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, 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 August 4, 2000, there were 6,603,687
shares outstanding.
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 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
Report of Independent Accountants......................................9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................10 - 16
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................17 - 18
Part II - Other Information
OTHER INFORMATION...........................................................19
SIGNATURES..................................................................20
EXHIBIT INDEX...............................................................21
2
PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in Thousands)
ASSETS
Cash and due from financial institutions $20,077 $24,420
Interest-bearing demand deposits in other financial institutions 271 2,069
Total cash and cash equivalents 20,348 26,489
Securities available for sale 69,305 81,056
Federal Home Loan Bank stock 12,056 11,782
Loans held for sale 713
Loans receivable, net 941,935 856,759
Premises and equipment, net 16,469 16,348
Acquisition intangibles 11,231 11,828
Other assets 12,567 12,906
------ ------
Total Assets $1,084,624 $1,017,168
========= =========
LIABILITIES
Deposits $738,089 $711,954
Federal Home Loan Bank advances 238,125 216,353
Federal funds purchased 14,159 1,600
Accrued expenses and other liabilities 14,358 9,429
------ -----
Total Liabilities 1,004,731 939,336
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
6,603,687 shares at June 30, 2000,
6,471,617 shares at December 31, 1999 66 65
Additional Paid-in Capital 79,993 77,562
Retained earnings 1,998 10,454
Accumulated other comprehensive income (867) (855)
Employee Stock Ownership Plan (Unallocated Shares) (1,258) (1,462)
Management Recognition and Retention Plan (Unearned Shares) (39) (215)
Less Cost of Common Stock in
Treasury - 0 shares at
June 30, 2000, 376,828 shares at
December 31, 1999 _____ (7,717)
-------
Total Shareholders' Equity 79,893 77,832
------ ------
Total Liabilities and Shareholders' Equity $1,084,624 $1,017,168
========= =========
See accompanying notes to consolidated financial statements.
3
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in Thousands,
except per share data)
Interest Income
Loans $18,319 $15,293 35,586 $30,540
Investment securities and
equity investments 1,169 1,147 2,339 2,120
Other interest and dividend income 268 356 519 821
--- --- --- ---
19,756 16,796 38,444 33,481
------ ------ ------ ------
Interest Expense
Deposits 8,516 6,991 16,534 14,291
Federal Home Loan Bank advances 3,558 2,250 6,757 4,548
Other 154 9 269 12
--- - --- --
12,228 9,250 23,560 18,851
------ ----- ------ ------
NET INTEREST INCOME 7,528 7,546 14,884 14,630
Provision for loan losses 345 285 675 555
--- --- --- ---
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,183 7,261 14,209 14,075
----- ----- ------ ------
Noninterest income
Service charges and other fees 1,246 1,143 2,319 2,180
Mortgage servicing fees 60 98 122 204
Gain on sale of loans 30 151 49 595
Gain (loss) on sale of securities - - - (9)
Fees from sales of mutual funds
and annuities 279 232 638 434
Other 31 21 92 66
-- -- -- --
1,646 1,645 3,220 3,470
----- ----- ----- -----
Noninterest expense
Compensation and benefits 2,881 2,921 5,841 5,768
Occupancy 443 420 845 853
Furniture, fixtures and equipment 257 324 489 655
Advertising 108 75 208 150
FDIC deposit insurance 37 101 72 204
State single business tax 17 143 35 285
Data processing 320 336 639 614
Professional services 122 89 257 228
Acquisition intangibles amortization 298 301 597 602
Other 747 675 1,464 1,316
--- --- ----- -----
5,230 5,385 10,447 10,675
----- ----- ------ ------
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 3,599 3,521 6,982 6,870
Federal income tax expense 1,273 1,259 2,484 2,495
----- ----- ----- -----
NET INCOME $2,326 $2,262 $4,498 $4,375
===== ===== ===== =====
Earnings per common share
Basic $.36 $.34 $.70 $.67
=== === === ===
Diluted .35 .32 .67 .63
=== === === ===
Dividends per common share .12 .10 .23 .19
=== === === ===
See accompanying notes to consolidated financial statements.
