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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-24118
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
245 Central Avenue, Holland, Michigan 49423
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 393-7000
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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. [ ]
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 14, 2000, was
$86.1 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 14, 2000, there were issued and outstanding 6,076,389 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the 1999 Report to Shareholders.
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting
of Shareholders for the year ended December 31, 1999.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference,
contains, and future filings by Ottawa Financial Corporation ("Ottawa Financial"
or the "Company") on Form 10- Q and Form 8-K and future oral and written
statements by Ottawa Financial and its management may contain, forward-looking
statements about Ottawa Financial and its subsidiaries which we believe are
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, without limitation, statements with
respect to anticipated future operating and financial performance, growth
opportunities, interest rates, cost savings and funding advantages expected or
anticipated to be realized by management. Words such as "may," "could,"
"should," "would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan" and similar expressions are intended to identify these forward-looking
statements. Forward-looking statements by Ottawa Financial and its management
are based on beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions of management and are not guarantees of future
performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 1999 Report to Shareholders (attached to this document and
Exhibit 13) and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:
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 new products and services
of AmeriBank 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 the success of AmeriBank in gaining regulatory approval of its 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 the foregoing.
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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 FDIC, the
Federal Deposit Insurance Corporation. We currently serve Allegan, Kent,
Muskegon, Newaygo, Oceana and Ottawa Counties in Western Michigan through our 26
retail banking offices. At December 31, 1999, we had total assets of $1.02
billion, deposits of $712.0 million and shareholders' equity of $77.8 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
supplement those deposits with wholesale funds, primarily advances from the
Federal Home Loan Bank. We invest these retail and wholesale funds in
owner-occupied, one- to four-family residential mortgage loans,
nonowner-occupied one- to four-family residential, construction, commercial and
multi-family real estate loans, commercial business loans, as well as a variety
of consumer loans.
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 advances from the Federal Home Loan
Bank also have a variety of interest rates and terms including fixed rate, daily
and quarterly adjusting variable rate and putable advances.
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Our executive offices are located at 245 Central Avenue, Holland, Michigan
49423 and our telephone number at that address is (616) 393-7000.
RECENT LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act, which modernizes the
financial services industry by, among other things, permitting banking,
insurance and securities companies to combine, was signed into law. It is
unclear what impact this legislation will have on our operations, although the
anticipated creation of larger and stronger financial services competitors could
materially affect Ottawa Financial and AmeriBank.
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 small business and mortgage 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 13.8% since 1987. Income levels in the market area tend to approximate state
and national averages. Employment in the area has grown 39.1% over the past 10
years compared to 18.0% 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 growth in our loan portfolio
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since 1996 has been 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.
Our loan officers and certain executive officers have approval authority on
loans depending on type and amount. Commercial and residential mortgage 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.
Commercial and residential mortgage loans greater than $1.5 million must be
approved by the Board of Directors. Consumer loans greater than $500,000 must be
approved by the Board of Directors.
At December 31, 1999, the maximum amount that could have been loaned to any
one borrower and the borrower's related entities was approximately $17.5
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 at December 31, 1999 totaled $15.8 million consisting of a
number of loans, the largest of which is a $4.9 million loan secured by an
apartment building, two retail centers and a commercial light industrial
building. At December 31, 1999, the loans were current and performing in
accordance with their terms.
The next largest 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, 1999 of $3.8 million. The line of credit is secured by
publicly traded marketable securities. At December 31, 1999 the line of credit
was performing in accordance with its repayment terms.
At December 31, 1999, we had 23 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.
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.
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<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGE LOANS:
Secured by one- to four-family ... $432,145 47.99% $425,974 52.01% $483,502 62.20% $516,935 69.59% $209,159 71.24%
Construction or development ...... 50,814 5.64 30,673 3.74 33,232 4.27 15,219 2.04 42,659 14.53
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Residential Loans ...... 482,959 53.64 456,647 55.75 516,734 66.47 532,154 71.63 251,818 85.77
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
COMMERCIAL LOANS
Secured by multi-family properties 55,692 6.18 49,402 6.03 38,663 4.97 34,262 4.61 13,221 4.50
Secured by commercial properties . 67,192 7.46 51,637 6.30 35,147 4.52 42,745 5.75 4,106 1.40
Construction or development ...... 74,897 8.32 87,119 10.64 37,913 4.88 18,604 2.50 -- --
Business ......................... 78,318 8.70 53,935 6.59 37,322 4.80 14,996 2.02 -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Commercial Loans ....... 276,099 30.66 242,093 29.56 149,045 19.17 110,607 14.89 17,327 5.90
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
CONSUMER LOANS
Automobile ....................... 77,577 8.62 62,146 7.59 49,264 6.34 46,247 6.23 9,530 3.25
Home equity lines of credit ...... 32,742 3.64 30,178 3.68 32,379 4.17 29,170 3.93 12,039 4.10
Home equity installment .......... 20,755 2.31 19,469 2.38 23,581 3.03 20,262 2.73 373 0.12
Other ............................ 10,276 1.14 8,497 1.04 6,354 0.82 4,433 0.60 2,516 0.86
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Consumer Loans ......... 141,350 15.70 120,290 14.69 111,578 14.35 100,112 13.48 24,458 8.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Loans ................. 900,408 100.00% 819,030 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00%
====== ====== ====== ====== ======
LESS:
Undisbursed portion of
construction loans.............. 38,482 44,797 25,787 22,956 14,861
Deferred fees and discounts........ 453 640 854 1,237 1,034
Allowance for losses............... 4,714 3,823 3,293 3,129 1,251
-------- -------- -------- -------- --------
Total Loans Receivable, Net.. $856,759 $769,770 $747,423 $715,551 $276,457
======== ======== ======== ======== ========
</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,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
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:
RESIDENTIAL MORTGAGE LOANS:
Secured by one- to four-family ... $140,283 15.58% $156,383 19.09% $113,954 14.66% $108,747 14.64% $ 95,141 32.40%
Construction or development ...... 1,791 0.20 23,974 2.93 27,681 3.56 5,650 0.76 9,442 3.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Residential Loans ...... 142,074 15.78 180,357 22.02 141,635 18.22 114,397 15.40 104,583 35.62
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
COMMERCIAL LOANS:
Secured by multi-family properties 48,390 5.37 40,003 4.88 27,187 3.50 15,937 2.15 3,163 1.08
Secured by commercial properties . 59,946 6.66 47,792 5.84 25,558 3.29 27,108 3.65 1,347 0.46
Construction or development ...... 35,694 3.96 68,214 8.33 31,619 4.07 6,902 0.93 -- --
Business ......................... 61,971 6.88 38,097 4.65 14,004 1.80 6,007 0.81 -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Commercial Loans ....... 206,001 22.88 194,106 23.70 98,368 12.65 55,954 7.53 4,510 1.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
CONSUMER LOANS:
Total Consumer Loans ............. 114,741 12.74 90,112 11.00 79,199 10.19 65,241 8.78 12,294 4.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
TOTAL FIXED-RATE LOANS ....... 462,816 51.40 464,575 56.72 319,202 41.06 235,592 31.71 121,387 41.34
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
ADJUSTABLE-RATE LOANS:
RESIDENTIAL MORTGAGE LOANS
Secured by one- to four-family ... 291,862 32.41 269,591 32.92 369,548 47.54 408,188 54.95 114,018 38.83
Construction or development ...... 49,023 5.44 6,699 0.82 5,551 0.71 9,569 1.29 33,217 11.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Residential Loans ...... 340,885 37.86 276,290 33.73 375,099 48.25 417,757 56.24 147,235 50.15
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
COMMERCIAL LOANS:
Secured by multi-family properties 7,302 0.81 9,399 1.15 11,476 1.48 18,325 2.47 10,058 3.43
Secured by commercial properties . 7,246 0.80 3,845 0.47 9,589 1.23 15,637 2.10 2,759 0.94
Construction or development ...... 39,203 4.35 18,905 2.31 6,294 0.81 11,702 1.58 -- --
Business ......................... 16,347 1.82 15,838 1.93 23,318 3.00 8,989 1.21 -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Commercial Loans ....... 70,098 7.79 47,987 5.86 50,677 6.52 54,653 7.36 12,817 4.37
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
CONSUMER LOANS
Total Consumer Loans ............... 26,609 2.96 30,178 3.68 32,379 4.17 34,871 4.69 12,164 4.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
TOTAL ADJUSTABLE-RATE LOANS ..... 437,592 48.60 354,455 43.28 458,155 58.94 507,281 68.29 172,216 58.66
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
TOTAL LOANS ................. 900,408 100.00% 819,030 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00%
====== ====== ====== ====== ======
LESS:
Undisbursed portion of
construction loans............... 38,482 44,797 25,787 22,956 14,861
Deferred fees and discounts.......... 453 640 854 1,237 1,034
Allowance for losses................. 4,714 3,823 3,293 3,129 1,251
-------- -------- -------- -------- --------
Total loans receivable, net... $856,759 $769,770 $747,423 $715,551 $276,457
======== ======== ======== ======== ========
</TABLE>
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The following table illustrates the interest rate sensitivity of our loan
portfolio at December 31, 1999. 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>
Multi-family and Construction
Residential Real Commercial Real and Commercial
Estate Estate Development Business Consumer Total
---------------- ---------------- -------------- --------------- --------------- --------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Periods Ending
December 31,
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000(1) ...................... $ 15,904 7.32% $ 39,192 8.30% $ 41,751 8.27% $ 30,762 8.25% $ 40,153 8.93% $167,762 8.34%
2001 - 2004 .................. 63,776 7.31 66,740 8.08 32,508 7.77 42,541 8.04 88,267 9.03 293,832 8.16
2005 and following ........... 352,465 7.30 16,952 7.89 51,452 7.09 5,015 7.71 12,930 8.98 438,814 7.35
-------- ---- -------- ---- -------- ----
Totals .................. $432,145 7.30% $122,884 8.13% $125,711 7.66% $ 78,318 8.10% $141,350 9.00% $900,408 7.80%
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
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The total amount of loans due after December 31, 2000 which have fixed or
predetermined interest rates is $376.6 million while the total amount of loans
due after such date which have floating or adjustable interest rates is $356.0
million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
During 1998 and 1999, 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. We continue to purchase loans secured by residential properties in
southwest and southeast Michigan and central Texas. Most of these loans are
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 and 1999 we purchased$112,000 and $20.9
million, respectively. We supplemented our internal growth with increased loan
purchases in 1999 in order to continue leveraging our capital to desired levels.
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; Market Risk Analysis" in the 1999 Report to
Shareholders 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
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owner-occupied loans. Adjustable rates are offered on nonowner-occupied one- to
four-family residential loans, with terms of up to 30 years.
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
maturity of 10 years with an amortization period of up to 25 years. Most of
these loans, however, have maturities of 5 years or less with amortization
periods of 20 years. 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
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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 reduced. At December 31, 1999,
no portion 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, 1999, we had 28
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, 1999, was an $11.5 million line of credit for the construction
of a medical office facility, of which $7.5 million was outstanding as of such
date.
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
11
<PAGE>
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. Construction and development loans to borrowers
other than owner-occupants also involve many of the same risks discussed above
regarding multi-family and commercial real estate loans and tend to be more
sensitive to general economic conditions than many other types of loans.
COMMERCIAL BUSINESS LENDING
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 2000. At December 31, 1999, the
average outstanding loan balance in our commercial business loan portfolio was
$150,000, with the largest commercial business loan being a $6.0 million term
loan secured by owner occupied real estate.
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 primarily originate automobile loans, our largest segment of consumer
loans, on an indirect basis and originate direct automobile loans on a more
limited basis. Indirect loans are loans made when the Company purchases loan
contracts, often at a discount, from automobile dealers which have extended
credit to their customers, as opposed to direct loans, which are loans made when
the Company extends credit directly to the borrower. 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. Our
automobile loans typically are originated at fixed interest rates with terms up
to 60 months for new and used vehicles. Loans secured by automobiles are
generally originated for up to 80% of the National Automobile Dealers
Association book value of the automobile securing the loan. At December 31,
1999, our automobile loan portfolio totaled $77.6 million, of which $62.2
million were originated on an indirect basis.
12
<PAGE>
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 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, 1999, we
had $20.8 million of home equity installment loans and $32.7 million of home
equity lines of credit outstanding, representing 2.3% and 3.6%, respectively, of
our gross loan portfolio. At that date, we had $41.7 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, 1999, $421,000 or 0.30% 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 servicing fee is
13
<PAGE>
recognized as income over the life of the loan. We serviced for others mortgage
loans that we originated and sold amounting to $261.0 million at December 31,
1999.
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.
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 1999 Report to Shareholders.
14
<PAGE>
ORIGINATIONS BY TYPE Year Ended December 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)
ADJUSTABLE-RATE LOANS:
Residential Mortgage Loans:
Secured by one- to four-family ........... $ 59,376 $ 36,790 $ 57,043
Construction or development .............. 47,593 10,567 --
Commercial Loans:
Secured by multi-family properties ....... 7,727 685 1,710
Secured by commercial properties ......... 8,971 371 --
Construction or development .............. 29,153 20,849 4,507
Commercial business ...................... 14,423 31,172 19,422
Consumer and Other Loans ................... 12,001 27,944 12,000
--------- --------- ---------
Total Adjustable-Rate Loans ......... 179,244 128,378 94,682
--------- --------- ---------
FIXED-RATE LOANS:
Residential Mortgage Loans:
Secured by one- to four-family ........... 55,568 172,737 58,086
Construction or development .............. 6,490 38,037 18,656
Commercial Loans:
Secured by multi-family properties ....... 1,272 15,386 7,251
Secured by commercial properties ......... 11,140 19,396 5,836
Construction or development .............. 2,194 38,855 13,221
Commercial business ...................... 26,583 21,168 8,798
Consumer and Other Loans ................... 70,731 61,126 38,775
--------- --------- ---------
Total Fixed-Rate Loans .............. 173,978 366,705 150,623
--------- --------- ---------
Total Loans Originated .............. 353,222 495,083 245,305
PURCHASED LOANS:
Secured by one- to four-family ............. 20,942 112 6,039
--------- --------- ---------
Total Loans Originated and Purchased ... 374,164 495,195 251,344
--------- --------- ---------
LOANS SOLD:
Secured by one- to four-family ............. 65,986 148,280 43,161
LOAN REPAYMENTS:
Principal repayments ....................... 213,796 344,526 179,735
--------- --------- ---------
Total Loans Sold and Repaid ............ 279,782 492,806 222,896
--------- --------- ---------
Increase (Decrease) in Other Items, Net .... (6,502) 19,958 5,379
--------- --------- ---------
Net Increase ........................ $ 87,880 $ 22,347 $ 33,827
========= ========= =========
Due to the historically low interest rate environment during 1998, we
experienced a shift in customer demand from adjustable rate to fixed rate
products. Increasing interest rates the latter part of 1999 caused a shift in
consumer demand back to adjustable 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
15
<PAGE>
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.
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, 1999, 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..... 70 $2,998 0.69% 6 $180 0.04% 76 $3,178 0.73%
Multi-family and commercial
real estate....................... 1 316 0.57 -- -- -- 1 316 0.57
Construction or development......... 5 1,207 0.96 -- -- -- 5 1,207 0.96
Commercial business................. 10 1,549 1.98 5 711 0.91 15 2,260 2.89
Consumer............................ 93 908 0.64 52 421 0.30 145 1,329 0.94
--- ------ --- ------ --- ------
Total........................... 179 $6,978 63 $1,312 242 $8,290
=== ====== === ====== === ======
</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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family .............................. $ 175 $ 696 $ 917 $1,792 $ --
Multi-family and commercial real estate .......... -- 879 -- -- --
Construction or development ...................... -- 609 611 -- --
Commercial business .............................. 389 504 118 -- --
Consumer ......................................... 323 446 434 331 --
------ ------ ------ ------ ------
Total ......................................... 887 3,134 2,080 2,123 --
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family .............................. 5 32 98 132 1,317
Multi-family and commercial real estate .......... -- -- 546 426 1,110
Construction or development ..................... -- 21 -- -- --
Commercial business .............................. 322 -- -- -- --
Consumer ......................................... 98 11 2 55 7
------ ------ ------ ------ ------
Total ......................................... 425 64 646 613 2,434
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family .............................. 536 656 276 39 296
Consumer loans ................................... 250 174 181 150 --
------ ------ ------ ------ ------
Total ......................................... 786 830 457 189 296
------ ------ ------ ------ ------
Total non-performing assets ........................ $2,098 $4,028 $3,183 $2,925 $2,730
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets .................................... 0.21 % 0.43% 0.36% 0.34% 0.74%
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $161,000, none of which was included in
interest income.
