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, 2000
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 May 2, 2000, there were
5,978,410 shares outstanding.
<PAGE>
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
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
Independent Accountants Report......................................9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................10 - 15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................16 - 17
PART II - OTHER INFORMATION
OTHER INFORMATION...........................................................18
SIGNATURES..................................................................18
EXHIBIT INDEX...............................................................19
2
<PAGE>
<TABLE>
<CAPTION>
PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
March 31, 2000 December 31, 1999
-------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $16,694 $24,420
Interest-bearing demand deposits in other financial institutions 970 2,069
--- -----
Total cash and cash equivalents 17,664 26,489
Securities available for sale 78,827 81,056
Federal Home Loan Bank stock 11,782 11,782
Loans receivable, net 899,392 856,759
Premises and equipment, net 16,295 16,348
Acquisition intangibles 11,530 11,828
Other assets 12,854 12,906
------ ------
Total Assets $1,048,344 $1,017,168
========= =========
LIABILITIES
Deposits $733,081 $711,954
Federal Home Loan Bank advances 221,353 216,353
Federal funds purchased 1,500 1,600
Accrued expenses and other liabilities 13,209 9,429
------ -----
Total Liabilities 969,143 939,336
------- -------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
6,471,617 shares at March 31, 2000
and December 31, 1999 65 65
Additional Paid-in Capital 77,686 77,562
Retained earnings, substantially restricted 11,920 10,454
Accumulated other comprehensive income (1,012) (855)
Employee Stock Ownership Plan (Unallocated Shares) (1,359) (1,462)
Management Recognition and Retention Plan (Unearned Shares) (90) (215)
Less Cost of Common Stock in
Treasury - 395,281 shares at
March 31, 2000, 376,828 shares at
December 31, 1999 (8,009) (7,717)
------- -------
Total Shareholders' Equity 79,201 77,832
------ ------
Total Liabilities and Shareholders' Equity $1,048,344 $1,017,168
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in Thousands,
except per share data)
Interest Income
Loans $17,267 $15,246
Investment securities and
equity investments 1,171 973
Other interest and dividend income 250 466
--- ---
18,688 16,685
------ ------
Interest Expense
Deposits 8,019 7,299
Federal Home Loan Bank advances 3,199 2,298
Other 114 3
--- -
11,332 9,600
------ -----
NET INTEREST INCOME 7,356 7,085
Provision for loan losses 330 270
--- ---
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,026 6,815
----- -----
Noninterest income
Service charges and other fees 1,072 1,036
Mortgage servicing fees 62 106
Gain on sale of loans 20 444
Gain (loss) on sale of securities (9)
Fees from sales of mutual funds and annuities 359 201
Other 60 46
-- --
1,573 1,824
----- -----
Noninterest expense
Compensation and benefits 2,961 2,847
Occupancy 403 432
Furniture, fixtures and equipment 232 331
Advertising 100 75
FDIC deposit insurance 35 102
State single business tax 17 142
Data processing 318 278
Professional services 136 139
Acquisition intangibles amortization 298 301
Other 716 642
--- ---
5,216 5,289
----- -----
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 3,383 3,350
Federal income tax expense 1,210 1,237
----- -----
NET INCOME $2,173 $2,113
===== =====
Earnings per common share:
Basic $.37 $.35
=== ===
Diluted .36 .34
=== ===
Dividends per common share .12 .10
=== ===
See accompanying notes to consolidated financial statements.
