UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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 000-30495

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 o  filer Accelerated  o filer 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 May 14, 2012, 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

 

 
3.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Cash and cash equivalents
  $ 11,419     $ 21,345  
Interest-bearing time deposits with financial institutions
    54,811       55,348  
Securities available for sale
    56,964       42,187  
Loans held for sale
    102       145  
Loans, net of allowance for loan losses of $2,852 and $2,781, respectively
    122,414       126,774  
Premises and equipment, net
    7,332       7,428  
Goodwill
    2,446       2,446  
Core deposit intangible, net
    178       215  
Other real estate owned
    4,726       4,878  
Cash surrender value of life insurance
    3,888       3,857  
Accrued interest receivable and other assets
    5,761       6,034  
                 
Total assets
  $ 270,041     $ 270,657  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest-bearing demand
  $ 38,766     $ 36,894  
Interest-bearing demand
    78,549       81,581  
Money market savings
    26,285       24,538  
Savings
    34,908       32,562  
Certificates and other time deposits of $100,000 or more
    26,451       28,037  
Other certificates and time deposits
    38,465       38,644  
Total deposits
    243,424       242,256  
                 
Borrowings
    -       1,800  
Other liabilities
    2,272       2,352  
Total liabilities
    245,696       246,408  
                 
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
    4,868       4,844  
Retained earnings
    25,111       25,003  
Treasury stock, at cost - 107,746 shares
    (6,299 )     (6,299 )
Accumulated other comprehensive loss
    (89 )     (53 )
Total shareholders’ equity
    24,345       24,249  
                 
Total liabilities and shareholders’ equity
  $ 270,041     $ 270,657  
 

 
See accompanying notes to condensed consolidated financial statements.
 
 
4.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months ended March 31, 2012 and 2011
(In thousands, except share and per share data)
(Unaudited)

 
   
2012
   
2011
 
Interest and Dividend Income
           
Loans, including fees
  $ 1,883     $ 2,064  
Securities available for sale
               
Taxable
    185       218  
Exempt from federal income tax
    88       113  
Interest-bearing deposits with financial institutions
    226       258  
Other
    4       9  
Total interest and dividend income
    2,386       2,662  
                 
Interest Expense
               
Interest-bearing demand deposits
    8       26  
Money market savings accounts
    3       6  
Savings deposits
    9       7  
Time deposits
    319       393  
Borrowings
    -       5  
Total interest expense
    339       437  
                 
NET INTEREST INCOME
    2,047       2,225  
Provision for loan losses
    90       300  
 
               
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    1,957       1,925  
                 
Noninterest Income
               
Service fees
    157       144  
Trust and farm management fees
    135       135  
Mortgage servicing income, net
    90       51  
Net realized losses on available for sale securities
    -       (10 )
Other
    146       182  
Total noninterest income
    528       502  
                 
Noninterest Expense
               
Salaries and employee benefits
    1,190       1,164  
Occupancy and equipment
    298       311  
Data processing fees
    127       132  
Insurance
    156       138  
Professional fees
    145       112  
Amortization of core deposit intangible
    37       37  
Other real estate owned, net
    225       206  
Other
    217       243  
Total noninterest expense
    2,395       2,343  
                 
INCOME BEFORE INCOME TAXES
    90       84  
                 
Income tax benefit
    (18 )     (47 )
                 
NET INCOME
  $ 108     $ 131  
                 
Earnings per share – basic
  $ 0.17     $ 0.20  
Earnings per share – diluted
  $ 0.17     $ 0.20  
                 
Average shares outstanding
    645,988       645,988  
 

 
See accompanying notes to condensed consolidated financial statements.
 
 
5.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months ended March 31, 2012 and 2011
(In thousands)
(Unaudited)

 
   
2012
   
2011
 
             
Net income
  $ 108     $ 131  
                 
Other comprehensive loss
               
Unrealized net loss on securities available for sale, net of reclassifications and tax effects
    (98 )     (131 )
Net gain relating to benefit liability
    62       -  
Other comprehensive loss
    (36 )     (131 )
                 
Comprehensive income
  $ 72     $ -  
 

 
See accompanying notes to condensed consolidated financial statements.
 
6.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Three Months ended March 31, 2012 and 2011
(In thousands)
(Unaudited)

 
                           
Accumulated
   
Total
 
         
Additional
               
Other
   
Share-
 
   
Common
   
Paid-In
   
Retained
   
Treasury
   
Comprehensive
   
holders’
 
   
Stock
   
Capital
   
Earnings
   
Stock
   
Income (Loss)
   
Equity
 
                                     
Balance at January 1, 2012
  $ 754     $ 4,844     $ 25,003     $ (6,299 )   $ (53 )   $ 24,249  
                                                 
Net income
    -       -       108       -       -       108  
                                                 
Other comprehensive loss
    -       -       -       -       (36 )     (36 )
                                                 
Comprehensive income
                                            72  
                                                 
Stock options vested
    -       24       -       -       -       24  
                                                 
Balance at March 31, 2012
  $ 754     $ 4,868     $ 25,111     $ (6,299 )   $ (89 )   $ 24,345  
                                                 
Balance at January 1, 2011
  $ 754     $ 4,736     $ 24,253     $ (6,299 )   $ (477 )   $ 22,967  
                                                 
Net income
    -       -       131       -       -       131  
                                                 
Other comprehensive loss
    -       -       -       -       (131 )     (131 )
                                                 
Comprehensive income
                                            -  
                                                 
Stock options vested
    -       28       -       -       -       28  
                                                 
Balance at March 31, 2011
  $ 754     $ 4,764     $ 24,384     $ (6,299 )   $ (608 )   $ 22,995  
 

 
See accompanying notes to condensed consolidated financial statements.