OTHER LOANS OF CONCERN. As of December 31, 1999, there were $2.7 million of
other loans not included in the table or discussed above where known information
about the possible credit problems of borrowers caused management to have doubts
as to the ability of the borrower to comply with present loan repayment terms.
These loans consist of seven commercial and multi-family loans, the largest of
which was a $2.0 million loan secured by a manufacturing plant. We are
monitoring this loan as a result of a tenant vacancy. The loan was current on
payments as of December 31, 1999. These loans have been considered by management
in conjunction with the analysis of the adequacy of the allowance for loan
losses.
As of December 31, 1999, 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,
17
<PAGE>
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 and 1999. The total allowance balance
was increased throughout 1998 and 1999 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 -
Provision for Loan Losses," in the 1999 Report to Shareholders. The following
table sets forth an analysis of our allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ...................... $ 3,823 $ 3,293 $ 3,129 $ 1,251 $ 1,118
Acquired from AmeriBank Federal Savings
Bank ................................................ -- -- -- 1,358 --
Charge-offs:
Consumer ......................................... 544 576 615 134 28
Recoveries .......................................... 265 176 119 90 1
------- ------- ------- ------- -------
Net charge-offs ..................................... (279) (400) (496) (44) (27)
Additions charged to operations ..................... 1,170 930 660 564 160
------- ------- ------- ------- -------
Balance at end of period ............................ $ 4,714 $ 3,823 $ 3,293 $ 3,129 $ 1,251
======= ======= ======= ======= =======
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 ................... 9.88% 11.09% 16.25% ---%(1) ---%(1)
======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------
(1) Less than 0.10%.
18
<PAGE>
The distribution of our allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ----------------- ----------------- -----------------
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>
Residential Mortgage Loans:
Secured by one- to four-family .... $ 242 47.99% $ 262 52.01% $ 289 62.20% $ 331 69.59% $ 166 71.24%
Construction or development ....... 244 5.64 157 3.74 306 4.27 11 2.04 53 14.53
Commercial Loans:
Secured by multi-family ........... 418 6.18 371 6.03 279 4.97 18 4.61 413 4.50
Secured by commercial properties .. 532 7.46 436 6.30 318 4.52 606 5.75 21 1.40
Construction or development ....... 411 8.32 390 10.64 165 4.88 43 2.50 -- --
Business .......................... 626 8.70 504 6.59 289 4.80 150 2.02 -- --
Consumer and Other Loans:
Automobile ........................ 1,052 8.62 818 7.59 649 6.34 486 6.23 56 3.25
Home equity lines of credit ....... 163 3.64 151 3.68 162 4.17 146 3.93 70 4.10
Home equity installment ........... 104 2.31 96 2.38 115 3.03 101 2.73 -- 0.12
Other ............................. 155 1.14 129 1.04 99 0.82 44 0.60 17 0.86
Unallocated ......................... 767 -- 509 -- 622 -- 1,193 -- 455 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .......................... $4,714 100.00% $3,823 100.00% $3,293 100.00% $3,129 100.00% $1,251 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
19
<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, 1999, 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, 1999, 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
-------------------------- Weighted
Amortized Cost Fair Value Average Yield
-------------------------- -------------
(Dollars in Thousands)
Due in one year or less................. $15,051 $14,960 5.15%
Due after one year through five years... 37,175 36,445 6.18
Due after five through 10 years......... 1,578 1,583 6.42
------- -------
Total............................... 53,804 52,988 5.87
Asset-backed debt securities(1)......... 28,548 28,068 6.65
-------- --------
Total............................... $82,352 $81,056 6.14
======= =======
- ---------------------------------
(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.
20
<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 2 of the Notes to Consolidated Financial
Statements in the 1999 Report to Shareholders.
December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Carrying Carrying Carrying
Value Value Value
-------- -------- --------
(Dollars in Thousands)
Equity Securities .................... $ -- $ -- $ --
------- ------- -------
Debt Securities:
Corporate .......................... $ 6,928 $ 8,176 $ 2,010
Asset-backed Small Business
Administration loans ........... 8,031 10,731 15,232
Mortgage-backed .................... 20,037 26,544 13,203
Government and agency .............. 45,956 25,542 25,007
Municipal obligations .............. 104 653 1,856
------- ------- -------
Total debt securities .......... 81,056 71,646 57,308
Federal Home Loan Bank Stock ....... 11,782 11,782 7,308
------- ------- -------
Total securities ................ $92,838 $83,428 $64,616
======= ======= =======
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;
Market Risk Analysis" in the 1999 Report to Shareholders. Based on our
experience, we believe that our savings, interest and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, our
21
<PAGE>
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.
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---------- --------- ----------
(Dollars in Thousands)
Opening balance .................. $ 693,632 $ 654,560 $ 622,492
Net Deposits (Withdrawals) ....... (6,319) 14,081 6,373
Interest credited ................ 24,641 24,991 25,695
--------- --------- ---------
Ending balance ................... $ 711,954 $ 693,632 $ 654,560
--------- ========= =========
Net increase ..................... $ 18,322 $ 39,072 $ 32,068
--------- ========= =========
Percent increase ................. 2.64% 5.97% 5.15%
========= ========= =========
The following table sets forth the dollar amount of deposits in the various
types of deposit programs that we offered at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------ ---------------------- -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION AND SAVINGS DEPOSITS:
Noninterest-bearing ................. $ 40,969 5.75% $ 40,813 5.88% $ 28,431 4.34%
Savings accounts (1.74(1)) .......... 46,022 6.46 54,475 7.85 60,143 9.19
NOW accounts and money market
deposit accounts (3.69(1)) ........ 215,403 30.26 200,132 28.86 160,296 24.49
-------- ------ -------- ------ -------- ------
Total Non-certificates .......... 302,394 42.47 295,420 42.59 248,870 38.02
-------- ------ -------- ------ -------- ------
Certificates:
3.00 - 4.99% ...................... 68,217 9.58 26,539 3.83 9,612 1.47
5.00 - 6.99% ...................... 331,409 46.55 360,045 51.91 359,494 54.92
7.00 - 8.99% ...................... 9,934 1.40 11,241 1.62 36,109 5.52
9.00 - 10.99% ..................... -- -- 387 0.05 475 .07
-------- ------ -------- ------ -------- ------
Total Certificates .............. 409,560 57.53 398,212 57.41 405,690 61.98
-------- ------ -------- ------ -------- ------
Total Deposits .................. $711,954 100.00% $693,632 100.00% $654,560 100.00%
======== ------ ======== ------ ======== ======
</TABLE>
- --------------------
(1) At December 31, 1999.
22
<PAGE>
The following table shows rate and maturity information on our certificates
of deposit as of December 31, 1999.
3.00- 5.00- 7.00- Percent
4.99% 6.99% 8.99% Total of Total
------------------------------------------------------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- -----------------------------
March 31, 2000 ....... $ 19,236 $ 52,041 $ 7,278 $ 78,555 19.18%
June 30, 2000 ........ 16,084 43,596 1,719 61,399 14.99
September 30, 2000 ... 6,891 49,926 20 56,837 13.88
December 31, 2000 .... 9,271 27,964 439 37,674 9.20
March 31, 2001 ....... 6,436 4,185 217 10,838 2.65
June 30, 2001 ........ 2,923 3,844 68 6,835 1.67
September 30, 2001 ... 573 42,590 2 43,165 10.54
December 31, 2001 .... 1,023 33,676 16 34,715 8.48
March 31, 2002 ....... 1,249 35,165 10 36,424 8.89
June 30, 2002 ........ 1,823 29,340 -- 31,163 7.61
September 30, 2002 ... 199 3,604 -- 3,803 0.93
December 31, 2002 .... 109 1,053 2 1,164 0.28
Thereafter ........... 2,400 4,425 163 6,988 1.70
-------- -------- -------- -------- ------
Total ............. $ 68,217 $331,409 $ 9,934 $409,560 100.00%
======== ======== ======== ======== ======
Percent of total .. 16.65% 80.92% 2.43% 100.00%
===== ===== ==== ======
The following table indicates the amount of our certificates of deposit by
time remaining until maturity as of December 31, 1999.
<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> <C>
Certificates of deposit less than $100,000 ......... $ 69,235 $ 52,936 $ 82,958 $155,844 $360,973
Certificates of deposit of $100,000 or more ....... 9,320 8,463 11,553 19,251 48,587
-------- -------- -------- -------- --------
Total certificates of deposit .................... $ 78,555 $ 61,399 $ 94,511 $175,095 $409,560
======== ======== ======== ======== ========
</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.
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,
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we have used putable and variable rate 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. Variable rate advances adjust
periodically based upon a predetermined index for a set period of time. Of the
$216.4 million of advances outstanding at December 31, 1999, $102.4 million were
fixed term and rate, $64.0 million were putable advances and $50.0 million were
adjustable rate 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, 1999, we had $216.4 million of advances from the Federal
Home Loan Bank of Indianapolis and the capacity to borrow up to $299.7 million;
however, the current Board policy limits our borrowing capacity to $254.3
million. For additional information on our borrowings and maturities, see Note 8
of the Notes to Consolidated Financial Statements contained in the 1999 Report
to Shareholders.
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,
----------------------------------
1999 1998 1997
--------- -------- --------
(In Thousands)
DURING THE PERIODS:
MAXIMUM BALANCE:
Federal Home Loan Bank advances ...... $216,353 $169,768 $145,458
AVERAGE BALANCE:
Federal Home Loan Bank advances ...... $171,179 $160,533 $140,746
The following table sets forth the end of period interest rates and
balances at the dates indicated:
December 31,
------------------------------------------
1999 1998 1997
----------- ----------- ------------
(Dollars in Thousands)
Federal Home Loan Bank advances ... $ 216,353 $ 160,268 $ 145,458
Weighted average interest rate of
Federal Home Loan Bank advances.. 5.88% 5.91% 5.98%
SUBSIDIARY AND OTHER ACTIVITIES
AmeriBank has three wholly-owned subsidiaries: OS Services, Inc. and
AmeriPlan Financial Services, Inc. and AmeriBank Mortgage Company. At December
31, 1999, AmeriBank's investment in its subsidiaries totaled $1.7 million. The
subsidiaries of AmeriBank generated net income of $409,000 during 1999.
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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 $803,000. In addition, Ottawa
Financial received $345,000 in tax credits during 1999 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 $858,000
for 1999.
As of January 1, 2000, AmeriBank's residential mortgage lending operations
were segregated and transferred to AmeriBank Mortgage Company. AmeriBank
Mortgage Company's operations include originating and selling residential
mortgage loans. The reason for segregating these operations is to allow us to
more accurately monitor the operation's profitability and performance, as well
as to achieve more favorable state tax treatment.
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 Institutions 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'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 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, 1999, we were
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classified as a well-capitalized institution and was not subject to any
assessment. See Note 11 of Notes to Consolidated Financial Statements in the
1999 Report to Shareholders.
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 CAMELs rating system) established by the Federal Financial
Institutions Examination Council. For all but the most highly rated institutions
meeting the conditions set forth above, a ratio of Tier 1 capital to total
assets of not less than 4% must be maintained. Tier 1 capital is the sum of
common shareholders' 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 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.
26
<PAGE>
At December 31, 1999, AmeriBank's ratio of Tier 1 capital of total assets
was 6.7%, its ratio of Tier 1 capital to risk-weighted assets was 9.5% and its
ratio of total capital to risk-weighted assets was 10.2%. At December 31, 1999,
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 shareholders 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 August 1999 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.
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 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.
27
<PAGE>
Ottawa Financial stock held by persons who are affiliates, generally
including executive officers, directors and 10% shareholders 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, 1999, 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 8.4% and were 8.0% for the
calendar year 1999. For the year ended December 31, 1999, the Federal Home Loan
Bank of Indianapolis paid us dividends totaling $943,000.
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 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 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
28
<PAGE>
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 shareholder, including distributions on redemption,
dissolution or liquidation, or for any other purpose except to absorb bad debt
losses. As of December 31, 1999, 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 and for 1995.
With respect to years examined by the IRS, all deficiencies have been satisfied.
29
<PAGE>
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 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 27 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, Bank One and Michigan
National Bank. Despite the presence of significant competition, we have
demonstrated the ability to sustain positive deposit growth rates during the
past several years. Growth of deposits can be attributed to a strong local
economy, customer loyalty and our local orientation.
EMPLOYEES
At December 31, 1999, we had a total of 320 employees, including 90
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers our employee relations to be good.
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EXECUTIVE OFFICERS OF OTTAWA FINANCIAL
DOUGLAS J. IVERSON. Mr. Iverson, age 50, 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 46, 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 ("AFSB," which was acquired by
Ottawa Financial in February 1996) 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.
LEE PANKRATZ, age 49, is Senior Vice President and Chief Lending Officer of
AmeriBank. He has been involved in banking since 1972 working primarily as a
lending officer. Prior to joining AmeriBank in 1996, Mr. Pankratz was employed
by AFSB as Senior Vice President of Lending since 1990. He has extensive
background in all phases of lending with particular emphasis in commercial real
estate. Mr. Pankratz has a BA from Olivet College.
JON W. SWETS. Mr. Swets, age 34, is Senior Vice President and Chief
Financial Officer of Ottawa Financial and 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 public accounting firm. Mr. Swets joined Crowe, Chizek and
Company LLP as a staff accountant in June 1987.
TIMOTHY LOCKWOOD, age 46, is Senior Vice President of Operations of
AmeriBank. He has been involved in banking since 1976 working primarily in the
area of operations and accounting. Prior to joining AmeriBank in 1996, he was
employed as Senior Vice President and Chief Financial Officer of AFSB. Prior to
AFSB, Mr. Lockwood was employed by AmeriTrust in Elkhart, Indiana, where he had
worked since 1976 in the area of accounting. Mr. Lockwood holds a BS from
Indiana University.
CHERYL BLOUW, age 52, is Senior Vice President of Retail Banking of
AmeriBank. Mrs. Blouw has been with AmeriBank since 1980, working primarily in
the area of retail banking.
ITEM 2. PROPERTIES
Our operations are conducted through AmeriBank's main office and 26
branches, including a "drive-up" facility. At December 31, 1999, we owned
AmeriBank's main office and 24 of its branch offices; the remaining two branch
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<PAGE>
offices and the land on which they are situated were leased. As of December 31,
1999, the net book value of our investment in premises, equipment and
leaseholds, excluding computer equipment, was approximately $14.4 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, 1999 was $1.8 million.
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 10 of the Notes to Consolidated
Financial Statements in the 1999 Report to Shareholders.
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,
1999.
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
1999 Report to Shareholders for year ended December 31, 1999 is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Selected Consolidated Financial Information" of the
attached 1999 Report to Shareholders for year ended December 31, 1999 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 1999 Report to Shareholders
for year ended December 31, 1999 is incorporated herein by reference.
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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 1999 Report
to Shareholders for year ended December 31, 1999 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The section entitled "Consolidated Financial Statements" of the attached
1999 Report to Shareholders for year ended December 31, 1999 is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
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 2000, 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)
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the definitive
proxy statement for the Annual Meeting of Shareholders to be held in April 2000,
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 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 2000, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held in April 2000,
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 2000, 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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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 Balance Sheets at December 31, 1999 and 1998.
3.Consolidated Statements of Income for the Years ended December 31, 1999,
1998 and 1997.
4.Consolidated Statements of Changes in Shareholders' Equity for the Years
ended December 31, 1999, 1998 and 1997.
5.Consolidated Statements of Cash Flows for the Years ended December 31,
1999, 1998 and 1997.
6.Consolidated Statements of Comprehensive Income for the Years ended
December 31, 1999, 1998 and 1997.
7. Notes to Consolidated Financial Statements.
8. Ottawa Financial Corporation Quarterly Financial Data.
(2) FINANCIAL STATEMENT SCHEDULES: All financial statement schedules have
been omitted as the information is not required under the related instructions
or is inapplicable.