4
<PAGE>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in Thousands)
<S> <C> <C>
Net Income $2,173 $2,113
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during the period
on securities available for sale (157) (109)
Less: reclassification adjustment for accumulated (gains)
losses included in net income 0 3
- -
Unrealized gains (losses) on securities available for sale (157) (106)
----- -----
Comprehensive income $2,016 $2,007
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,173 $2,113
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 303 329
Net amortization of security premiums and discounts 80 112
Amortization of acquisition intangibles 298 301
Provision for loan losses 330 270
Loss on limited partnership investments 57 60
ESOP expense 227 292
MRP expense 125 124
Origination of loans for sale (2,183) (31,014)
Proceeds from sale of loans originated for sale 2,182 30,965
Gain on sale of loans (20) (444)
(Gain) / loss on sale of securities 0 9
Changes in:
Other assets 99 33
Other liabilities 3,780 4,679
----- -----
Net cash from operating activities 7,451 7,829
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities:
Purchases (5,870)
Maturities, prepayments and calls 1,888 5,831
Sales 1,005
Purchases of loans (11,994) (3,527)
Loan originations net of principal payments on loans (30,948) 6,553
Premises and equipment expenditures, net (250) (673)
----- -----
Net cash from investing activities (41,304) 3,319
-------- -----
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Three Months Ended
March 31,
2000 1999
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 21,127 (12,446)
Net increase(decrease) in Federal funds purchased (100)
Proceeds from FHLB advances 58,000 5,000
Repayment of FHLB advances (53,000) (18,000)
Proceeds from exercise of stock options 331
Proceeds from exercise of stock warrants 853
Cash paid for exchange of warrants for cash (92)
Cash dividends paid (707) (603)
Purchase of treasury shares (292) (227)
----- -----
Net cash from financing activities 25,028 (25,184)
------ --------
Net change in cash and cash equivalents (8,825) (14,036)
Cash and cash equivalents at beginning of period 26,489 42,225
------ ------
Cash and cash equivalents at end of period $17,664 $28,189
====== ======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $10,630 $9,579
Income taxes 400 100
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 2000
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements reflect the consolidated financial condition
and results of operations of Ottawa Financial Corporation, AmeriBank and
AmeriBank's wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
As of January 1, 2000, AmeriBank's residential mortgage lending
operations were segregated and transferred into AmeriBank Mortgage Company, a
wholly-owned subsidiary of AmeriBank. The operations of AmeriBank Mortgage
Company include originating and selling residential mortgage loans.
These interim financial statements are not audited and reflect all
adjustments which, in management's opinion, are necessary to present fairly the
consolidated financial position of Ottawa at March 31, 2000, and its results of
operations, cash flows, and comprehensive income for the periods presented. All
adjustments are normal and recurring in nature. The accompanying consolidated
financial statements do not contain all the necessary financial disclosures
required by generally accepted accounting principles and should be read with the
consolidated financial statements and notes of Ottawa Financial Corporation for
the year ended December 31, 1999.
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 dividend paid on June 30,
1999.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
Ottawa Financial Corporation
Holland, Michigan
We have reviewed the consolidated statement of financial condition of Ottawa
Financial Corporation as of March 31, 2000, and the related consolidated
statements of operations, comprehensive income, and cash flows for the quarters
ended March 31, 2000 and 1999.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the AICPA. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
April 17, 2000
9
<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 March 31,
2000 to December 31, 1999 and the results of operations for the three months
ended March 31, 2000, compared to the same period in 1999. This discussion
should be read with the interim consolidated condensed financial statements and
footnotes attached.
This document, including information included or incorporated by
reference, contains, and future filing by the Company on Form 10-K, Form 10-Q
and Form 8-K and future oral and written statements by the Company and its
management may contain, forward-looking statements about Ottawa Financial and
its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance, growth opportunities, interest rates, cost
savings and funding advantages expected or anticipated to be realized by
management. Words such as "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions of
management and are not guarantees of future performance. The Company disclaims
any obligation to update or revise any forward-looking statements based on the
occurrence of future events, the receipt of new information, or otherwise. The
important factors we discuss below and elsewhere in this document, as well as
other factors discussed under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this document and
identified in our filings with the SEC and those presented elsewhere by our
management from time to time, could cause actual results to differ materially
from those indicated by the forward-looking statements made in this document.
The following factors, many of which are subject to change based on
various other factors beyond our control, could cause our financial performance
to differ materially from 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 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 the foregoing.
10
<PAGE>
FINANCIAL CONDITION
Total assets increased to $1.05 billion at March 31, 2000 from $1.02
billion at December 31, 1999. This growth was in the loan portfolio and was
funded primarily from the growth in deposits.
Net loans receivable increased to $899.39 million at March 31, 2000
from $856.76 million at December 31, 1999. Through our focus on the development
of our commercial and business banking services, as well as healthy loan demand
in our market area, we were able to grow our commercial business and commercial
real estate portfolio by $18.28 million during the first quarter of 2000. This
growth was accompanied by the increase in the mortgage portfolio of $24.74
million during the first quarter of 2000. The combination of rising interest
rates and loan demand in our market area caused a shift in our mortgage
portfolio from fixed-rate loans to adjustable-rate loans. 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 an increase
in our overall mortgage loan portfolio.
Deposits increased to $733.08 million at March 31, 2000 from $711.95
million at December 31, 1999. The growth was primarily in certificates of
deposit, and to a lesser extent in money market savings accounts. This growth,
along with the reduction in low-yielding investable funds, was used to fund the
loan growth discussed above.
