SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

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 November 8, 2002, the Registrant had outstanding 657,956 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
Item 4.	Controls and Procedures
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 SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

		September 30, 2002			December 31, 2001
ASSETS
Cash and cash equivalents		$	7,099		$	7,933
Federal funds sold		5,600			—
Certificates of deposit		10,805			3,100
Securities available-for-sale		97,363			104,319
Loans held for sale		903			1,475
Loans, less allowance for loan losses of $1,095 and $1,119		104,257			106,924
Bank premises and equipment, net		4,415			2,839
Due from broker		—			477
Interest receivable and other assets		5,438			5,498
Total assets		$	235,880		$	232,565
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Demand – non-interest-bearing		$	18,269		$	21,437
NOW accounts		46,874			23,835
Money market accounts		8,463			8,554
Savings		18,336			16,860
Time, $100,000 and over		24,901			20,479
Other time		68,945			74,102
Total deposits		185,788			165,267
Federal funds purchased		—			5,050
Securities sold under agreements to repurchase		16,648			30,849
Borrowings		4,600			4,200
Interest payable and other liabilities		2,940			4,292
Total liabilities		209,976			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		24,186			23,178
Treasury stock, at cost, 91,644 shares		(5,196		)	(5,196		)
Accumulated other comprehensive income		2,164			175
Total shareholders’ equity		25,904			22,907
Total liabilities and shareholders’ equity		$	235,880		$	232,565

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (In thousands, except share and per share data)

(Unaudited)

 

		Three Months Ended September 30,							Nine Months Ended September 30,
		2002				2001			2002			2001
Interest income
Loans (including fee income)		$		2,064		$	2,344		$	6,154		$	7,209
Securities
Taxable		942				984			3,021			2,825
Exempt from federal income tax		229				365			694			1,176
Certificates of deposit		76				20			151			134
Federal funds sold		12				—			13			—
Total interest income		3,323				3,713			10,033			11,344
Interest expense
NOW account deposits		94				101			256			311
Money market deposit accounts		33				57			118			190
Savings deposits		79				81			244			243
Time deposits		1,001				1,343			3,234			4,213
Repurchase agreements		144				291			445			904
Borrowings		28				45			86			75
Federal funds purchased		7				12			44			42
Total interest expense		1,386				1,930			4,427			5,978
NET INTEREST INCOME		1,937				1,783			5,606			5,366
Provision for loan losses		30				60			90			240
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,907				1,723			5,516			5,126
Noninterest income
Service charges on deposit accounts		212				194			578			620
Trust and farm management fee income		114				108			342			324
Other income		174				125			485			343
Gain on loan sales		73				74			131			188
Securities gains (losses), net		86				111			87			121
Total noninterest income		659				612			1,623			1,596
Noninterest expenses
Salaries and employee benefits		953				979			2,853			2,845
Occupancy and equipment expense		215				210			625			621
Data processing expense		108				122			331			386
Supplies		28				22			92			97
Advertising and promotions		25				33			74			84
Professional fees		81				83			293			253
Other expenses		275				258			752			809
Total noninterest expenses		1,685				1,707			5,020			5,095
INCOME BEFORE INCOME TAXES		881				628			2,119			1,627
Provision for income taxes		220				106			453			182
NET INCOME		$	661			$	522		$	1,666		$	1,445
Comprehensive income		$	1,332			$	1,450		$	3,655		$	3,302
Earnings per share		$	1.00			$	0.79		$	2.53		$	2.18
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

Nine Months ended Septemeber 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		—				—			1,445			—			—			1,445
Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects		—				—			—			—			1,857			1,857
Comprehensive income																		3,302
Cash dividends declared ($1 per share)		—				—			(662		)	—			—			(662		)
Balance at September 30, 2001		$	750			$	4,000		$	23,835		$	(5,000	)	$	1,638		$	25,223
Balance at January 1, 2002		$	750			$	4,000		$	23,178		$	(5,196	)	$	175		$	22,907
Net income		—				—			1,666			—			—			1,666
Unrealized net gain on securities available-for-sale, net of reclassifications and tax effects		—				—			—			—			1,989			1,989
Comprehensive income																		3,655
Cash dividends declared ($1 per share)		—				—			(658		)	—			—			(658		)
Balance at September 30, 2002		$	750			$	4,000		$	24,186		$	(5,196	)	$	2,164		$	25,904

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months ended Septemeber 30, 2002 and 2001

(In thousands)

(Unaudited)

 

