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FIRST OTTAWA BANCSHARES, INC - Quarter Report: 2002 June (Form 10-Q)

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

 

OR

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For transition period from              to               

 

Commission file number 005-57237

 

 

FIRST OTTAWA BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

 

36-4331185

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

701-705 LaSalle Street
Ottawa, Illinois

 

61350

(Address of principal executive offices)

 

(ZIP Code)

 

 

 

(815) 434-0044

(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  ý  No  o

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date:  As of July 31, 2002, the Registrant had outstanding 658,356 shares of common stock, $1.00 par value per share.

 

 



 

FIRST OTTAWA BANCSHARES, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I

 

 

Item 1.

Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

PART II

 

 

Item 1.

Legal Proceedings

Item 2.

Changes in Securities

Item 3.

Defaults Upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information

Item 6.

Exhibits and Reports on Form 8-K

Item 7.

Signatures

 

2



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIRIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

June 30,
2002

 

December 31,
2001

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

4,922

 

$

7,933

 

 

 

 

 

 

 

Certificates of deposit

 

6,567

 

3,100

 

Securities available-for-sale

 

102,777

 

104,319

 

Loans held for sale

 

767

 

1,475

 

Loans, less allowance for loan losses of $1,095 and $1,126

 

107,382

 

106,924

 

Bank premises and equipment, net

 

4,190

 

2,839

 

Due from broker

 

 

477

 

Interest receivable and other assets

 

5,127

 

5,498

 

 

 

 

 

 

 

Total assets

 

$

231,732

 

$

232,565

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand – non-interest-bearing

 

$

20,387

 

$

21,437

 

NOW accounts

 

25,542

 

23,835

 

Money market accounts

 

8,851

 

8,554

 

Savings

 

18,419

 

16,860

 

Time, $100,000 and over

 

19,050

 

20,479

 

Other time

 

70,017

 

74,102

 

Total deposits

 

162,266

 

165,267

 

 

 

 

 

 

 

Federal funds purchased

 

8,150

 

5,050

 

Securities sold under agreements to repurchase

 

28,883

 

30,849

 

Borrowings

 

4,600

 

4,200

 

Interest payable and other liabilities

 

3,261

 

4,292

 

Total liabilities

 

207,160

 

209,658

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock - $1 par value, 750,000 shares authorized and issued

 

750

 

750

 

Additional paid-in capital

 

4,000

 

4,000

 

Retained earnings

 

23,525

 

23,178

 

Treasury stock, at cost, 91,644 shares

 

(5,196

)

(5,196

)

Accumulated other comprehensive income

 

1,493

 

175

 

Total shareholders’ equity

 

24,572

 

22,907

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

231,732

 

$

232,565

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIRIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Interest income

 

 

 

 

 

 

 

 

 

Loans (including fee income)

 

$

2,035

 

$

2,404

 

$

4,090

 

$

4,865

 

Securities

 

 

 

 

 

 

 

 

 

Taxable

 

1,021

 

928

 

2,079

 

1,841

 

Exempt from federal income tax

 

237

 

369

 

465

 

811

 

Certificates of deposit

 

65

 

38

 

75

 

38

 

Federal funds sold

 

 

46

 

1

 

76

 

Total interest income

 

3,358

 

3,785

 

6,710

 

7,631

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

NOW account deposits

 

87

 

101

 

162

 

210

 

Money market deposit accounts

 

44

 

63

 

85

 

133

 

Savings deposits

 

85

 

81

 

165

 

162

 

Time deposits

 

1,053

 

1,403

 

2,233

 

2,870

 

Repurchase agreements

 

143

 

277

 

301

 

613

 

Borrowings

 

29

 

30

 

58

 

30

 

Federal funds purchased

 

22

 

23

 

37

 

30

 

Total interest expense

 

1,463

 

1,978

 

3,041

 

4,048

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

1,895

 

1,807

 

3,669

 

3,583

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

30

 

90

 

60

 

180

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

1,865

 

1,717

 

3,609

 

3,403

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

183

 

226

 

366

 

426

 

Trust and farm management fee income

 

114

 

108

 

228

 

216

 

Other income

 

