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**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31,2009**

 

**Commission file number:  000-30495**

 

**FIRSTOTTAWA BANCSHARES, INC.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                       | ** ** | **36-4331185**                        |
|------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction      |       | (I.R.S. Employer  Identification No.) |
| of Incorporation or  Organization) |       |                                  |

 

| **701-705  LaSalle Street**               | ** ** |       |
|-------------------------------------------|------------|------------|
| **Ottawa,  Illinois**                     |       | **61350**  |
| (Address of Principal  Executive Offices) |       | (ZIP Code) |

 

**(815)434-0044**

(RegistrantTelephone Number,

including AreaCode)

 

Securities registered under Section 12(b) ofthe Exchange Act:

**None**

 

Securities registered under Section 12(g) ofthe Exchange Act:

 

**Common Stock, par value $1.00 pershare**

(Title of Class)

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes o  No x

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

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

 

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

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

 

| Large accelerated filer  o |   | Accelerated filer o          |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated filer o    |   | Smaller reporting  company x |

 

Indicate by check mark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2).  Yes o  No x

 

The aggregate market value of the voting andnon-voting common equity held by non-affiliates of the registrant, based on thelast known sales price on or prior to June 30, 2009, the last business dayof the Company’s most recently completed second fiscal quarter, was$44,361,150.

 

645,988 shares of commonstock were outstanding as of March 13, 2010.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

** **

The Company’s 2009 Annual Report to Stockholders isincorporated by reference in Parts II and IV, and the Company’s Proxy Statementfor the Annual Meeting of Stockholders to be held May 19, 2010 isincorporated by reference in Part III.

 

Except for those portionsof the 2009 Annual Report incorporated by reference, the Annual Report is notdeemed filed as part of this Report.

 

 

 

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INDEX

 
| ** **    | ** **                                                                                                           | **Page No.** |
|---------------|----------------------------------------------------------------------------------------------------------------------|--------------|
| PART I   |                                                                                                                 |         |
| ** **    | ** **                                                                                                           | ** **   |
| Item 1        | Business                                                                                                             | 1            |
| Item 1A       | Risk Factors                                                                                                         | 22           |
| Item 1B       | Unresolved  Staff Comments                                                                                           | 22           |
| Item 2        | Properties                                                                                                           | 22           |
| Item 3        | Legal Proceedings                                                                                                    | 22           |
| Item 4        | [Reserved]                                                                                                           | 22           |
|          |                                                                                                                 |         |
| PART II  |                                                                                                                 |         |
|          |                                                                                                                 |         |
| Item 5        | Market for  the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 23           |
| Item 6        | Selected  Financial Data                                                                                             | 23           |
| Item 7        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 23           |
| Item 7A       | Quantitative  and Qualitative Disclosures about Market Risk                                                          | 24           |
| Item 8        | Financial  Statements and Supplementary Data                                                                         | 24           |
| Item 9        | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 24           |
| Item 9A       | Controls and  Procedures                                                                                             | 25           |
| Item 9B       | Other Information                                                                                                    | 25           |
|          |                                                                                                                 |         |
| PART III |                                                                                                                 |         |
|          |                                                                                                                 |         |
| Item 10       | Directors,  Executive Officers and Corporate Governance                                                              | 26           |
| Item 11       | Executive  Compensation                                                                                              | 26           |
| Item 12       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 26           |
| Item 13       | Certain  Relationships and Related Transactions and Director Independence                                            | 27           |
| Item 14       | Principal  Accountant Fees and Services                                                                              | 27           |
|          |                                                                                                                 |         |
| PART IV  |                                                                                                                 |         |
|          |                                                                                                                 |         |
| Item 15       | Exhibits  and Financial Statement Schedules                                                                          | 28           |

 

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**PART I**

** **

**Item 1.        Business**.

 

**General**

 

First Ottawa Bancshares, Inc.(the “Company”) is a bank holding company for its wholly-owned subsidiary,First National Bank of Ottawa (the “Bank”), and the Bank’s wholly ownedsubsidiary, First Ottawa Financial Corporation. The Company was organized as a Delaware corporation in 1999.  As of December 31, 2009, the Company hadtotal assets of $283.7 million, total deposits of $251.2 million, net loans,including loans held for sale, of $147.2 million and total stockholders’ equityof $26.0 million.  For the year ended December 31,2009, the Company had interest income of $12.4 million and net income of $1.8million, which amounted to basic net income per share of $2.84, and diluted netincome per share of $2.83.

 

The Company conducts a generalbanking business embracing most of the services, both commercial and consumer,which banks may lawfully provide, including the following principalservices:  the acceptance of deposits fordemand, savings, and time accounts and the servicing of such accounts;commercial, agricultural, consumer, and real estate lending, includinginstallment loans, personal lines of credit, and overdraft protection; trustoperations; farm management; safe deposit operations; and an extensive varietyof additional services tailored to the needs of individual customers, includingthe sale of traveler’s checks, cashier’s checks, and foreign currency and otherspecial services.  Loans, both commercialand consumer, are provided on either a secured or unsecured basis tocorporations, partnerships, and individuals. Commercial lending covers such areas as business, industry, capital,agriculture, inventory, and real estate, with the latter including residentialproperties.  Consumer loans, includinginstallment and other types of loans, are made for a variety of purposes,including automobile purchases, recreational vehicle purchases, and consumergoods.

 

**Market Area**

 

The Company is located in north-central Illinois, withcorporate offices in Ottawa, Illinois in LaSalle County, approximately 80 milessouthwest of Chicago.  All branches,including, Streator, LaSalle County; Morris and Minooka, Grundy County; andYorkville, Kendall County, are located in Illinois within 45 miles of thecorporate offices.  Ottawa, Morris, andYorkville are the county seats of their respective counties, all withassociated governmental offices and workforce. Ottawa and Streator are the principal cities of the 5th largestMicropolitan Statistical Area in the United States, by population, asdetermined by the 2000 U.S. census. The population concentration in the Company’smarket areas, which is larger than many metropolitan areas, has added to interestin the region for developers and those exploring relocation or expansion. Themarket areas are served by major transportation routes, Interstates 80, 88, 39,and 55, as well as rail, and the Illinois River waterway system. The Companycontinues to explore expansion opportunities within its existing market areaand in surrounding areas.