		2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	1,666		$	1,445
Adjustments to reconcile net income to net cash from operating activities
Change in deferred loan fees		(4		)	(5		)
Provision for loan losses		90			240
Depreciation and amortization		225			212
Premium amortization on securities, net		74			15
Net real estate loans originated for sale		703			745
Gain on loan sales		(131		)	(188		)
Gain on sale/call of securities available-for-sale		(87		)	(121		)
Loss on sale of other real estate owned		5			15
Change in interest receivable and other assets		99			111
Change in interest payable and other liabilities		(1,052		)	(46		)
Net cash from operating activities		1,588			2,423
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale		7,831			4,651
Proceeds from maturities of securities		12,836			36,854
Purchases of securities available-for-sale		(10,207		)	(50,798		)
Purchases of certificates of deposit		(7,705		)	(3,000		)
Change in federal funds sold		(5,600		)	—
Net change in loans receivable		2,454			5,688
Proceeds from sale of other real estate owned		70			190
Property and equipment expenditures		(1,788		)	(322		)
Net cash from investing activities		(2,109		)	(6,737		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits		20,521			(9,017		)
Change in federal funds purchased		(5,050		)	8,300
Proceeds from borrowings		400			4,000
Change in securities sold under agreements to repurchase		(14,201		)	3,612
Dividends paid		(1,983		)	(1,987		)
Net cash from financing activities		(313		)	4,908
Change in cash and cash equivalents		(834		)	594
Cash and cash equivalents at beginning of period		7,933			6,971
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	7,099		$	7,565

 

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)

September 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 nine months ended September 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 September 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:

 

		September 30, 2002					December 31, 2001
		Amount			Ratio		Amount			Ratio
Total capital (to risk-weighted  assets)		$	24,601		18.8	%	$	23,848		18.6	%
Tier I capital (to risk-weighted assets)		23,482			17.9	%	22,739			17.6
Tier I capital (to average assets)		23,482			10.2	%	22,739			10.1

 

At September 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 September 30, 2002, the Company had $1.8 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 2.99% 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 $4.7 million 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 September 30, 2002, the fair value was estimated to be ($106,000) and other income includes ($27,000)  for both the three and nine month periods ended September 30, 2002.

 

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

 

On October 1, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 147, “Acquisitions of Certain Financial Institutions.”  SFAS No. 147 is effective October 1, 2002, and may be early applied.  SFAS No. 147 supersedes SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.”  SFAS No. 147 provides guidance on the accounting for the acquisition of a financial institution, and applies to all such acquisitions except those between two or more mutual enterprises.  Under SFAS No. 147, the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a financial institution business combination represents goodwill that should be accounted for under SFAS No. 142, “Goodwill and Other Intangible Assets.”  If certain criteria are met, the amount of the unidentifiable intangible asset resulting from prior financial institutions acquisitions is to be reclassified to goodwill upon adoption of this Statement.  Financial institutions meeting conditions outlined in SFAS No. 147 are required to restate previously issued financial statements.  The objective of the restatement is to present the balance sheet and income statement as if the amount accounted for under SFAS No. 72 as an unidentifiable intangible asset had been reclassified to goodwill as of the date the Company adopted SFAS No. 142.  Adoption of SFAS No. 147 on October 1, 2002 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

8

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

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 September 30, 2002 increased to $235.9 million, as contrasted to $232.6 million at December 31, 2001, an increase of $3.3 million, or 1.4%.  This increase was the result of  increases in federal funds sold of $5.6 million, certificates of deposit of $7.7 million, and premises and equipment of $1.6 million. These increases were offset by decreases in cash and due from banks, securities available for sale, loans, and loans held for sale. Cash and due from banks decreased $834,000 as a result of a reduction in the balance due from the Federal Reserve Bank and a reduction of cash on hand at September 30, 2002.  Securities available for sale decreased by  $7.0 million, primarily as a result of maturities of securities and reinvestment in certificates of deposits. Loans decreased by $2.7 million due to payments in excess of demand and management’s emphasis on credit quality during the first nine months of the year.  Loans held for sale decreased by  $572,000 due to sales in excess of originations during the first nine 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 fourth quarter of 2002, with an anticipated completion date during the second quarter of 2003. An extensive remodeling 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 $1.6 million, or 57.1%, since December 31, 2001.  Management estimates additional expenditures relating to the Morris property will be approximately $800,000.

 

Total liabilities at September 30, 2002 remained stable at $210.0 million compared to $209.7 million at December 31, 2001, an increase of $300,000, or 0.1%. This slight increase was the result of increases in deposits and borrowings, partially offset by decreases in federal funds purchased, repurchase agreements, and other liabilities. Deposits increased by $20.5 million,  from $165.3 million at December 31, 2001, to $185.8 million at September 30, 2002, due primatily to the addition of a jumbo NOW product.   At September 30, 2002,  the Company was in a federal funds sold position, which was a $10.0 million change from federal funds purchased of $5.1 million at December 31, 2001. Other liabilities decreased by $1.4  million due to the reduction of dividends payable of  $1.3 million and decreases in interest payable due to the decline in deposit balances and deposit interest rates during the period ended September 30, 2002.  Securities sold under agreements to repurchase decreased $14.2 million to $16.6 million as of September 30, 2002. This decrease was due primarily to a change in customer product offerings resulting in a shift to the jumbo NOW product discussed above.

