10-Q 1 a2049548z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] 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 (I.R.S. Employer Identification No.) of incorporation or organization) 701-705 LASALLE STREET 61350 OTTAWA, ILLINOIS (ZIP Code) (Address of principal executive offices) (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 X No --- --- Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date: As of April 27, 2001 the Registrant had outstanding 662,281 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 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Item 7. Signatures 14 ------------------------------------------------------------------------------- 2. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited)

--------------------------------------------------------------------------------------------------------------- Mar. 31, 2001 Dec. 31, 2000 ------------- ------------- ASSETS Cash and due from banks $ 7,102 $ 6,971 Federal funds sold 3,850 - ------------- ------------- Total cash and cash equivalents 10,952 6,971 Securities available-for-sale 86,565 92,445 Loans held for sale 744 693 Loans, less allowance for loan losses of $1,158 and $1,108 113,129 115,811 Bank premises and equipment, net 2,444 2,497 Interest receivable and other assets 5,711 6,590 ------------- ------------- Total assets $ 219,545 $ 225,007 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Demand - non-interest-bearing $ 18,099 $ 20,538 NOW accounts 26,675 26,220 Money market accounts 8,381 8,941 Savings 17,106 16,794 Time, $100,000 and over 23,557 25,170 Other time 75,143 75,790 ------------- ------------- Total deposits 168,961 173,453 Securities sold under agreements to repurchase 23,935 24,638 Interest payable and other liabilities 2,578 4,333 ------------- ------------- Total liabilities 195,474 202,424 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 23,530 23,052 Treasury stock, at cost, 87,719 shares (5,000) (5,000) Accumulated other comprehensive income (loss) 791 (219) ------------- -------------- Total shareholders' equity 24,071 22,583 ------------- ------------- Total liabilities and shareholders' equity $ 219,545 $ 225,007 ============= ============= ---------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements. 3. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three months ended March 31, 2001 and 2000 (In thousands, except share and per share data) (Unaudited)

---------------------------------------------------------------------------------------------------------------- 2001 2000 ---- ---- Interest income Loans (including fee income) $ 2,460 $ 2,646 Securities Taxable 932 931 Exempt from federal income tax 423 436 Federal funds sold 30 - ---------- --------- Total interest income 3,845 4,013 Interest expense NOW account deposits 109 151 Money market deposit accounts 71 98 Savings deposits 80 102 Time deposits 1,467 1,377 Repurchase agreements 336 229 Federal funds purchased 6 92 ---------- --------- Total interest expense 2,069 2,049 ---------- --------- NET INTEREST INCOME 1,776 1,964 Provision for loan losses 90 90 ---------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,686 1,874 Noninterest income Service charges on deposit accounts 200 169 Trust and farm management fee income 108 90 Other fees and commissions 157 95 ---------- --------- Total noninterest income 465 354 Noninterest expenses Salaries and employee benefits 895 835 Occupancy and equipment expense 208 224 Data processing expense 135 134 Supplies 31 33 Advertising and promotions 26 42 Professional fees 66 66 Other expenses 281 246 ---------- --------- Total noninterest expenses 1,642 1,580 ---------- --------- INCOME BEFORE INCOME TAXES 509 648 Provision for income taxes 31 105 ---------- --------- NET INCOME $ 478 $ 543 ========== ========== Comprehensive income $ 1,488 $ 112 ========== ========== Earnings per share $ 0.72 $ 0.80 ========== =========== Average shares outstanding 662,281 681,631 ----------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements. 4. FIRST OTTAWA BANCSHARES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three months ended March 31, 2001 and 2000 (In thousands, except per share data) (Unaudited)