176

 

175

 

369

 

333

 

Securities gains (losses), net

 

1

 

10

 

1

 

10

 

Total noninterest income

 

474

 

519

 

964

 

985

 

 

 

 

 

 

 

 

 

 

 

Noninterest expenses

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

937

 

970

 

1,900

 

1,866

 

Occupancy and equipment expense

 

210

 

203

 

410

 

411

 

Data processing expense

 

106

 

129

 

223

 

265

 

Supplies

 

33

 

44

 

64

 

75

 

Advertising and promotions

 

25

 

26

 

49

 

52

 

Professional fees

 

124

 

104

 

212

 

169

 

Other expenses

 

282

 

270

 

477

 

551

 

Total noninterest expenses

 

1,717

 

1,746

 

3,335

 

3,389

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

622

 

490

 

1,238

 

999

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

139

 

45

 

233

 

76

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

483

 

$

445

 

$

1,005

 

$

923

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,124

 

$

365

 

$

2,323

 

$

1,853

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.73

 

$

0.67

 

$

1.53

 

$

1.39

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

658,356

 

662,281

 

658,356

 

662,281

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months ended June 30, 2002 and 2001

(In thousands, except per share data)

(Unaudited)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Share-
holders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2001

 

$

750

 

$

4,000

 

$

23,052

 

$

(5,000

)

$

(219

)

$

22,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

923

 

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects

 

 

 

 

 

930

 

930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($1 per share)

 

 

 

(662

 

 

(662

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2001

 

$

750

 

$

4,000

 

$

23,313

 

$

(5,000

)

$

711

 

$

23,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2002

 

$

750

 

$

4,000

 

$

23,178

 

$

(5,196

)

$

175

 

$

22,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

1,005

 

 

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects

 

 

 

 

 

1,318

 

1,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($1 per share)

 

 

 

(658

 

 

(658

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2002

 

$

750

 

$

4,000

 

$

23,525

 

$

(5,196

)

$

1,493

 

$

24,572

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months ended June 30, 2002 and 2001

(In thousands)

(Unaudited)

 

 

 

2002

 

2001

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

1,005

 

$

923

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

Change in deferred loan fees

 

(3

)

(3

)

Provision for loan losses

 

60

 

180

 

Depreciation and amortization

 

149

 

141

 

Premium amortization on securities, net

 

45

 

(1

)

Net real estate loans originated for sale

 

727

 

(39

)

Gain on loan sales

 

(19

)

(114

)

Gain on sale/call of securities available-for-sale

 

(1

)

(10

)

Loss on sale of other real estate owned

 

5

 

15

 

Change in interest receivable and other assets

 

363

 

(3

)

Change in interest payable and other liabilities

 

(1,043

)

(671

)

Net cash from operating activities

 

1,288

 

419

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from sales of securities available-for-sale

 

252

 

 

Proceeds from maturities of securities

 

7,230

 

20,709

 

Purchases of securities available-for-sale

 

(3,510

)

(21,536

)

Purchases of certificates of deposit

 

(3,467

)

(2,000

)

Net change in loans receivable

 

(590

)

3,148

 

Proceeds from sale of other real estate owned

 

70

 

173

 

Property and equipment expenditures

 

(1,492

)

(90

)

Net cash from investing activities

 

(1,507

)

404

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Change in deposits

 

(3,001

)

(7,667

)

Change in federal funds purchased

 

3,100

 

5,750

 

Proceeds from borrowings

 

400

 

4,000

 

Change in securities sold under agreements to repurchase

 

(1,966

)

(2,400

)

Dividends paid

 

(1,325

)

(1,325

)

Net cash from financing activities

 

(2,792

)

(1,642

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

(3,011

)

(820

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

7,933

 

6,971

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

4,922

 

$

6,151

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINACIAL STATEMENTS

(Table dollars in thousands)

June 30, 2002 and 2001

 

NOTE 1 – BASIS OF PRESENTATION

 

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent with those used in the preparation of annual consolidated financial statements.  The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim periods presented.  Results for the three months and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the interim financial period and with the instructions to Form 10-Q.  Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

During 2001, First Ottawa Bancshares, Inc. (Company) organized a wholly-owned subsidiary, First Ottawa Financial Corporation, to sell insurance and investment products.  There was no significant activity at this subsidiary through June 30, 2002.