 
7.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended March 31, 2012 and 2011
(In thousands)
(Unaudited)


   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 108     $ 131  
Items not requiring (providing) cash
               
Provision for loan losses
    90       300  
Depreciation and amortization
    141       141  
Premium amortization on securities, net
    118       131  
Loans originated for sale
    (5,928 )     (2,751 )
Proceeds from the sale of loans
    6,061       3,389  
Gains on sales of loans held for sale
    (90 )     (63 )
Losses on sales of securities, net
    -       10  
Writedowns and loss on sales of other real estate owned
    152       146  
Stock options vested
    24       28  
Change in interest receivable and other assets
    355       (3 )
Change in interest payable and other liabilities
    (80 )     143  
Net cash provided by operating activities
    951       1,602  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sales of securities available for sale
    -       422  
Proceeds from maturities, calls, and paydowns of securities available for sale
    2,079       1,527  
Purchases of securities available for sale
    (17,123 )     (5,300 )
Proceeds from maturities of interest-bearing time deposits
    3,579       5,169  
Purchases of interest-bearing time deposits
    (3,042 )     -  
Net change in loans
    4,270       985  
Proceeds from sales of other real estate owned
    -       458  
Net purchases of premises and equipment
    (8 )     (14 )
Net cash provided by (used in) investing activities
    (10,245 )     3,247  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net change in deposits
    1,168       (9,650 )
Repayment of borrowings
    (1,800 )     (2,000 )
Dividends paid
    -       (168 )
Net cash used in financing activities
    (632 )     (11,818 )
                 
Net change in cash and cash equivalents
    (9,926 )     (6,969 )
                 
Cash and cash equivalents at beginning of period
    21,345       17,087  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 11,419     $ 10,118  
 

 
See accompanying notes to condensed consolidated financial statements.

 
8.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands)
March 31, 2012 and 2011

 
NOTE 1 – BASIS OF PRESENTATION

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent with those used in the preparation of annual consolidated financial statements. The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim periods presented. Results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

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 2011 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2011 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
 
   
March 31,
 
   
2012
   
2011
 
             
Net income (in thousands)
  $ 108     $ 131  
Weighted average shares outstanding
    645,988       645,988  
Effect of dilutive securities:
               
Stock options
    -       -  
Shares used to compute diluted earnings per share
    645,988       645,988  
                 
Earnings per share (not stated in thousands):
               
                 
Basic
  $ 0.17     $ 0.20  
Diluted
    0.17       0.20  

A total of 71,990 and 74,440 stock options for the three month periods ended March 31, 2012 and 2011, respectively, are not included in the above calculations as they are non-dilutive.
 

 
 
9.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Table
dollars in thousands) March 31, 2012 and 2011

 
NOTE 3 – CAPITAL RATIOS

At the dates indicated, the capital ratios for the Company and the Bank were:

                           
To Be Well
 
                           
Capitalized
 
               
Minimum
   
Under Prompt
 
               
Capital
   
Corrective
 
   
Actual
   
Requirement
   
Action Provisions
 
As of March 31, 2012
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
             
(Amounts in Thousands)
             
Total capital to risk weighted assets:
                                   
Consolidated
  $ 23,531       14.0 %   $ 13,477       8.0 %     N/A       N/A  
First National Bank of Ottawa
    23,415       13.9       13,466       8.0     $ 16,833       10.0 %
                                                 
Tier I capital to risk weighted assets:
                                               
Consolidated
  $ 21,418       12.7 %   $ 6,738       4.0 %     N/A       N/A  
First National Bank of Ottawa
    21,302       12.7       6,733       4.0     $ 10,100       6.0 %
                                                 
Tier I capital to average assets:
                                               
Consolidated
  $ 21,418       7.9 %   $ 10,800       4.0 %     N/A       N/A  
First National Bank of Ottawa
    21,302       7.9       10,795       4.0     $ 13,493       5.0 %

                                     
                           
To Be Well
 
                           
Capitalized
 
               
Minimum
   
Under Prompt
 
               
Capital
   
Corrective
 
   
Actual
   
Requirement
    Action Provisions  
As of December 31, 2011
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
             
(Amounts in Thousands)
             
Total capital to risk weighted assets:
                                   
Consolidated
  $ 22,726       15.6 %   $ 11,652       8.0 %     N/A       N/A  
First National Bank of Ottawa
    22,605       15.5       11,643       8.0     $ 14,554       10.0 %
                                                 
Tier I capital to risk weighted assets:
                                               
Consolidated
  $ 20,894       14.4 %   $ 5,826       4.0 %     N/A       N/A  
First National Bank of Ottawa
    20,773       14.3       5,822       4.0     $ 8,732       6.0 %
                                                 
Tier I capital to average assets:
                                               
Consolidated
  $ 20,894       7.5 %   $ 11,155       4.0 %     N/A       N/A  
First National Bank of Ottawa
    20,773       7.5       11,133       4.0     $ 13,916       5.0 %
 

 
 
10.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 3 – CAPITAL RATIOS (Continued)

As of March 31, 2012, the Bank met the requirements to be categorized as “well capitalized” under the regulatory framework for prompt correction action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios (as defined by applicable regulators) as set forth in the above table. Management is not aware of any conditions or events since March 31, 2012 that would change the Bank’s category. On September 30, 2011, the Bank agreed with the Office of the Comptroller of the Currency to maintain a minimum Tier I leverage ratio of 7.25%, which is in excess of the minimum requirement of 5.00% to be well capitalized under prompt corrective action provisions. The Bank was in compliance with this heightened capital requirement at March 31, 2012.

