1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number 0-24118
OTTAWA FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3172166
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
245 Central Avenue, Holland, Michigan 49423
--------------------------------------------
(Address of principal executive offices)
616-393-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Class:
Common stock, $.01 par value As of May 7, 1996, there were
5,490,238 shares outstanding.
2
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
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 Stockholders' Equity . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 6
Notes to the Consolidated Financial Statements . . . . . . . . . 8-16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 17-22
Part II - Other Information
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
3
PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
March 31, 1996 December 31, 1995
-------------- -----------------
ASSETS
Cash and due from financial institutions $ 17,898,576 $ 11,422,266
Interest-bearing demand deposits in other
financial institutions 3,782,569 4,445,521
------------ ------------
Total cash and cash equivalents 21,681,145 15,867,787
Securities available for sale 86,088,806 64,763,730
Federal Home Loan Bank stock 4,846,100 2,162,100
Loans receivable, net 594,330,855 276,456,500
Accrued interest receivable
Loans 3,528,742 1,895,933
Securities 1,383,252 736,000
Real estate owned and real
estate in judgment 333,420 366,262
Premises and equipment, net 12,509,628 5,636,478
Acquisition intangibles 16,199,516
Other assets 4,479,772 2,420,372
------------ ------------
Total assets $745,381,236 $370,305,162
============ ============
LIABILITIES
Deposits $583,139,855 $243,219,523
Federal Home Loan Bank advances 71,240,532 43,240,532
Advances from borrowers for taxes
and insurance 1,749,961 252,599
Accrued expenses and other liabilities 7,959,537 4,032,491
------------ ------------
Total liabilities 664,089,885 290,745,145
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
5,836,838 shares at March 31, 1996
5,821,838 shares at December 31, 1995 58,368 58,218
Additional Paid-in Capital 60,303,323 57,662,412
Retained earnings, substantially
restricted 32,158,964 31,276,876
Net unrealized gain or (loss) on securities available
for sale, net of tax (270,223) 390,556
Employee Stock Ownership Plan
(Unallocated Shares) (3,176,360) (3,302,352)
Management Recognition and
Retention Plan (Unearned Shares) (2,413,665) (2,311,137)
Less Cost of Common Stock in
Treasury - 382,000 Shares at
March 31, 1996, 306,000 shares at
December 31, 1995 (5,369,056) (4,214,556)
------------ ------------
Total Stockholders' Equity 81,291,351 79,560,017
------------ ------------
Total Liabilities and
Stockholders' Equity $745,381,236 $370,305,162
============ ============
See accompanying notes to consolidated financial statements.
3
4
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31
1996 1995
---- ----
Interest Income
Loans $ 8,932,998 $4,794,872
Investment securities and
equity investments 1,268,255 1,169,684
Other interest and dividend income 122,980 64,929
----------- ----------
10,324,233 6,029,485
----------- ----------
Interest Expense
Deposits 4,507,529 2,244,088
Federal Home Loan Bank advances 831,629 237,493
Other 2,519 17,180
----------- ----------
5,341,677 2,498,761
----------- ----------
NET INTEREST INCOME 4,982,556 3,530,724
Provision for loan losses 113,793 30,000
----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,868,763 3,500,724
----------- ----------
Noninterest income
Service charges and other fees 766,211 509,738
Gain on sale of loans 54,398 5,311
Other 99,017 (4,557)
----------- ----------
919,626 510,492
----------- ----------
Noninterest expense
Compensation and benefits 1,896,628 1,265,490
Occupancy 235,147 188,243
Furniture, fixtures and equipment 140,130 145,669
Advertising 57,520 56,599
FDIC deposit insurance premium 233,332 130,752
State single business tax 71,444 55,500
Data processing 217,624 146,294
Other 913,483 574,834
----------- ----------
3,765,308 2,563,381
----------- ----------
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 2,023,081 1,447,835
Federal income tax expense 726,906 454,646
----------- ----------
NET INCOME $ 1,296,175 $ 993,189
=========== ==========
Primary and fully diluted earnings
per common and common
share equivalents .24 .19
=== ===
Dividends per common share .08 .07
=== ===
See accompanying notes to consolidated financial statements.
