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UNITED STATES

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, 2009

OR

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

For transition period from                          to

 

Commission file number 005-57237

 

FIRST OTTAWA BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

 

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)            Yes o  No  x

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date:  As of May 13, 2009, the Registrant had outstanding 644,999 shares of common stock, $1.00 par value per share.

 

 

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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	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26
PART II
Item 1.	Legal Proceedings	27
Item 1.A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	28
Item 6.	Exhibits	28
Item 7.	Signatures	28

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

		March 31,			December 31,
		2009			2008
		(Unaudited)
ASSETS
Cash and cash equivalents		$	18,395		$	26,474
Certificates of deposit		24,692			14,854
Securities available-for-sale		55,717			57,825
Loans held for sale		614			229
Loans, less allowance for loan losses of $1,842 and $1,612		151,490			157,751
Premises and equipment, net		7,579			7,198
Goodwill		2,446			2,446
Core deposit intangible		617			653
Interest receivable and other assets		8,138			7,751
Total assets		$	269,688		$	275,181
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Demand – non-interest-bearing		$	29,043		$	31,374
NOW accounts		77,178			72,624
Money market accounts		23,922			28,959
Savings		24,208			22,235
Time, $100,000 and over		32,099			30,868
Other time		51,645			54,670
Total deposits		238,095			240,730
Other borrowings		4,000			6,000
Interest payable and other liabilities		2,580			3,782
Total liabilities		244,675			250,512
Commitments and contingent liabilities
Shareholders’ equity
Preferred stock - $1 par value, 20,000 shares Authorized; none issued		—			—
Common stock - $1 par value, 1,000,000 shares authorized and 752,745 issued		753			753
Additional paid-in capital		4,444			4,408
Retained earnings		26,584			26,031
Treasury stock, at cost, 107,746 shares		(6,299		)	(6,299		)
Accumulated other comprehensive loss		(469		)	(224		)
Total shareholders’ equity		25,013			24,669
Total liabilities and shareholders’ equity		$	269,688		$	275,181

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months ended March 31, 2009 and 2008

(In thousands, except share and per share data)

(Unaudited)

 

		2009			2008
Interest income
Loans		$	2,464		$	2,881
Securities
Taxable		253			401
Exempt from federal income tax		334			232
Certificates of deposit		171			77
Federal funds sold		8			64
Total interest income		3,230			3,655
Interest expense
NOW account deposits		82			158
Money market deposit accounts		47			145
Savings deposits		24			30
Time deposits		756			1,044
Other borrowings		35			33
Federal funds purchased		—			—
Total interest expense		944			1,410
NET INTEREST INCOME		2,286			2,245
Provision for loan losses		270			30
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS		2,016			2,215
Non-interest income
Service charges on deposit accounts		198			191
Trust and farm management fee income		135			135
Gain on loan sales		92			28
Securities gains		231			22
Other income		145			26
Total non-interest income		801			402
Non-interest expense
Salaries and employee benefits		1,125			1,092
Occupancy and equipment expense		311			324
Data processing expense		138			127
Insurance expense		107			45
Professional fees		121			102
Amortization of core deposit intangible		37			41
Other expenses		276			287
Total non-interest expenses		2,115			2,018
INCOME BEFORE INCOME TAXES		702			599
Provision for income taxes		149			131
NET INCOME		$	553		$	468
Earnings per share – basic		$	0.86		$	0.72
Earnings per share – diluted		$	0.86		$	0.72
Average shares outstanding		644,884			646,603

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months ended March 31, 2009 and 2008

(In thousands, except per share data)

(Unaudited)

 

														Accumulated
					Additional									Other			Total
		Common			Paid-In			Retained			Treasury			Comprehensive			Shareholders’
		Stock			Capital			Earnings			Stock			Income (Loss)			Equity
Balance at January 1, 2009		$	753		$	4,408		$	26,031		$	(6,299	)	$	(224	)	$	24,669
Net income		—			—			553			—			—			553
Unrealized net loss on securities available-for-sale, net of reclassi- fications and tax effects		—			—			—			—			(138		)	(138		)
Net loss relating to benefit obligation		—			—			—			—			(107		)	(107		)
Comprehensive income		—			—			—			—			—			308
Shares granted		—			9			—			—			—			9
Stock options vested		—			27			—			—			—			27
Balance at March 31, 2009		$	753		$	4,444		$	26,584		$	(6,299	)	$	(469	)	$	25,013
Balance at January 1, 2008		$	753		$	4,300		$	26,113		$	(6,102	)	$	(458	)	$	24,606
Net income		—			—			468			—			—			468
Unrealized net gain on securities available-for-sale, net of reclassi- fications and tax effects		—			—			—			—			365			365
Net gain relating to benefit obligation		—			—			—			—			25			25
Comprehensive income																	858
Stock options vested		—			27			—			—			—			27
Purchase 2,526 treasury shares		—						—			(197		)	—			(197		)
Balance at March 31, 2008		$	753		$	4,326		$	26,581		$	(6,299	)	$	(67	)	$	25,294