 

The Company’s market areas incorporate diverseeconomic sectors, including agriculture, 

 

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transportation, industry, and mining, primarily mining of high qualitysilica sand.  The sand deposits haveencouraged extensive glass manufacturing activity in the area.  The various economies in these market areasare generally expanding with development, both commercial and residential, duein part to relatively inexpensive real estate costs and the proximity to themetropolitan urban and suburban concentrations in the Chicago, Naperville, andJoliet corridor.  The central location,transportation routes, and lack of congestion also make the area desirable fordistribution and warehousing operations. The Illinois River waterway provides preferable market opportunities andpricing for the agricultural sector.  Theunusual geographic terrain and parklands have spurred tourism in the area,which attracts in excess of 1 million visitors per year.

 

**Lending Activities**

 

***General.*** The Company relies on interest incomefrom lending activities as a major source of revenue.  The Company has a community bank focus — servingthe credit needs of the local community. Because of this local focus, the Company has a flexible process forhandling loan requests rather than being tied to rigid standards.  The discussions below regarding lendingpolicies reflect general guidelines and may vary on a case-by-case basisdepending on the borrower’s credit history and the type and size of loan.  During the approval process for loans itoriginates, the Company assesses both the applicant’s ability to repay the loanand the value of any collateral securing the loan.  The Company verifies the applicant’s abilityto repay the loan by using credit reports, financial statements, confirmations,and other items, including appraisals.

 

Ten loan officers have theauthority to handle all lending activities of the Company.  Each lending officer has authority to approveextensions of credit up to their individual lending limit.  The Company has an Officers Loan Committee(consisting of Loan Officers, the Chief Lending Officer, and the President ofthe Bank) which approves loans of up to $1,000,000.  All loans between $1,000,000 and $2,000,000are sent to the Director’s Loan Committee for approval.  The Director’s Loan Committee is alsoresponsible for monitoring concentration of credits, problem and past dueloans, and charge-offs of uncollectible loans, as well as  formulating recommendations for the Board ofDirectors regarding loan policy modifications, loan classifications, andcharge-offs. All loans in excess of $2,000,000 are reviewed and approved by theentire Board of Directors.  The Board ofDirectors also is responsible for directing and supervising the Director’s LoanCommittee, policy review, and oversight of the loan and investment functions ofthe Company.  The Board of Directors alsomonitors the adequacy of the Company’s loan loss reserves.

 

***LoanPortfolio Composition***.  The Company’s gross loanportfolio, totaled $149.5 million at December 31, 2009, representing 59.5%of the Company’s total deposits at that date. The Company’s loan portfolio at December 31, 2009 included $103.6million for real estate purposes, $11.0 million for consumer purposes, and$34.8 million for commercial and agricultural purposes.

 

Certain risks, includingthe risk of non-payment, are associated with each type of loan.  The primary risks associated with consumerloans relate to the borrower, such as the risk of a borrower’s unemployment asa result of deteriorating economic conditions or the amount and nature of aborrower’s other existing indebtedness, and the value of the collateralsecuring the loan if the Company must take possession of the collateral.  Consumer loans also have risks associated 

 

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with concentrations of loans in a single type ofloan.  The primary risks associated withcommercial loans are the experience and quality of the borrower’s management,the business climate, and the impact of economic factors.  With respect to agricultural loans, theprimary risks are weather, market conditions, and, like commercial loans, thequality of the borrower’s management. Risks associated with real estate loans include concentrations of loansin a single type of loan such as commercial or agricultural and fluctuatingland values.

 

The Company’s strategy inaddressing and managing these types of risks is to follow its loan policies andunderwriting practices, which include: (i) granting loans on a sound andcollectible basis; (ii) investing funds profitably for the benefit of theCompany’s stockholders and the protection of its depositors; (iii) servingthe legitimate needs of the community and the Company’s general market areawhile maintaining a balance between maximum yield and minimum risk; (iv) ensuringthat primary and secondary sources of repayment are adequate in relation toamount of the loan; (v) developing and maintaining adequate diversificationof the loan portfolio as a whole and of the loans within each loan category; (vi) ensuringthat each loan is properly documented and, if appropriate, secured orguaranteed by government agencies; and (vii) developing and applyingadequate collections procedures.

 

**All table amounts throughout the Form 10-K are inthousands except share and per share data.**

** **

The following table presents thecomponents of the Company’s loan portfolio as of December 31 for each yearshown.

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Real estate  loans                         |       | $        | 103,579    |     | $          | 112,237  |       | $        | 120,581    |     | $          | 102,516 |   | $ | 95,469 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Commercial and  agricultural loans         |       | 34,855   |       | 33,632   |       | 28,354   |       | 39,610   |       | 33,686   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Installment  loans, net of unearned income |       | 2,654    |       | 3,772    |       | 5,439    |       | 7,401    |       | 11,585   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Home equity  lines of credit               |       | 8,351    |       | 9,721    |       | 11,051   |       | 11,411   |       | 12,120   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Total Loans                                |       | 149,439  |       | 159,363  |       | 165,425  |       | 160,938  |       | 152,860  |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Allowance for  loan losses                 |       | (2,334   | )          | (1,612   | )          | (1,588   | )          | (1,463   | )          | (1,344   | )          |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans, net                                 |       | $        | 147,105    |     | $          | 157,751  |       | $        | 163,837    |     | $          | 159,475 |   | $ | 151,516 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans held for  sale                       |       | $        | 46         |     | $          | 229      |       | $        | —     |     | $          | — |   | $ | — |   |

 

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Maturities (based on contractualterms) of the Company’s commercial and construction loan portfolio at December 31,2009 are summarized below:

 
| ** **                   | ** ** | **One Year** | ** ** | **One to**     | ** ** | **Over**       | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                   | ** ** | **or Less**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
|                         |       |         |       |           |       |           |       |       |       |
| Commercial and  agricultural |       | $            | 13,947     |           | $          | 15,666         |       | $          | 5,242      |   | $ | 34,855 |   |
|                         |       |         |       |           |       |           |       |       |       |
| Construction                 |       | 8,910        |       | 5,101          |       | 231            |       | 14,242     |       |
|                         |       |         |       |           |       |           |       |       |       |
| Total                        |       | $            | 22,857     |           | $          | 20,767         |       | $          | 5,473      |   | $ | 49,097 |   |

 

At December 31, 2009, of thetotal loans that mature in more than one year, $77.3 million, or 74.0%, bearinterest at fixed rates and $27.2 million, or 26.0%, bear interest at variablerates.