(3) EXHIBITS: See Index to Exhibits.
(b) REPORTS ON FORM 8-K: No current reports were filed on Form 8-K during the
quarter ended December 31, 1999.
35
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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 29, 2000 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Douglas J. Iverson By: /s/ Gordon H. Cunningham
------------------------------------------- --------------------------------------------
Douglas J. Iverson, Vice Chairman of Gordon H. Cunningham, Chairman of
the Board and Chief Executive Officer the Board
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 29, 2000 Date: March 29, 2000
--------------- ---------------
By: /s/ Ronald L. Haan By: /s/ Gordon L. Grevengoed
------------------------------------------- --------------------------------------------
Ronald L. Haan, President and Director Gordon L. Grevengoed, Director
Date: March 29, 2000 Date: March 29, 2000
--------------- ---------------
By: /s/ Leon E. Koops By: /s/ Brian W. Koop
------------------------------------------- --------------------------------------------
Leon E. Koops, Director Brian W. Koop, Director
Date: March 29, 2000 Date: March 29, 2000
--------------- ---------------
<PAGE>
By: /s/ Ronald J. Bieke By: /s/ B. Patrick Donnelly, III
------------------------------------------- --------------------------------------------
Ronald J. Bieke, Director B. Patrick Donnelly, III, Director
Date: March 29, 2000 Date: March 29, 2000
--------------- ---------------
By: /s/ Robert D. Kolk By: /s/ Richard T. Walsh
------------------------------------------- --------------------------------------------
Robert D. Kolk, Director Richard T. Walsh, Director
Date: March 29, 2000 Date: March 29, 2000
--------------- ---------------
By: /s/ Jon W. Swets
-------------------------------------------
Jon W. Swets, Vice President and
Chief Financial Officer (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
Date: March 29, 2000
---------------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
- ----------- ---------------------------------------------------------------
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, filed as an exhibit to the Registrant's
Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-24118), is incorporated herein by reference.
4 Registrant's Specimen Stock Certificate, filed on March 18,
1994 as an exhibit to Registrant's Registration Statement on
Form S-1 (File No. 33-76600), is incorporated herein by
reference.
10.1 Employment 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.
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 1999 Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
this 22nd day of February, 2000 by and between Ottawa Financial Corporation.
(the "Company") and Ronald L. Haan (the "Employee").
WHEREAS, the Employee serves as the President, Chief Operating Officer and
Secretary of the Company and of the Company's wholly-owned subsidiary, AmeriBank
(the "Bank");
WHEREAS, the Employee has an existing employment agreement entered into as
of August 10, 1995 (the "Prior Employment Agreement") which he is willing to
terminate in consideration of this Agreement becoming effective;
WHEREAS, the board of directors of the Company (the "Board of Directors")
believes it is in the best interests of the Company and its subsidiaries for the
Company to enter into this Agreement with the Employee in order to assure
continuity of management of the Company and its subsidiaries; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. DEFINITIONS.
(a) The term "Change in Control" means (1) an acquisition of securities
of the Company or the Bank that is determined by the Board of Directors to
constitute an acquisition of control of the Company or the Bank within the
meaning of the Change in Bank Control Act, 12 U.S.C. ss. 1817(j) and the Savings
and Loan Holding Company Act, 12U.S.C. ss.1467a, and applicable regulations
thereunder; (2) an event that would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the Effective Date,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); (3) any person (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act) directly or indirectly of securities of the
Company or the Bank representing 25% or more of the combined voting power of the
Company's or the Bank's outstanding securities; (4) individuals who are members
of the Board of Directors on the Effective Date (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof, PROVIDED THAT any
person becoming a director subsequent to the Effective Date whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by a nominating committee serving under an Incumbent Board, shall
be considered a member of the Incumbent Board; or (5) approval by the Company's
stockholders of a plan of reorganization, merger or consolidation of the
Company, sale of all or substantially all of the assets of the Company, a
similar transaction in which the Company is not the resulting entity; PROVIDED
<PAGE>
THAT the term "change in control" shall not include an acquisition of securities
by an employee benefit plan of the Bank or the Company. In the application of
regulations under the Change in Bank Control Act or the Savings and Loan Holding
Company Act, determinations to be made by the applicable federal banking
regulator shall be made by the Board of Directors.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
consolidated group of the Company (or its successors) for federal income tax
reporting.
(c) The term "Date of Termination" means the date upon which the
Employee's employment with the Company or the Bank or both ceases, as specified
in a notice of termination pursuant to Section 8 of this Agreement.
(d) The term "Effective Date" means March _____, 2000.
(e) The term "Involuntarily Termination" means the termination of the
employment of Employee (i) by either the Company or the Bank or both without his
express written consent; or (ii) by the Employee by reason of a material
diminution of or interference with his duties, responsibilities or benefits,
including (without limitation) any of the following actions unless consented to
in writing by the Employee: (1) a requirement that the Employee be based at any
place other than Grand Rapids, Michigan, or within 40 miles thereof, except for
reasonable travel on Company or Bank business; (2) a material demotion of the
Employee; (3) a material reduction in the number or seniority of personnel
reporting to the Employee or a material reduction in the frequency with which,
or in the nature of the matters with respect to which such personnel are to
report to the Employee, other than as part of a Bank- or Company-wide reduction
in staff; (4) a reduction in the Employee's salary or a material adverse change
in the Employee's perquisites, benefits, contingent benefits or vacation, other
than prior to a Change in Control as part of an overall program applied
uniformly and with equitable effect to all members of the senior management of
the Bank or the Company; (5) a material permanent increase in the required hours
of work or the workload of the Employee; or (6) the failure of the Board of
Directors (or a board of directors of a successor of the Company) to elect him
as President and Chief Operating Officer of the Company (or a successor of the
Company) or any action by the Board of Directors (or a board of directors of a
successor of the Company) removing him from any of such offices, or the failure
of the board of directors of the Bank (or any successor of the Bank) to elect
him as President and Chief Operating Officer of the Bank (or any successor of
the Bank) or any action by such board (or board of a successor of the Bank)
removing him from any of such offices. The term "Involuntary Termination" does
not include Termination for Cause or termination of employment due to death or
permanent disability pursuant to Section 7(g) of this Agreement, or suspension
or temporary or permanent prohibition from participation in the conduct of the
affairs of a depository institution under Section 8 of the Federal Deposit
Insurance Act.
2
<PAGE>
(f) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Employee with either the Company or the
Bank, as the case may be, because of the Employee's dishonesty, incompetence,
willful misconduct, breach of a fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (excluding violations which do not have a material adverse
affect on the Company or the Bank) or final cease-and-desist order, or (except
as provided below) material breach of any provision of this Agreement. No act or
failure to act by the Employee shall be considered willful unless the Employee
acted or failed to act with an absence of good faith and without a reasonable
belief that his action or failure to act was in the best interest of the
Company. The Employee shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Directors at a meeting of the Board duly
called and held for such purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board of
Directors the Employee has engaged in conduct described in the preceding
sentence and specifying the particulars thereof in detail.
2. TERM; TERMINATION OF PRIOR EMPLOYMENT AGREEMENT. The term of this
Agreement shall be a period of three years commencing on the Effective Date,
subject to earlier termination as provided herein. On each anniversary of this
Agreement the term shall be extended for a period of one year in addition to the
then-remaining term, PROVIDED THAT the Company has not given notice to the
Employee in writing at least 90 days prior to such anniversary that the term of
this Agreement shall not be extended further, and PROVIDED FURTHER THAT the
Employee has not received an unsatisfactory performance review by either the
Board of Directors or the board of directors of the Bank. The Employee's Prior
Employment Agreement shall terminate immediately prior to the Effective Date.
3. EMPLOYMENT. The Employee is employed as the President, Chief Operating
Officer and Secretary of the Company and as the President, Chief Operating
Officer and Secretary of the Bank. As such, the Employee shall render
administrative and management services as are customarily performed by persons
situated in similar executive capacities, and shall have such other powers and
duties as the Board of Directors or the board of directors of the Bank may
prescribe from time to time. The Employee shall also render services to any
subsidiary or subsidiaries of the Company or the Bank as requested by the
Company or the Bank from time to time consistent with his executive position.
The Employee shall devote his best efforts and reasonable time and attention to
the business and affairs of the Company and the Bank to the extent necessary to
discharge his responsibilities hereunder. The Employee may (i) serve on
corporate or charitable boards or committees, and (ii) manage personal
investments, so long as such activities do not interfere materially with
performance of his responsibilities hereunder.
3
<PAGE>
4. CASH COMPENSATION.
(a) SALARY. The Company agrees to pay the Employee during the term of
this Agreement a base salary (the "Company Salary") the annualized amount of
which shall be not less than the annualized aggregate amount of the Employee's
base salary from the Company and any Consolidated Subsidiaries in effect at the
Effective Date; PROVIDED THAT any amounts of salary actually paid to the
Employee by any Consolidated Subsidiaries shall reduce the amount to be paid by
the Company to the Employee. The Company Salary shall be paid no less frequently
than monthly and shall be subject to customary tax withholding. The amount of
the Employee's Company Salary may be increased (but shall not be decreased) from
time to time in accordance with the amounts of salary approved by the Board of
Directors or the board of directors of any of the Consolidated Subsidiaries
after the Effective Date.
(b) BONUSES. The Employee shall be entitled to participate in an
equitable manner with all other executive officers of the Company and the Bank
in such performance-based and discretionary bonuses, if any, as are authorized
and declared by the Board of Directors for executive officers of the Company and
by the board of directors of the Bank for executive officers of the Bank.
(c) EXPENSES. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Company and the Bank, PROVIDED THAT
the Employee accounts for such expenses as required under such policies and
procedures.
(d) DEFERRAL OF NON-DEDUCTIBLE COMPENSATION. In the event that the
Employee's aggregate compensation (including compensatory benefits which are
deemed remuneration for purposes of Section 162(m) of the Internal Revenue Code
of 1986 as amended (the "Code")) from the Company and the Consolidated
Subsidiaries for any calendar year exceeds the greater of (i) $1,000,000 or (ii)
the maximum amount of compensation deductible by the Company or any of the
Consolidated Subsidiaries in any calendar year under Section 162(m) of the Code
(the "maximum allowable amount"), then any such amount in excess of the maximum
allowable amount shall be mandatorily deferred with interest thereon at 8% per
annum, compounded annually, to a calendar year such that the amount to be paid
to the Employee in such calendar year, including deferred amounts and interest
thereon, does not exceed the maximum allowable amount. Subject to the foregoing,
deferred amounts including interest thereon shall be payable at the earliest
time permissible. All unpaid deferred amounts shall be paid to the Employee not
later than his Date of Termination unless his Date of Termination is on a
December 31st, in which case, the unpaid deferred amounts shall be paid to the
Employee on the first business day of the next succeeding calendar year. The
provisions of this subsection shall survive any termination of the Employee's
employment and any termination of this Agreement.
4
<PAGE>
5. BENEFITS.
(a) PARTICIPATION IN BENEFIT PLANS. The Employee shall be entitled to
participate, to the same extent as executive officers of the Company and the
Bank generally, in all plans of the Company and the Bank relating to pension,
retirement, thrift, profit-sharing, savings, group or other life insurance,
hospitalization, medical and dental coverage, travel and accident insurance,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof. In addition, the Employee shall be entitled to be
considered for benefits under all of the stock and stock option related plans in
which the Company's or the Bank's executive officers are eligible or become
eligible to participate.
(b) FRINGE BENEFITS. The Employee shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans or perquisites which
are or may become generally available to the Company's or the Bank's executive
officers, including but not limited to supplemental retirement, incentive
compensation, supplemental medical or life insurance plans, company cars, club
dues, physical examinations, financial planning and tax preparation services.
6. VACATIONS; LEAVE. The Employee shall be entitled to annual paid vacation
in accordance with the policies established by the Board of Directors and the
board of directors of the Bank for executive officers and to voluntary leaves of
absence, with or without pay, from time to time at such times and upon such
conditions as the Board of Directors may determine in its discretion.
7. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. If the Employee experiences an Involuntary
Termination, other than for cause or by reason of death or permanent disability,
the Company shall pay the Employee his salary and provide to the Employee the
same insurance benefits as he was receiving before the date of termination
through the remaining term of this Agreement.
(b) CHANGE IN CONTROL AND TAX GROSS UP. In the event that the Employee
experiences an Involuntary Termination within the 6 months preceding, at the
time of, or within 24 months following a Change in Control, in lieu of the
Company's obligations under Section 7(a) of this Agreement, the Company shall
pay to the Employee in cash, within 30 days after the later of the date of such
Change in Control or the Date of Termination, an amount equal to 299% of the
Employee's "base amount" as determined under Section 280G of the Code.
In the event that any payments or benefits provided or to be
provided to the Employee pursuant to this Agreement, in combination with
payments or benefits, if any, from other plans or arrangements maintained by the
Company or any of the Consolidated Subsidiaries, constitute "excess parachute
payments" under Section 280G of the Code that are subject to excise tax under
Section 4999 of the Code, the Company shall pay to the Employee in cash an
additional amount equal to the amount of the Gross Up Payment (as hereinafter
defined). The "Gross Up Payment" shall be the amount needed to ensure that the
amount of such payments and the value of such benefits received by the Employee
(net of such excise tax and any federal, state and local tax on the Company's
payment to him attributable to such excise tax) equals the amount of such
5
<PAGE>
payments and value of such benefits as he would receive in the absence of such
excise tax and any federal, state and local tax on the Company's payment to him
attributable to such excise tax. The Company shall pay the Gross Up Payment
within 30 days after the Date of Termination. For purposes of determining the
amount of the Gross Up Payment, the value of any non-cash benefits and deferred
payments or benefits shall be determined by the Company's independent auditors
in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In
the event that, after the Gross Up Payment is made, the amount of the excise tax
is determined to be less than the amount calculated in the determination of the
actual Gross Up Payment made by the Company, the Employee shall repay to the
Company, at the time that such reduction in the amount of excise tax is finally
determined, the portion of the Gross Up Payment attributable to such reduction,
plus interest on the amount of such repayment at the applicable federal rate
under Section 1274 of the Code from the date of the Gross Up Payment to the date
of the repayment. The amount of the reduction of the Gross Up Payment shall
reflect any subsequent reduction in excise taxes resulting from such repayment.
In the event that, after the Gross Up Payment is made, the amount of the excise
tax is determined to exceed the amount anticipated at the time the Gross Up
Payment was made, the Company shall pay to the Employee, in immediately
available funds, at the time that such additional amount of excise tax is
finally determined, an additional payment ("Additional Gross Up Payment") equal
to such additional amount of excise tax and any federal, state and local taxes
thereon, plus all interest and penalties, if any, owned by the Employee with
respect to such additional amount of excise and other tax. The Company shall
have the right to challenge, on the Employee's behalf, any excise tax assessment
against him as to which the Employee is entitled to (or would be entitled if
such assessment is finally determined to be proper) a Gross Up Payment or
Additional Gross Up Payment, PROVIDED THAT all costs and expenses incurred in
such a challenge shall be borne by the Company and the Company shall indemnify
the Employee and hold him harmless, on an after-tax basis, from any excise or
other tax (including interest and penalties with respect thereto) imposed as a
result of such payment of costs and expenses by the Company.
(c) TERMINATION FOR CAUSE. In the event of Termination for Cause, the
Company shall have no further obligation to the Employee under this Agreement
after the Date of Termination other than deferred amounts under Section 4(d).
(d) VOLUNTARY TERMINATION. The Employee may terminate his employment
voluntarily at any time by a notice pursuant to Section 8 of this Agreement. In
the event that the Employee voluntarily terminates his employment other than by
reason of any of the actions that constitute Involuntary Termination under
Section 1(e)(ii) of this Agreement ("Voluntary Termination"), the Company shall
be obligated to the Employee for the amount of his Company Salary and benefits
only through the Date of Termination, at the time such payments are due, and the
Company shall have no further obligation to the Employee under this Agreement
except as provided in Section 4(d).
(e) DEATH. In the event of the death of the Employee while employed
under this Agreement and prior to any termination of employment, the Company
shall pay to the Employee's estate, or such person as the Employee may have
previously designated in writing, (i) the Company Salary which was not
6
<PAGE>
previously paid to the Employee through the last day of the calendar month in
which Employee's death occurred and, if applicable, the Change in Control
payment set forth in the first paragraph of Section 7(b), provided Employee died
within six months prior or 12 months following such change in control; and (ii)
the unpaid deferred amounts under Section 4(d).