 

NOTE 2 – CAPITAL RATIOS

 

At the end of the period,  the Company’s and Bank’s capital ratios were the same and were:

 

 

 

June 30, 2002

 

December 31, 2001

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

23,991

 

18.2

%

$

23,848

 

18.6

%

Tier I capital (to risk-weighted assets)

 

22,896

 

17.4

%

22,739

 

17.6

 

Tier I capital (to average assets)

 

22,896

 

10.0

%

22,739

 

10.1

 

 

At June 30, 2002, the Company and the Bank were categorized as well capitalized and management is not aware of any conditions or events since the most recent notification that would change the Company’s or Bank’s categories.

 

7



 

NOTE 3 - DERIVATIVES

 

The Company uses derivatives to fix future cash flows for interest payments on some of its floating rate certificates of deposit.  In this regard, the Company has entered into an interest rate swap with the Federal Home Loan Bank of Chicago to fix the interest rate on a specific certificate of deposit product.  At June 30, 2002, the Company had $1.5 million of certificates of deposit, which mature in 2006 and 2007, and in conjunction with it pays the Federal Home Loan Bank a weighted average interest rate of 3.11% and will receive an interest rate from the Federal Home Loan Bank based on the appreciation of the S&P 500 Index.  This interest received from the Federal Home Loan Bank will be paid to the customer.  The assets and liabilities in this transaction are being netted and the resulting income or expense recorded in other income.

 

In addition to the above, the Company also purchased $3,600,000 of certificates of deposit, which are included in the certificates of deposit caption on the consolidated balance sheet.  These investments mature throughout 2006 and 2007.  The investments that individually do not exceed $100,000 are secured by the FDIC.  Investments that do individually exceed $100,000 are guaranteed by a standby letter of credit issued by the Federal Home Loan Bank of Pittsburgh with an interest rate of 0%.  The initial investment is not at risk, but the return on the investment is based on a calculation of the appreciation in the S&P 500 Index.  The fair value of this embedded derivative is recorded in other assets and the fair value adjustment is included in other income.  At June 30, 2002, the fair value was estimated to be ($42,000).

 

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In 2001, new accounting guidance was issued that, beginning in 2002, revised the accounting for goodwill and intangible assets.  Intangible assets with indefinite lives and goodwill are no longer amortized, but are periodically reviewed for impairment and written down if impaired.  Additional disclosures about intangible assets and goodwill may be required.  An initial goodwill impairment test is required during the first six months of 2002.  The new guidance did not have a material effect on the financial statements of the Company, as the Company has no recorded goodwill at June 30, 2002.

 

A new accounting standard dealing with asset retirement obligations will apply for 2003.  The Company does not believe this standard will have a material affect on its financial position or results of operations.

 

Effective January 1, 2002, the Company adopted a new standard issued by the Financial Accounting Standards Board on impairment and disposal of long-lived assets.  The effect of this on the financial position and results of operations of the Company was not material.

 

8



 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated.  The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes.  In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties.  The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.

 

CONSOLIDATED FINANCIAL CONDITION

Total assets at June 30, 2002 remained stable at $231.7 million, as contrasted to $232.6 million at December 31, 2001, a decrease of $0.9 million, or 0.4%.  This slight decrease was the result of a decrease in cash and due from banks, securities available for sale, and loans held for sale, partially offset by modest increases in interest receivable and other assets, certificates of deposits at other financial institutions and bank premises and equipment. Cash and due from banks decreased $3.0 million as a result of a reduction in the balance due from the Federal Reserve Bank at June 30, 2002.  Securities available for sale decreased by  $1.5 million, primarily as a result of maturities of securities and reinvestment in certificates of deposits.  Loans held for sale decreased by  $708,000 due to sales in excess of originations during the first six months of the year.

