1998
Ottawa Financial Corporation / Ameribank
Report To Shareholders
[COVER PHOTO: CURRENTLY UNDER CONSTRUCTION IN MUSKEGON IS THE MERCY HEALTH
PAVILION WHICH WILL HOUSE MEDICAL OFFICES. MERCY HOSPITAL WILL LEASE THE
FACILITY FOR WHICH FINANCING IS BEING PROVIDED BY AMERIBANK. REVIEWING THE
PROJECT'S PROGRESS ARE FROM LEFT TO RIGHT, WILLIAM FETTIS AND DENNY CHERETTE OF
INVESTMENT PROPERTY ASSOCIATES AND LEE PANKRATZ, AMERIBANK'S CHIEF LENDING
OFFICER.]
Our Mission: Leadership Through Service
AmeriBank, a wholly-owned subsidiary of Ottawa Financial Corporation, is a
financial service organization offering a broad line of financial products and
services. AmeriBank delivers value to its shareholders, customers, employees and
the communities it serves through superior quality products and services,
visionary leadership, strong employee relations, solid performance and
profitable growth.
Ottawa Financial Corporation Officers Branch Office and ATM Locations Grand Rapids
Gordon H. Cunningham Holland/Zeeland Downtown Grand Rapids
Chairman of the Board, Attorney 190 Monroe Avenue, NW
Downtown Holland 616-559-1712
Douglas J. Iverson 245 Central Avenue
Vice Chairman and CEO 616-393-7141 Alpine (ATM)
3320 Alpine Avenue, NW
Ronald L. Haan Beechwood (ATM) 616-785-1000
President, COO and Secretary 180 Douglas Avenue
616-393-7180 Breton (ATM)
Jon W. Swets 2609 Breton Avenue, SE
Chief Financial Officer and Assistant Secretary Downtown Holland Drive-In (ATM) 616-956-7110
10 East 9th Street
616-393-7104 Byron Center (ATM)
2384 84th Street, SW
Ottawa Financial Corporation Board of Directors Downtown Zeeland 616-878-1573
146 East Main Street
Gordon H. Cunningham 616-772-2191 Cascade (ATM)
Chairman of the Board 6750 Cascade Road, SE
Attorney & Partner Hamilton (ATM) 616-949-5515
Cunningham Dalman, P.C. 4672 Pine Street
616-751-5101 Cutlerville (ATM)
Douglas J. Iverson 675 68th Street, SW
Vice Chairman and CEO Hudsonville (ATM) 616-827-1400
AmeriBank 2855 Port Sheldon Street, SW
616-669-4400 Grandville (ATM)
Ronald L. Haan 4495 Wilson Avenue, SW
President, COO and Secretary South Washington (ATM) 616-531-0700
AmeriBank 1000 South Washington Avenue
616-393-7065 Jenison (ATM)
Ronald J. Bieke 600 Baldwin Drive, SW
President West Ottawa (ATM) 616-457-3350
Arcadia BIDCO Corporation 392 136th Street
616-393-7103 Kentwood (ATM)
B. Patrick Donnelly, III 5300 Kalamazoo Avenue, SE
President Zeeland West (ATM) 616-281-5200
Productive Solutions, LLC 523 West Main Street
616-772-4800 Muskegon/North Lakeshore
Gordon L. Grevengoed
Retired Vice Chairman of the Board and CEO ATM Only Locations Downtown Muskegon
AmeriBank 880 First Street
Westshore Mall 616-726-4461
G. W. Haworth 12231 James Street, Holland
Founding Chairman Fremont (ATM)
Haworth, Inc. Hope College 211 W. Main Street
DeWitt Center, Holland 616-924-5600
Robert D. Kolk
President Haworth Inc. Grand Haven (ATM)
Mechanical Transplanter Co. Member Center, Holland 1600 S. Beacon Boulevard
616-846-1350
Brian Koop
Vice President and Senior Executive Hart (ATM)
JCI Institute 424 State Street
616-873-5607
Leon E. Koops
President North Muskegon (ATM)
Hamilton Distributing Company 621 Dykstra Road
616-744-4731
Roosevelt Park (ATM)
3145 Henry Street
616-759-3000
Terrace Street Drive-In (ATM)
877 Terrace Street
616-722-1371
Whitehall (ATM)
211 South Mears Avenue
616-894-5635
Ottawa Financial Corporation
245 Central Avenue
Holland, Michigan 49423
www.AmeriBank.net
AmeriBank
---------------------------
Ottawa Financial Corporation
TABLE OF CONTENTS
Our Mission: Leadership Through Service, Inside Front Cover
Letter To Our Shareholders, page 2
Commercial Banking: Consistent Approach Defines Success, page 4
Branch Banking: Expanding Services, Building Strong Relationships, page 6
Residential Mortgages: Realizing Gains in a Challenging Environment, page 8
AmeriPlan: A First Year Success Story, page 10
Gordon L. Grevengoed: A Tribute, page 12
Financial Charts, page 13
Selected Consolidated Financial Information, page 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 16
Report of Independent Auditors, page 28
Consolidated Balance Sheets, page 29
Consolidated Statements of Income, page 30
Consolidated Statements of Changes in Shareholders' Equity, page 31
Consolidated Statements of Cash Flows, page 32
Consolidated Statements of Comprehensive Income, page 33
Notes to Consolidated Financial Statements, page 34
Quarterly Financial Information, page 51
Shareholder Information, page 52
Officers and Directors, Inside Back Cover
Branch Office and ATM Locations, Inside Back Cover
Cover photo: Currently under construction in Muskegon is the Mercy Health
Pavilion which will house medical offices. Mercy Hospital will lease the
facility for which financing is being provided by AmeriBank. Reviewing the
project's progress are from left to right, William Fettis and Denny Cherette of
Investment Property Associates and Lee Pankratz, AmeriBank's Chief Lending
Officer.
OTTAWA FINANCIAL CORPORATION 1
[PICTURE OF DOUGLAS J. IVERSON, VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER OTTAWA
FINANCIAL CORPORATION]
Letter to our Shareholders
Dear Shareholders:
1998 was a year of strong financial performance for Ottawa Financial
Corporation. Our record earnings of $8.7 million for the year resulted in an 18%
improvement in earnings per share. We remain committed to the enhancement of
shareholder value. That commitment defines our strategic initiatives and
determines the products we provide, the services we offer and the people we
employ.
During 1998, we focused on expanding our business banking services and
promised to develop as a full financial service company. We have made
significant progress in both areas. We increased our commercial loan portfolio
by $71.1 million, representing 45% growth. We expanded our deposit customer base
by $39.0 million, with the largest increase in commercial deposit accounts. In
addition, our investment subsidiary contributed $597,000 in gross revenues to
noninterest income during the year. Our qualified staff, along with our new
commercial banking product lines such as account analysis, zero balance
accounts, sweep accounts and direct deposit-ACH origination, contributed heavily
to achieving these goals.
Our focus for 1999 is on the bottom line. Our goals for this upcoming year
include continuing to grow the loan portfolio. Our attention will be on the
higher yielding commercial and consumer lines of business. In addition, we are
analyzing opportunities for enhancing noninterest income, as well as evaluating
and implementing new initiatives for containing costs and improving
efficiencies. We are pleased about providing automated underwriting to our
mortgage banking customers and look forward to complete implementation of this
service in 1999. We are confident this technology will improve efficiencies in
our mortgage loan origination.
2 OTTAWA FINANCIAL CORPORATION
We have a strong loyalty to the local markets we serve and are excited to
introduce AmeriBank as the first co-sponsor of the Grand Rapids and Holland area
Parade of Homes. Historically, these parades combined have attracted over 30,000
individuals, builders, developers and realtors from Western Michigan. We are
encouraged that this opportunity will increase our presence in our market areas
and will enable us to attract new, and strengthen existing, customer
relationships.
As a financial service company, our operations are dependent on technology.
We have been committed to implementing the latest advances in technology, when
cost justified, for the benefit of our customers and internal efficiencies. With
the dependency on technology has come an intense public interest in preparing
for the year 2000, sometimes called Y2K. Our Y2K plan is on schedule and we have
been successfully preparing and testing all systems and affected areas in order
to provide a smooth transition into the year 2000.
It is with great admiration for his professional talents and personal
accomplishments that I wish to thank Gordon L. Grevengoed for his 42 years of
leadership and loyalty. Mr. Grevengoed, Vice Chairman, President and CEO
announced his retirement in November 1998. While Mr. Grevengoed will be leaving
the management of the company, we are pleased that he will be continuing to
assist in defining the direction of the corporation and the bank through his
service as a member of the Board of Directors. As a personal friend and
colleague, I would like to wish Gordon health and happiness in his well-deserved
retirement.
I am fortunate to be working along side of Ronald L. Haan, President and COO,
who is a highly talented and experienced financial executive. Both Ron and I, in
our newly appointed positions, are surrounded by a qualified management team.
This key group of gifted individuals will be instrumental in guiding your
company into the next millennium and delivering on our promise to improve
shareholder value.
On behalf of the Corporation, I would like to thank our employees for their
hard work and dedicated service, our customers for their loyalty and support,
and our shareholders for their allegiance and continued confidence. We are
committed to building shareholder value through continuous improvement in our
operations and look forward to an exciting year ahead.
Sincerely,
/s/ Douglas J. Iverson
Douglas J. Iverson
Vice Chairman and Chief Executive Officer
Ottawa Financial Corporation
OTTAWA FINANCIAL CORPORATION 3
LEADERSHIP THROUGH SERVICE
[PICTURE OF MICHAEL WEBSTER, SENIOR VICE PRESIDENT, COMMERCIAL LENDING --
CAPTION: AMERIBANK HAS DEVELOPED A REPUTATION IN THE AREA OF COMMERCIAL REAL
ESTATE, CONSTRUCTION, AND DEVELOPMENT LENDING BY SERVING THIS MARKET
CONSISTENTLY SINCE 1990.
-- MICHAEL WEBSTER
SENIOR VICE PRESIDENT,
COMMERCIAL LENDING]
COMMERCIAL BANKING:
CONSISTENT APPROACH DEFINES SUCCESS
Consistency. In a word, it captures the essence of AmeriBank's commercial
banking division. Whether describing service offerings, relationship building,
or caliber of staff, consistency is key to our continuing success in commercial
and business banking.
1998 was an outstanding year on all fronts. Our pledge to introduce a variety
of non-lending commercial products and services was fulfilled enabling AmeriBank
to better meet the present and future needs of our customers. The addition of
more sophisticated cash management services such as sweep accounts, business
credit cards, bank courier service and others aided in attracting new commercial
customers.
Cash management services go hand-in-hand with commercial lending which also
saw significant growth in 1998. Total outstanding commercial business and real
estate loans rose from $157 million to $228 million--an increase of 45 percent.
This portfolio includes commercial real estate, construction and development
loans, multi-family real estate loans, industrial real estate loans, equipment
and commercial vehicle loans and operating lines of credit. In addition, letters
of credit to support purchases, as well as taxable and tax-free bond issuances
are offered. Even with strong growth, asset quality has not diminished. The
findings of our independent loan review confirm that asset quality continues to
be very high.
A long-range goal is to restructure our loan portfolio evenly between
commercial, residential mortgage and consumer loans. Whereas commercial loans
represented 21 percent of our total loan portfolio at year-end 1997, they now
comprise 29 percent. This represents remarkable progress toward our goal which
will allow the bank to increase earnings at a comfortable level of risk.
Commercial lending, in particular, has benefited greatly from a consistent
approach. Michael Webster, Senior Vice President of Commercial Lending, says
AmeriBank has built a name for itself in the area of commercial real estate,
construction and development lending by serving this market consistently since
1990. "It's a lending discipline that takes longer to understand and properly
administer than others. We have seasoned professionals and we've been able to
attract additional talent because of our solid reputation."
These qualities have not gone unnoticed, particularly during this time of
bank mega-mergers. Says Webster, "We're dependable and consistent in a market
that hasn't seen much consistency."
In 1999, the commercial division will focus on growing its loan portfolio,
adding experienced lenders and delivering top-quality service to an expanding
customer base.
4 OTTAWA FINANCIAL CORPORATION
[PAGE 5 -- PICTURE]
[PICTURE OF JIM STUCK, GRANDVILLE BRANCH MANAGER --
CAPTION: PROVIDING QUALITY SERVICE IS ROOTED IN THE DEVELOPMENT OF STRONG
RELATIONSHIPS. AMERIBANK'S BRANCH BANKS FOCUS ON DEVELOPING CLOSE TIES WITH THE
PEOPLE AND COMMUNITIES THEY SERVE.
-- JIM STUCK
GRANDVILLE BRANCH MANAGER]
BRANCH BANKING:
EXPANDING SERVICES, BUILDING
STRONG RELATIONSHIPS
Today's consumers are seeking better and faster ways of meeting the demands of
daily living. Increasingly, technology is providing the solutions. At AmeriBank,
we continue to harness the power and ease of technological advances for the
benefit of our customers.
During the second quarter of 1998, we introduced AmeriCall 24TM. This
automated telephone service provides an extremely efficient way for AmeriBank
customers to access their accounts anytime, anywhere. Customers are able to
retrieve useful account and banking information as well as complete common
banking transactions such as transfers, advances, and payments. AmeriCall 24TM
has proven to be very popular for many of our customers. The volume of
transactions has steadily increased each month, with well over 1800 transactions
now received daily.
Fulfilling customer expectations through new and different products and
services tailored to their future needs will continue to be one of our corporate
objectives. Likewise, we continue to focus on the quality of service provided
and the building of relationships. Our slogan, "Friendly. Local. Smart."
summarizes these benefits.
These attributes come to life annually in a community service project called
StoryBook Christmas. Bank staff and customers pull together to collect thousands
of new and gently used books for distribution to West Michigan organizations who
then distribute them to children in need. During the 1998 holiday season,
AmeriBank's 26 branches collected over 8,700 books.
In Grand Rapids, the pediatric unit at St. Mary's Hospital received over 500
books--a portion of the books that were collected by the Grandville and Cascade
branch offices. "Our staff, customers and people from the community have all
supported this program with their enthusiasm and their contributions," Jim
Stuck, manager of AmeriBank's Grandville branch said. "We are pleased to be able
to help the kids by making their stay in the hospital a little more pleasant by
offering them a choice of books."