(f) PERMANENT DISABILITY. For purposes of this Agreement, the term
"permanently disabled" means that the Employee has a mental or physical
infirmity which permanently impairs his ability to perform substantially his
duties and responsibilities under this Agreement and which results in (i)
eligibility of the Employee under the long-term disability plan of the Company
or the Bank, if any; or (ii) inability of the Employee to perform substantially
his duties and responsibilities under this Agreement for a period of 180
consecutive days. Either the Company or the Bank or both may terminate the
employment of the Employee after having established that the Employee is
permanently disabled. (g) REGULATORY ACTION. Notwithstanding any other
provisions of this Agreement:
(1) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the affairs of a depository institution by an
order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the
Company under this Agreement shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be affected;.
(2) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations of the Company under this Agreement shall terminate as of
the date of default, but this provision shall not affect any vested rights of
the contracting parties; and
(3) All obligations of the Company under this Agreement shall be
terminated, except to the extent determined that continuation of this Agreement
is necessary for the continued operation of the Bank: (i) by the Director of the
Office of Thrift Supervision (the "Director") or his or her designee, at the
time the Federal Deposit Insurance Corporation enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at
the time the Director or his or her designee approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by any such
action.
8. NOTICE OF TERMINATION. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Employee during the term of this
Agreement, the Company or the Bank, or both, shall deliver to the Employee a
written notice of termination, stating whether such termination constitutes
Termination for Cause or Involuntary Termination, setting forth in reasonable
detail the facts and circumstances that are the basis for the termination, and
specifying the date upon which employment shall terminate, which date shall be
at least 30 days after the date upon which the notice is delivered, except in
the case of Termination for Cause. In the event that the Employee determines in
good faith that he has experienced an Involuntary Termination of his employment,
he shall send a written notice to the Company stating the circumstances that
7
<PAGE>
constitute such Involuntary Termination and the date upon which his employment
shall have ceased due to such Involuntary Termination. In the event that the
Employee desires to effect a Voluntary Termination, he shall deliver a written
notice to the Company, stating the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, unless the parties agree to a date sooner.
9. ATTORNEYS FEES. The Company shall pay all legal fees and related
expenses (including the costs of experts, evidence and counsel) incurred by the
Employee as a result of (i) the Employee's contesting or disputing any
termination of employment, or (ii) the Employee's seeking to obtain or enforce
any right or benefit provided by this Agreement or by any other plan or
arrangement maintained by the Company (or its successors) or the Consolidated
Subsidiaries under which the Employee is or may be entitled to receive benefits;
PROVIDED THAT the Company's obligation to pay such fees and expenses is subject
to the Employee's prevailing with respect to the matters in dispute in any
action initiated by the Employee or the Employee's having been determined to
have acted reasonably and in good faith with respect to any action initiated by
the Company or the Bank.
10. NON-DISCLOSURE AND NON-SOLICITATION.
(a) NON-DISCLOSURE. The Employee acknowledges that he has acquired, and
will continue to acquire while employed by the Company and/or any Consolidated
Subsidiary, special knowledge of the business, affairs, strategies and plans of
the Company and the Consolidated Subsidiaries which has not been disclosed to
the public and which constitutes confidential and proprietary business
information owned by the Company and the Consolidated Subsidiaries, including
but not limited to, information about the customers, customer lists, software,
data, formulae, processes, inventions, trade secrets, marketing information and
plans, and business strategies of the Company and the Consolidated Subsidiaries,
and other information about the products and services offered or developed or
planned to be offered or developed by the Company and/or the Consolidated
Subsidiaries ("Confidential Information"). The Employee agrees that, without the
prior written consent of the Company, he shall not, during the term of his
employment or at any time thereafter, in any manner directly or indirectly
disclose any Confidential Information to any person or entity other than the
Company and the Consolidated Subsidiaries. Notwithstanding the foregoing, if the
Employee is requested or required (including but not limited to by oral
questions, interrogatories, requests for information or documents in legal
proceeding, subpoena, civil investigative demand or other similar process) to
disclose any Confidential Information the Employee shall provide the Company
with prompt written notice of any such request or requirement so that the
Company and/or a Consolidated Subsidiary may seek a protective order or other
appropriate remedy and/or waive compliance with the provisions of this Section
10(a). If, in the absence of a protective order or other remedy or the receipt
of a waiver from the Company, the Employee is nonetheless legally compelled to
disclose Confidential Information to any tribunal or else stand liable for
contempt or suffer other censure or penalty, the Employee may, without liability
hereunder, disclose to such tribunal only that portion of the Confidential
Information which is legally required to be disclosed, provided that the
Employee exercise his best efforts to preserve the confidentiality of the
8
<PAGE>
Confidential Information, including without limitation by cooperating with the
Company and/or a Consolidated Subsidiary to obtain an appropriate protective
order or other reliable assurance that confidential treatment will be accorded
the Confidential Information by such tribunal. On the Date of Termination, the
Employee shall promptly deliver to the Company all copies of documents or other
records (including without limitation electronic records) containing any
Confidential Information that is in his possession or under his control, and
shall retain no written or electronic record of any Confidential Information.
(b) NON-SOLICITATION. During the three year period next following the
Date of Termination, the Employee shall not directly or indirectly solicit,
encourage, or induce any person while employed by the Company or any
Consolidated Subsidiary to (i) leave the Company or any Consolidated Subsidiary,
(ii) cease his or her employment with the Company or any Consolidated Subsidiary
or (iii) accept employment with another entity or person.
The provisions of this Section 10 shall survive any termination of the
Employee's employment and any termination of this Agreement.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company shall require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation and
benefits from the Company in the same amount and on the same terms as provided
for an Involuntary Termination under Section 7 hereof. For purposes of
implementing the provisions of this Section 11(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Company, or, if to the Employee, to such home or other address as the
Employee has most recently provided in writing to the Company.
9
<PAGE>
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Michigan.
17. ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement (other than relating to the enforcement of the provisions of
Section 10) shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
18. EQUITABLE AND OTHER JUDICIAL RELIEF. In the event of an actual or
threatened breach by the Employee of any of the provisions of Section 10, the
Company shall be entitled to equitable relief in the form of an injunction from
a court of competent jurisdiction and such other equitable and legal relief as
such court deems appropriate under the circumstances. The parties agree that the
Company shall not be required to post any bond in connection with the grant or
issuance of an injunction (preliminary, temporary and/or permanent) by a court
of competent jurisdiction, and if a bond is nevertheless required, the parties
agree that it shall be in a nominal amount. The parties further agree that in
the event of a breach by the Employee of any of the provisions of Section 10,
the Company will suffer irreparable damage and its remedy at law against the
Employee is inadequate to compensate it for such damage.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Ottawa Financial Corporation.
/s/ Gordon Cunningham /s/ Douglas J. Iverson
- --------------------- ---------------------------
By: Douglas J. Iverson
Its: Chief Executive Officer
Employee
/s/ Ronald L. Haan
----------------------------
Ronald L. Haan
10
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Year Ended
December 31, 1999
---------------------
(Dollars in Thousands
except share and per
share data)
<S> <C>
EARNINGS PER COMMON SHARE
Net Income available to common shareholders $ 9,508
==========
Weighted average common shares outstanding 5,961,287
EARNINGS PER COMMON SHARE $ 1.60
===========
EARNINGS PER COMMON SHARE ASSUMING DILUTION
Net Income available to common shareholders $ 9,508
==========
Weighted average common shares outstanding 5,961,287
Add: Dilutive effects of assumed exercises of stock options and warrants 333,757
Weighted average common and dilutive potential common shares outstanding 6,295,044
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 1.51
===========
</TABLE>
[FRONT COVER]
Ottawa Financial Corporation / AmeriBank
1999 Report to Shareholders
Profitability
Growth
Techniques
Values
Diversification
Citizenship
Leadership
[INSIDE FRONT COVER]
Growth Through Leadership
AmeriBank, a wholly-owned subsidiary of Ottawa Financial Corporation, is
committed to the concepts of leadership, citizenship and technology to achieve
growth. By offering a broad line of financial products and services in support
of community and business objectives, AmeriBank consistently delivers value to
our shareholders, customers, employees and the communities we serve.
Table of Contents
Financial Highlights, page 1
Letter To Our Shareholders, page 2
Financial Charts, page 17
Selected Consolidated Financial Information, page 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations, page 20
Report of Independent Auditors, page 30
Consolidated Balance Sheets, page 31
Consolidated Statements of Income, page 32
Consolidated Statements of Changes in Shareholders' Equity, page 33
Consolidated Statements of Cash Flows, page 34
Consolidated Statements of Comprehensive Income, page 35
Notes to Consolidated Financial Statements, page 36
Quarterly Financial Information, page 55
Shareholder Information, page 56
Officers and Directors, Inside Back Cover
Branch Office and ATM Locations, Inside Back Cover
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
1999 1998 % Change
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data(1)
<S> <C> <C> <C>
Net interest income $ 30,096 $ 27,892 +7.9%
Noninterest income 6,683 7,811 -14.4
Noninterest expense 20,963 21,092 -.6
Income before income taxes 14,646 13,681 +7.1
Net income 9,508 8,668 +9.7
Diluted earnings per common share 1.51 1.31 +15.3
Total assets 1,017,168 938,030 +8.4
Total liabilities 939,336 864,623 +8.6
Shareholders' equity 77,832 73,407 +6.0
Book value per share 12.77 12.25 +4.2
Cash dividends declared per share .45 .35 +28.6
</TABLE>
(1) All per share information has been retroactively adjusted to reflect the 10%
stock dividends paid on June 30, 1999 and August 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Favorable trend in return 30.5% compounded annual Improved efficiency through
on equity through active growth rate in earnings per share increased revenue on
capital management... from 1995 to 1999... stabilized expenses...
RETURN EARNINGS EFFICIENCY
ON [LINE GRAPH] PER [LINE GRAPH] RATIO [LINE GRAPH]
EQUITY SHARE
</TABLE>
* Adjusted to remove the impact of the one-time SAIF assessment.
** All amounts adjusted for stock dividends.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 1
<PAGE>
Dear Shareholders:
During 1999, we focused on profitable growth through improved efficiencies and
diversification of our products and services. With this focus, we grew to over
one billion dollars in assets for the first time in history and achieved record
earnings of $9.5 million. This resulted in earnings per share of $1.51, a 15%
improvement over the prior year and a 30.5% compounded annual growth rate since
1995.
While our financial performance in 1999 was strong, we saw the value of our
stock decline 6% from the prior year. The rising interest rate environment and
other factors negatively affected bank stocks across the country. Our solid
financial performance has resulted in an average total annual return to our
shareholders of 20% since our inception as a public company in 1994. We are
determined to focus on our strategic goals which will maximize shareholder
value.
Executing on our strategic initiatives, we focused our attention during 1999
on expanding business banking services. We continued to diversify our loan
portfolio by expanding the higher yielding lines of business. As a result,
commercial real estate and commercial business loans increased by $46.2 million
during the year, 30% higher than the previous year. Further, we added
specialized expertise to our cash management staff to broaden our product line
for business customers.
In addition to an emphasis on diversification, we also evaluated alternatives
for containing costs and improving efficiencies. Indicative of our commitment in
these areas have been the successful integration of our Y2K readiness plan,
implementation of automated underwriting and our well-received AmeriLoan24(TM)
"loan by phone" service.
Ottawa's performance and accomplishments are products of our highly dedicated
and successful employees, management team and Board of Directors. I am fortunate
to be working along side of Ronald L. Haan, President and COO, who continues to
provide strong leadership and direction. We are supported by a talented Chief
Financial Officer, Jon W. Swets, and a well-qualified management team. This
talented group of individuals is focused on continually improving performance
and delivering quality products and services to our customers.
I would like to thank Gerrard W. Haworth for his leadership and dedication to
our Board of Directors over the past 33 years. In June 1999, Mr. Haworth retired
from our Board. His unparalleled success and achievement in business and our
community have been a model for us. We will miss his leadership and wish him
health and happiness in his retirement.
- --------------------------------------------------------------------------------
2 OTTAWA FINANCIAL CORPORATION
<PAGE>
A bank's commitment to a community's values aren't always reflected in its
balance sheet. Even so, it's important to us that we conduct our business in a
fashion which is consistent with the principles and integrity of the communities
we serve. This loyalty to local markets, along with AmeriBank's service-driven
culture, enables us to attract new customer relationships while maintaining
existing ones. Our genuine interest in the success of our customers and their
profitability defines the foundation of these relationships.
In the following pages you'll hear from some of our customers about how we've
met their banking needs and delivered on our promise to provide high quality
products and services.
The upcoming year will be a challenging one for the banking industry. With
rising interest rates, tightening net interest margins, increasing competitive
pressures and growing customer needs, we need to stay committed to our primary
strategic initiative: profitable growth through improved efficiency and
diversification. We will continue to pursue higher yielding commercial business
loans, while maintaining strong asset quality, and develop additional business
products to better serve our commercial customers and enhance non-interest
income. Some of our objectives - technology enhancements and Internet banking,
for instance - will not only meet the evolving needs of our customers, they'll
also be the catalysts for improved operational efficiencies.
On behalf of the Corporation, I would like to thank our employees and
management team for their outstanding service, our customers for their continued
loyalty and our shareholders for their confidence and support. We will remain
focused on our goal of achieving profitable growth and look forward with
enthusiasm to the year ahead.
Sincerely,
"...we need to stay
/s/ Douglas J. Iverson committed to our primary
strategic initiative:
Douglas J. Iverson profitable growth through
Vice Chairman and Chief Executive Officer improved efficiency
Ottawa Financial Corporation and diversification."
[PICTURE]
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 3
<PAGE>
" AmeriBank really [PICTURE]
understood the problem
and was enthusiastic
in its desire to help."
[PICTURE]
Glenn Anderson
President
Holland Plastics Corporation
Grand Haven, MI
Custom injection molder
and manufacturer
GROWTH. The opportunity for business growth often comes unexpectedly. Just ask
Glenn Anderson, President of Holland Plastics Corporation. "One of our customers
had an incredible demand - one that required a significant increase in our
credit line," he says. "AmeriBank really understood the problem and was
enthusiastic in its desire to help. In fact, one of the bank officers has been
heavily involved in the decision for us to move into new markets." Because it
understands the need for growth, AmeriBank is eager to help this custom
injection molder and manufacturer. One of our responsibilities to them is to
ensure they have the tools needed to remain competitive.
- --------------------------------------------------------------------------------
4 OTTAWA FINANCIAL CORPORATION
<PAGE>
"Our success isn't difficult to understand. AmeriBank grows by helping our
clients grow. With a healthy diversity of clientele which mirrors the local
market, we're able to avoid cyclic trends which can negatively affect specific
industries."
AmeriBank closed the books on the 20th Century with a solid record of
performance and a bright outlook for continued growth into the 21st Century.
Much of our success can be attributed to the ability of AmeriBank staff to build
lasting relationships with customers and to customize products and services that
help them reach their goals.
While the focus of our efforts is on helping customers succeed, we too
benefit from the relationships that develop. We are fortunate to work with many
talented and visionary individuals with whom we share common goals and a vision
for the future. This is truly the foundation upon which mutually beneficial
relationships grow and flourish.
[PICTURE]
Ron Haan
President, COO
AmeriBank
Grand Rapids, MI
GROWTH
[PICTURE]
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 5
<PAGE>
We are often asked, "With so many financial service companies around these days,
what makes AmeriBank different?" Good question. We think it's because we see
each of our customers as a long-term relationship. In order to succeed, each of
us - bank and customer alike - needs to rely on the commitment and capabilities
of the other.
To keep our part of the bargain, we not only provide for customers' immediate
needs, we also do whatever it takes to meet their evolving, often unexpected,
financial needs.
LEADERSHIP
[PICTURE]
- --------------------------------------------------------------------------------
6 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PICTURE] "We're not just an
account number for them...
As far as I'm concerned,
we're partners forever."
