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 June 30, 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 of incorporation or organization) (IRS Employer 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 5, 1996, there were
5,308,546 shares outstanding.
2
OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-17
PART II - OTHER INFORMATION
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART 1 OTTAWA FINANCIAL CORPORATION
Item 1. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
Cash and due from financial institutions $ 14,978,680 $ 11,422,266
Interest-bearing demand deposits in other
financial institutions 2,089,398 4,445,521
------------ ------------
Total cash and cash equivalents 17,068,078 15,867,787
Securities available for sale 79,240,996 64,763,730
Federal Home Loan Bank stock 5,146,400 2,162,100
Loans receivable, net 642,088,386 276,456,500
Accrued interest receivable
Loans 3,783,394 1,895,933
Securities 1,085,878 736,000
Real estate owned and real
estate in judgment 37,767 366,262
Premises and equipment, net 12,976,525 5,636,478
Acquisition intangibles 15,894,830
Other assets 4,822,484 2,420,372
------------ ------------
Total assets $782,144,738 $370,305,162
============ ============
LIABILITIES
Deposits $601,746,599 $243,219,523
Federal Home Loan Bank advances 89,669,897 43,240,532
Advances from borrowers for taxes
and insurance 3,489,021 252,599
Accrued expenses and other liabilities 6,900,826 4,032,491
------------ ------------
Total liabilities 701,806,343 290,745,145
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
5,955,912 shares at June 30, 1996
5,821,838 shares at December 31, 1995 59,559 58,218
Additional Paid-in Capital 60,860,638 57,662,412
Retained earnings, substantially
restricted 33,198,123 31,276,876
Net unrealized gain or (loss) on securities available
for sale, net of tax (399,591) 390,556
Employee Stock Ownership Plan
(Unallocated Shares) (3,051,844) (3,302,352)
Management Recognition and
Retention Plan (Unearned Shares) (2,268,241) (2,311,137)
Less Cost of Common Stock in
Treasury - 541,366 Shares at
June 30, 1996, 306,000 shares at
December 31, 1995 (8,060,249) (4,214,556)
------------ ------------
Total Stockholders' Equity 80,338,395 79,560,017
------------ ------------
Total Liabilities and
Stockholders' Equity $782,144,738 $370,305,162
============ ============
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
Interest Income
Loans $12,449,956 $5,098,926 $21,382,954 $ 9,893,798
Investment securities and
equity investments 1,282,633 1,159,753 2,478,154 2,329,436
Other interest and dividend income 172,631 76,864 368,345 141,794
----------- ---------- ----------- -----------
13,905,220 6,335,543 24,229,453 12,365,028
----------- ---------- ----------- -----------
Interest Expense
Deposits 6,572,052 2,480,956 11,079,581 4,725,043
Federal Home Loan Bank advances 1,170,869 280,506 2,002,499 518,000
Other 4,533 16,771 7,051 33,951
----------- ---------- ----------- -----------
7,747,454 2,778,233 13,089,131 5,276,994
----------- ---------- ----------- -----------
NET INTEREST INCOME 6,157,766 3,557,310 11,140,322 7,088,034
Provision for loan losses 150,000 30,000 263,793 60,000
----------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,007,766 3,527,310 10,876,529 7,028,034
----------- ---------- ----------- -----------
Noninterest income
Service charges and other fees 789,880 576,021 1,556,089 1,085,758
Gain on sale of loans 20,806 248,283 75,204 253,594
Loss on securities (6,752) (343,122) (4,267) (343,122)
Loss on sale REO (14,049) (14,049)
Other 112,431 (11,166) 188,050 (15,722)
----------- ---------- ----------- -----------
902,316 470,016 1,801,027 980,508
----------- ---------- ----------- -----------
Noninterest expense
Compensation and benefits 2,240,214 1,294,876 4,137,432 2,560,365
Occupancy 290,377 165,865 523,843 354,108
Furniture, fixtures and equipment 191,062 146,831 331,192 292,500
Advertising 55,133 41,958 112,652 98,557
FDIC deposit insurance premium 326,473 130,752 559,805 261,505
State single business tax 86,325 55,500 157,769 111,000
Data processing 253,848 150,347 471,471 296,641
Other 1,079,986 655,824 1,973,647 1,230,659
----------- ---------- ----------- -----------
4,523,418 2,641,953 8,267,811 5,205,335
----------- ---------- ----------- -----------
INCOME BEFORE FEDERAL
INCOME TAX EXPENSE 2,386,664 1,355,373 4,409,745 2,803,207
Federal income tax expense 930,713 533,597 1,657,619 988,242
----------- ---------- ----------- -----------
NET INCOME $ 1,455,951 $ 821,776 $ 2,752,126 $ 1,814,965
