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FIRST OTTAWA BANCSHARES, INC - Quarter Report: 2011 June (Form 10-Q)

first-ottawa10q_063011.htm


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 June 30, 2011
 
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)
   
Delaware
36-4331185
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
   
701 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 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 x 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.
 
Large accelerated filer o  Accelerated filer o  Non-accelerated filer o  Smaller reporting company x

 
 

 
 
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 August 12, 2011, the registrant had outstanding 645,988 shares of common stock, $1.00 par value per share.
 


 
 
 
 

FIRST OTTAWA BANCSHARES, INC.
 
 
Form 10-Q Quarterly Report
 
Table of Contents
 
PART I
     
4
27
37
38
     
PART II
     
39
39
39
39
39
39
39
 
41


 
3.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and due from banks
  $ 12,054     $ 17,087  
Interest-bearing time deposits in financial institutions
    47,587       54,837  
Securities available for sale
    52,427       50,749  
Loans held for sale
    696       895  
Loans, net of allowance for loan losses of $3,434 and $3,363, respectively
    140,301       137,417  
Premises and equipment, net
    7,586       7,771  
Goodwill
    2,446       2,446  
Core deposit intangible, net
    288       361  
Other real estate owned, net
    3,233       3,005  
Cash surrender value of life insurance
    3,780       3,679  
Accrued interest receivable and other assets
    7,444       7,548  
                 
Total assets
  $ 277,842     $ 285,795  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest-bearing demand
  $ 36,346     $ 36,206  
Interest-bearing demand
    92,668       101,890  
Money market savings
    19,764       19,147  
Savings
    30,841       26,559  
Certificates and other time deposits of $100,000 or more
    31,978       31,523  
Other certificates and time deposits
    40,492       43,270  
Total deposits
    252,089       258,595  
                 
Borrowings
          2,000  
Other liabilities
    2,257       2,233  
Total liabilities
    254,346       262,828  
                 
Commitments and contingencies
               
                 
Shareholders’ equity
               
Preferred stock, $1 par value Authorized and unissued – 20,000 shares
     —        
Common stock - $1 par value, 1,000,000 shares authorized and 753,734 issued
    754       754  
Additional paid-in capital
    4,789       4,736  
Retained earnings
    24,543       24,253  
Treasury stock, at cost - 107,746 shares
    (6,299 )     (6,299 )
Accumulated other comprehensive loss
    (291 )     (477 )
Total shareholders’ equity
    23,496       22,967  
                 
Total liabilities and shareholders’ equity
  $ 277,842     $ 285,795  
 
See accompanying notes to condensed consolidated financial statements.

 
4.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income
                       
Loans, including fees
  $ 2,109     $ 2,185     $ 4,173     $ 4,382  
Securities available for sale
                               
Taxable
    227       174       445       378  
Exempt from federal income tax
    109       183       222       381  
Interest-bearing deposits with financial institutions
    245       236       503       491  
Other
    7       9       16       15  
Total interest and dividend income
    2,697       2,787       5,359       5,647  
                                 
Interest expense
                               
Interest-bearing demand deposits
    24       45       50       98  
Money market savings accounts
    6       14       12       28  
Savings deposits
    9       13       16       29  
Time deposits
    372       491       765       1,002  
Borrowings
          16       5       37  
Total interest expense
    411       579       848       1,194  
                                 
NET INTEREST INCOME
    2,286       2,208       4,511       4,453  
Provision for loan losses
    100       270       400       540  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    2,186       1,938       4,111       3,913  
                                 
Noninterest income
                               
Service fees
    163       182       307       377  
Trust and farm management fees
    135       135       270       270  
Mortgage servicing income, net
    66       65       117       127  
Net realized gains (losses) on available for sale securities
    2       52       (8 )     78  
Other
    156       171       338       352  
Total noninterest income
    522       605       1,024       1,204  
                                 
Noninterest expense
                               
Salaries and employee benefits
    1,196       1,166       2,360       2,320  
Occupancy and equipment
    300       304       611       610  
Data processing
    140       127       272       252  
Insurance
    139       177       277       348  
Professional fees
    154       151       266       276  
Amortization of core deposit intangible
    36       36       73       73  
Other real estate owned, net
    371       121       577       193  
Other
    213       366       456       589  
Total noninterest expense
    2,549       2,448       4,892       4,661  
                                 
INCOME BEFORE INCOME TAXES
    159       95       243       456  
                                 
Income tax expense (benefit)
          (43 )     (47 )     10  
                                 
NET INCOME
  $ 159     $ 138     $ 290     $ 446  
                                 
Earnings per share-basic
  $ 0.25     $ 0.21     $ 0.45     $ 0.69  
Earnings per share-diluted
  $ 0.25     $ 0.21     $ 0.45     $ 0.69  
Dividends per share
  $ 0.00     $ 0.54     $ 0.00     $ 0.54  

See accompanying notes to condensed consolidated financial statements.

 
5.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Six Months ended June 30, 2011 and 2010
(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, 2011
  $ 754     $ 4,736     $ 24,253     $ (6,299 )   $ (477 )   $ 22,967  
                                                 
Net income
                290                   290  
                                                 
Unrealized net gain on securities available for sale, net of reclassifications and tax effects
                            186       186  
                                                 
Comprehensive income
                                            476  
                                                 
Stock options vested
          53                         53  
                                                 
Balance at June 30, 2011
  $ 754     $ 4,789     $ 24,543     $ (6,299 )   $ (291 )   $ 23,496  
                                                 
Balance at January 1, 2010
  $ 754     $ 4,603     $ 26,871     $ (6,299 )   $ 49     $ 25,978  
                                                 
Net income
                446                   446  
                                                 
Unrealized net loss on securities available for sale, net of reclassifications and tax effects
                            (87 )     (87 )
                                                 
Comprehensive income
                                            359  
                                                 
Cash dividends declared
($.54 per share)
                (349 )                 (349 )
                                                 
Stock options vested
          64                         64  
                                                 
Balance at June 30, 2010
  $ 754     $ 4,667     $ 26,968     $ (6,299 )   $ (38 )   $ 26,052  
 
See accompanying notes to condensed consolidated financial statements.