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months ended March 31, 2009 and 2008

(In thousands)

(Unaudited)

 

		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	553		$	468
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		270			30
Depreciation and amortization		135			164
Premium amortization on securities, net		93			67
Derivative valuation adjustment		47			240
Loans originated for sale		(7,677		)	(1,373		)
Proceeds from the sale of loans		7,384			1,277
Gain on loan sales		(92		)	(28		)
Gain on sales of securities		(231		)	(22		)
Grant of Incentive shares		9			—
Vested stock options		27			27
Change in interest receivable and other assets		(152		)	396
Change in interest payable and other liabilities		97			(301		)
Net cash from operating activities		463			945
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale		13,974			2,531
Proceeds from maturities and calls of securities		2,843			5,211
Purchases of securities available-for-sale		(14,780		)	(10,063		)
Proceeds from maturities of certificates of deposit		4,276			200
Purchases of certificates of deposit		(14,161		)	(12,507		)
Net change in loans receivable		5,715			1,858
Property and equipment expenditures		(475		)	(7		)
Net cash from investing activities		(2,608		)	(12,777		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits		(2,635		)	6,120
Change in federal funds purchased		—			—
Proceeds (repayments) from other borrowings		(2,000		)	6,214
Purchases of treasury shares		—			(197		)
Dividends paid		(1,299		)	(1,297		)
Net cash from financing activities		(5,934		)	10,840
Change in cash and cash equivalents		(8,079		)	(992		)
Cash and cash equivalents at beginning of period		26,474			16,499
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	18,395		$	15,507

 

See accompanying notes to condensed consolidated financial statements.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINACIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

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, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in First Ottawa Bancshares, Inc.’s (the Company) annual report on Form 10-K for 2008 filed with the Securities and Exchange Commission.  The condensed consolidated balance sheet of the Company as of December 31, 2008 has been derived from the audited consolidated balance sheet as of that date.

 

 The Company currently has two wholly-owned subsidiaries. The First National Bank of Ottawa, operates as a full service community bank and First Ottawa Financial Corporation, which sells insurance and investment products.

 

NOTE 2 — EARNINGS PER SHARE

 

The number of shares used to compute basic and diluted earnings per share were as follows:

 

		Three Months Ended
		March 31,
		2009			2008
Net income (in thousands)		$	553		$	468
Weighted average shares outstanding		644,884			646,603
Effect of dilutive securities:
Stock options		584			2,695
Shares used to compute diluted earnings per share		645,468			649,298
Earnings per share:
Basic		$	0.86		$	0.72
Diluted		0.86			0.72

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 2 — EARNINGS PER SHARE (Continued)

 

A total of 4,626 and 51,392 shares for the three month periods ended March 31, 2009 and 2008 are not included in the above calculations as they are non-dilutive.

 

NOTE 3 — CAPITAL RATIOS

 

At the dates indicated, the Company’s capital ratios were:

 

		March 31, 2009					December 31, 2008
		Amount			Ratio		Amount			Ratio
Total capital (to risk-weighted assets)		$	24,213		13.3	%	$	23,354		13.2	%
Tier I capital (to risk-weighted assets)		22,371			12.3	%	21,742			12.3	%
Tier I capital (to average assets)		22,371			8.2	%	21,742			8.1	%

 

At the dates indicated, 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 4 — DERIVATIVE FINANCIAL INSTRUMENTS

 

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 161, Accounting for Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  This standard amends and expands the disclosure requirements in FAS 133 about an entity’s derivative instruments and hedging activities. Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. Fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The Company uses this fair value hedge 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 Broker Dealer Financial Services Corporation (BDFS), to fix the interest rate on a specific certificate of deposit product.  At March 31, 2009, the Company had $3.6 million of certificates of deposit, which mature in 2009 through 2014, on which it has prepaid the BDFS for an interest rate swap and will receive an interest rate from the BDFS based on the appreciation of the S&P 500 Index.  This interest received from the BDFS will be paid to the customer.  The certificates of deposit have an embedded derivative which is a written call option. The assets and liabilities in this transaction are being netted in other liabilities and the fair value adjustment recorded in other income.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 4 — DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

 

The table below presents certain information regarding the Company’s interest rate swap agreement designated as a fair value hedge.