4
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in Thousands)
Net Income $ 2,326 $ 2,262 $ 4,498 $ 4,375
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during the
period on securities available for sale 145 (349) (12) (461)
Less: reclassification adjustment for accumulated
(gains) losses included in net income 6
------- ------- ------- -------
Unrealized gains (losses) on securities
available for sale 145 (349) (12) (455)
------- ------- ------- -------
Comprehensive income $ 2,471 $ 1,913 $ 4,486 $ 3,920
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
2000 1999
---- ----
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,498 $4,375
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 616 660
Net amortization of security premiums and discounts 131 202
Amortization of acquisition intangibles 597 602
Provision for loan losses 675 555
Loss on limited partnership investments 113 74
ESOP expense 488 576
MRP expense 176 249
Origination of loans for sale (6,276) (51,711)
Proceeds from sale of loans originated for sale 5,565 53,653
Gain on sale of loans (49) (595)
(Gain) / Loss on sale of securities 9
Changes in:
Other assets 251 (1,070)
Other liabilities 4,929 1,550
----- -----
Net cash from operating activities 11,714 9,129
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Purchases (23,032)
Maturities, prepayments and calls 11,583 12,808
Sales 1,005
Purchases of FHLB stock (274)
Purchases of loans (17,985) (9,910)
Loan originations net of principal payments on loans (67,819) 1,047
Premises and equipment expenditures, net (737) (1,032)
----- -------
Net cash from investing activities (75,232) (19,114)
6
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Six Months Ended
June 30
2000 1999
---- ----
(Dollars in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 26,135 (15,773)
Net increase (decrease) in Federal funds purchased 12,559 10,600
Proceeds from FHLB advances 124,000 16,000
Repayment of FHLB advances (102,228) (25,915)
Proceeds from exercise of stock options 14 430
Proceeds from exercise of stock warrants 1,072
Cash paid for exchange of warrants for cash (92)
Cash dividends paid (1,488) (1,278)
Purchase of treasury shares (1,615) (513)
------- -----
Net cash from financing activities 57,377 (15,469)
------ --------
Net change in cash and cash equivalents (6,141) (25,454)
Cash and cash equivalents at beginning of year 26,489 42,225
------ ------
Cash and cash equivalents at end of year $20,348 $16,771
====== ======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $22,059 $19,402
Income taxes 2,925 2,450
See accompanying notes to consolidated financial statements.
7
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 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 June 30, 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, 2000.
8
REPORT OF INDEPENDENT ACCOUNTANTS
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 June 30, 2000, and the related consolidated
statements of operations and comprehensive income for the quarter and
year-to-date periods ended June 30, 2000 and 1999, and the related consolidated
statements of cash flows for the year-to-date periods ended June 30, 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 American
Institute of Certified Public Accountants. 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
July 14, 2000
9
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,
2000 to December 31, 1999 and the results of operations for the three and six
months ended June 30, 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
FINANCIAL CONDITION
Total assets increased to $1.08 billion at June 30, 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, additional borrowings from the
Federal Home Loan Bank and the reduction in low-yielding investable funds.
Net loans receivable increased to $941.94 million at June 30, 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 $41.69 million during the first six months of 2000.
This growth was accompanied by the increase in the residential mortgage
portfolio of $39.45 million during the same period. The combination of rising
interest rates and loan demand in our market area caused a shift in our
residential 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 $738.09 million at June 30, 2000 from $711.95
million at December 31, 1999. The growth was primarily in certificates of
deposit, and to a lesser extent in commercial checking and money market savings
accounts. Commercial checking accounts grew by $4.22 million during the first
half of this year. This represents a 19% growth rate and is due to our increased
emphasis on growing commercial deposit relationships and partly as a by-product
of our growth in commercial lending. The deposit growth was supplemented by the
use of Federal Home Loan Bank advances and the reduction in low-yielding
investable funds to fund the loan growth discussed above.
The primary component of growth in shareholders' equity for the six months
ended June 30, 2000 was net income. The increase was partially offset by cash
dividends declared and additional repurchases of common stock.
11
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.