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 March 31, 2012, the Company had $3.9 million of certificates of deposit, which mature in 2012 through 2017, 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
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
March 31, 2012
                       
U. S. Treasury
  $ 2,005     $ 3     $ -     $ 2,008  
Federal agencies
    23,938       74       (87 )     23,925  
State and municipal
    15,669       490       (93 )     16,066  
Corporate obligations
    1,732       17       (1 )     1,748  
Asset backed securities
    12,994       16       (13 )     12,997  
Mortgage–backed securities and collateralized mortgage obligations
    210       8       -       218  
Marketable equity securities
    5       -       (3 )     2  
Total investment securities
  $ 56,553     $ 608     $ (197 )   $ 56,964  
 

 
 
11.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 5 – SECURITIES AVAILABLE FOR SALE (Continued)
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
December 31, 2011
                       
U. S. Treasury
  $ 2,010     $ 7     $ -     $ 2,017  
Federal agencies
    21,925       55       (73 )     21,907  
State and municipal
    15,681       574       (20 )     16,235  
Corporate obligations
    1,747       13       (2 )     1,758  
Mortgage–backed securities and collateralized mortgage obligations
    259       10       -       269  
Marketable equity securities
    5       -       (4 )     1  
Total investment securities
  $ 41,627     $ 659     $ (99 )   $ 42,187  
 
As of March 31, 2012 and December 31, 2011, the Company had approximately $11.6 million and $12.2 million, respectively, invested in bonds issued by municipalities located within LaSalle County, Illinois.

Securities with an approximate carrying value of $22.6 million and $21.2 million, were pledged at March 31, 2012 and December 31, 2011, 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 March 31, 2012 were as follows. Securities not due at a single maturity date, primarily mortgage–backed and equity securities, are shown separately.
 
   
Amortized
Cost
   
Fair
Value
 
Within one year
  $ 9,334     $ 9,373  
One to five years
    32,530       32,679  
Five to ten years
    11,892       12,155  
After ten years
    2,582       2,537  
      56,338       56,744  
Mortgage–backed securities and collateralized mortgage obligations
    210       218  
Marketable equity securities
    5       2  
Totals
  $ 56,553     $ 56,964  
 
Information regarding realized gains and losses on sales of securities available for sale as of March 31, 2012 and 2011 follows:
 
   
2012
   
2011
 
Gross gains
  $ -     $ -  
Gross losses
    -       (10 )
Tax expense
    -       (3 )
 

 
 
12.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 March 31, 2012 and December 31, 2011 was $26.3 million and $21.9 million, respectively, which was approximately 46.1% and 51.9% 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
Securities
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2012
                                   
Federal agencies
  $ 10,657     $ (87 )   $ -     $ -     $ 10,657     $ (87 )
State and municipal
    1,653       (67 )     4,253       (26 )     5,906       (93 )
Corporate obligations
    314       (1 )     -       -       314       (1 )
Asset backed securities
    9,376       (13 )     -       -       9,376       (13 )
Marketable equity securities
    -       -       2       (3 )     2       (3 )
                                                 
Total temporarily impaired securities
  $ 22,000     $ (168 )   $ 4,255     $ (29 )   $ 26,255     $ (197 )
                                                 
December 31, 2011
                                               
Federal agencies
  $ 15,853     $ (73 )   $ -     $ -     $ 15,853     $ (73 )
State and municipal
    5,182     $ (18 )     202       (2 )     5,384     $ (20 )
Corporate obligations
    644     $ (2 )     -       -       644     $ (2 )
Marketable equity securities
    -       -       1       (4 )     1       (4 )
Total temporarily impaired securities
  $ 21,679     $ (93 )   $ 203     $ (6 )   $ 21,882     $ (99 )
 

 
 
13.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Major classifications of loans as of March 31, 2012 and December 31, 2011 are summarized as follows:

   
2012
   
2011
 
Commercial:
           
Real estate
  $ 40,183     $ 41,902  
Non-real estate
    20,719       18,113  
Construction and land development
    5,303       5,504  
Agricultural
    21,909       26,998  
Residential
    35,397       35,542  
Consumer
    1,755       1,496  
Total loans
    125,266       129,555  
Allowance for loan losses
    (2,852 )     (2,781 )
Loans, net
  $ 122,414     $ 126,774  
 
At March 31, 2012 and December 31, 2011, respectively, the Company held $40.2 million and $42.0 million in commercial real estate and $5.3 million and $5.5 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.
 

