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 June 30, 1999
Commission File Number 0-24118
OTTAWA FINANCIAL CORPORATION
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-3172166
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 August 4, 1999, there were 6,258,019
shares outstanding.
<PAGE>
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
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.........................................9-15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................16-18
Part II - Other Information
OTHER INFORMATION.............................................................19
SIGNATURES....................................................................20
EXHIBIT INDEX.................................................................21
2
<PAGE>
<TABLE>
<CAPTION>
PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 15,368 $ 20,437
Interest-bearing demand deposits in other financial institutions 1,403 21,788
--------- ---------
Total cash and cash equivalents 16,771 42,225
Securities available for sale 80,121 71,646
Federal Home Loan Bank stock 11,782 11,782
Loans held for sale 1,470 3,375
Loans receivable, net 778,636 769,770
Premises and equipment, net 15,572 15,200
Acquisition intangibles 12,430 13,032
Other assets 12,074 11,000
--------- ---------
Total Assets $ 928,856 $ 938,030
========= =========
LIABILITIES
Deposits $ 677,859 $ 693,632
Federal funds purchased 10,600
Federal Home Loan Bank advances 150,353 160,268
Accrued expenses and other liabilities 12,075 10,723
--------- ---------
Total Liabilities 850,887 864,623
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
6,437,447 shares at June 30, 1999,
6,770,757 shares at December 31, 1998 64 62
Additional Paid-in Capital 76,825 73,177
Retained earnings, substantially restricted 6,732 15,363
Net unrealized gain or (loss) on securities available for sale, net of tax (432) 23
Employee Stock Ownership Plan (Unallocated Shares) (1,672) (1,886)
Management Recognition and Retention Plan (Unearned Shares) (463) (712)
Less Cost of Common Stock in
Treasury - 174,428 shares at
June 30, 1999, 777,780 shares at
December 31, 1998 (3,085) (12,620)
--------- ---------
Total Shareholders' Equity 77,969 73,407
--------- ---------
Total Liabilities and Shareholders' Equity $ 928,856 $ 938,030
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Thousands,
except per share data)
<S> <C> <C> <C> <C>
Interest Income
Loans $ 15,293 $ 15,706 $ 30,540 $ 31,008
Investment securities and
equity investments 1,147 1,006 2,120 1,971
Other interest and dividend income 356 251 821 540
-------- -------- -------- --------
16,796 16,963 33,481 33,519
-------- -------- -------- --------
Interest Expense
Deposits 6,991 7,570 14,291 15,186
Federal Home Loan Bank advances 2,250 2,371 4,548 4,622
Other 9 22 12 31
-------- -------- -------- --------
9,250 9,963 18,851 19,839
-------- -------- -------- --------
NET INTEREST INCOME 7,546 7,000 14,630 13,680
Provision for loan losses 285 225 555 435
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,261 6,775 14,075 13,245
-------- -------- -------- --------
Noninterest income
Service charges and other fees 1,143 998 2,180 2,058
Mortgage servicing fees 98 81 204 171
Gain on sale of loans 151 555 595 992
Gain (loss) on sale of securities (9) (24)
Other 253 305 500 349
-------- -------- -------- --------
1,645 1,939 3,470 3,546
-------- -------- -------- --------
Noninterest expense
Compensation and benefits 2,921 2,909 5,768 5,756
Occupancy 420 373 853 735
Furniture, fixtures and equipment 324 300 655 585
Advertising 75 75 150 150
FDIC deposit insurance 101 101 204 201
State single business tax 143 138 285 276
Data processing 336 241 614 469
Professional services 89 115 228 212
Acquisition intangibles amortization 301 304 602 608
Other 675 644 1,316 1,351
-------- -------- -------- --------
5,385 5,200 10,675 10,343
-------- -------- -------- --------
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 3,521 3,514 6,870 6,448
Federal income tax expense 1,259 1,287 2,495 2,390
-------- -------- -------- --------
NET INCOME $ 2,262 $ 2,227 $ 4,375 $ 4,058
======== ======== ======== ========
Earnings per common share
Basic $ .38 $ .36 $ .73 $ .67
======== ======== ======== ========
Diluted .36 .33 .69 .60
======== ======== ======== ========
Dividends per common share .11 .08 .21 .16
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Six Months Ended
June 30
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Net Income $ 4,375 $ 4,058
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during the period
