UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24118
OTTAWA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 38-3172166
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
245 Central Avenue, Holland, Michigan 49423
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 393-7000
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and asked
price of such stock on the Nasdaq National Market as of March 25, 1999, was
$111.8 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
As of March 25, 1999, there were issued and outstanding 5,699,041 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the year ended December 31, 1998. Part III of Form 10-K - Portions of the proxy
statement for the Annual Meeting of Stockholders for the year ended December 31,
1998.
FORWARD-LOOKING STATEMENTS
Ottawa Financial Corporation, and its wholly-owned subsidiary,
AmeriBank, may from time to time make written or oral "forward-looking
statements", including statements contained in their filings with the Securities
and Exchange Commission ("SEC"). These forward-looking statements may be
included in this Annual Report on Form 10-K and the exhibits attached to it, in
Ottawa Financial's reports to stockholders and in other communications by the
company, which are made in good faith by us pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the U.S. economy in general and the strength of the local
economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
o the willingness of users to substitute competitors' products and services
for our products and services;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of Ottawa Financial or AmeriBank.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ottawa Financial Corporation is a holding company and the sole
shareholder of AmeriBank. In March 1994, AmeriBank converted from a mutual form
to a stock form of ownership. Ottawa Financial's common stock is traded on the
Nasdaq-Amex National Market under the symbol "OFCP."
On February 13, 1996, Ottawa Financial acquired AmeriBank Federal
Savings Bank, a federally chartered savings bank headquartered in Muskegon,
Michigan, pursuant to which Ottawa Financial acquired all of the outstanding
shares of common stock of AmeriBank Federal Savings Bank for approximately $32.7
million in cash, converted options and warrants. AmeriBank Federal Savings Bank
was then merged into AmeriBank.
AmeriBank is the only operating subsidiary of Ottawa Financial.
AmeriBank is a Michigan- chartered savings bank headquartered in Holland,
Michigan. Originally organized in 1888, as Ottawa Savings Bank, FSB, which
converted to a federal savings bank in 1988, we changed our name in 1996 from
Ottawa Savings Bank, FSB to AmeriBank, and converted to a state-chartered
savings bank in July 1997. Our deposits are insured up to the applicable limits
by the Federal Deposit Insurance Corporation ("FDIC"). We currently serve
Allegan, Kent, Muskegon, Newaygo, Oceana and Ottawa Counties in Western Michigan
through our 26 retail banking offices. At December 31, 1998, we had total assets
of $938.0 million, deposits of $693.6 million and shareholders' equity of $73.4
million.
We have been, and intend to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities we serve. We attract retail deposits from the general public
and invests those funds primarily in first mortgages on owner-occupied, one- to
four-family residences. We also originate nonowner-occupied one- to four-family
residences, construction, commercial and multi-family real estate.
Our revenues are derived principally from interest on loans and
investment securities.
We offer a variety of individual and commercial deposit accounts having
a wide range of interest rates and terms. Our deposits consist of passbook and
statement savings accounts, interest and non-interest-bearing checking accounts,
and money market and certificate accounts. We also offer debit and credit cards
as well as ATM services. We solicit deposits from our market area only, and have
never used brokers to obtain deposits.
Our executive offices are located at 245 Central Avenue, Holland,
Michigan 49423 and our telephone number at that address is (616) 393-7000.
3
MARKET AREA
Our market area of Allegan, Kent, Muskegon, Newaygo, Oceana and Ottawa
Counties located in western Michigan is diverse. This area consists of three
mid-sized cities, Grand Rapids, Muskegon and Holland and rural areas. Our
headquarters are located in Holland, Michigan. Grand Rapids is the second
largest city in Michigan and has a solid and diverse economic base. Holland, the
largest city in Ottawa County also has a solid and diverse economic base, which
includes tourism, office furniture, automotive components and assemblies,
pharmaceutical, transportation, equipment, candy, food and construction
supplies. Companies operating in the market area include Steelcase, Herman
Miller, Amway, Haworth, Johnson Controls, General Motors, Gerber, SPX, Donnelly,
Foremost Insurance and Meijers, Inc. Holland, situated on Lake Macatawa and Lake
Michigan and Muskegon, situated on Muskegon Lake and Lake Michigan, benefit from
tourism and recreational activities, which peak in the summer months.
Much of our success as a mortgage and small business lender has been
due to our market area's favorable population, housing and income demographics.
While population growth has generally been static in Michigan since 1980, as its
manufacturing base has declined, demographic trends in our market area reflect
above-average population growth, including population growth in our market area
of 9.4% since 1990. Income levels in the market area tend to approximate state
and national averages. Unemployment in the area at December 31, 1998 was
approximately 2.4% versus 3.4% for the State of Michigan as a whole.
LENDING ACTIVITIES
GENERAL. We have historically originated 30 year, fixed-rate mortgage
loans secured by one- to four-family residences. Since 1978, however, we have
emphasized the origination of adjustable-rate residential mortgage loans, call
option and balloon payment loans, which has dramatically reduced our portfolio
of long term fixed rate loans. Today, we continue to sell fixed rate mortgage
loans with terms of 15 years or longer. These sales activities have generated
income from the sale of mortgages in the secondary market and have increased
income from loan servicing operations. Since the acquisition of AmeriBank
Federal Savings Bank in February 1996, we have generated a larger percentage of
commercial business loans, commercial real estate loans and consumer loans. We
continue to emphasize commercial and multi-family real estate, and commercial
business loans as well as consumer loans which have higher yields than
traditional one- to four-family loans. Most of the current growth in our loan
portfolio for 1997 and 1998 was in commercial real estate, commercial business
and consumer loans. Management's strategy has been to increase the percentage of
assets in our portfolio with shorter maturities or terms to repricing, and in
some cases higher yields, than traditional 30 year fixed rate residential
mortgage loans.
4
Our loan officers and certain executive officers have approval
authority on loans depending on type and amount. Loans greater than $500,000 but
less than $1.5 million require the approval of our Loan Committee comprised of
certain loan officers and executive officers. Loans greater than $1.5 million
must be approved by the Board of Directors.
At December 31, 1998, the maximum amount that could have been loaned to
any one borrower and the borrower's related entities was approximately $15.5
million. At such date, we had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount.
Our largest lending relationship to a single borrower or a single group
of related borrowers was a $14.0 million line of credit with an outstanding
balance as of December 31, 1998 of $6.2 million. The line of credit is secured
by publicly traded marketable securities. At December 31, 1998, the line of
credit was performing in accordance with its repayment terms.
The next largest relationship to a single borrower or a single group of
related borrowers totaled $12.5 million consisting of a number of loans, the
largest of which is a $8.1 million loan secured by a multi-family housing
development. At December 31, 1998, the loans were current and performing in
accordance with their terms.
At December 31, 1998, we had 28 other loans or lending relationships to
a single borrower or group of related borrowers with a balance in excess of $2.5
million, all of which were performing in accordance with their repayment terms
at such date.
5
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.
