FHLB stock (4,474) (350) (3,112)
Purchases of loans (6,039) (27,027)
Loan originations and principal payments on loans (21,621) (26,255) (117,970)
Premises and equipment expenditures, net (1,379) (1,575) (2,985)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (42,318) (28,578) (131,293)
Cash flows from financing activities
Net increase in deposits $ 39,072 $ 32,068 $ 46,248
Net increase (decrease) in Federal funds purchased (2,000) 2,000
Proceeds from FHLB advances 163,625 67,000 112,500
Repayment of FHLB advances (148,815) (60,712) (21,461)
Proceeds from exercise of stock options 492 258 508
Proceeds from exercise of stock warrants 1,635 502
Cash dividends paid (2,113) (1,858) (1,699)
Purchase of treasury shares (13,640) (8,833) (7,787)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 40,256 26,425 130,309
- -------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 9,701 9,723 6,933
Cash and cash equivalents at beginning of year 32,524 22,801 15,868
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,225 $ 32,524 $ 22,801
===============================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 39,228 $ 37,289 $ 29,194
Income taxes 4,340 3,167 1,766
</TABLE>
See accompanying notes to consolidated financial statements.
32 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
DOLLARS IN THOUSANDS
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 8,668 $ 7,527 $ 3,094
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during
the period on securities available for sale (55) 235 (467)
Less: Reclassification adjustment for accumulated
(gains) losses included in net income 16 (94) (3)
- -----------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available
for sale (39) 141 (470)
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 8,629 $ 7,668 $ 2,624
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: Ottawa Financial
Corporation is a thrift holding company and the sole shareholder of AmeriBank.
AmeriBank is the sole shareholder of O.S. Services, Inc. and AmeriPlan Financial
Services, Inc. The consolidated financial statements include the accounts of
Ottawa, AmeriBank and AmeriBank's wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
AmeriBank's primary services include accepting deposits and making
commercial, mortgage and installment loans at its 26 retail banking offices in
six counties in the Western Michigan. Due to the significance of these primary
services, our operations are reported as one segment. Other operations include
that of O.S. Services and AmeriPlan Financial Services. The operations of O.S.
Services include investing in the stock of MMLIC Life Insurance Company and
participating as a limited partner in affordable housing projects. AmeriPlan
Financial Services was established in December 1997. Its operations include
selling 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 us 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 our 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 status of contingencies
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 Ottawa 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.
Securities Available for Sale: Securities available for sale consist of
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 income tax, in other comprehensive income.
Declines in the fair value of individual securities below cost, which we
consider to be other thantemporary, 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.
Loan Income: Interest on loans is accrued over the term of the loans based upon
the principal outstanding, using the interest method. We review loans delinquent
90 days or more to determine if the interest accrual should be discontinued and
the loan considered impaired. The carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and changes 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.
34 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 1 (continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The total cost
of mortgage loans purchased or originated with the intent to sell is allocated
between the right to service the loan 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.
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,
we maintain the allowance 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 we 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 our
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.
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.
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 an accelerated basis
over 10 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.
OTTAWA FINANCIAL CORPORATION 35
<PAGE>
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Retirement Plans: Ottawa sponsors a noncontributory defined benefit pension
plan. The plan covers 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 plan is
to contribute the minimum funding requirement calculated by consulting
actuaries.
Employee Stock Ownership Plan: The cost of shares issued to the employee stock
ownership plan 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 plan shares
are recorded as a reduction of retained earnings; dividends on unallocated plan
shares are reflected as a reduction of debt and accrued interest.
Earnings Per Share: Amounts reported as basic 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 employee stock ownership plan. Diluted earnings
per common share 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 dividends paid on August
31, 1998 and September 30, 1997.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies. As of December 31, 1998 we have no derivative holdings.
Mortgage loans originated for sale converted into securities will be affected
by a new accounting standard for 1999. The new standard allows classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements. As of December 31, 1998
we have no securitizations.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are such matters that will have a
material effect on the financial statements.
Equity: Ottawa is authorized to issue 5,000,000 shares of 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 Ottawa 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 not issued and has no present
plans for the issuance of any preferred stock.
Common stock has $.01 par and 10,000,000 shares authorized. As of December
31, 1998 and 1997, 6,155,234 and 6,614,297 shares were outstanding. Treasury
stock is carried at cost. As of December 31, 1998 and 1997, 707,073 and 769,904
shares were held in the treasury. Transfers from retained earnings are made for
stock dividends using the fair value of shares issued.
Reclassifications: Certain amounts on the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998 presentation.