 

		March 31, 2009 (unaudited)
Fair value of interest rate swap agreement		$	440
Balance sheet location of fair value amount		Other Liabilities
Gain (loss) on interest rate swap		(154		)
Gain (loss) on call option		155
Net gain (loss) recognized in income		1
Location of gain (loss) recognized in income		Other Income

 

In addition to the above, the Company also purchased $1.7 million of certificates of deposit which are included in the certificates of deposit caption on the consolidated balance sheet.  These certificates of deposit were purchased as investments to generate a return and have a five year term from date of purchase.  The investments do not individually exceed $100,000 and are insured by the FDIC. 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  which is a purchased call option, is recorded in certificates of deposit and the fair value adjustment is included in other income.  At March 31, 2009, the Company had allocated $76,000 to this asset and recorded a valuation loss of $17,000.

 

The table below presents certain information regarding the Company’s purchased and written call options which are embedded derivatives that are not designated as hedging instruments under Statement 133:

 

		March 31, 2009 (unaudited)
Purchased call options- Investment cds		$	75
Balance sheet location of fair value amount		Certificates of Deposit
Net gain (loss) recognized in income		(17		)
Location of gain (loss) recognized in income		Other Income
Written call options — Customer cds		442
Balance sheet location of fair value amount		Other Liabilities
Net gain (loss) recognized in income		155
Location of gain (loss) recognized in income		Other Income

 

NOTE 5 — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

 

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157).  FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 5 — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

 

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1                                                                         Quoted prices in active markets for identical assets or liabilities

 

Level 2                                                                         Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3                                                                         Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Available-for-sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  Level 1 securities include highly liquid government bonds, and exchange traded equities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  Level 2 securities include certain collateralized mortgage and debt obligations, government agency bonds and certain municipal securities.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company currently holds no Level 3 securities.

 

Interest Rate Swap Agreements

 

The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 5 — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

 

Other Real Estate Owned

 

The fair value of the Company’s other real estate owned is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell.

 

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring and non-recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at March 31, 2009:

 

					Fair Value Measurements Using
		Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Recurring basis:
Available-for-sale securities		$	55,717		$	962		$	54,755		$	—
Purchased call options- investment cds		75			—			75			—
Written call options- customer cds		(442		)	—			(442		)	—
Interest rate swap agreements — customer cds		440			—			440			—
Non-recurring basis:
Other real estate owned		275			—			—			275

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 5 — DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)

 

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

 

					Fair Value Measurements Using
		Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Available-for-sale securities		$	57,825		$	893		$	56,932		$	—
Purchased call options — investment cds		135			—			135			—
Written call options — customer cds		(597		)	—			(597		)	—
Interest rate swap agreements — customer cds		594			—			594			—

 

NOTE 6 — RECLASSIFICATIONS

 

Certain reclassifications have been made to the December 31, 2008 condensed consolidated financial statements in order to conform to the March 31, 2009 condensed consolidated financial statement presentation.  These reclassifications had no effect on net income.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 7 — FUTURE ACCOUNTING PRONOUNCEMENTS

 

SFAS No. 141 (revised 2007), Business Combinations

 

The objective of this Statement is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  This Statement introduces new accounting concepts, and several of these changes have the potential to generate greater earnings volatility, in connection with and after an acquisition.  Some of the more significant changes include:

 

·                Transaction costs and restructuring charges will now be expensed.

 

·                The accounting for certain assets acquired and liabilities assumed will change significantly.  The most significant to the Company being that allowance for loan losses at acquisition date will be eliminated.

 

·                Contingent consideration will be measured at fair value until settled.

 

·                Equity issued in an acquisition will be valued at the closing date, as opposed to the announcement date.

 

·                Material adjustments made to the initial acquisition will be recorded back to the acquisition date.

 

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51

 

This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Before this statement was issued, limited guidance existed for reporting noncontrolling interests.  As a result, considerable diversity in practice existed.  Socalled minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity.  This Statement improves comparability by eliminating that diversity.

 

SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities—An Amendment SFAS Statement No. 133

 

This Statement was issued in March 2008 and amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.  To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 7 — FUTURE ACCOUNTING PRONOUNCEMENTS (Continued)

 

strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.

