<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 0-24118
OTTAWA FINANCIAL CORPORATION
----------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-3172166
-------- ----------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
245 Central Avenue, Holland, Michigan, 49423
--------------------------------------------
(Address of Principal Executive Offices)
616-393-7000
------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
-------- -----
Class: Common Stock - $.01 par value
As of May 5, 1998, there were 5,280,883 shares of common stock outstanding.
<PAGE> 2
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
PART I - FINANCIAL INFORMATION
Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below:
Page
----
ITEM 1 FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition...........3
Consolidated Statements of Operations....................4
Consolidated Statements of Comprehensive Income..........5
Consolidated Statements of Cash Flows..................6-7
Notes to the Consolidated Financial Statements...........8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................9-13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..............................................14-16
PART II - OTHER INFORMATION
OTHER INFORMATION.........................................................17
SIGNATURES................................................................18
EXHIBIT INDEX.............................................................19
2
<PAGE> 3
PART I
Item 1
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 29,324 $ 25,437
Interest-bearing demand deposits in other financial institutions 692 7,087
--------- ---------
Total cash and cash equivalents 30,016 32,524
Securities available for sale 62,118 57,308
Federal Home Loan Bank stock 8,023 7,308
Loans held for sale 3,371 1,955
Loans receivable, net 771,285 747,423
Accrued interest receivable
Loans 3,845 3,859
Securities 836 669
Premises and equipment, net 16,061 15,030
Acquisition intangibles 13,944 14,248
Other assets 5,966 5,493
--------- ---------
Total Assets $ 915,465 $ 885,817
========= =========
LIABILITIES
Deposits $ 663,887 $ 654,560
Federal funds purchased 5,000
Federal Home Loan Bank advances 154,458 145,458
Advances from borrowers for taxes and insurance 2,443 917
Accrued expenses and other liabilities 12,331 8,519
--------- ---------
Total Liabilities 838,119 809,454
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
6,094,966 shares at March 31, 1998,
6,012,997 shares at December 31, 1997 61 60
Additional Paid-in Capital 68,971 67,381
Retained earnings, substantially restricted 24,711 23,386
Net unrealized gain or (loss) on securities available for sale, net of tax 33 62
Employee Stock Ownership Plan (Unallocated Shares) (2,221) (2,323)
Management Recognition and Retention Plan (Unearned Shares) (1,151) (1,502)
Less Cost of Common Stock in
Treasury - 778,463 shares at
March 31, 1998, 699,913 shares at
December 31, 1997 (13,058) (10,701)
--------- ---------
Total Shareholders' Equity 77,346 76,363
--------- ---------
Total Liabilities and Shareholders' Equity $ 915,465 $ 885,817
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
---- ----
(Dollars in Thousands,
except per share data)
Interest income
<S> <C> <C>
Loans $ 15,303 $ 14,457
Investment securities and equity investments 965 961
Other interest and dividend income 288 204
-------- --------
16,556 15,622
-------- --------
Interest expense
Deposits 7,617 7,053
Federal Home Loan Bank advances 2,250 2,012
Other 9 4
-------- --------
9,876 9,069
-------- --------
NET INTEREST INCOME 6,680 6,553
Provision for loan losses 210 150
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,470 6,403
-------- --------
Noninterest income
Service charges and other fees 1,060 537
Mortgage servicing fees 90 63
Gain on sale of loans 437 16
Gain (loss) on sale of securities (24) 64
Other 44 41
-------- --------
1,607 721
-------- --------
Noninterest expense
Compensation and benefits 2,847 2,341
Occupancy 362 330
Furniture, fixtures and equipment 285 256
Advertising 75 87
FDIC deposit insurance 100 24
State single business tax 138 90
Data processing 228 211
Professional services 96 80
Acquisition intangibles amortization 304 312
Other 708 692
-------- --------
5,143 4,423
-------- --------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX EXPENSE 2,934 2,701
Federal income tax expense (benefit) 1,103 985
-------- --------
NET INCOME (LOSS) $ 1,831 $ 1,716
======== ========
Earnings per common share $ .36 $ .32
======== ========
Earnings per common share assuming dilution $ .32 $ .31
======== ========
Dividends per common share $ .10 $ .08
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