 

The Company has purchased real estate in Morris, Illinois with the intention of establishing a full service branch facility in that community. Construction on the facility will commence during the third quarter of 2002, with an anticipated completion date during the first quarter of 2003. An extensive remodeling project of the main banking facility was commenced in the third quarter of 2001, and was completed prior to the end of the second quarter of 2002. As a result, bank premises and equipment has increased $1.4 million, or 50.0%, since December 31, 2001.  Management estimates additional expenditures for the Morris property will be approximately $800,000.

 

Total liabilities at June 30, 2002 were $207.2 million compared to $209.7 million at December 31, 2001, a decrease of $2.5 million, or 1.2%. This decrease was the result of a decrease in deposits, repurchase agreements and other liabilities, partially offset by an increase in federal funds purchased and borrowings.  Deposits decreased by $3.0 million,  from $165.3 million at December 31, 2001, to $162.3 million at June 30, 2002, due to reductions in offered rates on time deposits.  Federal funds purchased totaled $8.1 million at June 30, 2002, a $3.1 million increase from December 31, 2001. Other liabilities decreased by $1.0 million due to the reduction of dividends payable of $667,000 and decreases in interest payable due to the decline in deposit balances and deposit interest rates during the period ended June 30, 2002.  Securities sold under agreements to repurchase decreased $1.9 million to $28.9 million as of June 30, 2002. This decrease was due primarily to a change in customer product offerings.

 

9



 

Total equity was $24.6 million at June 30, 2002 compared to $22.9 million at December 31, 2001.  This increase was the result of $346,000 of additional retained earnings from net income for the six month period ended June 30, 2002 and an increase of $1.3 million, net of tax, in the Company’s investment portfolio due to current market valuation.

 

CONSOLIDATED RESULTS OF OPERATIONS

Net income for the second quarter of 2002 was $483,000, or $0.73 per share, an 8.5% increase compared to $445,000, or $.67 per share, in the second quarter of 2001.  The increase in net income for the quarter was primarily the result of an increase in net interest income of $88,000, a decrease of non-interest expense of $29,000, and a decrease in the provision for loan losses of $60,000.  These changes were partially offset by a decrease in non-interest income of $45,000 and by a $94,000 increase in the provision for income taxes.  This increase in the Company’s tax provision reflected both an increase in pre-tax income and a migration from tax exempt to taxable investments held in the securities portfolio.

 

During the six months ended June 30, 2002, net income was $1.01 million, or $1.53 per share, compared to $923,000, or $1.39 per share during the first six months of 2001.  This 9.4% increase in net income for the six month period was primarily due to an $86,000 increase in net interest income, or 2.4%, a decrease in the provision for loan losses of $120,000, and a decrease in non-interest expense of $54,000, or 1.6%. Increased net interest income was partially offset by a decrease in non-interest income of $21,000, or 2.1%, and an increase in income tax expense of $157,000, or 206.6%. This increase in the Company’s tax provision reflected both an increase in pre-tax income and a migration from tax exempt to taxable investments held in the securities portfolio.

 

The annualized return on average assets was .88% for the six months ended June 30, in 2002 compared to .83% in 2001.   The annualized return on average equity increased to 8.47% for the six months ended June 30, 2002 from 8.04% in 2001.

 

NET INTEREST INCOME

Net interest income was $1.9 and $1.8 million for the three months ended June 30, 2002 and 2001, respectively.  Total interest income declined to $3.4 million for the three months ended June 30, 2002 from $3.8 million for the same period ended June 30, 2001.  This decrease was primarily the result of a decrease in interest income from loans to $2.0 million for the three months ended June 30, 2002 from $2.4 million for the same period a year earlier, a 16.7% decrease.   This decrease was mitigated by a similar decline in interest expense, to $1.5 million for the three months ended June 30, 2002 from $2.0 million for the same period ended June 30, 2001, a 25% decrease.  Decreases in interest income and interest expense were due to decreases in interest rates and average balances during the first six months of 2002.

 

Net interest income for the six months ended June 30, 2002 and 2001 was $3.6 million. The Company’s net interest margin was 3.52% for the six months ended June 30, 2002 and 3.86% a year earlier.  The yield on average earning assets decreased to 6.34% for the six months ended

 

10



 

June 30, 2002 from 7.74% for the same period ended June 30, 2001, a decline of 140 basis points.  This decrease was partially offset by a corresponding decrease in the cost of funds to 3.34% from 3.86% paid for the same period ended June 30, 2001, a 52 basis point decline. These decreases were reflective of  the declining rate environment throughout 2001 and low rate environment which was sustained during  the first six months of 2002.