 
6.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2011 and 2010
(In thousands)
(Unaudited)
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 290     $ 446  
Items not requiring (providing) cash
               
Provision for loan losses
    400       540  
Depreciation and amortization
    284       275  
Premium amortization on securities, net
    281       177  
Derivative valuation adjustment
          3  
Loans originated for sale
    (6,052 )     (6,884 )
Proceeds from the sale of loans
    6,392       6,481  
Gains on sales of loans held for sale
    (141 )     (172 )
(Gains) losses on sales of securities, net
    8       (78 )
Writedowns and loss on sales of other real estate owned
    203       95  
Stock options vested
    53       64  
Change in interest receivable and other assets
    (93 )     122  
Change in interest payable and other liabilities
    438       (140 )
Net cash provided by operating activities
    2,063       929  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of securities available for sale
    422       2,247  
Proceeds from maturities, calls, and paydowns of securities available for sale
    3,193       18,091  
Purchases of securities available for sale
    (5,300 )     (20,296 )
Proceeds from maturities of interest-bearing time deposits
    10,936       8,236  
Purchases of interest-bearing time deposits
    (3,686 )     (8,018 )
Net change in loans receivable
    (4,621 )     2,781  
Proceeds from sales of other real estate owned
    660       1,042  
Net purchases of premises and equipment
    (26 )     (417 )
Net cash provided by investing activities
    1,578       3,666  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net change in deposits
    (6,506 )     (9,753 )
Repayment of borrowings
    (2,000 )     (2,000 )
Dividends paid
    (168 )     (401 )
Net cash used in financing activities
    (8,674 )     (12,154 )
                 
Net change in cash and cash equivalents
    (5,033 )     (7,559 )
                 
Cash and cash equivalents at beginning of period
    17,087       17,921  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 12,054     $ 10,362  
 
See accompanying notes to condensed consolidated financial statements.

 
7.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
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, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.
 
The accompanying unaudited condensed consolidated financial statements of First Ottawa Bancshares, Inc. (the Company) 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. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for 2010 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2010 has been derived from the audited consolidated balance sheet as of that date.
 
The Company’s wholly-owned subsidiary, The First National Bank of Ottawa (the Bank), operates as a full service community bank. First Ottawa Financial Corporation, a wholly owned subsidiary of the Bank, 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income (in thousands)
  $ 159     $ 138     $ 290     $ 446  
Weighted average shares outstanding
    645,988       645,988       645,988       645,988  
Effect of dilutive securities:
                               
Stock options
          2,827             2,231  
Shares used to compute diluted earnings per share
    645,988       648,815       645,988       648,219  
 
Earnings per share (not stated in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Basic
  $ 0.25     $ 0.21     $ 0.45     $ 0.69  
Diluted
    0.25       0.21       0.45       0.69  
 
A total of 74,440 and 44,414 options for the three month periods ended June 30, 2011 and 2010, respectively, are not included in the above calculations as they are non-dilutive.
 

 
8.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 3 – CAPITAL RATIOS
 
At the dates indicated, capital ratios for the Company and the Bank were:
 
                           
To Be Well
 
                           
Capitalized
 
               
Minimum
   
Under Prompt
 
               
Capital
   
Corrective
 
   
Actual
   
Requirement
      Action Provisions  
As of June 30, 2011
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
      (Amounts in Thousands)  
Total capital to risk weighted assets:
                                   
Consolidated
  $ 22,437       13.3 %   $ 13,516       8.0 %     N/A       N/A  
First National Bank of Ottawa
    22,220       13.2       13,508       8.0     $ 16,885       10.0 %
                                                 
Tier I capital to risk weighted assets:
                                               
Consolidated
  $ 20,310       12.0 %   $ 6,758       4.0 %     N/A       N/A  
First National Bank of Ottawa
    20,093       11.9       6,754       4.0     $ 10,131       6.0 %
                                                 
Tier I capital to average assets:
                                               
Consolidated
  $ 20,310       7.3 %   $ 11,144       4.0 %     N/A       N/A  
First National Bank of Ottawa
    20,093       7.2       11,140       4.0     $ 13,925       5.0 %
 
                                   
To Be Well
 
                                   
Capitalized
 
                   
Minimum
   
Under Prompt
 
                   
Capital
   
Corrective
 
   
Actual
   
Requirement
      Action Provisions  
As of December 31, 2010
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                 
(Amounts in Thousands)
                 
Total capital to risk weighted assets:
                                               
Consolidated
  $ 22,269       12.7 %   $ 14,054       8.0 %     N/A       N/A  
First National Bank of Ottawa
    22,048       12.6       14,001       8.0     $ 17,502       10.0 %
                                                 
Tier I capital to risk weighted assets:
                                               
Consolidated
  $ 20,067       11.4 %   $ 7,027       4.0 %     N/A       N/A  
First National Bank of Ottawa
    19,846       11.3       7,001       4.0     $ 10,501       6.0 %
                                                 
Tier I capital to average assets:
                                               
Consolidated
  $ 20,067       6.6 %   $ 12,176       4.0 %     N/A       N/A  
First National Bank of Ottawa
    19,846       6.5       12,171       4.0     $ 15,214       5.0 %
 

 
9.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 3 – CAPITAL RATIOS (Continued)
 
At the dates indicated, the Company and the Bank met the requirements to be categorized as “well capitalized” under general minimum regulatory requirements 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. In connection with the current economic environment and the Bank’s level of nonperforming assets, which is higher than historical levels, the Bank’s Board of Directors has resolved to maintain the Bank’s Tier 1 to average assets ratio at or above 7.25%.
 
NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS
 
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 a 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 June 30, 2011, the Company had $3.6 million of certificates of deposit, which mature in 2011 through 2016, on which it has prepaid BDFS for an interest rate swap and will receive an interest rate from BDFS based on the appreciation of the S&P 500 Index. This interest received from 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 time deposits and the fair value adjustment recorded in other income.
 