 

***Consumer Loans***.  The Company makes consumer loans for variouspurposes, including personal, family, and nonbusiness reasons such as automobileand recreational vehicle purchases, on both a direct and indirect basis.  Consumer loans totaled approximately $11.0million at December 31, 2009, or approximately 7.4% of the Company’s totalloan portfolio.  Approximately 12.3% ofthe Company’s consumer loans were automobile loans, and of these loans,approximately 15.5% were made indirectly by the Company through automobiledealers.  At December 31, 2009, theCompany had no consumer loans past due in excess of 90 days.

 

In approving consumer loans,lending officers consider the borrower’s past credit history, the borrower’sability to repay the debt, the collateral offered, and local economicconditions that could affect the borrower’s income.  Loans being originated for new borrowers mustbe accompanied by a completed application dated and signed by the borrower,giving the details of the loan request. Total debt, along with the gross monthly income of the borrower, arerequired to be shown on the application. A brief cash flow analysis is performed by the loan officer showing theamount of the borrower’s income available for debt service based on currentdebts plus the new loan request. Generally, debt service to gross income should not exceed 40%. Newcredit reports are obtained on all borrowers with each loan request.  The value of collateral on loans secured byused automobiles is generally determined by using industry-accepted used carguides.  In connection with usedautomobile loans, the Company generally requires a 90% loan-to-value ratio; however,depending upon various factors, including the credit experience of the Companywith the borrower, the Company may extend credit in excess of the value of theused automobile.  A loan-to-value ratioof 90% of sticker price is generally required for new automobile loans.  Boats, mobile homes, recreational vehicles,and similar items generally require a loan-to-value ratio of 70% to 80% of thecurrent market value of the collateral. Unsecured consumer loans are granted to borrowers based upon satisfactoryincome, indebtedness levels, and credit records and experience.

 

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***Commercial,Agricultural, and Real Estate Lending***.

 

**RealEstate Lending**.The Company’s primary real estate lending consists of commercial loans with asmall portion in residential and agricultural real estate loans.  Real estate loans at December 31, 2009totaled approximately $103.6 million or approximately 69.3% of the Company’stotal loan portfolio.  All borrowersrequesting a real estate loan are required to submit an application which isreviewed by the lending officer.  Acredit investigation is performed and an analysis of the borrower’s ability torepay is conducted.  Subsequently, aninspection and appraisal of the real property is conducted to determine whetheror not the property is of sufficient value to meet the Company’s suggestedmaximum loan-to-value ratio of 80% to 85% of the lesser of the appraised valueor the purchase price of the property securing the loan.  Under certain federal guaranteed loanprograms utilized by the Company, the maximum loan-to-value ratio is higher.  With respect to loans secured by commercialor industrial real estate, the Company analyzes the potential for environmentalliability concerns and, depending upon the circumstances, the Company mayrequire additional information or testing. Commercial and agricultural real estate loans are generally originated underthe same policies and procedures as discussed below for commercial andagricultural non-real estate loans.

 

The Company’s residentialreal estate loans consist of 15-year, 20-year and 30-year fixed-rate andvariable-rate loans with amortization periods equal to the maturity of theloan.  The Company’s fixed-rate loanswith biweekly payments account for approximately 46.9% of all the residentialreal estate loans of the Company. The biweekly loan program amortizes 25-yearloans in approximately 18.9 years.  TheCompany also originates a variety of loans that are sold into the secondarymarket through Federal Home Loan Mortgage Corporation (“Freddie Mac”) andprivate investors.  These loans areunderwritten to meet all Freddie Mac requirements.  The Company retains servicing rights on loanssold into the secondary market.  At December 31,2009, mortgage loans serviced for the secondary market totaled approximately$31.7 million.

 

AtDecember 31, 2009, the Company had six residential real estate mortgage loans  totaling $513,000 that were past due inexcess of 90 days, and 21 commercial real estate loans totaling $8.5 million,past due in excess of 90 days. Management feels the Company is wellcollateralized and expects no loss in excess of specific allocations on theloans.

 

**Commercial and Agricultural.**  At December 31,2009, the Company’s commercial and agricultural loans totaled $34.9 million, orapproximately 23.3% of the total loan portfolio of the Company.  The majority of agricultural and commercial non-realestate loans are written for one to five years. These loans may bear interestat a fixed or variable rate and are amortized over a 15-year to 20-year period.Fixed rates are established by the Company’s management after considering thecost of funds to the Company as well as the rates of competinginstitutions.  The variable rate isgenerally based upon the national prime rate as disclosed in *The Wall Street Journal*. Principal and interest payments on commercial loans generally arerequired monthly; whereas, payments on agricultural loans vary from monthly,quarterly, semi-annually, and annually. At December 31, 2009, the Company had nine commercial non-realestate loans totaling $348,000 thatwere past due inexcess of 90 days. There were no agricultural non-real estate loans at December 31,2009 that

 

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werepast due in excess of 90 days. Management feels the Company is wellcollateralized and expects no loss in excess of specific allocations on theloans.

 

All commercial and agricultural borrowers, bothexisting and new, are required by a Company policy to have a current financialstatement no older than one year. Borrowers also are required to provide the Company with recent taxreturns and pro forma projections.  Usingcertain computer programs and the data supplied by borrowers, the loan officersproduce additional financial information utilized in analyzing the loans andthe borrowers.  The general nature of thecollateral securing the Company’s commercial and agricultural loans consists ofequipment, farm products, crops, inventory, chattel paper, accounts receivable,and general intangibles.  The Company’sloan-to-value ratio with respect to agricultural and commercial non-real estateloans averages 66 2/3% to 75% of the value of the collateral securing the loan.