---- ----
(Dollars in Thousands, except per share data)
<S> <C> <C>
Net Income $ 1,831 $ 1,716
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during the period
on securities available for sale (45) (115)
Less: reclassification adjustment for accumulated (gains)
losses included in net income 16 (42)
------- -------
Unrealized gains (losses) on securities available for sale (29) (157)
------- -------
Comprehensive income $ 1,802 $ 1,559
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,831 $ 1,716
Adjustments to reconcile net income to net cash from operating activities
Depreciation 284 270
Net amortization of security premiums and discounts 134 92
Amortization of acquisition intangibles 304 312
Provision for loan losses 210 150
Loss on limited partnership investments 82 25
ESOP expense 373 220
MRP expense 135 143
Origination of loans for sale (25,579) (3,343)
Proceeds from sale of loans originated for sale 24,298 3,359
Gain on sale of loans (437) (16)
(Gain)/loss on sale of securities 24 (64)
Changes in:
Other assets (785) (1,189)
Other liabilities 3,998 2,396
-------- --------
Net cash from operating activities 4,872 4,071
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (17,094) (96)
Proceeds from calls and maturities of securities available for sale 6,160 3,700
Proceeds from sale of securities available for sale 3,976 161
Purchases of FHLB stock (715) (100)
Principal payments on mortgage-backed certificates 2,038 2,097
Purchases of loans (910)
Loan originations net of principal payments on loans (23,770) (6,337)
Premises and equipment expenditures, net (1,315) (195)
-------- --------
Net cash from investing activities (30,720) (1,680)
-------- --------
</TABLE>
6
<PAGE> 7
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,327 13,478
Net increase (decrease) in Federal funds purchased 5,000 (2,000)
Proceeds from FHLB advances 27,000 16,000
Repayment of FHLB advances (18,000) (19,000)
Net increase in advances from borrowers 1,526 723
Proceeds from exercise of stock options 163 36
Proceeds from exercise of stock warrants 1,187
Cash dividends paid (506) (435)
Purchase of treasury shares (2,357) (2,493)
-------- --------
Net cash from financing activities 23,340 6,309
-------- --------
Net change in cash and cash equivalents (2,508) 8,700
-------- --------
Cash and cash equivalents at beginning of period 32,524 22,801
-------- --------
Cash and cash equivalents at end of period $ 30,016 $ 31,501
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 6,255 $ 8,312
Income taxes 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1998
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Ottawa Financial Corporation ("Corporation") and its wholly owned subsidiary,
AmeriBank ("Bank"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
These interim financial statements are prepared without audit and
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Corporation at March
31, 1998, and its results of operations and statement of cash flows for the
periods presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read in conjunction with the consolidated financial statements and notes thereto
of Ottawa Financial Corporation for the year ended December 31, 1997.
The provision for income taxes is based upon the effective tax rate
expected to be applicable for the entire year.
Earnings per common share and Earnings per common share assuming
dilution were computed under the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which was adopted retroactively
beginning the fourth quarter of 1997. All prior amounts have been restated to be
comparable. Amounts reported as 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
include issued shares less shares held in the treasury and unallocated shares
held by the ESOP. Earnings per common share assuming dilution 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 dividend paid on September 30, 1997.
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("SFAS No. 130"). The
Corporation adopted SFAS No. 130 retroactively beginning with the first quarter
of 1998. Under this standard, comprehensive income is defined as all changes in
equity other than those resulting from investments by owners and distributions
to owners, and therefore includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
8
<PAGE> 9
Item 2
OTTAWA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the financial condition of Ottawa
Financial Corporation ("Corporation") and its wholly owned subsidiary, AmeriBank
("Bank") at March 31, 1998 to December 31, 1997 and the results of operations
for the three months ended March 31, 1998, compared to the same period in 1997.