LEADERSHIP. "AmeriBank tries to help with everything. They're always looking for
solutions," declares Dan Davis, President of TLI, Inc. As a trailer rental and
leasing company that believes in the value of personal service and competitive
pricing, TLI appreciates their partnership with AmeriBank. "We're not just an
account number for them," says Davis. "They've taken the time to really
understand the elements that are important to my business including providing
creative financing for a special buying opportunity we encountered recently. As
far as I'm concerned, we're partners forever."
[PICTURE]
Dan Davis
President
TLI, Inc.
Grand Rapids, MI
Trailer rental and
leasing company
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 7
<PAGE>
Techniques
"Our business is built
on relationships, but
only if we can deliver
the goods. AmeriBank [PICTURE]
understands our need
for continuing technology
improvements in order
to make this possible."
[PICTURE]
Bill Ockerlund
CFO
Steketee-Van Huis, Inc.
Holland, MI
Commercial printing
and packaging
Banking is a rapidly evolving business. In today's highly competitive
environment, it pays to be nimble. Our culture at AmeriBank thrives on change,
which means that change is a strategic advantage for us.
By using an innovative combination of financial and service technologies,
AmeriBank can customize a range of lending and deposit products that provide
unique financial solutions for our customers. In every sense, we are their
business partners.
We understand that a growing, productive relationship requires that we do our
part to meet their financial and competitive market needs.
- --------------------------------------------------------------------------------
8 OTTAWA FINANCIAL CORPORATION
<PAGE>
TECHNIQUE. Technology combines with technique for high-end commercial printer
Steketee-VanHuis. "The challenge we face," reports President Ted Etheridge, "is
a desire to stay private while competing with large, public companies. Our
business is built on relationships, but only if we can deliver the goods.
AmeriBank takes the time to understand our need for continuing technology
improvements in order to make this possible." The name Steketee-VanHuis means
high quality within the printing industry. We're proud to be associated with a
company nimble enough to successfully carve out a profitable niche for
themselves in a volatile marketplace.
"The challenge we face
is a desire to stay private
while competing
with large, public
companies...
(AmeriBank) [PICTURE]
makes this
possible."
Ted Etheridge
CEO
Steketee-Van Huis, Inc.
Holland, MI
Commercial printing
and packaging
TECHNIQUES
[PICTURE]
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 9
<PAGE>
A business cannot succeed without growth, nor can it grow without profit. The
financial marketplace is increasingly competitive and AmeriBank has taken steps
to ensure our profitability for shareholders by streamlining our operations with
the latest technology and adopting an administrative vigilance which continually
seeks out new methods of cost reduction.
PROFITABILITY
[PICTURE]
- --------------------------------------------------------------------------------
10 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PICTURE] "It's a pleasure to
work with a bank that
appreciates real world,
bottom-line thinking."
[PICTURE]
Mark Stockwell
President
Stockwell Manufacturing Company
Grand Rapids, MI
Quality screw
machine products
PROFITABILITY. Mark Stockwell, President of Stockwell Manufacturing, understands
that corporate profits don't automatically generate themselves. "The quality of
our products is exceptionally high, yet they must be priced to sell in a
competitive marketplace. It's a pleasure to work with a bank that appreciates
real world, bottom-line thinking." The services we provide to companies such as
Stockwell Manufacturing include an understanding of the constant pressure on
their profits. "I'm very happy with AmeriBank," says Stockwell. "Their services
are second to none. I've recommended them to others many times."
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 11
<PAGE>
"When we're presented
with new opportunities, [PICTURE]
AmeriBank can
match strides with
us quickly. That's an
important skill in
your banking partner."
[PICTURE]
Steve Buth
CEO
Profile Industrial Packaging, Inc.
Grand Rapids, MI
Plastic film
for industry
At AmeriBank, we believe that our customers as well as our employees are the key
to our success. That's why we're committed to delivering the finest products to
our customers and to investing in the communities where we all work and live.
West Michigan has always had a special attitude towards business. Competitive,
yes, but with a concern for and commitment to the community at large. They
understand that business success is lessened if the larger community is not also
enriched. AmeriBank not only shares this philosophy, it supports its expansion
throughout the entire West Michigan region.
- --------------------------------------------------------------------------------
12 OTTAWA FINANCIAL CORPORATION
<PAGE>
CITIZENSHIP. "We're in the packaging business, but what we really sell is trust
and dependability," declares Steve Ehmann, President of Profile Industrial
Packaging. He likes the fact that AmeriBank is big enough to help when he needs
it, yet is able to maintain a community bank attitude towards quick service.
"Our company has to move fast to take advantage of new business opportunities,"
Ehmann states. "AmeriBank's fast and flexible service attitude is a tremendous
asset to us." Understanding the special needs of growing companies such as
Profile Industrial Packaging is one of the many ways AmeriBank also supports our
community.
"We're in the packaging
business, but what
we really sell is
trust and
dependability,"
[PICTURE]
Steve Ehmann
President
Profile Industrial
Packaging, Inc.
Grand Rapids, MI
Plastic film
for industry
CITIZENSHIP
[PICTURE]
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 13
<PAGE>
We are fast becoming the bank of choice for small businesses in West Michigan.
From plastics manufacturing to golf retailing, and commercial printing to
transportation, our customers cover nearly the entire breadth of the commercial
landscape.
This diversity of our service and lending portfolio is intentional. By
viewing the local and regional economy from the many different perspectives
represented in this diversity, we are able to better educate not only ourselves,
but also our customers, on potential opportunities and hidden dangers.
Diversification
[PICTURE]
- --------------------------------------------------------------------------------
14 OTTAWA FINANCIAL CORPORATION
<PAGE>
[PICTURE] "We wanted to think
down-the-road when we
started our business...
AmeriBank helped us
plan for the expansion of
services we offer today."
Diversification. Whether you're looking for high-quality golf equipment,
professional instruction or superior practice facilities, Rockford Golf Center
has it all. "We wanted to think down-the-road when we started our business,"
says President Roger Mowrey, "and AmeriBank helped us plan for the expansion of
services we offer today." By keeping prices in line, watching their expenses and
associating themselves with only brand name merchandise, Rockford Golf is fast
becoming a name to be reckoned with in West Michigan. Roger Mowrey knows it
would have been difficult to do alone. "AmeriBank goes out of their way to help
you. There's no one there I can't trust and that means a lot to a businessman."
[PICTURE]
Roger Mowrey
President
Rockford Golf Center, Inc.
Rockford, MI
Master range and
golf shop
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 15
<PAGE>
"We've learned that the best [PICTURE]
way to keep AmeriBank's
bottom-line healthy is
to share the same business
values as the clients
we serve. Everyone
wins when we
all have the
same goal."
[PICTURE]
Jon Swets
Chief Financial Officer
AmeriBank
Grand Rapids, MI
VALUES. As President of Pearson Foods, Inc., David Pearson understands the value
of sharing a similar outlook with his financial institution. "We operate within
a fast-paced, entrepreneurial environment," he says. "To satisfy customers'
needs, our product line not only has to cover a wide spectrum, it also must be
supported by our commitment to product quality and genuine customer service.
AmeriBank has the entrepreneurial attitude which is a good fit for us," Pearson
reports. "The pressures of our marketplace can make us a very demanding banking
customer. We appreciate that AmeriBank's branch staff helps us clear a lot of
red tape and focus on the essence of our needs."
With the experience we've gained over the years, AmeriBank is able to recognize
the potential of small businesses and help them achieve it in ways they never
thought possible.
We understand that loans aren't the only vital need for growing small
businesses. AmeriBank starts by learning as much as we can about our customers
and their businesses because the more we know about them, the easier it is to
respond to their needs.
That's where our team of veteran loan officers comes in. They're responsive
and resourceful in meeting the needs of our customers. More importantly, they're
surrounded by professional staff who understand that customers' needs have a
higher priority than our own.
Values
[PICTURE]
- --------------------------------------------------------------------------------
16 OTTAWA FINANCIAL CORPORATION
<PAGE>
FINANCIAL CHARTS
Achieved $1 billion in assets Change in mix consistent
for the first time in history... with strategic direction...
[LINE GRAPH--TOTAL ASSETS [LINE GRAPH--LOAN PORTFOLIO MIX
MILLIONS OF DOLLARS] PER SHARE]
Improvement in net interest margin Level of non-performing
through favorable mix changes in assets well below peer...
loans and deposits...
[LINE GRAPH--NET INTEREST MARGIN [LINE GRAPH--NON-PERFORMING
PER SHARE] ASSETS TO TOTAL ASSETS
PER SHARE]
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 17
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following financial data summarizes more detailed financial information
disclosed throughout this report.
December 31, 1999 1998 1997 1996(1) 1995
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share and per share data
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $1,017,168 $ 938,030 $ 885,817 $848,306 $ 370,305
Loans receivable, net 856,759 769,770 747,423 715,551 276,457
Securities and Federal Home Loan Bank stock 92,838 83,428 64,616 69,864 66,926
Deposits 711,954 693,632 654,560 622,492 243,220
Federal Home Loan Bank advances 216,353 160,268 145,458 139,170 43,241
Shareholders' Equity 77,832 73,407 76,363 76,917 79,560
Selected Operations Data:
Total interest income $ 68,978 $ 67,904 $ 64,726 $ 54,669 $ 25,579
Total interest expense 38,882 40,012 37,704 30,531 11,321
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 30,096 27,892 27,022 24,138 14,258
Provision for loan losses 1,170 930 660 564 160
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 28,926 26,962 26,362 23,574 14,098
Service charges and other fees 5,068 4,749 3,356 3,042 2,219
Gain on sales of loans 666 2,398 370 141 309
Other noninterest income (loss) 949 664 420 145 (435)
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,683 7,811 4,146 3,328 2,093
Total noninterest expense(2) 20,963 21,092 18,708 21,844 10,651
- -------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 14,646 13,681 11,800 5,058 5,540
Income tax expense 5,138 5,013 4,273 1,964 1,911
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,508 $ 8,668 $ 7,527 $ 3,094 $ 3,629
===============================================================================================================================
Basic earnings per common share(3) $ 1.60 $ 1.45 $ 1.21 $ .46 $ .52
===============================================================================================================================
Diluted earnings per common share(3) $ 1.51 $ 1.31 $ 1.11 $ .45 $ .52
===============================================================================================================================
Cash dividends declared per common share(3) $ .45 $ .35 $ .30 $ .25 $ .23
===============================================================================================================================
(1) Significant variation from prior years due primarily to the acquisition of AFSB in February 1996.
(2) Noninterest expense for 1996 includes the one-time SAIF assessment of $3.5 million.
(3) Weighted average common shares outstanding for 1999, 1998, 1997, 1996, and 1995 were 5,961,287, 5,980,195, 6,231,985,
6,719,022, and 6,953,208 respectively. Weighted average common and dilutive potential common shares outstanding for
1999, 1998, 1997, 1996, and 1995 were 6,295,044, 6,630,634, 6,786,963, 6,879,536, and 6,995,320 respectively. All share
and per share information has been retroactively adjusted to reflect the 10% stock dividends paid on June 30, 1999,
August 31, 1998 and September 30, 1997, and the adoption of Statement of Financial Accounting Standards No. 128,
Earnings per Share.
</TABLE>
- --------------------------------------------------------------------------------
18 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets 1.00% .94% .87% .41% 1.08%
SAIF adjusted(2) .72
Average interest rate spread during period 2.96 2.89 3.01 3.08 3.31
Net interest margin(1) 3.37 3.26 3.37 3.50 4.44
Ratio of operating expense to
average total assets 2.19 2.28 2.15 3.06 3.16
SAIF adjusted(2) 2.56
Efficiency(3) 56.95 60.20 60.66 79.56 65.14
SAIF adjusted(2) 66.75
Return on equity 12.41 11.49 9.93 3.93 4.62
SAIF adjusted(2) 6.83
Quality Ratios:
Non-performing assets to
total assets at end of period 0.21 0.43 0.36 0.36 0.76
Allowance for loan losses to
non-performing loans 359.21 119.51 118.62 109.89 51.38
Allowance for loan losses to
total loans receivable, net 0.55 0.49 0.44 0.44 0.45
Capital Ratios:
Equity to total assets at end of period 7.65 7.83 8.62 9.07 21.48
Average equity to average assets 8.02 8.15 8.73 9.09 22.62
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.09x 1.08x 1.07x 1.10x 1.32x
Number of full service offices 27 26 26 26 13
(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.
(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.
</TABLE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 19
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & 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's focus in 1999 on profitable growth through
improved efficiencies and diversification enabled us to grow to over one billion
in assets for the first time in history and achieve record earnings of $9.5
million. Improvements in net interest income and stabilization of noninterest
expenses contributed heavily to the growth in earnings. These earnings resulted
in earnings per share of $1.51, a 15% improvement over the prior year.
We continued to diversify our loan portfolio by growing the higher yielding
loan categories. Our focus on expanding our business banking services, as well
as healthy loan demand in our market area, enabled us to increase our portfolio
of commercial real estate and commercial business loans. These portfolios grew
by a combined total of $46.2 million during the year, repre- senting 30% growth.
In addition, we increased our consumer portfolio by $21.1 million, representing
18% growth.
During 1999, we also evaluated alternatives for containing costs and
improving efficiencies. We performed a thorough analysis of ways to improve
efficiency in providing customer service at our 27 retail banking offices in
Western Michigan. We successfully implemented new technology in our mortgage
department to improve operational efficiency and provide greater customer
convenience. In addition, we defined standards for stabilizing salary costs in
all areas of the bank. These changes, as well as the growth in net interest
income, resulted in an improvement in our efficiency ratio to 56.95% in 1999
from 60.20% in 1998.
FINANCIAL CONDITION
Total assets increased to $1.0 billion at December 31, 1999 from $938.0 million
at December 31, 1998. Most of this growth was in the loan portfolio and, to a
lesser extent, in securities available for sale. Proceeds received primarily
from the growth in deposits and FHLB advances funded the increase in assets.
Securities increased to $81.1 million at December 31, 1999 from $71.6 million
at December 31, 1998. The growth in securities of $9.5 million was primarily in
agency bonds with the purpose of investing our excess interest-bearing demand
deposits in other financial institutions at December 31, 1998.
Net loans receivable increased to $856.8 million at December 31, 1999 from
$769.8 million at December 31, 1998. The commercial business and commercial real
estate portfolios grew by $46.2 million, while the consumer portfolio grew by
$21.1 million, representing growth rates of 30% and 18%. 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 residential mortgage loan portfolio increased by $26.3 million in 1999.
Due to the low interest rate environment in the beginning of the year, we
experienced a portion of our adjustable-rate mortgage loan portfolio refinancing
to fixed-rate loans. Since we sell almost all of our 15 and 30 year term
fixed-rate mortgage loan production and retain for our portfolio adjustable-rate
- --------------------------------------------------------------------------------
20 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
mortgage loan production, we experienced a decrease in our overall residential
mortgage loan portfolio through the third quarter of 1999. During the later
portion of the third quarter and entire fourth quarter however, the combination
of rising interest rates and loan demand in our market area caused a shift in
mix from fixed-rate loans to adjustable-rate loans. The growth in this product
during the last quarter of 1999 more than offset the overall reduction
experienced in the mortgage loan portfolio during the first nine months of the
year.
The increase in net loans receivable 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 $712.0 million at December 31, 1999 from $693.6 million
at December 31, 1998. Growth occurred in the areas of business checking, money
market savings and certificates of deposit accounts. These increases funded a
portion of the loan growth, however, approximately 84% of the residential real
estate, commercial business and commercial real estate loan growth discussed
above occurred in the last half of 1999. This quick growth in the loan portfolio
necessitated the use of wholesale funding sources. As a result, Federal Home
Loan Bank ("FHLB") advances increased by $56.1 million primarily in the last
half of 1999 to fund this loan growth.
The primary components of growth in shareholders' equity for 1999 related to
net income, as well as proceeds received from the exercise of stock options and
warrants. The increases in shareholders' equity were offset by quarterly cash
dividends declared and additional repurchases of the Corporation's outstanding
shares of common stock. During 1999, we repurchased 241,985 shares of common
stock at an average price of $21.26 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. However, as growth in assets continues
stock repurchase activity may be diminished.