 
 
14.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the allowance for loan losses by portfolio segment as of March 31, 2012 and 2011.

   
Commercial Real Estate
   
Commercial Non-Real Estate
   
Construction and Land Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
Allowance for loan losses:
 
2012
 
Balances, January 1
  $ 952     $ 458     $ 380     $ 109     $ 701     $ 27     $ 154     $ 2,781  
Provision for losses
    (62 )     96       (100 )     (20 )     (14 )     36       154       90  
Recoveries on loans
    -       1       1       2       -       2       -       6  
Loans charged off
    -       (16 )     -       -       -       (9 )     -       (25 )
Balances, March 31
  $ 890     $ 539     $ 281     $ 91     $ 687     $ 56     $ 308     $ 2,852  
                                                                 
Allowance for loan losses:
    2011  
Balances, January 1
  $ 1,515     $ 577     $ 633     $ 79     $ 497     $ 31     $ 31     $ 3,363  
Provision for losses
    113       404       (352 )     (1 )     11       (3 )     128       300  
Recoveries on loans
    -       -       -       -       22       2       -       24  
Loans charged off
    (76 )     (35 )     (8 )     -       (16 )     (1 )     -       (136 )
Balances, March 31
  $ 1,552     $ 946     $ 273     $ 78     $ 514     $ 29     $ 159     $ 3,551  
 

 
 
15.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 March 31, 2012.

         
Commercial
   
Construction
                               
   
Commercial
   
Non-Real
   
and Land
                               
   
Real Estate
   
Estate
   
Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
Total loans:
                                               
Individually evaluated for impairment
  $ 1,036     $ 1,090     $ 2,982     $ 800     $ 966     $ 28           $ 6,902  
Collectively evaluated for impairment
    39,147       19,629       2,321       21,109       34,431       1,727             118,364  
                                                               
Balances, March 31
  $ 40,183     $ 20,719     $ 5,303     $ 21,909     $ 35,397     $ 1,755           $ 125,266  
                                                               
Allowance for loan losses:
                                                             
Individually evaluated for impairment
  $ -     $ 191     $ 20     $ -     $ 326     $ 28     $ -     $ 565  
Collectively evaluated for impairment
    890       348       261       91       361       28       308       2,287  
                                                                 
Balances, March 31
  $ 890     $ 539     $ 281     $ 91     $ 687     $ 56     $ 308     $ 2,852  
 

 
 
16.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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, 2011.

         
Commercial
   
Construction
                               
   
Commercial
   
Non-Real
   
and Land
                               
   
Real Estate
   
Estate
   
Development
   
Agricultural
   
Residential
   
Consumer
   
Unallocated
   
Total
 
                                                 
Total loans:
                                               
Individually evaluated for impairment
  $ 1,020     $ 1,060     $ 2,995     $ 800     $ 1,051     $ 9           $ 6,935  
Collectively evaluated for impairment
    40,882       17,053       2,509       26,198       34,491       1,487             122,620  
                                                               
Balances, December 31
  $ 41,902     $ 18,113     $ 5,504     $ 26,998     $ 35,542     $ 1,496           $ 129,555  
                                                               
Allowance for loan losses:
                                                             
Individually evaluated for impairment
  $ -     $ 160     $ 21     $ -     $ 326     $ 8     $ -     $ 515  
Collectively evaluated for impairment
    952       298       359       109       375       19       154       2,266  
                                                                 
Balances, December 31
  $ 952     $ 458     $ 380     $ 109     $ 701     $ 27     $ 154     $ 2,781  
 

 
 
17.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 March 31, 2012.
 
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                               
With an allowance recorded:
                             
Commercial:
                             
Real estate
  $ -     $ -     $ -     $ -     $ -  
Non-real estate
    252       240       191       241       2  
Construction and land development
    2,426       2,398       20       2,413       12  
Agricultural
    -       -       -       -       -  
Residential
    686       685       326       686       1  
Consumer
    28       28       28       28       -  
Total
  $ 3,392     $ 3,351     $ 565     $ 3,367     $ 15  
                                         
With no related allowance:
                                       
Commercial:
                                       
Real estate
  $ 1,318     $ 1,036     $ -     $ 1,037     $ -  
Non-real estate
    850       850       -       850       2  
Construction and land development
    2,764       584       -       585       -  
Agricultural
    800       800       -       800       14  
Residential
    379       281       -       281       -  
Consumer
    -       -       -       -       -  
Total
  $ 6,111     $ 3,551     $ -     $ 3,553     $ 16  
                                         
Total:
                                       
Commercial:
                                       
Real estate
  $ 1,318     $ 1,036     $ -     $ 1,037     $ -  
Non-real estate
    1,102       1,090       191       1,091       4  
Construction and land development
    5,190       2,982       20       2,998       12  
Agricultural
    800       800       -       800       14  
Residential
    1,065       966       326       966       1  
Consumer
    28       28       28       28       -  
Total
  $ 9,503     $ 6,902     $ 565     $ 6,920     $ 31  
 

 
 
18.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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, 2011.