This discussion should be read in conjunction with the interim consolidated
condensed financial statements and footnotes included herein.
When used in this Quarterly Report on Form 10-Q, the words or phrases
"will likely result", "are expected to", "is anticipated", "estimate", "project"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties - including changes in
economic conditions in the Corporation's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Corporation's market area and competition, that could cause actual results to
differ materially from historical performance and those presently anticipated or
projected. The Corporation wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The Corporation wishes to advise readers that the factors listed above could
affect the Corporation's financial performance and could cause the Corporation's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The Corporation does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
The Corporation's total assets increased to $915.47 million at March
31, 1998 from $885.82 million at December 31, 1997. Most of the growth was in
the loan portfolio, which was funded from the proceeds received from FHLB
advances and federal funds purchased, as well as the growth in deposits.
Net loans receivable increased to $771.29 million at March 31, 1998
from $747.42 million at December 31, 1997. This growth was primarily in the
commercial portfolio and to a lesser degree in the consumer and mortgage
portfolios. The growth was achieved through Management's focus on the
development of its commercial and business banking services, as well as healthy
loan demand in the Corporation's market area. Furthermore, the volume of
residential mortgage loans originated for sale increased from $3.34 million for
the three months ended March 31, 1997 to $25.58 million for the same period in
1998, resulting from a change in the method of pricing mortgage loans to be
sold. The Corporation moved from rate commitments based upon a sixty day
delivery period to a thirty day delivery period to Freddie Mac, resulting in
more competitive rates being offered to customers.
Deposits increased to $663.89 million at March 31, 1998 from $654.56
million at December 31, 1997. The areas of growth were primarily in money market
savings and demand deposit accounts, as well as commercial checking accounts.
Due to the low rates being offered during the first quarter of 1998 on wholesale
funding sources, the Bank increased its use of federal funds purchased and FHLB
advances in funding the growth in the loan portfolio.
The primary components of growth in shareholders' equity for the three
months ended March 31, 1998 were net income and proceeds received from the
exercise of stock warrants. Proceeds from warrant exercises amounted to $1.19
million for the first quarter. According to their terms, the stock warrants
expire on February 13, 1999. As this expiration date approaches it is expected
that warrant exercise activity will increase resulting in increases in
shareholders' equity. Remaining warrants outstanding at March 31, 1998 would
allow the purchase of 517,054 shares at an exercise price of $15.91 per share
for total proceeds of $8.23 million. The growth in shareholders' equity was
partially offset by the quarter's cash dividends declared and additional
repurchases of the Corporation's outstanding shares of common stock. During the
first three months of 1998, 78,550 shares were repurchased at an average price
of $30.00 per share.
9
<PAGE> 10
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables present for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and the
resultant yields, as well as the amount of interest expense paid on average
interest-bearing liabilities, and the resultant rates.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Average Average
Outstanding Interest Yield/ Outstanding Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
------- ----------- ---- ------- ----------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) (2) $756,437 $15,313 8.14% $718,216 $14,469 8.06%
Securities (2) 63,225 975 6.17 61,709 989 6.40
Other interest-earning assets 16,853 289 6.95 13,387 204 6.10
-------- ------- ---- -------- ------- ----
Total interest-earning assets $836,515 $16,577 7.98% $793,312 $15,662 7.90%
-------- ------- ---- -------- ------- ----
Interest-Bearing Liabilities
Demand and NOW deposits $156,013 $1,475 3.83% $146,594 $1,382 3.83%
Savings deposits 61,936 315 2.06 66,724 403 2.45
Certificate accounts 408,544 5,827 5.78 386,560 5,268 5.54
FHLB advances 152,391 2,250 5.99 140,337 2,012 5.83
Other interest-bearing liabilities 634 9 5.68 197 4 8.16
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities $779,518 $9,876 5.14% $740,412 $9,069 4.97%
-------- ------ ---- -------- ------ ----
Net interest income $6,701 $6,593
====== ======
Net interest rate spread 2.84% 2.93%
==== ====
Net interest earning assets $56,997 $52,900
======= =======
Net yield on average
interest-earning assets 3.22% 3.32%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.07x 1.07x
===== =====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process, and
loan reserves.