36 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 2
ACQUISITION
On February 13, 1996, Ottawa completed the acquisition of AmeriBank Federal
Savings Bank, a federal savings bank headquartered in Muskegon, Michigan using
the purchase method of accounting. The consolidated statements of income reflect
the operating results of AmeriBank Federal Savings Bank since the effective date
of the acquisition. The following table presents unaudited pro forma information
as if the acquisition of AmeriBank Federal Savings Bank had occurred at the
beginning of 1996. 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.
1996
- --------------------------------------------------------------------------------
(Unaudited, Dollars in thousands except share data)
Interest income $57,609
Interest expense 32,332
- --------------------------------------------------------------------------------
Net interest income 25,277
Provision for loan losses 700
- --------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,577
Noninterest income 3,408
Noninterest expense 22,782
- --------------------------------------------------------------------------------
Income before federal income tax expense 5,203
Federal income tax expense 2,050
- --------------------------------------------------------------------------------
Net income $ 3,153
================================================================================
Proforma earnings per common share
Basic $ .52
================================================================================
Diluted .50
================================================================================
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
OTTAWA FINANCIAL CORPORATION 37
<PAGE>
Note 3
SECURITIES
Securities available for sale at year end are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1998
Debt securities
Obligations of U.S. Government
corporations and agencies $25,510 $ 69 $ 37 $25,542
Municipal obligations 649 4 653
Corporate 8,095 85 4 8,176
Asset-backed 37,358 137 220 37,275
- --------------------------------------------------------------------------------------------------------------------------
$71,612 $ 295 $ 261 $71,646
==========================================================================================================================
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
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>
Contractual maturities of debt securities available for sale at year end 1998
are as follows. Securities not due at a single maturity date, primarily
asset-backed securities, are shown separately. 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.
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
(Dollars in thousands)
Due in one year or less $ 5,542 $ 5,543
Due after one year through five years 28,605 28,722
Due after five through ten years 107 106
- --------------------------------------------------------------------------------
34,254 34,371
Asset-backed debt securities 37,358 37,275
- --------------------------------------------------------------------------------
$71,612 $71,646
================================================================================
Sales of securities available for sale are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Proceeds $ 3,965 $ 2,324 $ 25,371
Gross gains 154 26
Gross losses (24) (11) (21)
38 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 4
LOANS
Loans at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $ 425,974 $ 483,502
Secured by other properties 101,039 73,810
Construction loans 117,792 71,145
- --------------------------------------------------------------------------------
644,805 628,457
Less
Undisbursed portion of construction loans (44,797) (25,787)
Deferred fees and discounts (1,272) (854)
- --------------------------------------------------------------------------------
598,736 601,816
Commercial loans 53,935 37,322
Consumer and other loans
Student loans 21
Home equity and second mortgage 49,647 55,960
Other 71,275 55,597
- --------------------------------------------------------------------------------
120,922 111,578
- --------------------------------------------------------------------------------
773,593 750,716
Allowance for loan losses (3,823) (3,293)
- --------------------------------------------------------------------------------
$ 769,770 $ 747,423
================================================================================
Note 5
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance - beginning of year $ 3,293 $ 3,129 $ 1,251
Acquired balance 1,358
Provision 930 660 564
Recoveries 176 119 90
Loans charged-off (576) (615) (134)
- --------------------------------------------------------------------------------
Balance - end of year $ 3,823 $ 3,293 $ 3,129
================================================================================
Information regarding impaired loans is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Average investment in impaired loans $1,710 $1,354 $1,612
Interest income recognized on impaired loans including
interest income recognized on cash basis 24 104 46
Interest income recognized on impaired
loans on cash basis 24 4 5
OTTAWA FINANCIAL CORPORATION 39
<PAGE>
Note 5 (continued)
ALLOWANCE FOR LOAN LOSSES
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance of impaired loans $ 1,452 $ 1,942
Less portion for which no allowance for
loan losses is allocated (1,053) (490)
- --------------------------------------------------------------------------------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 399 $ 1,452
================================================================================
Portion of allowance for loan losses allocated
to the impaired loan balance $ 65 $ 346
Note 6
SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others, principally the Federal Home Loan Mortgage
Corporation, which are not reported as assets, totaled $227,939,000 and
$130,431,000 at December 31, 1998 and 1997. Custodial escrow balances maintained
in connection with this loan servicing, and included in demand deposits, were
$372,000 and $238,000 at December 31, 1998 and 1997.
Following is an analysis of the activity, in thousands, for mortgage
servicing rights:
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
- --------------------------------------------------------------------------------
Additions 1,655
Amortization (177)
- --------------------------------------------------------------------------------
Balance at December 31, 1998 $2,128
================================================================================
The carrying values of mortgage servicing rights approximate fair values for
all years presented.