In all, more than 20 groups and organizations receive books collected during
the program. Storybook Christmas fulfills a need in our community while
strengthening the bond between customers and staff.
6 OTTAWA FINANCIAL CORPORATION
[PAGE 7 -- PICTURE]
[PICTURE OF CINDY MATTHEWS, MUSKEGON BRANCH MANAGER --
CAPTION: AMERIBANK'S MUSKEGON BRANCH HAD ITS BEST YEAR EVER IN WRITING
RESIDENTIAL MORTGAGES, CONTRIBUTING TO THE BANK'S RECORD-SETTING YEAR.
-- CINDY MATTHEWS
MUSKEGON BRANCH MANAGER]
RESIDENTIAL MORTGAGES:
REALIZING GAINS IN A CHALLENGING ENVIRONMENT
Our residential mortgage division saw record activity in 1998. We originated
$258 million in new loans. In addition, $2.4 million in gains on sales of
mortgage loans were generated from secondary market operations, representing a
significant increase in this type of noninterest income.
While the bank realized record loan activity, sales of those loans actually
caused the bank's outstanding residential mortgage portfolio to decline by 12
percent. This small decrease contributed favorably to the restructuring of our
loan portfolio which has as its goal, a more even distribution between
residential mortgage, consumer, and commercial loans. We made significant
progress toward this long-term goal in 1998. As a result of the residential
mortgage activities noted here, our total loan portfolio is now more evenly
balanced.
These results were largely affected by our low-rate environment and a highly
competitive marketplace characterized by a variety of loan options. To offset
these market forces, specialized expertise has been added to the Corporation's
staff to develop the consumer and commercial loan portfolios and other lines of
fee-generating business consistent with the Corporation's strategic plan.
During the second quarter, we saw the addition of a new title insurance
subsidiary which will complement our residential mortgage program. This new
subsidiary is expected to offer competitive title insurance products to our loan
customers while adding revenue to our bottom line.
Over the years, we have worked to build asset quality in our commercial and
consumer loan portfolio. The findings of our most recent, independent loan
review confirm that AmeriBank has been able to maintain a high level of asset
quality in the face of increasing loan activity. We are proud of this
achievement and pledge to continue to increase our portfolio with high quality
assets.
8 OTTAWA FINANCIAL CORPORATION
[PAGE 9 -- PICTURE]
[PICTURE OF DON VANDENBRINK, AMERIBANK FINANCIAL PLANNER --
CAPTION: AMERIPLAN HAS BEEN SUCCESSFUL NOT ONLY IN MEETING THE NEEDS OF EXISTING
BANK CUSTOMERS BUT ALSO IN ATTRACTING NEW CUSTOMERS. FORTY-FIVE PERCENT OF
AMERIPLAN'S BUSINESS IN 1998 CAME FROM NEW CUSTOMERS.
-- DON VANDENBRINK
AMERIBANK FINANCIAL PLANNER]
AMERIPLAN:
A FIRST YEAR SUCCESS STORY
Our evolution into a financial service organization offering a broad line of
financial products and services remained on target with the successful
introduction of AmeriPlan Financial Services, Inc. This new subsidiary--which
completed its first full year--assists customers with personal, long-term
financial planning and offers alternative investment products and services.
AmeriPlan met its first-year sales goals resulting in significant increases
in non-interest fee income for the Corporation. AmeriPlan attained profitability
during 1998 and contributed a total of $597,000 in gross revenues. The majority
of sales were mutual funds and annuities. Two additional services were added
late in the year. Long-term care insurance and wrap accounts are now available.
AmeriPlan's introduction has been met with strong interest among existing
customers and also has served as a magnet attracting new customers to the
Corporation. Don VandenBrink, financial planner serving the Holland area, says
45 percent of AmeriPlan's business came from new customers, resulting in a whole
new revenue source for the bank. VandenBrink attributes the positive response to
several factors including a high level of trust between customer and provider,
the ever increasing need for non-traditional bank products, and also
convenience. "Customers often comment that it is so great having one location
where they can have all of their financial needs met," says VandenBrink.
These accomplishments were consistent with our stated goals of attracting new
bank relationships, strengthening existing bank relationships and growing
non-interest fee income. AmeriPlan services are offered through three registered
individuals each serving one of the Bank's three primary regions: Grand Rapids,
Holland and Muskegon.
During 1999, AmeriPlan will continue to build on its client base while
offering a high level of customer service. To achieve this, additional staff
members will be added in the support area. We are extremely optimistic about our
future as a financial services organization and AmeriPlan's continued success.
10 OTTAWA FINANCIAL CORPORATION
[PAGE 11 -- PICTURE]
GORDON L. GREVENGOED: A TRIBUTE
In November 1998, Ottawa Financial Corporation announced the retirement of
Gordon L. Grevengoed, Vice Chairman, President and CEO. Grevengoed, who
continues to serve on the boards of both the Corporation and the Bank, says he
is very pleased to be leaving the management of the company in the hands of Doug
Iverson, Vice-Chairman and CEO, and Ron Haan, President and COO. "We are very
fortunate to have two very talented individuals to lead the company as we move
into the new millennium. Both men are experienced, extremely gifted and are well
regarded in their communities and in the financial arena."
Grevengoed joined Ottawa Savings and Loan Association in Holland in 1956. One
of five employees at the time, he worked as a teller and took loan applications.
In reflecting on his 42 years in banking, he noted that it has been change that
has added excitement to his work. Change may be an understatement. From it's
humble beginnings as a single branch, Ottawa Savings Bank grew to 13 branches
and 190 employees before its merger in February 1996 with AmeriBank. Grevengoed
orchestrated the merger which combined Ottawa Savings Bank and AmeriBank under
the parent company, Ottawa Financial Corporation. Since then, under Grevengoed's
capable leadership, AmeriBank has grown to include 326 employees and 26 bank
locations in 6 west Michigan counties. Assets have appreciated by more than 32
percent to almost a billion dollars.
Grevengoed says his immediate retirement plans call for spending more time
with his wife Marilyn, their fourteen grandchildren, doing Christian service
work and playing golf and tennis. He said he knows he will have plenty of
opportunities to stay involved in the community, but he plans to take his time
deciding just what he will do.
12 OTTAWA FINANCIAL CORPORATION
FINANCIAL CHARTS
[BAR GRAPH: [BAR GRAPH: [BAR GRAPH:
RETURN ON EQUITY EARNINGS PER SHARE NET INTEREST MARGIN
PERCENTAGE DOLLARS PER SHARE PERCENTAGE
1994 - 6.38 1994* - .21 1994 - 4.17
1995 - 4.62 1995 - .57 1995 - 4.44
1996*- 6.83 1996**- .86 1996 - 3.50
1997 - 9.93 1997 - 1.22 1997 - 3.37
1998 - 11.49 1998 - 1.44 1998 - 3.26]
*ADJUSTED TO REMOVE ALL PER SHARE INFORMATION
THE IMPACT OF THE HAS BEEN ADJUSTED TO
ONE-TIME SAIF REFLECT THE 10% STOCK
ASSESSMENT.] DIVIDENDS PAID ON AUGUST 31,
1998 AND SEPTEMBER 30, 1997
*BASED UPON EARNINGS
SUBSEQUENT TO STOCK
CONVERSION IN AUGUST 1994.
**ADJUSTED TO REMOVE THE
IMPACT OF THE ONE-TIME SAIF
ASSESSMENT.]
[BAR GRAPH: [BAR GRAPH: [BAR GRAPH:
TOTAL ASSETS RETURN ON ASSETS NON-PERFORMING
MILLIONS OF DOLLARS PERCENTAGE ASSETS TO TOTAL
ASSETS
PERCENTAGE
1994 - 328 1994 - 1.03 1994 - .36
1995 - 370 1995 - 1.08 1995 - .76
1996 - 848 1996*- .72 1996 - .36
1997 - 886 1997 - .87 1997 - .36
1998 - 938] 1998 - .94 1998 - .43]
*ADJUSTED TO REMOVE THE IMPACT
OF THE ONE-TIME SAIF ASSESSMENT.]
OTTAWA FINANCIAL CORPORATION 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
The following financial data summarizes more detailed financial
information disclosed throughout this report.
December 31, 1998 1997 1996(1) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
Total assets $ 938,030 $ 885,817 $ 848,306 $ 370,305 $ 328,461
Loans receivable, net 769,770 747,423 715,551 276,457 230,818
Securities and Federal Home Loan Bank stock 83,428 64,616 69,864 66,926 73,577
Deposits 693,632 654,560 622,492 243,220 231,321
Federal Home Loan Bank advances 160,268 145,458 139,170 43,241 13,579
Shareholders' Equity 73,407 76,363 76,917 79,560 78,593
Selected Operations Data:
Total interest income $ 67,904 $ 64,726 $ 54,669 $ 25,579 $ 20,799
Total interest expense 40,012 37,704 30,531 11,321 9,182
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 27,892 27,022 24,138 14,258 11,617
Provision for loan losses 930 660 564 160 170
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 26,962 26,362 23,574 14,098 11,447
Service charges and other fees 4,749 3,356 3,042 2,219 1,870
Gain on sales of loans 2,398 370 141 309 110
Other noninterest income (loss) 664 420 145 (435) (121)
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 7,811 4,146 3,328 2,093 1,859
Total noninterest expense(2) 21,092 18,708 21,844 10,651 8,999
- -----------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 13,681 11,800 5,058 5,540 4,307
Income tax expense 5,013 4,273 1,964 1,911 1,308
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094 $ 3,629 $ 2,999
===================================================================================================================================
Basic earnings per common share(3) $ 1.59 $ 1.33 $ .51 $ .57 $ .21
===================================================================================================================================
Diluted earnings per common share(3) $ 1.44 $ 1.22 $ .49 $ .57 $ .21
===================================================================================================================================
Cash dividends declared per common share(3) $ .39 $ .33 $ .28 $ .25 $ .05
===================================================================================================================================
(1) Significant variation from prior years due primarily to the acquisition of
AFSB in February 1996 (see Note 2 of the Notes to the Consolidated
Financial Statements).
(2) Noninterest expense for 1996 includes the one-time SAIF assessment of $3.5
million (see Note 17 of the Notes to the Consolidated Financial
Statements).
(3) Weighted average common shares outstanding for 1998, 1997, 1996, 1995 and
1994 were 5,436,541, 5,665,441, 6,108,202, 6,321,098 and 6,320,267
respectively. Weighted average common and dilutive potential common shares
outstanding for 1998, 1997, 1996, 1995 and 1994 were 6,027,849, 6,169,966,
6,254,124, 6,359,382 and 6,320,267, respectively. All share and per share
information has been retroactively adjusted to reflect the 10% stock
dividends paid on August 31, 1998 and September 30, 1997, and the adoption
of Statement of Financial Accounting Standards No. 128, Earnings per Share.
14 OTTAWA FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets .94% .87% .41% 1.08% 1.03%
SAIF adjusted(2) .72
Average interest rate spread during period 2.89 3.01 3.08 3.31 3.53
Net interest margin(1) 3.26 3.37 3.50 4.44 4.17
Ratio of operating expense to
average total assets 2.28 2.15 3.06 3.16 3.14
SAIF adjusted(2) 2.56
Efficiency(3) 63.19 61.13 79.56 65.14 66.78
SAIF adjusted(2) 66.75
Return on equity 11.49 9.93 3.93 4.62 6.38
SAIF adjusted(2) 6.83
Quality Ratios:
Non-performing assets to
total assets at end of period 0.43 0.36 0.36 0.76 0.36
Allowance for loan losses to
non-performing loans 119.51 118.62 109.89 51.38 109.78
Allowance for loan losses to
total loans receivable, net 0.49 0.44 0.44 0.45 0.48
Capital Ratios:
Equity to total assets at end of period 7.83 8.62 9.07 21.48 23.92
Average equity to average assets 8.15 8.73 9.09 22.62 16.15
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.08x 1.07x 1.10x 1.32x 1.19x
Number of full service offices 26 26 26 13 13
(1) Net interest income divided by average interest-earning assets.
(2) Ratio is revised to remove the impact of the one-time SAIF assessment of
$3.5 million expensed in 1996 (see Note 17 of the Notes to Consolidated
Financial Statements).
(3) Ratio of noninterest expense to the total of net interest income before
provision for loan losses and noninterest income net of gains and losses on
sales of assets.
OTTAWA FINANCIAL CORPORATION 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read with the consolidated
financial statements attached. The financial statements reflect the consolidated
financial condition and results of operations of Ottawa Financial Corporation
and its wholly-owned subsidiary, AmeriBank.
General
Ottawa Financial Corporation recorded recorded earnings in 1998. Improvements in
net interest income and noninterest income contributed heavily to the growth in
earnings. Our focus on developing our business banking services, as well as
healthy loan demand in our market area, enabled us to increase the commercial
business and real estate loan portfolio. This portfolio, which includes
commercial real estate loans, construction and development loans, multi-family
real estate loans, industrial real estate loans, equipment and commercial
vehicle loans, and operating lines of credit grew by $71.1 million, representing
a 45% growth rate.
The recent mergers in our local market area and our promise to become a full
financial service company have enabled us to expand and diversify our customer
base. Deposits are up $39.0 million from 1997, with the largest increase in
commercial deposit accounts. Through our 26 retail banking offices in Western
Michigan, we began offering a number of new products and services during 1998.
These included special services for our business banking customers such as
account analysis, zero balance accounts, sweep accounts and direct deposit-ACH
origination; title insurance to our loan customers through our new title
insurance subsidiary; as well as "AmeriCall 24" for all of our deposit
customers.
Our new subsidiary, AmeriPlan Financial Services, Inc., assists customers
with their personal financial planning and offers a variety of investment and
insurance products. We have added specialized expertise to our staff to develop
this new line of fee generating business consistent with our strategic plan. The
benefit of this investment in resources is reflected in the growth in fee income
on sales of mutual funds and annuities. This investment subsidiary has
contributed $597,000 in gross revenues to noninterest income during 1998.