(2) Tax exempt interest on loans and securities has been converted to a fully -
taxable equivalent basis.
10
<PAGE> 11
RATE/VOLUME ANALYSIS
The following table represents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the change related to
changes in outstanding balances and that due to interest rate movements. 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). For purposes of this table, changes
attributable to both rate and volume that cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 vs. 1997
Increase (Decrease)
Due to Total Increase
Volume Rate (Decrease)
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 773 $ 71 $ 844
Securities 26 (40) (14)
Other interest-earning assets 57 28 85
----- ----- -----
Total interest-earning assets $ 856 $ 59 $ 915
===== ===== =====
Interest-bearing liabilities:
Demand and NOW deposits 93 0 93
Savings deposits (27) (61) (88)
Certificate accounts 307 252 559
Borrowings 177 61 238
Other interest-bearing liabilities 6 (1) 5
----- ----- -----
Total interest-bearing liabilities $ 556 $ 251 $ 807
===== ===== =====
Net interest income $ 300 $(192) $ 108
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1998 was $1.83 million or
$.32 per share assuming dilution compared to net income of $1.72 million or $.31
per share assuming dilution for the same period in 1997. The improvement in
earnings over the same period in the prior year is due primarily to the growth
in noninterest income and, to a lesser extent, an improvement in net interest
income. These improvements were partially offset by increases in the provision
for loan losses and noninterest expenses.
11
<PAGE> 12
To supplement the EPS information typically disclosed, the Corporation
is providing "cash" or "tangible" EPS assuming dilution as an alternative
measure for evaluating the Corporation's ability to grow tangible capital. The
calculations of cash or tangible earnings per share were specifically formulated
by the Corporation and may not be comparable to similarly titled measures
reported by other companies. This measure is not intended to reflect cash flow
per share. The cash or tangible EPS for the first quarter of 1998 was $.43,
which is $.11 per share higher than the standard EPS, compared to a tangible EPS
of $.41 for the first quarter of 1997. This measure and the factors influencing
its calculation are described more fully in the 1997 Annual Report to
Shareholders.
Net income for the quarter ended March 31, 1998 yielded a return on
average equity ("ROE") of 9.65% compared to an ROE of 9.02% for the same period
in 1997. The increase in the return on average equity is primarily attributable
to the improved earnings resulting from the growth in noninterest income and net
interest income. In addition to the increase in net income, ROE was also
positively impacted by the stock buy back activity discussed above.
Net interest income increased $108,000 on a tax equivalent basis for
the three months ended March 31, 1998 as compared to the same period in 1997.
The increase in net interest income is attributable to the positive impact of
interest-earning asset volume increases caused by internal growth experienced
during 1997 and the first three months of 1998. The yield on total
interest-earning assets improved primarily due to a change in the composition of
the Bank's loan portfolio to higher yielding commercial loans. Offsetting this
improvement in the yield on interest-earning assets was the increase in the cost
of interest-bearing liabilities, resulting in a decline in the net interest
spread. The cost of interest-bearing liabilities increased primarily due to an
increase in FHLB advances as a percent of total interest-bearing liabilities.
Further, the rates on deposit accounts have generally decreased since the first
quarter of 1997, however, the cost of certificate accounts increased to 5.78%
for the first quarter of 1998 compared to 5.54% for the first quarter of 1997.