 

9

 

Total equity was $25.9 million at September 30, 2002 compared to $22.9 million at December 31, 2001.  This increase was the result of $1.0 million of additional retained earnings from net income for the nine month period ended September 30, 2002 and an increase of $2.0 million, net of tax, in the Company’s investment portfolio due to current market valuation improvements.

 

CONSOLIDATED RESULTS OF OPERATIONS

Net income for the third quarter of 2002 was $661,000, or $1.00 per share, a 26.6% increase compared to $522,000, or $.79 per share, in the third quarter of 2001.  The increase in net income for the quarter was primarily the result of an increase in net interest income of $154,000, an increase of non-interest income of $47,000, and a decrease in the provision for loan losses of $30,000.  These changes were partially offset by a $114,000 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 nine months ended September 30, 2002, net income was $1,666,000, or $2.53 per share, compared to $1,445,000, or $2.18 per share during the first nine months of 2001.  This 15.3% increase in net income for the nine month period was primarily due to a $240,000 increase in net interest income, a decrease in the provision for loan losses of $150,000, a slight increase in non interest income of $27,000, and a decrease in non-interest expense of $75,000. Increased net interest income was partially offset by an increase in income tax expense of $271,000, or 148.9%. 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 .97% for the nine months ended September 30, in 2002 compared to .86% in 2001.   The annualized return on average equity increased to 9.14% for the nine months ended September 30, 2002 from 8.05% in 2001.

 

NET INTEREST INCOME

Net interest income was $1.9 million and $1.8 million for the three months ended September 30, 2002 and 2001, respectively.  Total interest income declined to $3.3 million for the three months ended September 30, 2002 from $3.7 million for the same period ended September 30, 2001.  This decrease was partially the result of a decrease in interest income from loans to $2.1 million for the three months ended September 30, 2002 from $2.3 million for the same period a year earlier, an 8.7% decrease.   Interest income from investments also decreased $178,000 or 13.2%,  from $1.3 million for the same period a year earlier. This decrease in interest income was offset by a slightly larger decline in interest expense, to $1.4 million for the three months ended September 30, 2002 from $1.9 million for the same period ended September 30, 2001, a 28.2% decrease.  Decreases in interest income and interest expense were due both to decreases in interest rates and average balances during the first nine months of 2002.

 

Net interest income for the nine months ended September 30, 2002 and 2001 was $5.6 million and $5.4 million, respectively. The Company’s net interest margin was 3.57% for the nine months ended September 30, 2002 and 3.79% a year earlier.  The yield on average earning assets decreased to 6.29% for the nine months ended

 

10

 

September 30, 2002 from 7.59% for the same period ended September 30, 2001, a decline of 130 basis points.  This decrease was partially offset by a corresponding decrease in the cost of funds to 3.20% from 3.86% paid for the same period ended September 30, 2001, a 66 basis point decline. These decreases were reflective of  the declining rate environment throughout 2001 and low rate environment which was sustained during  the first nine months of 2002.

 

PROVISION FOR LOAN LOSSES

The provision for loan losses decreased by $30,000 in the third quarter of 2002 compared to the same period in 2001. The decrease in the provision for the three months ended September 30, 2002, was due primarily to an overall decrease in the  average net loan portfolio from $113.4 million in 2001, to $107.0 million for the three month period ended September 30, 2002.

 

For the nine months ended September 30, 2002, the provision decreased $150,000 due to a decrease in the average loan portfolio and improved credit quality. The allowance for loan losses totaled $1.1 million, or 1.1% of total loans at September 30, 2002, which is consistent with $1.1 million or 1.0% as of December 31, 2001.  Nonaccrual loans decreased from $387,000 at December 31, 2001 to $382,000 at September 30, 2002.  Nonperforming loans, including nonaccrual loans, increased $544,000 to $1.8 million over the same period due to increases in personal real estate and agricultural loan delinquencies more than 90 days past due, however, total delinquencies of 3.2% at September 30, 2002, continue to show improvement from 4.4% at December 31, 2001.

 

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 September  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 $659,000 for the three months ended September 30, 2002 compared to $612,000 for the same period in 2001, an increase of $47,000 or 7.7%.  Service charges on deposit accounts increased $18,000, or 9.3%, to $212,000, due to a third quarter increase in fees on overdrawn demand accounts and an increase in fees collected. Trust and farm management fee

 

11

 

income increased $6,000 due to modest growth in trust relationships and estates under administration.  In addition, other income increased due to bank owned life insurance income of $70,000. Gains on the sale of investments decreased $25,000 due to decreased calls and sales activity compared to the same period in 2001.