   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                               
With an allowance recorded:
                             
Commercial:
                             
Real estate
  $ -     $ -     $ -     $ -     $ -  
Non-real estate
    215       163       160       189       1  
Construction and land development
    2,427       2,410       21       2,415       126  
Agricultural
    -       -       -       -       -  
Residential
    686       686       326       665       30  
Consumer
    9       9       8       9       -  
Total
  $ 3,337     $ 3,268     $ 515     $ 3,278     $ 157  
                                         
With no related allowance:
                                       
Commercial:
                                       
Real estate
  $ 1,301     $ 1,020     $ -     $ 1,298     $ -  
Non-real estate
    949       897       -       923       5  
Construction and land development
    2,764       585       -       813       -  
Agricultural
    800       800       -       899       49  
Residential
    461       365       -       413       13  
Consumer
    -       -       -       -       -  
Total
  $ 6,275     $ 3,667     $ -     $ 4,346     $ 67  
                                         
Total:
                                       
Commercial:
                                       
Real estate
  $ 1,301     $ 1,020     $ -     $ 1,298     $ -  
Non-real estate
    1,164       1,060       160       1,112       6  
Construction and land development
    5,191       2995       21       3,228       126  
Agricultural
    800       800       -       899       49  
Residential
    1,147       1,051       326       1,078       43  
Consumer
    9       9       8       9       -  
Total
  $ 9,612     $ 6,935     $ 515     $ 7,624     $ 224  
 

 
 
19.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 March 31, 2012 and December 31, 2011:

   
30-59
Days
Past Due
   
60-89
Days
Past Due
   
Greater
than 90
Days
   
Total
Past
Due
   
Current
   
Total
Loans
   
Loans Past Due Greater than 90 Days, Still Accruing
   
Loans on Nonaccrual
 
                                                 
   
March 31, 2012
 
                                                 
Commercial:
                                               
Real estate
  $ 288     $ 772     $ 1,217     $ 2,277     $ 37,906     $ 40,183     $ 200     $ 1,017  
Non-real estate
    490       26       2,160       2,676       18,043       20,719       1,276       884  
Construction and land development
    157       -       2,982       3,139       2,164       5,303       -       2,982  
Agricultural
    -       -       -       -       21,909       21,909       -       -  
Residential
    426       444       1,022       1,892       33,505       35,397       56       966  
Consumer
    23       -       28       51       1,704       1,755       28       -  
                                                                 
Total
  $ 1,384     $ 1,242     $ 7,409     $ 10,035     $ 115,231     $ 125,266     $ 1,560     $ 5,849  
                                                                 
   
December 31, 2011
 
                                                                 
Commercial:
                                                               
Real estate
  $ 222     $ -     $ 1,928     $ 2,150     $ 39,752     $ 41,902     $ 908     $ 1,020  
Non-real estate
    244       1,141       1,002       2,387       15,726       18,113       -       1,002  
Construction and land development
    -       -       2,995       2,995       2,509       5,504       -       2,995  
Agricultural
    -       -       -       -       26,998       26,998       -       -  
Residential
    369       73       1,161       1,603       33,939       35,542       110       1,051  
Consumer
    5       -       9       14       1,482       1,496       -       9  
                                                                 
Total
  $ 840     $ 1,214     $ 7,095     $ 9,149     $ 120,406     $ 129,555     $ 1,018     $ 6,077  
 

 
 
20.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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:

Satisfactory:   Loans classified as Satisfactory are supported by financial statements that indicate average risk. The loans have exhibited two or more years of satisfactory repayment with a reasonable reduction of principal.

Satisfactory/Monitored:   Loans classified as Satisfactory/Monitored are considered to be of acceptable credit quality so long as they are given the proper level of management supervision.

Special Mention:   Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard:   Loans classified as Substandard are not adequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans classified as Substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Well defined weaknesses include a borrower’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, or the failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies arc not corrected.

Doubtful:   Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss:   Loans classified as Loss are considered uncollectible and charged off immediately.

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.
 

 
 
21.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present loans by class based on their assigned classifications determined by management as of March 31, 2012 and December 31, 2011:

   
Commercial
Real Estate
   
Commercial
Non-Real Estate
   
Construction
and Land
Development
   
Agricultural
   
Residential
   
Consumer
   
Total
 
                                           
   
March 31, 2012
 
Satisfactory
  $ 5,410     $ 1,773     $ 58     $ 985     $ -     $ -     $ 8,226  
Satisfactory/Monitored
    30,862       15,725       1,840       16,646       -       -       65,073  
Special Mention
    1,342       638       1,144       1,080       -       -       4,204  
Substandard
    2,569       2,437       2,261       3,198       -       -       10,465  
Doubtful
    -       146       -       -       -       -       146  
Performing
    -       -       -       -       34,375       1,727       36,102  
Nonperforming
    -       -       -       -       1,022       28       1,050  
                                                         
Total
  $ 40,183     $ 20,719     $ 5,303     $ 21,909     $ 35,397     $ 1,755     $ 125,266  
       
   
December 31, 2011
 
Satisfactory
  $ 5,535     $ 913     $ 60     $ 1,703     $ -     $ -     $ 8,211  
Satisfactory/Monitored
    32,268       14,279       1,976       20,419       -       -       68,942  
Special Mention
    1,398       219       1,205       1,536       -       -       4,358  
Substandard
    2,701       2,549       2,263       3,340       -       -       10,853  
Doubtful
    -       153       -       -       -       -       153  
Performing
    -       -       -       -       34,381       1,487       35,868  
Nonperforming
    -       -       -       -       1,161       9       1,170  
                                                         