This increase 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 ("AFSB") in early 1996. Net interest
spread declined from 2.93% to 2.84%, and net interest margin, from 3.32% to
3.22%, for the three months ended March 31, 1997 compared to the same period in
1998, respectively. The reduction in net interest margin was primarily the
result of this spread decline.
The provision for loan losses is a result of management's periodic
analysis of the adequacy of the allowance for loan losses. Although actual
losses on loans have not increased compared to the first quarter of the prior
year, the provision of $210,000 for the three months ended March 31, 1998
compared to $150,000 for the same period in the prior year was in response to
the growth achieved in the consumer and commercial loan portfolios.
The allowance is maintained by management at a level considered
adequate to cover possible loan losses that are currently anticipated based on
past loss experience, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates, which are subject to change over time. Although
the level of non-performing assets is considered in establishing the allowance
for loan losses balance, variations in non-performing loans have not been
meaningful based upon the Corporation's past loss experience and, as such, have
not had a significant impact on the overall level of the allowance for loan
losses. Delinquent loans more than 90 days are put on non-accrual status unless
they are adequately collateralized and in the process of collection (see
discussion on Non-Performing Assets and Allowance for Loan Losses below).
Noninterest income increased to $1.61 million for the three months
ended March 31, 1998 from $721,000 for the same period in 1997. The increase in
noninterest income is primarily the result of increased sales and realizations
of gains on sales of mortgage loans during the first quarter of 1998 compared to
the same quarter of the prior year. The increase is also attributable to
enhancements in deposit account service fees that were implemented during the
third quarter of 1997 to achieve more consistency in fee structures between the
Bank and AFSB. These increases were further complimented by increases in
mortgage servicing fees due to growth in the servicing portfolio and offset by
losses on the sale of securities during the first quarter of 1998 compared to
the same period in the prior year.
Noninterest expense increased to $5.14 million for the three months
ended March 31, 1998 from $4.42 million for the same period in 1997. The
increase in noninterest expense is primarily in employee related costs, a
portion of which is related to increased expense of the Employee Stock Ownership
Plan due to the higher market value of the Corporation's stock. Further,
specialized expertise has been added to the Corporation's staff to develop the
commercial and consumer loan portfolio's and other lines of fee generating
business consistent with the Corporation's strategic plan. The benefits of
12
<PAGE> 13
these investments in resources are expected to materialize more noticeably in
future quarters' earnings. However, it should be noted that actual results could
differ from expected due to factors outside of Management's control including
fluctuations in interest rates, demand for loans in the Corporation's market
area and competition.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's non-performing assets increased from $3.18 million at
December 31, 1997 to $3.59 million at March 31, 1998 largely due to an increase
in foreclosed assets. The percentage of non-performing assets to total assets
was .39% at March 31, 1998 compared to .31% at December 31, 1997. The
Corporation's allowance for loan losses as a percentage of non-performing loans
at March 31, 1998 was 129.37% compared to 120.32% at December 31, 1997.
Non-accruing loans at March 31, 1998 consisted of $1.42 million of residential
mortgage loans, $406,000 of consumer loans and $667,000 of commercial business
and nonresidential loans.
The table below sets forth the amounts and categories of non-performing
assets at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans $2,496 $2,080
Accruing loans delinquent more than 90 days:
One- to four-family 46 98
Commercial and multi-family real estate 118 546
Consumer 4 2
------ ------
Total 168 646
------ ------
Foreclosed assets:
One- to four-family 620 276
Consumer 306 181
------ ------
Total 926 457
------ ------
Total non-performing assets $3,590 $3,183
====== ======
Total as a percentage of total assets .39% .36%
====== ======
</TABLE>
LIQUIDITY
The Corporation anticipates it will have sufficient funds available to
meet current loan commitments primarily through sales, calls and maturities of
securities, loan payments and payoffs, and the growth of deposits. If necessary,
additional sources of liquidity are available from FHLB borrowings and unused
lines of credit with correspondent banks. At March 31, 1998, the Corporation had
commitments to make loans of $48.07 million, unused lines of credit of $56.16
million, and construction loans in process of $21.74 million.
