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 September 30, 1997
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
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(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 November 5, 1997, there were 5,331,170 shares outstanding.
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OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
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 Cash Flows ................... 5 - 6
Notes to the Consolidated Financial Statements .............. 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................... 8 - 13
PART II -- OTHER INFORMATION
OTHER INFORMATION .................................................... 14
SIGNATURES ........................................................... 15
EXHIBIT INDEX ........................................................ 16
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PART I
Item 1
OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
September 30, 1997 December 31, 1996
------------------ -----------------
(Dollars in Thousands)
ASSETS
Cash and due from financial institutions $ 23,482 $ 20,253
Interest-bearing demand deposits in other financial institutions 4,230 2,548
-------- --------
Total cash and cash equivalents 27,712 22,801
Securities available for sale 53,012 62,906
Federal Home Loan Bank stock 7,308 6,958
Loans receivable, net 740,115 715,551
Accrued interest receivable
Loans 4,039 3,893
Securities 741 798
Premises and equipment, net 14,718 14,533
Acquisition intangibles 14,552 15,474
Other assets 4,769 5,392
-------- --------
Total Assets $866,966 $848,306
======== ========
LIABILITIES
Deposits $642,008 $622,492
Federal funds purchased 2,000
Federal Home Loan Bank advances 138,958 139,170
Advances from borrowers for taxes and insurance 2,035 270
Accrued expenses and other liabilities 8,229 7,458
-------- --------
Total Liabilities 791,230 771,390
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value;
10,000,000 shares authorized; issued
5,984,147 shares at September 30, 1997,
5,962,534 shares at December 31, 1996 60 60
Additional Paid-in Capital 66,616 61,048
Retained earnings, substantially restricted 21,766 32,672
Net unrealized gain or (loss) on securities available for sale, net of tax 10 (79)
Employee Stock Ownership Plan (Unallocated Shares) (2,450) (2,806)
Management Recognition and Retention Plan (Unearned Shares) (1,458) (1,977)
Less Cost of Common Stock in
Treasury -- 630,813 shares at
September 30, 1997, 782,866 shares at
December 31, 1996 (8,808) (12,002)
-------- --------
Total Shareholders' Equity 75,736 76,916
-------- --------
Total Liabilities and Shareholders' Equity $866,966 $848,306
======== ========
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------- -------- ------- -------
(Dollars in Thousands, except per share data)
Interest income
Loans $15,249 $ 13,383 $44,694 $34,766
Investment securities and equity investments 845 1,428 2,770 3,906
Other interest and dividend income 259 177 734 546
------- -------- ------- -------
16,353 14,988 48,198 39,218
------- -------- ------- -------
Interest expense
Deposits 7,475 6,896 21,755 17,975
Federal Home Loan Bank advances 2,093 1,587 6,181 3,590
Other 1 6 10 13
------- -------- ------- -------
9,569 8,489 27,946 21,578
------- -------- ------- -------
NET INTEREST INCOME 6,784 6,499 20,252 17,640
Provision for loan losses 180 150 480 414
------- -------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,604 6,349 19,772 17,226
------- -------- ------- -------
Noninterest income
Service charges and other fees 783 588 2,092 1,987
Mortgage servicing fees 80 74 222 232
Gain on sale of loans 21 18 41 93
Gain (loss) on sale of securities (4) 143 (4)
Other 62 76 202 248
------- -------- ------- -------
942 756 2,700 2,556
------- -------- ------- -------
Noninterest expense
Compensation and benefits 2,606 2,337 7,574 6,475
Occupancy 313 287 947 811
Furniture, fixtures and equipment 265 214 779 545
Advertising 75 161 237 273
FDIC deposit insurance (Note 2) 100 3,841 224 4,401
State single business tax 126 94 306 251
Data processing 216 277 670 748
Professional services 98 327 247 492
Acquisition intangibles amortization 305 306 922 769
Other 623 806 1,922 2,152
------- -------- ------- -------
4,727 8,650 13,828 16,917
------- -------- ------- -------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX EXPENSE 2,819 (1,545) 8,644 2,865
Federal income tax expense (benefit) 1,089 (409) 3,236 1,249
------- -------- ------- -------
NET INCOME (LOSS) $ 1,730 $(1,136) $ 5,408 $ 1,616