Note 7
PREMISES AND EQUIPMENT
Premises and equipment at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Land $ 3,206 $ 3,675
Buildings and improvements 11,638 11,336
Furniture and equipment 7,636 6,150
- --------------------------------------------------------------------------------
22,480 21,161
Accumulated depreciation (7,280) (6,131)
- --------------------------------------------------------------------------------
$15,200 $15,030
================================================================================
40 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 8
DEPOSITS
Deposits at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing $ 40,813 $ 28,431
NOW accounts and MMDAs 200,132 160,296
Passbook and statement savings 54,475 60,143
Certificates of deposit 398,212 405,690
- --------------------------------------------------------------------------------
$693,632 $654,560
================================================================================
Scheduled maturities of time deposits, in thousands, over the next five years
are as follows:
1999 $320,191
2000 53,416
2001 11,093
2002 7,529
2003 and thereafter 5,983
- --------------------------------------------------------------------------------
$398,212
================================================================================
The aggregate amount of demand, savings and certificates of deposit with
balances of $100,000 or more was approximately $103,596,000 and $78,138,000 at
December 31, 1998 and 1997.
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 year end:
<TABLE>
<CAPTION>
Range of Weighted Average
Principal Terms Advance Amount Maturities Interest Rate
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1998
<S> <C> <C> <C>
Single-maturity fixed rate advances $104,125 February 1999 to June 1010 6.06%
Putable advances 51,000 May 2000 to May 2008 5.53%
Amortizable mortgage advances 5,143 June 1999 to May 2000 6.91%
- ----------------------------------------------------------------------------------------------------------------
160,268
================================================================================================================
1997
Single-maturity fixed rate advances $ 96,500 February 1998 to December 2007 5.99%
Putable advances 18,000 May 2000 to December 2002 5.87%
Short-term variable rate advances 25,000 March 1998 to July 1998 5.80%
Amortizable mortgage advances 5,958 June 1999 to May 2000 6.91%
================================================================================================================
$145,458
</TABLE>
Maturities of advances outstanding, in thousands, over the next five years
are:
1999 $ 61,405
2000 18,738
2001 8,000
2002 12,000
2003 15,000
2004 and thereafter 45,125
- --------------------------------------------------------------------------------
$160,268
================================================================================
Some of the advances are subject to prepayment penalties according to the
conditions of the credit policy of the Federal Home Loan Bank.
At December 31, 1998, Ottawa had an unused line of credit with a major bank
totaling $15 million.
OTTAWA FINANCIAL CORPORATION 41
<PAGE>
Note 10
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Ottawa 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 include standby letters of credit, commitments to make
loans and fund loans in process. Ottawa's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is equal to
the contractual amount of these instruments. Ottawa follows the same credit
policy to make these commitments as it uses for those loans recorded in the
financial statements.
The contract amounts of these financial instruments at year end are as
follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Financial instruments whose contract amount represents credit risk
Commitments to make loans $19,427 $23,844
Unused consumer lines of credit 34,854 33,729
Unused commercial lines of credit 24,190 9,930
Loans in process 44,797 25,787
Letters of credit 10,340 5,110
</TABLE>
Since certain commitments to make loans and fund loans in process expire
without being used, the above amounts do not necessarily represent future cash
commitments. Commitment periods are generally for 30 to 120 days. Approximately
39% and 43% of commitments to make loans and to fund loans in process were made
at fixed rates as of December 31, 1998 and 1997. Rate ranges for these fixed
rate commitments were 6.20% to 10.00% and 6.00% to 10.5% as of December 31, 1998
and 1997. Lines of credit are issued at variable market rates. No losses are
anticipated as a result of these transactions.
Note 11
COMMITMENTS AND CONTINGENCIES
Ottawa has entered into employment agreements with two of its officers. Under
the terms of these agreements, certain events leading to separation from Ottawa
could result in cash payments aggregating approximately $1.5 million.
A lawsuit against AmeriBank has recently been filed. The complaint alleges
that we have engaged in the unauthorized practice of law due to charging a fee
for preparing loan documents. The complaint seeks class action certification,
restitution of all fees paid for the last six years, interest, attorney fees and
other costs. We believe, after consultation with legal counsel, that the
complaint is wholly without merit, and intend to vigorously defend against this
lawsuit.