4
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Months Ended
March 31
1996 1995
---- ----
Balance, Beginning of Period $79,560,017 $78,593,378
Net Income 1,296,175 993,189
Purchase of AmeriBank
Cost of Warrants and Options 2,306,266
Shares Committed to be Released
Under Employee Stock Ownership Plan 203,363 127,495
Issuance of Common Stock for Management
Recognition Plan 241,875
Unearned Management Recognition
Plan Shares (241,875)
Shares Earned Under Management Recognition
and Retention Plan 139,347
Cash Dividend - $.08 Per Share - March 31, 1996 (414,087)
$.07 Per Share - March 31, 1995 (363,890)
Change in Unrealized Loss on Securities Available
For Sale, Net of Tax (645,230) 808,850
Shares Repurchased for Treasury at Cost (1,154,500)
----------- -----------
Balance, End of Period $81,291,351 $80,159,022
=========== ===========
See accompanying notes to consolidated financial statements.
5
6
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,296,175 $ 993,189
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 147,300 113,293
Net amortization of security premiums and discounts 32,103 8,036
Amortization of intangible asset 152,343 0
Provision for loan losses 113,793 30,000
Loss on limited partnership investments 20,915 16,698
ESOP expense 203,363 127,495
MRP expense 139,347 0
Organization of loans for sale (2,344,000) (183,000)
Proceeds from sale of loans originated for sale 2,398,398 188,311
Gain on sale of loans (54,398) (5,311)
Deferred taxes 506,226 22,999
Changes in assets and liabilities
Deferred loan fees and discounts 1,147,000 (43,529)
Interest receivable (2,280,061) (146,867)
Other assets 2,276,095 (445,983)
Accrued interest payable 1,390,982 975,010
Other liabilities (911,386) (32,647)
------------- ------------
Net cash from operating activities 4,234,195 1,617,694
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash paid for, acquisition of AmeriBank (see Note 2) (22,958,606) 0
Purchase of securities available for sale (2,000,000) (596,485)
Proceeds from calls and maturities of securities available for sale 3,373,435 2,445,000
Proceeds from sale of securities available for sale 18,224,257 0
Purchases of securities held to maturity 0 (2,000)
Proceeds from calls and maturities of securities held to maturity 0 2,150,000
Purchases of FHLB stock (1,000,000) 0
Principal payments on mortgage-backed certificates 672,801 276,107
Purchases of loans 0 (232,000)
Loan originations and principal payments on loans (24,403,762) (8,158,977)
Premises and equipment expenditures, net (264,090) (514,778)
------------- ------------
Net cash from investing activities (28,355,965) (4,633,133)
6
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Three Months Ended
March 31
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,896,353 (838,985)
Proceeds from FHLB advances 28,000,000 0
Repayment of FHLB advances (4,890,000) 0
Net income (dec) in advances from borrowers 1,497,362 605,912
Cash dividends paid (414,087) (363,890)
Purchase of treasury shares (1,154,500) 0
----------- -----------
Net cash from financing activities 29,935,128 (596,963)
Net change in cash and cash equivalents 5,813,358 (3,612,402)
----------- -----------
Cash and cash equivalents at beginning of year 15,867,787 14,758,555
----------- -----------
Cash and cash equivalents at end of year $21,681,145 $11,146,153
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,950,695 $ 1,523,751
Income taxes 0 0
Supplemental disclosure of noncash investing activities
Transfers from loans to real estate owned 37,767 40,002
See accompanying notes to consolidated financial statements.
7
8
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the
accounts of Ottawa Financial Corporation ("Company") and its wholly owned
subsidiary, Ottawa Savings Bank, F.S.B. ("Bank"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company at March 31,
1996, and its results of operations and statement of cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated financial statements do not purport to contain all
the necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances and should be
read in conjunction with the consolidated financial statements and notes
thereto of Ottawa Financial Corporation for the year ended December 31, 1995.
The provision for income taxes is based upon the effective tax rate
expected to be applicable for the entire year.
Earnings per common share and common share equivalents for the quarter
ended March 31, 1996, were computed by dividing net income for the quarter
ended March 31, 1996 by 5,322,658, the weighted average number of shares
outstanding and the weighted average number of common stock equivalents
resulting from dilutive stock options for the quarter ended March 31, 1996.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage
Servicing Rights. The Corporation adopted SFAS No. 122 on January 1,
1996, as required. SFAS No. 122 eliminates the accounting distinction between
originated and purchased mortgage servicing rights. Beginning in 1996, when a
loan is originated with the intent to sell, a separate asset will be recognized
for the mortgage servicing right, which is consistent with the current
treatment of purchased mortgage servicing rights. SFAS No. 122 also changes
the manner in which impairment of capitalized mortgage servicing rights is
recognized. Impairment will be recognized using the fair value of individual
stratum of servicing rights based on the underlying risk characteristics of the
serviced loan portfolio, compared to an aggregate portfolio approach under
existing accounting guidance.