Total
  $ 41,902     $ 18,113     $ 5,504     $ 26,998     $ 35,542     $ 1,496     $ 129,555  
 

 
 
22.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 6 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present information related to troubled debt restructurings as of March 31, 2012 and December 31, 2011:
 

   
March 31, 2012
   
December 31, 2011
 
   
Number of Loans
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
   
Number of Loans
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
 
                                     
Commercial:
                                   
Real estate
    1     $ 1,030     $ 766       1     $ 1,030     $ 766  
Non-real estate
    3       179       179       1       57       57  
Construction and land development
    -       -       -       -       -       -  
Agricultural
    1       800       800       1       800       800  
Residential
    1       258       160       1       258       160  
Consumer
    -       -       -       -       -       -  
                                                 
Total troubled debt restructurings
    6     $ 2,267     $ 1,905       4     $ 2,145     $ 1,783  

   
March 31, 2012
   
December 31, 2011
 
   
Number of Loans
   
Recorded Investment
   
Number of Loans
   
Recorded Investment
 
                         
Commercial:
                       
Real estate
    1     $ 766       1     $ 766  
Non-real estate
    -       -       -       -  
Construction and land development
    -       -       -       -  
Agricultural
    -       -       -       -  
Residential
    1       160       1       160  
Consumer
    -       -       -       -  
                                 
Total troubled debt restructurings that subsequently defaulted
    2     $ 926       2     $ 926  
 

 
 
23.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 generally accepted accounting principles (“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.
 

 
 
24.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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 March 31, 2012:

         
Fair Value Measurements Using
 
   
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Recurring basis:
                       
Assets:
                       
Available for sale securities:
                       
U.S. Treasuries
  $ 2,008     $ -     $ 2,008     $ -  
Federal agencies
    23,925       -       23,925       -  
State and municipals
    16,066       -       16,066       -  
Asset backed securities
    12,997       -       12,997       -  
Mortgage–backed   securities and collateralized mortgage obligations
    218       -       218       -  
Corporate obligations
    1,748       -       1,748       -  
Equities
    2       2       -       -  
Interest rate swap agreements – customer CDs
    1,364       -       1,364       -  
Total assets
  $ 58,328     $ 2     $ 58,326     $ -  
Liabilities:
                               
Written call options- customer CDs
  $ (1,364 )   $ -     $ (1,364 )   $ -  
                                 
Nonrecurring basis:
                               
Impaired loans
  $ 2,786     $ -     $ -     $ 2,786  
 

 
 
25.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
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, 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
  $ 2,017     $ -     $ 2,017     $ -  
Federal agencies
    21,907       -       21,907       -  
State and municipals
    16,235       -       16,235       -  
Mortgage–backed securities and collateralized mortgage obligations
    269       -       269       -  
Corporate obligations
    1,758       -       1,758       -  
Equities
    1       1       -       -  
Interest rate swap agreements –customer CDs
    1,079       -       1,079       -  
Total assets
  $ 43,266     $ 1     $ 43,265     $ -  
                                 
Liabilities:
                               
Written call options –customer CDs
  $ (1,079 )   $ -     $ (1,079 )   $ -  
                                 
Nonrecurring basis:
                               
Impaired loans
  $ 2,753     $ -     $ -     $ 2,753  

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 March 31, 2012 and December 31, 2011.

Nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring 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 March 31, 2012 and December 31, 2011, other real estate owned measured at fair value was $4.7 and $4.9 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
 

 
 
26.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 7 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

(Continued)

unobservable inputs, all other real estate owned values have been classified as Level 3. Goodwill was evaluated for impairment at December 31, 2011. No impairment was identified.

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 March 31, 2012 and December 31, 2011 were as follows:


   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Assets
                       
Cash and due from banks
  $ 11,419     $ 11,419     $ 21,345     $ 21,345  
Interest-bearing time deposits in financial institutions
    54,811       55,682       55,348       56,254  
Securities available for sale
    56,964       56,964       42,187       42,187  
Loans held for sale
    102       102       145       145  
Loans, net
    122,414       124,456       126,774       131,558  
Cash surrender value of life insurance
    3,888       3,888       3,857       3,857  
Accrued interest receivable
    1,171       1,171       1,174       1,174  
                                 
Liabilities
                               
Deposits with no stated maturities
    178,508       178,508       175,575       175,575  
Time deposits
    64,916       66,042       66,681       67,655  
Borrowings
    -       -       1,800       1,800  
Accrued interest payable
    205       205       245       245  
 
NOTE 8 – RECLASSIFICATIONS

Certain reclassifications have been made to the December 31, 2011 and March 31, 2011 condensed consolidated financial statements in order to conform to the March 31, 2012 condensed consolidated financial statement presentation. These reclassifications had no effect on net income.

NOTE 9 – SUBSEQUENT EVENTS

Subsequent events have been evaluated through May 14, 2012, which is the date the financial statements were issued.
 

 
 
27.