After careful consideration and evaluation, the management and Board of
Directors of Ottawa Financial Corporation determined it was in the best
interests of the Corporation and its shareholders to make an exchange offer for
warrants outstanding at the end of 1998. 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. The purpose of the
exchange was to reduce the amount of cash to be received by the Corporation,
estimated at $7.8 million, 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,
Ottawa accepted tenders for approximately 86% of its warrants. In connection
with this exchange, we issued 180,600 shares of our 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 $1.1 million.
On June 30, 1999, we paid a 10% stock dividend, the third 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 June 30,
1999, August 31, 1998 and September 30, 1997.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 21
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF 1999 TO 1998
Net income. Net income for 1999 was $9.5 million, or $1.51 per diluted common
share, compared to $8.7 million, or $1.31 per diluted common share for 1998.
Diluted earnings per share increased $.20, or 15%, for the year ended December
31, 1999 compared to 1998. The improvement in earnings over the prior year was
due primarily to the growth in net interest income and the stabilization of
noninterest expense. This improvement was partially offset by the decrease in
gains on sales of loans.
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 $1.86 for the year ended December 31, 1999, compared
to $1.66 for 1998, showing a 12% 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 1999 was 12.41% compared to 11.49% for 1998. The 8%
improvement in return on equity was primarily attributable to the improved
earnings. In addition, our stock buyback activity and warrant exchange offer
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. Net interest income is affected by economic and
competitive factors that influence interest rates, loan demand, deposit flows
and alternative sources of funds.
Net interest income increased $2.2 million on a tax equivalent basis for the
year ended December 31, 1999 as compared to the same period in 1998. The
increase in net interest income was attributable to the positive impact of
interest-earning asset volume increases caused by internal growth experienced in
1999 and late 1998, as well as the positive impact of decreases in the cost of
interest-bearing liabilities. The improvement in interest income resulting from
the increase in the volume of interest-earning assets was partially offset by a
decrease in the yield on interest-earning assets caused by the decline in the
general market interest rates. There was an even larger decrease in the cost of
interest-bearing liabilities, resulting in an improvement in net interest
spread. While there was an overall increase in the volume of interest-bearing
liabilities, the shift in mix from higher costing certificates of deposit to
lower costing demand deposits contributed to the lower interest expense. These
improvements in net interest income were due to the spread improvement discussed
above and the growth in noninterest-bearing deposits during the past year.
- --------------------------------------------------------------------------------
22 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1)(2) $795,190 $62,967 7.92% $778,282 $62,687 8.05% $732,927 $59,994 8.19%
Securities(2) 78,825 4,677 5.93 60,513 3,859 6.38 56,635 3,787 6.68
Other interest-earning assets 18,962 1,377 7.26 19,119 1,425 7.46 15,754 1,071 6.80
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets(1) 892,977 69,021 7.72 857,914 67,971 7.92 805,316 64,852 8.05
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits 205,820 7,139 3.47 173,322 6,517 3.76 149,909 5,823 3.89
Savings deposits 52,411 905 1.73 59,485 1,125 1.89 65,678 1,551 2.37
Certificate accounts 383,296 20,623 5.38 401,026 22,741 5.67 393,757 22,024 5.61
FHLB advances 171,179 9,985 5.83 160,533 9,591 5.97 140,746 8,293 5.91
Other interest-bearing liabilities 3,521 230 6.54 663 38 5.73 184 13 7.07
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 816,227 38,882 4.76 795,029 40,012 5.03 750,274 37,704 5.04
Net interest income $ 30,139 $ 27,959 $ 27,148
==================================================================================================================================
Net interest rate spread 2.96% 2.89% 3.01%
==================================================================================================================================
Net earning assets $ 76,750 $ 62,885 $ 55,042
Net yield on average
interest-earning assets 3.37% 3.26% 3.37%
==================================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 1.09x 1.08x 1.07x
==================================================================================================================================
(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.
</TABLE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 23
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, infor-mation 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 1999 vs. 1998 1998 vs. 1997
- -----------------------------------------------------------------------------------------------------------------------------
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 $ 1,258 $ (978) $ 280 $ 3,632 $ (940) $ 2,692
Securities 1,062 (244) 818 222 (150) 72
Other interest-earning assets (12) (36) (48) 244 111 355
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,308 (1,258) 1,050 4,098 (979) 3,119
Interest-bearing liabilities:
Demand and NOW deposits $ 1,060 $ (438) $ 622 $ 873 $ (179) $ 694
Savings deposits (127) (93) (220) (137) (289) (426)
Certificate accounts (982) (1,136) (2,118) 410 307 717
FHLB advances 613 (219) 394 1,181 117 1,298
Other interest-bearing liabilities 186 6 192 27 (2) 25
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 750 (1,880) (1,130) 2,354 (46) 2,308
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,558 $ 622 $ 2,180 $ 1,744 $ (933) $ 811
=============================================================================================================================
</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 $1.2 million in 1999 compared to $930,000 in 1998. The ratio of
non-performing assets, consisting of loans 90 days or more delinquent and
foreclosed assets, to total assets was .21% as of December 31, 1999 compared to
.43% as of December 31, 1998. The ratio of the allowance for loan losses to
total loans receivable was .55% as of December 31, 1999 compared to .49% as of
December 31, 1998. 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
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.
- --------------------------------------------------------------------------------
24 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 1999 was $6.7 million compared to
$7.8 million for 1998. The decrease related to the lower gains on sales of
mortgage loans. The rising interest rate environment in 1999 not only caused a
reduction in the volume of loans originated for sale but also caused a
tightening of the profit margins experienced on the sale of those loans.
Noninterest income in other areas including loan servicing fees, deposit account
service charges and fees from the sale of mutual funds and annuities improved in
1999.
Noninterest Expense. Noninterest expense decreased to $21.0 million for 1999
compared to $21.1 million for 1998. Slight increases in salaries expense were
more than offset by the reduction in ESOP expense due to lower accounting
charges related to the reduction in our stock price, and pension income
resulting in overall decreases in compensation and benefits expense for 1999
compared to 1998. Due to favorable market conditions, the performance of the
pension assets was strong and exceeded the expenses associated with the plan,
thereby resulting in net pension income. Our efficiency ratio, defined as
noninterest expense divided by the sum of net interest income and noninterest
income, decreased from 60.20% in 1998 to 56.95% in 1999. This ratio demonstrates
that our ability to generate revenues on our noninterest expense dollars has
improved over the prior year.
Income Tax Expense. The increase in the income tax expense from $5.0 million in
1998 to $5.1 million in 1999 is due to the higher pre-tax income for the year.
COMPARISON OF 1998 TO 1997
Net income. Net income for 1998 was $8.7 million, or $1.31 per diluted common
share, compared to $7.5 million, or $1.11 per diluted common share for 1997.
Diluted earnings per share increased $.20, 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.
Our diluted cash or tangible earnings per share under was $1.66 for the year
ended December 31, 1998, compared to $1.44 for 1997, showing a 16% improvement.
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. 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 FHLB 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
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 25
<PAGE>
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MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
generally decreased during 1998, 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.
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.
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.
Y2K READINESS DISCLOSURE
We successfully completed our Y2K readiness plan and experienced no material
issues. All systems and functions have been processing well since January 1,
2000. We will continue to monitor all systems throughout the year.
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.
- --------------------------------------------------------------------------------
26 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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, 1999 and 1998, 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, 1999: Net Portfolio Value Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NII % Change in NII
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+300 $ 50,356 -39% $ 20,235 -31%
+200 60,890 -27 23,412 -20
+100 73,191 -12 26,468 -10
0 83,204 -- 29,299 --
-100 84,197 1 31,910 9
-200 90,050 8 33,703 15
-300 97,142 17 35,349 21
December 31, 1998: Net Portfolio Value Net Interest Income
- -----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NII % Change in NII
- -----------------------------------------------------------------------------------------------------------------------
+300 $ 45,280 -39% $ 20,275 -27%
+200 56,873 -23 23,040 -18
+100 64,838 -13 25,532 -9
0 74,187 -- 27,965 --
-100 79,649 7 30,309 8
-200 83,117 12 31,886 14
-300 91,819 24 33,440 20
</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 most 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 identifies only slight changes in our interest rate risk position
in 1999 compared to 1998. The composition changes in the balance sheet during
1999 have produced a net nominal impact on interest rate risk. FHLB advances
grew by $56.1 million and the weighted average time for this portfolio to
reprice decreased by 12 months. This decrease in repricing frequency has had a
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 27
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
negative impact on our interest rate risk. However, the weighted average
maturity in the certificates of deposit portfolio increased by four months due
to growth in our 30-month CD product. This increase has had a positive impact on
interest rate risk and entirely offset the negative impact of the FHLB advances
changes. Further, growth in the commercial and installment loan portfolios have
had a positive impact on interest rate risk. These portfolios bear less interest
rate risk than the residential mortgage loan portfolio due to their shorter
weighted average maturities. However, this positive impact was outweighed by
composition changes within the mortgage loan portfolio. The net result of all of
these changes has been a slight increase in sensitivity to a rise in interest
rates from 1998 to 1999.
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 installment
and commercial business loan portfolios. In addition, we are underwriting all
long-term, fixed-rate mortgages in accordance with Freddie Mac 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 residential 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 certificates of deposit.
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 FHLB
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 FHLB's advances program instead of selling our investment
securities.
Advances from the Federal Home Loan Bank of Indianapolis increased $56.1
million during 1999 while assets grew by $79.1 million. Deposits were the other
source of funds for this asset growth. Federal Home Loan Bank advances totaled
$216.4 million as of December 31, 1999. Approximately $101.2 million of these
advances come due in 2000. We may choose to renew or pay off these advances
depending upon our liquidity needs at that time.
- --------------------------------------------------------------------------------
28 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Ottawa Financial Corporation, the holding company for AmeriBank, 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 11 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 11 of the Consolidated Financial Statements.
ACCOUNTING AND REGULATORY STANDARDS
For accounting standards, see "New Accounting Pronouncements" in Note 1 of the
Notes to Consolidated Financial Statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference,
contains, and future filings by the Company on Form 10-K, Form 10-Q and Form 8-K
and future oral and written statements by the Company and its management may
contain, forward-looking statements about Ottawa Financial and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by management. Words
such as "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by the Company and
its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this document and identified in our filings with the SEC and
those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking
statements made in this document:
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 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 the foregoing.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 29
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
[CROWE CHIZEK LOGO]
Board of Directors and Shareholders
Ottawa Financial Corporation
Holland, Michigan
We have audited the accompanying consolidated balance sheets of Ottawa Financial
Corporation as of December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 1, 2000
- --------------------------------------------------------------------------------
30 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Dollars in thousands
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 24,420 $ 20,437
Interest-bearing demand deposits in other financial institutions 2,069 21,788
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 26,489 42,225
Securities available for sale 81,056 71,646
Loans held for sale 3,375
Loans receivable, net 856,759 769,770
Federal Home Loan Bank stock 11,782 11,782
Premises and equipment, net 16,348 15,200
Acquisition intangibles 11,828 13,032
Other assets 12,906 11,000
- ---------------------------------------------------------------------------------------------------------------------
Total assets $1,017,168 $ 938,030
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 711,954 $ 693,632
Federal Home Loan Bank advances 216,353 160,268
Federal funds purchased 1,600
Accrued expenses and other liabilities 9,429 10,723
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 939,336 864,623
Shareholders' equity
Preferred stock
Common stock 65 62
Additional paid-in capital 77,562 73,177
Retained earnings, substantially restricted 10,454 15,363
Accumulated other comprehensive income (855) 23
Employee Stock Ownership Plan (1,462) (1,886)
Management Recognition and Retention Plan (215) (712)
Less cost of common stock in treasury (7,717) (12,620)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 77,832 73,407
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,017,168 $ 938,030
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 31
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data
<S> <C> <C> <C>
Interest income
Loans $ 62,932 $ 62,646 $ 59,948
Securities 4,669 3,833 3,707
Other 1,377 1,425 1,071
- -----------------------------------------------------------------------------------------------------------------------
68,978 67,904 64,726
Interest expense
Deposits 28,667 30,383 29,398
Federal Home Loan Bank advances 9,985 9,591 8,293
Other 230 38 13
- -----------------------------------------------------------------------------------------------------------------------
38,882 40,012 37,704
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 30,096 27,892 27,022
Provision for loan losses 1,170 930 660
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,926 26,962 26,362
Noninterest income
Service charges and other fees 4,669 4,400 3,039
Mortgage servicing fees, net 399 349 317
Gain on sale of mortgage loans 666 2,398 370
Gain (loss) on securities (8) (24) 143
Fees from sales of mutual funds and annuities 858 597 --
Other 99 91 277
- -----------------------------------------------------------------------------------------------------------------------
6,683 7,811 4,146
Noninterest expense
Compensation and benefits 11,213 11,521 10,356
Occupancy 1,680 1,550 1,316
Furniture, fixtures and equipment 1,199 1,241 1,056
Advertising 325 275 276
FDIC deposit insurance premium 403 400 324
State single business tax 570 517 357
Data processing 1,197 1,130 891
Professional services 426 495 379
Acquisition intangibles amortization 1,204 1,216 1,226
Other 2,746 2,747 2,527
- -----------------------------------------------------------------------------------------------------------------------
20,963 21,092 18,708
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 14,646 13,681 11,800
Federal income tax expense 5,138 5,013 4,273
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 9,508 $ 8,668 $ 7,527
=======================================================================================================================
Earnings per common share
Basic $ 1.60 $ 1.45 $ 1.21
=======================================================================================================================
Diluted $ 1.51 $ 1.31 $ 1.11
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements..
- --------------------------------------------------------------------------------
32 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumu-
lated Unallocated
Other Employee Unearned Total
Additional Compre- Stock Management Share-
Common Paid-in Retained hensive Ownership Recognition Treasury holders'
Years ended December 31, 1999, 1998 and 1997 Stock Capital Earnings Income Plan Shares Plan Shares Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 $ 60 $ 61,049 $ 32,672 $ (79) $ (2,806) $(1,977) $(12,002) $ 76,917
Net income for the year ended
December 31, 1997 7,527 7,527
29,079 shares issued upon
exercise of stock options 258 258
38,182 shares issued upon
exercise of stock warrants 502 502
62,760 shares committed to be released
under employee stock ownership plan 654 483 1,137
Issuance of 11,638 shares of common
stock for management recognition plan 249 (249)
Shares earned under management
recognition and retention plan 572 572
15,224 shares forfeited under management
recognition and retention plan (152) 152
Acquisition of 528,740 treasury
shares, at cost (8,833) (8,833)
Cash dividend - $.30 per share (1,858) (1,858)
10% Stock dividend 4,821 (14,955) 10,134
Change in unrealized gain (loss) on securities
available for sale, net of tax of $73 141 141
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 60 67,381 23,386 62 (2,323) (1,502) (10,701) 76,363
Net income for the year ended
December 31, 1998 8,668 8,668
62,425 shares issued upon
exercise of stock options 1 491 492
124,353 shares issued upon
exercise of stock warrants 1 1,634 1,635
59,611 shares committed to be released
under employee stock ownership plan 909 437 1,346
Shares earned under management
recognition and retention plan 509 509
15,481 shares forfeited under management
recognition and retention plan (293) 12 281
Acquisition of 606,645 treasury
shares, at cost (13,640) (13,640)
Cash dividend - $.35 per share (2,113) (2,113)
10% Stock dividend 2,869 (14,590) 11,721
Tax benefit of equity deductions 186 186
Change in unrealized gain (loss) on securities
available for sale, net of tax of $(21) (39) (39)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 62 73,177 15,363 23 (1,886) (712) (12,620) 73,407
Net income for the year ended
December 31, 1999 9,508 9,508
82,077 shares issued upon
exercise of stock options 1 790 791
81,124 shares issued upon
exercise of stock warrants 1 1,077 1,078
180,600 shares issued upon exchange
of stock warrants 1 (93) (92)
56,463 shares committed to be released
under employee stock ownership plan 733 424 1,157
Shares earned under management
recognition and retention plan 497 497
Acquisition of 241,985 treasury
shares, at cost (5,145) (5,145)
Cash dividend - $.45 per share (2,689) (2,689)
10% Stock dividend 1,680 (11,728) 10,048
Tax benefit of equity deductions 198 198
Change in unrealized gain (loss) on securities
available for sale, net of tax of $(452) (878) (878)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 $ 65 $ 77,562 $ 10,454 $ (855) $ (1,462) $ (215) $ (7,717) $77,832
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 33
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,508 $ 8,668 $ 7,527
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,255 1,209 1,079
Net amortization of security premiums and discounts 329 418 314
Amortization of intangible assets 1,204 1,216 1,226
Provision for loan losses 1,170 930 660
(Gain) loss on sales of securities 8 24 (143)
Loss on limited partnership investment 281 332 82
ESOP expense 1,157 1,346 1,137
MRP expense 497 509 572
Origination of loans for sale (63,310) (151,356) (45,354)
Proceeds from sales of loans originated for sale 66,652 150,678 43,531
Gain on sales of loans (666) (2,398) (370)
Changes in assets and liabilities
Other assets (1,740) (1,286) (94)
Other liabilities (1,096) 1,473 1,709
- ----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 15,249 11,763 11,876
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities
Purchases (36,993) (59,110) (30,092)
Maturities, prepayments and calls 24,916 40,301 33,409
Sales 1,005 3,965 2,324
Purchases of FHLB stock (4,474) (350)
Purchases of loans (20,942) (6,039)
Loan originations and principal payments on loans (66,518) (21,621) (26,255)
Premises and equipment expenditures, net (2,403) (1,379) (1,575)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (100,935) (42,318) (28,578)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 18,322 39,072 32,068
Net increase (decrease) in Federal funds purchased 1,600 (2,000)
Proceeds from FHLB advances 114,961 163,625 67,000
Repayment of FHLB advances (58,876) (148,815) (60,712)
Proceeds from exercise of stock options 791 492 258
Proceeds from exercise of stock warrants 1,078 1,635 502
Cash paid for exchange of stock warrants (92)
Cash dividends paid (2,689) (2,113) (1,858)
Purchase of treasury shares (5,145) (13,640) (8,833)
- ----------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 69,950 40,256 26,425
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (15,736) 9,701 9,723
Cash and cash equivalents at beginning of year 42,225 32,524 22,801
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,489 $ 42,225 $ 32,524
======================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 39,100 $ 39,228 $ 37,289
Income taxes 5,050 4,340 3,167
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
34 OTTAWA FINANCIAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Net income $ 9,508 $ 8,668 $ 7,527
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during the period
on securities available for sale (883) (55) 235
Less: Reclassification adjustment for accumulated
(gains) losses included in net income 5 16 (94)
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available for sale (878) (39) 141
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 8,630 $ 8,629 $ 7,668
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 35
<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
inter-company transactions and balances have been eliminated in consolidation.