======= ======== ======= =======
Earnings per share:
Primary $.31 $(.20) $.97 $.28
==== ====== ==== ====
Fully diluted $.30 $(.20) $.93 $.28
==== ====== ==== ====
Dividends per common share $.09 $.08 $.26 $.23
==== ====== ==== ====
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
1997 1996
----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $5,408 $1,616
Adjustments to reconcile net income to net cash from operating activities
Depreciation 802 588
Net amortization of security premiums and discounts 254 220
Amortization of acquisition intangibles 922 769
Provision for loan losses 480 414
Loss on limited partnership investments 63 63
ESOP expense 778 607
MRP expense 442 430
Origination of loans for sale (24,469) (5,811)
Proceeds from sale of loans originated for sale 24,510 5,904
Gain on sale of loans (41) (93)
Gain on sale of securities (143)
Changes in:
Other assets 545 1,337
Other liabilities 771 4,770
-------- ---------
Net cash from operating activities 10,322 10,814
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash paid for acquisition of AmeriBank (23,161)
Purchase of securities available for sale (16,823) (10,351)
Proceeds from calls and maturities of securities available for sale 19,316 15,802
Proceeds from sale of securities available for sale 2,324 24,976
Purchases of FHLB stock (350) (2,287)
Principal payments on mortgage-backed certificates 4,981 3,143
Purchases of loans (3,607) (17,757)
Loan originations net of principal payments on loans (21,437) (96,772)
Premises and equipment expenditures, net (987) (2,030)
-------- ---------
Net cash from investing activities (16,583) (108,437)
-------- ---------
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OTTAWA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
CONTINUED
Nine Months Ended
September 30
1997 1996
----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 19,516 39,342
Net decrease in Federal funds purchased (2,000)
Proceeds from FHLB advances 49,000 96,000
Repayment of FHLB advances (49,212) (21,461)
Net increase in advances from borrowers 1,765 1,409
Proceeds from exercise of stock options 204 508
Proceeds from exercise of stock warrants 197
Cash dividends paid (1,358) (1,270)
Purchase of treasury shares (6,940) (7,787)
-------- --------
Net cash from financing activities 11,172 106,741
-------- --------
Net change in cash and cash equivalents 4,911 9,118
-------- --------
Cash and cash equivalents at beginning of year 22,801 15,868
-------- --------
Cash and cash equivalents at end of year $27,712 $24,986
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $27,674 $19,831
Income taxes 2,667 1,766
See accompanying notes to consolidated financial statements.
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OTTAWA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Ottawa Financial Corporation ("Corporation") and its wholly owned subsidiary,
AmeriBank ("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 Corporation at September 30,
1997, 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, 1996.
The Corporation acquired AmeriBank, Federal Savings Bank ("AFSB") on
February 13, 1996. Therefore the financial results for the nine months ended
September 30, 1996, reflect the consolidation of financial information since
that date. The financial results for the three and nine months ended September
30, 1997, reflect the consolidation of financial information for the entire
quarter and nine month period.
The provision for income taxes is based upon the effective tax rate
expected to be applicable for the entire year.
Earnings per share for the quarter ended September 30, 1997, were computed
by dividing net income for the quarter ended September 30, 1997 by 5,602,203
shares for primary and 5,711,861 shares for fully diluted. Earnings per share
for the nine months ended September 30, 1997, were computed by dividing net
income for the nine months ended September 30, 1997 by 5,556,956 shares for
primary and 5,800,761 shares for fully diluted. The shares are based on the
weighted average number of shares outstanding and reflect common stock
equivalents.
On August 28, 1997, the Corporation declared a 10% stock dividend, which
was the first stock dividend declared by the Corporation. The stock dividend
was paid from the Corporation's treasury shares and was accounted for at the
market value of $25.00 per share on the record date. The balance of treasury
shares was reduced at cost using the average cost method. All per share
amounts have been retroactively adjusted to reflect this stock dividend.