 

***Interest Rates and Fees***. Interest rates and fees charged on the Company’s loans are affectedprimarily by the market demand for loans and the supply of money available forlending purposes.  These factors areaffected by, among other things, general economic conditions and the policiesof the federal government, including the Federal Reserve Board, legislative taxpolicies, and governmental budgetary matters.

 

***Non-Performing Loans***. When a borrower fails to make a required payment on a loan and does notcure the delinquency within 30 days, the loan is classified as delinquent.  In this event, the normal procedure followedby the Company is to make contact with the borrower at prescribed intervals in aneffort to bring the loan to a current status. In most cases, delinquencies are cured promptly, but, if not, theCompany normally records a notice of default, subject to any required priornotice to the borrower, and commences foreclosure proceedings when loanpayments are 120 days past due.

 

At December 31, 2009, the Company had 19 loansdelinquent for 30 to 90 days in an aggregate principal amount of $2.2 million,representing 1.5% of the total loan portfolio. At December 31, 2009, the Company had 36 loans totaling $9.4million delinquent for more than 90 days.

 

It is the Company’s policy to discontinue the accrualof interest income on any loan when, in accordance with banking regulations orin the opinion of management, there is reasonable doubt as to thecollectibility of interest or principal. Interest on these loans is credited to income only when the collectionof principal is reasonably assured and only to the extent interest payments arereceived.  If management feels collectionof both interest and principal is probable, the loan is not transferred tononaccrual status.  At December 31,2009, there were 23 loans totaling $6.8 million, on nonaccrual status. Managementfeels the Company is well collateralized and expects no loss in excess of specificallocations on the loans.

 

As a result of economic conditions and other factorsbeyond the Company’s control, the Company’s future loss and delinquencyexperience cannot be predicted with certainty.

 

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The nonperforming assets of theCompany as of December 31 are indicated below:

 
| ** **                                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonaccrual loans                                                      |       | $        | 6,809      |     | $          | 965      |       | $        | 1,163      |     | $          | 362 |   | $ | — |   |
| Loans  90 days past due and still accruing interest                   |       | 2,583    |       | 2,098    |       | 701      |       | 305      |       | 1,337    |       |
| Other real estate owned                                               |       | 1,898    |       | 310      |       | 325      |       | 118      |       | 88       |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Total nonperforming assets                                            |       | $        | 11,290     |     | $          | 3,373    |       | $        | 2,189      |     | $          | 785 |   | $ | 1,425 |   |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of total loans                   |       | 6.28     | %          | 2.11     | %          | 1.13     | %          | .49      | %          | .88      | %          |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  assets as a percentage of total assets                 |       | 3.98     |       | 1.23     |       | .81      |       | .28      |       | .51      |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of the allowance for loan losses |       | 402.40   |       | 209.24   |       | 117.38   |       | 48.59    |       | 99.48    |       |

 

The effect of nonaccrual loans upon interest income is not deemed to bematerial by management.  Loans are placedin nonaccrual status when 90 days past due, unless they are fully secured andin the process of collection.  At December 31,2009, there were other impaired loans with specific reserve allocationsclassified as problem loans that were not included above.  Management also maintains a report on loans requiringattention that includes loans greater than 60 days delinquent or other loans asdeemed necessary by the Company’s internal loan review or the loancommittee.  The total of loans requiringattention as of December 31, 2009 was $13.1 million.

 

***Allowancefor Losses on Loans***.  In originating loans, theCompany recognizes that losses will be experienced on loans and that the riskof loss will vary with, among other things, the type of loan being made, thecreditworthiness of the borrower over the term of the loan, general economicconditions and, in the case of a secured loan, the quality of the security forthe loan.  The Company maintains anallowance for loan losses to absorb probable incurred credit losses inherent inthe loan portfolio.  The allowance forloan losses represents management’s estimate of probable incurred losses basedon information available as of the date of the financial statements.  The allowance for loan losses is based onmanagement’s evaluation of the collectibility of the loan portfolio, includingpast loan loss experience, known and inherent risks in the nature and volume ofthe portfolio, information about specific borrower situations, includingborrower financial position and collateral values, economic conditions andother factors and estimates, which are subject to change over time.

 

The loan portfolio andother credit exposures are regularly reviewed by management to evaluate theadequacy of the allowance for loan losses. The methodology for assessing the appropriateness of the allowanceincludes comparisons to actual losses, industry data and economicconditions.  In addition, the regulatoryagencies, as an integral part of their 

 

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examination process,periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to makeadditional provisions for estimated losses based upon judgments different fromthose of management.

 

In connection withassessing the allowance, loss factors are applied to various pools ofoutstanding loans.  The Companysegregates the loan portfolio according to risk characteristics (i.e., mortgageloans, commercial real estate, agricultural, business, consumer, etc.) and riskgradings.  Loss factors are derived usingthe Company’s historical loss experience and may be adjusted for significantfactors that, in management’s judgment, affect the collectibility of theportfolio as of the evaluation date. Commercial real estate and commercial business loans are individuallyevaluated for impairment and specific reserves are allocated as needed inaccordance with Generally Accepted Accounting Principles.

 

In addition, managementassesses the allowance using factors that cannot be associated with specificcredit or loan categories.  These factorsinclude management’s subjective evaluation of local and national economic andbusiness conditions, portfolio concentration and changes in the character andsize of the loan portfolio.  Theallowance methodology reflects management’s objective that the overallallowance appropriately reflects a margin for the imprecision necessarilyinherent in the estimates of expected credit losses.

