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, 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 May 7, 1999, there were 5,685,680
shares outstanding.
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 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:
GE
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 - 17
PART II - OTHER INFORMATION
OTHER INFORMATION.........................................................18
SIGNATURES................................................................18
EXHIBIT INDEX.............................................................19
2
PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
March 31, 1999 December 31, 1998
-------------- -----------------
(Dollars in Thousands)
ASSETS
Cash and due from financial institutions $19,777 $20,437
Interest-bearing demand deposits in other financial institutions 8,412 21,788
----- ------
Total cash and cash equivalents 28,189 42,225
Securities available for sale 70,403 71,646
Federal Home Loan Bank stock 11,782 11,782
Loans held for sale 3,552 3,375
Loans receivable, net 766,790 769,770
Premises and equipment, net 15,544 15,200
Acquisition intangibles 12,731 13,032
Other assets 10,957 11,000
------ ------
Total Assets $919,948 $938,030
======= =======
LIABILITIES
Deposits $681,186 $693,632
Federal Home Loan Bank advances 147,268 160,268
Accrued expenses and other liabilities 15,204 10,723
------ ------
Total Liabilities 843,658 864,623
------- -------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
6,412,679 shares at March 31, 1999,
6,155,234 shares at December 31, 1998 64 62
Additional Paid-in Capital 74,649 73,177
Retained earnings, substantially restricted 16,873 15,363
Net unrealized gain or (loss) on securities available for sale, net of tax (83) 23
Employee Stock Ownership Plan (Unallocated Shares) (1,778) (1,886)
Management Recognition and Retention Plan (Unearned Shares) (588) (712)
Less Cost of Common Stock in
Treasury - 718,138 shares at
March 31, 1999, 707,073 shares at
December 31, 1998 (12,847) (12,620)
-------- --------
Total Shareholders' Equity 76,290 73,407
------ ------
Total Liabilities and Shareholders' Equity $919,948 $938,030
======= =======
See accompanying notes to consolidated financial statements.
3
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Thousands,
except per share data)
Interest Income
Loans $15,246 $15,303
Investment securities and
equity investments 973 965
Other interest and dividend income 466 288
--- ---
16,685 16,556
------ ------
Interest Expense
Deposits 7,299 7,617
Federal Home Loan Bank advances 2,298 2,250
Other 3 9
- -
9,600 9,876
----- -----
NET INTEREST INCOME 7,085 6,680
Provision for loan losses 270 210
--- ---
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,815 6,470
----- -----
Noninterest income
Service charges and other fees 1,036 1,060
Mortgage servicing fees 106 90
Gain on sale of loans 444 437
Gain (loss) on sale of securities (9) (24)
Other 247 44
--- --
1,824 1,607
----- -----
Noninterest expense
Compensation and benefits 2,847 2,847
Occupancy 432 362
Furniture, fixtures and equipment 331 285
Advertising 75 75
FDIC deposit insurance 102 100
State single business tax 142 138
Data processing 278 228
Professional services 139 96
Acquisition intangibles amortization 301 304
Other 642 708
--- ---
5,289 5,143
----- -----
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 3,350 2,934
Federal income tax expense 1,237 1,103
----- -----
NET INCOME $2,113 $1,831
===== =====
Earnings per common share:
Basic $.39 $.33
=== ===
Diluted .37 .29
=== ===
Dividends per common share .11 .09
=== ===
See accompanying notes to consolidated financial statements.
4
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Thousands)
Net Income $2,113 $1,831
Other comprehensive income, net of tax:
Unrealized gains (losses) arising during the period
on securities available for sale (109) (45)
Less: reclassification adjustment for accumulated (gains)
losses included in net income 3 16
- --
Unrealized gains (losses) on securities available for sale (106) (29)
----- ----
Comprehensive income $2,007 $1,802
====== ======
See accompanying notes to consolidated financial statements.