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------------------ -----------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable (1) (2) $900,449 $ 35,602 7.91% $775,764 $ 30,557 7.91%
Securities (2) 76,217 2,341 6.14 72,922 2,127 5.83
Other interest-earning 12,750 519 8.14 25,808 821 6.42
-------- -------- ---- -------- -------- ----
Total interest-earning $989,416 $ 38,462 7.77% $874,494 $ 33,505 7.69%
-------- -------- ---- -------- -------- ----
Interest-Bearing Liabilities:
Demand and NOW deposits $213,918 $ 4,196 3.92% $202,696 $ 3,408 3.39%
Savings deposits 47,404 413 1.74 54,020 463 1.73
Certificate accounts 416,991 11,925 5.72 386,580 10,420 5.44
FHLB advances 221,275 6,757 6.11 156,461 4,548 5.86
Other interest-bearing 7,661 269 6.97 339 12 6.98
-------- -------- ---- -------- -------- ----
Total interest-bearing $907,249 $ 23,560 5.21% $800,096 $ 18,851 4.75%
-------- -------- ---- -------- -------- ----
Net interest income $ 14,902 $ 14,654
====== ======
Net interest rate spread 2.56% 2.94%
==== ====
Net earning assets $ 82,167 $ 74,398
======= ======
Net yield on average
interest-earning assets 3.01% 3.36%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities 1.09x 1.09x
===== =====
(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
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
2000 vs. 1999
-------------------------------
Increase
(Decrease)
Due to
------------------
Total
Volume Rate Increase
(Decrease)
-------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 4,929 $ 116 $ 5,045
Securities - Taxable 98 116 214
Other interest-earning assets (675) 373 (302)
------- ------- -------
Total interest-earning assets $ 4,352 $ 605 $ 4,957
======= ======= =======
Interest-bearing liabilities:
Demand and NOW deposits $ 196 $ 592 $ 788
Savings deposits (58) 8 (50)
Certificate accounts 848 657 1,505
Borrowings 1,969 240 2,209
Other interest-bearing liabilities 257 -- 257
------- ------- -------
Total interest-bearing liabilities $ 3,212 $ 1,497 $ 4,709
======= ======= =======
Net interest income $ 1,140 $ (892) $ 248
======= ======= =======
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2000 was $2.33 million or $.35
per diluted common share compared to net income of $2.26 million or $.32 per
diluted common share for the same period in 1999. Net income for the six months
ended June 30, 2000 was $4.50 million or $.67 per diluted common share compared
to net income of $4.38 million or $.63 per diluted common share for the same
period in 1999. The improvement in earnings over the same periods in the prior
year was due to a combination of growth in net interest income in the first
quarter and noninterrest expense reductions during both the first and second
quarters. 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, 2000.
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
13
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 and first six months of 2000 were $.42 and $.81 compared to a cash EPS
of $.40 and $.79 for the same periods in the prior year. This measure and the
factors influencing its calculation are described more fully in our 1999 Annual
Report to Shareholders.
Net interest income increased $248,000 on a tax equivalent basis for the
six months ended June 30, 2000 compared to the same period in 1999. 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 first six 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 both the volume and 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 six
months of 2000 compared to the same period in the prior year. While there was a
46 basis point rise in the cost of interest-bearing liabilities, there was only
a 8 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 first six months 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 six months 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 six months of the prior
year, the provision of $675,000 for the six months ended June 30, 2000 compared
to $555,000 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, 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 $3.22 million for the six months ended
June 30, 2000 from $3.47 million for the same period in 1999. The decrease
related primarily to lower gains on sales of mortgage loans which fell by
$546,000 compared to the first six months of 1999. The rising interest rate
environment caused a shift in the mix of our mortgage loan originations from
fixed-rate to adjustable-rate loans. Since we retain adjustable-rate mortgage
loans for our portfolio, our loan sale volume decreased. Noninterest income,
other than income from mortgage loan sales, grew during the second quarter and
the first six months of 2000 compared to the same periods of the prior year.
This growth was due primarily to the increase in fees on sales of mutual funds
and annuities.