on securities available for sale (461) 12
Less: reclassification adjustment for accumulated (gains)
losses included in net income 6 16
------- -------
Unrealized gains (losses) on securities available for sale (455) 28
------- -------
Comprehensive income $ 3,920 $ 4,086
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,375 $ 4,058
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 660 577
Net amortization of security premiums and discounts 202 230
Amortization of acquisition intangibles 602 608
Provision for loan losses 555 435
Loss on limited partnership investments 74 82
ESOP expense 576 731
MRP expense 249 270
Origination of loans for sale (51,711) (59,971)
Proceeds from sale of loans originated for sale 53,653 59,018
Gain on sale of loans (595) (992)
(Gain) / Loss on sale of securities 9 24
Changes in:
Other assets (1,070) 40
Other liabilities 1,550 2,371
-------- --------
Net cash from operating activities 9,129 7,481
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Purchases (23,032) (19,094)
Maturities, prepayments and calls 12,808 14,056
Sales 1,005 3,976
Purchases of FHLB stock (787)
Purchases of loans (9,910)
Loan originations net of principal payments on loans 1,047 (25,844)
Premises and equipment expenditures, net (1,032) (1,128)
-------- --------
Net cash from investing activities (19,114) (28,821)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Six Months Ended
June 30
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits (15,773) 16,379
Net increase in Federal funds purchased 10,600
Proceeds from FHLB advances 16,000 63,500
Repayment of FHLB advances (25,915) (47,315)
Proceeds from exercise of stock options 430 397
Proceeds from exercise of stock warrants 1,072 1,470
Cash paid for exchange of warrants for cash (92)
Cash dividends paid (1,278) (1,001)
Purchase of treasury shares (513) (6,840)
-------- --------
Net cash from financing activities (15,469) 26,590
-------- --------
Net change in cash and cash equivalents (25,454) 5,250
-------- --------
Cash and cash equivalents at beginning of year 42,225 32,524
-------- --------
Cash and cash equivalents at end of year $ 16,771 $ 37,774
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 19,402 $ 20,754
Income taxes 2,450 1,710
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1999
(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 June 30, 1999,
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, 1998.
The provision for income taxes is based upon the effective tax rate
expected to be applicable for the entire year.
Amounts reported as basic earnings per common share reflect the earnings
available to common shareholders for the period divided by the weighted average
number of common shares outstanding during the period. 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
include the shares that would be outstanding assuming exercise of dilutive stock
options and warrants. All share and per share information has been retroactively
adjusted to reflect the 10% stock dividends paid on June 30, 1999 and August 31,
1998.
NOTE 2 - PENDING LITIGATION
The claim against AmeriBank for liquidated damages and deconversion fees
made by On-Line Financial Services, Inc. and our claim for damages against
On-Line were settled in April 1999 with no damages to either party.
A lawsuit against AmeriBank was filed in December 1998 alleging that we
engaged in the unauthorized practice of law due to charging a fee for preparing
loan documents. The complaint sought class action certification, restitution of
all fees paid for the last six years, interest, attorney fees and other costs.
The class action certification was obtained in March 1999. We filed a motion for
summary disposition based upon our belief that the complaint was wholly without
merit. In July 1999 the court granted our motion and the case was dismissed.
Since then, the plaintiff has amended the complaint and is now alleging we have
violated certain banking regulations. We again believe, after consultation with
legal counsel, that these allegations are wholly without merit and intend to
vigorously defend against this lawsuit.
8
<PAGE>
Item 2
OTTAWA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion compares the financial condition of Ottawa
Financial Corporation and its wholly owned subsidiary, AmeriBank, at June 30,
1999 to December 31, 1998, and the results of operations for the three and six
months ended June 30, 1999, compared to the same periods in 1998. This
discussion should be read with the interim consolidated condensed financial
statements and footnotes attached.