5
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,113 $1,831
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 329 284
Net amortization of security premiums and discounts 112 134
Amortization of acquisition intangibles 301 304
Provision for loan losses 270 210
Loss on limited partnership investments 60 82
ESOP expense 292 373
MRP expense 124 135
Origination of loans for sale (31,014) (25,579)
Proceeds from sale of loans originated for sale 30,965 24,298
Gain on sale of loans (444) (437)
(Gain) / loss on sale of securities 9 24
Changes in:
Other assets 33 (785)
Other liabilities 4,679 5,524
----- -----
Net cash from operating activities 7,829 6,398
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Purchases (5,870) (17,094)
Maturities, prepayments and calls 5,831 8,198
Sales 1,005 3,976
Purchases of FHLB stock (715)
Purchases of loans 3,527
Loan originations net of principal payments on loans (501) (23,770)
Premises and equipment expenditures, net (673) (1,315)
----- -------
Net cash from investing activities 3,319 (30,720)
----- --------
6
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Three Months Ended
March 31,
1999 1998
---- ----
(Dollars in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits (12,446) 9,327
Net increase in Federal funds purchased 5,000
Proceeds from FHLB advances 5,000 27,000
Repayment of FHLB advances (18,000) (18,000)
Proceeds from exercise of stock options 331 163
Proceeds from exercise of stock warrants 853 1,187
Cash paid for exchange of warrants for cash (92)
Cash dividends paid (603) (506)
Purchase of treasury shares (227) (2,357)
----- -------
Net cash from financing activities (25,184) 21,814
-------- ------
Net change in cash and cash equivalents (14,036) (2,508)
-------- -------
Cash and cash equivalents at beginning of period 42,225 32,524
------ ------
Cash and cash equivalents at end of period $28,189 $30,016
====== ======
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $7,064 $6,255
Income taxes 100 0
See accompanying notes to consolidated financial statements.
7
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements reflect the consolidated financial condition
and results of operations of Ottawa Financial Corporation and its wholly-owned
subsidiary, AmeriBank. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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, 1999, 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, 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 dividend paid on 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 has recently been filed. The complaint
alleges that we have engaged in the unauthorized practice of law due to charging
a fee for preparing loan documents. The complaint seeks class action
certification, restitution of all fees paid for the last six years, interest,
attorney fees and other costs. The class action certification was obtained in
March 1999. We believe, after consultation with legal counsel, that the
complaint is wholly without merit, and intend to vigorously defend against this
lawsuit.
8
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,
1999 to December 31, 1998 and the results of operations for the three months
ended March 31, 1999, compared to the same period 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.
9
FINANCIAL CONDITION
Total assets decreased to $919.95 million at March 31, 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 and repayment of
FHLB advances.
Net loans receivable decreased to $766.79 million at March 31, 1999
from $769.77 million at December 31, 1998. 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 $12.85 million during the first quarter of 1999. This
growth, however, was more than offset by the decrease in the mortgage portfolio
of $16.87 million during the first quarter of 1999. Due to the low interest rate
environment, 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 $681.19 million at March 31, 1999 from $693.63
million at December 31, 1998 and Federal Home Loan Bank advances decreased to
$147.27 million at March 31, 1999 from $160.27 million at December 31, 1998. Due
to the decline in the loan portfolio discussed above, we used our balance of
low-yielding investable funds to payoff higher costing Federal Home Loan Bank
advances at the time of maturity. In addition, due to excess liquidity we priced
our certificates of deposit either at or below the market in certain maturity
categories that provided for some reduction in the certificates of deposit
portfolio.
The primary components of growth in shareholder's equity for the three
months ended March 31, 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 164,181 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
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 blances are daily average balances.
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
---------------------------------------- ---------------------------------------
Average Interest Average
Outstanding Earned/ Yield/ Outstanding Interest Yield/
Balance Paid Rate Balance Earned/Paid Paid
---------------------------------------- ---------------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable (1) (2) $774,091 $15,255 7.93% $756,437 $15,313 8.14%
Securities (2) 70,790 977 5.52 63,225 976 6.17
Other interest-earning assets 29,757 466 6.35 16,853 288 6.95
-------- ------- ---- -------- ------- ----
Total interest-earning assets $874,638 $16,698 7.68% $836,515 $16,577 7.98%
-------- ------- ---- -------- ------- ----
Interest-Bearing Liabilities:
Demand and NOW deposits $198,974 $ 1,682 3.43% $156,013 $ 1,475 3.83%
Savings deposits 53,550 228 1.73 61,936 315 2.06
Certificate accounts 393,545 5,389 5.55 408,544 5,827 5.78
FHLB advances 158,055 2,298 5.90 152,391 2,250 5.99
Other interest-bearing liabilities 250 3 4.64 634 9 5.68
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $804,374 $ 9,600 4.84% $779,518 $ 9,876 5.14%
-------- ------- ---- -------- ------- ----
Net interest income $ 7,098 $ 6,701
====== =====
Net interest rate spread 2.84% 2.84%
==== ====
Net earning assets $ 70,264 $ 56,997
====== ======
Net yield on average
interest-earning assets 3.26% 3.22%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.09x 1.07x
==== ====
(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
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.