=========== ========== =========== ===========
Primary and fully diluted earnings
per common and common
share equivalents .28 .16 .52 .35
=== === === ===
Dividends per common share .08 .08 .16 .15
=== === === ===
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended
June 30
1996 1995
---- ----
Balance, Beginning of Period $79,560,017 $78,593,378
Net Income 2,752,126 1,814,965
Purchase of AmeriBank
Cost of Warrants and Options 2,306,266
Shares Issued Upon Exercise of Stock Options 479,699
Shares Committed to be Released
Under Employee Stock Ownership Plan 406,686 269,598
Issuance of Common Stock for Management
Recognition Plan 241,875 2,666,607
Unearned Management Recognition
Plan Shares (241,875) (2,666,607)
Shares Earned Under Management Recognition
and Retention Plan 284,771 88,870
Cash Dividend - $.16 Per Share - June 30, 1996 (830,879)
$.15 Per Share - June 30, 1995 (792,397)
Change in Unrealized Loss on Securities Available
For Sale, Net of Tax (774,598) 1,932,320
Shares Repurchased for Treasury at Cost (3,845,693) (3,827,056)
----------- -----------
Balance, End of Period $80,338,395 $78,079,678
=========== ===========
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,752,126 $ 1,814,965
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 345,521 229,586
Net amortization of security premiums and discounts 140,030 17,095
Amortization of intangible asset 457,029 0
Provision for loan losses 263,793 54,759
Loss on limited partnership investments 41,830 33,420
ESOP expense 406,686 269,598
MRP expense 284,771 88,870
Origination of loans for sale (4,032,000) (1,022,859)
Proceeds from sale of loans originated for sale 4,107,204 1,035,131
Gain on sale of loans (75,204) (12,272)
Loss on sale of equity securities 0 137,219
Gain on sale of consumer loans 0 (229,861)
Other than temporary loss on securities available for sale 0 205,903
Deferred taxes 603,333 8,999
Changes in assets and liabilities
Deferred loan fees and discounts 1,238,000 (40,080)
Interest receivable (2,237,339) (33,353)
Other assets 1,979,047 (451,453)
Accrued interest payable 340,161 71,999
Other liabilities (1,016,383) 257,265
------------- ------------
Net cash from operating activities 5,598,605 2,434,931
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash paid for acquisition of AmeriBank (22,958,606) 0
Purchase of securities available for sale (8,336,525) (643,360)
Proceeds from calls and maturities of securities available for sale 8,314,475 5,445,000
Proceeds from sale of securities available for sale 24,976,063 0
Purchases of securities held to maturity 0 (2,000)
Proceeds from calls and maturities of securities held to maturity 0 2,150,000
Proceeds from sale of equity securities 0 2,758,312
Proceeds from sale of consumer loans 0 6,797,315
Purchases of FHLB stock (1,300,300) 0
Principal payments on mortgage-backed certificates 1,860,416 584,625
Purchases of loans (6,591,000) (598,100)
Loan originations and principal payments on loans (65,515,640) (21,217,754)
Premises and equipment expenditures, net (929,208) (615,127)
------------- -------------
Net cash from investing activities (70,480,325) (5,341,089)
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Six Months Ended
June 30
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 25,503,097 7,773,897
Net increase in FHLB advances 41,539,365 4,661,330
Net increase in advances from borrowers 3,236,422 1,257,888
Proceeds from exercise of stock options 479,699 0
Cash dividends paid (830,879) (792,397)
Purchase of treasury shares (3,845,693) (3,827,056)
----------- -----------
Net cash from financing activities 66,082,011 9,073,662
----------- -----------
Net change in cash and cash equivalents 1,200,291 6,167,504
----------- -----------
Cash and cash equivalents at beginning of year 15,867,787 14,758,555
----------- -----------
Cash and cash equivalents at end of year $17,068,078 $20,926,059
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $12,748,970 $ 5,204,995
Income taxes $ 1,020,334 $ 710,243
Supplemental disclosure of noncash investing activities
Transfers from loans to real estate owned $ 37,767 $ 167,001
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 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 June 30,
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 six
months ended June 30, 1996, were computed by dividing net income for the period
by 5,292,140, the weighted average number of shares outstanding and the
weighted average number of common stock equivalents resulting from dilutive
stock options for the six months ended June 30, 1996.