 

PROVISION FOR LOAN LOSSES

The provision for loan losses decreased by $60,000 in the second quarter of 2002 compared to the same period in 2001. The decrease in the provision for the three months ended June 30, 2002, was due primarily to the decrease in nonperforming loans and an overall decrease in the gross loan portfolio. As of June 30, 2002, the allowance for loan losses totaled $1.0 million, or 1.0% of total loans, which is a decrease from $1.1 million as of December 31, 2001.  Nonaccrual loans decreased from $387,000 at December 31, 2001 to $306,000 at June 30, 2002.  Nonperforming loans, including nonaccrual loans, decreased $500,000 to $747,000 over the same period.

 

The amounts of the provision and allowance for loan losses are influenced by current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company’s market area and management’s assessment of current collection risks within the loan portfolio. Along with other financial institutions, management shares a concern for the outlook of the economy during the remainder of 2002.  A slowdown in economic activity beginning in 2001 severely impacted several major industries as well as the economy as a whole.  Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable.  In addition, consumer confidence may be negatively impacted by the recent substantial decline in equity prices.  These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans.

 

The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements.  The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management has concluded that the allowance for loan losses was adequate at June  30, 2002. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

 

NONINTEREST INCOME

The Company’s non-interest income totaled $474,000 for the three months ended June 30, 2002 compared to $519,000 for the same period in 2001, a decrease of $45,000 or 8.7%.  Service charges on deposit accounts decreased $43,000, or 19%, to $183,000, due to charge-offs of overdrawn demand accounts and a reduction in fees collected. Trust and farm management fee income increased $6,000 due to modest growth in trust relationships and estates under administration.  In addition, bank owned life insurance income increased $62,000, offset by $42,000 of expense from the derivative valuation of indexed powered certificates of deposit.

 

11



 

For the six months ended June 30, 2002, non-interest income decreased by 2.1% or $21,000 to $964,000.  Service charges on deposit accounts decreased $60,000, or 14.1%, trust and farm management fee increased $12,000, or 5.6%. Commissions from mortgage banking decreased $56,000 due to decreased origination volume, and other fees and commissions increased $36,000 due to an increase in trust fees and income related to bank owned life insurance.

 

NONINTEREST EXPENSE

The Company’s non-interest expense was  $1.7 million for the three months ended June 30, 2002 and 2001.  Other expense increased $12,000 to $282,000. Salaries and benefits decreased $33,000, or 3.4%, to $937,000.  Increases in occupancy and equipment expense of $7,000, and professional fees of $20,000 were offset by decreases in data processing expense of $23,000, and supplies of $11,000. Data processing expense decreased due to item processing and imaging that is now performed at the Bank.

 

For the six months ended June 30, 2002, non-interest expenses decreased $54,000 to $3.3 million, or 1.6%, compared to the year earlier period.  Salaries and benefits increased $34,000, or 1.8%, to $1.9 million.  Supplies expense, data processing, advertising and promotion expense declined $56,000 in total due to a disciplined approach to controlling costs.   Professional fees increased by $43,000, primarily due to more extensive outsourcing of formerly in-house functions. Other expenses decreased $74,000 primarily due to reductions in expenses related to repossessed assets and decreased director fees due to a reduction in the number of directors.

 

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are deposits, repurchase agreements, and proceeds from principal and interest payments on loans and securities.  While maturities and scheduled amortization of loans and securities and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.  The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.

 

Liquidity management is both a daily and long-term responsibility of management.  The Company adjusts its investments in liquid assets based upon management’s assessment of  (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program.  Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.

 

The Company’s most liquid assets are cash and short-term investments.  The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activities during any given year.  At June 30, 2002, cash and short-term investments totaled $5.5 million.  The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans.  The Company may also utilize the sale of securities available-for-sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and American National Bank.