Financial Condition
Total assets increased to $938.0 million at December 31, 1998 from $885.8
million at December 31, 1997. Loans and securities experienced the most growth.
Proceeds received from the growth in deposits and FHLB advances funded the
increase in assets.
Securities increased to $71.6 million at December 31, 1998 from $57.3 million
at December 31, 1997. As interest rates declined during the year, a large
portion of our agency securities were called by the issuers. With these proceeds
and other funding sources, we invested in non-callable agency securities and
adjustable rate securities. We invested in non-callable agency securities to
reduce the risk of having to reinvest in lower yielding securities during a
falling interest rate environment as a result of the issuers exercising their
call option and invested in adjustable rate securities to manage interest rate
risk.
Net loans receivable increased to $769.8 million at December 31, 1998 from
$747.4 million at December 31, 1997. The commercial business and commercial real
estate portfolio grew by 45%, while the consumer portfolio grew by 8%. Our focus
on the development of our commercial and business banking services, as well as
healthy loan demand in our market area, provided for this growth.
The one-to-four family mortgage loan portfolio decreased by 12% during 1998
even though the volume of loans originated increased dramatically. The volume of
residential mortgage loans originated for sale increased from $45.4 million in
1997 to $151.4 million in 1998. We achieved this growth from the significant
increase in refinancing activity resulting from the decline in mortgage interest
rates during 1998, as well a change in our method of pricing mortgage loans to
be sold. During the third quarter of 1997, we offered more competitive rates to
our customers by implementing more sophisticated pricing tools. We sell almost
16 OTTAWA FINANCIAL CORPORATION
all of our 15 and 30 year term fixed rate mortgage production and retain for our
portfolio adjustable rate mortgage production. A significant portion of our
adjustable portfolio refinanced to fixed rate during 1998. We then sold these
fixed rate loans causing the overall decrease in our mortgage portfolio.
The increase in both net loans receivable and origination of loans for sale
reflects the continued healthy loan demand in our market area. We were well
positioned with our loan products to capitalize on this demand. The growth was
achieved while maintaining rates consistent with our competitors and maintaining
credit quality standards.
Deposits increased to $693.6 million at December 31, 1998 from $654.6 million
at December 31, 1997. Business checking and money market savings accounts
experienced the most growth. The growth in these areas compensated for a decline
in certificates of deposit of $7.5 million. Much of the longer term certificates
of deposit that matured during the year did not roll over into new certificate
of deposit accounts likely due to the low interest rate environment. Due to the
low rates being offered on wholesale funding sources, we increased our use of
Federal Home Loan Bank advances in funding the growth in the loan and security
portfolios.
The primary components of growth in shareholders' equity for 1998 related to
net income, as well as proceeds received from the exercise of stock options and
warrants. These increases were more than offset by quarterly cash dividends
declared and additional repurchases of the Corporation's outstanding shares of
common stock. During 1998, we repurchased 551,495 shares of common stock at an
average price of $24.73 per share. Stock repurchases are an important part of
our capital management and are used to supplement asset growth in achieving our
desired capital levels. We will continue to repurchase stock as long as it
positively affects our financial performance and does not jeopardize safe and
sound capital levels. As such, stock repurchase activity may diminish if growth
in assets continues.
As of December 31, 1998, 444,431 outstanding warrant certificates were
exercisable into 537,762 shares of Ottawa's common stock. At the exercise price
of $14.46 per share, this would have resulted in proceeds of $7.8 million. After
careful consideration and evaluation, the management and Board of Directors of
Ottawa Financial Corporation determined it was in the best interests of the
Company to make an exchange offer for the outstanding warrants. We offered to
exchange for each outstanding warrant, at the holder's option, either .44 shares
of common stock or $10.03 in cash. The purpose of the exchange was to reduce the
amount of cash received and the number of shares of common stock that could be
issued pursuant to an exercise of the warrants. We believed we had adequate
capital for our current and foreseeable operations and did not believe we could
adequately leverage the funds that would be received upon exercise of the
warrants in a manner consistent with our business objectives. We determined that
the offer to exchange the warrants for common stock or cash would limit the
receipt of excess capital and the number of shares issuable upon exercise of the
warrants and best utilize our capital base to maximize value to our
shareholders. As of January 26, 1999, the expiration date of the exchange offer,
we accepted tenders for approximately 86% of our outstanding warrants. In
connection with this exchange, we issued 164,181 shares of Ottawa Financial
Corporation common stock and paid $90,130 in cash. The remaining 14% of the
warrants were exercised by the date of the warrant plan expiration, resulting in
additional capital of $900,000.
On August 31, 1998, we paid a 10% stock dividend, the second stock dividend
declared by the corporation. We have not reduced the amount of the cash
dividends as a result of the stock dividend. All share and per share amounts
have been retroactively adjusted to reflect the stock dividends paid on August
31, 1998 and September 30, 1997.
OTTAWA FINANCIAL CORPORATION 17
Results of Operations
Comparison of 1998 to 1997
Net income. Net income for 1998 was $8.7 million, or $1.44 per diluted common
share, compared to $7.5 million, or $1.22 per diluted common share for 1997.
Diluted earnings per share increased $.22, or 18%, for the year ended December
31, 1998 compared to 1997. The growth in noninterest income and, to a lesser
extent, the increase in net interest income provided the improvement in
earnings. Increases in the provision for loan losses and noninterest expenses
partially offset the improvements in earnings.
In 1996, we introduced a measure we refer to as "cash" or "tangible" earnings
per share. Due to significant differences in methods of accounting for business
combinations, the concept of cash or tangible earnings per share provides
comparability between companies using different methods. Amortization of
goodwill and core deposit intangibles, which are non-cash components of net
income, are added back to earnings in computing cash or tangible earnings per
share. Further, Employee Stock Ownership Plan and Management Recognition Plan
expenses are added back as these items also do not involve actual current period
cash outflow. Cash or tangible earnings per share also serves as an alternative
measure for determining the rate of growth in regulatory (tangible) capital.
Since the amortization of goodwill and core deposit intangibles and expenses
related to the Employee Stock Ownership Plan and Management Recognition Plan do
not reduce tangible capital, these items are added back to earnings in
evaluating tangible capital growth. Our diluted cash or tangible earnings per
share under this method was $1.83 for the year ended December 31, 1998, compared
to $1.58 for 1997, showing a 16% improvement. Since we specifically formulated
the calculations for cash or tangible earnings per share, the calculations may
not be comparable to similarly titled measures reported by other companies. This
measure is not intended to reflect cash flow per share.
Return on equity for 1998 was 11.49% compared to 9.93% for 1997. The 16%
improvement in return on equity was primarily attributable to the improved
earnings. In addition, our stock buyback activity also positively impacted
return on equity.
Net Interest Income. Our net income is primarily dependent upon net interest
income. Net interest income is a function of the difference, or margin between
the average yield earned on loans and investment securities and the average rate
paid on deposits and other borrowings, as well as relative amounts of these
assets and liabilities. The interest margin is affected by economic and
competitive factors that influence interest rates, loan demand and deposit
flows.
Net interest income increased $811,000 on a tax equivalent basis for the year
ended December 31, 1998 as compared to the same period in 1997. The volume
increases in interest-earning assets caused by internal growth experienced in
1998 and late 1997 increased net interest income. Despite the significant
decline in general market interest rates during 1998, the yield on total
interest-earnings assets experienced only a slight decline. This is attributable
to the change in the composition of our loan portfolio to higher yielding
commercial loans during 1998. The stable composition of our interest-bearing
liabilities, accompanied by the offsetting affects of the general decline in the
cost of deposits compared to the small increase in the cost of Federal Home Loan
Bank advances, resulted in a minor decline in the cost of interest-bearing
liabilities. Together, the decline in the yield on interest-earning assets,
offset with the small decline in the cost of interest-bearing liabilities,
resulted in a decline in the net interest spread from 3.01% in 1997 to 2.89% in
1998. While the rates on deposit accounts have generally decreased since 1997,
the cost of certificate of deposit accounts increased to 5.67% for 1998 compared
to 5.61% for 1997. This increase in cost of certificates of deposit is almost
entirely due to the decrease in amortization of the purchase accounting
adjustment relative to certificate accounts obtained in the acquisition of the
former AmeriBank, FSB in early 1996. Amortization of this purchase accounting
adjustment was an offset to interest expense. The reduction in net interest
margin from 3.37% in 1997 to 3.26% in 1998 is primarily attributable to the
spread decline discussed above.
18 OTTAWA FINANCIAL CORPORATION
Our strategy during 1999 will be to continue to grow the loan portfolio and
alter the composition to increase our percentage of higher yielding commercial
and consumer loans in relation to the total loan portfolio. It is anticipated
this shift may continue to have a positive impact on net interest income and the
overall yield on interest-earning assets, but may also result in additional
provisions for loan losses as a result of the greater inherent risks associated
with commercial and consumer lending compared to residential mortgage lending.
Interest rate spreads on the growth likely will tighten due to the current
interest rate environment and the cost of funding sources.
Average Balances, Interest Rates and Yields
This table presents the amount of interest income from average interest-earning
assets and the yields earned on those assets, as well as the interest expense on
average interest-bearing liabilities and the rates paid on those liabilities.
All average balances are daily average balances.
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average
Out- Interest Out- Interest Out- Interest
standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- -----------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Loans receivable(1)(2) $778,282 $62,687 8.05% $732,927 $59,994 8.19% $605,563 $49,036 8.10%
Securities(2) 60,513 3,859 6.38 56,635 3,787 6.68 75,850 5,037 6.64
Other interest-earning assets 19,119 1,425 7.46 15,754 1,071 6.80 11,378 733 6.44
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets(1) 857,914 67,971 7.92 805,316 64,852 8.05 692,791 54,806 7.91
Interest-Bearing Liabilities:
Demand and NOW deposits 173,322 6,517 3.76 149,909 5,823 3.89 127,574 4,518 3.54
Savings deposits 59,485 1,125 1.89 65,678 1,551 2.37 68,590 1,735 2.53
Certificate accounts 401,026 22,741 5.67 393,757 22,024 5.61 341,795 18,803 5.50
FHLB advances 160,533 9,591 5.97 140,746 8,293 5.91 94,269 5,451 5.78
Other interest-bearing liabilities 663 38 5.73 184 13 7.07 248 24 9.68
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 795,029 40,012 5.03 750,274 37,704 5.04 632,476 30,531 4.83
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $27,959 $27,148 $24,275
=============================================================================================================================
Net interest rate spread 2.89% 3.01% 3.08%
=============================================================================================================================
Net earning assets $62,885 $55,042 $60,315
=============================================================================================================================
Net yield on average
interest-earning assets 3.26% 3.37% 3.50%
=============================================================================================================================
Average interest-earning assets to
average interest-bearing liabilities 1.08x 1.07x 1.10x
=============================================================================================================================
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Tax-exempt interest on loans and securities has been converted to a
fully-taxable equivalent basis.
OTTAWA FINANCIAL CORPORATION 19
Rate/Volume Analysis of Net Interest Income
This table presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). Changes attributable to both
rate and volume which cannot be segregated have been allocated proportionately
to the change due to volume and the change due to rate.
Year Ended December 31 1998 vs. 1997 1997 vs. 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total Increase (Decrease) (Decrease) Total Increase
Due To Volume Due To Rate (Decrease) Due To Volume Due To Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 3,632 $ (940) $ 2,692 $ 10,420 $ 538 $ 10,958
Securities 222 (150) 72 (1,285) 35 (1,250)
Other interest-earning assets 244 111 355 296 42 338
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,098 (979) 3,119 9,431 615 10,046
Interest-bearing liabilities:
Demand and NOW deposits $ 873 $ (179) $ 694 $ 840 $ 465 $ 1,305
Savings deposits (137) (289) (426) (72) (112) (184)
Certificate accounts 410 307 717 2,902 319 3,221
FHLB advances 1,181 117 1,298 2,737 105 2,842
Other interest-bearing liabilities 27 (2) 25 (5) (6) (11)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,354 (46) 2,308 6,402 771 7,173
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,744 $ (933) $ 811 $ 3,029 $ (156) $ 2,873
==================================================================================================================================
Provision for Loan Losses. Management's periodic analysis of the adequacy of the
allowance for loan losses determines the provision for loan losses. The
provision was $930,000 in 1998 compared to $660,000 in 1997. The ratio of
non-performing assets, consisting of loans 90 days or more delinquent and
foreclosed assets, to total assets was .43% as of December 31, 1998 compared to
.36% as of December 31, 1997. The ratio of the allowance for loan losses to
total loans receivable was .49% as of December 31, 1998 compared to .44% as of
December 31, 1997. The increase in the provision was primarily for the purpose
of growing the allowance for loan loss balance to keep pace with loan growth.
The increase was also in response to the shift in the mix of the loan portfolio
from mortgage loans to commercial and consumer loans and the higher risk of loss
associated with these loans. We anticipate we will increase the allowance for
loan loss balance in future periods as we continue to increase these commercial
and consumer loan portfolios.
We maintain the allowance for loan losses at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations, including their financial position and collateral values, and other
factors and estimates, which are subject to change over time. Although the level
20 OTTAWA FINANCIAL CORPORATION
of non-performing assets is considered in establishing the allowance for loan
losses balance, variations in non-performing loans have not been meaningful
based on our past loss experience and, as such, have not had a significant
impact on the overall level of the allowance for loan losses.
While we consider the allowance for loan losses to be adequate to provide for
potential losses, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Financial Institutions Bureau and
the Federal Deposit Insurance Corporation review the allowance for loan losses
as part of their examination process. These regulatory agencies may require
additional general or specific allowances based upon their judgement of the
information available to them at the time of their examination.
Noninterest Income. Noninterest income for 1998 was $7.8 million compared to
$4.1 million for 1997. Increased sales and realizations of gains on sales of
mortgage loans, along with fees on sales of mutual funds and annuities, have
significantly increased noninterest income. In addition, increases in deposit
account service fees contributed to the growth in noninterest income. During the
third quarter of 1997, we modified deposit fee structures to achieve more
consistency between AmeriBank and AFSB. Savings accounts that fell below a
minimum balance and checking accounts that had cancelled checks returned to
customers with monthly bank statements were assessed fees.