NOTE 5 – SECURITIES AVAILABLE FOR SALE
                         
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
June 30, 2011
                       
U. S. Treasury
  $ 3,030     $ 20     $     $ 3,050  
Federal agencies
    24,523       215       (18 )     24,720  
State and municipal
    21,607       271       (468 )     21,410  
Corporate obligations
    1,775       41             1,816  
Mortgage–backed securities and collateralized mortgage obligations
    1,328       89             1,417  
Marketable equity securities
    16       1       (3 )     14  
                                 
Total investment securities
  $ 52,279     $ 637     $ (489 )   $ 52,427  
 

 
10.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 5 – SECURITIES AVAILABLE FOR SALE (Continued)
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
December 31, 2010
                       
U. S. Treasury
  $ 3,564     $ 14     $     $ 3,578  
Federal agencies
    25,693       174       (322 )     25,545  
State and municipal
    18,087       275       (394 )     17,968  
Corporate obligations
    1,807       24             1,831  
Mortgage–backed securities and collateralized mortgage obligations
    1,717       96             1,813  
Marketable equity securities
    15       2       (3 )     14  
                                 
Total investment securities
  $ 50,833     $ 585     $ (719 )   $ 50,749  
 
As of June 30, 2011 and December 31, 2010, the Company had approximately $16.2 million and $16.1 million respectively, invested in bonds issued by municipalities located within LaSalle County, Illinois.
 
Securities with an approximate carrying value of $45.2 million and $42.6 million were pledged at June 30, 2011 and December 31, 2010, respectively, to secure trust and public deposits, and for other purposes as required or permitted by law.
 
The amortized cost and fair value of contractual maturities of securities available for sale at June 30, 2011 were as follows. Securities not due at a single maturity date, primarily mortgage–backed and equity securities, are shown separately.
 
     
Amortized
   
Fair
 
     
Cost
   
Value
 
                   
 
Within one year
  $ 21,952     $ 22,034  
 
One to five years
    22,607       22,807  
 
Five to ten years
    3,336       3,386  
 
After ten years
    3,040       2,769  
        50,935       50,996  
 
Mortgage–backed securities and collateralized mortgage obligations
    1,328       1,417  
 
Marketable equity securities
    16       14  
                   
 
Totals
  $ 52,279     $ 52,427  
 
Information regarding realized gains and losses on sales of securities available for sale for the six month period ended June 30, 2011 and 2010 follows:
 
     
2011
   
2010
 
                   
 
Gross gains
  $ 2     $ 78  
 
Gross losses
    (10 )      
 
Tax expense (benefit)
    (2 )     27  
 

 
11.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 5 – SECURITIES AVAILABLE FOR SALE (Continued)
 
Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2011 and December 31, 2010 was $15.8 million and $20.5 million, respectively, which was approximately 30.1% and 40.4% of the Company’s available for sale investment portfolio at those dates. These declines primarily resulted from market interest rates being greater than the coupon rates on the individual bonds.
 
Based on evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other–than–temporary impairment is identified.
 
The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
   
Less than 12 Months
   
12 Months or More
    Total  
Description of
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
June 30, 2011
                                   
Federal agencies
  $ 4,299     $ (18 )   $     $     $ 4,299     $ (18 )
State and municipal
    11,288       (465 )     199       (3 )     11,487       (468 )
Marketable equity securities
    3       (3 )                 3       (3 )
                                                 
Total temporarily impaired securities
  $ 15,590     $ (486 )   $ 199     $ (3 )   $ 15,789     $ (489 )
                                                 
December 31, 2010
                                               
Federal agencies
  $ 14,189     $ (322 )   $     $     $ 14,189     $ (322 )
State and municipal
    6,018     $ (389 )     299     $ (5 )     6,317     $ (394 )
Marketable equity securities
    2       (3 )                 2       (3 )
                                                 
Total temporarily impaired securities
  $ 20,209     $ (714 )   $ 299     $ (5 )   $ 20,508     $ (719 )
 

 
12.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
 
Major classifications of loans as of June 30, 2011 and December 31, 2010 are summarized as follows:
 
   
2011
   
2010
 
Commercial:
           
Real estate
  $ 50,303     $ 41,970  
Non-real estate
    17,647       28,336  
Construction and land development
    8,630       10,388  
Agricultural
    29,107       26,982  
Residential
    35,707       30,669  
Consumer
    2,341       2,435  
                 
Total
  $ 143,735     $ 140,780  
 
At June 30, 2011 and December 31, 2010, respectively, the Company held $50.3 million and $42.0 million in commercial real estate and $8.6 million and $10.4 million in loans collateralized by construction and land development real estate, predominantly in the northern Illinois geographic area. Due to national, state and local economic conditions, values for commercial and development real estate have declined, and the market for these properties is depressed.
 

 
13.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the allowance for loan losses by portfolio segment as of June 30, 2011 and 2010.
 
         
Commercial
   
Construction
                               
   
Commercial
   
Non-Real
   
and Land
                               
   
Real Estate
   
Estate
   
Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
 
  2011
Allowance for loan losses:
                                                               
Balances, January 1
  $ 1,515     $ 577     $ 633     $ 79     $ 497     $ 31     $ 31     $ 3,363  
Provision for losses
    247       (130 )     (196 )     7       132       (4 )     344       400  
Recoveries on loans
          39                   22       6             67  
Loans charged off
    (82 )     (35 )     (260 )           (16 )     (3 )           (396 )
Balances, June 30
  $ 1,680     $ 451     $ 177     $ 86     $ 635     $ 30     $ 375     $ 3,434  
                                                                 
 
  2010  
Allowance for loan losses:
                                                               
Balances, January 1
  $ 906     $ 553     $ 380     $ 83     $ 310     $ 32     $ 70     $ 2,334  
Provision for losses
    77       (32 )     223       18       194       (15 )     75       540  
Recoveries on loans
    89       16                         14             119  
Loans charged off
    (237 )     (56 )     (213 )     (18     (219 )     (1 )           (744 )
Balances, June 30
  $ 835     $ 481     $ 390     $ 83     $ 285     $ 30     $ 145     $ 2,249  
 

 
14.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the recorded investment in loans and the related allowance for loan losses by portfolio segment and based on impairment method as of June 30, 2011.
 