The primary component of growth in shareholders' equity for the three
months ended March 31, 2000 was net income. The increase was offset by cash
dividends declared and additional repurchases of common stock.
11
<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>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------------------------- ------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) (2) $878,108 $17,275 7.88% $774,091 $15,255 7.93%
Securities (2) 80,086 1,171 5.85 70,790 977 5.52
Other interest-earning assets 12,625 251 7.96 29,757 466 6.35
------ --- ---- ------ --- ----
Total interest-earning assets $970,819 $18,697 7.70% $874,638 $16,698 7.68%
------- ------ ---- ------- ------ ----
Interest-Bearing Liabilities:
Demand and NOW deposits $210,908 $2,037 3.87% $198,974 $1,682 3.43%
Savings deposits 46,359 202 1.75 53,550 228 1.73
Certificate accounts 412,174 5,780 5.62 393,545 5,389 5.55
FHLB advances 216,147 3,199 5.94 158,055 2,298 5.90
Other interest-bearing liabilities 6,436 114 7.12 250 3 4.64
----- --- ---- --- - ----
Total interest-bearing liabilities $892,024 $11,332 5.10% $804,374 $9,600 4.84%
------- ------ ---- ------- ----- ----
Net interest income $7,365 $7,098
===== =====
Net interest rate spread 2.60% 2.84%
==== ====
Net earning assets $78,795 $70,264
====== ======
Net yield on average
interest-earning assets 3.03% 3.26%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.09x 1.09x
==== ====
</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.
12
<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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 vs. 1999
------------------------------------
Increase
(Decrease)
Due to
------------------
Total
Increase
Volume Rate (Decrease)
-----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $2,046 $(26) $2,020
Securities - Taxable 134 60 194
Other interest-earning assets (404) 189 (215)
----- --- -----
Total interest-earning assets $1,776 $223 $1,999
----- --- -----
Interest-bearing liabilities:
Demand and NOW deposits $105 $250 $355
Savings deposits (31) 5 (26)
Certificate accounts 259 132 391
Borrowings 859 42 901
Other interest-bearing liabilities 109 2 111
--- ---- ---
Total interest-bearing liabilities $1,301 $431 $1,732
----- --- -----
Net interest income $475 $(208) $267
=== ===== ===
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 2000 was $2.17 million or
$.36 per diluted common share compared to net income of $2.11 million or $.34
per diluted common share for the same period in 1999. The improvement in
earnings over the same period in the prior year was due primarily to the growth
in net interest income. This improvement was partially offset by the decrease in
gains on sales of loans. In addition to the increase in net income, earnings per
share was enhanced through our continued stock repurchase activity. All per
share information has been retroactively adjusted to reflect the 10% stock
dividend paid on June 30, 1999.
To supplement the earnings per share information typically disclosed,
we are providing "cash" or "tangible" earnings per share as an alternative
measure for evaluating our 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 first quarter of 2000 was $.44 compared to a cash EPS of $.42 for the
first quarter of 1999. This measure and the factors influencing its calculation
are described more fully in our 1999 Annual Report to Shareholders.
Net interest income increased $267,000 on a tax equivalent basis for
the three months ended March 31, 2000 compared to the same period in 1999. The
increase in net interest income was attributable to the positive impact of
13
<PAGE>
interest-earning asset volume increases caused by internal growth experienced
during 1999 and the first three months of 2000. The improvement in interest
income resulting from the increase in the volume of interest-earning assets was
partially offset by the increase in the cost of interest-bearing liabilities.
The increase in the cost of interest-bearing liabilities resulted from the rise
in general market interest rates, as well as an increase in FHLB advances as a
percent of total interest-bearing liabilities during the first quarter of 2000
compared to the same period in the prior year. While there was a 26 basis point
rise in the cost of interest-bearing liabilities, there was only a 2 basis point
rise in the yield on interest-earning assets. The limited improvement in yield
on interest-earning assets was due to the increased demand for adjustable-rate
mortgage loans during the fourth quarter of 1999 and first quarter of 2000. This
lower-yielding portfolio offset the improvement in yield that resulted from the
growth in the commercial loan portfolio. Due to the increase in the cost of
interest-bearing liabilities and the limited increase in yield on
interest-earning assets, we saw a reduction in our net interest rate spread and
net interest margin during the first quarter of 2000 compared to the same period
in the prior 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 three months of the
prior year, the provision of $330,000 for the three months ended March 31, 2000
compared to $270,000 for the same period in the prior year was in response to
the growth achieved in the commercial loan portfolio, which generally involves 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 to $1.57 million for the three months
ended March 31, 2000 from $1.82 million for the same period in 1999. The
decrease related primarily to lower gains on sales of mortgage loans. The rising
interest rate environment 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, other than income
from mortgage loan sales, grew during the first quarter of 2000 compared to the
same quarter of the prior year by $173,000, representing a 13% increase. This
increase was due primarily to the increase in fees on sales of mutual funds and
annuities.