December 31,
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1998 1997 1996 1995 1994
---------------- ---------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family ........ $425,974 51.97% $483,502 62.20% $516,935 69.59% $209,159 71.24% $184,237 76.10%
Multi-family ............... 49,402 6.03 38,663 4.97 34,262 4.61 13,221 4.50 9,200 3.80
Commercial ................. 51,637 6.30 35,147 4.52 42,745 5.75 4,106 1.40 4,903 2.02
Construction or development 117,792 14.37 71,145 9.15 33,823 4.55 42,659 14.53 20,420 8.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans . 644,805 78.67 628,457 80.84 627,765 84.50 269,145 91.67 218,760 90.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Automobile ................ 62,778 7.66 49,264 6.34 46,247 6.23 9,530 3.25 4,515 1.86
Home equity lines of credit 30,178 3.68 32,379 4.17 29,170 3.93 12,039 4.10 10,060 4.16
Home equity installment ... 19,115 2.33 22,905 2.95 19,247 2.59 -- -- -- --
Student ................... -- -- 21 -- 103 .01 85 .03 7,067 2.92
Other ..................... 8,851 1.08 7,009 .90 5,345 .72 2,804 .95 1,687 .70
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans .... 120,922 14.75 111,578 14.36 100,112 13.48 24,458 8.33 23,329 9.64
Commercial business loans . 53,935 6.58 37,322 4.80 14,996 2.02 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans ....... 174,857 21.33 148,900 19.16 115,108 15.50 24,458 8.33 23,329 9.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans .......... 819,622 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00% 242,089 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process ........... 44,797 25,787 22,956 14,861 9,110
Deferred fees and discounts 1,272 854 1,237 1,034 1,043
Allowance for losses ....... 3,823 3,293 3,129 1,251 1,118
-------- -------- -------- -------- --------
Total loans receivable, net $769,770 $747,423 $715,551 $276,457 $230,818
======== ======== ======== ======== ========
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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1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
FIXED-RATE LOANS:
Real estate:
One- to four-family ............. $156,383 19.08% $113,954 14.66% $108,747 14.64% $ 95,141 32.40% $ 96,381 39.82%
Multi-family .................... 40,003 4.88 27,187 3.50 15,937 2.14 3,163 1.08 3,080 1.27
Commercial ...................... 47,792 5.83 25,558 3.29 27,108 3.65 1,347 .46 2,692 1.11
Construction or development ..... 92,188 11.25 59,300 7.62 12,552 1.69 9,442 3.21 5,841 2.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate real
estate loans ............... 336,366 41.04 225,999 29.07 164,344 22.12 109,093 37.15 107,994 44.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial ....................... 38,097 4.65 14,004 1.80 6,007 .81 -- -- -- --
Consumer ......................... 90,744 11.07 79,199 10.19 65,241 8.78 12,294 4.19 8,028 3.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans ....... 465,207 56.76 319,202 41.06 235,592 31.71 121,387 41.34 116,022 47.93
ADJUSTABLE-RATE LOANS
Real estate:
One- to four-family ............. 269,591 32.89 369,548 47.54 408,188 54.95 114,018 38.84 87,856 36.29
Multi-family .................... 9,399 1.15 11,476 1.48 18,325 2.47 10,058 3.43 6,120 2.53
Commercial ...................... 3,845 0.47 9,589 1.23 15,637 2.10 2,759 .94 2,211 .91
Construction or development ..... 25,604 3.12 11,845 1.52 21,271 2.86 33,217 11.31 14,579 6.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate real
estate loans................ 308,439 37.63 402,458 51.77 463,421 62.38 160,052 54.52 110,766 45.75
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial ....................... 15,838 1.93 23,318 3.00 8,989 1.21 -- -- -- --
Consumer ......................... 30,178 3.68 32,379 4.17 34,871 4.70 12,164 4.14 15,301 6.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable rate loans .. 354,455 43.24 458,155 58.94 507,281 68.29 172,216 58.66 126,067 52.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans .............. 819,662 100.00% 777,357 100.00% 742,873 100.00% 293,603 100.00% 242,089 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process ................. 44,797 25,787 22,956 14,861 9,110
Deferred fees and discounts ...... 1,272 854 1,237 1,034 1,043
Allowance for loan losses ........ 3,823 3,293 3,129 1,251 1,118
-------- -------- -------- -------- --------
Total loans receivable, net.... $769,770 $747,423 $715,551 $276,457 $230,818
======== ======== ======== ======== ========
7
The following table illustrates the interest rate sensitivity of our
loan portfolio at December 31, 1998. Loans that have adjustable or renegotiable
interest rates and call option loans are shown as maturing in the period during
which the contract is due. The schedule does not reflect the effects of possible
prepayments, enforcement of due-on-sale, call option clauses or the effect of
the amortization of deferred loan fees.
Real Estate
----------------------------------------
Construction
Mortgage (1) or Development Commercial Consumer Total
-------------------- ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Periods Ending December 31,
1999(2) .......... $ 41,233 7.99% $ 71,854 7.74% $ 25,022 7.74% $ 33,138 9.56% $171,247 7.77%
2000 - 2003 ...... 127,155 7.80 26,730 7.38 24,326 8.24 75,544 9.26 253,755 8.63
2004 and following 358,625 7.51 19,208 7.36 4,587 7.84 12,240 8.95 394,660 7.85
-------- --------
Totals ...... $527,013 7.62 $117,792 7.60 $ 53,935 7.97 $120,922 9.31 $819,662 8.07
======== ======== ======== ======== ========
(1) Includes one- to four-family, multi-family and commercial real estate loans.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
8
The total amount of loans due after December 31, 1999 which have fixed
or predetermined interest rates is $236.9 million while the total amount of
loans due after such date which have floating or adjustable interest rates is
$411.5 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
During 1998, we focused our residential lending program on the
origination of loans secured by mortgages on owner-occupied, one- to four-family
residences. We also originated loans secured by nonowner-occupied, one- to
four-family residences. Residential mortgage loan originations derive from a
number of sources, including advertising, direct solicitation, real estate
broker referrals, existing borrowers and depositors, builders and walk-in
customers. Loan applications are accepted at most of AmeriBank's offices.
We emphasize the origination of a variety of residential loans,
including conventional 15 and 30 year fixed-rate loans and adjustable-rate
mortgage loans. The substantial majority of these loans were secured by
properties in our market area. In the past, we purchased loans secured by
residential properties in southwest and southeast Michigan and central Texas.
Most of these loans were purchased from a mortgage banking firm which has
established a long term relationship with us. The historical loan losses
incurred from these purchased loans have been negligible. During 1998 we
purchased only $112,000 in loans due to the high volume of loan originations we
produced internally.
Our one- to four-family residential adjustable-rate mortgage loans are
fully amortizing loans with contractual maturities of up to 30 years. Our
adjustable-rate mortgage loans generally carry interest rates which are reset to
a stated margin over an independent index, generally the one-, three- or
five-year constant maturity treasury index. Increases or decreases in the
interest rate of our adjustable-rate mortgage loans are generally limited to 2%
annually with lifetime interest rate caps of 6% over the initial interest rate.
Our adjustable-rate mortgage loans may be convertible into fixed-rate loans upon
payment of a fee, do not contain prepayment penalties and do not produce
negative amortization. Initial interest rates offered on our adjustable-rate
mortgage loans may be below the fully indexed rate, although borrowers are
generally qualified at the fully indexed rate.
We also offer fixed-rate mortgage loans to owner occupants with
maturities up to 30 years, which conform to secondary market standards. Interest
rates charged on these fixed-rate loans are priced on a daily basis according to
market conditions. These loans generally do not include prepayment penalties. We
currently sell in the secondary market, long-term, conforming fixed-rate loans
with terms of 15 years or greater which we originated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management" in the Annual Report to Stockholders attached as
Exhibit 13 to this Annual Report on Form 10-K.
We offer one- to four-family residential mortgage loans to
nonowner-occupants. These loans are underwritten considering cash flows from the
subject property in addition to using the same criteria as owner-occupied, one-
to four-family residential loans, but are generally priced at higher rates than
owner-occupied loans. Adjustable rates are offered on nonowner-occupied one-to
four-family residential loans, with terms of up to 30 years.
9
We originate residential mortgage loans with loan-to-value ratios of up
to 97% for owner-occupied residential loans and up to 80% for nonowner-occupied
residential loans. For loans with loan-to-value ratios in excess of 80%, we
require private mortgage insurance in an amount sufficient to reduce our
exposure to 80% or less of the lower of the appraised value or purchase price of
the underlying collateral.
In underwriting one- to four-family residential real estate loans, we
evaluate both the borrower's ability to make monthly payments and the value of
the property securing the loan. Properties securing one- to four-family
residential real estate loans that we made are appraised by independent fee
appraisers. We require borrowers to obtain title insurance and fire, property
and, if necessary, flood insurance. We originate real estate loans that contain
a "due on sale" clause which allows us to declare the unpaid principal balance
due and payable upon the sale of the security property. We generally enforce our
"due on sale" power to allow for faster repricing and to reduce the duration of
our loan portfolio.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
In order to enhance the yield on our assets, we originate permanent
loans secured by multi-family and commercial real estate. Our permanent
multi-family and commercial real estate loan portfolio includes loans secured by
apartment buildings, condominiums, small office buildings, small business
facilities, medical facilities and other non-residential building properties,
substantially all of which are located within our primary market area.