We may from time to time make written or oral "forward-looking
statements." These forward-looking statements may be contained in this quarterly
filing with the Securities and Exchange Commission, our Annual Report to
Shareholders, other filings with the Securities and Exchange Commission, 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 operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and services
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.
FINANCIAL CONDITION
Total assets decreased to $928.86 million at June 30, 1999 from $938.03
million at December 31, 1998. Most of this decrease was in cash and cash
equivalents, resulting primarily from the decline in deposits.
Net loans receivable increased to $778.64 million at June 30, 1999 from
$769.77 million at December 31, 1998. Through our focus on the development of
9
<PAGE>
our commercial and business banking services and our consumer lending products,
as well as healthy loan demand in our market area, we were able to grow our
commercial business and commercial real estate loan portfolio by $20.18 million
and our consumer loan portfolio by $8.29 million during the first six months of
1999. This growth, however, was partially offset by the decrease in the
residential mortgage portfolio of $21.01 million during the same period. Due to
the low interest rate environment in the first quarter, a portion of our
adjustable-rate mortgage loan portfolio refinanced to fixed rate loans during
the first three months of the year. Since we sell almost all of our 15 and 30
year term fixed rate mortgage loan production and retain for our portfolio
adjustable rate mortgage loan production, we saw a decrease in our overall
mortgage loan portfolio.
Deposits decreased to $677.86 million at June 30, 1999 from $693.63
million at December 31, 1998. This decrease in deposits was a result of a
reduction in our certificates of deposit portfolio. Due to excess liquidity as
evidenced by the high balance of cash and cash equivalents at December 31, 1998,
we priced our certificates of deposit either at or below the market in certain
maturity categories to provide for some reduction in the certificates of deposit
portfolio. This portfolio decreased by $22.59 million in the first six months of
1999 while our transaction and savings accounts increased by $6.82 million in
the same period.
The primary components of growth in shareholder's equity for the six
months ended June 30, 1999 related to net income, as well as proceeds received
from the exercise of stock options and warrants. The increases were offset by
cash dividends declared and additional repurchases of outstanding shares of
common stock. In connection with our warrant exchange offer that expired on
January 26, 1999, we issued 180,599 shares of Ottawa Financial Corporation
common stock and paid $90,130 in cash. The remaining warrants were exercised by
the date of the warrant plan expiration, resulting in additional capital of
$900,000.
10
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
This table presents the amount of interest income from average
interest-earning assets and the yields earned on those assets, as well as the
interest expense on average interest-bearing liabilities and the rates paid on
those liabilities. All average balances are daily average balances.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------------------------- -----------------------------------
Average Interest Average
Outstanding Earned/ Yield/ Outstanding Interest Yield/
Balance Paid Rate Balance Earned/Paid Rate
----------------------------------- -----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) (2) $775,764 $ 30,557 7.91% $769,089 $ 31,029 8.10%
Securities (2) 72,922 2,127 5.83 61,058 1,988 6.51
Other interest-earning assets 25,808 821 6.42 14,727 540 7.33
-------- -------- ---- -------- -------- ----
Total interest-earning assets $874,494 $ 33,505 7.69% $844,874 $ 33,557 7.97%
-------- -------- ---- -------- -------- ----
Interest-Bearing Liabilities:
Demand and NOW deposits $202,696 $ 3,408 3.39% $161,526 $ 3,052 3.81%
Savings deposits 54,020 463 1.73 62,316 624 2.02
Certificate accounts 386,580 10,420 5.44 403,311 11,510 5.76
FHLB advances 156,461 4,548 5.86 155,454 4,622 6.00
Other interest-bearing liabilities 339 12 6.98 1,133 31 5.47
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities $800,096 $ 18,851 4.75% $783,740 $ 19,839 5.10%
-------- ---- -------- -------- ----
Net interest income $ 14,654 $ 13,718
======== ========
Net interest rate spread 2.94% 2.87%
==== ====
Net earning assets $ 74,398 $ 61,134
======== ========
Net yield on average
interest-earning assets 3.36% 3.26%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.09x 1.08x
</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.
11
<PAGE>
RATE/VOLUME ANALYSIS
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.