Noninterest expense was relatively stable for the three months ended
March 31, 2000 compared to the same period in the prior year. There was a slight
increase in compensation and benefits for the periods presented. Improvements in
ESOP expense and pension income were offset by increases in salary expense. Due
to favorable market conditions, the performance of the pension assets was strong
and exceeded the expenses associated with the plan thereby resulting in net
pension income. Due to a reduction in premiums within the industry, our FDIC
deposit insurance expense decreased during the first quarter of 2000 compared to
the same period in the prior year. In addition, tax savings strategies
implemented in the first quarter of the year resulted in a decrease in our state
single business tax expense. Our efficiency ratio, defined generally as
noninterest expense divided by the sum of net interest income and noninterest
income, decreased from 60.17% for the three months ended March 31, 1999 to
58.53% for the same period in 2000. This ratio demonstrates that while the
absolute dollars of noninterest expense were stable for the period presented,
our ability to generate revenues on those dollars improved.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets increased to $3.87 million at March 31, 2000 from
$2.10 million at December 31, 1999. The percentage of non-performing assets to
total assets was .37% at March 31, 2000 compared to .21% at December 31, 1999.
The Corporation's allowance for loan losses as a percentage of non-performing
loans at March 31, 2000 was 148.96% compared to 359.21% at December 31, 1999.
The increase in non-performing assets was due primarily to the addition of one
loan to commercial business loans more than 90 days delinquent and still
accruing. Management anticipates that all principal and interest due on this
loan will be collected in full.
14
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets at March 31, 2000 and December 31, 1999.
March 31 December 31
2000 1999
---- ----
(Dollars in Thousands)
Non-accruing loans:
One to four family $387 $175
Multi-family and commercial real estate --- ---
Construction or development --- ---
Commercial business 737 389
Consumer 227 323
--- ---
Total 1,351 887
Accruing loans delinquent more than 90 days:
One- to four-family 492 5
Multi-family and commercial real estate --- ---
Construction or development --- ---
Commercial business 1,489 322
Consumer 3 98
- --
Total 1,984 425
----- ---
Foreclosed assets:
One- to four-family 258 536
Consumer 281 250
--- ---
Total 539 786
--- ---
Total non-performing assets $3,874 $2,098
===== =====
Total as a percentage of total assets .37% .21%
=== ===
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 March 31, 2000, we had
commitments to make loans of $25.89 million, unused lines of credit of $105.97
million, and construction loans in process of $49.00 million.
CAPITAL RESOURCES
AmeriBank is subject to capital 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, 1999. The
Bank remains "well capitalized" under the prompt corrective action regulations.
YEAR 2000 ISSUE
We successfully completed our Y2K readiness plan and experienced no
material issues. All systems and functions have been processing well since
January 1, 2000. We will continue to monitor all systems throughout the year.
15
<PAGE>
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.
Senior management and the Board of Directors review AmeriBank's (the
Company's operating subsidiary) 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 March 31, 2000 and December 31, 1999, 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.
<TABLE>
<CAPTION>
March 31, 2000: 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>
+300 $ 38,670 -47% $ 22,924 -27%
+200 53,904 -27 25,888 -17
+100 66,387 -10 28,684 -8
0 73,612 --- 31,267 ---
-100 78,157 6 33,526 7
-200 82,357 12 34,976 12
-300 87,315 19 36,317 16
December 31, 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 $ 50,356 -39% $ 20,235 -31%
+200 60,890 -27 23,412 -20
+100 73,191 -12 26,468 -10
0 83,204 --- 29,299 ---
-100 84,197 1 31,910 9
-200 90,050 8 33,703 15
-300 97,142 17 35,349 21
</TABLE>
16
<PAGE>
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.