Based on the volume of mortgage banking activity conducted during
1995, the Corporation does not expect SFAS No. 122 to have a significant impact
on its consolidated financial condition and results of operations for 1996.
The FASB has issued SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123 establishes a fair value based method of accounting
for employee stock options and similar equity instruments, such as warrants,
and encourages all companies to adopt that method of accounting for all of
their employee stock compensation plans. However, the statement allows
companies to continue measuring compensation cost for such plans using
accounting guidance in place prior to SFAS No. 123. Companies that elect to
remain with
8
9
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
the former method of accounting must make pro-forma disclosures of net income
and earnings per share as if the fair value method provided for in SFAS No. 123
had been adopted. The accounting requirements of the Statement are required
for transactions entered into in fiscal years that begin after December 15,
1995, although early adoption is permitted. Disclosure requirements are
effective for financial statements issued after December 15, 1995 or the period
in which the accounting requirements are adopted if they are early adopted.
Companies which elect to continue measuring compensation costs under current
guidance must present pro-forma disclosures for awards granted in the first
fiscal year beginning after December 15, 1994, however that disclosure need not
be made until financial statements for that fiscal year are presented for
comparative purposes with financial statements for a later fiscal year.
Management has concluded that the Corporation will not adopt the fair value
accounting provisions of SFAS No. 123 and will continue to apply its current
method of accounting. Accordingly, adoption of SFAS No. 123 will have no
impact on the Corporation's consolidated financial position or results of
operations.
NOTE 2 - ACQUISITION
On February 13, 1996, the Company completed the acquisition of
AmeriBank Federal Savings Bank ("AmeriBank"), a federal savings bank
headquartered in Muskegon, Michigan. Under the terms of this transaction, the
Company acquired all of the outstanding stock of AmeriBank in exchange for
approximately $30.4 million in cash and warrants to acquire 567,000 shares of
Company stock at $17.50 per share. The value of the warrants is determined to
be approximately $555,000. Further, options to acquire AmeriBank stock were
converted to options to acquire Company stock. The value of these options for
purposes of determining the total cost to the Company for the merger
transaction is approximately $1.8 million. Accordingly, the total cost of the
transaction considering cash, warrants, and converted options is approximately
$32.7 million.
The acquisition is being accounted for using the purchase method of
accounting. Intangibles acquired are being amortized under various methods and
over the lives of the corresponding assets and liabilities. In conjunction
with the acquisition, the fair values of significant assets and liabilities
assumed were as follows, stated in thousands of dollars:
Cash acquired net of cash paid for acquisition $ (22,958)
Securities 42,629
Loans 294,699
Premises and equipment 6,756
Acquisition intangibles 16,352
Deposits (333,024)
Other borrowings (4,890)
9
10
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
The results of operations reflects AmeriBank from February 13, 1996,
through March 31, 1996. The following table presents proforma information as
if the acquisition of AmeriBank had occurred at the beginning of both 1996 and
1995 (in thousands, except per share data):
Three Months Ended
March 31
1996 1995
---- ----
Interest income $13,263,592 $11,155,889
Interest expense 7,141,966 5,563,260
----------- -----------
Net interest income 6,121,626 5,592,629
Provision for loan losses 250,003 105,000
----------- -----------
Net interest income after
provision for loan losses 5,871,623 5,487,629
Non-interest income 1,000,727 824,131
Non-interest expense 4,703,920 4,470,387
----------- -----------
Income before federal income tax 2,168,430 1,841,373
Federal income tax expense 812,843 623,455
----------- -----------
Net income $ 1,355,587 $ 1,217,918
=========== ===========
Primary and fully diluted earnings
per common and common share equivalents $ .25 $ .22
=========== ===========
In connection with the acquisition, the following benefits were
provided. The Company entered into an employment agreement with one of its
officers. Under the terms of that agreement, certain events leading to
separation from the Company could result in cash payments aggregating
approximately $353,000. Further, AmeriBank options rolled over into 149,144
options to acquire Company Stock at a price equivalent to the original
AmeriBank exercise price, additional options to purchase 41,486 shares
of common stock were awarded and an additional 15,000 shares of common stock
were awarded under the MRP. For more discussion regarding the stock option
plan and the MRP, see Note 3.