 

FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies

 

This FSP amends and clarifies FAS 141(R), Business Combinations, regarding the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP eliminates the distinction between contractual and noncontractual contingencies discussed in FAS 141(R), specifies whether contingencies should be measured at fair value or in accordance with FAS 5, provides application guidance on subsequent accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies and establishes new disclosure requirements.  This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

 

FSP FAS 157-4—Determining Fair Value When the Volume and Level of Activity for The Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

 

This FSP, issued on April 9, 2009, provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased.  This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.   Even if there has been a significant decrease in the volume and level of activity regardless of valuation technique, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and APG 28-1 are adopted concurrently.  This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption.

 

FSP No. 115-2 and FAS 124-2—Recognition and Presentation of Other-Than-Temporary Impairments

 

Issued on April 9, 2009, this FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2009 and 2008

 

NOTE 7 — FUTURE ACCOUNTING PRONOUNCEMENTS (Continued)

 

March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APG 28-1 are adopted concurrently.  This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption.

 

FSP No. 107-1 and APG 28-1—Interim Disclosures about Fair Value of Financial Instruments

 

This FSP issued on April 9, 2009 amends the other-than-temporary guidance in United States generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities and does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  Effective for interim reporting periods ending after June 15, 2009, early adoption is permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 are adopted concurrently.

 

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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.

 

Overview

 

First Ottawa Bancshares, Inc. is the holding company for First National Bank of Ottawa. The Company is headquartered in Ottawa, Illinois and operates four offices in Ottawa, two branches in Streator, a branch in Yorkville, a branch in Morris, and a loan production office in Minooka, Illinois. The Company continues to explore expansion opportunities within its existing market area and in surrounding areas.

 

The Company has submitted an application with the Office of the Comptroller of Currency and received approval to relocate the branch located at 401 East Main Street in Streator, Illinois, to 409 East Bridge Street in Streator Illinois. This relocation would be considered a short distance relocation as defined in 12 CFR 5.3(i).

 

The Company’s principal business is conducted by the Bank and consists of a full range of community-based financial services, including commercial and retail banking.  The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses.  Net interest income is the difference between the income the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings.  The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio.  Other income consists of service charges on deposit accounts, trust and farm management fee income, securities gains (losses), gains (losses) on sales of loans, and other income.  Other expenses include salaries and employee benefits, as well as occupancy and equipment expenses and other non-interest expenses.

 

Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts of and rates on interest-bearing liabilities.  Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in coping with such changes.  The provision for loan losses is dependent upon management’s assessment of the collectibility of the loan portfolio under current economic conditions.

 

The Company’s net income for the three months ended March 31, 2009, was $553,000, or $.86 per common share, compared to net income of $468,000, or $.72 per common share for the three months ended March 31, 2008.  The increase in net income was due primarily to an increase in 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

non-interest income. This increase in non-interest income was partially offset by a decrease in net-interest income after the provision for loan losses.

 

The Company’s assets at March 31, 2009 were $269.7 million contrasted to $275.2 million at December 31, 2008, a decrease of $5.5 million, or 2.0%.

 

CRITICAL ACCOUNTING POLICIES

 

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry.  The Company’s significant accounting policies are described in detail in the notes to the Company’s consolidated financial statements for the year ended December 31, 2008. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The Company’s financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

 

Allowance for Credit Losses- The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

 

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

 

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures.  The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

 

Mortgage Servicing Rights- Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.

 

Derivatives- As a part of the Company’s funding strategy, derivative financial instruments, all of which are interest rate swap arrangements, are used to reduce exposure to changes in interest rates for certain financial instruments.  These derivatives are accounted for by recognizing the fair value of the contracts on the balance sheet.  The valuation of these derivatives is considered critical because carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and the information used to record valuation adjustments for the interest rate swaps and related deposit products are provided by third parties.

 

Additionally, the Company has purchased certificate of deposits which contain an equity related embedded derivative component.  The initial investment in the certificate of deposit is not at risk but the return on the investment is based on appreciation in the S&P 500 Index.  Accordingly, the fair value of the embedded derivative is recorded in certificates of deposit and the fair value adjustment is included in other income.

 

Stock Compensation- Grants under the Company’s stock incentive plan are accounted for under the provisions of Statement of Accounting Standards (SFAS) No. 123R, applying the fair value method and the use of an option pricing model to estimate the value of the options granted.  The stock options are granted with an exercise price equal to the market price at the date of grant.  Resulting compensation expense, under the stock options, is measured and recorded based on the estimated value of the options.