The table identifies only slight changes in our interest rate risk
position in the first quarter of 2000 for rate shocks up to 200 basis points
either up or down. The table, however, displays an increase in risk for the 300
basis point interest rate shock upward. This increase in risk relates partially
to the decrease in the value of our equity at a 0 basis point shock from
December 31, 1999 to March 31, 2000. As equity decreases, the percent change in
net portfolio value increases for the same dollar amount change in net portfolio
value. This dynamic is emphasized at the higher basis point shock levels.
Further, the rapid rise in market interest rates during the first quarter has
resulted in larger declines than in the past in the value of our adjustable rate
mortgage loan portfolio for upward interest rate shocks of over 200 basis
points. Most of our adjustable rate mortgage loans contain interest rate
adjustment caps of 200 basis points per year. The rapid rise in rates has caused
more of these loans to hit their adjustment caps in the computations of their
value for the upward interest rate shock of 300 basis points.
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
installment and commercial business loan portfolios. In addition, we are
underwriting all long-term, fixed rate residential 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 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 certificates of deposit.
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.
17
<PAGE>
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
See Note 10 of the 1999 Annual Report to Shareholders.
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) The following exhibits are filed herewith:
Exhibit 11- Statement re Computation of Per Share Earnings
Exhibit 15 - Letter re unaudited interim financial statement
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K.
Ottawa filed a Form 8-K dated February 1, 2000
containing a press release announcing the Annual Meeting of
Shareholders for the year ended December 31, 1999.
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: MAY 12, 2000 DOUGLAS J. IVERSON
------------------- ------------------------------------
Douglas J. Iverson
Vice Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: MAY 12, 2000 JON W. SWETS
------------------- ------------------------------------
Jon W. Swets
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Statement - Re: Computation of per share earnings.
15 Letter re unaudited interim financial information
27 Financial Data Schedule (electronic filing only)
(a) Exhibit 11 - COMPUTATION OF BASIC EARNINGS PER COMMON SHARE AND
DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(Dollars in thousands, except per share data)
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income available to common shareholders $2,173 $2,113
====== ======
Weighted average common shares outstanding 5,902,737 5,922,375
========= =========
Basic earnings per common share $.37 $.35
==== ====
DILUTED EARNINGS PER COMMON SHARE
Net income available to common shareholders $2,173 $2,113
====== ======
Weighted average common shares outstanding 5,902,737 5,922,375
Add: Dilutive effects of assumed exercises of
stock options and warrants 217,576 389,110
Weighted average common and dilutive potential
Common shares outstanding 6,120,313 6,311,485
========= =========
Diluted earnings per common share $.36 $.34
==== ====
</TABLE>
Note: The share and per share information disclosed above have been
retroactively adjusted to reflect the 10% stock dividend paid on June 30,
1999.
April 17, 2000
Ottawa Financial Corporation
Holland, Michigan
We have reviewed, in accordance with standards established by the AICPA, the
unaudited interim financial information of Ottawa Financial Corporation for the
periods ended March 31, 2000 and 1999 as indicated in our report dated April 17,
2000. Because we did not perform an audit, we expressed no opinion on that
information. We are aware that our report referred to above, which was included
in your quarterly report on Form 10-Q, is being incorporated by reference in
Registration Statements (File Nos. 333-1350, 333-4242 and 333-79843) on Form S-8
and in the Registration Statement (File No. 333-4950) on Form S-3.
We also are aware that our report referred to above, under Rule 436(c) under the
Securities Act of 1933, is not considered a part of the registration statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of the Act.
Crowe, Chizek and Company LLP
<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 March 31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,694
<INT-BEARING-DEPOSITS> 970
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,827
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 904,360
<ALLOWANCE> 4,968
<TOTAL-ASSETS> 1,048,344
<DEPOSITS> 733,081
<SHORT-TERM> 123,727
<LIABILITIES-OTHER> 13,209
<LONG-TERM> 99,126
65
0
<COMMON> 0
<OTHER-SE> 79,136
<TOTAL-LIABILITIES-AND-EQUITY> 1,048,344
<INTEREST-LOAN> 17,267
<INTEREST-INVEST> 1,171
<INTEREST-OTHER> 250
<INTEREST-TOTAL> 18,688
<INTEREST-DEPOSIT> 8,019
<INTEREST-EXPENSE> 11,332
<INTEREST-INCOME-NET> 7,356
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,216
<INCOME-PRETAX> 3,383
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,173
<EPS-BASIC> .37
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.03
<LOANS-NON> 1,351
<LOANS-PAST> 1,984
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,714
<CHARGE-OFFS> 152
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 4,968
<ALLOWANCE-DOMESTIC> 3,940
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,028
</TABLE>