         
Commercial
   
Construction
                               
   
Commercial
   
Non-Real
   
and Land
                               
   
Real Estate
   
Estate
   
Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
Total loans:
                                               
Individually evaluated for impairment
  $ 1,330     $ 1,029     $ 3,216     $ 360     $ 566     $           $ 6,501  
Collectively evaluated for impairment
    48,973       16,618       5,414       28,747       35,141       2,341             137,234  
                                                               
Balances, June 30
  $ 50,303     $ 17,647     $ 8,630     $ 29,107     $ 35,707     $ 2,341           $ 143,735  
                                                               
Allowance for loan losses:
                                                             
Individually evaluated for impairment
  $ 175     $ 109     $ 4     $     $ 301     $     $     $ 589  
Collectively evaluated for impairment
    1,505       342       173       86       334       30       375       2,845  
                                                                 
Balances, June 30
  $ 1,680     $ 451     $ 177     $ 86     $ 635     $ 30     $ 375     $ 3,434  
 

 
15.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the recorded investment in loans and the related allowance for loan losses by portfolio segment and based on impairment method as of December 31, 2010.
 
         
Commercial
   
Construction
                               
   
Commercial
   
Non-Real
   
and Land
                               
   
Real Estate
   
Estate
   
Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
Total loans:
                                               
Individually evaluated for impairment
  $ 2,147     $ 2,111     $ 4,003     $ 359     $ 286     $           $ 8,906  
Collectively evaluated for impairment
    39,823       26,225       6,385       26,623       30,383       2,435             131,874  
                                                               
Balances, December 31
  $ 41,970     $ 28,336     $ 10,388     $ 26,982     $ 30,669     $ 2,435           $ 140,780  
                                                               
Allowance for loan losses:
                                                             
Individually evaluated for impairment
  $ 48     $ 4     $ 377     $     $ 97     $     $     $ 526  
Collectively evaluated for impairment
    1,467       573       256       79       400       31       31       2,837  
                                                                 
Balances, December 31
  $ 1,515     $ 577     $ 633     $ 79     $ 497     $ 31     $ 31     $ 3,363  
 
 
16.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011.
 
   
Unpaid
               
Average
   
Interest
 
   
Principal
   
Recorded
   
Related
   
Recorded
   
Income
 
   
Balance
   
Investment
   
Allowance
   
Investment
   
Recognized
 
                               
With an allowance recorded:
                             
Commercial:
                             
Real estate
  $ 1,330     $ 1,330     $ 175     $ 1,330     $ 9  
Non-real estate
    1,079       1,029       109       1,029       9  
Construction and land development
    2,242       2,123       4       2,123        
Agricultural
                             
Residential
    308       308       301       310       5  
Consumer
                             
Total
  $ 4,959     $ 4,790     $ 589     $ 4,792     $ 23  
                                         
With no related allowance:
                                       
Commercial:
                                       
Real estate
  $     $     $     $     $  
Non-real estate
                             
Construction and land development
    3,159       1,093             1,264        
Agricultural
    580       360             360        
Residential
    258       258             258       4  
Consumer
                             
Total
  $ 3,997     $ 1,711     $     $ 1,882     $ 4  
                                         
Total:
                                       
Commercial:
                                       
Real estate
  $ 1,330     $ 1,330     $ 175     $ 1,330     $ 9  
Non-real estate
    1,079       1,029       109       1,029       9  
Construction and land development
    5,401       3,216       4       3,387        
Agricultural
    580       360             360        
Residential
    566       566       301       568       9  
Consumer
                             
Total
  $ 8,956     $ 6,501     $ 589     $ 6,674     $ 27  
 
 
17.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010.
 
   
Unpaid
               
Average
   
Interest
 
   
Principal
   
Recorded
   
Related
   
Recorded
   
Income
 
   
Balance
   
Investment
   
Allowance
   
Investment
   
Recognized
 
                               
With an allowance recorded:
                             
Commercial:
                             
Real estate
  $ 114     $ 114     $ 48     $ 53     $  
Non-real estate
    1,905       1,905       4       404       2  
Construction and land development
                377       379        
Agricultural
                             
Residential
    286       286       97       64       2  
Consumer
                             
Total
  $ 2,305     $ 2,305     $ 526     $ 900     $ 4  
                                         
With no related allowance:
                                       
Commercial:
                                       
Real estate
  $ 3,631     $ 2,033     $     $ 1,278     $ 6  
Non-real estate
    206       206             129        
Construction and land development
    6,032       4,003             3,321        
Agricultural
    579       359             72        
Residential
                      65        
Consumer
                             
Total
  $ 10,448     $ 6,601     $     $ 4,865     $ 6  
                                         
Total:
                                       
Commercial:
                                       
Real estate
  $ 3,745     $ 2,147     $ 48     $ 1,331     $ 6  
Non-real estate
    2,111       2,111       4       533       2  
Construction and land development
    6,032       4,003       377       3,700        
Agricultural
    579       359             72        
Residential
    286       286       97       129       2  
Consumer
                             
Total
  $ 12,753     $ 8,906     $ 526     $ 5,765     $ 10  
 
 
18.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the recorded investment in loans by class based on current payment and accrual status as of June 30, 2011 and December 31, 2010:
 
                                      Loans Past        
    30-59     60-89    
Greater
   
Total
             
Due Greater
       
   
Days
   
Days
   
than 90
   
Past
         
Total
 
than 90 Days,
 
Loans on
 
   
Past Due
   
Past Due
   
Days
   
Due
 
Current
   
Loans
 
Still Accruing
 
Nonaccrual
 
                                                     
  June 30, 2011  
                                                     
Commercial:
                                                   
Real estate
  $ 96     $ 1,456     $ 1,492     $ 3,044     $ 47,258     $ 50,303     $ 360     $ 1,132  
Non-real estate
    47             932       979       16,668       17,647             932  
Construction and land development
                3,216       3,216       5,414       8,630             3,216  
Agricultural
                838       838       28,270       29,107       478       360  
Residential
    868       53       734       1,655       34,052       35,707       191       543  
Consumer
    14             22       36       2,305       2,341       22        
                                                                 
Total
  $ 1,025     $ 1,509     $ 7,234     $ 10,406     $ 133,967     $ 143,735     $ 1,051     $ 6,183  
                                                                 
  December 31, 2010  
                                                                 
Commercial:
                                                               
Real estate
  $ 872     $     $ 1,717     $ 2,589     $ 39,381     $ 41,970     $ 143     $ 1,854  
Non-real estate
    248             2,058       2,306       26,030       28,336             2,107  
Construction and land development
                4,363       4,363       6,025       10,388             4,363  
Agricultural
                204       204       26,778       26,982       204        
Residential
    580       313       169       1,062       29,607       30,669       169        
Consumer
    5                   5       2,430       2,435              
                                                                 
Total
  $ 1,705     $ 313     $ 8,511     $ 10,529     $ 130,251     $ 140,780     $ 516     $ 8,324  
 
 
19.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)
 
The Company utilizes an internal asset classification system as a means of reporting loans based on credit quality as follows:
   
 
Excellent – Grade 1: Loans secured by liquid collateral or other cash equivalents or backed by the full faith and credit of the United States Government or an agency thereof.
   