Noninterest Expense. Noninterest expense increased to $21.1 million for 1998
compared to $18.7 million for 1997. Employee related costs, a portion of which
relates to the increased expense of the Employee Stock Ownership Plan due to the
higher market value of our stock, increased noninterest expense. Further, we
added specialized expertise to our staff to develop the commercial and consumer
loan portfolios and other lines of fee generating business consistent with our
strategic plan. The benefits of these investments in resources have been
reflected in the growth in the commercial business and real estate loan
portfolio and the increases in fee income on sales of mutual funds and
annuities.
Income Tax Expense. The increase in the income tax expense from $4.3 million in
1997 to $5.0 million in 1998 is due to the higher pre-tax income for the year.
Year 2000 Issue. The year 2000 ("Y2K") issue relates to the inability of
computer systems to recognize the year 2000. Processing problems could result
from existing computer programs and systems misinterpreting the year 2000 as the
year 1900. The financial institutions industry could be significantly impacted
by the Y2K issue due to our dependence on technology and date-sensitive data. If
systems cannot identify the year 2000, calculations that rely on date field
information, such as interest, payment or due dates and other operating
functions, could create incorrect information. We may be unable to process
transactions, prepare statements or engage in similar normal business
activities. Similarly, a failure to properly address the Y2K issue could
negatively impact our ability to interact with our suppliers and creditors, as
well as to adequately assess the creditworthiness of our borrowers. Therefore,
if not adequately addressed, the Y2K issue could have a significant adverse
impact on our operations and, in turn, our financial condition and results of
operations.
Financial institution regulators are increasing their focus on Y2K compliance
issues. The Federal Financial Institutions Examination council issued several
statements on Y2K Project Management Awareness. These statements require us to
examine the potential impact of the Y2K issue on our customers, suppliers and
borrowers. These statements also require us to assess our exposure, measure our
risk and prepare a plan to address the Y2K issue.
Our Y2K assessment began in late 1997 when an action plan was developed and
approved by our Board of Directors. We created a "Y2K Task Force" to work with
associates corporate-wide to prepare for Y2K. This task force has identified all
areas that may be affected by the coming millenium. These areas include (i)
OTTAWA FINANCIAL CORPORATION 21
information technology systems, such as our data processor and other proprietary
and vendor supported business applications (ii) non-information technology
systems, such as facilities and related building services, for example,
utilities, security systems, general business equipment and non-computer office
equipment; and (iii) business relationships, for example, borrowers and
suppliers. Our Computer and Network Department, as well as our Technology
Committee, have been testing our information and non-information technology
systems to assess Y2K compliance. If an area is not validated as Y2K compliant,
then updates are made to become Y2K compliant.
The phases of our Y2K plan and the status of completion are discussed below.
1. Awareness: We defined the Y2K problem and identified the resources to perform
compliance work. We formed a Y2K task force and developed a strategy for
identifying areas that may be affected by Y2K. We completed this phase in
September 1997.
2. Assessment: We evaluated the complexity of the Y2K issue and detailed the
effort necessary to address the issues. This phase identified all areas that
may be affected by the Y2K date change. We went beyond obvious information
systems such as hardware, software, networks and automated teller machines
and included environmental systems that are dependent on embedded microchips,
such as security systems, elevators and vaults. We categorized items into
three main areas: mission critical, non-mission critical and miscellaneous.
We then assigned all items identified to individuals throughout the
Corporation. We completed this phase in June 1998.
3. Renovation: This phase included code enhancements, hardware and software
upgrades, system replacements, vendor certifications and other similar
changes. We prioritized this work based on information gathered during the
assessment phase. Where we rely on third party vendors, we obtained
certifications verifying Y2K compliance. Where certifications could not be
obtained, alternative options were identified for all important banking
functions. We completed this phase in December 1998.
4. Validation: We are testing the incremental changes to hardware and software
components. In addition to testing the upgraded components, we are verifying
connections with other systems. We are establishing controls to assure
effective and timely completion of all hardware and software testing prior to
final implementation. As with the renovation phase, we will continue
discussions with vendors regarding the success of their validation efforts.
We expect to complete this phase by March 31, 1999.
5. Implementation: We will certify systems as Y2K compliant. For any system
failing certification, we will assess the effect on our operations and
implement our contingency plans. Any mission-critical system that is
potentially non-compliant will be immediately resolved. In addition, this
phase will ensure that any new systems or subsequent changes to verified
systems are Y2K compliant. We expect to complete this phase by June 30, 1999.
We are expensing all costs associated with required system changes as they
occur. These costs are being funded through operating cash flows. We estimate
the total cost of our Y2K conversion project will be $350,000, net of income
taxes. We do not expect significant increases in future data processing costs
relating to Y2K compliance.
The software program that processes and tracks customer account information
is the most significant component of our computer system. This software is the
ITI Premier Financial Information System that is used by 3,500 banks across the
country and has been certified as Y2K compliant. This is relatively new software
that was written to include four digits for the year calculations and therefore
does not require its language to be rewritten. An outside service bureau runs
this software for us. Since we are in the process of converting to a new service
bureau, we have not yet completed the Y2K compliance testing on our network.
22 OTTAWA FINANCIAL CORPORATION
However, the service bureau itself is certified as Y2K compliant and has
verified compliance for other clients it services. We expect to complete the
testing on our network by March 31, 1999.
While our Y2K readiness process is proceeding according to plan, as a
precaution, we developed a contingency plan for each of our mission critical
systems during the assessment phase. Since most of our mission critical systems
are dependent on third party vendors or service providers, our contingency plan
is to select a new vendor or service provider and convert to their system. We
have secured alternative sources or services for mission critical areas for
which we did not receive a satisfactory response by January 31, 1999. We will
seek alternative sources or services for non-mission critical areas for which we
do not receive a satisfactory response by June 30, 1999. We also developed
contingency plans in the event of physical disaster including power outage
and/or telecommunication system outages. We assigned responsibilities regarding
final preparation to individuals within each department. In addition, we
identified a centralized location to accomplish communications and data
processing under various disaster conditions.
Comparison of 1997 to 1996
Net income. Net income for 1997 was $7.5 million compared to $3.1 million for
1996. The one-time assessment of $3.5 million to recapitalize the Savings
Association Insurance Fund is included in net income for 1996. Net income for
1996 would have been $5.4 million without this assessment. Growth in net
interest income and improvements in efficiency contributed to the increase in
net income.
Diluted earnings per share for 1997 was $1.22 compared to $.49 for the prior
year. Diluted earnings per share would have been $.86 for 1996 if the effect of
the $3.5 million assessment was removed from earnings. The improvement in net
interest income and Ottawa's stock repurchase activity positively impacted
earnings per share. Our tangible earnings per share was $1.58 for 1997, compared
to a tangible earnings per share of $.99 for 1996, as adjusted for the effect of
the special Savings Association Insurance Fund assessment.
Return on equity increased from 6.83% in 1996 to 9.93% in 1997. The improved
earnings resulting from the growth in assets in 1996 and 1997, along with our
stock repurchases, increased return on equity.
Net Interest Income. Net interest income increased $2.9 million on a tax
equivalent basis for the year ended December 31, 1997 compared to the same
period in 1996. Volume increases resulting from the AFSB acquisition and
internal growth experienced during 1996 and 1997 increased net interest income.
While net interest income increased, the net interest spread declined from 3.08%
in 1996 to 3.01% in 1997. The increase in the loan portfolio as a percent of
total interest-earning assets, as well as a general rise in the rates of
interest-earning assets, improved the yield on interest-earning assets. The
increase in Federal Home Loan Bank advances as a percent of total
interest-bearing liabilities, a shift in mix from lower costing demand deposit
and savings accounts to higher costing money market demand and savings accounts,
as well as a general rise in the rates of interest-bearing liabilities,
increased the cost of interest-bearing liabilities. The improvement in the yield
on interest-earning assets, however, was more than offset by the increase in the
cost of interest-bearing liabilities, resulting in a decline in the net interest
spread. This spread decline, along with Ottawa becoming more leveraged through
acquisition and internal growth, reduced net interest margin from 3.50% in 1996
to 3.37% in 1997. The ratio of average interest-earnings assets to average
interest-bearing liabilities, which declined from 1.10x in 1996 to 1.07x in
1997, illustrates our increase in leveraging.
OTTAWA FINANCIAL CORPORATION 23
Provision for Loan Losses. The provision for loan losses was $660,000 for 1997
and $564,000 for 1996. The ratio of non-performing assets, consisting of loans
90 days or more delinquent and foreclosed assets, to total assets was .36% as of
both December 31, 1997 and 1996. The ratio of allowance for loan losses to total
loans receivable was .44% as of both December 31, 1997 and 1996. While the risk
profile of the loan portfolio did not change dramatically, we increased the
provision so the allowance for loan loss balance kept pace with the loan growth.
Noninterest Income. Noninterest income increased from $3.3 million in 1996 to
$4.1 million in 1997. Enhancements in deposit account service fees that were
implemented during the third quarter of 1997 to achieve more consistency in fee
structures between AmeriBank and AFSB improved noninterest income. The increase
in deposit account service fees was complimented by increases in gains on sales
of mortgage loans and gains on sales of equity securities.
Noninterest Expense. Noninterest expense decreased from $21.8 million for 1996
to $18.7 million for 1997. The one-time SAIF assessment in 1996 of $3.5 million,
as well as declines in FDIC deposit insurance, data processing and professional
services, decreased noninterest expense. Increases in compensation and benefits
partially offset these decreases.
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund, requiring us to pay a one-time special
assessment of $3.5 million. The decrease in the FDIC deposit insurance reflects
the lower charge of 6.5 cents per $100 of domestic deposits in 1997 versus the
23 cents per $100 of domestic deposits in 1996.
We underwent an electronic data processing conversion in 1996. The conversion
itself required substantial outside consulting services, resulting in
approximately $400,000 of non-recurring expenses during 1996. During 1997, we
experienced economies of operations reflected in lower levels of data processing
and other noninterest expenses and experienced cost savings as a result of
reduced contracted services.
A greater number of full-time equivalent employees and an increase in
employee stock ownership plan expense attributable to the higher market price of
our stock during 1997 increased compensation and benefits.
Income Tax Expense. Income tax expense for 1997 was $4.3 million compared to
$2.0 million for 1996. The higher federal tax expense is primarily due to a
higher level of pre-tax income and to a lesser extent, a full twelve months of
goodwill amortization, which is not deductible for tax purposes, in 1997
compared to ten and one half months of amortization in 1996, based upon the date
of the merger consummation.
Asset/Liability Management; Market Risk Analysis
The balance sheet consists of investments in interest-earning assets, primarily
loans and investment securities, which are primarily funded by interest-bearing
liabilities, deposits and borrowings. These financial instruments have varying
levels of sensitivity to changes in market interest rates, resulting in market
risk. Other than loans that are originated and held for sale, all of our
financial instruments are for other than trading purposes. We are subject to
interest rate risk to the extent that our interest-bearing liabilities with
short and intermediate-term maturities reprice more rapidly, or on a different
basis, than our interest-earning assets.
Senior management and the Board of Directors review the Bank's exposure to
interest rate risk on a quarterly basis. We measure interest rate risk by
computing estimated changes in net interest income and the net portfolio value
of cash flows from assets, liabilities and off-balance sheet items within a
range of assumed changes in market interest rates. If estimated changes to net
portfolio value and net interest income are not within the limits established by
the Board, the Board may direct management to adjust the Bank's asset and
liability mix to bring interest rate risk within Board approved limits.
24 OTTAWA FINANCIAL CORPORATION
Net portfolio value represents the market value of equity and is equal to the
market value of assets minus the market value of liabilities, with adjustments
made for off-balance sheet items. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of sudden and sustained 1% to 3%
increases and decreases in market interest rates. The following tables set forth
the change in AmeriBank's net portfolio value and net interest income at
December 31, 1998 and 1997, based on internal assumptions, that would occur upon
an immediate change in interest rates, with no effect given to any steps that
management might take to counteract that change.
December 31, 1998: Net Portfolio Value Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NPV % Change in NPV
- ----------------------------------------------------------------------------------------------------------------------
+300 $ 38,798 -48% $ 20,275 -27%
+200 52,011 -30 23,040 -18
+100 63,218 -15 25,532 -9
0 74,187 -- 27,965 --
-100 84,511 14 30,309 8
-200 89,599 21 31,886 14
-300 99,922 35 33,440 20
December 31, 1997: Net Portfolio Value Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------
Change in Interest Rate (Basis Points) $ Amount in NPV % Change in NPV $ Amount in NPV % Change in NPV
- ----------------------------------------------------------------------------------------------------------------------
+300 $ 54,990 -33% $ 19,803 -22%
+200 64,479 -21 21,699 -14
+100 73,263 -11 23,518 -7
0 81,958 -- 25,286 --
-100 90,649 11 27,101 7
-200 96,085 17 28,488 13
-300 106,833 30 29,521 17
As illustrated in the table, net portfolio value is more sensitive to rising
rates than declining rates. This occurs because, as rates rise, the market value
of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, we do not experience a significant rise in
market value for these loans because borrowers prepay at relatively high rates.
The value of our deposits and borrowings changes in approximately the same
proportion in rising or falling rate scenarios.
The results for the 300 basis point interest rate shocks are monitored
primarily to assist in identifying trends in our interest rate risk profile. We
feel that a sudden and sustained change in interest rates of 300 basis points is
not a realistic event. Therefore we focus on managing, to acceptable levels, the
change in NPV for the 100 and 200 basis point interest rate shocks both up and
down.
The table shows there has been an increase in sensitivity to a rise in
interest rates from 1997 to 1998. At an increase in interest rates of 200 basis
points, net portfolio value decreases by 30% as of December 31, 1998 compared to
a 21% decrease as of December 31, 1997. Approximately one-third of the increase
in sensitivity relates to the decrease in our equity from December 31, 1997 to
December 31, 1998. As equity decreases through continued capital management, the
percent change in NPV increases for the same dollar amount change in NPV. The
OTTAWA FINANCIAL CORPORATION 25
other reasons for the increase in sensitivity relate to the loan and deposit
portfolio mix changes during the year. A significant portion of our adjustable
rate mortgage loan portfolio refinanced into fixed rate loans causing an
increase in our interest rate risk in a rising rate environment. Further, the
weighted average maturity of our certificate of deposit portfolio decreased
during 1998. This change in maturity structure also causes an increase in our
interest rate risk in a rising rate environment.