 

The allowance for loan losses is established through acharge to operations at the time loan value becomes impaired or, in thejudgment of management, other subjective factors warrant additional reserves.As noted in the previous table, nonperforming loans increased by $6.3 millionin 2009 after increasing by $1.2 million during 2008.  Management considered this information alongwith other portfolio trends when considering the adequacy of the allowance forloan losses at December 31, 2009 to absorb probable losses on existingloans. At December 31, 2009, the balance in the allowance for loan losseswas $2.3 million, or 1.56% of gross loans outstanding.  Management has concluded that the allowancefor loan losses was adequate at December 31, 2009. However, there can beno assurance that the allowance for loan losses is adequate to cover suchlosses.

 

The Company had 16 properties valued at a total of$1.9 million, resulting from foreclosure, classified as other real estate ownedat December 31, 2009. Other real estate owned is generally carried at thelower of cost or estimated market value.

 

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***Summary of Loan Loss Experience.***The allowance for loan losses is maintained bymanagement at a level considered adequate to cover losses that are currentlyanticipated based upon past loss experience, known and inherent risks in thenature and volume of the portfolio, information about specific borrowersituations, including borrower financial position and collateral values,economic conditions and other factors and estimates which are subject to changeover time.

 

Loan loss experience for the five years ended December 31,2009 is summarized as follows:

 
| ** **                                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance of the  allowance for loan losses at beginning of year |       | $        | 1,612      |     | $          | 1,588    |       | $        | 1,463      |     | $          | 1,344 |   | $ | 1,174 |   |
| Charge-offs                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 434      |       | 77       |       | 16       |       | 2        |       | —   |       |
| Commercial                                                     |       | 227      |       | 41       |       | 67       |       | 34       |       | 71       |       |
| Installment                                                    |       | 23       |       | 89       |       | 55       |       | 81       |       | 145      |       |
| Total charge-offs                                              |       | 684      |       | 207      |       | 138      |       | 117      |       | 216      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Recoveries                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 1        |       | 1        |       | —   |       | 1        |       | 8        |       |
| Commercial                                                     |       | 31       |       | 16       |       | 56       |       | 9        |       | 16       |       |
| Installment                                                    |       | 44       |       | 44       |       | 27       |       | 46       |       | 62       |       |
| Total recoveries                                               |       | 76       |       | 61       |       | 83       |       | 56       |       | 86       |       |
| Net charge-offs                                                |       | 608      |       | 146      |       | 55       |       | 61       |       | 130      |       |
| Provision                                                      |       | 1,330    |       | 170      |       | 180      |       | 180      |       | 300      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance at end of year                                         |       | $        | 2,334      |     | $          | 1,612    |       | $        | 1,588      |     | $          | 1,463 |   | $ | 1,344 |   |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net charge-offs  to average total loans                        |       | .41      | %          | .09      | %          | .03      | %          | .04      | %          | .09      | %          |
| Allowance  for loan losses to total loans at year-end          |       | 1.56     |       | 1.01     |       | .96      |       | .91      |       | .88      |       |

 

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The Company’sallocation of the allowance for loan losses as of December 31 is presentedbelow:

 
| ** **                         | ** ** | **2009**   | ** ** | **2008**          | ** ** | **2007**   | ** ** | **2006**          | ** ** | **2005**   | ** ** |
|------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Percent**       | ** ** | ** ** | ** ** | **Percent**       | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** |
| ** **                         | ** ** | **Amount** | ** ** | **Allowance**     | ** ** | **Amount** | ** ** | **Allowance**     | ** ** | **Amount** | ** ** | **Allowance** | ** ** | **Amount** | ** ** | **Allowance** | ** ** | **Amount** | ** ** | **Allowance** | ** ** |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Real  estate loans                 |       | $          | 1,679      |              | 71.9       | %          | $          | 1,196             |       | 74.2       | %          | $ | 1,179 |   | 74.2 | % | $ | 253 |   | 17.3 | % | $ | 131 |   | 9.7 | % |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial  and agricultural loans |       | 553        |       | 23.7              |       | 336        |       | 20.8              |       | 248        |       | 15.6 |   | 633 |   | 43.3 |   | 613 |   | 45.6 |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Installment loans                  |       | 32         |       | 1.4               |       | 51         |       | 3.2               |       | 74         |       | 4.7 |   | 97 |   | 6.6 |   | 141 |   | 10.5 |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unallocated                        |       | 70         |       | 3.0               |       | 29         |       | 1.8               |       | 87         |       | 5.5 |   | 480 |   | 32.8 |   | 459 |   | 34.2 |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Balance  at end of year            |       | $          | 2,334      |              | 100.0      | %          | $          | 1,612             |       | 100.0      | %          | $ | 1,588 |   | 100.0 | % | $ | 1,463 |   | 100.0 | % | $ | 1,344 |   | 100.0 | % |

 

**InvestmentActivities**

 

**The investment policies ofthe Company, as established by the Board of Directors, attempt to provide andmaintain liquidity, generate a favorable return on investments withoutincurring undue interest rate and credit risk, and complement the Company’slending activities.  The policies providethe authority to invest in United States Treasury and federal agencysecurities, mortgage-backed securities, municipal securities, equitysecurities, and certificates of deposits.**

** **

Approximately $2.1 million of the States and political subdivisionsbonds held at December 31, 2009 are callable at the option of the issuer,which represent limited prepayment risk to the Company.

 

As of December 31, 2009, the Company had approximately $10.9million invested in municipalities located within LaSalle County, Illinois.

 

The Company purchased $775,000 of index powered certificates of depositbetween 2005 and 2009. These deposits were placed with multiple issuers so thatall of the principal deposited is insured through the FDIC. Income returns arenot guaranteed for these instruments, however principal is guaranteed if heldto maturity.