 

Valuation Measurements-  Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Investment securities and derivatives are carried at fair value, as defined in SFAS No. 157 “Fair Value Measurement” (“SFAS 157”), which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other postretirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company’s results of operations.

 

Goodwill-  Under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is required to evaluate goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has elected to test for goodwill impairment as of December 31st  of each year. The Company cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the effect of the economic environment on the Company’s customer base, or a material negative change in its relationship with significant customers.

 

CONSOLIDATED FINANCIAL CONDITION

 

Total assets at March 31, 2009 were $269.7 million contrasted to $275.2 million at December 31, 2008, a decrease of $5.5 million, or 2.0%.  This decrease in total assets was the result of an $8.1 million decrease in cash and cash equivalents, a $2.1 million decrease in securities available for sale, and a $6.3 million decrease in loans due to current economic trends and a decline in demand.  These decreases were partially offset by a $9.8 million increase in certificates of deposit at other financial institutions and modest increases in loans held for sale and premises and equipment. The $5.5 million decrease in total assets resulted in a corresponding decrease of  $2.0 million in other borrowings, as well as a $2.6 million decrease in deposits.

 

Total liabilities at March 31, 2009 were $244.7 million compared to $250.5 million at December 31, 2008, a decrease of $5.8 million, or 2.3%. This decrease in total liabilities was primarily the  result of a $5.0 million decrease in money market accounts, a $1.8 million decrease in time deposit accounts, a $2.3 million decrease in non-interest bearing demand accounts, a $2.0 million decrease in other borrowings, and a $1.2 million decrease in other liabilities. . The decrease in other liabilities was primarily due to the payment of dividends in the first quarter. The decreases were partially offset by a $4.6 million increase in NOW accounts and a $2.0 million increase in regular savings accounts.

 

Total shareholder’s equity was $25.0 million at March 31, 2009 compared to $24.7 million at December 31, 2008.  This increase was the result of $553,000 of additional retained earnings from net income for the quarter ended March 31, 2009 and a decrease of $245,000, net of tax, in the valuation of the Company’s investment portfolio.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

CONSOLIDATED RESULTS OF OPERATIONS

 

Net income for the first quarter of 2009 was $553,000, or $0.86 per share, an 18.2% increase compared to $468,000, or $0.72 per share, in the first quarter of 2008.  The increase in net income for the quarter was primarily the result of an increase in non-interest income of $399,000 and a nominal increase in net interest income of $41,000. These increases in income were offset by an increase in the provision for loan losses, which was $270,000 in 2009 compared to $30,000 in 2008, and also an increase in non-interest expense of $97,000 compared to 2008 results. In addition, the provision for income taxes increased by $18,000 in 2009 as compared to 2008.

 

The annualized return on average assets was 0.81% in the first quarter of 2009 compared to 0.68% in the first quarter of 2008.   The annualized return on average equity increased to 9.23% in the first quarter of 2009 from 7.42% the first quarter of 2008.

 

NET INTEREST INCOME

 

Net interest income was $2.3 million for the three months ended March 31, 2009 compared to $2.2 million in 2008, a 1.8% increase.  Total interest income decreased $425,000 to $3.2 million for the three months ended March 31, 2009 compared to the same period in 2008.  This decrease was the result of a decrease in interest income from loans of $417,000, to $2.4 million compared to 2008, a decrease of taxable investment income of $148,000 to $253,000 compared to the same period in 2008, and a decrease in income from federal funds sold of $56,000, to $8,000 in 2009. These decreases were partially offset by an increase in tax exempt investment income of $102,000.  In addition, income on certificates of deposit held for investment increased by $94,000 to $171,000 in 2009. Decreased interest income was a result of decreases in both interest rates on investments and decreased volume of taxable investments and average loans outstanding during the first quarter of 2009. Increased tax exempt investment income and certificates of deposit held for investment income was attributable to increases in principal balances of tax exempt securities available-for-sale and investment certificates of deposit compared to the end of the first quarter of 2008.

 

The Company’s net interest margin was 3.92% for the three months ended March 31, 2009 compared to 3.66% for the same period in 2008.  The yield on average earning assets decreased to 5.48% for the three months ended March 31, 2009 from 5.91% for the same period in 2008, a 43 basis point decrease.  This decrease was offset by an even larger decrease in the cost of funds from 2.25% to 1.56% paid for the same period ended March 31, 2009, a 69 basis point decrease. The largest decrease in interest expense was due to a $288,000 decrease in interest paid on time deposit accounts. This reduction was due to both rate and volume factors.