To decrease our exposure to interest rate risk, we are trying to reduce the
duration and average life of our interest-earning assets. To achieve this goal,
we are emphasizing adjustable rate mortgage loans and growing our consumer and
commercial business portfolios which are shorter term in nature than the
mortgage portfolio. In addition, we are underwriting all long-term, fixed rate
mortgages in accordance with Federal Home Loan Mortgage Corporation guidelines
which allows us the flexibility of selling these assets into the secondary
market. We are currently selling all 30- and 15-year fixed-rate mortgage loans
as they are originated. With our funding sources, we are attempting to reduce
the impact of interest rate changes by emphasizing non-interest bearing products
and using longer term fixed rate advances from the Federal Home Loan Bank.
As with any method of measuring interest rate risk, the above table
inherently has shortcomings. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate before changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. When there is a change in interest rates,
expected rates of prepayments on loans, decay rates of deposits and early
withdrawals from certificates could likely differ from those assumed in the
table. Finally, the ability of many borrowers to service their debt may decrease
in the event of a significant interest rate increase.
In addition, the above table may not properly reflect the impact of general
interest rate movements on our net interest income because the repricing of
certain categories of assets and liabilities are influenced by competitive and
other pressures beyond our control.
Liquidity and Capital Resources
AmeriBank's principal sources of funds are deposits; borrowings, primarily
Federal Home Loan Bank advances; principal and interest payments on loans; sales
of loans; and maturities and sales of securities. We have classified all
securities held in portfolio as available for sale, which increases our
liquidity flexibility. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and loan prepayments are more
influenced by interest rates, general economic conditions and competition.
We view liquidity management to be both a daily and long-term responsibility.
We maintain a level of liquidity consistent with our assessment of expected loan
demand, loan sales, deposit flows, yields available on interest-earning deposits
and investment securities, and the objectives of our asset/liability management
program. We generally invest excess liquidity in interest-earning overnight
deposits of the Federal Home Loan Bank of Indianapolis. Other investments
include U.S. Treasury and federal agency securities, collateralized mortgage
obligations, mortgage and other asset-backed securities, municipal bonds and
corporate debt securities. When overnight deposits with the Federal Home Loan
Bank are drawn to low levels to maintain liquidity, we will generally borrow
funds through the Federal Home Loan Bank's advances program instead of selling
our investment securities.
Advances from the Federal Home Loan Bank of Indianapolis increased only $14.8
million during 1998 while assets grew by $52.2 million. Deposits were the
primary source of funds for this asset growth and there was very little pressure
on liquidity. Federal Home Loan Bank advances totaled $160.3 million as of
December 31, 1998. Approximately $61.4 million of these advances come due in
1999. We may choose to renew or pay off these advances depending upon our
liquidity needs at that time.
26 OTTAWA FINANCIAL CORPORATION
Ottawa also has a need for, and sources of, liquidity. Dividends from
AmeriBank are its primary source of liquidity, subject to certain regulatory
constraints (see Note 13 of the Notes to Consolidated Financial Statements).
Ottawa has modest operating costs and the dividends paid on common stock are
discretionary.
AmeriBank is subject to three capital to asset requirements as discussed in
Note 12 of the Consolidated Financial Statements.
Accounting and Regulatory Standards
For accounting standards, see "Future Accounting Changes" in Note 1 of the Notes
to Consolidated Financial Statements.
Disclosure Regarding Forward-Looking Statements
We may from time to time make written or oral "forward-looking statements."
These forward-looking statements may be contained in this Annual Report to
Shareholders, in our filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-K and its exhibits, and in other
communications by us, which are made in good faith pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan", and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements include statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties. The following factors,
many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements:
o the strength of the United States economy in general and the strength of
the local economies in which we conduct our operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
o the willingness of users to substitute competitors' products and services
for our products and services;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of Ottawa or AmeriBank.
OTTAWA FINANCIAL CORPORATION 27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ottawa Financial Corporation
[EMBLEM] Holland, Michigan
CROWE CHIZEK We have audited the accompanying consolidated balance sheets of
Ottawa Financial Corporation as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in
shareholders' equity, cash flows and comprehensive income for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Ottawa Financial Corporation as of December 31, 1998
and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 26, 1999
28 OTTAWA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------
Assets
Cash and due from financial institutions $ 20,437 $ 25,437
Interest-bearing demand deposits in other financial institutions 21,788 7,087
- ---------------------------------------------------------------------------------------------
Total cash and cash equivalents 42,225 32,524
Securities available for sale 71,646 57,308
Loans held for sale 3,375 1,955
Loans receivable, net 769,770 747,423
Federal Home Loan Bank stock 11,782 7,308
Premises and equipment, net 15,200 15,030
Acquisition intangibles 13,032 14,248
Other assets 11,000 10,021
- ---------------------------------------------------------------------------------------------
Total assets $ 938,030 $ 885,817
=============================================================================================
Liabilities and Shareholders' Equity
Deposits $ 693,632 $ 654,560
Federal Home Loan Bank advances 160,268 145,458
Accrued expenses and other liabilities 10,723 9,436
- ---------------------------------------------------------------------------------------------
Total liabilities 864,623 809,454
Commitments and contingent liabilities
Shareholders' equity
Preferred stock
Common stock 62 60
Additional paid-in capital 73,177 67,381
Retained earnings, substantially restricted 15,363 23,386
Net unrealized gain (loss) on securities available for sale 23 62
Employee Stock Ownership Plan (1,886) (2,323)
Management Recognition and Retention Plan (712) (1,502)
Less cost of common stock in treasury (12,620) (10,701)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 73,407 76,363
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 938,030 $ 885,817
=============================================================================================
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 29
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
Interest income
Loans $ 62,646 $ 59,948 $ 48,991
Securities 3,833 3,707 4,945
Other 1,425 1,071 733
- -------------------------------------------------------------------------------------------
67,904 64,726 54,669
Interest expense
Deposits 30,383 29,398 25,056
Federal Home Loan Bank advances 9,591 8,293 5,451
Other 38 13 24
- -------------------------------------------------------------------------------------------
40,012 37,704 30,531
- -------------------------------------------------------------------------------------------
Net interest income 27,892 27,022 24,138
Provision for loan losses 930 660 564
- -------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 26,962 26,362 23,574
Noninterest income
Service charges and other fees 4,400 3,039 2,755
Mortgage servicing fees 349 317 287
Gain on sale of mortgage loans 2,398 370 141
Gain (loss) on securities (24) 143 5
Other 688 277 140
- -------------------------------------------------------------------------------------------
7,811 4,146 3,328
Noninterest expense
Compensation and benefits 11,521 10,356 8,945
Occupancy 1,550 1,316 1,112
Furniture, fixtures and equipment 1,241 1,056 781
Advertising 275 276 364
FDIC deposit insurance premium 400 324 1,235
SAIF assessment 3,510
State single business tax 517 357 338
Data processing 1,130 891 939
Professional services 495 379 697
Acquisition intangibles amortization 1,216 1,226 1,081
Other 2,747 2,527 2,842
- -------------------------------------------------------------------------------------------
21,092 18,708 21,844
- -------------------------------------------------------------------------------------------
Income before federal income tax expense 13,681 11,800 5,058
Federal income tax expense 5,013 4,273 1,964
- -------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094
Earnings per common share
===========================================================================================
Basic $ 1.59 $ 1.33 $ .51
===========================================================================================
Diluted $ 1.44 $ 1.22 $ .49
===========================================================================================
See accompanying notes to consolidated financial statements.
30 OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Net Unrealized
Gain (Loss) Unallocated
on Securities Employee Unearned
Additional Available Stock Management
Common Paid-in Retained for Sale, Ownership Recognition
Years ended December 31, 1998, 1997 and 1996 Stock Capital Earnings Net of Tax Plan Shares Plan Shares
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 $ 59 $ 57,662 $ 31,277 $ 391 $ (3,302) $ (2,311)
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
152,093 shares issued upon
exercise of stock options 1 507
60,024 shares committed to be released
under employee stock ownership plan 332 496
Issuance of 18,150 shares of common
stock for management recognition plan 242 (242)
Shares earned under management
recognition and retention plan 576
Acquisition of 577,008 treasury
shares, at cost
Cash dividend - $.28 per share (1,699)
Change in unrealized gain (loss) on securities
available for sale, net of tax of $242 (470)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 60 61,049 32,672 (79) (2,806) (1,977)
Net income for the year ended
December 31, 1997 7,527
26,435 shares issued upon
exercise of stock options 258
34,711 shares issued upon
exercise of stock warrants 502
57,098 shares committed to be released
under employee stock ownership plan 654 483
Issuance of 10,580 shares of common
stock for management recognition plan 249 (249)
Shares earned under management
recognition and retention plan 572
13,840 shares forfeited under management
recognition and retention plan (152) 152
Acquisition of 480,673 treasury
shares, at cost
Cash dividend - $.33 per share (1,858)
10% Stock dividend 4,821 (14,955)
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $73 141
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 60 67,381 23,386 62 (2,323) (1,502)
Net income for the year ended
December 31, 1998 8,668
56,750 shares issued upon
exercise of stock options 1 491
113,048 shares issued upon
exercise of stock warrants 1 1,634
54,233 shares committed to be released
under employee stock ownership plan 909 437
Shares earned under management
recognition and retention plan 509
14,074 shares forfeited under management
recognition and retention plan (293) 12 281
Acquisition of 551,495 treasury
shares, at cost
Cash dividend - $.39 per share (2,113)
10% Stock dividend 2,869 (14,590)
Tax benefit of equity deductions 186
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $(21) (39)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ 62 $ 73,177 $ 15,363 $ 23 $ (1,886) $ (712)
- ---------------------------------------------------------------------------------------------------------------------------------
OTTAWA FINANCIAL CORPORATION 31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (cont'd)
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Total
Treasury Shareholders'
Years ended December 31, 1998, 1997 and 1996 Stock Equity
- -----------------------------------------------------------------------------
Balance - December 31, 1995 $ (4,215) $ 79,561
Net income for the year ended
December 31, 1996 3,094
Cost of warrants and options related
to the acquisition of AmeriBank 2,306
152,093 shares issued upon
exercise of stock options 508
60,024 shares committed to be released
under employee stock ownership plan 828
Issuance of 18,150 shares of common
stock for management recognition plan
Shares earned under management
recognition and retention plan 576
Acquisition of 577,008 treasury
shares, at cost (7,787) (7,787)
Cash dividend - $.28 per share (1,699)
Change in unrealized gain (loss) on securities
available for sale, net of tax of $242 (470)
- ------------------------------------------------------------------------------
Balance - December 31, 1996 (12,002) 76,917
Net income for the year ended
December 31, 1997 7,527
26,435 shares issued upon
exercise of stock options 258
34,711 shares issued upon
exercise of stock warrants 502
57,098 shares committed to be released
under employee stock ownership plan 1,137
Issuance of 10,580 shares of common
stock for management recognition plan
Shares earned under management
recognition and retention plan 572
13,840 shares forfeited under management
recognition and retention plan
Acquisition of 480,673 treasury
shares, at cost (8,833) (8,833)
Cash dividend - $.33 per share (1,858)
10% Stock dividend 10,134
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $73 141
- ------------------------------------------------------------------------------
Balance - December 31, 1997 (10,701) 76,363
Net income for the year ended
December 31, 1998 8,668
56,750 shares issued upon
exercise of stock options 492
113,048 shares issued upon
exercise of stock warrants 1,635
54,233 shares committed to be released
under employee stock ownership plan 1,346
Shares earned under management
recognition and retention plan 509
14,074 shares forfeited under management
recognition and retention plan
Acquisition of 551,495 treasury
shares, at cost (13,640) (13,640)
Cash dividend - $.39 per share (2,113)
10% Stock dividend 11,721
Tax benefit of equity deductions 186
Change in unrealized gain (loss) on securities
available fo sale, net of tax of $(21) (39)
- ------------------------------------------------------------------------------
Balance - December 31, 1998 $ (12,620) $ 73,407
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 31A
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 8,668 $ 7,527 $ 3,094
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,209 1,079 844
Net amortization of security premiums and discounts 418 314 332
Amortization of intangible assets 1,216 1,226 1,081
Provision for loan losses 930 660 564
(Gain) loss on sales of securities 24 (143) (5)
Loss on limited partnership investment 332 82 112
ESOP expense 1,346 1,137 828
MRP expense 509 572 576
Origination of loans for sale (151,356) (45,354) (9,833)
Proceeds from sales of loans originated for sale 150,678 43,531 9,973
Gain on sales of loans (2,398) (370) (140)
Changes in assets and liabilities
Other assets (1,286) (94) (302)
Other liabilities 1,473 1,709 793
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 11,763 11,876 7,917
Cash flows from investing activities
Acquisition of AFSB (23,534)
Activity in available-for-sale securities
Purchases (59,110) (30,092) (14,016)
Maturities, prepayments and calls 40,301 33,409 31,980
Sales 3,965 2,324 25,371
Purchases of FHLB stock (4,474) (350) (3,112)
Purchases of loans (6,039) (27,027)
Loan originations and principal payments on loans (21,621) (26,255) (117,970)
Premises and equipment expenditures, net (1,379) (1,575) (2,985)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (42,318) (28,578) (131,293)
Cash flows from financing activities
Net increase in deposits $ 39,072 $ 32,068 $ 46,248
Net increase (decrease) in Federal funds purchased (2,000) 2,000
Proceeds from FHLB advances 163,625 67,000 112,500
Repayment of FHLB advances (148,815) (60,712) (21,461)
Proceeds from exercise of stock options 492 258 508
Proceeds from exercise of stock warrants 1,635 502
Cash dividends paid (2,113) (1,858) (1,699)
Purchase of treasury shares (13,640) (8,833) (7,787)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 40,256 26,425 130,309
- -------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 9,701 9,723 6,933
Cash and cash equivalents at beginning of year 32,524 22,801 15,868
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 42,225 $ 32,524 $ 22,801
===============================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 39,228 $ 37,289 $ 29,194
Income taxes 4,340 3,167 1,766
See accompanying notes to consolidated financial statements.