Six Months Ended
June 30
1999 vs. 1998
--------------------------------
Increase
(Decrease)
Due to
-------------------
Total
Volume Rate Increase
(Decrease)
--------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 273 $ (745) $ (472)
Securities - Taxable 300 (161) 139
Other interest-earning assets 341 (60) 281
------- ------- -------
Total interest-earning assets $ 914 $ (966) $ (52)
======= ======= =======
Interest-bearing liabilities:
Demand and NOW deposits 627 (271) 356
Savings deposits (77) (84) (161)
Certificate accounts (466) (624) (1,090)
Borrowings 30 (104) (74)
Other interest-bearing liabilities (33) 14 (19)
------- ------- -------
Total interest-bearing liabilities $ 81 $(1,069) $ (988)
======= ======= =======
Net interest income $ 833 $ 103 $ 936
======= ======= =======
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1999 was $2.26 million or $.36
per share assuming dilution compared to net income of $2.23 million or $.33 per
share assuming dilution for the same period in 1998. Net income for the six
months ended June 30, 1999 was $4.38 million or $.69 per share assuming dilution
compared to net income of $4.06 million or $.60 per share assuming dilution for
the same period in 1998. The improvement in earnings over the same periods in
the prior year was due primarily to the growth in net interest income. This
improvement was partially offset by a decrease in gains on sales of loans. All
per share information has been retroactively adjusted to reflect the 10% stock
dividends paid on June 30, 1999 and August 31, 1998.
To supplement the EPS information typically disclosed, we are providing
"cash" or "tangible" EPS as an alternative measure for evaluating the
Corporation's ability to grow tangible capital. The calculations of cash
earnings per share were specifically formulated by us 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
second quarter of 1999 was $.44, which was $.08 per share higher than the
standard EPS, compared to a cash EPS of $.42 for the second quarter of 1998. The
12
<PAGE>
cash or tangible EPS for the six months ended June 30, 1999 was $.87, which was
$.18 per share higher than the standard EPS, compared to a cash EPS of $.78 for
the same period in 1998. This measure and the factors influencing its
calculation are described more fully in the 1998 Annual Report to shareholders.
Net interest income increased $936,000 on a tax equivalent basis for the
six months ended June 30, 1999 compared to the same period in 1998. The increase
in net interest income was attributable to the positive impact of
interest-earning asset volume increases caused by internal growth experienced
during the latter half of 1998 as well as the positive impact of decreases in
the cost of interest-bearing liabilities. The improvement in interest income
resulting from the increase in the volume of interest-earning assets was offset
by the 28 basis point drop in the yield on interest-earning assets caused by the
decline in general market interest rates. There was also a 35 basis point
decrease in the cost of interest-bearing liabilities, resulting in a seven basis
point improvement in net interest spread. While there was an overall increase in
the volume of interest-bearing liabilities, the shift in the mix from higher
costing certificates of deposit to lower costing demand deposits for the first
six months of 1999 compared to the same period of the prior year contributed to
the lower interest expense. Net interest margin increased to 3.36% from 3.26%
for the six months ended June 30, 1999 compared to the same period in the prior
year. The improvement in net interest margin was due to the spread improvement
discussed above and the growth in noninterest-bearing deposits during the past
year.
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 six months of the prior
year, the provision of $555,000 for the six months ended June 30, 1999 compared
to $435,000 for the same period in the prior year was in response to the growth
achieved in the consumer and commercial loan portfolios, which generally involve
a greater degree of credit risk than one-to-four family mortgage lending.
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 our 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 decreased for both the three and six month periods
ended June 30, 1999 compared to the same periods in 1998. The decrease related
primarily to lower gains on sales of mortgage loans. The rising interest rate
environment in 1999 not only caused a reduction in the volume of loans
originated for sale but also caused a tightening of the profit margins
experienced on the sale of those loans. Noninterest income in most other areas
improved in 1999.
Noninterest expense showed a moderate increase to $10.68 million for the
six months ended June 30, 1999 from $10.34 million for the same period in 1998.