 

PROVISION FOR LOAN LOSSES

 

The provision for loan losses was $270,000 in the first quarter of 2009, compared to $30,000 for the same period in 2008. This increase is a result of current national and local economic issues including uncertainties regarding the recession that could have a negative impact on the ability of borrowers to repay loans during 2009. As of March 31, 2009, the allowance for loan losses totaled $1.8 million, or 1.20% of total loans, which has increased from 1.01% as of December 31, 2008.  Nonaccrual loans increased from $1.0 million at December 31, 2008 to $1.6 million at

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

March 31, 2009. Nonperforming loans, including nonaccrual loans, decreased $314,000 to $2.7 million over the same period. Management feels that these nonperforming loans are well collateralized, which significantly reduces the Company’s exposure to losses on the credits.

 

The amounts of the provision and allowance for loan losses are influenced by a number of factors, including 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 economy for the remainder of 2009. Should the economic climate continue to deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge- offs, and delinquencies could rise and require increases in the provision. 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 March 31, 2009 to cover probable losses inherent in our loan portfolio. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

 

NON-INTEREST INCOME

 

The Company’s non-interest income totaled $801,000 for the three months ended March 31, 2009 compared to $402,000 for the same period in 2008, an increase of $399,000 or 99.3%. The increase in non-interest income was primarily due to a $209,000 increase in gain on the sale of investment securities to $231,000 in 2009. Gain on loan sales increased $64,000 to $92,000 in the first quarter of 2009 due to increased mortgage refinancing activity occurring during the first three months of 2009. Derivatives market value losses related to indexed certificates of deposit were $17,000 in the first quarter 2009 compared to market value losses of $158,000 for the same period in 2008. Service charges on deposit accounts experienced a nominal increase of $7,000 to $198,000 for the first quarter 2009 compared to the same period of 2008.

 

NON-INTEREST EXPENSE

 

The Company’s non-interest expense was $2.1 million for the three months ended March 31, 2009 and $2.0 million for the same period in 2008. Salaries and benefits, the largest component of non-interest expense, increased $33,000, or 3.0%, to $1.1 million.  Modest decreases in occupancy and equipment expense of $13,000, other expenses of $11,000, and amortization of core deposit intangible expense of $4,000 were offset by increases in insurance expense of $62,000, data processing expense of $11,000, and professional fees of $19,000. Insurance expense increased primarily due to expected increases in FDIC insurance for the current year. Amortization is related to the core deposit intangible resulting from the purchase of our two Streator branches in 2003. In addition, income tax expense increased $18,000 to $149,000 in 2009 compared to the same period in 2008.

 

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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, 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 United States 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, 2009, cash and short-term investments totaled $18.4 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 M&I Marshall and Ilsley Bank.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following table discloses contractual obligations and commercial commitments of the Company as of March 31, 2009:

 

					Less Than									After
		Total			1 Year			1 – 3 Years			4 – 5 Years			5 Years
Lines of credit(1)		$	29,828		$	14,336		$	6,318		$	2,462		$	6,712
Federal Home Loan
Bank advances		4,000			2,000			2,000			—			—
Data processing
contract payable		1,002			223			445			334			—
Standby letters of credit(1)		315			303			12			—			—
		$	35,145		$	16,862		$	8,775		$	2,796		$	6,712

 

(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, 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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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

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.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK

 

ITEM 3:                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

 

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FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARIES

CONTROLS AND PROCEDURES

 

ITEM 4:                  CONTROLS AND PROCEDURES

 

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2009 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of March 31, 2009.  These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

There have been no changes in the Company’s internal controls or disclosure controls or in other factors that have materially affected, or are reasonably likely to materially affect internal controls over financial reporting or disclosure controls.

 

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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 1.A.		RISK FACTORS
		The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
		None
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
		None
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
		None

 

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ITEM 5.                          OTHER INFORMATION

 

None

 

ITEM 6.                          EXHIBITS

 

Exhibits
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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
Date: May 14, 2009	Joachim J. Brown
	President and Chief Executive Officer
	(Principal Executive Officer)
	/S/ Vincent G Easi
Date: May 14, 2009	Vincent G. Easi
	Chief Financial Officer
	(Principal Financial Officer)

 

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