On-Line Financial Services, Inc. was serving as AmeriBank's primary data
processing service provider. Due to dissatisfaction with the services provided
by On-Line, we claimed damages against On-Line and converted to a new data
processing servicer in March 1999. On-Line has alleged that we have no basis for
being dissatisfied with their services and has claimed liquidated damages of
approximately $1.5 million. On-Line has also indicated that to receive our
historical data and financial information, they will charge us $1.7 million upon
deconversion. We believe, after consultation with legal counsel, that these
charges are not consistent with the contract and intend to dispute them. It is
anticipated that our damage claim against On-Line could exceed $750,000. Both
parties have agreed to have the claims settled in arbitration, which is expected
to begin during or after March 1999.
Ottawa and AmeriBank 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 our
consolidated financial position.
42 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 12
RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Effective July 25, 1997, AmeriBank 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.
AmeriBank 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:
Capital to Risk-Weighted Assets Tier 1 Capital
Total Tier 1 to Average Assets
- --------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
AmeriBank's actual capital levels (in millions) and minimum required levels
at year end are as follows:
<TABLE>
<CAPTION>
Minimum Required Minimum Required To Be
For Capital Well Capitalized Under Prompt
Actual Adequacy Purposes Corrective Action Regulations
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 62.3 10.3% $ 48.6 8.0% $ 60.7 10.0%
Tier 1 capital (to risk weighted assets) 58.5 9.6 24.3 4.0 36.4 6.0
Tier 1 capital (to average total assets) 58.5 6.3 37.0 4.0 46.2 5.0
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
</TABLE>
AmeriBank was categorized as well capitalized at year end 1998 and 1997.
During 1998 and 1997, AmeriBank made capital distributions to Ottawa in the
amount of $12,500,000 and $4,000,000, respectively. These distributions were
made primarily to allow Ottawa to pay dividends and fund the stock repurchase
transactions discussed in Note 13. The distributions were within the guidelines
described above.
The Qualified Thrift Lender test requires at least 65% of assets to be
maintained in housing-related finance and other specified areas. If this test is
not met, limits are placed on growth, branching, new investments, Federal Home
Loan Bank advances and dividends, or AmeriBank must convert to a commercial bank
charter. Management believes this test is met.
At the time of conversion to a stock association, a liquidation account of
$26,527,000 was established which is equal to AmeriBank'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. AmeriBank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
OTTAWA FINANCIAL CORPORATION 43
<PAGE>
Note 13
STOCK REPURCHASE PROGRAMS
During 1998, 1997 and 1996, Ottawa repurchased 551,495, 480,673 and 577,008
shares of its common stock at an average price of $24.73, $18.37 and $13.50.
Repurchased shares are treated as treasury shares and are available for
general corporate purposes, including issuance in connection with stock
dividends, stock based compensation and warrant plans.
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 14
STOCK WARRANT PLAN
In connection with the acquisition of AmeriBank Federal Savings Bank on February
13, 1996, Ottawa issued 566,546 warrants to the former AmeriBank Federal Savings
Bank shareholders. Prior to the 10% stock dividends paid on August 31, 1998 and
September 30, 1997, each warrant entitled the holder to purchase one share of
Ottawa Financial Corporation's common stock at an exercise price of $17.50.
Effective August 31, 1998, each warrant allows the holder to purchase 1.21
shares of common stock at a price of $14.46 per share reflecting a proportionate
adjustment as a result of the 10% stock dividends. All warrants were exercisable
immediately upon issue and expired on February 16, 1999.
No warrants were exercised during 1996. During 1997 and 1998, 34,711 and
113,048 shares of Ottawa Financial Corporation's common stock were issued upon
the exercise of 28,687 and 93,428 warrants. As of December 31, 1998, 444,431
warrant certificates were exercisable into 537,762 shares of common stock.
On December 24, 1998, Ottawa offered to exchange, for each outstanding
warrant, at the holder's option, either .44 shares of the Corporation's common
stock or $10.03 in cash. As of January 26, 1999, the expiration date of the
exchange offer, Ottawa accepted tenders for approximately 86% of its warrants.
In connection with this exchange, Ottawa issued 164,181 shares of its common
stock and paid $90,130 in cash. The remaining 14% of the warrants were exercised
by the date of the warrant plan expiration, resulting in additional capital of
$900,000.
Note 15
STOCK-BASED COMPENSATION PLANS
Ottawa maintains an Employee Stock Ownership Plan for the benefit of
substantially all employees. During 1994, this plan borrowed $4,222,050 from
Ottawa and used those funds to acquire 510,868 shares of the Corporation's stock
at $8.26 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 employee stock ownership plan are allocated to
participants based on principal and interest payments made on the loan. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the
plan with funds from Ottawa's discretionary contributions to the plan and
earnings on the plan's 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 dividends
paid on August 31, 1998 and September 30, 1997. During 1998, 1997 and 1996,
54,233, 57,098, and 60,024 shares of stock with a fair value of $24.82, $19.91
and $13.79 per share were committed to be released, resulting in employee stock
ownership plan compensation expense of $1,346,000, $1,137,000 and $828,000,
respectively.