 
Good – Grade 2: Loans to businesses with strong financial statements and at least three consecutive years of profits. Loans secured by publicly traded marketable securities where there is no impediment to liquidation.
   
 
Satisfactory – Grade 3: Loans supported by financial statements that indicate average risk. Loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of principal.
   
 
Satisfactory/Monitored – Grade 4: Considered to be of acceptable credit quality so long as the loan is given the proper level of management supervision.
   
 
Special Mention – Grade 5: Loans that possess some credit deficiency or potential weakness that deserve close attention.
   
 
Substandard – Grade 6: Loans that possess a defined credit weakness. The likelihood that the loan will be paid from the primary source of repayment is uncertain.
   
 
Doubtful – Grade 7: Credit weaknesses make full collection of principal highly improbable. Primary source of repayment is gone and there is considerable doubt as to the quality of the secondary source of repayment.
   
 
Loss – Grade 8: Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible.
 
The Company categorizes homogenous loans (residential and consumer) possessing similar risk and loss characteristics into performing or nonperforming categories based on relevant information about the ability of the borrowers to service their debt. Such ability is determined based on the borrower’s current payment status. Performing loans are less than 90 days past due on payments owed to the Company. Nonperforming loans are loans greater than or equal to 90 days past due and still accruing interest, loans on nonaccrual, and/or loans considered to be troubled debt restructurings that are not performing under the modified terms of the loan agreement. The following table presents total loans by class based on their assigned classifications determined by management as of June 30, 2011 and December 31, 2010.
 

 
20.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
         
Commercial
   
Construction
                         
   
Commercial
   
Non-Real
   
and Land
                         
   
Real Estate
   
Estate
   
Development
 
Agricultural
   
Residential
   
Consumer
   
Total
 
                                           
    June 30, 2011  
                                           
Satisfactory
  $ 5,654     $ 1,091     $ 273     $ 1,690     $     $     $ 8,708  
Satisfactory/Monitored
    40,942       13,048       2,108       24,568                   80,666  
Special Mention
    1,521       1,816       1,945       302                   5,584  
Substandard
    2,186       1,692       4,304       2,547                   10,729  
Performing
                            34,973       2,319       37,292  
Nonperforming
                            734       22       756  
                                                         
Total
  $ 50,303     $ 17,647     $ 8,630     $ 29,107     $ 35,707     $ 2,341     $ 143,735  
 
    December 31, 2010  
                                                         
Satisfactory
  $ 6,452     $ 1,263     $ 448     $ 1,233     $     $     $ 9,396  
Satisfactory/Monitored
    31,035       21,124       2,018       25,215                   79,392  
Special Mention
    1,575       2,201       1,772                         5,548  
Substandard
    2,908       3,371       6,150       534                   12,963  
Doubtful
          377                               377  
Performing
                            30,500       2,435       32,935  
Nonperforming
                            169             169  
                                                         
Total
  $ 41,970     $ 28,336     $ 10,388     $ 26,982     $ 30,669     $ 2,435     $ 140,780  
 
Troubled Debt Restructurings
 
As of June 30, 2011 and December 31, 2010, the Company had one loan (residential) considered to be a troubled debt restructuring. The recorded investment outstanding pre-modification was $258,000, and was the same amount as of June 30, 2011. This loan was not performing as of June 30, 2011, but was performing as of December 31, 2010. The Company has no troubled debt restructurings that subsequently defaulted.
 

 
21.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 7 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
 
FASB Accounting Standards Codification (ASC) Topic 820 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. Topic 820 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.
 
Securities Available for Sale
 
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include 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, and corporate obligations. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment 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 (such as the S&P 500 index) and, therefore, are classified within Level 2 of the valuation hierarchy.
 
Impaired Loans
 
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.
 

 
22.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 7 – 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 and non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at June 30, 2011:
 
         
Fair Value Measurements Using
 
         
Quoted Prices in
         
Significant
 
         
Active Markets for
   
Significant Other
   
Unobservable
 
         
Identical Assets
   
Observable Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Recurring basis:
                       
Assets:
                       
Available for sale securities:
                       
U.S. Treasuries
  $ 3,050     $     $ 3,050     $  
Federal agencies
    24,720             24,720        
State and municipals
    21,410             21,410        
Mortgage–backed securities and collateralized mortgage obligations
    1,417             1,417        
Corporate obligations
    1,816             1,816        
Equities
    14       14              
Interest rate swap agreements – customer CDs
    1,147             1,147        
Total assets
    53,574       14       53,560        
                                 
Liabilities:
                               
Written call options-customer CDs
    (1,147 )           (1,147 )      
                                 
Nonrecurring basis:
                               
Impaired loans
    4,201                   4,201  
 

 
23.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 7 – 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 and non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at December 31, 2010:
 
         
Fair Value Measurements Using
 
         
Quoted Prices in
         
Significant
 
         
Active Markets for
   
Significant Other
   
Unobservable
 
         
Identical Assets
   
Observable Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Recurring basis:
                       
Assets:
                       
Available for sale securities:
                       
U.S. Treasuries
  $ 3,578     $     $ 3,578     $  
Federal agencies
    25,545             25,545        
State and municipals
    17,968             17,968        
Mortgage–backed securities and collateralized mortgage obligations
    1,813             1,813        
Corporate obligations
    1,831             1,831        
Equities
    14       14              
Interest rate swap agreements – customer CDs
    1,093             1,093        
Total assets
    51,842       14       51,828        
                                 
Liabilities:
                               
Written call options – customer CDs
    (1,093 )           (1,093 )      
                                 
Nonrecurring basis:
                               
Impaired loans
    1,779                   1,779  
 
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities, excluding impaired loans, measured at fair value on a nonrecurring basis were not significant at June 30, 2011 and December 31, 2010.
 
Nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include other real estate owned (upon initial recognition or subsequent impairment) and reporting units measured at fair value in the first step of a goodwill impairment test. At June 30, 2011 and December 31, 2010, other real estate owned measured at fair value was $3.2 million and $3.0 million, respectively, using a combination of observable inputs, including recent appraisals and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all other real estate owned values have been classified as Level 3. Goodwill was evaluated for impairment at December 31, 2010. No impairment was identified.
 

 
24.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 7 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES (Continued)
 
The following methods and assumptions were used to estimate fair values for financial instruments carried on the balance sheet at other than fair value. The carrying amount is considered to estimate fair value for cash and cash equivalents, deposits with no stated maturity such as demand, NOW, money market and savings deposits, accrued interest receivable and payable, and variable rate loans or deposits. The fair value of loans held for sale are based on quoted market prices. For interest-bearing time deposits, fixed rate loans and deposits, or borrowings, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. The carrying amount of life insurance approximates fair value as it reflects the policies’ cash surrender values. The fair value of off–balance–sheet items is based on the fees or cost that would currently be charged to enter into or terminate such agreements and is not material.
 
The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2011 and December 31, 2010 were as follows:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
Assets
                       
Cash and due from banks
  $ 12,054     $ 12,054     $ 17,087     $ 17,087  
Interest-bearing time deposits in financial institutions
    47,587       48,451       54,837       55,805  
Securities available for sale
    52,427       52,427       50,749       50,749  
Loans held for sale
    696       696       895       895  
Loans, net
    140,301       140,720       137,417       136,121  
Cash surrender value of life insurance
    3,780       3,780       3,679       3,679  
Accrued interest receivable
    1,639       1,639       1,397       1,397  
                                 
Liabilities
                               
Deposits with no stated maturities
    179,619       179,619       183,802       183,802  
Time deposits
    72,470       73,544       74,793       76,499  
Borrowings
                2,000       2,005  
Accrued interest payable
    286       286       332       332  
 
NOTE 8 – RECLASSIFICATIONS
 
Certain reclassifications have been made to the December 31, 2010 and June 30, 2010 condensed consolidated financial statements in order to conform to the June 30, 2011 condensed consolidated financial statement presentation. These reclassifications had no effect on net income.
 
NOTE 9 – SUBSEQUENT EVENTS
 
Subsequent events have been evaluated through August 12, 2011, which is the date the financial statements were issued.
 

 
25.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
June 30, 2011 and 2010
 
 
NOTE 10 – NEW ACCOUNTING PRONOUNCEMENTS
 
ASC Topic 310 “Receivables.” New authoritative accounting guidance under ASC Topic 310, “Receivables,” amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the Allowance for Loan and Lease Losses (the “allowance”). The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The new authoritative guidance amends only the disclosure requirements for loans and leases and the allowance. The Company adopted the period end disclosure provisions of the new authoritative guidance under ASC Topic 310 in the reporting period ending December 31, 2010. Adoption of the new guidance did not have a material impact on the Company’s financial position or results of operations. The Company adopted the disclosure provisions of the new authoritative guidance about activity that occurs during a reporting period on January 1, 2011; the adoption did not have a material impact on the Company’s financial position or results of operations. The disclosures related to loans modified in a troubled debt restructuring are effective for the reporting periods beginning after June 15, 2011; the adoption is not expected to have a material impact on the Company’s financial position or results of operations.
 
ASC Topic 310 “Receivables,” Subtopic 310-40 “Troubled Debt Restructurings by Creditors.” New authoritative accounting guidance under Subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors” amended prior guidance to provide assistance in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring. The new authoritative guidance provides clarification for evaluating whether a concession has been granted and whether a debtor is experiencing financial difficulties. The new authoritative guidance is effective for the reporting periods beginning after June 15, 2011 and will be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Adoption of the new guidance is not expected to have a material impact on the Company’s financial position or results of operations.
 

 
26.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
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
 
The Company is the holding company for the Bank. 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’s principal business is conducted by the Bank which provides a full range of community-based financial services, including commercial and retail banking to its customers. The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, noninterest income, and noninterest 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. Noninterest income consists of service charges on deposit accounts, trust and farm management fee income, securities gains (losses), net mortgage servicing income, and other income. Noninterest expenses include salaries and employee benefits, as well as occupancy and equipment expenses and other 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 June 30, 2011, was $159,000, or $.25 per common share, compared to net income of $138,000, or $.21 per common share for the three months ended June 30, 2010. The increase in net income was due primarily to an increase in net interest income after the provision for loan losses which was partially offset by an increase in noninterest expense and a decrease in noninterest income.
 
The Company’s assets at June 30, 2011 were $277.8 million compared to $285.8 million at December 31, 2010, a decrease of $8.0 million, or 2.8%.
 
 
 
27.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
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, 2010. 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 Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
 
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest
 

 
28.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
owed. Impairment is measured on a loan by loan basis for commercial/agricultural and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Impairment of Long-Lived Assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less estimated costs to sell.
 
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
 
Mortgage Servicing Rights: Servicing rights are recognized as assets for the allocated value of servicing rights retained on loans sold and are classified with interest receivable and other assets in the consolidated balance sheets. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. Any impairment of a grouping is reported as a valuation allowance. There was no such valuation allowance recorded at June 30, 2011 or December 31, 2010.
 
Intangible Assets: Core deposit intangibles are being amortized on an accelerated basis over 11 years and are periodically evaluated as to the recoverability of their carrying value. The remaining core deposit intangible will be fully amortized in the year 2014.
 
Goodwill: Goodwill represents the excess of the original cost over fair value of assets acquired and liabilities assumed and related acquisition costs. Goodwill is reviewed for impairment annually with any loss recognized through the income statement.
 