 

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table
dollars in thousands)
March 31, 2012 and 2011

 
NOTE 10 – NEW ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-03, Transfers and Servicing (Topic 860); Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The new authoritative guidance was effective for reporting periods beginning on or after December 15, 2011. The adoption of this pronouncement did not have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220); Presentation of Comprehensive Income . ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The new authoritative guidance was effective for reporting periods beginning after December 15, 2011, and did not have a material impact on the Company’s financial position or results of operations. Additionally, the guidance required entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. However, this requirement has been deferred under ASU 2011-12 as issued in December 2011.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350); Testing Goodwill for Impairment. ASU 2011-08 permits an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The new authoritative guidance is effective for fiscal years beginning after December 15, 2011, and is not expected to have a material impact on the Company’s financial position or results of operations. Early adoption is permitted.
 

 
 
28.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


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 March 31, 2012, was $108,000, or $.17 per common share, compared to net income of $131,000, or $.20 per common share, for the three months ended March 31, 2011. The decrease in net income was due primarily to an increase in noninterest expense and a decrease in income tax benefit compared to the same period in 2011.

The Company’s assets at March 31, 2012 were $270.0 million compared to $270.7 million at December 31, 2011, a decrease of $616,000, or (0.2%).
 

 
 
29.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
RECENT DEVELOPMENTS
 
On April 5, 2012, the U.S. President signed into law the Jumpstart Our Business Startups Act (the JOBS Act ), which is generally intended to stimulate economic growth by helping smaller and emerging growth companies access the U.S. capital markets. The JOBS Act amends various provisions of, and adds new sections to, the Securities Act of 1933 and the Securities Exchange Act of 1934 (as amended by the JOBS Act, the Exchange Act ), as well as provisions of the Sarbanes-Oxley Act of 2002. The JOBS Act directs the Securities and Exchange Commission to issue rules implementing certain of the JOBS Act amendments. Except as noted below, the Company is currently evaluating the effects that the provisions of the JOBS Act and the Securities and Exchange Commission rules adopted pursuant to the JOBS Act will have on the Company.
 
The JOBS Act increases the statutory threshold for deregistration under the Securities Exchange Act of 1934 for bank holding companies from 300 to 1,200 stockholders of record. On May 11, 2012, the Company filed a Form 15 with the Securities and Exchange Commission to deregister the Company s common stock under Section 12(g)(4) of the Exchange Act. The Section 12(g) deregistration will become in 90 days, or such shorter period as determined by the Securities and Exchange Commission. Based on the filing date of the Form 15, the Company does not expect to have any further reporting obligations under the Exchange Act after August 9, 2012. Until the Section 12(g) deregistration is effective, the Company is required to file all reports as required by the Exchange Act Sections 13(a), 14, and 16. The Company expects the deregistration to provide substantial cost savings in the form of reduced audit, legal and filing expenses and other costs related to complying with the Exchange Act.
 
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, 2011. 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.
 

 
 
30.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
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 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 are included in net expenses from other real estate owned.
 

 
 
31.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
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 March 31, 2012 or December 31, 2011.

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.

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 Per Share : Basic earnings 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.
 

 
 
32.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
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.

CONSOLIDATED FINANCIAL CONDITION

Total assets at March 31, 2012 were $270.0 million compared to $270.7 million at December 31, 2011, a decrease of $616,000, or (0.2%). This decrease in total assets was the result of a $9.9 million decrease in cash and due from banks, a $4.4 million decrease in net loans due to current economic trends and a decline in demand, a $537,000 decrease in interest-bearing time deposits in financial institutions, a $152,000 decrease in other real estate owned, and a modest decrease in premises and equipment of $96,000. These decreases were partially offset by a $14.8 million increase in securities available for sale and a nominal increase of $31,000 in cash surrender value of life insurance. The $616,000 decrease in total assets corresponded to a decrease of $1.8 million in borrowings as well as a $1.2 million increase in deposits.

Total liabilities at March 31, 2012 were $245.7 million compared to $246.4 million at December 31, 2011, a decrease of $712,000, or (0.3%). This decrease in total liabilities was primarily the result of a $1.8 million decrease in borrowings. This decrease in borrowings was partially offset by an increase in total deposits of $1.2 million. The increase in deposits was a result of increases in noninterest-bearing demand, money market savings and savings accounts while interest-bearing demand and time deposits decreased. The decrease in borrowings was due to a reduction in federal funds purchased.

Total shareholders’ equity was $24.3 million at March 31, 2012 and $24.2 million at December 31, 2011. Total shareholders’ equity increased as a result of $108,000 of additional retained earnings from net income for the quarter ended March 31, 2012, partially offset by a decrease of $36,000, net of tax, in the valuation of the Company’s investment portfolio.

CONSOLIDATED RESULTS OF OPERATIONS

Net income for the first quarter of 2012 was $108,000, or $0.17 per share, a 17.6% decrease compared to $131,000, or $0.20 per share, in the first quarter of 2011. The decrease in net income for the quarter was primarily the result of a $52,000 increase in noninterest expenses and a $29,000 decrease in the tax benefit compared to the same period in 2011. Current year net interest income after the provision increased by $32,000, and noninterest income increased by $26,000 compared to March 31, 2011. The provision for loan losses of $90,000 decreased $210,000 compared to the same period in 2011. Increases in net interest income and noninterest income were offset by increases in noninterest expense and decreased income tax benefit. The provision for income taxes increased by $29,000, from a $47,000 tax benefit in 2011, to a $18,000 tax benefit in the first quarter of 2012.
 