Permanent multi-family and commercial real estate loans have a maximum
term of 25 years, and typically have terms of 20 years or less, for
adjustable-rate mortgage and call option loans, with fixed-rate loans having
terms of 10 years or less. Multi-family loans and commercial real estate loans
are written in amounts of up to 80% of the lesser of the appraised value of the
property or the purchase price, and borrowers are generally personally liable
for all or part of the indebtedness.
Appraisals on properties securing multi-family and commercial real
estate loans that we originate are primarily performed by independent appraisers
who we designate at the time the loan is made. Management reviews all appraisals
on multi-family and commercial real estate loans. In addition, our underwriting
procedures generally require verification of the borrower's credit history,
income and financial statements, banking relationships, references, and
historical and projected cash flows for the property that indicate minimum debt
service coverage ratios of 1.15% or more.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired. For example, if leases are not obtained or renewed, or a bankruptcy
court modifies a lease term, or a major tenant is unable to fulfill its lease
obligations, cash flow from the project will be
10
reduced. At December 31, 1998, $879,000 or 0.87% of the multi-family and
commercial real estate loan portfolio was non-performing. See "-- Asset
Quality." There can be no assurance that delinquencies will not increase in the
future.
CONSTRUCTION AND DEVELOPMENT LENDING
We make construction loans to individuals for the construction of their
residences. Construction loans are also made to builders and developers for the
construction of one- to four-family residences and the development of one- to
four-family lots, residential subdivisions, condominium developments and other
commercial developments.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates and terms which
match any one- to four-family loans then offered by us, except that during the
construction phase, the borrower pays interest only. Residential construction
loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans.
Construction loans to builders of one- to four-family residences
generally require the payment of interest only for up to one year and either
have terms of up to 30 years with adjustable rates or with call options. These
loans are structured to be assumed by qualified borrowers as permanent loans.
These loans may also provide for the payment of loan fees from loan proceeds.
We also make loans to builders for the purpose of developing one- to
four-family lots and residential condominium projects. These loans typically
have terms of 36 months or less with maximum loan to value ratios of 80%. These
loans may provide for the payment of loan fees from loan proceeds. Loan
principal is typically paid down as lots or units are sold.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from us, as well as referrals from existing customers and walk-in customers. As
part of the application process, the applicant must submit accurate plans,
specifications and costs of the project to be constructed or developed to us.
These items are used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of current appraised value and/or the
cost of construction (land plus building). At December 31, 1998, we had 25
construction and development loans in excess of $500,000, all but one of the
loans were current at such date. Our largest construction and development loan
at December 31, 1998, was a $8.1 million line of credit for the construction of
a multi-family housing development, of which $1.79 million was outstanding.
Because of the uncertainties inherent in estimating development and
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. Construction and development loans to borrowers
other than owner-occupants also involve many of the same risks discussed above
regarding multi-family and
11
commercial real estate loans and tend to be more sensitive to general economic
conditions than many other types of loans.
COMMERCIAL BUSINESS LENDING
Our commercial business lending portfolio contains loans with a variety
of purposes and security, including loans to finance operations and equipment.
Generally, our commercial business lending has been limited to borrowers
headquartered, or doing business, in our primary market area. Over the last
several years, management has focused on increasing our portfolio of commercial
business loans. These loans typically carry higher yields and shorter terms to
maturity than mortgage loans. Management intends to continue to increase the
size of our commercial business portfolio during 1999. At December 31, 1998, the
average outstanding loan balance in our commercial business loan portfolio was
$106,000, with the largest commercial business loan being a $14.0 million line
of credit with an outstanding balance at December 31, 1998 of $6.2 million.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
CONSUMER LENDING
We originate a variety of different types of consumer loans, including
automobile loans, home equity lines of credit and installment loans, home
improvement loans, deposit account loans and other loans for household and
personal purposes. Recently, we have placed greater emphasis on consumer loans,
because of their attractive yields and shorter terms to maturity.
We originate automobile loans, our largest segment of consumer loans,
on both a direct and an indirect basis. Direct loans are made when we extend
credit directly to the borrower. Indirect loans are obtained when we purchase
loan contracts from retailers of goods or services which have extended credit to
their customers.
We began our indirect lending program in 1995 with selected automobile
dealers located in our lending area. Moreover, we acquired a $25.0 million
portfolio of mature, indirect automobile loans upon our acquisition of AmeriBank
Federal Savings Bank. At December 31, 1998, our automobile loan portfolio
totaled $62.8 million, of which $51.2 million were originated on an indirect
basis.
Our home equity installment loans are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
generally will not exceed the greater of 90% of the appraised value of the
property or 90% of two times the Michigan real estate assessment
12
value. These loans are written with fixed terms of up to 15 years, or up to ten
years with a call option after five years, and carry fixed rates of interest. We
also originate home equity lines of credit utilizing the same underwriting
standards as for home equity installment loans. Home equity lines of credit are
revolving line of credit loans. The majority of our existing home equity line of
credit portfolio has an original 10 year term; however, we currently offer these
loans with adjustable rates, interest only payments and a term of five years. At
December 31, 1998, we had $19.1 million of home equity installment loans and
$30.2 million of home equity lines of credit outstanding, representing 2.3% and
3.7%, respectively, of our gross loan portfolio. At that date, we had $34.9
million of unused credit available under our home equity line of credit program.
The underwriting standards that we employ for consumer loans include a
determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. At December 31, 1998, $457,000 or 0.4% of
our consumer loan portfolio was non-performing. There can be no assurance that
delinquencies will not increase in the future.
LOAN ORIGINATIONS, PURCHASES AND SALES
Real estate loans are originated by our staff of loan officers. Loan
applications are taken in most branch offices and then submitted to our
designated loan underwriters for approval.
We originate both adjustable-rate and fixed-rate loans; however, our
ability to originate loans is dependent upon the relative customer demand for
loans in our market. Demand is affected by the interest rate environment.
Currently, almost all fixed-rate residential mortgage loans with maturities of
15 years or greater are originated for sale to Freddie Mac with servicing rights
retained. These loans are originated to satisfy customer demand, generate
servicing fee income and are sold to achieve the goals of our asset/liability
management program. Borrowers are allowed to lock in an interest rate at the
date of application without a fee. We manage the volume of loans originated but
not closed by offsetting these loan commitments with forward commitments from
Freddie Mac when the volume of applications exceeds $6.0 million.
When loans are sold, we typically retain the responsibility for
collecting and remitting loan payments, making certain that real estate tax
payments are made on behalf of borrowers, and otherwise servicing the loans. We
receive a servicing fee for performing these functions. The
13
servicing fee is recognized as income over the life of the loan. We serviced for
others mortgage loans that we originated and sold amounting to $227.9 million at
December 31, 1998.
We purchase real estate loans from selected sellers from time to time
to supplement our origination volume. We carefully review and underwrite all
loans to be purchased to insure that they meet our underwriting standards. We
did not purchase a significant amount of real estate loans during 1998.
In periods of economic uncertainty, our ability to originate large
dollar volumes of real estate loans may be substantially reduced or restricted,
with a resultant decrease in related fee income and operating earnings. In
addition, our ability to sell loans may substantially decrease as potential
buyers, principally government agencies, reduce their purchasing activities.
The following table shows our loan origination, purchase, sale and
repayment activities for the periods indicated. Fixed-rate and call option loans
that we modify are not reflected as new loan originations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations" in the Annual Report to Stockholders attached as Exhibit
13 to this Annual Report on Form 10-K.