Shares held by the plan at year end are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Allocated shares 282,638 228,405 171,307
Unallocated shares 228,230 282,463 339,561
- --------------------------------------------------------------------------------
Total ESOP shares 510,868 510,868 510,868
================================================================================
Fair value of unallocated shares $ 4,850 $ 8,731 $ 4,717
================================================================================
Ottawa maintains a management recognition plan, with 272,039 shares
authorized. This is a restricted stock award plan in which stock awards vest in
five equal annual installments, subject to the continuous employment of the
recipients. Compensation expense is based upon the market price of Ottawa's
stock at the date of grant, and is recognized on a prorata basis over the
vesting period of the awards. Compensation expense for this plan was $509,000,
$572,000 and $576,000 for 1998, 1997 and 1996. The unamortized unearned
compensation value of the management recognition plan is shown as a reduction to
shareholders' equity in the consolidated balance sheets.
44 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 15 (continued)
STOCK-BASED COMPENSATION PLANS
Ottawa also maintains a stock option and incentive plan, with 1,014,646
shares authorized. Stock options vest in five equal annual installments and
expire 10 years from the date of grant. No compensation expense is being
recognized for options that have an exercise price equal to the market price of
the Corporation's stock at the date of grant.
The management recognition plan and the stock option and incentive plan are
administered by a committee of the Board of Directors of Ottawa. This committee
selects recipients and defines the terms of awards consistent with the plans.
Statement of Financial Accounting Standards No. 123 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, basic earnings per common share and diluted
earnings per common share had the fair value method been used to measure
compensation cost for the stock option and inventive plan. 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 management recognition plan is the same as if the provisions of FAS No. 123
had been applied.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------
(Dollars in thousands except share data)
<S> <C> <C> <C>
Net income as reported $ 8,668 $ 7,527 $ 3,094
Pro forma net income 8,218 7,150 2,783
- ----------------------------------------------------------------------------------------
Basic earnings per common share as reported 1.59 1.33 .51
Pro forma basic earnings per common share 1.51 1.26 .45
- ----------------------------------------------------------------------------------------
Diluted earnings per common share as reported 1.44 1.22 .49
Pro forma diluted earnings per common share 1.38 1.17 .45
- ----------------------------------------------------------------------------------------
</TABLE>
The fair values of stock options were estimated using option pricing models
with the following weighted-average assumptions as of grant date.
1998 1997 1996
- ------------------------------------------------------------------------
Risk-free interest rate 4.77% 6.27% 5.78%
Expected life 10 Years 10 Years 10 Years
Expected volatility of stock price 6.45% 6.00% 4.00%
Expected dividends 1.91% 1.97% 2.23%
Information regarding the stock option plan at year end is as follows:
<TABLE>
<CAPTION>
Number Weighted-Average Range of Weighted-Average
of Options Exercise Price Exercise Price Fair Value of Grants
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, end of 1995 552,374 $10.90
Granted 125,219 $13.40 $3.18
Conversion of AFSB options 179,743 3.57
Exercised (152,093) 3.37
Forfeited (4,126) 10.90
Outstanding, end of 1996 701,117 $11.15 $3.97- $13.54
Granted 90,844 18.67 $5.46
Exercised (26,435) 9.76
Forfeited (27,667) 11.25
Outstanding, end of 1997 737,859 $12.07 $3.97-$26.48
Granted 128,931 25.34 $4.97
Exercised (56,750) 8.67
Forfeited (55,856) 24.67
Outstanding, end of 1998 754,184 13.66 $3.61-$30.34
=================================================================================================================================
</TABLE>
OTTAWA FINANCIAL CORPORATION 45
<PAGE>
Note 15 (continued)
STOCK-BASED COMPENSATION PLANS
Stock options exercisable at year-end are as follows:
Number Weighted-Average
of Options Exercise Price
- --------------------------------------------------------------------------------
1996 134,380 $ 9.90
1997 243,418 10.46
1998 329,291 11.68
At year-end 1998, the weighted average remaining life of options outstanding
was 7.27 years.
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 16
PENSION PLANS
Ottawa sponsors a noncontributory defined benefit pension plan. On January 1,
1998 two separate plans were merged into one. The separate plans were from each
of the two Banks that merged in early 1996 as discussed in Note 2. Both plans
were curtailed prior to the merger.