AmeriBank's primary services include accepting deposits and making
commercial, mortgage and installment loans at its 27 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.
As of January 1, 2000, AmeriBank's residential mortgage lending operations
were segregated and transferred into AmeriBank Mortgage Company, a wholly-owned
subsidiary of AmeriBank. The operations of AmeriBank Mortgage Company include
originating and selling residential mortgage loans.
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 than temporary, are charged to earnings as a realized loss.
Premiums and discounts on securities available for sale are recognized in
interest income using the level-yield method over the estimated life of the
security. Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
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
- --------------------------------------------------------------------------------
36 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes: Income tax expense is based on the amount of taxes due on the tax
return plus the change in deferred taxes computed based on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates, adjusted for
allowances made for uncertainty regarding the realization of net tax assets.
Retirement Plans: 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 June 30,
1999, 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.
New Accounting Pronouncements: Beginning January 1, 2001, 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, 1999 we have no derivative holdings.
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, 1999 and 1998, 6,471,617 and 6,155,234 shares were issued. Treasury stock is
carried at cost. As of December 31, 1999 and 1998, 376,828 and 162,257 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 in the 1998 and 1997 consolidated financial
statements have been reclassified to conform with the 1999 presentation.
- --------------------------------------------------------------------------------
38 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 2 - Securities
Securities available for sale at year end are as follows:
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
1999
<S> <C> <C> <C> <C>
Debt securities
Obligations of U.S. Government corporations and agencies $ 46,647 $ 33 $ 724 $ 45,956
Municipal obligations 106 2 104
Corporate 7,051 123 6,928
Asset-backed 28,548 34 514 28,068
- -----------------------------------------------------------------------------------------------------------------------------------
$ 82,352 $ 67 $ 1,363 $ 81,056
===================================================================================================================================
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
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
===================================================================================================================================
</TABLE>
Contractual maturities of debt securities available for sale at year end 1999
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.
<TABLE>
<CAPTION>
Amortized Cost Fair Value
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Due in one year or less $ 15,051 $ 14,960
Due after one year through five years 37,175 36,445
Due after five through ten years 1,578 1,583
- -------------------------------------------------------------------------------------------------------------
53,804 52,988
Asset-backed debt securities 28,548 28,068
- -------------------------------------------------------------------------------------------------------------
$ 82,352 $ 81,056
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Sales of securities available for sale are as follows:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Proceeds $ 1,005 $ 3,965 $ 2,324
Gross gains 154
Gross losses (8) (24) (11)
</TABLE>
As of December 31,1999, securities with a carrying value of $74,024,000 were
pledged to secure Federal Home Loan Bank advances under a blanket collateral
agreement.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 39
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 3 - LOANS
Loans at year end are as follows:
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Residential mortgage loans (principally conventional)
Secured by one-to-four family residences $ 432,145 $ 425,974
Construction 50,814 30,673
- ----------------------------------------------------------------------------------------------------------------------
482,959 456,647
Commercial loans
Secured by multi-family and commercial properties 122,884 101,039
Construction 74,897 87,119
Business 78,318 53,935
- ----------------------------------------------------------------------------------------------------------------------
276,099 242,093
Consumer and other loans
Home equity 53,497 49,647
Other (principally auto) 87,853 70,643
- ----------------------------------------------------------------------------------------------------------------------
141,350 120,290
- ----------------------------------------------------------------------------------------------------------------------
900,408 819,030
Less
Undisbursed portion of construction loans (38,482) (44,797)
Deferred fees and discounts (453) (640)
Allowance for loan losses (4,714) (3,823)
- ----------------------------------------------------------------------------------------------------------------------
(43,649) (49,260)
- ----------------------------------------------------------------------------------------------------------------------
$ 856,759 $ 769,770
======================================================================================================================
</TABLE>
As of December 31,1999, residential mortgage loans amounting to $418,481,000
were pledged to secure Federal Home Loan Bank advances under a blanket
collateral agreement.
<TABLE>
<CAPTION>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Balance - beginning of year $ 3,823 $ 3,293 $ 3,129
Provision 1,170 930 660
Recoveries 265 176 119
Loans charged-off (544) (576) (615)
- ----------------------------------------------------------------------------------------------------------------------
Balance - end of year $ 4,714 $ 3,823 $ 3,293
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
40 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Information regarding impaired loans is as follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Average investment in impaired loans $ 1,715 $ 1,710 $ 1,354
Interest income recognized on impaired loans including
interest income recognized on cash basis 69 24 104
Interest income recognized on impaired loans on cash basis 69 24 4
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
Balance of impaired loans at year end $ 3,247 $ 1,452
Less portion for which no allowance for loan losses is allocated (2,861) (1,053)
- ----------------------------------------------------------------------------------------------------------------------
Portion of impaired loan balance for which an allowance for credit losses is allocated $ 386 $ 399
Portion of allowance for loan losses allocated to the impaired loan balance $ 51 $ 65
</TABLE>
NOTE 5 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others, principally the Federal Home Loan Mortgage
Corporation, which are not reported as assets, totaled $261,047,000 and
$227,939,000 at December 31, 1999 and 1998. Custodial escrow balances maintained
in connection with this loan servicing, and included in demand deposits, were
$488,000 and $372,000 at December 31, 1999 and 1998.
Following is an analysis of the activity, in thousands, for mortgage
servicing rights:
Balance at January 1, 1997 $ 457
Additions 237
Amortization (44)
- ------------------------------------------------------------------------------
Balance at December 31, 1997 650
- ------------------------------------------------------------------------------
Additions 1,655
Amortization (177)
- ------------------------------------------------------------------------------
Balance at December 31, 1998 2,128
Additions 759
Amortization (292)
- ------------------------------------------------------------------------------
Balance at December 31, 1999 $ 2,595
==============================================================================
The carrying values of mortgage servicing rights approximate fair values for
all years presented.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 41
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at year end are as follows:
1999 1998
- -------------------------------------------------------------------
Dollars in thousands
Land $ 3,590 $ 3,206
Buildings and improvements 12,641 11,638
Furniture and equipment 8,764 7,636
- -------------------------------------------------------------------
24,995 22,480
Accumulated depreciation (8,647) (7,280)
- -------------------------------------------------------------------
$ 16,348 $ 15,200
===================================================================
NOTE 7 - DEPOSITS
Deposits at year end are as follows:
1999 1998
- ---------------------------------------------------------------------
Dollars in thousands
Noninterest-bearing $ 40,969 $ 40,813
NOW accounts and MMDAs 215,403 200,132
Passbook and statement savings 46,022 54,475
Certificates of deposit 409,560 398,212
- ---------------------------------------------------------------------
$ 711,954 $ 693,632
=====================================================================
Scheduled maturities of time deposits, in thousands, over the next five years
are as follows:
1999 1998
- ----------------------------------------------------------------------
Year 1 $ 234,465 $ 320,191
Year 2 95,553 53,416
Year 3 72,554 11,093
Year 4 3,324 7,529
Year 5 and thereafter 3,664 5,983
- ----------------------------------------------------------------------
$ 409,560 $ 398,212
======================================================================
The aggregate amount of demand, savings and certificates of deposit with
balances of $100,000 or more was approximately $99,881,000 and $91,717,000 at
December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
42 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - BORROWINGS
Advances from the Federal Home Loan Bank of Indianapolis, collateralized by
securities and mortgage loans under a blanket collateral agreement and Federal
Home Loan Bank stock, consist of the following at year end:
<TABLE>
<CAPTION>
Principal Terms Advance Amount Range of Maturities Weighted Average Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
1999
<S> <C> <C>
Single-maturity fixed rate advances $ 99,125 January 2000 to June 2010 6.08%
Putable advances 64,000 May 2000 to April 2009 5.60%
Short-term variable rate advances 50,000 January 2000 to July 2000 5.80%
Amortizable mortgage advances 3,228 May 2000 6.82%
- ------------------------------------------------------------------------------------------------------------------------
$ 216,353
========================================================================================================================
1998
Single-maturity fixed rate advances $ 104,125 February 1999 to June 2010 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
========================================================================================================================
</TABLE>
Maturities of advances outstanding, in thousands, over the next five years
are:
1999 1998
- -----------------------------------------------------------------
Year 1 $ 101,228 $ 61,405
Year 2 13,000 18,738
Year 3 22,000 8,000
Year 4 17,000 12,000
Year 5 16,000 15,000
Year 6 and thereafter 47,125 45,125
- -----------------------------------------------------------------
$ 216,353 $ 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. Putable advances
are fixed rate advances for a scheduled period of time after which the Federal
Home Loan Bank may convert the advance to a variable rate. If converted, we may
prepay the advance without penalty.
At December 31, 1999, Ottawa had unused lines of credit with two major banks
totaling $28.4 million.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 43
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Financial instruments whose contract amount represents credit risk
Commitments to make loans $ 23,881 $ 19,427
Unused consumer lines of credit 41,691 34,854
Unused commercial lines of credit 39,273 24,190
Loans in process 38,483 44,797
Letters of credit 22,138 10,340
</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
33% and 39% of commitments to make loans and to fund lines of credit and loans
in process were made at fixed rates as of December 31, 1999 and 1998. Rate
ranges for these fixed rate commitments were 7.13% to 10.50% and 6.20% to 10.00%
as of December 31, 1999 and 1998. Lines of credit are generally issued at
variable market rates. No losses are anticipated as a result of these
transactions.
NOTE 10 - 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 $1.8 million.
A lawsuit against AmeriBank was filed in December 1998 alleging that we
engaged in the unauthorized practice of law due to charging a fee for preparing
loan documents. The complaint sought class action certification, restitution of
all fees paid for the last six years, interest, attorney fees and other costs.
The class action certification was obtained in March 1999. We filed a motion for
summary disposition based upon our belief that the complaint was wholly without
merit. In July 1999, the court granted our motion and the case was dismissed.
After the case was dismissed, the plaintiff amended the complaint and alleged we
violated certain banking regulations. In September 1999, the case was again
dismissed from the state court system. After the case was dismissed for the
second time, the attorney for the plaintiff filed a similar case on behalf of a
new plaintiff in the federal court system, with a focus on the allegation that
we violated certain banking regulations. In October 1999 we filed a motion for
summary disposition within the federal courts. In December 1999 the case was
dismissed from the federal courts. Subsequently, both cases have been appealed
at both the federal and state courts. We continue to believe that these
allegations are wholly without merit and intend to vigorously defend against
these lawsuits.
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 or results of operations.
- --------------------------------------------------------------------------------
44 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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
under- capitalized, 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
- ---------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 70.2 10.2% $ 54.9 8.0% $ 68.7 10.0%
Tier 1 capital (to risk weighted assets) 65.5 9.5 27.5 4.0 41.2 6.0
Tier 1 capital (to average total assets) 65.5 6.7 39.2 4.0 49.0 5.0
1998
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
</TABLE>
AmeriBank was categorized as well capitalized at year end 1999 and 1998.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 45
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1999 and 1998, AmeriBank made capital distributions to Ottawa in the
amount of $6,000,000 and $12,500,000, respectively. These distributions were
made primarily to allow Ottawa to pay dividends and fund the stock repurchase
transactions discussed in Note 12. The distributions were within regulatory
guidelines.
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.
Note 12 - Stock Repurchase Programs
During 1999, 1998 and 1997, Ottawa repurchased 241,985, 606,645 and 528,740
shares of its common stock at an average price of $21.26, $22.48 and $16.70
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 June 30, 1999, August 31, 1998 and
September 30, 1997.
NOTE 13 - 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. All warrants were exercisable immediately upon issue and
expired on February 16, 1999.
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 180,600 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
$1.1 million.
- --------------------------------------------------------------------------------
46 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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 561,532 shares of the Corporation's stock
at $7.52 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 June 30, 1999, August 31, 1998 and September 30, 1997. During 1999, 1998
and 1997, 56,463, 59,611, and 62,760 shares of stock with a fair value of
$20.49, $22.58 and $18.12 per share were committed to be released, resulting in
employee stock ownership plan compensation expense of $1,157,000, $1,346,000 and
$1,137,000, respectively.
Shares held by the plan at year end are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Dollars in thousands
Allocated shares 367,132 310,670 251,059
Unallocated shares 194,400 250,862 310,473
- -------------------------------------------------------------------------------
Total ESOP shares 561,532 561,532 561,532
===============================================================================
Fair value of unallocated shares $ 3,524 $ 4,850 $ 8,731
===============================================================================
Ottawa maintains a management recognition plan, with 299,243 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 $497,000,
$509,000 and $572,000 for 1999, 1998 and 1997. The unamortized unearned
compensation value of the management recognition plan is shown as a reduction to
shareholders' equity in the consolidated balance sheets.
Ottawa also maintains a stock option and incentive plan, with 1,427,518
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.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 47
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data
<S> <C> <C> <C>
Net income as reported $ 9,508 $ 8,668 $ 7,527
Pro forma net income 8,948 8,218 7,150
- --------------------------------------------------------------------------------------------------
Basic earnings per common share as reported 1.60 1.45 1.21
Pro forma basic earnings per common share 1.50 1.37 1.15
- --------------------------------------------------------------------------------------------------
Diluted earnings per common share as reported 1.51 1.31 1.11
Pro forma diluted earnings per common share 1.43 1.25 1.06
- --------------------------------------------------------------------------------------------------
</TABLE>
The fair values of stock options were estimated using option pricing models
with the following weighted-average assumptions as of grant date.