 

12



 

The following table discloses contractual obligations and commercial commitments of the Company as of June 30, 2002:

 

 

 

Total

 

Less Than
1 Year

 

1 – 3 Years

 

4 – 5 Years

 

After
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

$

8,150

 

$

8,150

 

$

 

$

 

$

 

Securities sold under agreements to repurchase

 

28,883

 

28,883

 

 

 

 

FHLB advances

 

4,000

 

4,000

 

 

 

 

Note payable

 

600

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

41,633

 

$

41,633

 

$

 

$

 

$

 

 

 

 

Total
Amounts
Committed

 

Less Than
1 Year

 

1 – 3 Years

 

4 – 5 Years

 

Over
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Lines of credit(1)

 

$

13,713

 

$

6,465

 

$

414

 

$

778

 

$

6,056

 

Standby letters of credit(1)

 

351

 

351

 

 

 

 

Other commitments to extend credit(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,064

 

$

6,816

 

$

414

 

$

778

 

$

6,056

 

 


(1)  Represents amounts committed to customers.

 

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.  The primary impact of inflation on the operations of the Company is reflected in increased operating costs.  Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

13



 

SAFE HARBOR STATEMENT

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

                                         The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

 

                                         The economic impact of the terrorist attacks that occurred on September 11th, as well as any future threats and attacks, and the response of the United States to any such threats and attacks.

 

                                         The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

 

                                         The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

 

                                         The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

 

                                         The inability of the Company to obtain new customers and to retain existing customers.

 

                                         The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

 

14



 

                                         Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

 

                                         The ability of the Company to develop and maintain secure and reliable electronic systems.

 

                                         The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

 

                                         Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

 

                                         Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

 

                                         The costs, effects and outcomes of existing or future litigation.

 

                                         Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

 

                                         The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

 

15



 

ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s overall interest rate sensitivity is demonstrated by net income analysis and “Gap” analysis.  Net income analysis measures the change in net income in the event of hypothetical changes in interest rates.  This analysis assesses the risk of change in net income in the event of sudden and sustained 2.0% increases and decreases in market interest rates.  The tables below present the Company’s projected changes in annualized net income for the various rate shock levels at June 30, 2002 and June 30, 2001.

 

 

 

2002 Net Income

 

 

 

Amount

 

Change

 

Change

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

+200 bp

 

$

2,102

 

$

(253

)

(10.7

)%

Base

 

2,355

 

 

 

-200 bp

 

2,571

 

216

 

9.2

%

 

 

 

2001 Net Income

 

 

 

Amount

 

Change

 

Change

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

+200 bp

 

$

1,603

 

$

(198

)

(11.0

)%

Base

 

1,801

 

 

 

-200 bp

 

1,911

 

110

 

6.1

%

 

As shown above, at June 30, 2002, the effect of an immediate 200 basis point increase in interest rates would decrease the Company’s net income by 10.7% or approximately $253,000.  The effect of an immediate 200 basis point decrease in rates would increase the Company’s net interest income by 9.2% or approximately $216,000.  However, the Company does not anticipate market interest rates decreasing an additional 200 basis points, so these results may not be achievable.  Net income sensitivity has decreased since December 31, 2001, however, overall net income sensitivity has remained relatively constant as a percentage of net income from June 30, 2001 to June 30, 2002.

 

16



 

PART II

 

ITEM 1.          LEGAL PROCEEDINGS

 

There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.

 

ITEM 2.          CHANGES IN SECURITIES

 

None

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the Annual Meeting of Stockholders held on May 15, 2002, Bradley J. Armstrong, Joachim J. Brown, John L. Cantlin, Patty P. Godfrey, Thomas E. Haeberle, Donald J. Harris, Erika S. Kuiper, Thomas P. Rooney, and William J. Walsh were elected to serve as directors of the Company. In addition, the stockholders elected to make several amendments to the Certificate of Incorporation, including an increase in the number of authorized shares, elimination of cumulative voting for directors, setting the number of directors, providing for director qualification requirements, creation of a staggered board, definition of when a director may be removed for cause, procedure to Amend bylaws, requiring stockholder action to be taken at a meeting, procedures to call a special meeting, vote required to amend the Certificate of Incorporation, ability to enter into business combinations with significant stockholders, indemnification of directors and officers and the ability for the board to consider non-stockholder interests in decision making.  In addition, the stockholders voted to approve the 2002 Stock Incentive Plan.