 

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**SecuritiesPortfolio.**

 

The following table shows the maturity distribution of theavailable-for-sale securities portfolio and the weighted average yield of theportfolio at December 31, 2009.

 
| ** **                                                     | ** ** | ** **        | ** ** | **Weighted** | ** ** | **One to** | ** ** | **Weighted** | ** ** | **Five**        | ** ** | **Weighted** | ** ** | **Over**   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-----------------|------------|--------------|------------|-----------------|------------|--------------|------------|------------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **                                                     | ** ** | **One Year** | ** ** | **Average**  | ** ** | **Five**        | ** ** | **Average**  | ** ** | **to Ten** | ** ** | **Average**  | ** ** | **Ten**    | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average**  | ** ** |
| ** **                                                     | ** ** | **or Less**  | ** ** | **Yield**    | ** ** | **Years**       | ** ** | **Yield**    | ** ** | **Years**       | ** ** | **Yield**    | ** ** | **Years**  | ** ** | **Yield**    | ** ** | **Total**  | ** ** | **Yield**    | ** ** |
| ** **                                                     | ** ** | ** **        | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** |
| U.S. Treasury securities                                       |       | $                 | 2,530      |         | .45        | %               | $          | 2,668        |       | 1.16            | %          | $            | —     |       | —     | %            | $          | —     |       | —       | %          | $ | 5,198 |   | .80 | % |
| U.S. Government agencies                                       |       | 7,050             |       | 2.32         |       | 16,827          |       | 2.42         |       | —          |       | —       |       | —     |       | —       |       | 23,877     |       | 2.39         |       |
| States and political subdivisions                              |       | 10,646            |       | 3.46         |       | 8,959           |       | 3.51         |       | 4,226           |       | 5.04         |       | —     |       | —       |       | 23,831     |       | 3.75         |       |
| Mortgage-backed  securities and collateralized obligations (1) |       | 889               |       | 3.51         |       | 2,429           |       | 4.51         |       | 122             |       | 8.54         |       | —     |       | —       |       | 3,440      |       | 4.40         |       |
| Corporate bonds                                                |       | —            |       | —       |       | —          |       | —       |       | —          |       | —       |       | —     |       | —       |       | —     |       | —       |       |
| Equity securities                                              |       | 27                |       | N/A          |       | —          |       | —       |       | —          |       | —       |       | —     |       | —       |       | 27         |       | N/A          |       |
|                                                           |       |              |       |         |       |            |       |         |       |            |       |         |       |       |       |         |       |       |       |         |       |
| Total securities                                               |       | $                 | 21,142     |         | 2.72       | %               | $          | 30,883       |       | 2.79            | %          | $            | 4,348      |       | 5.13       | %            | $          | —     |       | —       | %          | $ | 56,373 |   | 2.94 | % |

 

----

(1)  Mortgage-backed securities reflect thecontractual maturity of the related instrument.

 

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**Deposits***.*

 

The Company offers deposit services, including demand,savings, and time deposit accounts and programs, which include interest-bearingand non-interest-bearing demand deposits and individual retirementaccounts.  The Company believes it has astable deposit base.  Management believesthat this stability is due to the Company’s emphasis on being a locally ownedand operated bank and by providing quality, personalized service to itscustomers.

 

The following table showsthe Company’s average balances and rates paid during the years shown.

 
| ** **                                         | ** ** | **For the Years Ended December 31,** | ** **    |
|----------------------------------------------------|------------|---------------------------------------------------------------|---------------|
| ** **                                         | ** ** | **2009**                                                      | ** **    | **2008** | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | ** **                                                    | ** **    | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Average**                                                   | ** **    | **of** | ** ** | ** ** | ** ** | **Average** | ** ** | **of** | ** ** | ** ** | ** ** | **Average** | ** ** | **of** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Balance**                                                   | ** **    | **Deposits** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Deposits** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Deposits** | ** ** | **Rate** | ** ** |
|                                               |       |                                                          |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  demand deposits               |       | $                                                             | 34,035        |   | 13.3 | % | — | % | $ | 33,961 |   | 14.0 | % | — | % | $ | 31,759 |   | 13.0 | % | — | % |
| Interest-bearing  demand and money market accounts |       | 116,570                                                       |          | 45.7 |   | .34 |   | 95,138 |   | 39.2 |   | 1.07 |   | 98,592 |   | 40.3 |   | 2.25 |   |
| Savings accounts                                   |       | 24,118                                                        |          | 9.5 |   | .34 |   | 22,739 |   | 9.4 |   | .51 |   | 23,418 |   | 9.5 |   | .53 |   |
| Time deposit accounts                              |       | 80,246                                                        |          | 31.5 |   | 3.27 |   | 90,715 |   | 37.4 |   | 3.86 |   | 90,970 |   | 37.2 |   | 4.22 |   |
|                                               |       |                                                          |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                               |       | $                                                             |  254,969 |   | 100.0 | % | 1.22 | % | $ | 242,553 |   | 100.0 | % | 2.24 | % | $ | 244,739 |   | 100.0 | % | 2.92 | % |

 

The distribution of the majorcomponents of deposits as of December 31, 2009 and 2008 is summarized inthe balance sheets included in the 2009 consolidated financial statements,which consolidated financial statements are incorporated herein by reference.The following is a maturity distribution of time certificates of deposit of$100,000 or more at December 31, 2009:

 
| ** **                       | ** ** | **Balance** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|-------------|------------|----------------|------------|
| Maturity                         |       |        |       |           |       |
| Three months or  less            |       | $           | 6,422      |           | 22.5       | % |
| Over three  months to six months |       | 4,789       |       | 16.8           |       |
| Over six months  to one year     |       | 3,322       |       | 11.6           |       |
| Over one year                    |       | 14,020      |       | 49.1           |       |
|                             |       |        |       |           |       |
| Total                            |       | $           | 28,553     |           | 100.0      | % |

 

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**Borrowings**

 

The Company’s other available sources of funds include financingarrangements for securities sold under agreements to repurchase, federal fundspurchased lines, and Federal Home Loan Bank borrowings. Total borrowingsdecreased to $4.0 million in 2009 as a result of $2.0 million in Federal HomeLoan Bank advances being repaid in 2009. The Bank maintains physical control ofall securities sold under repurchase agreements. There were no outstandingsecurities sold under agreements to repurchase during 2009 or 2008. Informationconcerning securities sold under agreements to repurchase is summarized asfollows:

 
| ** **                                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |
| Balance at  December 31                           |       | $        | —     |     | $          | — |   |
| Weighted average  interest rate during the year        |       | —   | %          | 1.56     | %          |
| Weighted average  interest rate at the end of the year |       | —   | %          | —   | %          |
| Maximum  month-end balance                             |       | $        | —     |     | $          | 2,000 |   |
| Average balance  for the year                          |       | —   |       | 77       |       |

 

**Trust**

 

The Company’s trust departmentprimarily services LaSalle County and surrounding counties.  At December 31, 2009, the trustdepartment had 355 accounts under management, 191 of which were discretionaryaccounts.  The trust department providesa full complement of asset management services for personal trusts, estates,and agencies.  At December 31, 2009,the trust department had assets under management of approximately $80.6million, of which $71.2 million was in discretionary accounts.