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Standards ("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 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 Company 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 Company's consolidated financial position or results of
operations.
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1996
(UNAUDITED)
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. The total cost of the transaction
considering cash, warrants, and converted options is approximately $32.7
million.
The results of operations reflects AmeriBank from February 13, 1996
through June 30, 1996. The following table presents proforma information as if
the acquisition of AmeriBank had occurred at the beginning of both 1996 and
1995:
Six Months Ended
June 30
1996 1995
---- ----
Interest income $27,168,812 $23,177,503
Interest expense 14,889,420 12,243,324
----------- -----------
Net interest income 12,279,392 10,934,179
Provision for loan losses 400,003 210,000
----------- -----------
Net interest income after
provision for loan losses 11,879,389 10,724,179
Non-interest income 1,903,043 1,609,920
Non-interest expense 9,227,338 8,853,055
----------- -----------
Income before federal income tax 4,555,094 3,481,044
Federal income tax expense 1,743,556 1,281,610
----------- -----------
Net income $2,811,538 $ 2,199,434
=========== ===========
Primary and fully diluted earnings
per common and common share equivalents $ .53 $ .40
=========== ===========
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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 June 30, 1996 to December 31, 1995 and the
results of operations for the three months ended and six months ended June 30,
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 $411.83 million, or 111.21%, from $370.31
million on December 31, 1995 to $782.14 million on June 30, 1996, of which
$356.77 million of assets were acquired from AmeriBank.
Total cash and cash equivalents increased 7.56%, or $1.20 million, to
$17.07 million on June 30, 1996 from $15.87 million on December 31, 1995.
Investment securities available for sale increased 22.36%, or $14.48 million
from $64.76 million on December 31, 1995 to $79.24 million on June 30, 1996, of
which $42.63 million of investment securities available for sale were acquired
from AmeriBank. Proceeds of $33.29 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 132.25% or $365.63 million from $276.46
million on December 31, 1995 to $642.09 million on June 30, 1996. This
increase is primarily the result of $294.70 million of loans acquired from
AmeriBank, a very strong economic market, and a broad range of lending products
now available in the Bank's combined larger market.
Deposits increased 147.41%, or $358.53 million, from $243.22 million on
December 31, 1995 to $601.75 million on June 30, 1996, of which $333.02 million
were acquired from AmeriBank. The Bank has also been aggressive in marketing
its Certificates of Deposit program, generating approximately $24 million in
new Certificates of Deposit.
Federal Home Loan Bank advances increased 107.38% from $43.24 million
on December 31, 1995 to $89.67 million at June 30, 1996. The proceeds of the
advances were used primarily to fund the AmeriBank acquisition and loan growth
during the six months ended June 30, 1996.
Total stockholders' equity increased from $79.56 million on December
31, 1995 to $80.34 million on June 30, 1996. Stockholders' equity increased as
a result of net income after payment of dividends, the exercise of stock options
which increased common stock and additional paid in capital, and by the cost of
warrants and options issued upon the purchase of AmeriBank. The increase was
partially offset as a result of the repurchase of 235,366 shares of Company
common stock and by the change in net unrealized gain or loss on securities
available for sale, net of tax, which decreased from a gain of $390,556 on
December 31, 1995 to a loss of $399,591 on June 30, 1996 as a result of the
general increase in market interest rates during the six month period ended
June 30, 1996.
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During the second quarter of 1996, the Company declared a cash dividend
of $.08 per share. Dividends declared, as a percentage of earnings per share
were 28.57% for the three month period ended June 30, 1996. Dividends paid for
the six month period ended June 30, 1996 was $.16 per share. Dividends
declared as a percentage of earnings per share was 30.77% for the six month
period ended June 30, 1996.
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.