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
NOTE 3 - STOCK OPTION AND INCENTIVE PLAN ("SOP") AND MANAGEMENT
RECOGNITION PLAN ("MRP")
The Company's Board of Directors adopted an SOP and MRP after the
plans were approved by shareholders at the April 25, 1995 annual meeting. The
SOP and MRP are administered by a committee of directors of the Company. This
committee selects recipients and terms of awards pursuant to the Plan. Total
shares available under the SOP and MRP plans at March 31, 1996, were 562,062
and 224,825, respectively. On April 23, 1996, Ottawa Financial Corporation
shareholders approved reservation of an additional 276,488 shares under the SOP
plan.
NOTE 4 - SECURITIES
The amortized cost and estimated fair values of securities at March
31, 1996, are as follows.
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Available for Sale
Equity securities
Money market funds $ 913,763 $ 913,763
Mortgage-backed funds
Other funds
Other 157,805 $ 84,486 242,291
----------- -------- -------- -----------
1,071,568 84,486 0 1,156,054
----------- -------- -------- -----------
Debt securities
Obligations of US government
corporations and agencies 23,051,897 29,321 180,824 22,900,394
Corporate 24,696,380 103,966 86,967 24,713,379
Asset backed 32,584,351 105,640 495,543 32,194,448
State and municipal securities 5,094,102 42,099 11,670 5,124,531
----------- -------- -------- -----------
85,426,730 281,026 775,004 84,932,752
----------- -------- -------- -----------
$86,498,298 $365,512 $775,004 $86,088,806
=========== ======== ======== ===========
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
The amortized cost and estimated fair values of securities at December 31,
1995 are as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Available for Sale
Equity securities
Money market funds $17,150,000 $17,150,000
Mortgage-backed funds 2,574,257 2,574,257
Other funds 172,636 $ 97,419 270,055
----------- -------- -----------
19,896,893 97,419 19,994,312
Debt securities
Obligations of US government
corporations and agencies 11,920,073 124,003 $14,390 12,029,686
Corporate 21,050,018 242,291 21,292,309
Asset backed 11,304,995 145,161 2,733 11,447,423
----------- -------- ------- -----------
44,275,086 511,455 17,123 44,769,418
----------- -------- ------- -----------
$64,171,979 $608,874 $17,123 $64,763,730
=========== ======== ======= ===========
NOTE 5 - STOCK REPURCHASE PROGRAM
On August 7, 1995, Ottawa Financial Corporation received approval from
the Office of Thrift Supervision to repurchase up to 5% or 277,042 of its
outstanding shares, beginning August 21, 1995. During the first quarter of
1996, 76,000 shares have been repurchased at an average price of $16.08 per
share, leaving 176,042 shares to be repurchased under this program.
On September 19, 1995, Ottawa Financial Corporation received approval
from the Office of Thrift Supervision to repurchase up to 224,825 of its
outstanding shares. This repurchase program will provide shares for the
Corporation's stock-based benefit plans. No shares have been repurchased under
this program.
12
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
NOTE 6 - BORROWINGS FROM FEDERAL HOME LOAN BANK OF INDIANAPOLIS
Rate at Balance at
March 31 March 31 December 31
Due Date 1996 1996 1995
-------- ---- ---- ----
Single maturity fixed rate
February 15, 1996 8.4000% $ 0 $ 2,000
December 1, 1997 5.5900% 4,000 4,000
December 1, 1997 5.4100% 5,000 5,000
February 23, 1998 4.9700% 10,000 0
May 8, 1998 5.4300% 3,000 3,000
November 30, 1998 5.6600% 6,000 6,000
December 1, 1998 5.4700% 5,000 5,000
December 28, 1998 5.3900% 5,000 0
February 1, 1999 5.2600% 5,000 0
February 16, 1999 5.1200% 5,000 0
March 17, 1999 7.3000% 3,000 3,000
October 29, 1999 6.6600% 2,870 2,870
October 29, 1999 6.8400% 130 130
Single maturity variable rate
June 24, 1996 - reprices daily 6.0200% 0 5,000
September 23, 1996 - reprices daily 5.6200% 2,000 0
March 19, 1997 - reprices quarterly 5.4075% 5,000 0
March 27, 1997 - reprices quarterly 5.4075% 3,000 0
Amortizable fixed rate
June 15, 1999 7.1600% 2,241 2,241
May 15, 2000 6.8200% 5,000 5,000
-------- -------
$ 71,241 $43,241
======== =======
During April 1996, an additional $15,000,000 of single maturity, variable
rate advances were borrowed from the Federal Home Loan Bank of Indianapolis.