NOTE 2 - SAIF ASSESSMENT
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund (SAIF), requiring AmeriBank to pay a
one-time special assessment of $3.51 million. This amount was expensed as of
September 30, 1996, and is reflected in noninterest expense in the consolidated
statement of operations.
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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 ("Corporation") and its wholly owned subsidiary,
AmeriBank ("Bank") at September 30, 1997 to December 31, 1996 and the results
of operations for the three and nine months ended September 30, 1997, compared
to the same periods in 1996. This discussion should be read in conjunction
with the interim consolidated condensed financial statements and footnotes
included herein.
When used in this Quarterly Report on Form 10-Q, the words or phrases
"will likely result", "are expected to", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties --
including changes in economic conditions in the Corporation's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Corporation's market area and competition, that could
cause actual results to differ materially from historical performance and those
presently anticipated or projected. The Corporation wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made. The Corporation wishes to advise readers that the
factors listed above could affect the Corporation's financial performance and
could cause the Corporation's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Corporation does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
The Corporation's total assets increased to $866.97 million at September
30, 1997 from $848.31 million at December 31, 1996. Most of the growth was in
loans and liquid assets, which was funded from the proceeds received from the
call and maturity of securities and the growth in deposits.
Net loans receivable increased to $740.12 million at September 30, 1997
from $715.55 million at December 31, 1996. Most of this growth was in new
originations of commercial and consumer loans, which were funded primarily by
retail deposits as opposed to wholesale funding sources. The volume of loans
originated for sale increased from $5.81 million for the nine months ended
September 30, 1996 to $24.47 million for the same period in 1997, resulting
from a change in the method of pricing mortgage loans to be sold. The
Corporation moved from rate commitments based upon a sixty day delivery period
to a thirty day delivery period to Freddie Mac, resulting in more competitive
rates being offered to customers.
Deposits increased $19.52 million to $642.01 million at September 30,
1997, from $622.49 million at December 31, 1996. The areas of growth were
primarily in certificates of deposits and, to a lesser extent, money market
savings accounts.
The change in total shareholders' equity relates to the retention of net
income for the nine months ended September 30, 1997, which was more than offset
by quarterly cash dividends declared and additional repurchases of the
Corporation's outstanding shares of common stock. During the first nine months
of 1997, 367,875 shares were repurchased at an average price of $18.86 per
share, which both completed the repurchase plan approved in December 1996 and
began a new repurchase plan approved in June 1997. The stock buy back has
enhanced the Corporation's return on equity and earnings per share.
As discussed in Note 1 to the consolidated financial statements, the
Corporation declared a 10% stock dividend on August 28, 1997. The stock
dividend was paid from the Corporation's treasury shares and was recorded at
the market price of the Corporation's stock on the date of record. The
Corporation does not anticipate reducing the amount of the cash dividends as a
result of the stock dividend.
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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.
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
---------------------------------- --------------------------------
Average Average
Outstanding Interest Yield/ Outstanding Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
----------- ----------- ------ ----------- ----------- ------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable (1) (2) $729,849 $44,729 8.17 % $573,174 $34,797 8.09 %
Securities (2) 56,933 2,839 6.63 83,140 4,250 6.82
Other interest-earning assets 14,047 734 6.98 6,487 267 5.48
-------- ------- ---- -------- ------- ----
Total interest-earning assets $800,829 $48,302 8.04 % $662,801 $39,314 7.90 %
-------- ------- ---- -------- ------- ----
Interest-Bearing Liabilities
Demand and NOW deposits $149,498 $4,314 3.87 % $122,145 $3,204 3.50 %
Savings deposits 66,574 1,195 2.41 68,309 1,289 2.52
Certificate accounts 390,187 16,247 5.58 327,958 13,482 5.49
FHLB advances 140,476 6,178 5.90 82,969 3,590 5.78
Other interest-bearing liabilities 203 11 7.31 234 13 6.68
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $746,938 $27,945 5.02 % $601,615 $21,578 4.79 %
-------- ------- ---- -------- ------- ----
Net interest income $20,357 $17,736
======= =======
Net interest rate spread 3.02 % 3.11 %
==== ====
Net interest earning assets $ 53,891 $ 61,186
======== ========
Net yield on average
interest-earning assets 3.39 % 3.57 %
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 1.07x 1.10x
===== =====
(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.