 
29.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
Stock Options: The Company has a stock–based compensation plan. Grants under the Company’s stock incentive plan are accounted for by 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 relating to the stock options is measured and recorded based on the estimated value of the options. The value of options granted under this plan is charged to expense over the vesting period of the grants.
 
Earnings (Loss) Per Share: Basic earnings (loss) per share is calculated based on the weighted-average common shares outstanding during the year. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to net income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options.
 
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on– and off–balance–sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.
 
Derivatives: All derivative instruments are recorded at their fair values and the change in the fair value of a derivative is included in interest income. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur.
 

 
30.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
CONSOLIDATED FINANCIAL CONDITION
 
Total assets at June 30, 2011 were $277.8 million compared to $285.8 million at December 31, 2010, a decrease of $8.0 million, or 2.8%. This decrease in total assets was the result of a $5.0 million decrease in cash and due from bank accounts, a $7.3 million decrease in interest-bearing time deposits in financial institutions, and modest decreases of $199,000 in loans held for sale, and $185,000 in premises and equipment. These decreases were partially offset by a $2.9 million increase in loan balances outstanding, a $1.7 million increase in securities available for sale, a $228,000 increase in other real estate owned, and a nominal increase of $101,000 in cash surrender value of life insurance. The $8.0 million decrease in total assets corresponded to a decrease of $2.0 million in borrowings, as well as a $6.5 million decrease in deposits.
 
Total liabilities at June 30, 2011 were $254.3 million compared to $262.8 million at December 31, 2010, a decrease of $8.5 million, or 3.2%. This decrease in total liabilities was primarily the result of an $9.2 million decrease in interest-bearing demand accounts, a $2.3 million decrease in time deposit accounts, and a $2.0 million decrease in borrowings. These decreases were partially offset by increases in savings deposits of $4.3 million, money market accounts of $617,000, noninterest-bearing demand accounts of $140,000 and an increase in other liabilities of $24,000. Decreases in interest-bearing demand and time deposit accounts were attributable to local municipalities drawing down balances for operations and other seasonal payments. The decrease in borrowings was due to a Federal Home Loan Bank advance maturing without renewal.
 
Total shareholder’s equity was $23.5 million at June 30, 2011 and $ 23.0 million at December 31, 2010. This increase was the result of $290,000 of additional retained earnings from net income for the six months ended June 30, 2011 and an increase of $186,000, net of tax, in the valuation of the Company’s investment portfolio.
 
CONSOLIDATED RESULTS OF OPERATIONS
 
Net income for the second quarter of 2011 was $159,000, or $0.25 per share, a 15.2% increase compared to $138,000, or $0.21 per share, in the second quarter of 2010. The increase in net income for the quarter was primarily the result of a decrease in the provision for loan losses of $170,000, and an increase in net interest income of $78,000. Noninterest income decreased by $83,000, compared to the same period in 2010. This decrease was primarily due to a decrease in gains on security sales of $50,000 and a decrease in service charges on deposit accounts of $19,000. Noninterest expense also increased due to an increase in other real estate owned expenses of $250,000. The increase in income before taxes also resulted in an increase in the income tax provision of $43,000.
 
During the six months ended June 30, 2011, net income was $290,000, or $0.45 per share, compared to $446,000, or $0.69 per share, during the first six months of 2010. This 35.0% decrease in net income for the six-month period was due in part to a decrease in noninterest income of $180,000 or 15.0%, and an increase in noninterest expense of $231,000, or 5.0% compared to the six months ended June 30, 2010. Decreases in noninterest income and increased noninterest expenses were partially offset by an increase of $58,000, or 1.3% in net interest
 

 
31.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
income and a $140,000, or 25.9% decrease in the provision for loan losses compared to the first six months of 2010. The decrease in the Company’s pretax income also resulted in a decrease in the income tax provision of $57,000 for the first six months of 2011, compared to the same period in 2010.
 
The annualized return on average assets was 0.21% for the six months ended June 30, 2011, compared to 0.33% in 2010. The annualized return on average equity decreased to 2.5% for the six months ended June 30, 2011, from 3.4% in 2010.
 
NET INTEREST INCOME
 
Net interest income increased by 3.5% to $2.3 million for the three months ended June 30, 2011 as compared to the same period in 2010. Total interest and dividend income decreased to $2.7 million for the three months ended June 30, 2011, compared to $2.8 million for the three months ended June 30, 2010. This change was primarily the result of a decrease in interest income from loans to $2.1 million for the three months ended June 30, 2011 from $2.2 million for the same period a year earlier. This decrease was the result of a $4.4 million decrease in the year to date average principal balance of the loan portfolio compared to the prior year and loans repricing downward as mortgage interest rates remained historically low during 2010 and in the first half of 2011. In addition, a decrease of interest income from tax exempt securities of $74,000 for the second quarter of 2011 compared to the prior year resulted in a decrease in total interest and dividend income of $90,000 for the second quarter of 2011 compared to the prior year. Total interest expense decreased to $411,000 for the three months ended June 30, 2011 from $579,000 for the same period ended June 30, 2010, which represents a 29.0% decrease. Decreased interest expense was primarily the result of lower rates paid on deposits. The $168,000 decrease in total interest expense more than offset the decrease in total interest income for the quarter resulting in a $78,000 increase in net interest income for the second quarter in 2011 compared to the prior year.
 
Net interest income for both the six months ended June 30, 2011 and 2010 was $4.5 million. There was a nominal increase of $58,000 in 2011 which was the result of a $288,000 decrease in total interest and dividend income, that was offset by a $346,000 decrease in total interest expense compared to the prior year. The Company’s net interest margin was 3.68% for the six months ended June 30, 2011 and 3.88% a year earlier. Loan and securities income is reflected on a fully tax equivalent basis utilizing a 34% rate for municipal securities and tax exempt loans. Net interest income on a fully taxable equivalent basis was $4.5 million for the six months ending June 30, 2011 and 2010. The tax equivalent yield on average earning assets of $244.5 million in 2011 and $235.5 million for the same period in 2010, decreased to 4.38% for the six months ended June 30, 2011 from 4.90% for the same period ended June 30, 2010, a decrease of 52 basis points. This decrease was offset by a corresponding decrease in the cost of funds to 0.70% from 1.02% paid for the same period ended June 30, 2010, a 32 basis point decrease. These decreases resulted from ongoing repricing of assets and liabilities as they matured in the decreasing rate environment in late 2010 and during the first six months of 2011.
 