The following sets forth the funded status and amounts recognized in the
consolidated financial statements at year end for the plan. The 1997 and 1996
information shown below reflects combined information for the two separate
plans.
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 3,947 $ 4,089
Interest cost 288 280
Actuarial gain 263
Benefits paid (906) (422)
- --------------------------------------------------------------------------------
Ending benefit obligation 3,592 3,947
Change in plan assets, at fair value:
Beginning plan assets 5,923 5,467
Actual return 1,203 878
Benefits paid (959) (422)
- --------------------------------------------------------------------------------
Ending plan assets 6,167 5,923
- --------------------------------------------------------------------------------
Funded Status 2,575 1,976
Unrecognized net (gain) loss (678) (405)
- --------------------------------------------------------------------------------
Prepaid pension asset $ 1,897 $ 1,571
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net pension cost included in operations, including the effects
of curtailment, consisted of the following components
Interest cost on projected benefit obligation $ 288 $ 280 $ 274
Actual return on plan assets (1203) (878) (663)
Net amortization and deferral 589 466 270
- -----------------------------------------------------------------------------------------------
Net pension income $(326) $(132) $(119)
===============================================================================================
</TABLE>
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 8.00%, 8.25% and 8.00% for 1998,
1997 and 1996. As a result of the plan curtailments, all accumulated benefits
under the plans are vested and no further benefits arising from service to
Ottawa will accrue.
The plan assets are invested in U.S. Government and corporate bonds, listed
stocks and a group annuity fund at a major life insurance company.
Ottawa 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. Ottawa does not make
matching contributions to this plan.
46 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 17
SAIF ASSESSMENT
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund, requiring AmeriBank 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:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Current tax expense $4,858 $3,961 $1,674
Deferred tax expense (benefit) 155 312 290
- --------------------------------------------------------------------------------
$5,013 $4,273 $1,964
================================================================================
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
Statutory rate 35% 34% 34%
==========================================================================================
<S> <C> <C> <C>
Tax expense at statutory rate $ 4,789 $ 4,012 $ 1,720
Low-income housing credit (327) (239) (150)
ESOP 314 227 113
Tax-exempt interest (45) (84) (63)
Goodwill amortization 329 319 279
Change in deferred tax asset valuation allowance (46) (60)
Other (1) 98 65
- ------------------------------------------------------------------------------------------
$ 5,013 $ 4,273 $ 1,964
==========================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at year end are as
follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Deferred loan fees $ 192 $ 163
Management recognition plan restricted stock 96 89
ESOP 52 42
Capital loss carryforward 80 126
Accrued expenses 138 22
Allowance for loan losses 428 59
Nonaccrual loan interest 73 66
Other 118 64
- --------------------------------------------------------------------------------
1,177 631
Deferred tax liabilities
Depreciation (590) (578)
Pension (405) (394)
Purchase accounting adjustment (870) (692)
FHLB stock dividends (70) (68)
Mortgage servicing rights (619) (86)
Unrealized gain on available for sale securities (10) (32)
Other (87) (76)
- --------------------------------------------------------------------------------
(2,651) (1,926)
Valuation allowance for deferred tax assets (80) (126)
- --------------------------------------------------------------------------------
Net deferred tax liability $(1,554) $(1,421)
================================================================================
OTTAWA FINANCIAL CORPORATION 47
<PAGE>
Note 18 (continued)
FEDERAL INCOME TAXES
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, 1998 or 1997.
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.
An income tax benefit of $186,000 attributable to deductions related to the
exercise of nonqualified stock options and the vesting of management recognition
plan shares was allocated directly to shareholders' equity in 1998.
Retained earnings at December 31, 1998, 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, 1998, 1997
and 1996 was approximately $3.0 million.
Note 19
EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
(Dollars in thousands except share data)
<S> <C> <C> <C>
Basic
Net Income available to common shareholders $ 8,668 $ 7,527 $ 3,094
=========================================================================================
Weighted average common shares outstanding 5,436,541 5,665,441 6,108,202
=========================================================================================
Basic earnings per common share $ 1.59 $ 1.33 $ .51
=========================================================================================
Diluted
Net Income available to common shareholders $ 8,668 $ 7,527 $ 3,094
=========================================================================================
Weighted average common shares outstanding 5,436,541 5,665,441 6,108,202
Add: Dilutive effects of assumed
exercises of stock options and warrants 591,308 504,525 145,922
- -----------------------------------------------------------------------------------------
Weighted average common and dilutive
potential common shares outstanding 6,027,849 6,169,966 6,254,124
=========================================================================================
Diluted earnings per common share $ 1.44 $ 1.22 $ .49
=========================================================================================
</TABLE>
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 20
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values of
each class of financial instrument for which it is practicable to estimate that
value:
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, the allowance for loan losses, demand deposits,
savings accounts, money market deposits and variable rate loans or deposits that
reprice frequently and fully. Security fair values are based on market prices or
dealer quotes, and if no such information is available, on quoted market prices
for similar instruments. For fixed rate loans and deposits and for variable rate
loans and deposits with infrequent repricing or repricing limits, fair value is
based on discounted cash flows using current market rates applied to the
estimated life and credit risk. Prepayment speeds are assumed in projecting
future cash flows based upon the current interest rate environment and recent
actual prepayment history. Fair values for impaired loans are estimated using
discounted cash flow analysis. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements.