While noninterest expense showed an increase, our efficiency ratio, defined as
noninterest expense divided by the sum of net interest income and noninterest
income, decreased from 61.08% for the six months ended June 30, 1998 to 59.08%
for the same period in 1999. This ratio demonstrates that while the absolute
dollars of noninterest expense increased for the period presented, our ability
to generate revenues on those dollars improved.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets decreased to $2.46 million at June 30, 1999 from
$4.03 million at December 31, 1998 primarily due to decreases in non-accruing
loans. The percentage of non-performing assets to total assets was .27% at June
30, 1999 compared to .43% at December 31, 1998. Our allowance for loan losses as
a percentage of non-performing loans at June 30, 1999 was 240.12% compared to
129.37% at December 31, 1998.
13
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets at June 30, 1999 and December 31, 1998.
June 30 December 31
1999 1998
---- ----
(Dollars in Thousands)
Non-accruing loans
One to four family $175 $696
Multi-family and commercial real estate 879
Construction or development 1,057 609
Commercial business 394 504
Consumer 173 446
----- -----
Total 1,799 3,134
Accruing loans delinquent more than 90 days:
One- to four-family --- 32
Commercial and multi-family real estate --- ---
Construction or development --- 21
Consumer --- 11
----- -----
Total 64
Foreclosed assets:
One- to four-family 431 656
Consumer 231 174
----- -----
Total 662 830
----- -----
Total non-performing assets $2,461 $4,028
===== =====
Total as a percentage of total assets .27% .43%
=== ===
LIQUIDITY
We anticipate we will have sufficient funds available to meet current loan
commitments through sales, calls and maturities of securities, loan payments and
payoffs, and the growth of deposits. If necessary, significant sources of
liquidity are available from Federal Home Loan Bank advances and unused lines of
credit with correspondent banks. At June 30, 1999, we had commitments to make
loans of $23.38 million, unused lines of credit of $62.93 million, and
construction loans in process of $52.86 million.
CAPITAL RESOURCES
AmeriBank is subject to capital requirements in accordance with state
banking regulations. There has been no significant change in the level of the
AmeriBank's regulatory capital relative to the requirements since December 31,
1998. AmeriBank remains "well capitalized" under the prompt corrective action
regulations.
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 not
adequately addressed, the Y2K issue could have a significant adverse impact on
our business and, in turn, our financial condition and results of operations.
14
<PAGE>
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. Our Computer and Network
Department, as well as our Technology Committee, have been testing these areas
to assess Y2K compliance. If an area is not validated as Y2K compliant, then
updates are made to become Y2K compliant.
Our Y2K plan consists of several phases including awareness, assessment,
renovation, validation and implementation. Within the awareness phase, we
defined the Y2K problem and identified the resources to perform compliance work.
Within the assessment phase, we evaluated the complexity of the Y2K issue and
detailed the effort necessary to address the issues. The renovation phase
included code enhancements, hardware and software upgrades, system replacements,
vendor certifications and other similar changes. Within the validation phase, we
tested the incremental changes to hardware and software components identified in
the renovation phase. All of the above stages were completed prior to March 31,
1999.
At the end of the implementation phase we were able to certify our
mission-critical systems as Y2K compliant. In addition, this phase ensured that
any new systems or subsequent changes to verified systems are Y2K compliant.
This phase was completed 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 $300,000, net of
income taxes. Approximately two thirds of this estimated cost has been spent
through June 30,1999. 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 which also is certified as Y2K
compliant. We have completed the compliance testing of this system and our
interfacing with the service bureau in the implementation phase discussed above
and have concluded that it is Y2K compliant.
In addition to reviewing our own computer operating systems and
applications, we initiated formal communications with our significant vendors
(operating risk) and large customers (credit risk) to determine the extent to
which AmeriBank is vulnerable to those third parties' failure to resolve their
own Y2K issues. There is no assurance that the systems of other companies with
which we have a relationship will be timely converted. If such modifications and
conversions are not made, or are not completed in a timely manner, the Y2K issue
could have an adverse impact on our operations. Our communications with these
third parties have taken place over the various stages of our Y2K plan. We have
assessed the readiness status of our significant vendors and borrowers and have
updated these assessments on an ongoing basis. If any of these vendors or
borrowers displayed a high risk of not being ready for Y2K, the relationship was
severed. Underwriting standards for our significant borrowing customers have
incorporated Y2K assessments since late 1997. At that time all existing
significant borrowing customer relationships were evaluated and new
relationships have been evaluated in the underwriting process. Y2K readiness is
monitored on an ongoing basis by the individual loan officers assigned to these
borrowing customers.