CAPITAL RESOURCES
The Bank is subject to capital to asset requirements in accordance with
Bank regulations. There has been no significant change in the level of the
Bank's regulatory capital relative to the requirements since December 31, 1997.
The Bank remains "well capitalized" under the prompt corrective action
regulations.
13
<PAGE> 14
Item 3
OTTAWA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Corporation's 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). Such
financial instruments have varying levels of sensitivity to changes in market
interest rates resulting in market risk. Other than loans which are originated
and held for sale, all of the financial instruments of the Corporation are for
other than trading purposes.
The Bank is subject to interest rate risk to the extent that its
interest-bearing liabilities with short and intermediate-term maturities reprice
more rapidly, or on a different basis, than its interest-earning assets.
Management works to reduce its exposure to interest rate risk. Significant
effort is being made to reduce the duration and average life of the Bank's
interest-earning assets. The Bank continues to emphasize adjustable rate
mortgages and is attempting to grow its consumer and commercial portfolios which
are shorter term in nature than the mortgage portfolio. In addition, all
long-term, fixed rate mortgages are underwritten in accordance with Federal Home
Loan Mortgage Corporation ("FHLMC") guidelines thereby allowing the flexibility
of sale of the assets into the secondary market. All 30-year fixed rate loans
are sold as they are originated and beginning in late March 1998 originations of
all 15-year fixed rate loans are sold as well. With its funding sources,
management is attempting to reduce the impact of interest rate changes by
emphasizing non-interest bearing products, longer term certificates of deposit
and use of fixed rate, term advances from the FHLB.
Management measures the Bank's interest rate risk by computing
estimated changes in net interest income and the net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. The Bank's exposure to
interest rate risk is reviewed on a quarterly basis by senior management and the
Board of Directors. Exposure to interest rate risk is measured with the use of
interest rate sensitivity analysis to determine the change in NPV in the event
of hypothetical changes in interest rates. If estimated changes to NPV 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.
NPV represents the market value of portfolio 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 4%
increases and decreases in market interest rates. The tables below present the
Bank's projected change in NPV and net interest income ("NII") for the various
rate shock levels at March 31, 1998 and December 31, 1997.
14
<PAGE> 15
<TABLE>
<CAPTION>
March 31, 1998: Net Portfolio Value Net Interest Income
------------------------- --------------------------
Change in
Interest Rate $ Amount % Change $ Amount % Change
(Basis Points) in NPV in NPV in NII in NII
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+400 $34,589 -57% $17,611 -33%
+300 49,060 -39 20,229 -23
+200 60,270 -25 22,287 -15
+100 70,448 -12 24,258 -7
0 80,484 --- 26,175 ---
-100 90,127 12 28,060 7
-200 95,837 19 29,526 13
-300 106,251 32 30,642 17
-400 113,494 41 30,928 18
<CAPTION>
December 31, 1997: Net Portfolio Value Net Interest Income
------------------------- --------------------------
Change in
Interest Rate $ Amount % Change $ Amount % Change
(Basis Points) in NPV in NPV in NII in NII
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+400 $42,260 -48% $17,370 -31%
+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
-400 115,250 41 29,823 18
</TABLE>
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, the Bank does not experience a significant rise
in market value for these loans because borrowers prepay at relatively high
rates. The value of the Bank's deposits and borrowings changes in approximately
the same proportion in rising or falling rate scenarios.
The tables above indicate that from December 31, 1997 to March 31, 1998
there has been an increase in sensitivity to a rise in interest rates. At an
increase in interest rates of 400 basis points, NPV decreases by 57% as of March
31, 1998 compared to a 48% decrease as of December 31, 1997. This change is due
primarily to an increase in the size of the Bank's 15-year fixed rate mortgage
portfolio and a decrease in its adjustable rate mortgage loan portfolio in the
same time period.