 

For the nine months ended September 30, 2002, non-interest income increased by 1.7% or $27,000 to $1.6 million.  Service charges on deposit accounts decreased $42,000, or 6.8%, trust and farm management fee increased $18,000, or 5.6%. Gain on loan sales decreased $57,000 due to mangement’s decision to retain servicing rights on loans sold. This decrease was mitigated by increased servicing income and commissions from mortgage banking. Other fees and commissions increased $142,000, primarily due to an increase in  income related to bank owned life insurance which was partially offset by a $27,000 net expense related to the valuation of index powered certificates of deposit.

 

NONINTEREST EXPENSE

The Company’s non-interest expense was $1.7 million for the three months ended September 30, 2002 and 2001.  Other expense increased $17,000 to $275,000. Salaries and benefits decreased $26,000, or 2.7%, to $953,000.  Increases in occupancy and equipment expense of $5,000, and supplies of $6,000 were offset by decreases in data processing expense of $14,000, advertising expense of $8,000, and professional fees of $2,000. Data processing expense decreased due to item processing and imaging that is now performed at the Bank.

 

For the nine months ended September 30, 2002, non-interest expenses decreased $75,000 to $5.0 million, or 1.5%, compared to the year earlier period.  Salaries and benefits remained stable, increasing $8,000, or 0.3%.  Supplies expense, data processing, advertising and promotion expense declined $70,000 in total due to a disciplined approach to controlling costs.   Professional fees increased by $40,000, primarily due to more extensive outsourcing of formerly in-house functions. Other expenses decreased $57,000 primarily due to reductions in expenses related to repossessed assets, decreased director fees due to a reduction in the number of directors, and a decrease in secondary mortgage expenses as a result of selling loans with servicing retained.

 

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

 

12

 

given year.  At September 30, 2002, cash and short-term investments totaled $18.7 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.

 

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

 

		Total			Less Than 1 Year			1 – 3 Years			4 – 5 Years			After 5 Years
Securities sold under agreements to repurchase		$	16,684		$	16,684		$	—		$	—		$	—
FHLB advances		4,000			4,000			—			—			—
Note payable		600			600			—			—			—
		$	21,284		$	21,284		$	—		$	—		$	—

 

		Total Amounts Committed			Less Than 1 Year			1 – 3 Years			4 – 5 Years			Over 5 Years
Lines of credit(1)		$	12,893		$	7,063		$	300		$	662		$	4,868
Standby letters of credit(1)		416			416			—			—			—
Other commitments to extend credit(1)		—			—			—			—			—
		$	13,309		$	7,479		$	300		$	662		$	4,868

 

(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.

 

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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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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 September 30, 2002 and September 30, 2001.

 

			2002 Net Income
			Amount			Change			Change
			(Dollars in Thousands)
+200 bp			$	2,286		$	(72	)	(3.1	)%
Base			2,358			—			—
-200 bp			2,414			56			2.4	%

 

			2001 Net Income
			Amount			Change			Change
			(Dollars in Thousands)
+200 bp			$	1,840		$	(116	)	(6.0	)%
Base			1,956			—			—
-200 bp			2,051			95			4.8	%

 

As shown above, at September 30, 2002, the effect of an immediate 200 basis point increase in interest rates would decrease the Company’s net income by 3.1% or approximately $72,000.  The effect of an immediate 200 basis point decrease in rates would increase the Company’s net interest income by 2.4% or approximately $56,000.  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, and overall, net income sensitivity has decreased as a percentage of net income from September 30, 2001 to September 30, 2002.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

 

ITEM 4: CONTROLS AND PROCEDURES

 

Based upon an evaluation within the 90 days prior to the filing date of this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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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
		None
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)
November 13, 2002	/s/ JOACHIM J. BROWN
	Joachim J. Brown
	President (Principal Executive Officer)
November 13, 2002	/s/ DONALD J. HARRIS
	Donald J. Harris
	Executive Vice President, Cashier, and Trust Officer (Principal Financial Officer)

 

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I,  Joachim J. Brown, Principal Executive Officer of the Company, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of First Ottawa Bancshares, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)                                  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)                                  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)                                 any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 13, 2002
	/s/ Joachim J. Brown
	Joachim J. Brown
	Principal Executive Officer

 

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I , Donald J. Harris, Principal Financial Officer of the Company, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of First Ottawa Bancshares, Inc.;

 

2.               Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)                                  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)                                  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)                                 any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.               The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 13, 2002
	/s/ Donald J. Harris
	Donald J. Harris
	Principal Financial Officer

 

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