15
<PAGE>
While our Y2K readiness process is proceeding according to plan, as a
precaution, we developed a contingency plan 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.
The costs of the project, the date on which we believe the Year 2000
modifications will be completed, and the related risk exposures are based on
management's best estimates. There can be no guarantee that these estimates will
be achieved and actual results could differ from those anticipated. Furthermore,
no assurance can be given that our contingency plans, if needed, will function
as anticipated, or that our results of operations will not be adversely affected
by difficulties or delays in third parties Y2K readiness efforts. Specific
factors that might cause differences include, but are not limited to, the
ability of other companies on which our systems rely to modify or convert their
systems to be Y2K compliant, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Item 3
OTTAWA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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.
Our senior management and Board of Directors review AmeriBank'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 AmeriBank's asset and
liability mix to bring interest rate risk within Board approved limits.
Net portfolio value 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 3% increases and decreases in market interest rates. The tables below
present the change in AmeriBank's net portfolio value and net interest income at
June 30, 1999 and December 31, 1998, based on internal assumptions, that would
occur upon an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
16
<PAGE>
JUNE 30, 1999: Net Portfolio Value Net Interest Income
----------------------- ------------------------
Change in
Interest Rate $ Amount % Change $ Amount % Change
(Basis Points) in NPV in NPV in NII in NII
- --------------------------------------------------------------------------------
+300 $ 41,486 -46 % $ 21,870 -25 %
+200 53,690 -30 24,351 -16
+100 65,115 -15 26,748 -8
0 76,320 --- 29,117 ---
-100 84,864 11 31,329 8
-200 88,029 15 32,774 13
-300 96,512 26 33,996 17
DECEMBER 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
- --------------------------------------------------------------------------------
+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
As illustrated in the table, net portfolio value 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, 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 net portfolio value for the 100 and 200 basis point interest rate
shocks both up and down.
17
<PAGE>
The tables above show that from December 31, 1998 to June 30, 1999 there
has been a slight decrease in sensitivity to a rise in interest rates. At an
increase in interest rates of 300 basis points, net portfolio value decreases by
46% as of June 30, 1999 compared to a 48% decrease as of December 31, 1998. Most
of the decrease in sensitivity relates to the increase in our equity from
December 31, 1998 to June 30, 1999. As equity increases, the percent change in
net portfolio value decreases for the same dollar amount change in net portfolio
value. A deposit portfolio mix change also contributed to the decrease in
sensitivity. During the six months ended June 30, 1999, many of our shorter-term
certificates of deposit matured and rolled over into our 30-month certificate
program. The effect of this shift was to lengthen the average maturity of our
certificate of deposit portfolio which decreases our sensitivity to a rise in
interest rates.
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 loan portfolios which are shorter-term in nature than the
mortgage loan portfolio. In addition, we are underwriting all long-term, fixed
rate residential mortgages in accordance with Freddie Mac guidelines which
allows us the flexibility of selling these assets into the secondary market. We
are currently selling 30- and 15-year fixed-rate residential mortgage loans as
they are originated. With our funding sources, we are attempting to reduce the
impact of interest rate changes by emphasizing non-interest bearing products and
using longer-term fixed-rate 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 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 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.
18
<PAGE>
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
PART II - OTHER INFORMATION
Item 1 Legal Proceedings:
There are no matters required to be reported under this item, but
see Note 2 of the Notes to Consolidated Financial Statements.
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:
On April 27, 1999, Ottawa Financial Corporation held its Annual
Meeting of Shareholders ("Meeting").