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
Interest-Earning Assets:
Loans receivable (1) (2) $526,727 $21,401 8.13% $239,991 $ 9,894 8.31%
Securities - Taxable 80,002 2,404 6.48 69,812 2,329 6.64
Securities - Tax Exempt (2) 3,589 113 6.30
Other interest earning assets 7,188 368 6.37 3,451 142 8.26%
----- --- ---- ----- --- ----
Total interest-earning assets (1) $617,506 $24,286 7.87% $313,254 $12,365 7.94%
------- ------ ---- -------- ------- ----
Interest-Bearing Liabilities:
Demand and NOW deposits $114,276 $ 1,975 3.48% $ 44,570 $ 601 2.72%
Savings deposits 66,066 850 2.59 48,090 583 2.44
Certificate accounts 302,793 8,254 5.48 127,766 3,541 5.59
FHLB advances 69,889 2,003 5.76 15,190 518 6.88
Other interest bearing liabilities 182 7 7.80 768 34 8.91%
--- - ---- --- -- ----
Total interest-bearing liabilities $553,206 $13,089 4.76% $236,384 $ 5,277 4.50%
------- ------ ---- ------- ----- ----
Net interest income $11,197 $ 7,088
====== =====
Net interest rate spread 3.11% 3.44%
==== ====
Net earning assets $ 64,300 $ 76,870
====== ======
Net yield on average
interest-earning assets 3.63% 4.56%
=== =====
Average interest-earning assets
to average interest-bearing
liabilities 1.12x 1.32x
==== ====
____________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
and loan reserves.
(2) Tax exempt interest on securities and loans has been converted to a
fully-taxable equivalent basis. Fully-taxable equivalent adjustments
are as follows: (Dollars in Thousands)
11
12
Six Months Ended
June 30
1996
----
Loans $19
Securities 38
--
Total $57
==
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 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.
Six Months Ended
June 30
1996 vs. 1995
Increase
(Decrease) Total
Due to Increase
Volume Rate (Decrease)
------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $11,652 $(145) $11,507
Securities
Taxable 161 (86) 75
Tax Exempt 113 113
Other interest-earning assets 284 (58) 226
--- ---- ---
Total interest-earning assets $12,210 $(289) $11,921
======= =====
Interest-bearing liabilities:
Demand and NOW deposits 1,165 209 1,374
Savings deposits 229 38 267
Certificate accounts 4,772 (59) 4,713
FHLB advances 1,580 (95) 1,485
Other interest-bearing liabilities (23) (4) (27)
---- --- ----
Total interest-bearing liabilities $7,723 $89 $ 7,812
===== == -----
Net interest income $ 4,109
======
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RESULTS OF OPERATIONS
Net income increased 77.6% from $822,000 in the quarter ended June 30,
1995 to $1.46 million in the quarter ended June 30, 1996. The net income for
the six month period increased 51.9% from $1.81 million through June 30, 1995
to $2.75 million through June 30, 1996. The increase was due primarily to
asset growth resulting from the acquisition of AmeriBank in the first quarter
of 1996. Additionally, the net effect of the amortization of the purchase
accounting adjustments and goodwill that was generated in the acquisition has
also had a small positive impact on net income during the quarter ended June
30, 1996. The difference between the purchase price and net book value of
AmeriBank on the date of acquisition was approximately $12.7 million. The
excess was allocated to the significant assets and liabilities assumed in the
acquisition to record these items at their fair values (referred to as purchase
accounting adjustments), with the remaining excess allocated to goodwill. The
purchase accounting adjustments and goodwill are being amortized under various
methods and over the lives of the corresponding assets and liabilities.
The most significant purchase accounting adjustment relates to
deposits, for which an increase in value of approximately $3.89 million was
recorded. This adjustment is being amortized over approximately 4.5 years,
resulting in a positive impact to income through the year 2000. Offsetting
this positive impact to income is the amortization of the other purchase
accounting adjustments and the amortization of goodwill, which are being
amortized using the straight-line method over a period of 15 years. Overall,
the net effect is an increase to income, after taxes, during 1996 and a
decrease to income, after taxes, thereafter.
Net interest income increased $2.60 million during the quarter ended
June 30, 1996, compared to the same period in 1995, reflecting increased income
as a result of the acquisition of AmeriBank and continued strong core earnings,
partially offset by increased interest expense on deposits and borrowings as a
result of increases in balances and the rates paid on such liabilities. For
the six month period ended June 30, 1996, net interest income was up $4.05
million. The net yield on average interest earning assets, i.e. net interest
margin, decreased from 4.56% for the six months ended June 30, 1995 to 3.63%
for the six months ended June 30, 1996. The reduction in net interest margin
was primarily the result of the liquidation of interest earning securities to
fund the acquisition of AmeriBank, and the result of the acquisition of
AmeriBank, which had a net interest margin of 2.62% at December 31, 1995. The
percentage of total average interest-bearing assets to total average
interest-bearing liabilities decreased to 112% at June 30, 1996, from 132%
at June 30, 1995. This decrease was primarily the result of the acquisition of
AmeriBank which had an average of total interest bearing assets to total
interest bearing liabilities of 102% at December 31, 1995.