 

The Company, inconjunction with its trust department, also provides farm managementservices.  At December 31, 2009, thedepartment managed 41 farms.  Thedepartment manages or directs approximately 5,924 acres of farmland in LaSalleCounty, Illinois and surrounding counties.

 

**Competition**

 

The Company has activecompetition in all product and service areas in which it presentlyengages.  The Company not only competesfor commercial and individual deposits, loans, and trust business with otherLaSalle, Grundy, and Kendall County, Illinois banks, but also with savings andloan associations, credit unions, and other financial service companies locatedin and around LaSalle, Grundy and Kendall Counties.  Many of these competitors may not be subjectto the same regulatory restrictions as the Company. There are approximately 19commercial banks and six savings institutions with offices in LaSalle County,11 commercial banks and three savings institutions in Grundy County, and 19commercial banks and one savings institution in Kendall County.  In addition there are 10 credit unions locatedin the same county markets. The principal methods of competition in the bankingand financial services industry are quality of services to the customer; easeof access to services; and pricing of services, including interest rates paidon deposits, interest rates charged on borrowings, and fees charged forfiduciary services. The financial services industry is also likely to becomemore competitive as further technological advances enable more companies toprovide financial services.

 

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**Employees**

 

As of December 31,2009, the Company had 95 employees, consisting of 81 full-time employees and 14part-time employees.  The Company’semployees are not subject to a collective bargaining agreement, and managementbelieves it has excellent relations with its staff.

 

**Stock Repurchases**

 

During2008, the Company repurchased 2,526 shares of its common stock for aggregatepurchase prices of $197,000. No common stock was repurchased during 2009.

 

## **Website**

##  

## The Company maintains a website atwww.firstottawa.com.  The Company makesavailable free of charge on or through its website, the annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after theCompany electronically files such material with, or furnishes it to, theSecurities and Exchange Commission.  TheCompany will also provide copies of its filings free of charge upon writtenrequest to: Ms. Cheryl Gage, Corporate Secretary, First Ottawa Bancshares, Inc.701-705 LaSalle Street, P.O. Box 657, Ottawa, Illinois 61350.Additionally, all of the Company’s filings with the Securities and ExchangeCommission are also available, free of charge, through the SEC’s website atwww.sec.gov.

##  

**SUPERVISION AND REGULATION**

 

# **General**

#  

Financialinstitutions, their holding companies and their affiliates are extensivelyregulated under federal and state law. As a result, the growth and earnings performance of the Company may beaffected not only by management decisions and general economic conditions, butalso by the requirements of federal and state statutes and by the regulationsand policies of various bank regulatory authorities, including the Office ofthe Comptroller of the Currency (the “OCC”), the Board of Governors of theFederal Reserve System (the “Federal Reserve”) and the FederalDeposit Insurance Corporation (the “FDIC”). Furthermore, taxation laws administered by the Internal Revenue Serviceand state taxing authorities and securities laws administered by the Securitiesand Exchange Commission (the “SEC”) and state securities authorities havean impact on the business of the Company. The effect of these statutes,regulations and regulatory policies may be significant, and cannot be predictedwith a high degree of certainty.

 

Federaland state laws and regulations generally applicable to financial institutionsregulate, among other things, the scope of business, the kinds and amounts ofinvestments, reserve requirements, capital levels relative to operations, thenature and amount of collateral for loans, the establishment of branches,mergers and consolidations and the payment of dividends. This system ofsupervision and regulation establishes a comprehensive framework for therespective operations of the Company and its subsidiaries and is intendedprimarily for the protection of FDIC-insured deposits and depositors of theBank, rather than stockholders.  Inaddition to this generally

 

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applicable regulatory framework, turmoil in thecredit markets in recent years has prompted the enactment of unprecedentedlegislation that has allowed the U.S. Department of the Treasury (the “Treasury”) to make equity capitalavailable to qualifying financial institutions to help restore confidence andstability in the U.S. financial markets, which imposes additional requirementson institutions in which the Treasury invests.

 

Thefollowing is a summary of the material elements of the regulatory frameworkthat currently applies to the Company and its subsidiaries.  It does not describe all of the statutes,regulations and regulatory policies that apply, nor does it restate all of therequirements of those that are described. Additionally, in response to the global financial crisis that began in2007, various legislative and regulatory proposals have been issued addressing,among other things, the restructuring of the federal bank regulatory system,more stringent regulation of consumer products such as mortgages and creditcards, and safe and sound compensation practices. At this time, the Company isunable to determine whether any of these proposals will be adopted asproposed.  As such, the following isqualified in its entirety by reference to applicable law.  Any change in statutes, regulations orregulatory policies may have a material effect on the business of the Companyand its subsidiaries.

 

**The Company**

 

***General.**** *The Company, asthe sole stockholder of the Bank, is a bank holding company.  As a bank holding company, the Company isregistered with, and is subject to regulation by, the Federal Reserve under theBank Holding Company Act of 1956, as amended (the “BHCA”).  In accordance with Federal Reservepolicy, the Company is expected to act as a source of financial strength to theBank and to commit resources to support the Bank in circumstances where theCompany might not otherwise do so.  Underthe BHCA, the Company is subject to periodic examination by the FederalReserve.  The Company is also required tofile with the Federal Reserve periodic reports of the Company’s operations andsuch additional information regarding the Company and its subsidiaries as theFederal Reserve may require.