Three Months Ended
March 31,
1999 vs. 1998
--------------------------------
Increase
(Decrease)
Due to
-------------------
Total
Volume Rate Increase
(Decrease)
---------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 427 $(485) $ (58)
Securities - Taxable 16 (14) 2
Other interest-earning assets 200 (23) 177
-----
Total interest-earning assets $ 643 $(522) $ 121
===== ===== =====
Interest-bearing liabilities:
Demand and NOW deposits $ 336 $(129) $ 207
Savings deposits (39) (48) (87)
Certificate accounts (210) (228) (438)
Borrowings 81 (33) 48
Other interest-bearing liabilities (5) (1) (6)
----- ----- -----
Total interest-bearing liabilities $ 163 $(439) $(276)
===== ===== =====
Net interest income $ 480 $ (83) $ 397
===== ===== =====
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1999 was $2.11 million or
$.37 per share assuming dilution compared to net income of $1.83 million or $.29
per share assuming dilution for the same period in 1998. The improvement in
earnings over the same period in the prior year was due primarily to the growth
in noninterest income and, to a lesser extent, an improvement in net interest
income. These improvements were partially offset by increases in the provision
for loan losses and noninterest expenses. The 28% improvement in earnings per
share compared to the 15% improvement in earnings is due to a smaller number of
shares outstanding as a result of the stock repurchase activity since March 31,
1998 and the exercise and exchange of warrant certificates in the first quarter
of 1999. All per share information has been retroactively adjusted to reflect
the 10% stock dividends paid on August 31, 1998.
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 1999 was $.46, which was $.09 per share higher than the
standard EPS, compared to a cash EPS of $.39 for the first quarter of 1998,
showing an 18% improvement. This measure and the factors influencing its
calculation are described more fully in our 1998 Annual Report to Shareholders.
12
Net income for the three months ended March 31, 1999 yielded a return
on average equity ("ROE") of 11.30% compared to an ROE of 9.65% for the same
period in 1998. The increase in the ROE was attributable to the improved
earnings resulting from increased noninterest income and net interest income, as
well as the Corporation's stock repurchase activity.
Net interest income increased $397,000 on a tax equivalent basis for
the three months ended March 31, 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 1998 and the first three months of 1999, 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 slightly diminished by the 30 basis point drop in the yield on
interest-earning assets caused by the decline in general market interest rates.
There was also a 30 basis point decrease in the cost of interest-bearing
liabilities, resulting in a stable net interest spread of 2.84%. 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 quarter of 1999 compared to the same quarter of the prior
year contributed to the lower interest expense. Net interest margin increased to
3.26% from 3.22% for the three months ended March 31, 1999 compared to the same
period in the prior year. The improvement in net interest margin was primarily
the result of the growth in noninterest-bearing deposits since March 31, 1998.
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 $270,000 for the three months ended March 31, 1999
compared to $210,000 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 increased to $1.82 million for the three months
ended March 31, 1999 from $1.61 million for the same period in 1998. The
increase in noninterest income was primarily the result of higher levels of fee
income generated from AmeriPlan's (AmeriBank's wholly-owned subsidiary) sales of
mutual funds and annuities for the entire quarter of 1999 compared to a partial
quarter of operation in 1998 . Noninterest expense showed only a moderate
increase to $5.29 million for the three months ended March 31, 1999 from $5.14
million for the same period in 1998. While noninterest expense showed a slight
increase, our efficiency ratio, defined as noninterest expense divided by the
sum of net interest income and noninterest income, decreased from 62.95% for the
three months ended March 31, 1998 to 60.17% 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 $3.34 million at March 31, 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 .36% at March
31, 1999 compared to .43% at December 31, 1998. The Corporation's allowance for
loan losses as a percentage of non-performing loans at March 31, 1999 was
151.11% compared to 129.37% at December 31, 1998.
13
The table below sets forth the amounts and categories of non-performing
assets at March 31, 1999 and December 31, 1998.