Noninterest expense decreased for the quarter and the six months ended
June 30, 2000 compared to the same periods in the prior year. Compensation and
benefits expense was relatively stable 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 second quarter and the first six
months of 2000 compared to the same periods 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 59.08% for the six months ended June 30, 1999
to 57.75% for the same period in 2000. This improvement in our efficiency ratio
is a result of these favorable reductions in noninterest expenses.
14
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Non-performing assets increased to $3.59 million at June 30, 2000 from
$2.10 million at December 31, 1999. The percentage of non-performing assets to
total assets was .33% at June 30, 2000 compared to .21% at December 31, 1999.
The Corporation's allowance for loan losses as a percentage of non-performing
loans at June 30, 2000 was 168.08% compared to 359.21% at December 31, 1999. The
increase in non-performing assets was due primarily to the addition of one loan
to non-accruing commercial business loans. Management anticipates based on
collateral value that all principal and interest due on this loan will be
collected in full.
The table below sets forth the amounts and categories of non-performing
assets at June 30, 2000 and December 31, 1999.
June 30 December 31
2000 1999
---- ----
(Dollars in Thousands)
Non-accruing loans:
One to four family $547 $175
Multi-family and commercial real estate - -
Construction or development - -
Commercial business 2,333 389
Consumer 131 323
--- ---
Total 3,011 887
Accruing loans delinquent more than 90 days:
One- to four-family - 5
Multi-family and commercial real estate 78 -
Construction or development - -
Commercial business - 322
Consumer - 98
---- ---
Total 78 425
-- ---
Foreclosed assets:
One- to four-family 274 536
Consumer 229 250
--- ---
Total 503 786
--- ---
Total non-performing assets $3,592 $2,098
===== =====
Total as a percentage of total assets .33 % .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 June 30, 2000, we had commitments to make
loans of $12.43 million, unused lines of credit of $79.29 million, and
construction loans in process of $54.40 million.
15
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.
16
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
June 30, 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.
JUNE 30, 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
- ---------------------------------------------------------------------------
+300 $31,404 -55 % $20,601 -32 %
+200 47,946 -32 24,035 -21
+100 61,265 -13 27,313 -10
0 70,402 --- 30,390 ---
-100 78,611 12 33,155 9
-200 83,112 18 35,122 16
-300 89,564 27 36,942 22
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
17
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 slight increases in our interest rate risk for the
first six months of 2000 for rate shocks up to 200 basis points either up or
down. The table, however, displays a larger 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 June 30, 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 six months of 2000 has resulted
in larger declines than in the past in the value of our adjustable rate
residential 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. Finally, the
significant growth in our adjustable rate residential mortgage portfolio, given
the rate adjustment caps and the rising interest rate environment, has caused an
increase in our interest rate risk.
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 growth in our installment and commercial business loan
portfolios. In addition, we are underwriting all long-term, fixed rate and
adjustable 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 have been and will continue to sell 30- and
15-year fixed-rate residential mortgage loans as they are originated. In
addition, beginning June 1, 2000 we have been selling our adjustable 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.
18
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 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:
On April 25, 2000, 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
--------------------- --------- --------------
Gordon H. Cunningham 5,137,646 44,858
B. Patrick Donnelly, III 5,138,918 43,586
Robert D. Kolk 5,159,294 23,210
Ratification of the appointment Votes For Votes Against Abstain
of Crowe, Chizek and Company LLP as --------- ------------- -------
independent auditors of the Corporation 5,156,593 11,556 14,355
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 statements
Exhibit 27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K.
Ottawa filed a Form 8-K dated May 24, 2000 containing a press
release announcing a 10% stock dividend and a cash dividend of $0.12
per share payable on June 30, 2000 to shareholders of record on June
14, 2000.
19
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 11, 2000 Douglas J. Iverson
---------------- -----------------------------------
Douglas J. Iverson
Vice Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: August 11, 2000 Jon W. Swets
---------------- -----------------------------------
Jon W. Swets
Chief Financial Officer
(Principal Financial Officer)
20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11 Statement - Re: Computation of per share earnings
15 Awareness Letter from Crowe, Chizek & Company LLP
27 Financial Data Schedule (electronic filing only)