13
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
NOTE 7 - LOANS
Loans are classified as follows:
March 31 December 31
1996 1995
---- ----
First mortgage loans
Principal balances
Secured by one-to-four family residences $410,741 $209,159
Secured by other properties 60,667 18,575
Construction loans 61,205 41,411
-------- --------
532,613 269,145
-------- --------
Consumer and other loans
Principal balances
Commercial loans 8,218 0
Auto loans 40,485 9,530
Home equity loans 23,207 12,038
Home improvement 8,288 373
Other 5,072 2,517
-------- --------
85,270 24,458
-------- --------
617,883 293,603
-------- --------
Less:
Undisbursed portion of
Construction loans 20,952 14,861
Deferred fees and discounts (113) 1,034
Allowance for loan losses 2,713 1,251
-------- --------
23,552 17,146
-------- --------
$594,331 $276,457
======== ========
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15
OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
NOTE 8 - ALLOWANCE FOR LOAN LOSSES
1996 1995
---- ----
Balance - beginning of year $1,251 $1,118
Provision 114 30
Acquisition of AmeriBank 1,338 0
Recoveries 26 0
Charge-offs (16) 0
------ ------
Balance - March 31 $2,713 $1,148
====== ======
NOTE 9 - DEPOSITS
March 31, December 31,
1996 1995
---- ----
Non-interest bearing $ 23,112 $ 12,262
NOW accounts and MMDAs 135,883 46,986
Passbook and statement savings 73,379 46,470
Certificates of deposit 350,766 137,502
-------- --------
$583,140 $243,220
======== ========
NOTE 10 - CAPITAL REQUIREMENTS
At March 31, 1996, the Bank meets all three regulatory requirements as
follows:
Actual Required Excess
------ -------- ------
Tangible capital 7.04% 1.50% 5.54%
Core capital 7.04% 3.00% 4.04%
Risk based capital 11.14% 8.00% 3.14%
15
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
The following is a reconciliation of the Bank's capital under generally
accepted accounting principals ("GAAP") to regulatory capital at March 31,
1996.
GAAP Tangible Leverage Risk-Based
Capital Capital Capital Capital
------- ------- ------- -------
GAAP capital $66,178 $ 66,178 $ 66,178 $ 66,178
=======
Non-allowable assets
Intangibles (16,231) (16,231) (16,231)
Additional capital items
Unrealized loss on
securities available for sale 367 367 367
Allowances - limited 2,713
-------- -------- --------
Regulatory capital - computed 50,314 50,314 53,027
Minimum capital requirement 10,764 21,529 38,066
-------- -------- --------
Regulatory capital - excess $ 39,550 $ 28,785 $ 14,961
======== ======== ========
Regulatory asset base $717,623 $717,623 $475,819
======== ======== ========
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Item 2.
OTTAWA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion compares the financial condition of Ottawa
Financial Corporation ("Company") and its wholly owned subsidiary, Ottawa
Savings Bank, FSB ("Bank") at March 31, 1996 to December 31, 1995 and the
results of operations for the three months ended March 31, 1996, compared to
the same period in 1995. This discussion should be read in conjunction with
the interim consolidated condensed financial statements and footnotes included
herein.
FINANCIAL CONDITION
Total assets increased $375.07 million or 101.29% from $370.31 million
on December 31, 1995 to $745.38 million on March 31, 1996, of which $356.77
million of assets were acquired from AmeriBank.
Total cash and cash equivalents increased 36.61% or $5.81 million, to
$21.68 million on March 31, 1996, from $15.87 million on December 31, 1995.