 
 
33.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


The annualized return on average assets was 0.16% in the first quarter of 2012 compared to 0.19% in the first quarter of 2011. The annualized return on average equity decreased to 1.77% in the first quarter of 2012 from 2.23% in the first quarter of 2011.
 
NET INTEREST INCOME

Net interest income before the provision for loan losses was $2.0 million for the three month period in 2012 compared to $2.2 million for the three months ended March 31, 2011. Total interest and dividend income decreased $276,000 to $2.4 million for the three months ended March 31, 2012, compared to the same period in 2011. The decrease in total interest and dividend income for the three months ended March 31, 2012 reflected a decrease in interest income and fees from loans of $181,000 to $1.9 million, a decrease in tax exempt investment income of $25,000 to $88,000, a decrease in taxable security income of $33,000, to $185,000, and a decrease in income on interest-bearing deposits with financial institutions of $32,000 to $226,000, compared to the same period in 2011. Decreased interest income was a result of decreases in interest rates on investments, volume of tax exempt investments and average loans outstanding during the first quarter of 2012.

The Company’s net interest margin was 3.43% for the three months ended March 31, 2012 compared to 3.64% for the same period in 2011. The yield on average earning assets decreased to 4.01% for the three months ended March 31, 2012 from 4.37% for the same period in 2011, a 36 basis point decrease. This decrease was offset by a similar decrease in the cost of funds from .73% to .58% paid for the same period ended March 31, 2012, a 15 basis point decrease. The decrease in interest expense was significantly affected by a $74,000 decrease in interest paid on time deposit accounts. This reduction was due primarily to rate factors.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $90,000 in the first quarter of 2012, and $300,000 in the first quarter of 2011. This decreased provision level reflects a reduction in the portfolio volume and an increase in the allowance for loan losses as a percentage of total loans compared to December 31, 2011. As of March 31, 2012, the allowance for loan losses totaled $2.9 million, or 2.28% of total loans, which has increased from 2.15% as of December 31, 2011. Nonaccrual loans decreased from $6.1 million at December 31, 2011 to $5.8 million at March 31, 2012. Nonperforming loans, including nonaccrual loans, increased $314,000 to $7.4 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.
 

 
 
34.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
Management concluded that the allowance for loan losses was adequate at March 31, 2012 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 $528,000 for the three months ended March 31, 2012 compared to $502,000 for the same period in 2011, an increase of $26,000, or 5.2%. The increase in noninterest income was primarily due to increased mortgage sales and servicing activity of $39,000 to $90,000, compared to the same period in 2011. In addition, service fees on deposit accounts also increased by $13,000, to $157,000 compared to the same period in the prior year.

NONINTEREST EXPENSE

The Company’s noninterest expense was $2.4 million for the three months ended March 31, 2012 and $2.3 million for the same period in 2011. Salaries and employee benefits, the largest component of noninterest expense, increased $26,000, or 2.2%, to $1.2 million. Other real estate owned expenses increased $19,000 to $225,000 in the first quarter of 2012 compared to 2011 due to increased expenses related to properties held and losses on the sale or valuation of other real estate in 2012. Modest increases in insurance expense of $18,000, and professional fees of $33,000 were partially offset by decreases in occupancy and equipment expense of $13,000, other expenses of $26,000, and data processing fees of $5,000. In addition, income tax expense increased $29,000 from a $47,000 benefit in the first quarter of 2011 compared to a $18,000 benefit in 2012.

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 the Company’s operating, financing, lending and investing activities during any given year. At
 

 
 
35.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
March 31, 2012, cash and due from banks and certificates of deposit held at other financial institutions maturing in less than 1 year totaled $26.1 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 March 31, 2012:
 
         
Less Than
               
After
 
   
Total
   
1 Year
   
1 – 3 Years
   
4 – 5 Years
   
5 Years
 
                               
Lines of credit (1)
  $ 18,830     $ 13,040     $ 1,239     $ 1,450     $ 3,101  
Data processing contract payable
    352       223       129       -       -  
Commitments to Extend credit
    110       110       -       -       -  
Standby letters of credit (1)
    339       329       10       -       -  
                                         
    $ 19,631     $ 13,702     $ 1,378     $ 1,450     $ 3,101  
 
(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.
 

 
 
36.

 
 
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.
 


 
37.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
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.
 

 
 
38.

 
 
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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 March 31, 2012 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 first quarter of 2012, 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.
 
 
39.

 


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.
   
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.
   
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 
None
   
DEFAULTS UPON SENIOR SECURITIES
   
 
None
   
MINE SAFETY DISCLOSURES
   
 
Not applicable
   
OTHER INFORMATION
   
 
None
   
EXHIBITS

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

 
40.

 
 
 
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011; (ii) Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and March 31, 2011; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and March 31, 2011; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2012 and March 31, 2011; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 2011; and (vi) 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.
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
FIRST OTTAWA BANCSHARES, INC.
   
(Registrant)
     
   
/s/ Joachim J. Brown
Date: May 14, 2012
 
Joachim J. Brown
   
President and Chief Executive Officer
   
(Principal Executive Officer)
     
     
   
/s/ Vincent G. Easi
Date: May 14, 2012
 
Vincent G. Easi
   
Chief Financial Officer
   
(Principal Financial Officer)

 
41.

 
 
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