14
Year Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
(In Thousands)
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real estate:
one- to four-family ....................... $ 36,790 $ 57,043 $ 111,313
multi-family .............................. 685 1,710 37,261
commercial ................................ 371 -- 6,202
construction or development ............... 31,416 4,507 37,137
Commercial business .......................... 31,172 19,422 --
Consumer ..................................... 27,944 12,000 37,580
--------- --------- ---------
Total adjustable-rate ................. 128,378 94,682 229,493
--------- --------- ---------
FIXED-RATE:
Real estate:
one- to four-family ....................... 172,737 58,086 19,644
multi-family .............................. 15,386 7,251 6,575
commercial ................................ 19,396 5,836 1,094
construction or development ............... 76,892 31,877 6,554
Commercial business .......................... 21,168 8,798 --
Consumer ..................................... 61,126 38,775 35,320
--------- --------- ---------
Total fixed-rate ...................... 366,705 150,623 69,187
--------- --------- ---------
Total loans originated ................ 495,083 245,305 298,680
--------- --------- ---------
PURCHASES:
Real estate: one- to four-family ............. 112 6,039 27,027
Loans acquired in the acquisition of AmeriBank
Federal Savings Bank ......................... -- -- 294,700
--------- ---------
Total purchases ....................... 112 6,039 321,727
--------- --------- ---------
SALES:
Real estate: one- to four-family ............. 148,280 43,161 9,833
Consumer loans ............................... -- -- --
--------- ---------
Total loan sales ...................... 148,280 43,161 9,833
--------- --------- ---------
REPAYMENTS:
Principal repayments ......................... 344,526 179,735 161,303
--------- --------- ---------
Total reductions ...................... 492,806 222,896 171,136
--------- --------- ---------
Increase (decrease) in other items, net ...... 19,958 5,379 (10,176)
--------- --------- ---------
Net increase .......................... $ 22,347 $ 33,827 $ 439,095
========= ========= =========
Due to the historically low interest rate environment during 1998, we
experienced a shift in customer demand from adjustable rate to fixed rate
products. Consistent with our asset/liability management policy, we sold a
substantial portion of our fixed rate products in the secondary market. In
addition, consistent with our strategic plan of achieving a more balanced loan
portfolio between residential mortgage, and consumer and commercial lending, we
focused our loan origination efforts towards originating consumer and commercial
loans.
15
ASSET QUALITY
When a borrower fails to make a required payment on a loan, we attempt
to cause the delinquency to be cured by contacting the borrower. In the case of
residential loans, a late notice is sent for accounts 30 or more days
delinquent. If the delinquency is not cured by the 60th day, contact with the
borrower may be made by phone and by a second letter. Additional written and
oral contacts may be made with the borrower between 30 and 60 days after the due
date. If the delinquency continues for a period of 60 days, we usually send a
default letter to the borrower and after 90 days, if the loan is still
delinquent, we institute appropriate action to foreclose on the property. If
foreclosed, the property is sold at public auction and may be purchased by us.
Delinquent consumer loans are handled in a generally similar manner, except that
initial contacts are made when the payment is 14 days past due and appropriate
action may be taken to collect any loan payment that is delinquent for more than
30 days. Our procedures for repossession and sale of consumer collateral are
subject to various requirements under Michigan consumer protection laws.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at December 31, 1998, in dollar amounts and as a percentage of
each category of our loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
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 . 87 $3,749 0.88% 17 $ 728 0.17% 104 $4,477 1.05%
Multi-family and commercial
real estate ................... -- -- -- 1 879 0.87 1 879 0.87
Construction or development ..... 2 262 0.22 3 630 0.53 5 892 0.75
Commercial business ............. 1 40 0.07 3 504 0.93 4 544 1.00
Consumer ........................ 62 620 0.51 46 457 0.38 108 1,077 0.89
---- ------ ---- ------ ----- ------
Total ....................... 152 $4,671 70 $3,198 222 $7,869
==== ====== ==== ====== ===== ======
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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ...................... $ 696 $ 917 $1,792 $ -- $ --
Multi-family and commercial real estate .. 879 -- -- -- --
Construction or development .............. 609 611 -- -- --
Commercial business ...................... 504 118 -- -- --
Consumer ................................. 446 434 331 -- --
------ ------ ------ ------ ------
Total ................................. 3,134 2,080 2,123 -- --
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One- to four-family ...................... 32 98 132 1,317 922
Multi-family and commercial real estate .. -- 546 426 1,110 96
Construction or development ............. 21 -- -- -- --
Consumer ................................. 11 2 55 7 1
------ ------ ------ ------ ------
Total ................................. 64 646 613 2,434 1,019
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ...................... 656 276 39 296 164
Consumer loans ........................... 174 181 150 -- --
------ ------ ------ ------ ------
Total ................................. 830 457 189 296 164
------ ------ ------ ------ ------
Total non-performing assets ................ $4,028 $3,183 $2,925 $2,730 $1,183
====== ====== ====== ====== ======
Total non-performing assets as a percentage
of total assets ............................ 0.43% 0.36% 0.34% 0.74% 0.36%
====== ====== ====== ====== ======
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $209,000, none of which was included in
interest income.
NON-PERFORMING LOANS. At December 31, 1998, we had $3.2 million in
non-performing loans, which constituted 0.39% of our gross loan portfolio.
Except as discussed immediately below, there were no non-accruing loans or
aggregate non-accruing loans-to-one-borrower in excess of $500,000.
The largest non-performing loan at December 31, 1998 totaled $879,000
and was secured by a multi-family real estate development. Based upon the
collateral value of property securing the loan and the strength of the
guarantor, loss of principal is not anticipated.
OTHER LOANS OF CONCERN. As of December 31, 1998, there were $3.3
million of other loans not included in the table or discussed above where known
information about the possible credit problems of borrowers caused management to
have doubts as to the ability of the borrower to comply with present loan
repayment terms. These loans consist of eight commercial and multi-family loans,
the largest of which was a $2.0 million loan secured by a manufacturing plant.
We are monitoring this loan as a result of a tenant vacancy. The loan was
current on payments as of December 31, 1998. These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.
17
As of December 31, 1998, there were no other loans not included in the
table above or discussed under "Other Loans of Concern" where known information
about the possible credit problems of borrowers caused management to have doubts
as to the ability of the borrower to comply with present loan repayment terms
and which may result in disclosure of such loans in the future.
ALLOWANCE FOR LOAN LOSSES. We established an allowance for loan losses
based on a systematic analysis of risk factors in the loan portfolio. This
analysis includes evaluation of concentrations of credit, past loss experience,
current economic conditions, amount and composition of the loan portfolio,
estimated fair value of the underlying collateral, loan commitments outstanding,
delinquencies, and other factors. Because we have had limited loan losses during
our history, management also considers the loss experience of similar portfolios
in comparable lending markets. Management's analysis results in establishment of
allowance amounts by loan type, based on allocations by quality classification.
A portion of the allowance also consists of an unallocated amount which
increased substantially in 1996 due to the combination of AmeriBank Federal
Savings Bank's unallocated portion of the allowance with our allowance. In 1997,
the unallocated portion of the allowance decreased as management allocated
larger portions of the allowance to the higher risk consumer, construction and
other non-residential lending portfolios due to the increased emphasis on growth
in these portfolios. Due to our continued emphasis in these lending portfolios,
the allowance allocations grew during 1998. The total allowance balance was
increased throughout 1998 in response to continued growth in our loan portfolio,
management's assessment of the risks inherent in the portfolio and charge-offs
credited against the allowance account during the year. Although management
believes it uses the best information available to make such determinations,
future adjustments to reserves may be necessary and net income could be
significantly affected if circumstances differ substantially from the
assumptions used in making the initial determinations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations Results
of Operations - Provision for Loan Losses," in the Annual Report to Stockholders
attached as Exhibit 13 to this Annual Report on Form 10-K.
18
The following table sets forth an analysis of our allowance for loan
losses.
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
Balance at beginning of period ................ $ 3,293 $ 3,129 $ 1,251 $ 1,118 $ 950
Acquired from AmeriBank Federal Savings
Bank .......................................... -- -- 1,358 -- --
Charge-offs:
Consumer .................................... 576 615 134 28 2
Recoveries .................................... 176 119 90 1 --
------- ------- ------- ------- -------
Net charge-offs ............................... (400) (496) (44) (27) (2)
Additions charged to operations ............... 930 660 564 160 170
------- ------- ------- ------- -------
Balance at end of period ...................... $ 3,823 $ 3,293 $ 3,129 $ 1,251 $ 1,118
======= ======= ======= ======= =======
Percentage of net charge-offs during the period
to average loans outstanding during the period ---%(1) ---%(1) ---%(1) ---%(1) ---%(1)
======= ======= ======= ======= =======
Percentage of net charge-offs during the period
to average non-performing assets ............. 11.09% 16.25% ---%(1) ---%(1) ---%(1)
===== ===== ======= ======= =======
- --------------
(1) Less than 1.00%.