Investment securities available for sale increased 32.94% from $64.76 million
on December 31, 1995 to $86.09 million on March 31, 1996, of which $42.63
million of investment securities available for sale were acquired from
AmeriBank. Proceeds of $21.60 million received from sold and matured
investment securities, together with an increase in deposits and Federal Home
Loan Bank advance borrowings, were used to fund the AmeriBank acquisition, to
fund loan growth and increase cash and cash equivalents.
Loans receivable increased 114.98% or $317.87 million from $276.46
million on December 31, 1995 to $594.33 million on March 31, 1996. This
increase is primarily the result of strong lending activity in the Company's
market and $294.70 million of loans acquired from AmeriBank.
Deposits increased 139.76% or $339.92 million from $243.22 million on
December 31, 1995 to $583.14 million on March 31, 1996, of which $333.02
million were acquired from AmeriBank.
Federal Home Loan Bank advances increased 64.75% from $43.24 million on
December 31, 1995 to $71.24 million at March 31, 1996. The proceeds of the
advances were used primarily to fund the AmeriBank acquisition and loan growth
during the first quarter.
The Company's net unrealized gain/loss on securities available for
sale, net of tax, decreased from a gain of $390,556 on December 31, 1995 to a
loss of $270,223 on March 31, 1996. The decrease was a result of the general
increase in market interest rates during the three month period ended March 31,
1996.
Total stockholders' equity increased from $79.56 million on December
31, 1995 to $81.29 million on March 31, 1996. Stockholders' equity increased
as a result of net income after payment of dividend and by the cost of warrants
and options issued upon the purchase of AmeriBank, partially offset as a result
of the repurchase of 76,000 shares of Company common stock and by the change in
net unrealized gain or loss on securities available for sale.
During the first quarter of 1996, the Company declared a cash dividend
of $.08 per share. Dividends declared, as a percentage of earnings per share
was 33.33% for the three month period ended March 31, 1996.
17
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AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables present for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and the
resultant yields, as well as the amount of interest expense paid on average
interest-bearing liabilities, and the resultant rates. All average balances
are monthly average balances.
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------------------------------- ------------------------------------
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) $439,353 $ 8,933 8.05% $234,419 $ 4,795 8.30%
Securities - Taxable 76,293 1,239 6.47 71,541 1,170 6.48
Securities - Tax Exempt 2,633 29 4.23
Other interest earning assets 8,851 123 5.56 3,004 65 8.77
-------- ------- -------- -------
Total interest-earning assets (1) $527,130 $10,324 7.84 $308,964 $ 6,030 7.87
-------- ------- -------- -------
Interest-Bearing Liabilities:
Demand and NOW deposits $ 77,406 $ 759 3.90 $ 45,104 $ 299 2.69
Savings deposits 59,243 377 2.55 47,821 289 2.44
Certificate accounts 248,155 3,372 5.43 125,237 1,657 5.37
FHLB advances 56,946 831 5.86 14,035 237 6.86
Other interest bearing liabilities 134 3 7.50 768 17 9.07
-------- ------- -------- -------
Total interest-bearing liabilities $441,884 $ 5,342 4.83 $232,965 $ 2,499 4.35
-------- ------- -------- -------
Net interest income $ 4,982 $ 3,531
======= =======
Net interest rate spread 3.01% 3.52%
==== ====
Net earning assets $ 85,246 $ 75,999
======== ========
Net yield on average
interest-earning assets 3.79% 4.63%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.19x 1.33x
==== ====
- --------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
and loan reserves.
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the change related
to changes in outstanding balances and that due to interest rate movements.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in
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rate multiplied by old volume). For purposes of this table, 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
1996 vs. 1995
--------------------------------------------------
Increase
(Decrease)
Due to
---------------------------------
Total Increase
Volume Rate (Decrease)
--------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $4,307 $(169) $4,138
Securities - Taxable 83 (14) 69
Securities - Tax Exempt 29 29
Other interest-earning assets 88 (30) 58
------ ----- ------
Total interest-earning assets $4,507 $(213) $4,294
====== ===== ======
Interest-bearing liabilities:
Demand and NOW deposits 275 185 460
Savings deposits 73 15 88
Certificate accounts 1,663 52 1,715
Borrowings 620 (40) 580
------ ------ ------
Total interest-bearing liabilities $2,631 $213 $2,843
====== ====== ======
Net interest income $1,451
======
RESULTS OF OPERATIONS
Net income increased 30.51% from $993,189 in the quarter ended March
31, 1995 to $1.30 million in the quarter ended March 31, 1996.