32 OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
DOLLARS IN THOUSANDS
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during
the period on securities available for sale (55) 235 (467)
Less: Reclassification adjustment for accumulated
(gains) losses included in net income 16 (94) (3)
- -----------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities available
for sale (39) 141 (470)
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 8,629 $ 7,668 $ 2,624
=====================================================================================================
See accompanying notes to consolidated financial statements.
OTTAWA FINANCIAL CORPORATION 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: Ottawa Financial
Corporation is a thrift holding company and the sole shareholder of AmeriBank.
AmeriBank is the sole shareholder of O.S. Services, Inc. and AmeriPlan Financial
Services, Inc. The consolidated financial statements include the accounts of
Ottawa, AmeriBank and AmeriBank's wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
AmeriBank's primary services include accepting deposits and making
commercial, mortgage and installment loans at its 26 retail banking offices in
six counties in the Western Michigan. Due to the significance of these primary
services, our operations are reported as one segment. Other operations include
that of O.S. Services and AmeriPlan Financial Services. The operations of O.S.
Services include investing in the stock of MMLIC Life Insurance Company and
participating as a limited partner in affordable housing projects. AmeriPlan
Financial Services was established in December 1997. Its operations include
selling investment products, including mutual funds and annuities, and offering
discount brokerage services.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The primary estimates incorporated into our consolidated financial
statements which are particularly susceptible to change in the near term include
the allowance for loan losses, the realization of deferred tax assets, the
determination and carrying value of certain financial instruments, the
determination and carrying value of impaired loans, the status of contingencies
and the evaluation of impairment of mortgage servicing assets.
Concentration of Credit Risk: Loans are granted to, and deposits are obtained
from, customers primarily in the Western Michigan area as described above.
Substantially all loans are secured by specific items of collateral, including
residential real estate, commercial real estate and consumer assets. Other
financial instruments which potentially subject Ottawa to concentrations of
credit risk include deposit accounts in other financial institutions.
Consolidated Statements of Cash Flows: For purposes of the consolidated
statements of cash flows, cash equivalents include demand balances with
financial institutions and Federal funds sold for one-day periods. Cash flows
are reported net for short-term investment, loan and deposit transactions, and
short-term borrowings.
Securities Available for Sale: Securities available for sale consist of
securities which might be sold prior to maturity due to changes in interest
rates, prepayment risks, yield and availability of alternative investments,
liquidity needs or other factors. Securities classified as available for sale
are reported at their fair value and the related unrealized holding gain or loss
is reported, net of income tax, in other comprehensive income.
Declines in the fair value of individual securities below cost, which we
consider to be other thantemporary, are charged to earnings as a realized loss.
Premiums and discounts on securities available for sale are recognized in
interest income using the level-yield method over the estimated life of the
security. Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
Loan Income: Interest on loans is accrued over the term of the loans based upon
the principal outstanding, using the interest method. We review loans delinquent
90 days or more to determine if the interest accrual should be discontinued and
the loan considered impaired. The carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and changes in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as adjustments to the provision for loan
losses.
For loans originated for portfolio, loan fees are deferred, net of certain
direct loan origination costs. The net amount deferred is reported in the
consolidated balance sheets as a reduction of loans and is recognized as
interest income over the contractual term of the loan using the level-yield
method.
34 OTTAWA FINANCIAL CORPORATION
Note 1 (continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated aggregate
market value. Net unrealized losses are recognized in a valuation allowance by
charges to income. Mortgage loans are sold into the secondary market at market
prices, which includes consideration for normal servicing fees. The total cost
of mortgage loans purchased or originated with the intent to sell is allocated
between the right to service the loan and the mortgage loan without servicing,
based on their relative fair values. The capitalized cost of loan servicing
rights is amortized in proportion to, and over the period of, estimated net
future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment by
stratifying them based on predominant risk characteristics of the underlying
serviced loans, such as loan type, term and note rate. Impairment represents the
excess of cost of an individual mortgage servicing rights stratum over its fair
value, and is recognized through a valuation allowance.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and the amount of loss on any loan is necessarily subjective. Accordingly,
we maintain the allowance at a level considered adequate to cover possible
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. While we may periodically allocate
portions of the allowance for specific problem loan situations, including
impaired loans discussed below, the whole allowance is available for any loan
charge-offs that occur. Loans are charged off in whole or in part when our
estimate of the undiscounted cash flows from the loan are less than the recorded
investment in the loan, although collection efforts may continue and future
recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and related components are depreciated using
the straight-line method with useful lives ranging from 10 to 40 years and
furniture and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years. Maintenance and repairs are charged to
expense and improvements are capitalized. The cost and accumulated depreciation
applicable to assets retired or otherwise disposed of are eliminated from the
accounts and the gain or loss on disposition is included in noninterest income
or expense. These assets are reviewed for impairment when events indicate the
carrying amount may not be recoverable.
Real Estate Owned: Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of cost or
fair value minus estimated costs to sell. Revenue and expenses from operations
of real estate owned is included in other noninterest expense.
Acquisition Intangibles: Goodwill is the excess of purchase price over
identified net assets in business acquisitions. Goodwill is expensed on the
straight-line method over 15 years. Identified intangibles represent the value
of depositor relationships purchased and is expensed on an accelerated basis
over 10 years. Goodwill and identified intangibles are assessed for impairment
based on estimated undiscounted cash flows, and written down if necessary.
Income Taxes: Income tax expense is based on the amount of taxes due on the tax
return plus the change in deferred taxes computed based on the expected future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates, adjusted for
allowances made for uncertainty regarding the realization of net tax assets.
OTTAWA FINANCIAL CORPORATION 35
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Retirement Plans: Ottawa sponsors a noncontributory defined benefit pension
plan. The plan covers all employees who have met certain age and service
requirements. Benefits from the defined benefit pension plan are based on years
of service and the employee's compensation. The funding policy for the plan is
to contribute the minimum funding requirement calculated by consulting
actuaries.
Employee Stock Ownership Plan: The cost of shares issued to the employee stock
ownership plan but not yet allocated to participants are presented in the
consolidated balance sheet as a reduction of shareholders' equity. Compensation
expense is recorded based on the market price of the shares as they are
committed to be released for allocation to participant accounts. The difference
between the market price and the cost of shares committed to be released is
recorded as an adjustment to paid in capital. Dividends on allocated plan shares
are recorded as a reduction of retained earnings; dividends on unallocated plan
shares are reflected as a reduction of debt and accrued interest.
Earnings Per Share: Amounts reported as basic earnings per common share reflect
the earnings available to common shareholders for the year divided by the
weighted average number of common shares outstanding during the year. Common
shares outstanding includes issued shares less shares held in the treasury and
unallocated shares held by the employee stock ownership plan. Diluted earnings
per common share includes the shares that would be outstanding assuming exercise
of dilutive stock options and warrants. All share and per share information has
been retroactively adjusted to reflect the 10% stock dividends paid on August
31, 1998 and September 30, 1997.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies. As of December 31, 1998 we have no derivative holdings.
Mortgage loans originated for sale converted into securities will be affected
by a new accounting standard for 1999. The new standard allows classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements. As of December 31, 1998
we have no securitizations.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are such matters that will have a
material effect on the financial statements.
Equity: Ottawa is authorized to issue 5,000,000 shares of preferred stock from
time to time in one or more series subject to applicable provisions of law, and
the Board of Directors is authorized to fix the designations, powers,
preferences and relative participating, optional and other special rights of
such shares, including voting rights (which could be multiple or as a separate
class) and conversion rights. In the event of a proposed merger, tender offer or
other attempt to gain control of Ottawa that the Board does not approve, it
might be possible for the Board to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. The Board of Directors has not issued and has no present
plans for the issuance of any preferred stock.
Common stock has $.01 par and 10,000,000 shares authorized. As of December
31, 1998 and 1997, 6,155,234 and 6,614,297 shares were outstanding. Treasury
stock is carried at cost. As of December 31, 1998 and 1997, 707,073 and 769,904
shares were held in the treasury. Transfers from retained earnings are made for
stock dividends using the fair value of shares issued.
Reclassifications: Certain amounts on the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998 presentation.
36 OTTAWA FINANCIAL CORPORATION
Note 2
ACQUISITION
On February 13, 1996, Ottawa completed the acquisition of AmeriBank Federal
Savings Bank, a federal savings bank headquartered in Muskegon, Michigan using
the purchase method of accounting. The consolidated statements of income reflect
the operating results of AmeriBank Federal Savings Bank since the effective date
of the acquisition. The following table presents unaudited pro forma information
as if the acquisition of AmeriBank Federal Savings Bank had occurred at the
beginning of 1996. The pro forma information includes adjustments for lost
interest on funds paid to consummate the acquisition, the amortization of
intangibles arising from the transaction, the elimination of acquisition related
expenses, and the related income tax effects. The pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.
1996
- --------------------------------------------------------------------------------
(Unaudited, Dollars in thousands except share data)
Interest income $57,609
Interest expense 32,332
- --------------------------------------------------------------------------------
Net interest income 25,277
Provision for loan losses 700
- --------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,577
Noninterest income 3,408
Noninterest expense 22,782
- --------------------------------------------------------------------------------
Income before federal income tax expense 5,203
Federal income tax expense 2,050
- --------------------------------------------------------------------------------
Net income $ 3,153
================================================================================
Proforma earnings per common share
Basic $ .52
================================================================================
Diluted .50
================================================================================
All share and per share information has been retroactively adjusted to reflect
the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
OTTAWA FINANCIAL CORPORATION 37
Note 3
SECURITIES
Securities available for sale at year end are as follows:
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1998
Debt securities
Obligations of U.S. Government
corporations and agencies $25,510 $ 69 $ 37 $25,542
Municipal obligations 649 4 653
Corporate 8,095 85 4 8,176
Asset-backed 37,358 137 220 37,275
- --------------------------------------------------------------------------------------------------------------------------
$71,612 $ 295 $ 261 $71,646
==========================================================================================================================
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1997
Debt securities
Obligations of U.S. Government
corporations and agencies $24,999 $ 65 $ 57 $25,007
Municipal obligations 1,846 12 2 1,856
Corporate 2,000 10 2,010
Asset-backed 28,369 169 103 28,435
- --------------------------------------------------------------------------------------------------------------------------
$57,214 $ 256 $ 162 $57,308
==========================================================================================================================
Contractual maturities of debt securities available for sale at year end 1998
are as follows. Securities not due at a single maturity date, primarily
asset-backed securities, are shown separately. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Cost Fair Value
- --------------------------------------------------------------------------------
(Dollars in thousands)
Due in one year or less $ 5,542 $ 5,543
Due after one year through five years 28,605 28,722
Due after five through ten years 107 106
- --------------------------------------------------------------------------------
34,254 34,371
Asset-backed debt securities 37,358 37,275
- --------------------------------------------------------------------------------
$71,612 $71,646
================================================================================
Sales of securities available for sale are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Proceeds $ 3,965 $ 2,324 $ 25,371
Gross gains 154 26
Gross losses (24) (11) (21)
38 OTTAWA FINANCIAL CORPORATION
Note 4
LOANS
Loans at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
First mortgage loans (principally conventional)
Secured by one-to-four family residences $ 425,974 $ 483,502
Secured by other properties 101,039 73,810
Construction loans 117,792 71,145
- --------------------------------------------------------------------------------
644,805 628,457
Less
Undisbursed portion of construction loans (44,797) (25,787)
Deferred fees and discounts (1,272) (854)
- --------------------------------------------------------------------------------
598,736 601,816
Commercial loans 53,935 37,322
Consumer and other loans
Student loans 21
Home equity and second mortgage 49,647 55,960
Other 71,275 55,597
- --------------------------------------------------------------------------------
120,922 111,578
- --------------------------------------------------------------------------------
773,593 750,716
Allowance for loan losses (3,823) (3,293)
- --------------------------------------------------------------------------------
$ 769,770 $ 747,423
================================================================================
Note 5
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance - beginning of year $ 3,293 $ 3,129 $ 1,251
Acquired balance 1,358
Provision 930 660 564
Recoveries 176 119 90
Loans charged-off (576) (615) (134)
- --------------------------------------------------------------------------------
Balance - end of year $ 3,823 $ 3,293 $ 3,129
================================================================================
Information regarding impaired loans is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Average investment in impaired loans $1,710 $1,354 $1,612
Interest income recognized on impaired loans including
interest income recognized on cash basis 24 104 46
Interest income recognized on impaired
loans on cash basis 24 4 5
OTTAWA FINANCIAL CORPORATION 39
Note 5 (continued)
ALLOWANCE FOR LOAN LOSSES
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance of impaired loans $ 1,452 $ 1,942
Less portion for which no allowance for
loan losses is allocated (1,053) (490)
- --------------------------------------------------------------------------------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 399 $ 1,452
================================================================================
Portion of allowance for loan losses allocated
to the impaired loan balance $ 65 $ 346
Note 6
SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others, principally the Federal Home Loan Mortgage
Corporation, which are not reported as assets, totaled $227,939,000 and
$130,431,000 at December 31, 1998 and 1997. Custodial escrow balances maintained
in connection with this loan servicing, and included in demand deposits, were
$372,000 and $238,000 at December 31, 1998 and 1997.
Following is an analysis of the activity, in thousands, for mortgage
servicing rights:
Balance at January 1, 1996 $ 0
Additions (acquired and originated) 489
Amortization (32)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 457
- --------------------------------------------------------------------------------
Additions 237
Amortization (44)
- --------------------------------------------------------------------------------
Balance at December 31, 1997 650
- --------------------------------------------------------------------------------
Additions 1,655
Amortization (177)
- --------------------------------------------------------------------------------
Balance at December 31, 1998 $2,128
================================================================================
The carrying values of mortgage servicing rights approximate fair values for
all years presented.
