See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINACIAL STATEMENTS
(Table dollars in thousands)
June 30, 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 six months ended June 30, 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 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, 2001.
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, 2001 | | December 31, 2000 | |
| |
| |
| |
| | Amount | | Ratio | | Amount | | Ratio | |
| |
| |
| |
| |
| |
| | | | | | | | | |
| | Total capital (to risk-weighted assets) | $ | 24,107 | | 18.9 | % | $ | 23,910 | | 18.8 | % |
| | Tier I capital (to risk-weighted assets) | 22,898 | | 18.0 | % | 22,609 | | 17.8 | % |
| | Tier I capital (to average assets) | 22,898 | | 10.3 | % | 22,609 | | 10.0 | % |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
At June 30, 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 categories.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” (“SAB 102”). Due tothe recent issuance of this SAB, management is not able to comment in the June 30, 2001 Form 10-Q regarding the effect of this SAB.
In July 2001, the Financial Accounting Standards Board approved two standards, Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The Company does not expect the adoption of these standards to have a material effect on its consolidated financial statements.
| 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, 2001 were $224.5 million contrasted to $225.0 million at December 31, 2000, a decrease of $0.5 million, or .2%. This decrease was the result of reductions in cash and due from banks, interest receivable and other assets, and loans, partially offset by an increase in securities available for sale. Cash and due from banks was reduced $.8 million in the routine management of liquidity. Interest receivable and other assets declined $.7 million. Loans declined by $3.3 million primarily as a result of an enhanced commitment to asset quality and partially as a reflection of loan repayments exceeding new loan demand that met the credit standards of the Company. The resulting funds of $4.8 million were deployed through purchases of securities available for sale and certificates of deposit held at other financial institutions.
Total equity was $23.8 million at June 30, 2001 compared to $22.6 million at December 31, 2000. This increase was the result $.3 million additional retained earnings and an increase of $.9 million in the Company’s investment portfolio due to declining interest rates.
CONSOLIDATED RESULTS OF OPERATIONS
Net income for the second quarter of 2001 was $445,000, or $.67 per share, a 18.2% decrease compared to $544,000, or $.82 per share, in the second quarter of 2000. The decrease in net income for the quarter was primarily a result of a decrease in net interest income of $102,000 and an increase of $103,000 in non-interest expense, partially offset by an increase of $102,000 in non-interest income. The increase in non-interest expense resulted from increases in salaries and benefits expense of $66,000 and professional fees of $44,000, partially offset by a reduction in other expense of $25,000.
During the six months ended June 30, 2001, net income was $923,000, or $1.39 per share, compared to $1,087,000, or $1.62 per share during the first six months of 1999. This 15.1% decrease in net income for the six month period is primarily due to a $291,000 decrease in net interest income, or 7.5%, and an increase in non-interest expense of $165,000, or 5.1%, partially offset by a decrease in income tax expense of $77,000, or 50.0%, and an increase in non-interest income of $214,000, or 27.8%. The annualized return on average assets was 0.83% in 2001 compared to .95% in 2000. The return on average equity decreased to 8.04% in 2001 from 9.99% in 2000.
NET INTEREST INCOME
Net interest income was $1,807,000 and $1,909,000 during the three months ended June 30, 2001 and 2000. Total interest income declined to $3,785,000 for the three months ended June 30, 2001 from $3,995,000 for the same period ended June 30, 2000. This decrease was primarily the result of a decrease in interest income from loans to $2,405,000 for the three months ended June 30, 2001 from $2,623,000 for the same period a year earlier, an 8.3% decrease. This decrease was partially mitigated by a similar decline in interest expense, $1,978,000 for the three months ended June 30, 2001 from $2,086,000 for the same period ended June 30, 2000, a 5.2% decrease.
Net interest income for the six months ended June 30, 2001 and 2000 was $3,583,000 and $3,874,000, respectively. The Company’s net interest margin was 3.86% for the six months ended June 30, 2001 and 3.99% a year earlier. The yield on average earning assets decreased to 7.74% for the six months ended June 30, 2001 from 7.80% for the same period ended June 30, 2000, a .06% decline. This decrease was offset by a corresponding decrease in the interest paid as a ratio of average earning assets to 3.86% from 3.99% for the six months ended June 30, 2000, a .13% decrease.
