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.
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.
3
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
4
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.
5
December 31,
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1999 1998 1997 1996 1995
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------- -------- -------- -------- -------
(Dollars in Thousands)
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
======== ======== ======== ======== ========
6
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.
December 31,
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1999 1998 1997 1996 1995
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------- -------- -------- -------- -------
(Dollars in Thousands)
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
======== ======== ======== ======== ========
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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.
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,
- ------------------------------
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%
======== ======== ======== ======== ======== ========
(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
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
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
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
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
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.
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)
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
=== ====== === ====== === ======
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
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
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%
====== ====== ====== ====== ======
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
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.
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
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)
======= ======= ======= ======= =======
- --------------------------------------------------------------------
(1) Less than 0.10%.
18
The distribution of our allowance for losses on loans at the dates
indicated is summarized as follows:
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)
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%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
19
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
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
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.
December 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------ ---------------------- -----------------------
(Dollars in Thousands)
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%
======== ------ ======== ------ ======== ======
- --------------------
(1) At December 31, 1999.
22
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.
Maturity
-----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
--------------------------------------------------------------------
(In Thousands)
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
======== ======== ======== ======== ========
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,
23
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.
24
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
25
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
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
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
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
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.
30
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
31
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.
32
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.
33
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.
34
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
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.
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
--------------- ---------------
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
---------------
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)