19
The distribution of our allowance for losses on loans at the dates
indicated is summarized as follows:
December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------ ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------- ---------
(Dollars in Thousands)
One- to four-family ....... $ 263 51.97% $ 289 62.20% $ 331 69.59% $ 166 71.24% $ 148 76.10%
Multi-family .............. 72 6.03 14 4.97 18 4.61 413 4.50 287 3.80
Commercial real estate .... 670 6.30 593 4.52 606 5.75 21 1.40 25 2.02
Construction or development 548 14.37 461 9.15 54 4.55 53 14.53 28 8.44
Commercial business ....... 568 6.58 289 4.80 150 2.02 -- -- -- --
Consumer .................. 1,193 14.75 1,024 14.36 777 13.48 143 8.33 62 9.64
Unallocated ............... 509 -- 623 -- 1,193 -- 455 -- 568 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................ $3,823 100.00% $3,293 100.00% $3,129 100.00% $1,251 100.00% $1,118 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
20
INVESTMENT ACTIVITIES
Generally, our investment policy is to invest funds among various
categories of investments and maturities based upon our asset/liability
management policies, concern for the highest investment quality, liquidity needs
and performance objectives. As market conditions change, we regularly
re-evaluate the marketable securities in our portfolio. The investment security
portfolio currently is composed of federal agency securities, collateralized
mortgage obligations, mortgage-backed securities, municipal bonds, corporate
debt securities and Federal Home Loan Bank stock.
At December 31, 1998, our entire investment and mortgage-backed
securities portfolios were classified as available for sale. The amortized cost,
fair value and weighted average yield of securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Yields on tax exempt
obligations have been computed on a tax equivalent basis.
Securities
---------------------
Amortized Weighted
Cost Fair Value Average Yield
--------- ---------- -------------
(Dollars in Thousands)
Due in one year or less ............. $ 5,542 $ 5,543 5.25%
Due after one year through five years 28,605 28,722 5.82
Due after five through 10 years ..... 107 106 7.33
------- ------- ----
34,254 34,371 5.72
Asset-backed debt securities(1) ..... 37,358 37,275 6.57
------- ------- ----
$71,612 $71,646 6.16
======= =======
- --------------------
(1) Consists of asset-backed Small Business Administration loans and
mortgage-backed securities.
Due to their variable payments, asset-backed securities are not
reported by a specific maturity grouping.
21
The following table sets forth the composition of our securities
portfolio at the dates indicated. For additional information on our investment
and mortgage-backed securities, see Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached as Exhibit 13
to this Annual Report on Form 10-K.
December 31,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
Carrying Carrying Carrying
Value Value Value
-------- --------- ---------
(Dollars in Thousands)
Equity Securities ............ $ -- $ -- $ 296
------- ------- -------
Debt Securities:
Corporate .................. 8,176 2,010 11,353
Asset-backed Small Business
Administration loans ......... 10,731 15,232 12,816
Mortgage-backed ............ 26,544 13,203 17,773
Government and agency ...... 25,542 25,007 15,960
Municipal obligations ...... 653 1,856 4,708
------- ------- -------
Total debt securities .. 71,646 57,308 62,610
Federal Home Loan Bank Stock 11,782 7,308 6,958
------- ------- -------
Total securities ........ $83,428 $64,616 $69,864
======= ======= =======
SOURCES OF FUNDS
GENERAL. Our primary sources of funds are deposits, principal and
interest payments on loans, sales of loans, maturities of securities, securities
available for sale and borrowings, principally Federal Home Loan Bank advances.
DEPOSITS. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, interest and non-interest-bearing checking accounts, money market
checking and savings accounts, and certificates of deposit. Our High Performance
Checking Account Program offers a variety of checking accounts to customers.
These checking accounts increase our core deposits, provide the opportunity to
cross sell our other products and generate additional fee income; however, the
cost of servicing these accounts has increased our non-interest expense. We rely
primarily on advertising, competitive pricing policies and customer service to
attract and retain these deposits. We solicit deposits from our market area
only, and have never used brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. We offer a variety of deposit accounts which has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our asset/liability management,
profitability and growth objectives. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset/Liability Management"
in the Annual Report to Stockholders attached as Exhibit 13 to this Annual
Report
22
on Form 10-K. Based on our experience, we believe that our savings, interest and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, our ability to attract and maintain certificates of deposit,
and the rates paid on these deposits, has been and will continue to be
significantly affected by market conditions.
The following table sets forth our savings flows during the periods
indicated.
Year Ended December 31,
---------------------------------------------
1998 1997 1996
-------- --------- ---------
(Dollars in Thousands)
Opening balance ................................ $654,560 $622,492 $243,220
Deposits acquired from AmeriBank Federal Savings
Bank ........................................... -- -- 333,000
Net Deposits (Withdrawals) ..................... 14,081 6,373 23,462
Interest credited .............................. 24,991 25,695 22,810
-------- -------- --------
Ending balance ................................. $693,632 $654,560 $622,492
======== ======== ========
Net increase ................................... $ 39,072 $ 32,068 $379,272
======== ======== ========
Percent increase ............................... 5.97% 5.15% 155.94%
======== ======== ========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs that we offered at the dates indicated.
December 31,
--------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:
- ---------------------------------
Noninterest-bearing ................. $ 40,813 5.88% $ 28,431 4.34% $ 25,487 4.09%
Savings accounts (1.74%(1)) ......... 54,475 7.85 60,143 9.19 64,987 10.44
NOW accounts and money market deposit
accounts (3.49%(1)) ................ 200,132 28.86 160,296 24.49 154,711 24.85
-------- ------ -------- ------ -------- ------
Total Non-certificates .............. 295,420 42.59 248,870 38.02 245,185 39.38
-------- ------ -------- ------ -------- ------
Certificates:
3.00-4.99% ....................... 26,539 3.83 9,612 1.47 25,807 4.15
5.00-6.99% ....................... 360,045 51.91 359,494 54.92 301,184 48.38
7.00-8.99% ....................... 11,241 1.62 36,109 5.52 49,651 7.98
9.00-10.99% ...................... 387 0.05 475 .07 665 .11
-------- ------ -------- ------ -------- ------
Total Certificates .................. 398,212 57.41 405,690 61.98 377,307 60.62
-------- ------ -------- ------ -------- ------
Total Deposits ...................... $693,632 100.00% $654,560 100.00% $622,492 100.00%
======== ====== ======== ====== ======== ======
- ------------------
(1) At December 31, 1998.
23
The following table shows rate and maturity information on our
certificates of deposit as of December 31, 1998.
3.00- 5.00- 7.00- 9.00- Percent
4.99% 6.99% 8.99% 10.99% Total of Total
-------- -------- ------- ------ -------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- -----------------------------
March 31, 1999...................... $ 3,775 $113,615 $ 315 $ 89 $117,794 29.58%
June 30, 1999....................... 7,606 102,519 356 298 110,779 27.82
September 30, 1999.................. 5,503 63,197 100 --- 68,800 17.28
December 31, 1999................... 3,301 19,106 411 --- 22,818 5.73
March 31, 2000...................... 37 12,124 7,598 --- 19,759 4.96
June 30, 2000....................... 40 13,045 1,618 --- 14,703 3.69
September 30, 2000.................. 11 10,975 26 --- 11,012 2.77
December 31, 2000................... 3,332 4,419 191 --- 7,942 1.99
March 31, 2001...................... --- 4,163 222 --- 4,385 1.10
June 30, 2001....................... 1,198 2,377 85 --- 3,660 0.92
September 30, 2001.................. 1 1,590 2 --- 1,593 0.40
December 31, 2001................... 876 563 16 --- 1,455 0.36
Thereafter.......................... 859 12,352 301 --- 13,512 3.40
-------- -------- ------- ---- -------- ------
Total............................ $ 26,539 $360,045 $11,241 $387 $398,212 100.00%
======== ======== ======= ==== ======== ======
Percent of total................. 6.67% 90.42% 2.82% 0.09% 100.00%
==== ===== ==== ==== ======
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of December 31, 1998.