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RATE/VOLUME ANALYSIS
The following table represents 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 that cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
Nine Months Ended
September 30
1997 vs. 1996
Increase (Decrease)
Due to Total Increase
Volume Rate (Decrease)
-----------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $9,599 $333 $9,932
Securities (1,309) (102) (1,411)
Other interest-earning assets 379 88 467
------- ------ -------
Total interest-earning assets $8,669 $319 $8,988
======= ====== =======
Interest-bearing liabilities:
Demand and NOW deposits 767 343 1,110
Savings deposits (32) (62) (94)
Certificate accounts 2,589 176 2,765
Borrowings 2,528 60 2,588
Other interest-bearing liabilities (2) 0 (2)
------- ------ -------
Total interest-bearing liabilities $5,850 $517 $6,367
======= ====== =======
Net interest income $2,819 $(198) $2,621
======= ====== =======
RESULTS OF OPERATIONS
The acquisition of AmeriBank, Federal Savings Bank ("AFSB") was closed on
February 13, 1996, therefore the financial results for the three and nine
months ended September 30, 1996 reflect the consolidation of financial
information since that date. The financial results for the three and nine
months ended September 30, 1997 reflect the consolidation of financial
information for the entire quarter and nine month period.
Net income for the quarter ended September 30, 1997 was $1.73 million or
$.31 per share compared to a net loss of $1.14 million or ($.20) per share for
the same period in 1996. Net income for the nine months ended September 30,
1997 was $5.41 million or $.97 per share compared to net income of $1.62
million or $.28 per share for the same period in 1996. The results of
operations for 1996 include the one-time assessment of $3.51 million relating
to legislation signed into law on September 30, 1996 to recapitalize the
Savings Association Insurance Fund ("SAIF"). Net income and earnings per share
for the quarter and nine months ended September 30, 1996, without the SAIF
assessment, would have been $1.18 million or $.21 per share, and $3.93 million
or $.68 per share, respectively. On a SAIF adjusted basis, earnings per share
increased 48% for the quarter ended September 30, 1997 and 43% for the nine
months ended September 30, 1997, compared to the same period in 1996. In
addition to the increase in net income, earnings per share ("EPS") was also
positively impacted by the stock buy back activity discussed above.
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To supplement the EPS information typically disclosed, the Corporation is
providing "cash" or "tangible" EPS as an alternative measure for evaluating the
Corporation's ability to grow tangible capital. The calculations of cash or
tangible earnings per share were specifically formulated by the Corporation 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 third quarter of 1997 was $.41, which is $.10 per share
higher than the standard EPS, compared to a SAIF adjusted tangible EPS of $.30
for the third quarter of 1996, showing a 37% improvement. The cash or tangible
EPS for the nine months ended September 30, 1997 was $1.27, which is $.30 per
share higher than the standard EPS, compared to a SAIF adjusted tangible EPS of
$.93 for the same period in 1996, showing a 37% improvement. This measure and
the factors influencing its calculation are described more fully in the 1996
Annual Report to Shareholders.
Net income for the quarter ended September 30, 1997 yielded a return on
average equity ("ROE") of 9.23%, representing a 54% improvement over the SAIF
adjusted ROE achieved for the same period in 1996 of 6.01%. ROE for the nine
months ended September 30, 1997 was 9.52% compared to a SAIF adjusted ROE of
6.49% for the same period in 1996, representing a 47% improvement. The
increase in the return on average equity is primarily attributable to the
improved earnings resulting from the positive impact of capital leveraging
experienced during 1996 and the first nine months of 1997. The capital
leveraging was achieved mostly through growth in assets and, to a lesser
extent, through the stock buy back activity.