Shareholders of the Corporation voted on the following matters at
the Meeting:
Election of Directors Votes For Votes Withheld
- --------------------- --------- --------------
Ronald J. Bieke 4,503,118 120,928
Ronald L. Haan 4,518,498 105,548
Douglas J. Iverson 4,506,614 117,432
Brian W. Koop 4,520,275 103,771
Ratification of an amendment to Ottawa Votes For Votes Against Abstain
Financial's 1995 Stock Option and --------- ------------- -------
Incentive Plan to increase the number of
shares available thereunder by 283,860 3,975,697 599,218 49,131
Ratification of an amendment to Ottawa
Financial's 1995 Stock Option and
Incentive Plan to remove Office of Thrift
Supervision restrictions on the granting
and vesting of awards under the Plan 3,983,481 527,655 112,910
Ratification of the appointment
of Crowe, Chizek and Company as
independent auditors of the Bank 4,559,849 32,001 32,196
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)
(c) Reports on Form 8-K
1. The Corporation filed a Current Report on Form 8-K dated
May 26, 1999 with the SEC, containing two press releases.
The first press release reported the retirement of G.W.
Haworth as a Director of Ottawa Financial and its
wholly-owned subsidiary, AmeriBank, effective June 1, 1999
and the appointment of Richard T. Walsh to succeed the
Director position vacated by Mr. Haworth effective June 1,
1999. The second press release reported the Board of
Director's declaration of a 10% stock dividend and a cash
dividend of $0.11 per share payable on June 30, 1999 to
shareholders of record on June 14, 1999.
19
<PAGE>
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: August 10, 1999 /s/ Douglas J. Iverson
------------------ -------------------------------------------
Douglas J. Iverson
Vice Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: August 10, 1999 /s/ Jon W. Swets
------------------- -------------------------------------------
Jon W. Swets
Chief Financial Officer
(Principal Financial Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
11 Statement - Re: Computation of per share earnings.
27 Financial Data Schedule (electronic filing only)
(a) Exhibit 11 - COMPUTATION OF BASIC EARNINGS PER COMMON SHARE AND DILUTED
EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
(Dollars in thousands,
except per share data)
BASIC EARNINGS PER COMMON SHARE
Net income available to common shareholders $ 2,262 $ 4,375
========== ==========
Weighted average common shares outstanding 6,026,891 5,974,633
========== ==========
Basic earnings per common share $ .38 $ .73
========== ==========
DILUTED EARNINGS PER COMMON SHARE
Net income available to common shareholders $ 2,262 $ 4,375
========== ==========
Weighted average common shares outstanding 6,026,891 5,974,633
Add: Dilutive effects of assumed exercises of
stock options and warrants 305,952 351,562
Weighted average common and dilutive potential
common shares outstanding 6,332,843 6,326,195
========== ==========
Dilutive earnings per common share $ .36 $ .69
========== ==========
Note: The share and per share information disclosed above have been
retroactively adjusted to reflect the 10% stock dividend paid on
June 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The financial data schedule contains financial information from the
Corporation's interim consolidated financial statements contained in its
quarterly report on Form 10-Q for the period ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,368
<INT-BEARING-DEPOSITS> 1,403
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,470
<INVESTMENTS-HELD-FOR-SALE> 80,121
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 782,957
<ALLOWANCE> 4,321
<TOTAL-ASSETS> 928,856
<DEPOSITS> 677,859
<SHORT-TERM> 32,828
<LIABILITIES-OTHER> 12,075
<LONG-TERM> 128,125
64
0
<COMMON> 0
<OTHER-SE> 77,905
<TOTAL-LIABILITIES-AND-EQUITY> 928,856
<INTEREST-LOAN> 30,540
<INTEREST-INVEST> 2,120
<INTEREST-OTHER> 821
<INTEREST-TOTAL> 33,481
<INTEREST-DEPOSIT> 14,291
<INTEREST-EXPENSE> 18,851
<INTEREST-INCOME-NET> 14,630
<LOAN-LOSSES> 555
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 10,675
<INCOME-PRETAX> 6,870
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,375
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 3.36
<LOANS-NON> 1,799
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,823
<CHARGE-OFFS> 212
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 4,321
<ALLOWANCE-DOMESTIC> 3,492
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 829
</TABLE>