Provision for loan losses increased $120,000 for the three month period
ended June 30, 1996 compared to the three month period ended June 30, 1995 and
increased $204,000 for the six month period ended June 30, 1996 compared to the
six month period ended June 30, 1995. This increase was based on management's
assessment of risk factors. The allowance is maintained by management at a
level considered adequate to cover possible 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. Considering management's intention to grow
commercial and consumer portfolios, increasing provisions are appropriate in
preparation for higher risk of loss with those portfolios compared to
mortgages. 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 Company'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. Delinquent loans are
put on non-accrual status unless they are adequately capitalized and in the
process of collection. As of June 30, 1996, $1.01 million of loans were
non-accruing, compared to none as of June 30, 1995. As of June 30, 1996, the
allowance for loan losses of $2.87 million was approximately .45% of net loans
receivable and 179.49% of nonperforming assets, as compared to .47% and 41.98%
as of June 30, 1995.
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Non-interest income increased by $432,000 in the second quarter
compared to the same period in 1995 and increased $821,000 for the six month
period ended June 30, 1996, as compared to the same period in 1995. Service
charges and other fees increased during the three and six month periods ended
June 30, 1996 due to increased deposit account activity, increased loan
origination and refinancing activity, and the contribution to non-interest
income due to the acquisition of AmeriBank.
Non-interest expense increased from $2.64 million for the three month
period ended June 30, 1995, to $4.52 million for the three month period ended
June 30, 1996. The Company's non-interest expense also increased from $5.21
million for the six month period ended June 30, 1995 to $8.27 million for the
six month period ended June 30, 1996. The Company's increase in non-interest
expense for both periods was due to the addition of non-interest expenses of
AmeriBank, an increase in compensation and benefit expenses, primarily related
to ESOP and MRP expense, amortization of acquisition intangibles, along with
general increases in other expenses. As a result of the updating and
conversion of the Company's data processing system, the Company will gain
efficiencies of service costs, lower overall data processing expense, partially
offset by depreciation expense on the new equipment.
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 reportedly 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 the proposed assessment
of 0.90% was effected based on deposits as of March 31, 1995 (as proposed), the
Bank's special assessment would amount to approximately $4.81 million before
taxes. Accordingly, this special assessment would significantly increase
non-interest expense and adversely effect the Company's results of operations.
Conversely, depending upon the Bank's capital level and supervisory rating, and
assuming (although there can be no assurance) the insurance premium levels for
BIF and SAIF members are again equalized, future deposit insurance premiums
could decrease significantly, to as low as $2,000, from the .23% of deposits
currently paid by the Bank, which would reduce non-interest expense for future
periods.
The Company's federal income tax expense increased from $534,000 for
the three month period ended June 30, 1995 to $931,000 for the three month
period ended June 30, 1996. The federal income tax expense for the six month
period ended June 30, 1995 of $988,000 increased to $1.66 million for the six
month period ended June 30, 1996. The increase in federal income tax was a
result of higher net income before federal income tax expense, and the
amortization of goodwill with no tax benefit.
Earnings for the second quarter and six months ended June 30, 1996 were
$.28 and $.52, respectively, per weighted average number of shares outstanding.
(The weighted average number of outstanding shares for the second quarter and
six months ended June 30, 1996, were 5,280,409 and 5,292,140 shares,
respectively.)
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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSS
The Company's non-performing assets decreased 41.43%, or $1.13 million,
from $2.73 million at December 31, 1995 to $1.60 million at June 30, 1996,
primarily as the result of a $1.10 million multi-family real estate loan
brought current at June 30, 1996. The loan remains on the Company's watch
credit list. At June 30, 1996, the percentage of non-performing assets to
total assets was .20% compared to .74% at December 31, 1995. The Company's
allowance for loan losses as a percentage of non-performing assets at June 30,
1996, was 179.21% compared to 45.81% at December 31, 1995.