Net interest income increased $1.45 million during the quarter ended
March 31, 1996, compared to the same period in 1995. The increase reflects the
net interest income from the acquisition of AmeriBank, continued strong core
earnings, which were partially offset by increased interest expense on deposits
and borrowings as a result of increases in balances and the rates paid on such
liabilities. The net yield on average interest earning assets, i.e. net
interest margin decreased from 4.63% for the three months ended March 31, 1995
to 3.79% for the three months ended March 31, 1996. This decrease was due in
part to the increase in the rates paid on the Bank's deposits and borrowings,
including deposits and liabilities which were acquired from AmeriBank. The
percentage of total average interest-bearing assets to total average
interest-bearing liabilities was 119% at March 31, 1996, compared to 133% at
March 31, 1995.
Provision for loan losses increased $84,000 for the three month period
ended March 31, 1996 compared to the three month period ended March 31, 1995.
This increase was based on management's assessment of risk factors included in
the loan portfolio of the Bank and the loan portfolio acquired from AmeriBank.
The allowance is maintained by management at a level considered adequate to
cover possible losses that are
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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 on the Bank's
past loss experience and, as such, the minor variations have not had a
significant impact on the overall level of the allowance for loan losses (see
discussion on non-performing assets and allowance for loan losses). Loans are
put on a non-accrual status unless they are adequately capitalized and in the
process of collection. As of March 31, 1996, there were $1.84 million in loans
in non-accrual status, compared to no loans in non-accrual status as of March
31, 1995. As of March 31, 1996, the allowance for loan losses of $2.71 million
was approximately .45% of net loans receivable and 95.53% of nonperforming
assets, as compared to .48% and 202.78%, respectively, at March 31, 1995.
Non-interest income was higher by $409,000 in the first quarter
compared to the same period in 1995. Service charges and other fees increased
during this period due to increased deposit account activity, increase in loan
origination and refinancing activity, and the $120,000 contribution to
non-interest income due to the acquisition of AmeriBank.
Non-interest expense for the three month period ended March 31, 1996
increased $1.14 million from $2.56 million for the three month period ended
March 31, 1995, to $3.77 million for the three month period ended March 31,
1996. The Bank's increase in non-interest expense was due to the non-interest
expenses of AmeriBank and an increase in compensation and benefit expenses,
primarily an increase in the ESOP expense of $75,000 and an increase in MRP
expense of $139,000, along with general increase in other Bank expenses.
The deposits of savings associations such as the Bank are presently
insured by the Savings Association Insurance Fund (the "SAIF"), which, along
with the Bank Insurance Fund (the "BIF"), is one of the two insurance funds
administered by the FDIC. Financial institutions which are members of the BIF
are experiencing substantially lower deposit insurance premiums because the BIF
has achieved its required level of reserves, while the SAIF has not yet
achieved its required reserves. A recapitalization plan for the SAIF under
consideration by Congress provides for a special assessment of 0.80% to 0.90%
of deposits to be imposed on all SAIF insured institutions to enable the SAIF
to achieve its required level of reserves. If a special assessment of 0.90%
was effected based on deposits as of the Bank as of March 31, 1995 (as
proposed), including the pro-forma effect of the acquisition of AmeriBank, the
Bank's assessment would amount to approximately $4.81 million before taxes.
Accordingly, this special assessment would significantly increase non-interest
expense and adversely effect the Corporation's consolidated results of
operations. If the one time assessment were adopted, the Bank has sufficient
liquid reserves on deposit at the FHLB and a reserve of short-term liquid
securities that could be used to fund the expense. This additional expense
could limit capital formation and adversely impact the Bank's risk
classification and associated FDIC premium rates. Conversely, depending upon
the Bank's capital level and supervisory rating, and assuming the insurance
premium levels for BIF and SAIF members are again equalized, future deposit
insurance premiums are expected to decrease significantly, which would reduce
non-interest expense for future periods.
The Company's federal income tax expense increased from $454,000 for
the three month period ended March 31, 1995 to $726,000 for the three month
period ended March 31, 1996. The increase in federal income tax was a result
of higher net income before federal income tax expense, partially offset by the
utilization of federal tax credits for low income housing.