------------------------------------------------------------------------------------------------------------------- Accumulated Total Additional Other Share- Common Paid-In Retained Treasury Comprehensive holders' Stock Capital Earnings Stock Income (Loss) Equity ----- ------- -------- ----- ------------ ------ Balance at January 1, 2000 $ 750 $ 4,000 $ 22,947 $ - $ (1,714) $ 25,983 Net income - - 543 - - 543 Unrealized net loss securities available-for-sale, net of reclassi- fication and tax effects - - - - (431) (431) ---------- Comprehensive income 112 Purchase of 87,719 treasury shares - - - (5,000) - (5,000) --------- ---------- ---------- ---------- --------- ---------- Balance at March 31, 2000 $ 750 $ 4,000 $ 23,490 $ (5,000) $ (2,145) $ 21,095 ========= ========== ========== ========== ========== ========= Balance at January 1, 2001 $ 750 $ 4,000 $ 23,052 $ (5,000) $ (219) $ 22,583 Net income - - 478 - - 478 Unrealized net gain on securities available-for-sale, net of reclassi- fications and tax effects - - - - 1,010 1,010 --------- Comprehensive income 1,488 --------- ---------- ---------- --------- --------- --------- Balance at March 31, 2001 $ 750 $ 4,000 $ 23,530 $ (5,000) $ 791 $ 24,071 ========= ========== ========== ========= ========= ========= -------------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed financial statements. 5. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2001 and 2000 (In thousands) (Unaudited)

---------------------------------------------------------------------------------------------------------------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 478 $ 543 Adjustments to reconcile net income to net cash from operating activities Change in deferred loan fees (2) 1 Provision for loan losses 90 90 Depreciation and amortization 71 73 Premium amortization on securities, net (4) 19 Net real estate loans originated for sale (12) 1,720 (Gain) Loss on loan sales (39) 18 Loss on sale of other real estate owned 14 14 Change in interest receivable and other assets 186 301 Change in interest payable and other liabilities (431) (419) ----------- ----------- Net cash from operating activities 351 2,360 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of securities 10,747 304 Purchases of securities available-for-sale (3,329) (714) Net change in loans receivable 2,594 2,484 Proceeds from sale of other real estate owned 155 40 Proceeds from sale of bank premises - 15 Property and equipment expenditures (18) (48) ----------- ----------- Net cash from investing activities 10,149 2,081 CASH FLOWS FROM FINANCING ACTIVITIES Change in deposits (4,492) (4,775) Change in federal funds purchased - 5,000 Change in securities sold under agreements to repurchase (703) (4,823) Purchase of treasury stock - (5,000) Dividends paid (1,324) (1,500) ----------- ----------- Net cash from financing activities (6,519) (11,098) ----------- ------------ Change in cash and cash equivalents 3,981 (6,657) Cash and cash equivalents at beginning of period 6,971 13,243 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,952 $ 6,586 =========== =========== ---------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements. 6. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table dollars in thousands) March 31, 2001 and 2000 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 ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 March 31, 2001. NOTE 2 - CAPITAL RATIOS At the end of the period the Company and Bank's capital ratios were the same and were:

March 31, 2001 December 31, 2000 -------------- ----------------- Amount Ratio Amount Ratio ------ ----- ------ ----- Total capital (to risk-weighted assets) $ 24,438 19.5% $ 23,910 18.8% Tier I capital (to risk-weighted assets) 22,633 18.1 22,609 17.8 Tier I capital (to average assets) 22,633 10.3 22,609 10.0

