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

 

 

 

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 11^th, 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.

 

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•                                         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.

 

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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.

 

 

 

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.

 

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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.

 

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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		—

 

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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		—

 

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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

 

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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)

 

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