15
<PAGE> 16
Due to the low level of mortgage loan interest rates, refinance activity
increased dramatically beginning in December 1997. Many of the Bank's customers
refinanced from adjustable rate to fixed rate mortgages causing the changes in
portfolio sizes discussed above. In the first quarter of 1998 Management
retained these 15-year fixed rate mortgages instead of selling them into the
secondary mortgage market. Most of these retained mortgages were funded by
long-term, fixed rate FHLB advances in order to reduce the level of additional
exposure to interest rate risk. As of March 24, 1998 the Bank began selling its
current production of 15-year fixed rate mortgages to further reduce its
exposure to interest rate risk.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. 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 in advance of 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 which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, expected
rates of prepayments on loans, decay rates of deposits and early withdrawals
from certificates could deviate significantly from those assumed in calculating
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 the Corporation's net interest income because
the repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Corporation's control.
16
<PAGE> 17
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
PART II - OTHER INFORMATION
Item 1 Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 Changes in Securities:
There are no matters required to be reported under this item.
Item 3 Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 Other Information:
There are no matters required to be reported under this item.
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibit 11 Statement - Re: Computation of Per Share Earnings
(b) Exhibit 27 - Financial Data Schedule (Electronic Filing Only)
17
<PAGE> 18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTTAWA FINANCIAL CORPORATION
Date: 5/13/98 Gordon L. Grevengoed
------- --------------------
Gordon L. Grevengoed
President and Chief Executive Officer
Date: 5/13/98 Jon W. Swets
------- ------------
Jon W. Swets
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
11 Statement - Re: Computation of Per Share Earnings.
27 Financial Data Schedule (Electronic Filing Only).
<PAGE> 1
(a) Exhibit 11 - Computation of Earnings per common share and Earnings per
common share assuming dilution
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1998
--------------
(Dollars in thousands, except per share data)
Earnings per common share
<S> <C>
Net income available to common shareholders $ 1,831
==========
Weighted average common shares outstanding 5,055,036
==========
Earnings per common share $ .36
==========
Earnings per common share assuming dilution
Net income available to common shareholders $ 1,831
==========
Weighted average common shares outstanding 5,055,036
Add: Dilutive effects of assumed exercises of
stock options and warrants 620,870
----------
Weighted average common and dilutive potential
Common shares outstanding 5,675,906
==========
Earnings per common share assuming dilution $ .32
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The financial data schedule contains financial information from the Corporatin's
interim consolidated financial statements contained in its quarterly report on
Form 10-Q for the period ended March 31, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,324
<INT-BEARING-DEPOSITS> 692
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,371
<INVESTMENTS-HELD-FOR-SALE> 62,118
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 774,733
<ALLOWANCE> 3,448
<TOTAL-ASSETS> 915,465
<DEPOSITS> 663,887
<SHORT-TERM> 65,500
<LIABILITIES-OTHER> 14,774
<LONG-TERM> 88,958
0
0
<COMMON> 60
<OTHER-SE> 77,285
<TOTAL-LIABILITIES-AND-EQUITY> 915,465
<INTEREST-LOAN> 15,303
<INTEREST-INVEST> 965
<INTEREST-OTHER> 288
<INTEREST-TOTAL> 16,556
<INTEREST-DEPOSIT> 7,617
<INTEREST-EXPENSE> 9,876
<INTEREST-INCOME-NET> 6,680
<LOAN-LOSSES> 210
<SECURITIES-GAINS> (24)
<EXPENSE-OTHER> 5,143
<INCOME-PRETAX> 2,934
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,831
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 3.22
<LOANS-NON> 2,496
<LOANS-PAST> 168
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,293
<CHARGE-OFFS> 98
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 3,448
<ALLOWANCE-DOMESTIC> 2,885
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 563
</TABLE>