 

As a result of the creation of a staggered board, Bradley J. Armstrong, Donald J. Harris and Thomas P. Rooney will serve as Class I directors with a term expiring in 2003; Joachim J. Brown, John L. Cantlin and Patty P. Godfrey will serve as Class II directors with a term expiring in 2004; and Thomas E. Haeberle, Erika S. Kuiper and William J. Walsh will serve as Class III directors with a term expiring in 2005.

 

17



 

The voting for each matter was as follows:

 

1.             Election of directors:

 

NOMINEE

 

FOR

 

WITHHOLD

 

Bradley J. Armstrong

 

525,656

 

3,764

 

Joachim J. Brown

 

525,683

 

3,764

 

John L. Cantlin

 

525,656

 

3,764

 

Patty P. Godfrey

 

523,327

 

3,764

 

Thomas E. Haeberle

 

525,206

 

3,764

 

Donald J. Harris

 

529,763

 

3,764

 

Erika S. Kuiper

 

521,989

 

3,764

 

Thomas P. Rooney

 

525,656

 

3,764

 

William J. Walsh

 

519,272

 

3,764

 

 

2.                                       Amend the Certificate of Incorporation to increase the number of authorized shares of common stock from 750,000 shares to 1,000,000 shares, and authorize 20,000 shares of a new class of preferred stock, $1.00 par value per share:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

470,111

 

24,517

 

9,555

 

 

 

3.                                       Amend the Certificate of Incorporation to eliminate cumulative voting for directors:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

449,336

 

48,112

 

6,735

 

 

 

4.                                       Amend the Certificate of Incorporation to set the number of directors and establish qualifications for service as a director, create a staggered board and define when a director may be removed for cause:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

468,222

 

30,602

 

5,359

 

 

 

18



 

5.                                       Amend the Certificate of Incorporation regarding amendments to the bylaws:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

506,952

 

12,381

 

9,115

 

 

 

6.             Amend the Certificate of Incorporation to require stockholder action to be taken at duly called meetings:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

509,957

 

8,246

 

10,245

 

 

 

7.                                       Amend the Certificate of Incorporation regarding the calling of special meetings of the stockholders:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

472,797

 

47,227

 

8,424

 

 

 

8.                                       Amend the Certificate of Incorporation to increase the vote required to amend the certificate of incorporation and to approve certain corporate actions:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

460,667

 

30,202

 

13,314

 

 

 

9.                                       Amend the Certificate of Incorporation regarding business combinations with significant stockholders:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

497,782

 

15,832

 

14,834

 

 

 

10.                                 Amend the Certificate of Incorporation regarding indemnification of directors and officers:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

503,727

 

12,196

 

12,525

 

 

 

19



 

11.                                 Amend the Certificate of Incorporation regarding consideration of non-stockholder interests:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

479,357

 

31,646

 

17,445

 

 

 

12.                                 Approve the First Ottawa Bancshares, Inc. 2002 Stock Incentive Plan:

 

For

 

Against

 

Abstain

 

Broker non-votes

 

471,937

 

20,332

 

11,914

 

 

 

ITEM 5.          OTHER INFORMATION

 

None

 

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibits

 

 

 

 

 

99.1

 

Certificate of Chief Executive Officer pursuant to The Sarbanes-Oxley Act of 2002

99.2

 

Certificate of Principal Financial Officer pursuant to The Sarbanes-Oxley Act of 2002

 

Reports on Form 8-K

 

None

 

20



 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

FIRST OTTAWA BANCSHARES, INC.

 

(Registrant)

 

 

 

 

August 9, 2002

/s/ JOACHIM J. BROWN

 

 

Joachim J. Brown

 

President (Principal Executive Officer)

 

 

August 9, 2002

/s/ DONALD J. HARRIS

 

 

Donald J. Harris

 

Executive Vice President, Cashier, and Trust Officer

 

(Principal Financial Officer)

 

21