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.............................. $105,014 $ 96,105 $79,902 $72,445 $353,466
Certificates of deposit of
$100,000 or more........................... 12,780 14,674 11,716 5,576 44,746
-------- -------- ------- ------- --------
Total certificates of deposit............... $117,794 $110,779 $91,618 $78,021 $398,212
======== ======== ======= ======= ========
BORROWINGS. Our other available sources of funds include advances from
the Federal Home Loan Bank of Indianapolis and other borrowings. As a member of
the Federal Home Loan Bank of Indianapolis, we are required to own capital stock
in the Federal Home Loan Bank and are authorized to apply for advances from the
Federal Home Loan Bank. Each Federal Home Loan Bank credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The
Federal Home Loan Bank of Indianapolis may prescribe the acceptable uses for
these advances, as well as limitations on the size of the advances and repayment
provisions.
24
We have borrowed funds from the Federal Home Loan Bank of Indianapolis
primarily under its fixed-rate lending programs, with terms requiring monthly
interest payments and principal payments due upon maturity. To a lesser extent,
we have used putable advances to reduce our cost of borrowing. A putable advance
provides us with a low fixed interest rate in exchange for the Federal Home Loan
Bank to have the option to convert the advance before maturity on any given
conversion date to an adjustable rate advance of predetermined index for the
remaining term to maturity. Of the $160.0 million of advances outstanding at
December 31, 1998, $106.0 million were fixed term and rate and $54.0 million
were putable advances. We utilize Federal Home Loan Bank advances as part of our
asset/liability management strategy in order to cost effectively extend the
maturity of our liabilities. We are subject to a fee if we prepay the advance.
At December 31, 1998, we had $160.0 million of advances from the
Federal Home Loan Bank of Indianapolis and the capacity to borrow up to $314.0
million; however, the current Board policy limits our borrowing capacity to
$235.0 million. For additional information on our borrowings and maturities, see
Note 9 of the Notes to Consolidated Financial Statements contained in the Annual
Report to Stockholders attached as Exhibit 13 to this Annual Report on Form
10-K.
The following table sets forth the maximum month-end balance and
average balance of Federal Home Loan Bank advances for the periods indicated.
Year Ended December 31,
----------------------------------
1998 1997 1996
------- -------- --------
(In Thousands)
DURING THE PERIODS:
Maximum Balance:
- ----------------
Federal Home Loan Bank advances........ $169,768 $145,458 $139,170
Average Balance:
- ----------------
Federal Home Loan Bank advances........ $160,533 $140,746 $ 94,269
The following table sets forth the end of period interest rates and
balances at the dates indicated:
December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Federal Home Loan Bank advances....... $160,268 $145,458 $139,170
Weighted average interest rate of
Federal Home Loan Bank advances....... 5.91% 5.98% 5.87%
25
SUBSIDIARY AND OTHER ACTIVITIES
AmeriBank has two wholly-owned service corporation subsidiaries: OS
Services, Inc. and AmeriPlan Financial Services, Inc. At December 31, 1998,
AmeriBank's investment in its service corporations totaled $1.4 million.
OS Services, Inc. invests in the stock of MMLIC Life Insurance Company,
a subsidiary of the Minnesota Mutual Life Insurance Company, St. Paul,
Minnesota. In addition, OS Services invests in limited partnerships that are
involved in developing and providing affordable housing. The partnerships also
provide investors with low income housing tax credits available under Section 42
of the Internal Revenue Code of 1986, as amended. AmeriBank, through OS Services
has an equity investment in the partnerships totaling $858,000. In addition,
Ottawa Financial received $327,000 in tax credits during 1998 as a result of
these activities. AmeriPlan's operations consist of offering investment
products, including mutual funds and annuities, as well as discount brokerage
services. AmeriPlan's gross revenues from sales of these products and services
amounted to $597,000. The subsidiaries of AmeriBank generated net income of
$368,000 during 1998.
REGULATION
GENERAL. AmeriBank is a state chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, AmeriBank is subject to broad regulation and oversight
by the Michigan Financial Institution Bureau and the FDIC extending to all its
operations. AmeriBank is a member of the Federal Home Loan Bank of Indianapolis
and is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System. As the savings and loan holding company of AmeriBank,
Ottawa Financial also is subject to federal regulation and oversight by the
Office of Thrift Supervision.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. AmeriBank is a member
of the Savings Association Insurance Fund, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC insured institutions. It also may prohibit any
FDIC insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the Savings Association Insurance
Fund or the Bank Insurance Fund. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the Office of
Thrift Supervision an opportunity to take action, and may terminate deposit
insurance if it determines that an institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
26
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At December 31, 1998, we were
classified as a well-capitalized institution and was not subject to any
assessment. See Note 12 of Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached as Exhibit 13 to this Annual Report on
Form 10-K.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund-insured institutions
and Bank Insurance Fund-insured institutions are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. In 1998, this amount was equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund-insured institutions paid an assessment equal
to about 1.50 basis points for each $100 in domestic deposits. The savings
institutions assessment is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund- insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-charted banks that
are not members of the Federal Reserve System ("State nonmember banks") are
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total assets of 3%, if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has well-
diversified risk, including not undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and in general is considered a
strong banking organization, rated composite 1 under the Uniform Financial
Institutions Rating System (the CAMEL rating system) established by the Federal
Financial Institutions Examination Council. For all but the most highly rated
institutions meeting the conditions set forth above, the minimum leverage
capital ratio is 3% plus an additional cushion amount of at least 100 to 200
basis points, consisting of a ratio of Tier 1 capital to total assets of not
less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock, including any related surplus and
minority interests in consolidated subsidiaries, minus all intangible assets,
other than certain purchased mortgage servicing rights and purchased credit card
relationships, minus identified losses and minus investments in securities
subsidiaries.
In addition to the leverage ratios, State nonmember banks must maintain
a minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least 4% points must be Tier 1 capital. Qualifying total
capital consists of Tier 1 capital plus Tier 2 or supplementary capital items,
which include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years and certain other capital instruments. The includable amount of Tier 2
capital cannot exceed a bank's Tier 1 capital. Qualifying total capital is
further reduced by the amount of the bank's investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks,
investments in securities subsidiaries and certain other deductions. Under the
FDIC
27
risk-weighting systems, all of the bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories. The aggregate dollar amount of each category
is multiplied by the risk weight assigned to that category. The sum of these
weighted values equals the bank's risk-weighted assets.
At December 31, 1998, AmeriBank's ratio of Tier 1 capital of total
assets was 6.3%, its ratio of Tier 1 capital to risk-weighted assets was 9.6%
and its ratio of total capital to risk-weighted assets was 10.3%. At December
31, 1998, AmeriBank was classified as "well capitalized" under FDIC regulations.
DIVIDEND LIMITATIONS. AmeriBank may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of AmeriBank at the time of its conversion to stock form. AmeriBank's
earnings appropriated to bad debt reserves and deducted for federal income tax
purposes are not available for payment of cash dividends or other distributions
to stockholders without payment of taxes at the then current tax rate by
AmeriBank on the amount of earnings removed from the reserves for such
distributions.
Under FDIC regulation, AmeriBank is prohibited from making any capital
distributions if after making the distribution, AmeriBank would have: (i) a
total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act, every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act requires the FDIC, in connection with the examination of
AmeriBank, to assess the institution's record of meeting the credit needs of its
community and to take this record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by AmeriBank.
An unsatisfactory rating may be used as the basis for the denial of an
application by the Office of Thrift Supervision. AmeriBank was examined for
Community Reinvestment Act compliance in November 1996 and received a rating of
"satisfactory."