March 31 December 31
1999 1998
---- ----
(Dollars in Thousands)
Non-accruing loans:
One to four family $522 $696
Commercial business and multi-family real estate 1,430 1,992
Consumer 388 446
--- ---
Total 2,340 3,134
Accruing loans delinquent more than 90 days:
One- to four-family 126 32
Commercial and multi-family real estate 190 21
Consumer 2 11
- --
Total 318 64
--- --
Foreclosed assets:
One- to four-family 407 656
Consumer 270 174
--- ---
Total 677 830
--- ---
Total non-performing assets $3,335 $4,028
===== =====
Total as a percentage of total assets .36% .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 March 31, 1999, we had
commitments to make loans of $39.09 million, unused lines of credit of $74.28
million, and construction loans in process of $38.41 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, 1998. The
Bank 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.
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.
14
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.
During the implementation phase we will certify systems as Y2K
compliant. For any system failing certification, we will assess the effect on
our operations and implement our contingency plans. Any mission-critical system
that is potentially non-compliant will be brought to the attention of executive
management immediately for resolution. In addition, this phase will ensure that
any new systems or subsequent changes to verified systems are Y2K compliant. We
expect to complete this phase by June 30, 1999.
We are expensing all costs associated with required system changes as
they occur. These costs are being funded through operating cash flows. We
estimate the total cost of our Y2K conversion project will be $350,000, net of
income taxes. We do not expect significant increases in future data processing
costs relating to Y2K compliance.
The software program that processes and tracks customer account
information is the most significant component of our computer system. This
software is the ITI Premier Financial Information System that is used by 3,500
banks across the country and has been certified as Y2K compliant. This is
relatively new software that was written to include four digits for the year
calculations, and therefore does not require its language to be rewritten. An
outside service bureau runs this software for us. Since we converted to a new
service bureau in March 1999, we have not yet completed the Y2K compliance
testing on our network. However, the service bureau itself is certified as Y2K
compliant and has verified compliance for other clients it services. We expect
to complete the testing on our network by June 30, 1999.
While our Y2K readiness process is proceeding according to plan, as a
precaution, we developed a contingency plan for each of our mission critical
systems during the assessment phase. Since most of our mission critical systems
are dependent on third party vendors or service providers, our contingency plan
is to select a new vendor or service provider and convert to their system. We
have secured alternative sources or services for mission critical areas for
which we did not receive a satisfactory response by January 31, 1999. We will
seek alternative sources or services for non-mission critical areas for which we
do not receive a satisfactory response by June 30, 1999. We also developed
contingency plans in the event of physical disaster including power outage
and/or telecommunication system outages. We assigned responsibilities regarding
final preparation to individuals within each department. In addition, we
identified a centralized location to accomplish communications and data
processing under various disaster conditions.
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. 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.
15
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 the Bank's exposure
to interest rate risk on a quarterly basis. We measure interest rate risk by
computing estimated changes in net interest income and the net portfolio value
of cash flows from assets, liabilities and off-balance sheet items within a
range of assumed changes in market interest rates. If estimated changes to net
portfolio value and net interest income are not within the limits established by
the Board, the Board may direct management to adjust the Bank's asset and
liability mix to bring interest rate risk within Board approved limits.
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 the Bank's net portfolio value and net interest
income at March 31, 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.
March 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 $ 45,158 -43% $ 22,166 -24%
+200 58,558 -26 24,847 -15
+100 69,019 -13 27,084 -7
0 79,310 --- 29,260 ---
-100 88,946 12 31,356 7
-200 91,050 15 32,477 11
-300 99,787 26 33,588 15
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
16
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 tables above show that from December 31, 1998 to March 31, 1999
there has been a decrease in sensitivity to a rise in interest rates. At an
increase in interest rates of 200 basis points, net portfolio value decreases by
26% as of March 31, 1999 compared to a 30% decrease as of December 31, 1998.
Most of the decrease in sensitivity relates to the increase in our equity from
December 31, 1998 to March 31, 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 three months ended March 31, 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 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 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.
17
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
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:
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 27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K.
Ottawa filed a Form 8-K dated January 6, 1999
containing a press release announcing the Annual Meeting of
Shareholders for the year ended December 31, 1998.
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 13, 1999 /s/ Douglas J. Iverson
---------------- --------------------------------
Douglas J. Iverson
Vice Chairman and Chief
Executive Officer
(Duly Authorized Officer)
Date: May 13, 1999 /s/ Jon W. Swets
---------------- ---------------------------------
Jon W. Swets
Chief Financial Officer
(Principal Financial Officer)
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
11 Statement - Re: Computation of per share earnings.
27 Financial Data Schedule (electronic filing only)