Net interest income increased $2.62 million on a tax equivalent basis for
the nine months ended September 30, 1997 as compared to the same periods in
1996. The increase in net interest income is attributable to the positive
impact of volume increases caused by the AFSB acquisition and internal growth
experienced during 1996 and the first nine months of 1997. While net interest
income increased, there was a decline in the net interest spread, from 3.11% to
3.02%, and net interest margin, from 3.57% to 3.39%, for the nine months ended
September 30, 1996 compared to the same period in 1997, respectively. The
yield on total interest-earning assets improved primarily due to an increase in
the loan portfolio as a percent of total interest-earning assets. Offsetting
this improvement in the yield on interest-earning assets was the increase in
the cost of interest-bearing liabilities, resulting in a decline in the net
interest spread. The cost of interest-bearing liabilities increased primarily
due to an increase in FHLB advances as a percent of total interest-bearing
liabilities and, to a lesser extent, a shift in mix from lower costing demand
deposit and savings accounts to higher costing money market demand and savings
accounts, as well as a general rise in the rates of interest-bearing
liabilities. The reduction in net interest margin was partially the result of
this spread decline, but also the result of the Corporation becoming more
leveraged through acquisition and internal growth. This increase in leveraging
is reflected in the ratio of average interest-earning assets to average
interest-bearing liabilities, which declined to 1.07x for the nine months ended
September 30, 1997 compared to 1.10x for the same period in 1996.
The provision for loan losses is a result of management's periodic
analysis of the adequacy of the allowance for loan losses. The provision of
$480,000 for the nine months ended September 30, 1997 was for the purpose of
growing the allowance for loan loss balance to keep pace with loan growth as
the credit risk profile of the Corporation's loan portfolio has not changed
dramatically. The Corporation anticipates that it will increase its allowance
for loan loss balance in future periods to prepare for the higher risk of loss
associated with management's intention to increase the commercial and consumer
loan portfolios.
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 the Corporation's 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 $942,000 and $2.70 million for the three
and nine months ended September 30, 1997 from $756,000 and $2.57 million for
the same period in 1996. The increase in noninterest income for the three
months ended September 30, 1997 compared to 1996 is primarily attributable to
an increase in deposit account service fees. During the third quarter of 1997,
fee structures were modified to achieve more consistency between AmeriBank and
AFSB. The primary areas of change related to assessing fees on savings
accounts that fell below a minimum balance
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and checking accounts for which cancelled checks were returned to customers
with monthly bank statements. Due to the nature of the fee assessments, it is
expected that customer behavior will change and the level of fee income will
diminish from the third quarter of 1997. For the nine months ended September
30, 1997, the increase in deposit account service fees was offset by declines
in ATM fees and gains on sales of loans, and complimented by increases in gains
on sales of securities. ATM fees declined due to new fees charged by
competitors for usage of their machines. As a result, AmeriBank customers used
competitors' machines less often. Since AmeriBank charges its customers when
they use a competitor's machine, fee income from this activity declined. In
addition, there was a decline in gains on sales of loans due to less favorable
market pricing during the first nine months of 1997. For the nine months ended
September 30, 1997, the Corporation had gains on sales of securities of
approximately $143,000.
Noninterest expense decreased to $4.73 and $13.83 million for the three
and nine months ended September 30, 1997 from $8.65 and $16.92 million for the
same periods in 1996. The decrease in noninterest expense for the three and
nine months ended September 30, 1997 compared to 1996 is primarily attributable
to the decrease in FDIC deposit insurance, data processing and professional
services, offset by increases in compensation and benefits and depreciation
expense. As discussed in Note 2 to the consolidated financial statements, the
results of operations for 1996 include the one-time assessment of $3.51 million
to recapitalize the SAIF. The additional decrease in the FDIC deposit
insurance reflects the lower charge of 6.5 cents per $100 of domestic deposits
in 1997 versus the 23 cents per $100 of domestic deposits in 1996. The 6.5
cent assessment in 1997 is entirely for debt service of the Financing
Corporation (FICO), as the Corporation's rate of deposit insurance assessment
is zero for 1997. During the third quarter of 1996, the Corporation recorded
non-recurring expenses of approximately $400,000 as a result of its conversion
to a new data processing system. During the first nine months of 1997, the
Corporation has achieved economies of operations reflected in lower levels of
data processing and other noninterest expenses and experienced cost savings as
a result of reduced contracted services. The increase in compensation and
benefits is due in part to a greater number of full-time equivalent employees
and an increase in ESOP expense attributable to the higher market price of the
Corporation's stock during 1997. The increase in depreciation expense relates
to the depreciation of the new data processing equipment.