Earnings of $.24 per common share and common share equivalents were
computed by dividing net income by the weighted average number of shares
outstanding. The weighted average number of shares outstanding for the first
quarter of 1995 was 5,322,658.
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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSS
The Company's non-performing assets increased 4.40% or $120,000 from
$2.73 million at December 31, 1995 to $2.85 million at March 31, 1996. At
March 31, 1996, the percentage of non-performing assets to total assets was
.38% compared to .74% at December 31, 1995. The Company's allowance for loan
losses as a percentage of non-performing assets at March 31, 1996, was 95.16%
compared to 45.82% at December 31, 1995.
Non-accruing loans at March 31, 1996 consist of a $1.1 million
multi-family real estate loan and $600,000 of loans secured by 22 individual
condominium units to the same borrower. These loans were originated in 1986
for $1.2 million with a loan-to-value ratio of 66%. Upon the loan becoming 90
days delinquent, the Corporation exercised its assignment of rents provision
under the mortgage documents giving the Corporation the right to receive the
rents directly and to engage a new property management company, which it did.
Currently, the project is at 90% occupancy and generating sufficient cash flow
to cover principal, interest, one-twelfth of the real estate taxes, and a
portion of the arrearage. The balance of the non-accruing loans in the amount
of $175,000 consists of residential loans of $78,000 and consumer loans of
$97,000.
Accruing loans delinquent more than 90 days, at March 31, 1996,
consisted of 27 one- to four-family residential loans totalling $629,000 and 21
consumer loans $54,000. At March 31, 1996, no individual one- to four-family
accruing loan delinquent 90 days or more exceeded $103,000 in net book value.
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio at March 31, 1996 and December 31, 1995.
March 31 December 31
1996 1995
-------- -----------
Non-accruing loans $1,835 $ ---
------
Accruing loans delinquent more than 90 days:
One- to four-family 629 1,317
Commercial and multi-family real estate 1,110
Consumer 54 7
------ ------
Total 2,518 2,434
------ ------
Foreclosed assets:
One- to four-family 333 296
------ ------
Total 333 296
------ ------
Total non-performing assets $2,851 $2,730
====== ======
Total as a percentage of total assets .38% .74%
=== ===
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The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
March 31 December 31
1996 1995
------------------------------------- --------------------------------------
Amount Percent of Loans in Amount Percent of Loans in
Each Category to Each Category to
Total Loans Total Loans
------ ------------------- ------ -------------------
One- to four-family $ 340 66.47% $ 166 71.24%
Commercial real estate 600 9.82 434 5.90
Construction or development 111 9.91 53 14.53
Commercial 47 1.33
Consumer 595 12.47 143 8.33
Unallocated 1,020 455
------ ------- ------ -------
Total $2,713 100.00% $1,251 100.00%
====== ======= ====== =======
LIQUIDITY
The Bank is required to maintain minimum levels of liquid assets of 5%
as defined by Bank regulators. The Bank's liquidity ratio of 12.11% at March
31, 1996 complies with minimum levels. At March 31, 1996, the Bank had
outstanding $74.61 million of loan commitments and unused lines of credit. The
Bank has certificates of deposit due in less than 12 months of $137.60 million.
It is anticipated that the majority of these certificates of deposit will
rollover into another certificate of deposit with the bank. The Bank
anticipates it will have sufficient funds available to meet current loan
commitments through growth of deposits, amortization of loans and additional
FHLB borrowings, if necessary.
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OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
PART II - OTHER INFORMATION
Item 1 Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 Changes in Securities:
There are no matters required to be reported under this item.
Item 3 Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 Other Information:
There are no matters required to be reported under this item.
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Exhibit 11 Statement - Re: Computation of per Share Earnings
(c) Reports on Form 8-K
1. The Corporation filed a Form 8-K dated
January 31, 1996, containing a press release
reporting fourth quarter and year end
financial results.
2. The Corporation filed a Form 8-K dated March
5, 1996, containing a press release reporting
the declaration of a cash dividend.
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, 1996 Gordon L. Grevengoed
----------------------- --------------------------------------
Gordon L. Grevengoed
President and Chief Executive Officer
Date: May 13, 1996 Richard J. Hilbink
----------------------- --------------------------------------
Richard J. Hilbink
Chief Financial Officer
23
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EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- ----------
11 Statement - Re: Computation of per share earnings.
27 Financial Data Schedule