HOLDING COMPANY REGULATION. Ottawa Financial is a unitary savings and
loan holding company subject to regulatory oversight by the Office of Thrift
Supervision. Ottawa Financial is required to register and file reports with and
is subject to regulation and examination by the Office of Thrift Supervision. In
addition, the Office of Thrift Supervision has enforcement authority over Ottawa
Financial and its non-savings association subsidiaries which also permits the
Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, Ottawa Financial
generally is not subject to activity restrictions. If Ottawa Financial acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities
28
of Ottawa Financial and any of its subsidiaries other than AmeriBank or any
other Savings Association Insurance Fund insured savings institution, would
generally become subject to additional restrictions.
FEDERAL SECURITIES LAW. The stock of Ottawa Financial is registered
with the SEC under the Securities Exchange Act of 1934, as amended. Ottawa
Financial is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934, as amended.
Ottawa Financial stock held by persons who are affiliates, generally
including executive officers, directors and 10% stockholders of Ottawa Financial
may not be resold without registration or unless sold in accordance with certain
resale restrictions. If Ottawa Financial meets specified current public
information requirements, each affiliate of Ottawa Financial is able to sell in
the public market, without registration, a limited number of shares in any
three-month period.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of Indianapolis, which is one of 12 regional Federal Home Loan Banks that
administers the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It makes loans to members in accordance with
policies and procedures, established by the board of directors of the Federal
Home Loan Bank, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the Federal Home Loan Bank are required to be
fully secured by sufficient collateral as determined by the Federal Home Loan
Bank. In addition, all long-term advances must be used for residential home
financing.
As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Indianapolis. At December 31, 1998, we had $11.8
million in Federal Home Loan Bank stock, which was in compliance with this
requirement. We receive dividends on our Federal Home Loan Bank stock. Over the
past five calendar years, these dividends have averaged 8.5% and were 8.0% for
the calendar year 1998. For the year ended December 31, 1998, the Federal Home
Loan Bank of Indianapolis paid us dividends totaling $777,000.
MICHIGAN BANKING LAW. Effective July 1, 1996, the Michigan Legislature
enacted the Michigan Savings Bank Act. In several respects, the Michigan Savings
Bank Act contains provisions similar to the Michigan Banking Code of 1969.
Pursuant to the Michigan Savings Bank Act, AmeriBank has converted its charter
from that of a federal savings bank to that of a Michigan savings bank.
As a state-chartered savings bank, AmeriBank is subject to the Michigan
Savings Bank Act and the regulations of the Michigan Financial Institutions
Bureau adopted thereunder, as well as other applicable provisions of Michigan
law. AmeriBank derives its lending and investment powers
29
from the Michigan Savings Bank Act, and is subject to periodic examination and
reporting requirements by the Financial Institutions Bureau. The Michigan
Savings Bank Act further regulates many of the internal operating affairs of
AmeriBank, including the activities of the board of directors and the noticing
and conduct of the annual shareholder meetings.
In order to maintain its qualification as a savings bank under the
Michigan Savings Bank Act, AmeriBank must maintain at least 50% of its total
assets, as measured by monthly averages calculated at the close of each calendar
month, in at least 9 months of the immediately preceding 12 months, in certain
consumer related assets, including residential single and multi-family loans,
home equity loans, stock issued by a federal home loan bank, loans to small
businesses and loans for personal, family, household or education purposes.
FEDERAL TAXATION. Savings institutions that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code, had been permitted to establish reserves for bad
debts and to make annual additions which may, within specified formula limits,
be taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" was computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans," which are generally
loans secured by improved real estate, was computed under either the experience
method or the percentage of taxable income method.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method was 8%. This percentage was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings institutions to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally, which is approximately 31.3%
assuming the maximum percentage bad debt deduction.
In addition to the regular income tax, corporations, including savings
institutions, generally are subject to a minimum tax. An alternative minimum tax
is imposed at a minimum tax rate of 20% on alternative minimum taxable income,
which is the sum of a corporation's regular taxable income, with certain
adjustments, and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income. For taxable years beginning after 1986 and
before 1996, corporations, including savings institutions, were also subject to
an environmental tax equal to .12% of the excess of alternative minimum taxable
income for the taxable year, which is determined without regard to net operating
losses and the deduction for the environmental tax, over $2.0 million.
To the extent earnings appropriated to a savings institution's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the institution's supplemental reserves
for losses on loans , such reserves for losses on loans may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a
30
shareholder, including distributions on redemption, dissolution or liquidation,
or for any other purpose except to absorb bad debt losses. As of December 31,
1998, our supplemental reserves for losses on loans for tax purposes totaled
approximately $12.3 million.
Ottawa Financial and its subsidiaries file consolidated federal income
tax returns on a calendar year basis using the accrual method of accounting.
Savings institutions, such as AmeriBank, that file federal income tax returns as
part of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings institution
members of the consolidated group that are functionally related to the
activities of the savings institution member.
We have been audited by the Internal Revenue Service ("IRS") with
respect to consolidated federal income tax returns for 1990 through 1993. We are
currently undergoing an audit by the IRS with respect to the consolidated
federal income tax return for 1995. With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management, any
examination of still open returns, including returns of subsidiaries and
predecessors of, or entities that we have merged with, would not result in a
deficiency which could have a material adverse effect on our financial
condition.
MICHIGAN TAXATION. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings bank
or a savings and loan institution less deposits owed to the federal or Michigan
state governments, their agencies or certain other financial institutions. This
tax has been repealed effective January 1, 1998. The State of Michigan also
imposes a "Single Business Tax," which is a value-added type of tax and is for
the privilege of doing business in the State of Michigan. The major components
of the Single Business Tax base are compensation, depreciation and federal
taxable income, as increased by net operating loss carry forwards, if any,
utilized in arriving at federal taxable income, and decreased by the cost of
acquisition of tangible assets during the year. The tax rate is 2.30% of the
Michigan adjusted tax base.
DELAWARE TAXATION. As a Delaware holding company, Ottawa Financial is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. Ottawa Financial is
also subject to an annual franchise tax imposed by the State of Delaware.
COMPETITION
We face strong competition in originating loans and attracting
deposits. Competition comes from other commercial banks, other savings
institutions, credit unions, mortgage banking companies and other non-bank
financial services companies including insurance companies and investment firms.
Finance companies compete with us for consumer loan business.
We attract all of our deposits through AmeriBank's branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is
31
principally from other savings institutions, commercial banks, credit unions,
mutual funds and insurance companies. We compete for these deposits by offering
a variety of deposit accounts at competitive rates, convenient business hours,
and convenient branch locations with interbranch deposit and withdrawal
privileges. Automated teller machine facilities are also available at most of
AmeriBank's 26 locations.
Our six county market area has a strong base of financial institutions
and several of those competitors are much larger than we are in terms of total
deposits and number of branches. The largest commercial banks operating in the
market area are National City, Old Kent, Huntington Bank, NBD Bank and Michigan
National Bank. Despite the presence of significant competition, we have
demonstrated the ability to sustain positive deposit growth rates during the
past year. Growth of deposits can be attributed to a strong local economy,
customer loyalty and our local orientation.
EMPLOYEES
At December 31, 1998, we had a total of 310 employees, including 91
part-time employees. Our employees are not represented by any collective
bargaining group. Management considers our employee relations to be good.
EXECUTIVE OFFICERS OF OTTAWA FINANCIAL
DOUGLAS J. IVERSON. Mr. Iverson, age 49, was appointed, effective
January 1, 1999, Chief Executive Officer and Vice Chairman of the Boards of
Ottawa Financial and AmeriBank. Previously, he served as Executive Vice
President, Secretary and Chief Operating Officer of Ottawa Financial and
President and Secretary of AmeriBank. Mr. Iverson joined AmeriBank in 1972, and
has served in numerous capacities during such tenure.
RONALD L. HAAN. Mr. Haan, age 45, was appointed, effective January 1,
1999, President and Chief Operating Officer of Ottawa Financial and AmeriBank.
Previously, he served as Senior Vice President and Assistant Secretary of Ottawa
Financial and Executive Vice President and Assistant Secretary of AmeriBank. Mr.