The Corporation's efficiency ratio, defined generally as noninterest
expense divided by the sum of net interest income and noninterest income,
decreased from 65.08% for the nine months ended September 30, 1996 to 60.72%
for the same period in 1997. A similar improvement was experienced for the
third quarter of the year in which the efficiency ratio decreased from 67.35%
in 1996 to 61.31% in 1997. The 1996 ratios have been adjusted for all
non-recurring items, including the $3.51 million one-time SAIF assessment,
$400,000 in data processing expenses and $218,000 of dividends received on the
Corporation's investment in Minnesota Mutual Life Insurance Company. This
ratio demonstrates that the Corporation's ability to generate revenues on its
noninterest expense dollars has improved.
Income tax expense for the first nine months of 1997 was $3.24 million
compared to $1.25 million for the same period in 1996. The higher federal tax
expense is primarily due to a higher level of pre-tax income, as well as a full
nine months of goodwill amortization, which is not deductible for tax purposes,
in 1997 compared to seven and one half months of amortization in 1996 based
upon the date of the merger consumation.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's non-performing assets increased from $2.93 million at
December 31, 1996 to $3.04 million at September 30, 1997. The percentage of
non-performing assets to total assets was .35% at September 30, 1997, which was
consistent with the December 31, 1996 ratio of .34%. The Corporation's
allowance for loan losses as a percentage of non-performing loans at September
30, 1997 was 116.43% compared to 114.36% at December 31, 1996. Non-accruing
loans at September 30, 1997 consisted of $1.54 million of residential mortgage
loans, $395,000 of consumer loans and $161,000 of commercial business loans.
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The table below sets forth the amounts and categories of non-performing
assets at September 30, 1997 and December 31, 1996.
September 30 December 31
1997 1996
-------- --------
(Dollars in Thousands)
Non-accruing loans $2,091 $2,123
Accruing loans delinquent more than 90 days:
One- to four-family 178 132
Commercial and multi-family real estate 505 426
Consumer 1 55
------ ------
Total 2,775 2,736
------ ------
Foreclosed assets:
One- to four-family 29 38
Consumer 239 151
------ ------
Total 268 189
------ ------
Total non-performing assets $3,043 $2,925
====== ======
Total as a percentage of total assets .35 % .34 %
====== ======
LIQUIDITY
The Bank anticipates it will have sufficient funds available to meet
current loan commitments primarily through sales, calls and maturities of
securities, loan payments and payoffs, and the growth of deposits. If
necessary, the Bank has additional sources of liquidity from FHLB borrowings
and unused lines of credit with correspondent banks. At September 30, 1997,
the Corporation had commitments to make loans of $31.96 million, unused lines
of credit of $42.06 million, and construction loans in process of $21.56
million.
CAPITAL RESOURCES
The Bank is subject to capital to asset 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, 1996.
The Bank remains "well capitalized" under the prompt corrective action
regulations.
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OTTAWA FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
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 11 Statement -- Re: Computation of Per
Share Earnings
(b) Exhibit 27 -- Financial Data Schedule (Electronic
Filing Only)
(c) Reports on Form 8-K
1. The Corporation filed a Form 8-K dated September 2, 1997,
containing a press release announcing the declaration
of (i) its regular quarterly cash dividend of $.10 per share
payable on September 30, 1997 to shareholders of record on
September 10, 1997 and (ii) a 10% stock dividend payable on
September 30, 1997 to shareholders of record on September
12, 1997.
2. The Corporation filed a Form 8-K dated October 2, 1997,
containing a press release announcing the adjustments to
its outstanding warrants as a result of the Corporation's
recently declared stock dividend.
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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: 11/12/97 Gordon L. Grevengoed
-------- ---------------------------------------
Gordon L. Grevengoed
President and Chief Executive Officer
Date: 11/12/97 Jon W. Swets
-------- ---------------------------------------
Jon W. Swets
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
11 Statement -- Re: Computation of Per Share Earnings.
27 Financial Data Schedule (Electronic Filing Only).
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