 
32.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
PROVISION FOR LOAN LOSSES
 
The provision for loan losses was $100,000 during the second quarter of 2011 compared to $270,000 during the second quarter of 2010. Year to date provision for loan loss was $400,000 in 2011 compared to $540,000 in 2010. These provision levels continue to be high compared to historical periods and reflect the ongoing national and local economic issues. As of June 30, 2011, the allowance for loan losses totaled $3.4 million, or 2.38% of total loans, which remained consistent with $3.4 million, or 2.39% of total loans, as of December 31, 2010. Nonaccrual loans decreased from $8.3 million at December 31, 2010 to $6.2 million at June 30, 2011. Nonperforming loans, including nonaccrual loans, decreased $1.6 million to $7.2 million over the same period. Management believes 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 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. While the general economy has shown signs of improvement, borrowers may continue to experience difficulties and the level of nonperforming loans, charge offs, and delinquencies could rise and require increases in the provision for loan losses. 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 concluded that the allowance for loan losses was adequate at June 30, 2011 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.
 
NONINTEREST INCOME
 
The Company’s noninterest income totaled $522,000 for the three months ended June 30, 2011 compared to $605,000 for the same period in 2010, a decrease of $83,000 or 13.7%. The decrease in noninterest income was primarily due to a $50,000 decrease in security gains resulting from a net gain of $2,000 on the sale of investment securities in the second quarter of 2011 compared to a $52,000 net gain in the second quarter of 2010. Also contributing to the decrease in noninterest income was a $19,000 decrease in service fees on deposit accounts and a $15,000 decrease in other income compared to the same period in the prior year. Mortgage servicing income remained steady for the three months ended June 30, 2011 and 2010.
 
For the six months ended June 30, 2011, total noninterest income decreased by 15.0% or $180,000 to $1.0 million. Securities gains decreased $86,000 to a loss of $8,000 compared to a gain of $78,000 in the prior year. Also, gains on loan sales to the secondary market decreased $10,000 to $117,000 compared to 2010, due to decreased origination and refinancing volume. Service
 

 
33.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
charges on deposit accounts decreased by $70,000, or 18.6%, due to lower overdraft volume. Other income decreased $14,000, or 4.0% compared to the same period in the prior year.
 
NONINTEREST EXPENSE
 
The Company’s noninterest expense was $2.5 million for the three months ended June 30, 2011 and $2.4 million for the same period in 2010. Salaries and employee benefits, the largest component of noninterest expense, increased $30,000, or 2.6%, to $1.2 million. Other real estate owned expenses increased $250,000 to $371,000 in the second quarter of 2011 compared to 2010 due to increased expenses related to properties held and valuation losses on other real estate in 2011. Modest increases in professional fees of $3,000, and data processing fees of $13,000, were offset by decreases in insurance expense of $38,000, and occupancy and equipment expenses of $4,000. Insurance expense decreased primarily due to expected decreases in FDIC insurance for the current year. Other expenses decreased by $153,000 in 2011 compared to the same period in 2010 due to an impairment charge of $129,000 taken in the prior year that elevated other expense in 2010. In addition, income tax expense increased $43,000 from a $43,000 benefit in 2010 compared to no expense or benefit for the second quarter in 2011.
 
For the six months ended June 30, 2011, total noninterest expense increased $231,000 to $4.9 million, or 5.0%, compared to the prior year period. Salaries and employee benefits increased $40,000, or 1.7%, to $2.4 million. Other real estate owned expenses increased $384,000 to $577,000 in the current year due to increased expenses related to properties held and valuation losses on other real estate in 2011. Increases in occupancy and equipment expenses of $1,000 and data processing expense of $20,000 were offset by decreases in professional fees expense of $10,000, other expenses of $133,000, and insurance expense of $71,000. Insurance expense decreased by $71,000 compared to the prior year due to an expected decrease in the FDIC insurance assessment rate for 2011. Other expenses decreased by $133,000 compared to the prior year due to an impairment charge of $129,000 that was taken during the second quarter of 2010. In addition, income tax expense decreased $57,000 due to a $47,000 benefit in 2011 compared to a $10,000 expense in 2010.
 
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 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
 

 
34.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
 
the Company’s operating, financing, lending, and investing activities during any given year. At June 30, 2011, cash and due from banks and certificates of deposit held at other financial institutions maturing in less than 1 year totaled $30.5 million. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available for sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago.
 
The following table discloses contractual obligations and commercial commitments of the Company as of June 30, 2011 (dollars in thousands):
 
         
Less Than
               
After
 
   
Total
   
1 Year
   
1 – 3 Years
   
4 – 5 Years
   
5 Years
 
                               
Lines of credit(1)
  $ 20,094     $ 11,439     $ 3,936     $ 1,627     $ 3,092  
Data processing contract payable
    519       223       296              
Standby letters of credit(1)
    294       272       22              
                                         
    $ 20,907     $ 11,934     $ 4,254     $ 1,627     $ 3,092  
 
(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.
 

 
35.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
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.
 

 
36.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
 

 
37.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
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 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 June 30, 2011 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. 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.
 
During the second quarter of 2011, 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.
 

 
38.

 
 
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.
[REMOVED AND RESERVED]
   
ITEM 5.
OTHER INFORMATION
   
 
None
   
ITEM 6.
EXHIBITS
 
 
Exhibits
 
     
 
 
 
 

 
39

 

ITEM 6.
EXHIBITS (Continued)
   
 
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010; (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and June 30, 2010; (iii) Condensed Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2011 and June 30, 2010; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010; and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
     
   
* As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.

 
40

 
 
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: August 12, 2011
Joachim J. Brown
 
President and Chief Executive Officer
 
(Principal Executive Officer)
   
 
/S/ Vincent G. Easi
 
Date: August 12, 2011
Vincent G. Easi
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
41.