At March 31, 2001, 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 category. NOTE 3 - NEW ACCOUNTING STANDARD Statement of Financial Accounting Standards No. 133 was adopted on January 1, 2001 and requires that all derivatives be recorded at fair value in the balance sheet, with changes in fair value reported in income. Adoption of this standard had no impact on the Company's consolidated financial statements. -------------------------------------------------------------------------------- 7. 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 March 31, 2001 were $219.5 million compared to $225.0 million at December 31, 2000, a decrease of $5.5 million, or 2.4%. This decrease was the result of reductions in loans and securities held for sale. Loans were reduced by $2.7 million, despite a slight increase in commercial and agricultural loans of $2 million. Installment loans were reduced by $3.6 million due primarily to planned efforts to improve asset quality through adherence to more stringent underwriting standards for indirect automobile loans. Investments available for sale decreased by $5.8 million, due to bonds being called in the lower interest rate environment. Remaining cash available was reinvested in federal funds sold which totaled $3.9 million as of March 31, 2001. Total equity was $24.1 million at March 31, 2001 compared to $22.6 million at December 31, 2000. This increase was the result of an increase in the market value of the Company's investment portfolio due to declining interest rates. In addition, net income of $478,000 contributed to this increase in total equity. CONSOLIDATED RESULTS OF OPERATIONS Net income for the first quarter of 2001 was $478,000, or 72 cents per share, a 12.0% decrease compared to $543,000, or 80 cents per share, in the first quarter of 2000. The annualized return on average assets was 0.87% in 2001 compared to 0.94% in 2000. The return on average equity decreased to 8.46% in 2001 from 9.60% in 2000. NET INTEREST INCOME Net interest income was $1,776,000 and $1,964,000 during the three months ended March 31, 2001 and 2000. The Company's net interest margin was 3.87% for the three months ended March 31, 2001, and 4.03% a year earlier. The decrease was due to a change in the mix of both assets and liabilities. On the asset side there was a slight shift from higher yielding loans to lower yielding securities, relatively speaking. Conversely, on the liability side there was a slight shift from lower cost transaction deposits to higher cost certificates of deposit and repurchase agreements. -------------------------------------------------------------------------------- (Continued) 8. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES The provision for loan losses remained unchanged at $90,000 in 2001 and 2000. As of March 31, 2001, the allowance for loan losses totaled $1.2 million, or 1.01% of total loans compared with 0.95% as of December 31, 2000. Nonaccrual loans increased from $467,000 at December 31, 2000 to $931,000 at March 31, 2001. Nonperforming loans also decreased $349,000 to $2,295,000 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. NONINTEREST INCOME The Company's noninterest income totaled $465,000 for the three months ended March 31, 2001 compared to $354,000 for the same period in 2000, an increase of $111,000. Service charges on deposit accounts increased $31,000, to $200,000 due primarily to re-pricing initiatives enacted as a result of cost and competitive analyses. Secondary mortgage origination fees increased due to an increased volume of loan originations. The Company realized a gain on the sale of loans of $39,000 during 2001 as contrasted to a loss of $18,000 for the same period in 2000. NONINTEREST EXPENSE The Company's noninterest expenses increased to $1,642,000 for the three months ended March 31, 2001 from $1,580,000 in 2000. Salaries and benefits increased $60,000, or 7.2%, to $895,000. -------------------------------------------------------------------------------- (Continued) 9. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits and proceeds from principal and interest payments on loans and securities. While maturities and scheduled amortization of loans and 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 March 31, 2001, cash and short-term investments totaled $11.0 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 advances from the Federal Home Loan Bank. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, 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. -------------------------------------------------------------------------------- (Continued) 10. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- SAFE HARBOR STATEMENT This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable by use of words such as "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. 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 the Bank include, but are not limited to, changes in interest rates; general economic conditions; the legislative/regulatory situation; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; and accounting principles, policies, and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. -------------------------------------------------------------------------------- (Continued) 11. 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 March 31, 2001 and March 31, 2000.

---------------------------------2001 NET INCOME--------------------------- Amount Change Change ------ ------ ------ (Dollars in Thousands) +200 bp $ 1,664 $ (167) (9.1)% Base 1,831 - - -200 bp 1,912 81 4.4%

---------------------------------2000 NET INCOME--------------------------- Amount Change Change ------ ------ ------ (Dollars in Thousands) +200 bp $ 1,955 $ (281) (12.6)% Base 2,236 - - -200 bp 2,419 183 8.2%

As shown above, at March 31, 2001, the effect of an immediate 200 basis point increase in interest rates would decrease the Company's net interest income by 9.1% or approximately $167,000. The effect of an immediate 200 basis point decrease in rates would increase the Company's net interest income by 4.4% or approximately $81,000. Overall net income sensitivity is largely unchanged from March 31, 2000 to March 31, 2001. -------------------------------------------------------------------------------- 12. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- 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 None Reports on Form 8-K None -------------------------------------------------------------------------------- 13. FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- 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) /S/ JOACHIM J. BROWN ----------------------------------------- Joachim J. Brown President (Principal Executive Officer) /S/ DONALD J. HARRIS ---------------------------------------------------- Donald J. Harris Executive Vice President, Cashier, and Trust Officer (Principal Financial Officer) -------------------------------------------------------------------------------- 14.