Haan also serves as a director of Ottawa Financial and AmeriBank. Before joining
Ottawa Financial in February 1996, he was employed in 1989 as Executive Vice
President of AmeriBank Federal Savings Bank and in February 1990 was appointed
Chief Financial Officer. In December 1990, Mr. Haan was elected President, Chief
Administrative Officer and a director of AmeriBank Federal Savings Bank. Prior
to his employment at AmeriBank Federal Savings Bank, Mr. Haan was employed by
MetroBanc Federal Savings Bank of Grand Rapids, Michigan, from 1978 to 1987 as
Vice President, and from 1987 to 1989 at Comerica Bank, Grand Rapids, Michigan,
as Vice President and Regional Manager.
JON W. SWETS. Mr. Swets, age 33, is Vice President and Chief Financial
Officer of Ottawa Financial and Senior Vice President-Chief Financial Officer of
AmeriBank. He joined Ottawa Financial and AmeriBank in these capacities in
November 1996. Prior to joining Ottawa Financial and AmeriBank, Mr. Swets was a
Senior Manager with Crowe, Chizek and Company LLP, a large
32
public accounting firm. Mr. Swets joined Crowe, Chizek and Company LLP as a
staff accountant in June 1987.
ITEM 2. PROPERTIES
Our operations are conducted through AmeriBank's main office and 25
branches, including a "drive-up" facility. At December 31, 1998, we owned
AmeriBank's main office and 23 of its branch offices; the remaining two branch
offices and the land on which they are situated were leased. As of December 31,
1998, the net book value of our investment in premises, equipment and
leaseholds, excluding computer equipment, was approximately $13.6 million.
We maintain an on-line data base of depositor and borrower customer
information. The net book value of the data processing and computer equipment
and software utilized by Ottawa Financial at December 31, 1998 was $1.6 million.
33
ITEM 3. LEGAL PROCEEDINGS
Ottawa Financial is involved as plaintiff or defendant in various legal
actions arising in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with our counsel representing us in the
proceedings, that the resolution of these proceedings should not have a material
effect on our results of operations. See Note 11 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders attached as Exhibit 13
to this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The section entitled "Shareholder Information - Market" of the attached
Annual Report to Stockholders for year ended December 31, 1998 is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Selected Consolidated Financial Information" of
the attached Annual Report to Stockholders for year ended December 31, 1998 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the attached Annual Report to
Stockholders for year ended December 31, 1998 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The section entitled "Management Discussion of Financial Condition and
Results of Operations - Asset/Liability Management" of the attached Annual
Report to Stockholders for year ended December 31, 1998 is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The section entitled "Consolidated Financial Statements" of the
attached Annual Report to Stockholders for year ended December 31, 1998 is
incorporated herein by reference.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information concerning directors of Ottawa Financial is incorporated
herein by reference from the definitive proxy statement for the Annual Meeting
of Shareholders to be held in April 1999, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
Information concerning executive officers of Ottawa Financial is set
forth under the caption "Executive Officers of Ottawa Financial" contained in
Part I of this Form 10-K.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires Ottawa Financial's directors
and executive officers, and persons who own more than 10% of a registered class
of Ottawa Financial's equity securities, to file with the SEC reports of
ownership and reports of changes in ownership of common stock and other equity
securities of Ottawa Financial. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish Ottawa Financial with
copies of all Section 16(a) forms they file.
To Ottawa Financial's knowledge, based solely on a review of the copies
of such reports furnished to Ottawa Financial and written representations that
no other reports were required during the fiscal year ended December 31, 1998,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the Annual Meeting of
Shareholders to be held in April 1999, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Shareholder Return Performance Presentation", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held in April 1999,
except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Shareholders to be held in April 1999, except for information
contained under the heading "Compensation Committee Report on Executive
Compensation" and "Shareholder Return Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report:
(1) FINANCIAL STATEMENTS:
The following financial statements are included under Part II, Item 8
of this Form 10-K:
1. Report of Independent Auditors.
2. Consolidated Statements of Balance Sheet at December 31, 1998 and
1997.
3. Consolidated Statements of Income for the Years ended December 31,
1998, 1997 and 1996.
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows for the Years ended December
31, 1998, 1997 and 1996.
6. Consolidated Statements of Comprehensive Income for the Years ended
December 31, 1998, 1997 and 1996.
7. Notes to Consolidated Financial Statements.
8. Ottawa Financial Corporation Quarterly Financial Data.
36
(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
(3) EXHIBITS:
See Index to Exhibits.
(b) REPORTS ON FORM 8-K:
1. Ottawa Financial filed a Current Report on Form 8-K dated
November 13, 1998, containing a press release announcing the
retirement of Gordon L. Grevengoed as Vice Chairman of the
Board and President and Chief Executive Officer ("CEO") of
Ottawa Financial and AmeriBank. The press release also
announced the appointment of Douglas J. Iverson as CEO and
Vice Chairman of the Boards of Ottawa Financial and AmeriBank
and Ronald L. Haan as President and Chief Operating Officer of
Ottawa Financial and AmeriBank.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OTTAWA FINANCIAL CORPORATION
Date: March 30, 1999 By: /s/ Douglas J. Iverson
---------------------- ----------------------------
Douglas J. Iverson
Vice Chairman of the Board
and Chief Executive Officer
(DULY AUTHORIZED
REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Douglas J. Iverson By: /s/ Gordon H. Cunningham
-------------------------------------- ----------------------------
Douglas J. Iverson, Vice Chairman of Gordon H. Cunningham,
the Board and Chief Executive Officer Chairman of the Board
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 30, 1999 Date: March 30, 1999
--------------------- -------------------------
By: /s/ Ronald L. Haan By: /s/ Gordon L. Grevengoed
-------------------------------------- ----------------------------
Ronald L. Haan, President and Director Gordon L. Grevengoed,
Director
Date: March 30, 1999 Date: March 30, 1999
----------------------------------- -------------------------
By: /s/ Leon E. Koops By: /s/ Brian W. Koop
-------------------------------------- ----------------------------
Leon E. Koops, Director Brian W. Koop, Director
Date: March 30, 1999 Date: March 30, 1999
----------------------------------- -------------------------
By: /s/ Ronald J. Bieke By: /s/ B. Patrick Donnelly, III
-------------------------------------- ----------------------------
Ronald J. Bieke, Director B. Patrick Donnelly, III,
Director
Date: March 30, 1999 Date: March 30, 1999
----------------------------------- -------------------------
By: /s/ Robert D. Kolk By: /s/ G. W. Haworth
-------------------------------------- ----------------------------
Robert D. Kolk, Director G. W. Haworth, Director
Date: March 30, 1999 Date: March 30, 1999
----------------------------------- -------------------------
By: /s/ Jon W. Swets
--------------------------------------
Jon W. Swets, Vice President and
Chief Financial Officer (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
Date: March 30, 1999
-----------------------------------
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.
4 Registrant's Specimen Stock Certificate, filed on March 18,
1994 as an exhibit to Registrant's Registration Statement on
Form S-1 (File No. 33-76600), is incorporated herein by
reference.
10.1 Employment Agreement between the Registrant's operating
subsidiary and Douglas J. Iverson, filed on March 18, 1994 as
an exhibit to Registrant's Registration Statement on Form S-1
(File No. 33-76600), is incorporated herein by reference.
10.2 Employment Agreement between the Registrant's operating
subsidiary and Ronald L. Haan, filed as an exhibit to the
Registrant's Report on Form 10-K for the year ended December
31, 1995 (File No. 0-24118), is incorporated herein by
reference.
10.3 Registrant's Employee Stock Ownership Plan, filed on March 18,
1994 as an exhibit to Registrant's Registration Statement on
Form S-1 (File No. 33-76600), is incorporated herein by
reference.
10.4 Registrant's 1995 Stock Option and Incentive Plan, filed as an
exhibit to the Registrant's Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-24118), is incorporated
herein by reference.
10.5 Registrant's Recognition and Retention Plan, filed as an
exhibit to the Registrant's Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-24118), is incorporated
herein by reference.
11 Statement re: computation of per share earnings
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)