The fair value of commitments was immaterial at the reporting dates presented.
48 OTTAWA FINANCIAL CORPORATION
<PAGE>
Note 20 (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Ottawa's financial instruments at year end are
as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Value Fair Value Carrying Value Fair Value
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 42,225 $ 42,225 $ 32,524 $ 32,524
Securities available for sale 71,646 71,646 57,308 57,308
Federal Home Loan Bank stock 11,782 11,782 7,308 7,308
Loans held for sale 3,375 3,375 1,955 1,955
Loans, net 769,770 774,621 747,423 754,092
Financial liabilities
Deposits 693,632 696,215 654,560 655,796
Federal Home Loan Bank advances 160,268 162,056 145,458 145,494
</TABLE>
Note 21
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Ottawa Financial Corporation at year end is
as follows:
Condensed Balance Sheets
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and due from financial institutions $ 278 $ 1,406
Loans receivable from Employee Stock Ownership Plan 2,111 2,533
Investment in subsidiary bank 71,185 72,634
Other assets 95 176
- --------------------------------------------------------------------------------
Total assets $73,669 $76,749
================================================================================
Liabilities $ 262 $ 386
Shareholders' Equity 73,407 76,363
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $73,669 $76,749
================================================================================
OTTAWA FINANCIAL CORPORATION 49
<PAGE>
Note 21 (continued)
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Condensed Statements of Income
for the years: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest and dividend income
Securities $ 175 $ 807
Loan to Employee Stock Ownership Plan $ 178 210 243
Dividends from subsidiary bank 12,500 4,000 2,449
- -------------------------------------------------------------------------------------------------------------------
12,678 4,385 3,499
Net gain on sale of securities 151 270
Operating expenses 867 769 737
- -------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and
equity in undistributed (excess distributed)
earnings of subsidiary bank 11,811 3,767 3,032
Federal income tax expense (benefit) (232) (88) 198
- -------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
(excess distributed) earnings of subsidiary bank 12,043 3,855 2,834
Equity in undistributed (excess distributed)
earnings of subsidiary bank (3,375) 3,672 260
- -------------------------------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094
===================================================================================================================
Condensed Statements of Cash Flows
for the years: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities
Net income $ 8,668 $ 7,527 $ 3,094
Adjustments to reconcile net income to
cash provided by operations
Equity in income of subsidiary bank (9,125) (7,672) (2,709)
Net accretion of securities discounts (12) (17)
Net gain on sale of securities (151) (270)
Change in
Interest receivable 75 305
Other assets 81 (86) 322
Other liabilities 63 68 270
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (313) (251) 995
Cash flows from investing activities Activity in available-for-sale securities:
Maturities, prepayments and calls 307 1,064
Sales 5,884 36,118
Principal reduction of ESOP note receivable 422 422 422
Contribution to subsidiary bank (111) (112) (108)
Cash paid in the acquisition of AFSB (30,943)
Cash dividends received from subsidiary bank 12,500 4,000 2,449
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 12,811 10,501 9,002
Cash flows from financing activities
Purchase of treasury shares (13,640) (8,833) (7,787)
Proceeds from exercise of stock options 492 258 508
Proceeds from exercise of stock warrants 1,635 502
Cash dividends paid (2,113) (1,858) (1,699)
- -------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (13,626) (9,931) (8,978)
- -------------------------------------------------------------------------------------------------------------------
Net change in cash (1,128) 319 1,019
Cash at beginning of period 1,406 1,087 68
- -------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 278 $ 1,406 $ 1,087
===================================================================================================================
</TABLE>
50 OTTAWA FINANCIAL CORPORATION
<PAGE>
QUARTERLY FINANCIAL INFORMATION
unaudited
The following is a summary of selected unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997. In our opinion, 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 March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands except share data(1))
<S> <C> <C> <C> <C>
1998
Net interest income $6,680 $7,000 $7,110 $7,102
Provision for loan losses 210 225 240 255
Noninterest income 1,607 1,939 1,995 2,270
Noninterest expense 5,143 5,200 5,352 5,397
Income before income taxes 2,934 3,514 3,513 3,720
Net income 1,831 2,227 2,205 2,405
Basic earnings per common share .32 .40 .41 .46
Diluted earnings per common share .29 .36 .37 .42
1997
Net interest income $6,553 $6,915 $6,784 $6,770
Provision for loan losses 150 150 180 180
Noninterest income 721 1,037 942 1,446
Noninterest expense 4,424 4,678 4,727 4,879
Income before income taxes 2,700 3,124 2,819 3,157
Net income 1,716 1,962 1,730 2,119
Basic earnings per common share .29 .35 .31 .38
Diluted earnings per common share .28 .33 .28 .34
</TABLE>
(1) All per share information has been retroactively adjusted to reflect the
stock dividends paid on August 31, 1998 and September 30, 1997 and the
effects of SFAS No. 128.