1999 1998 1997
- --------------------------------------------------------------------------
Risk-free interest rate 5.89% 4.77% 6.27%
Expected life 10 Years 10 Years 10 Years
Expected volatility of stock price 6.14% 6.45% 6.00%
Expected dividends 2.22% 1.91% 1.97%
Information regarding activity in the stock option plan 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 1996 771,229 $ 10.14 $ 3.61- $ 12.31
Granted 99,928 16.97 $ 4.96
Exercised (29,079) 8.87
Forfeited (30,434) 10.23
- ------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF 1997 811,644 $ 10.97 $ 3.61- $ 24.07
Granted 141,824 23.04 $ 4.52
Exercised (62,425) 7.88
Forfeited (61,442) 22.43
- ------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF 1998 829,601 $ 12.42 $ 5.92- $ 27.58
Granted 56,430 20.43 $ 5.09
Exercised (87,028) 10.21
Forfeited (4,825) 15.70
- ------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF 1999 794,178 $ 13.21 $ 5.92- $ 27.58
========================================================================================================================
</TABLE>
Stock options exercisable at year-end are as follows:
Number Weighted-Average
of Options Exercise Price
- --------------------------------------------------------------------
1997 267,760 $ 9.51
1998 362,220 10.62
1999 415,075 11.32
At year-end 1999, the weighted average remaining life of options outstanding
was 6.58 years.
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on June 30, 1999, August 31, 1998 and
September 30, 1997.
- --------------------------------------------------------------------------------
48 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - 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. 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 information
shown below reflects combined information for the two separate plans.
1999 1998
- ------------------------------------------------------------------------------
Dollars in thousands
Change in benefit obligation:
Beginning benefit obligation $ 3,592 $ 3,947
Interest cost 246 288
Actuarial gain 20 263
Benefits paid (393) (906)
- ------------------------------------------------------------------------------
Ending benefit obligation 3,465 3,592
Change in plan assets, at fair value:
Beginning plan assets 6,167 5,923
Actual return 527 1,203
Benefits paid (454) (959)
- ------------------------------------------------------------------------------
Ending plan assets 6,240 6,167
- ------------------------------------------------------------------------------
Funded Status 2,775 2,575
Unrecognized net (gain) loss (590) (678)
- ------------------------------------------------------------------------------
Prepaid pension asset $ 2,185 $ 1,897
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
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 $ 246 $ 288 $ 280
Actual return on plan assets (527) (1,203) (878)
Net amortization and deferral (7) 589 466
- -------------------------------------------------------------------------------------------------------------
Net pension income $ (288) $ (326) $ (132)
=============================================================================================================
</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% for all years presented.
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 and
listed stocks.
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.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 49
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
1999 1998 1997
- -------------------------------------------------------------------------------
Dollars in thousands
Current tax expense $ 5,078 $ 4,858 $ 3,961
Deferred tax expense (benefit) 60 155 312
- -------------------------------------------------------------------------------
$ 5,138 $ 5,013 $ 4,273
===============================================================================
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
Statutory rate 35% 35% 34%
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $ 5,126 $ 4,789 $ 4,012
Low-income housing credit (350) (327) (239)
ESOP 256 314 227
Tax-exempt interest (24) (45) (84)
Goodwill amortization 329 329 319
Change in deferred tax asset valuation allowance (14) (46) (60)
Other (185) (1) 98
- -------------------------------------------------------------------------------------------------
$ 5,138 $ 5,013 $ 4,273
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
50 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Deferred tax assets
Deferred loan fees $ 209 $ 192
Management recognition plan restricted stock 98 96
ESOP 52 52
Capital loss carryforward 66 80
Accrued expenses -- 138
Allowance for loan losses 922 428
Nonaccrual loan interest 56 73
Unrealized loss on available-for-sale securities 454 --
Other 53 118
- ---------------------------------------------------------------------------------------
1,910 1,177
Deferred tax liabilities
Depreciation (561) (590)
Pension (576) (405)
Purchase accounting adjustment (918) (870)
FHLB stock dividends (70) (70)
Mortgage servicing rights (790) (619)
Unrealized gain on available-for-sale securities -- (10)
Other (80) (87)
- ---------------------------------------------------------------------------------------
(2995) (2,651)
Valuation allowance for deferred tax assets (66) (80)
- ---------------------------------------------------------------------------------------
Net deferred tax liability $ (1,151) $ (1,554)
=======================================================================================
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits relating to
such assets will not be realized. Management established a valuation allowance
for the benefits associated with the losses on mutual fund securities at
December 31, 1996, since such losses were capital in nature and could only be
realized through offsetting capital gains. Sources of capital gains were not
available at either December 31, 1999 or 1998.
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 $198,000 and $186,000 attributable to deductions
related to the exercise of nonqualified stock options and the vesting of
management recognition plan shares were allocated directly to shareholders'
equity in 1999 and 1998.
Under the Internal Revenue Code, the Bank may, for tax purposes, deduct a
provision for bad debts in excess of such provisions recorded in the financial
statements. Retained earnings at December 31, 1999 includes approximately $8.8
million, consisting of bad debt deductions accumulated prior ro 1988, on which
no provision for federal income taxes has been made. The resulting amount of
unrecognized deferred tax liability was approximately $3.0 million.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 51
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share and per share data
BASIC
<S> <C> <C> <C>
Net Income available to common shareholders $ 9,508 $ 8,668 $ 7,527
=============================================================================================================================
Weighted average common shares outstanding 5,961,287 5,980,195 6,231,985
=============================================================================================================================
Basic earnings per common share $ 1.60 $ 1.45 $ 1.21
=============================================================================================================================
DILUTED
Net Income available to common shareholders $ 9,508 $ 8,668 $ 7,527
=============================================================================================================================
Weighted average common shares outstanding 5,961,287 5,980,195 6,231,985
Add: Dilutive effects of assumed exercises of stock options and warrants 333,757 650,439 554,978
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive potential common shares outstanding 6,295,044 6,630,634 6,786,963
=============================================================================================================================
Diluted earnings per common share $ 1.51 $ 1.31 $ 1.11
=============================================================================================================================
</TABLE>
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on June 30, 1999, August 31, 1998 and
September 30, 1997.
NOTE 18 - 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.
The estimated fair values of Ottawa's financial instruments at year end are
as follows:
<TABLE>
<CAPTION>
1999 1998
Carrying Value Fair Value Carrying Value Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 26,489 $ 26,489 $ 42,225 $ 42,225
Securities available for sale 81,056 81,056 71,646 71,646
Federal Home Loan Bank stock 11,782 11,782 11,782 11,782
Loans held for sale -- -- 3,375 3,375
Loans, net 856,759 845,444 769,770 774,621
FINANCIAL LIABILITIES
Deposits 711,954 711,141 693,632 696,215
Federal Home Loan Bank advances 216,353 213,180 160,268 162,056
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
52 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Ottawa Financial Corporation at year end is
as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 152 $ 278
Loans receivable from Employee Stock Ownership Plan 1,689 2,111
Investment in subsidiary bank 76,257 71,185
Other assets 10 95
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 78,108 $ 73,669
======================================================================================================================
LIABILITIES $ 276 $ 262
SHAREHOLDERS' EQUITY 77,832 73,407
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 78,108 $ 73,669
- ----------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
for the years ended December 31: 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
Interest and dividend income
Securities $ 175
Loan to Employee Stock Ownership Plan $ 147 $ 178 210
Dividends from subsidiary bank 6,000 12,500 4,000
- ----------------------------------------------------------------------------------------------------------------------
6,147 12,678 4,385
Net gain on sale of securities 151
Operating expenses 875 867 769
- ----------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed
(excess distributed) earnings of subsidiary bank 5,272 11,811 3,767
Federal income tax expense (benefit) (251) (232) (88)
- ----------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed (excess distributed)
earnings of subsidiary bank 5,523 12,043 3,855
Equity in undistributed (excess distributed) earnings of subsidiary bank 3,985 (3,375) 3,672
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 9,508 $ 8,668 $ 7,527
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 53
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
for the years ended December 31: 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 9,508 $ 8,668 $ 7,527
Adjustments to reconcile net income to cash provided by operations
Equity in income of subsidiary bank (9,985) (9,125) (7,672)
Net accretion of securities discounts (12)
Net gain on sale of securities (151)
Change in
Interest receivable 75
Other assets 85 81 (86)
Other liabilities 14 63 68
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (378) (313) (251)
Cash flows from investing activities
Activity in available-for-sale securities:
Maturities, prepayments and calls 307
Sales 5,884
Principal reduction of ESOP note receivable 422 422 422
Contribution to subsidiary bank (113) (111) (112)
Cash dividends received from subsidiary bank 6,000 12,500 4,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 6,309 12,811 10,501
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares (5,145) (13,640) (8,833)
Proceeds from exercise of stock options 791 492 258
Proceeds from exercise of stock warrants 1,078 1,635 502
Cash paid for exchange of warrants (92)
Cash dividends paid (2,689) (2,113) (1,858)
- ----------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (6,057) (13,626) (9,931)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash (126) (1,128) 319
Cash at beginning of period 278 1,406 1,087
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 152 $ 278 $ 1,406
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
54 OTTAWA FINANCIAL CORPORATION
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL INCORMATION unaudited
The following is a summary of selected unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998. 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)
1999
<S> <C> <C> <C> <C>
Net interest income $ 7,084 $ 7,546 $ 7,831 $ 7,635
Provision for loan losses 270 285 300 315
Noninterest income 1,825 1,645 1,559 1,654
Noninterest expense 5,290 5,385 5,233 5,055
Income before income taxes 3,349 3,521 3,857 3,919
Net income 2,113 2,262 2,485 2,648
Basic earnings per common share .35 .38 .41 .45
Diluted earnings per common share .34 .36 .39 .43
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 .29 .36 .37 .42
Diluted earnings per common share .26 .33 .34 .38
</TABLE>
(1) All per share information has been retroactively adjusted to reflect the
10% stock dividends paid on June 30, 1999 and August 31, 1998.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT 55
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
MARKET
Ottawa Financial Corporation's common stock is traded on the Nasdaq National
Market under the symbol "OFCP." The high and low sales 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 June 30, 1999 and August 31, 1998,
were as follows.
Quarter Ended High Low Dividends
- -----------------------------------------------------------------------
March 31, 1998 $ 28.306 $ 22.934 $ .08
June 30, 1998 24.793 23.554 .08
September 30, 1998 23.967 19.546 .09
December 31, 1998 21.818 16.818 .10
March 31, 1999 22.045 18.750 .10
June 30, 1999 22.125 18.409 .11
September 30, 1999 23.500 19.875 .12
December 31, 1999 20.875 17.375 .12
The information set forth in the table above was provided by The Nasdaq Stock
Market.
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 11 of the Notes to Consolidated Financial Statements.
As of March 14, 2000, Ottawa had approximately 2,089 shareholders of record
and 6,076,389 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 Jon W. Swets, Chief Financial Officer, Ottawa Financial
Corporation, 190 Monroe Avenue, NW, Grand Rapids, MI 49503 or by calling (616)
224-2841.
<TABLE>
<CAPTION>
<S> <C> <C>
Corporate Headquarters Independent Auditor General Counsel
245 Central Avenue Crowe, Chizek and Company LLP Cunningham Dalman, PC
Holland, MI 49423-3298 Grand Rapids, MI Holland, MI
Registrar/Transfer Agent Special Counsel
Registrar and Transfer Company Silver, Freedman & Taff, LLP
Cranford, NJ Washington, DC
</TABLE>
- --------------------------------------------------------------------------------
56 OTTAWA FINANCIAL CORPORATION
<PAGE>
[INSIDE BACK COVER]
<TABLE>
<CAPTION>
<S> <C> <C>
OTTAWA FINANCIAL CORPORATION OFFICERS BRANCH OFFICE AND ATM LOCATIONS
Gordon H. Cunningham Holland/Zeeland Grand Rapids
Chairman of the Board, Attorney
Downtown Holland Downtown Grand Rapids
Douglas J. Iverson 245 Central Avenue 190 Monroe Avenue, NW
Vice Chairman and CEO 616-393-7141 616-559-1712
Ronald L. Haan Beechwood (ATM) Alpine (ATM)
President, COO and Secretary 180 Douglas Avenue 3320 Alpine Avenue, NW
616-393-7180 616-785-1000
Jon W. Swets
Chief Financial Officer and Downtown Holland Drive-In (ATM) Breton (ATM)
Assistant Secretary 10 East 9th Street 2609 Breton Avenue, SE
616-393-7104 616-956-7110
OTTAWA FINANCIAL CORPORATION Downtown Zeeland Byron Center (ATM)
BOARD OF DIRECTORS 146 East Main Street 2384 84th Street, SW
616-772-2191 616-878-1573
Gordon H. Cunningham
Chairman of the Board Hamilton (ATM) Cascade (ATM)
Attorney & Partner 4672 Pine Street 6750 Cascade Road, SE
Cunningham Dalman, P.C. 616-751-5101 616-949-5515
Douglas J. Iverson Hudsonville (ATM) Cutlerville (ATM)
Vice Chairman and CEO 2855 Port Sheldon Street, SW 675 68th Street, SW
AmeriBank 616-669-4400 616-827-1400
Ronald L. Haan South Washington (ATM) Grandville (ATM)
President, COO and Secretary 1000 South Washington Avenue 4495 Wilson Avenue, SW
AmeriBank 616-393-7065 616-531-0700
Ronald J. Bieke West Ottawa (ATM) Jenison (ATM)
President 392 136th Street 600 Baldwin Drive, SW
Arcadia BIDCO Corporation 616-393-7103 616-457-3350
B. Patrick Donnelly, III Zeeland West (ATM) Kentwood (ATM)
President 523 West Main Street 5300 Kalamazoo Avenue, SE
Productive Solutions, LLC 616-772-4800 616-281-5200
Gordon L. Grevengoed ATM ONLY LOCATIONS Rockford (ATM)
Retired Vice Chairman of the Board 155 Marcell Drive, NE
and CEO Westshore Mall 616-433-4204
AmeriBank 12231 James Street, Holland
Muskegon/North Lakeshore
G. W. Haworth Hope College
(director emeritus) DeWitt Center, Holland Downtown Muskegon
Founding Chairman 880 First Street
Haworth, Inc. Haworth Inc. 616-726-4461
Member Center, Holland
Robert D. Kolk Fremont (ATM)
President 24 hour AmeriCall banking 211 W. Main Street
Mechanical Transplanter Co. 616-924-5600
877-515-bank (2265)
Brian Koop Grand Haven (ATM)
Vice President and Senior Executive 1600 S. Beacon Boulevard
JCI Institute 616-846-1350
Leon E. Koops Hart (ATM)
President 424 State Street
Hamilton Distributing Company 616-873-5607
Richard T. Walsh North Muskegon (ATM)
Chairman 621 Dykstra Road
Pioneer Industries, Inc. 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
</TABLE>
<PAGE>
[Back Cover]
Ottawa Financial Corporation
245 Central Avenue
Holland, Michigan 49423
www.AmeriBank.net
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------ --------------------------- --------- ------------
Ottawa Financial
Corporation AmeriBank 100% Federal
AmeriBank OS Services, Inc. 100% Michigan
AmeriBank AmeriPlan Financial 100% Michigan
Services, Inc.
AmeriBank AmeriBank Mortgage Company 100% Michigan
(formed January 1, 2000)
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, 333-4242 and 333-79843) of Ottawa Financial Corporation on
Form S-8 of our report dated March 1, 2000, on the financial statements of
Ottawa Financial Corporation as of December 31, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999, which report is included
in the Corporation's 1999 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 28, 2000
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,420
<INT-BEARING-DEPOSITS> 2,069
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,056
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 861,473
<ALLOWANCE> 4,714
<TOTAL-ASSETS> 1,017,168
<DEPOSITS> 711,954
<SHORT-TERM> 102,828
<LIABILITIES-OTHER> 9,429
<LONG-TERM> 115,125
0
0
<COMMON> 65
<OTHER-SE> 77,767
<TOTAL-LIABILITIES-AND-EQUITY> 1,017,168
<INTEREST-LOAN> 62,932
<INTEREST-INVEST> 4,669
<INTEREST-OTHER> 1,377
<INTEREST-TOTAL> 68,978
<INTEREST-DEPOSIT> 28,667
<INTEREST-EXPENSE> 10,215
<INTEREST-INCOME-NET> 30,096
<LOAN-LOSSES> 1,170
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 20,963
<INCOME-PRETAX> 14,646
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,508
<EPS-BASIC> 1.60
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 3.37
<LOANS-NON> 887
<LOANS-PAST> 425
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,823
<CHARGE-OFFS> 544
<RECOVERIES> 265
<ALLOWANCE-CLOSE> 4,714
<ALLOWANCE-DOMESTIC> 3,947
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 767
</TABLE>