Non-accruing loans at June 30, 1996 consisted of $708,000 of
residential mortgage loans and $297,000 of consumer loans. Included in the
non-accruing residential mortgage loans were $543,000 of loans to the same
borrower secured by 22 individual condominium rental units. The Company has
exercised its assignment of rents provision under the mortgage documents giving
the Company the right to receive the rents directly and to engage a new
property management company, which it has done. The loans have an estimated
loan-to-value ratio of 66%. At June 30, 1996, the largest accruing loan
delinquent more than 90 days did not exceed $90,000. Substantially all
non-accruing loans at June 30, 1996 had been classified as accruing delinquent
loans before being put on non-accrual status.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio at June 30, 1996 and December 31, 1995.
June 30 December 31
1996 1995
----------------- ----------------
Non-accruing loans $1,005 $ --
----- ---
Accruing loans delinquent more than 90 days:
One- to four-family 268 1,317
Commercial and multi-family real estate 217 1,110
Consumer 70 7
-- -
Total 556 2,434
--- -----
Foreclosed assets:
One- to four-family 38 296
-- ---
Total 38 296
-- ---
Total non-performing assets $1,599 $2,730
===== =====
Total as a percentage of total assets .20% .74%
=== ===
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The distribution of the Company's allowance for losses on loans at the dates
indicated is summarized as follows:
June 30 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 $ 523 66.17% $ 166 71.24%
Commercial real estate 330 9.23 434 5.90
Commercial 72 1.54
Construction or development 223 10.72 53 14.53
Consumer 633 12.34 143 8.33
Unallocated 1,085 455
----- -------- --- ---------
Total $2,866 100.00% $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 10.38% at June
30, 1996 complied with minimum levels. At June 30, 1996, the Bank had
outstanding $82.08 million of loan commitments and unused lines and letters of
credit. The Bank had $223.30 million of certificates of deposit due in less
than 12 months. The majority of these certificates of deposit are anticipated
to 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.
CAPITAL RESOURCES
The Bank is subject to three capital to asset requirements in accordance with
Bank regulations. The following table summarizes the Bank's regulatory capital
requirements versus actual capital as of June 30, 1996:
Actual Required Excess
------------------------ ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Capital Requirements:
Tangible $51,157 6.76% $11,352 1.50% $39,805 5.26%
Core Leverage Capital $51,157 6.76% $22,705 3.00% $28,452 3.76%
Risk-Based Capital $54,022 10.84% $39,853 8.00% $14,169 2.84%
The Bank is in the process of updating and converting its data
processing system. The Bank is making a significant commitment to computer
hardware and software in the approximate amount of $900,000. The new wide area
network technology and software will provide significant improvements in the
Bank's customer information system, allowing for fully integrated services and
providing state of the art commercial lending applications. In addition, the
new technology will provide improved budgeting, asset liability management,
financial management reporting, along with a voice response system, which will
provide an immediate benefit
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to the Bank and its customers. The new system will also enable the Bank to
provide home banking, digital file transfer capabilities, and internet
applications when, and if, it chooses to implement these programs. Management
believes that by upgrading its data processing system it will be able to expand
and enhance the products and services it offers to its customers and be better
situated to compete technologically in the banking industry of the 21st
century.
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OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 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: On April 23,
1996, Ottawa Financial Corporation held its Annual Meeting of
Stockholders ("Meeting").
Stockholders of the Company voted on the following matters at the
Meeting:
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Douglas J. Iverson 4,313,824 58,317
Ronald L. Haan 4,315,339 56,802
Brian W. Koop 4,317,363 54,778
Paul D. Winchester 4,319,834 52,307
Votes Votes Broker
Item For Against Abstentions Non-Voters
---- --- ------- ----------- ----------
Ratification of the adoption of 3,877,418 234,163 47,559 213,001
the amendment to the 1995
stock option plan
Ratification of the appointment 4,342,216 5,833 23,742
of Crowe, Chizek and
Company as independent
auditors of the Bank
Item 5 Other Information: There are no matters required to be reported under
this item.
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibit 11 Statement - Re: Computation of per Share Earnings
(b) Exhibit 27 - Financial Data Schedule
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(c) Reports on Form 8-K
1. The Corporation filed a Form 8-K dated April 22,
1996, with the SEC, containing a press release
reporting first quarter financial results.
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 12, 1996 Gordon L. Grevengoed
------------------------------------- ----------------------------------------------------------------
Gordon L. Grevengoed
President and Chief Executive Officer
Date: August 12, 1996 Richard J. Hilbink
------------------------------------- --------------------------------------------------------------------
Richard J. Hilbink
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11 Statement - Re: Computation of per share earnings.
27 Financial Data Schedule