Note 7
PREMISES AND EQUIPMENT
Premises and equipment at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Land $ 3,206 $ 3,675
Buildings and improvements 11,638 11,336
Furniture and equipment 7,636 6,150
- --------------------------------------------------------------------------------
22,480 21,161
Accumulated depreciation (7,280) (6,131)
- --------------------------------------------------------------------------------
$15,200 $15,030
================================================================================
40 OTTAWA FINANCIAL CORPORATION
Note 8
DEPOSITS
Deposits at year end are as follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest-bearing $ 40,813 $ 28,431
NOW accounts and MMDAs 200,132 160,296
Passbook and statement savings 54,475 60,143
Certificates of deposit 398,212 405,690
- --------------------------------------------------------------------------------
$693,632 $654,560
================================================================================
Scheduled maturities of time deposits, in thousands, over the next five years
are as follows:
1999 $320,191
2000 53,416
2001 11,093
2002 7,529
2003 and thereafter 5,983
- --------------------------------------------------------------------------------
$398,212
================================================================================
The aggregate amount of demand, savings and certificates of deposit with
balances of $100,000 or more was approximately $103,596,000 and $78,138,000 at
December 31, 1998 and 1997.
Note 9
BORROWINGS
Advances from the Federal Home Loan Bank of Indianapolis, collateralized by
mortgage loans under a blanket collateral agreement and Federal Home Loan Bank
stock, consist of the following at year end:
Range of Weighted Average
Principal Terms Advance Amount Maturities Interest Rate
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1998
Single-maturity fixed rate advances $104,125 February 1999 to June 1010 6.06%
Putable advances 51,000 May 2000 to May 2008 5.53%
Amortizable mortgage advances 5,143 June 1999 to May 2000 6.91%
- ----------------------------------------------------------------------------------------------------------------
160,268
================================================================================================================
1997
Single-maturity fixed rate advances $ 96,500 February 1998 to December 2007 5.99%
Putable advances 18,000 May 2000 to December 2002 5.87%
Short-term variable rate advances 25,000 March 1998 to July 1998 5.80%
Amortizable mortgage advances 5,958 June 1999 to May 2000 6.91%
================================================================================================================
$145,458
Maturities of advances outstanding, in thousands, over the next five years
are:
1999 $ 61,405
2000 18,738
2001 8,000
2002 12,000
2003 15,000
2004 and thereafter 45,125
- --------------------------------------------------------------------------------
$160,268
================================================================================
Some of the advances are subject to prepayment penalties according to the
conditions of the credit policy of the Federal Home Loan Bank.
At December 31, 1998, Ottawa had an unused line of credit with a major bank
totaling $15 million.
OTTAWA FINANCIAL CORPORATION 41
Note 10
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Ottawa is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include standby letters of credit, commitments to make
loans and fund loans in process. Ottawa's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is equal to
the contractual amount of these instruments. Ottawa follows the same credit
policy to make these commitments as it uses for those loans recorded in the
financial statements.
The contract amounts of these financial instruments at year end are as
follows:
1998 1997
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Financial instruments whose contract amount represents credit risk
Commitments to make loans $19,427 $23,844
Unused consumer lines of credit 34,854 33,729
Unused commercial lines of credit 24,190 9,930
Loans in process 44,797 25,787
Letters of credit 10,340 5,110
Since certain commitments to make loans and fund loans in process expire
without being used, the above amounts do not necessarily represent future cash
commitments. Commitment periods are generally for 30 to 120 days. Approximately
39% and 43% of commitments to make loans and to fund loans in process were made
at fixed rates as of December 31, 1998 and 1997. Rate ranges for these fixed
rate commitments were 6.20% to 10.00% and 6.00% to 10.5% as of December 31, 1998
and 1997. Lines of credit are issued at variable market rates. No losses are
anticipated as a result of these transactions.
Note 11
COMMITMENTS AND CONTINGENCIES
Ottawa has entered into employment agreements with two of its officers. Under
the terms of these agreements, certain events leading to separation from Ottawa
could result in cash payments aggregating approximately $1.5 million.
A lawsuit against AmeriBank has recently been filed. The complaint alleges
that we have engaged in the unauthorized practice of law due to charging a fee
for preparing loan documents. The complaint seeks class action certification,
restitution of all fees paid for the last six years, interest, attorney fees and
other costs. We believe, after consultation with legal counsel, that the
complaint is wholly without merit, and intend to vigorously defend against this
lawsuit.
On-Line Financial Services, Inc. was serving as AmeriBank's primary data
processing service provider. Due to dissatisfaction with the services provided
by On-Line, we claimed damages against On-Line and converted to a new data
processing servicer in March 1999. On-Line has alleged that we have no basis for
being dissatisfied with their services and has claimed liquidated damages of
approximately $1.5 million. On-Line has also indicated that to receive our
historical data and financial information, they will charge us $1.7 million upon
deconversion. We believe, after consultation with legal counsel, that these
charges are not consistent with the contract and intend to dispute them. It is
anticipated that our damage claim against On-Line could exceed $750,000. Both
parties have agreed to have the claims settled in arbitration, which is expected
to begin during or after March 1999.
Ottawa and AmeriBank periodically become defendants in certain claims and
legal actions arising in the ordinary course of business. Currently, there are
no matters which are expected to have a material adverse effect on our
consolidated financial position.
42 OTTAWA FINANCIAL CORPORATION
Note 12
RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Effective July 25, 1997, AmeriBank completed its conversion to a Michigan
chartered savings bank. As a state chartered savings bank, AmeriBank's primary
regulators are the Financial Institutions Bureau of Michigan and the Federal
Deposit Insurance Corporation.
AmeriBank is subject to regulatory capital requirements administered by these
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk-Weighted Assets Tier 1 Capital
Total Tier 1 to Average Assets
- --------------------------------------------------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
AmeriBank's actual capital levels (in millions) and minimum required levels
at year end are as follows:
Minimum Required Minimum Required To Be
For Capital Well Capitalized Under Prompt
Actual Adequacy Purposes Corrective Action Regulations
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Total capital (to risk weighted assets) $ 62.3 10.3% $ 48.6 8.0% $ 60.7 10.0%
Tier 1 capital (to risk weighted assets) 58.5 9.6 24.3 4.0 36.4 6.0
Tier 1 capital (to average total assets) 58.5 6.3 37.0 4.0 46.2 5.0
1997
Total capital (to risk weighted assets) $ 62.2 11.3% $ 43.9 8.0% $ 54.8 10.0%
Tier 1 capital (to risk weighted assets) 58.9 10.7 21.9 4.0 32.9 6.0
Tier 1 capital (to average total assets) 58.9 6.8 34.5 4.0 43.4 5.0
AmeriBank was categorized as well capitalized at year end 1998 and 1997.
During 1998 and 1997, AmeriBank made capital distributions to Ottawa in the
amount of $12,500,000 and $4,000,000, respectively. These distributions were
made primarily to allow Ottawa to pay dividends and fund the stock repurchase
transactions discussed in Note 13. The distributions were within the guidelines
described above.
The Qualified Thrift Lender test requires at least 65% of assets to be
maintained in housing-related finance and other specified areas. If this test is
not met, limits are placed on growth, branching, new investments, Federal Home
Loan Bank advances and dividends, or AmeriBank must convert to a commercial bank
charter. Management believes this test is met.
At the time of conversion to a stock association, a liquidation account of
$26,527,000 was established which is equal to AmeriBank's total net worth as of
the date of the latest audited balance sheet appearing in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Bank after
the conversion. The liquidation account is to be reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent
increases do not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. AmeriBank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
OTTAWA FINANCIAL CORPORATION 43
Note 13
STOCK REPURCHASE PROGRAMS
During 1998, 1997 and 1996, Ottawa repurchased 551,495, 480,673 and 577,008
shares of its common stock at an average price of $24.73, $18.37 and $13.50.
Repurchased shares are treated as treasury shares and are available for
general corporate purposes, including issuance in connection with stock
dividends, stock based compensation and warrant plans.
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 14
STOCK WARRANT PLAN
In connection with the acquisition of AmeriBank Federal Savings Bank on February
13, 1996, Ottawa issued 566,546 warrants to the former AmeriBank Federal Savings
Bank shareholders. Prior to the 10% stock dividends paid on August 31, 1998 and
September 30, 1997, each warrant entitled the holder to purchase one share of
Ottawa Financial Corporation's common stock at an exercise price of $17.50.
Effective August 31, 1998, each warrant allows the holder to purchase 1.21
shares of common stock at a price of $14.46 per share reflecting a proportionate
adjustment as a result of the 10% stock dividends. All warrants were exercisable
immediately upon issue and expired on February 16, 1999.
No warrants were exercised during 1996. During 1997 and 1998, 34,711 and
113,048 shares of Ottawa Financial Corporation's common stock were issued upon
the exercise of 28,687 and 93,428 warrants. As of December 31, 1998, 444,431
warrant certificates were exercisable into 537,762 shares of common stock.
On December 24, 1998, Ottawa offered to exchange, for each outstanding
warrant, at the holder's option, either .44 shares of the Corporation's common
stock or $10.03 in cash. As of January 26, 1999, the expiration date of the
exchange offer, Ottawa accepted tenders for approximately 86% of its warrants.
In connection with this exchange, Ottawa issued 164,181 shares of its common
stock and paid $90,130 in cash. The remaining 14% of the warrants were exercised
by the date of the warrant plan expiration, resulting in additional capital of
$900,000.
Note 15
STOCK-BASED COMPENSATION PLANS
Ottawa maintains an Employee Stock Ownership Plan for the benefit of
substantially all employees. During 1994, this plan borrowed $4,222,050 from
Ottawa and used those funds to acquire 510,868 shares of the Corporation's stock
at $8.26 per share. Participants become fully vested in allocated shares after
five years of credited service and may receive their distribution in the form of
cash or stock.
Shares issued to the employee stock ownership plan are allocated to
participants based on principal and interest payments made on the loan. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the
plan with funds from Ottawa's discretionary contributions to the plan and
earnings on the plan's assets. Principal payments are scheduled to occur in even
quarterly amounts over a ten-year period. However, in the event contributions
exceed the minimum debt service requirements, additional principal payments will
be made. For purposes of the following disclosure, all share and per share
information has been retroactively adjusted to reflect the 10% stock dividends
paid on August 31, 1998 and September 30, 1997. During 1998, 1997 and 1996,
54,233, 57,098, and 60,024 shares of stock with a fair value of $24.82, $19.91
and $13.79 per share were committed to be released, resulting in employee stock
ownership plan compensation expense of $1,346,000, $1,137,000 and $828,000,
respectively.
Shares held by the plan at year end are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Allocated shares 282,638 228,405 171,307
Unallocated shares 228,230 282,463 339,561
- --------------------------------------------------------------------------------
Total ESOP shares 510,868 510,868 510,868
================================================================================
Fair value of unallocated shares $ 4,850 $ 8,731 $ 4,717
================================================================================
Ottawa maintains a management recognition plan, with 272,039 shares
authorized. This is a restricted stock award plan in which stock awards vest in
five equal annual installments, subject to the continuous employment of the
recipients. Compensation expense is based upon the market price of Ottawa's
stock at the date of grant, and is recognized on a prorata basis over the
vesting period of the awards. Compensation expense for this plan was $509,000,
$572,000 and $576,000 for 1998, 1997 and 1996. The unamortized unearned
compensation value of the management recognition plan is shown as a reduction to
shareholders' equity in the consolidated balance sheets.
44 OTTAWA FINANCIAL CORPORATION
Note 15 (continued)
STOCK-BASED COMPENSATION PLANS
Ottawa also maintains a stock option and incentive plan, with 1,014,646
shares authorized. Stock options vest in five equal annual installments and
expire 10 years from the date of grant. No compensation expense is being
recognized for options that have an exercise price equal to the market price of
the Corporation's stock at the date of grant.
The management recognition plan and the stock option and incentive plan are
administered by a committee of the Board of Directors of Ottawa. This committee
selects recipients and defines the terms of awards consistent with the plans.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income, basic earnings per common share and diluted
earnings per common share had the fair value method been used to measure
compensation cost for the stock option and inventive plan. In future years, the
pro forma effect of not applying this standard is expected to increase as
additional options are granted. The compensation cost charged against income for
the management recognition plan is the same as if the provisions of FAS No. 123
had been applied.
1998 1997 1996
- ----------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Net income as reported $ 8,668 $ 7,527 $ 3,094
Pro forma net income 8,218 7,150 2,783
- ----------------------------------------------------------------------------------------
Basic earnings per common share as reported 1.59 1.33 .51
Pro forma basic earnings per common share 1.51 1.26 .45
- ----------------------------------------------------------------------------------------
Diluted earnings per common share as reported 1.44 1.22 .49
Pro forma diluted earnings per common share 1.38 1.17 .45
- ----------------------------------------------------------------------------------------
The fair values of stock options were estimated using option pricing models
with the following weighted-average assumptions as of grant date.
1998 1997 1996
- ------------------------------------------------------------------------
Risk-free interest rate 4.77% 6.27% 5.78%
Expected life 10 Years 10 Years 10 Years
Expected volatility of stock price 6.45% 6.00% 4.00%
Expected dividends 1.91% 1.97% 2.23%
Information regarding the stock option plan at year end is as follows:
Number Weighted-Average Range of Weighted-Average
of Options Exercise Price Exercise Price Fair Value of Grants
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of 1995 552,374 $10.90
Granted 125,219 $13.40 $3.18
Conversion of AFSB options 179,743 3.57
Exercised (152,093) 3.37
Forfeited (4,126) 10.90
Outstanding, end of 1996 701,117 $11.15 $3.97- $13.54
Granted 90,844 18.67 $5.46
Exercised (26,435) 9.76
Forfeited (27,667) 11.25
Outstanding, end of 1997 737,859 $12.07 $3.97-$26.48
Granted 128,931 25.34 $4.97
Exercised (56,750) 8.67
Forfeited (55,856) 24.67
Outstanding, end of 1998 754,184 13.66 $3.61-$30.34
=================================================================================================================================
OTTAWA FINANCIAL CORPORATION 45
Note 15 (continued)
STOCK-BASED COMPENSATION PLANS
Stock options exercisable at year-end are as follows:
Number Weighted-Average
of Options Exercise Price
- --------------------------------------------------------------------------------
1996 134,380 $ 9.90
1997 243,418 10.46
1998 329,291 11.68
At year-end 1998, the weighted average remaining life of options outstanding
was 7.27 years.