PROVISION FOR LOAN LOSSES
The provision for loan losses remained unchanged at $90,000 in the second quarter of 2001 and 2000. As of June 30, 2001, the allowance for loan losses totaled $1.2 million, or 1.06% of total loans which is an increase from .95% as of December 31, 2000. Nonaccrual loans increased from $467,000 at December 31, 2000 to $801,000 at June 30, 2001. Nonperforming loans, including nonaccrual loans, also increased $406,000 to $3,050,000 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 non-interest income totaled $519,000 for the three months ended June 30, 2001 compared to $417,000 for the same period in 2000, an increase of $102,000. Service charges on deposit accounts increased $46,000, or 25.6%, to $226,000. Trust and farm management fee income increased $18,000 due to modest growth in trust relationships and estates under administration. Other fees and commissions increased $24,000 to $175,000 largely due to an increase in mortgage banking income.
For the six months ended June 30, 2001, non-interest income increased $214,000 to $985,000. Service charges on deposit accounts increased $77,000, or 22.1%, trust and farm management fee increased $36,000, or 20%, and other fees and commissions increased $87,000 for the reasons previously discussed.
NONINTEREST EXPENSE
The Company’s non-interest expenses increased to $1,737,000 for the three months ended June 30, 2001 from $1,643,000 for the same period in 2000. Salaries and benefits increased $66,000, or 7.3%, to $970,000. Increases in occupancy and equipment expense of $13,000, supplies expense of $9,000, data processing expense of $4,000, and $44,000 in professional fees were offset to some extent by declines in advertising and promotional expense of $17,000 and other expenses of $25,000.
For the six months ended June 30, 2001, non-interest expenses increased $155,000 to $3,379,000, or 4.8%, compared to the year earlier period. Salaries and benefits increased $127,000, or 7.3%, to $1,866,000. Occupancy and equipment expense, supplies expense, data processing, advertising and promotion expense, and other expense declined $14,000 in total due to a disciplined approach to cost controls. Professional fees increased by $43,000. The increase in professional fees is primarily due to more extensive outsourcing of formerly in-house functions.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 June 30, 2001, cash and short-term investments totaled $6.2 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 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.
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 the 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.
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, 2001 and June 30, 2000.
| | | 2001 Net Income | |
| | |
| |
| | | Amount | | Change | | Change | |
| | |
| |
| |
| |
| | | (Dollars in Thousands) | |
| +200 bp | | $ | 1,603 | | $ | (198 | ) | (11.0 | )% |
| Base | | 1,801 | | - | | - | |
| –200 bp | | 1,911 | | 110 | | 6.1 | % |
| | | | | | | | | |
| | | 2000 Net Income | |
| | |
| |
| | | Amount | | Change | | Change | |
| | |
| |
| |
| |
| | | (Dollars in Thousands) | |
| +200 bp | | $ | 1,884 | | $ | (216 | ) | (10.3 | )% |
| Base | | 2,100 | | - | | - | |
| –200 bp | | 2,280 | | 180 | | 8.6 | % |
| | | | | | | | | |
As shown above, at June 30, 2001, the effect of an immediate 200 basis point increase in interest rates would decrease the Company's net income by 11.0% or approximately $198,000. The effect of an immediate 200 basis point decrease in rates would increase the Company's net interest income by 6.1% or approximately $110,000. Overall net income sensitivity has decreased from June 30, 2000 to June 30, 2001.
| PART II |
| |
| | |
| ITEM 1. | LEGAL PROCEEDINGS |
| | |
| | There are no material pending legal proceedings to which the Company or its subsidiary 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 |
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) |
| | |
| | |
| | |
| Date: August 14, 2001 | /S/ JOACHIM J. BROWN |
| |
|
| | Joachim J. Brown |
| | President (Principal Executive Officer) |
| | |
| | |
| | |
| Date: August 14, 2001 | /S/ DONALD J. HARRIS |
| |
|
| | Donald J. Harris |
| | Executive Vice President, Cashier, and Trust Officer |
| | (Principal Financial Officer) |