OTTAWA FINANCIAL CORPORATION 51
<PAGE>
SHAREHOLDER INFORMATION
Market
Ottawa Financial Corporation's common stock is traded on the Nasdaq National
Market under the symbol "OFCP." Total shares outstanding, net of treasury stock,
as of December 31, 1998, were 5,448,161. The high and low closing prices for the
common stock as reported on the Nasdaq as well as dividends declared per share,
adjusted for the 10% stock dividends paid on August 31, 1998 and September 30,
1997, were as follows.
Quarter Ended High Low Dividends
- --------------------------------------------------------------------------------
March 31, 1997 $ 17.252 $ 13.946 $ .07
June 30, 1997 18.802 16.942 .08
September 30, 1997 24.659 18.594 .08
December 31, 1997 30.909 23.636 .09
March 31, 1998 29.545 25.909 .09
June 30, 1998 26.818 25.909 .09
September 30, 1998 26.141 21.500 .10
December 31, 1998 24.000 18.875 .11
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
Ottawa and other factors. Restrictions on dividend payments are described in
Note 12 of the Notes to Consolidated Financial Statements.
As of March 11, 1999, Ottawa had approximately 2,210 shareholders of record
and 5,688,572 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, Vice Chairman and CEO, Ottawa Financial
Corporation, 245 Central Avenue, Holland, MI 49423-3298 or by calling (616)
393-7002.
Corporate Headquarters Registrar/Transfer Agent
245 Central Avenue Registrar and Transfer Company
Holland, MI 49423-3298 Cranford, NJ
Independent Auditor General Counsel
Crowe, Chizek and Company LLP Cunningham Dalman, PC
Grand Rapids, MI Holland, MI
Special Counsel
Silver, Freedman & Taff, LLP
Washington, DC
52 OTTAWA FINANCIAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of of
Parent Subsidiary Ownership Organization
- ----------------- --------------------- ---------- -------------
Ottawa Financial AmeriBank 100% Federal
Corporation
AmeriBank OS Services, Inc. 100% Michigan
AmeriBank AmeriPlan Financial 100% Michigan
Services, Inc.
The financial statements of Ottawa Financial Corporation are
consolidated with those of its subsidiaries.
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 26, 1999, on the
financial statements of Ottawa Financial Corporation as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
which report is included in the Corporation's 1998 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 30, 1999
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,437
<INT-BEARING-DEPOSITS> 21,788
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,375
<INVESTMENTS-HELD-FOR-SALE> 71,646
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 773,593
<ALLOWANCE> 3,823
<TOTAL-ASSETS> 938,030
<DEPOSITS> 693,632
<SHORT-TERM> 61,405
<LIABILITIES-OTHER> 10,723
<LONG-TERM> 98,863
0
0
<COMMON> 62
<OTHER-SE> 73,345
<TOTAL-LIABILITIES-AND-EQUITY> 938,030
<INTEREST-LOAN> 62,646
<INTEREST-INVEST> 3,833
<INTEREST-OTHER> 1,425
<INTEREST-TOTAL> 67,904
<INTEREST-DEPOSIT> 30,383
<INTEREST-EXPENSE> 9,629
<INTEREST-INCOME-NET> 27,892
<LOAN-LOSSES> 930
<SECURITIES-GAINS> (24)
<EXPENSE-OTHER> 21,092
<INCOME-PRETAX> 13,681
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,668
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 3.26
<LOANS-NON> 3,135
<LOANS-PAST> 64
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,293
<CHARGE-OFFS> 576
<RECOVERIES> 176
<ALLOWANCE-CLOSE> 3,823
<ALLOWANCE-DOMESTIC> 3,314
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 509
</TABLE>