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 16
PENSION PLANS
Ottawa sponsors a noncontributory defined benefit pension plan. On January 1,
1998 two separate plans were merged into one. The separate plans were from each
of the two Banks that merged in early 1996 as discussed in Note 2. Both plans
were curtailed prior to the merger.
The following sets forth the funded status and amounts recognized in the
consolidated financial statements at year end for the plan. The 1997 and 1996
information shown below reflects combined information for the two separate
plans.
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation:
Beginning benefit obligation $ 3,947 $ 4,089
Interest cost 288 280
Actuarial gain 263
Benefits paid (906) (422)
- --------------------------------------------------------------------------------
Ending benefit obligation 3,592 3,947
Change in plan assets, at fair value:
Beginning plan assets 5,923 5,467
Actual return 1,203 878
Benefits paid (959) (422)
- --------------------------------------------------------------------------------
Ending plan assets 6,167 5,923
- --------------------------------------------------------------------------------
Funded Status 2,575 1,976
Unrecognized net (gain) loss (678) (405)
- --------------------------------------------------------------------------------
Prepaid pension asset $ 1,897 $ 1,571
================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Net pension cost included in operations, including the effects
of curtailment, consisted of the following components
Interest cost on projected benefit obligation $ 288 $ 280 $ 274
Actual return on plan assets (1203) (878) (663)
Net amortization and deferral 589 466 270
- -----------------------------------------------------------------------------------------------
Net pension income $(326) $(132) $(119)
===============================================================================================
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.00% for all years presented. The
expected long-term rate of return on assets was 8.00%, 8.25% and 8.00% for 1998,
1997 and 1996. As a result of the plan curtailments, all accumulated benefits
under the plans are vested and no further benefits arising from service to
Ottawa will accrue.
The plan assets are invested in U.S. Government and corporate bonds, listed
stocks and a group annuity fund at a major life insurance company.
Ottawa maintains a 401(k) plan covering substantially all employees.
Employees who are 21 years and older and who have completed one year of service
are eligible. Employees may elect to contribute to the plan from 1% to 15% of
their salary subject to a statutory maximum amount. Ottawa does not make
matching contributions to this plan.
46 OTTAWA FINANCIAL CORPORATION
Note 17
SAIF ASSESSMENT
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund, requiring AmeriBank to pay a one-time
special assessment of $3,510,000. This amount is reflected in noninterest
expense in the 1996 consolidated statement of income.
Note 18
FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Current tax expense $4,858 $3,961 $1,674
Deferred tax expense (benefit) 155 312 290
- --------------------------------------------------------------------------------
$5,013 $4,273 $1,964
================================================================================
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------
Statutory rate 35% 34% 34%
==========================================================================================
Tax expense at statutory rate $ 4,789 $ 4,012 $ 1,720
Low-income housing credit (327) (239) (150)
ESOP 314 227 113
Tax-exempt interest (45) (84) (63)
Goodwill amortization 329 319 279
Change in deferred tax asset valuation allowance (46) (60)
Other (1) 98 65
- ------------------------------------------------------------------------------------------
$ 5,013 $ 4,273 $ 1,964
==========================================================================================
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at year end are as
follows:
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Deferred loan fees $ 192 $ 163
Management recognition plan restricted stock 96 89
ESOP 52 42
Capital loss carryforward 80 126
Accrued expenses 138 22
Allowance for loan losses 428 59
Nonaccrual loan interest 73 66
Other 118 64
- --------------------------------------------------------------------------------
1,177 631
Deferred tax liabilities
Depreciation (590) (578)
Pension (405) (394)
Purchase accounting adjustment (870) (692)
FHLB stock dividends (70) (68)
Mortgage servicing rights (619) (86)
Unrealized gain on available for sale securities (10) (32)
Other (87) (76)
- --------------------------------------------------------------------------------
(2,651) (1,926)
Valuation allowance for deferred tax assets (80) (126)
- --------------------------------------------------------------------------------
Net deferred tax liability $(1,554) $(1,421)
================================================================================
OTTAWA FINANCIAL CORPORATION 47
Note 18 (continued)
FEDERAL INCOME TAXES
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits relating to
such assets will not be realized. Management established a valuation allowance
for the benefits associated with the losses on mutual fund securities at
December 31, 1996, since such losses were capital in nature and could only be
realized through offsetting capital gains. Sources of capital gains were not
available at either December 31, 1998 or 1997.
During 1997, new tax law was established regarding thrift bad debt reserves.
Under the new rules, recapture of a portion of the tax bad debt reserve is
required. Beginning with the 1998 tax year, the Company will include an
additional $520,000 per year for six years in its taxable income. These new
rules had no impact on the consolidated financial statements as accounting
provisions have required recording deferred taxes for the amounts to be
recaptured.
An income tax benefit of $186,000 attributable to deductions related to the
exercise of nonqualified stock options and the vesting of management recognition
plan shares was allocated directly to shareholders' equity in 1998.
Retained earnings at December 31, 1998, 1997 and 1996 includes approximately
$8.8 million for which no federal income tax liability has been recorded. This
amount represents an allocation of income to bad debt deductions for tax
purposes alone. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments from carryback of net operating losses would
create income for tax purposes only, which would be subject to current tax. The
unrecorded deferred tax liability on the above amount at December 31, 1998, 1997
and 1996 was approximately $3.0 million.
Note 19
EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
1998 1997 1996
- -----------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Basic
Net Income available to common shareholders $ 8,668 $ 7,527 $ 3,094
=========================================================================================
Weighted average common shares outstanding 5,436,541 5,665,441 6,108,202
=========================================================================================
Basic earnings per common share $ 1.59 $ 1.33 $ .51
=========================================================================================
Diluted
Net Income available to common shareholders $ 8,668 $ 7,527 $ 3,094
=========================================================================================
Weighted average common shares outstanding 5,436,541 5,665,441 6,108,202
Add: Dilutive effects of assumed
exercises of stock options and warrants 591,308 504,525 145,922
- -----------------------------------------------------------------------------------------
Weighted average common and dilutive
potential common shares outstanding 6,027,849 6,169,966 6,254,124
=========================================================================================
Diluted earnings per common share $ 1.44 $ 1.22 $ .49
=========================================================================================
All share and per share information has been retroactively adjusted to
reflect the 10% stock dividends paid on August 31, 1998 and September 30, 1997.
Note 20
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values of
each class of financial instrument for which it is practicable to estimate that
value:
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, the allowance for loan losses, demand deposits,
savings accounts, money market deposits and variable rate loans or deposits that
reprice frequently and fully. Security fair values are based on market prices or
dealer quotes, and if no such information is available, on quoted market prices
for similar instruments. For fixed rate loans and deposits and for variable rate
loans and deposits with infrequent repricing or repricing limits, fair value is
based on discounted cash flows using current market rates applied to the
estimated life and credit risk. Prepayment speeds are assumed in projecting
future cash flows based upon the current interest rate environment and recent
actual prepayment history. Fair values for impaired loans are estimated using
discounted cash flow analysis. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements.
The fair value of commitments was immaterial at the reporting dates presented.
48 OTTAWA FINANCIAL CORPORATION
Note 20 (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Ottawa's financial instruments at year end are
as follows:
1998 1997
Carrying Value Fair Value Carrying Value Fair Value
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Financial assets
Cash and cash equivalents $ 42,225 $ 42,225 $ 32,524 $ 32,524
Securities available for sale 71,646 71,646 57,308 57,308
Federal Home Loan Bank stock 11,782 11,782 7,308 7,308
Loans held for sale 3,375 3,375 1,955 1,955
Loans, net 769,770 774,621 747,423 754,092
Financial liabilities
Deposits 693,632 696,215 654,560 655,796
Federal Home Loan Bank advances 160,268 162,056 145,458 145,494
Note 21
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Ottawa Financial Corporation at year end is
as follows:
Condensed Balance Sheets
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and due from financial institutions $ 278 $ 1,406
Loans receivable from Employee Stock Ownership Plan 2,111 2,533
Investment in subsidiary bank 71,185 72,634
Other assets 95 176
- --------------------------------------------------------------------------------
Total assets $73,669 $76,749
================================================================================
Liabilities $ 262 $ 386
Shareholders' Equity 73,407 76,363
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $73,669 $76,749
================================================================================
OTTAWA FINANCIAL CORPORATION 49
Note 21 (continued)
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed Statements of Income
for the years: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest and dividend income
Securities $ 175 $ 807
Loan to Employee Stock Ownership Plan $ 178 210 243
Dividends from subsidiary bank 12,500 4,000 2,449
- -------------------------------------------------------------------------------------------------------------------
12,678 4,385 3,499
Net gain on sale of securities 151 270
Operating expenses 867 769 737
- -------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and
equity in undistributed (excess distributed)
earnings of subsidiary bank 11,811 3,767 3,032
Federal income tax expense (benefit) (232) (88) 198
- -------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
(excess distributed) earnings of subsidiary bank 12,043 3,855 2,834
Equity in undistributed (excess distributed)
earnings of subsidiary bank (3,375) 3,672 260
- -------------------------------------------------------------------------------------------------------------------
Net income $ 8,668 $ 7,527 $ 3,094
===================================================================================================================
Condensed Statements of Cash Flows
for the years: 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities
Net income $ 8,668 $ 7,527 $ 3,094
Adjustments to reconcile net income to
cash provided by operations
Equity in income of subsidiary bank (9,125) (7,672) (2,709)
Net accretion of securities discounts (12) (17)
Net gain on sale of securities (151) (270)
Change in
Interest receivable 75 305
Other assets 81 (86) 322
Other liabilities 63 68 270
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (313) (251) 995
Cash flows from investing activities Activity in available-for-sale securities:
Maturities, prepayments and calls 307 1,064
Sales 5,884 36,118
Principal reduction of ESOP note receivable 422 422 422
Contribution to subsidiary bank (111) (112) (108)
Cash paid in the acquisition of AFSB (30,943)
Cash dividends received from subsidiary bank 12,500 4,000 2,449
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 12,811 10,501 9,002
Cash flows from financing activities
Purchase of treasury shares (13,640) (8,833) (7,787)
Proceeds from exercise of stock options 492 258 508
Proceeds from exercise of stock warrants 1,635 502
Cash dividends paid (2,113) (1,858) (1,699)
- -------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (13,626) (9,931) (8,978)
- -------------------------------------------------------------------------------------------------------------------
Net change in cash (1,128) 319 1,019
Cash at beginning of period 1,406 1,087 68
- -------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 278 $ 1,406 $ 1,087
===================================================================================================================
50 OTTAWA FINANCIAL CORPORATION
QUARTERLY FINANCIAL INFORMATION
unaudited
The following is a summary of selected unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997. In our opinion, all adjustments
necessary for a fair presentation of such financial data have been included. All
such adjustments are of a normal recurring nature.
Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands except share data(1))
1998
Net interest income $6,680 $7,000 $7,110 $7,102
Provision for loan losses 210 225 240 255
Noninterest income 1,607 1,939 1,995 2,270
Noninterest expense 5,143 5,200 5,352 5,397
Income before income taxes 2,934 3,514 3,513 3,720
Net income 1,831 2,227 2,205 2,405
Basic earnings per common share .32 .40 .41 .46
Diluted earnings per common share .29 .36 .37 .42
1997
Net interest income $6,553 $6,915 $6,784 $6,770
Provision for loan losses 150 150 180 180
Noninterest income 721 1,037 942 1,446
Noninterest expense 4,424 4,678 4,727 4,879
Income before income taxes 2,700 3,124 2,819 3,157
Net income 1,716 1,962 1,730 2,119
Basic earnings per common share .29 .35 .31 .38
Diluted earnings per common share .28 .33 .28 .34
(1) All per share information has been retroactively adjusted to reflect the
stock dividends paid on August 31, 1998 and September 30, 1997 and the
effects of SFAS No. 128.
OTTAWA FINANCIAL CORPORATION 51
SHAREHOLDER INFORMATION
Market
Ottawa Financial Corporation's common stock is traded on the Nasdaq National
Market under the symbol "OFCP." Total shares outstanding, net of treasury stock,
as of December 31, 1998, were 5,448,161. The high and low closing prices for the
common stock as reported on the Nasdaq as well as dividends declared per share,
adjusted for the 10% stock dividends paid on August 31, 1998 and September 30,
1997, were as follows.
Quarter Ended High Low Dividends
- --------------------------------------------------------------------------------
March 31, 1997 $ 17.252 $ 13.946 $ .07
June 30, 1997 18.802 16.942 .08
September 30, 1997 24.659 18.594 .08
December 31, 1997 30.909 23.636 .09
March 31, 1998 29.545 25.909 .09
June 30, 1998 26.818 25.909 .09
September 30, 1998 26.141 21.500 .10
December 31, 1998 24.000 18.875 .11
The information set forth in the table above was provided by The Nasdaq Stock
Market. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
The Board of Directors intends to continue the payment of quarterly cash
dividends, dependent upon the results of operations and financial condition of
Ottawa and other factors. Restrictions on dividend payments are described in
Note 12 of the Notes to Consolidated Financial Statements.
As of March 11, 1999, Ottawa had approximately 2,210 shareholders of record
and 5,688,572 shares outstanding of common stock.
Annual Report on Form 10-K
A copy of Ottawa Financial Corporation's Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission, may be obtained without charge upon
written request to Douglas J. Iverson, Vice Chairman and CEO, Ottawa Financial
Corporation, 245 Central Avenue, Holland, MI 49423-3298 or by calling (616)
393-7002.
Corporate Headquarters Registrar/Transfer Agent
245 Central Avenue Registrar and Transfer Company
Holland, MI 49423-3298 Cranford, NJ
Independent Auditor General Counsel
Crowe, Chizek and Company LLP Cunningham Dalman, PC
Grand Rapids, MI Holland, MI
Special Counsel
Silver, Freedman & Taff, LLP
Washington, DC
52 OTTAWA FINANCIAL CORPORATION