 

***Acquisitions, Activities and Change in Control.***** **The primary purpose of abank holding company is to control and manage banks.****TheBHCA generally requires the prior approval of the Federal Reserve for anymerger involving a bank holding company or any acquisition by a bank holdingcompany of another bank or bank holding company.  Subject to certain conditions (includingdeposit concentration limits established by the BHCA), the Federal Reserve mayallow a bank holding company to acquire banks located in any state of theUnited States. In approving interstate acquisitions, the Federal Reserve isrequired to give effect to applicable state law limitations on the aggregateamount of deposits that may be held by the acquiring bank holding company andits insured depository institution affiliates in the state in which the targetbank is located (provided that those limits do not discriminate againstout-of-state depository institutions or their holding companies) and state lawsthat require that the target bank have been in existence for a minimum period oftime (not to exceed five years) before being acquired by an out-of-state bankholding company.

 

TheBHCA generally prohibits the Company from acquiring direct or indirectownership or control of more than 5% of the voting shares of any company thatis not a bank and from engaging in any business other than that of banking,managing and controlling banks or furnishing services to banks and theirsubsidiaries.  This general prohibitionis subject to a number of exceptions. The principal exception allows bank holdingcompanies to engage in, and to own shares of

 

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companies engaged in,certain businesses found by the Federal Reserve to be “so closely related tobanking ... as to be a proper incident thereto.”  This authority would permit the Company toengage in a variety of banking-related businesses, including the ownership andoperation of a thrift, or any entity engaged in consumer finance, equipmentleasing, the operation of a computer service bureau (including softwaredevelopment), and mortgage banking and brokerage. The BHCA generally does notplace territorial restrictions on the domestic activities of non-bank subsidiariesof bank holding companies.

 

Additionally,bank holding companies that meet certain eligibility requirements prescribed bythe BHCA and elect to operate as financial holding companies may engage in, orown shares in companies engaged in, a wider range of nonbanking activities,including securities and insurance underwriting and sales, merchant banking andany other activity that the Federal Reserve, in consultation with the Secretaryof the Treasury, determines by regulation or order is financial in nature,incidental to any such financial activity or complementary to any suchfinancial activity and does not pose a substantial risk to the safety orsoundness of depository institutions or the financial system generally.  As of the date of this filing, the Companyhas not applied for approval to operate as a financial holding company.

 

Federal law also prohibitsany person or company from acquiring “control” of an FDIC-insured depositoryinstitution or its holding company without prior notice to the appropriatefederal bank regulator.  “Control” isconclusively presumed to exist upon the acquisition of 25% or more of theoutstanding voting securities of a bank or bank holding company, but may ariseunder certain circumstances between 10% and 24.99% ownership.

 

***Capital Requirements.***  Bank holding companies are required tomaintain minimum levels of capital in accordance with Federal Reserve capitaladequacy guidelines.  If capital levelsfall below the minimum required levels, a bank holding company, among otherthings, may be denied approval to acquire or establish additional banks ornon-bank businesses.

 

TheFederal Reserve’s capital guidelines establish the following minimum regulatorycapital requirements for bank holding companies: (i) a risk-based requirementexpressed as a percentage of total assets weighted according to risk; and (ii) aleverage requirement expressed as a percentage of total assets.  The risk-based requirement consists of aminimum ratio of total capital to total risk-weighted assets of 8% and aminimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  The leverage requirement consists of aminimum ratio of Tier 1 capital to total assets of 3% for the most highly ratedcompanies, with a minimum requirement of 4% for all others.  For purposes of these capital standards, Tier1 capital consists primarily of permanent stockholders’ equity less intangibleassets (other than certain loan servicing rights and purchased credit cardrelationships). Total capital consists primarily of Tier 1 capital plus Tier 2capital, which consists of other non-permanent capital items such as certainother debt and equity instruments that do not qualify as Tier 1 capital and aportion of the company’s allowance for loan and lease losses.

 

The risk-based and leveragestandards described above are minimum requirements. Higher capital levels willbe required if warranted by the particular circumstances or risk profiles ofindividual banking organizations. For example, the Federal Reserve’s capital guidelinescontemplate that additional capital may be required to take adequate accountof, among other things, interest rate risk, or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.  Further, any bankingorganization experiencing or anticipating significant growth would be expectedto maintain capital ratios, including tangible capital

 

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positions (*i.e.*,Tier 1 capital less all intangible assets), well above the minimum levels.  As of December 31, 2009 the Company hadregulatory capital in excess of the Federal Reserve’s minimum requirements.

 

***Emergency Economic StabilizationAct of 2008***.  Events inthe U.S. and global financial markets over the past several years, includingthe deterioration of the worldwide credit markets, have created significantchallenges for financial institutions throughout the country.  In response to this crisis affecting the U.S.banking system and financial markets, on October 3, 2008, the U.S.Congress passed, and the President signed into law, the Emergency Economic StabilizationAct of 2008 (the “EESA”).  The EESAauthorized the Secretary of the Treasury to implement various temporaryemergency programs designed to strengthen the capital positions of financialinstitutions and stimulate the availability of credit within the U.S. financialsystem.  Financial institutionsparticipating in certain of the programs established under the EESA arerequired to adopt the Treasury’s standards for executive compensation andcorporate governance.

 

***The TARP Capital PurchaseProgram.  ***On October 14,2008, the Treasury announced that it would provide Tier 1 capital (in the formof perpetual preferred stock) to eligible financial institutions.  This program, known as the TARP CapitalPurchase Program (the “CPP”), allocated $250 billion from the $700 billionauthorized by the EESA to the Treasury for the purchase of senior preferredshares from qualifying financial institutions (the “CPP Preferred Stock”).  Under the program, eligible institutions wereable to sell equity interests to the Treasury in amounts equal to between 1%and 3% of the institution’s risk-weighted assets.  The CPP Preferred Stock is non-voting andpays dividends at the rate of 5% per annum for the first five years andthereafter at a rate of 9% per annum.  Inconjunction with the purchase of the CPP Preferred Stock, the Treasury receivedwarrants to purchase common stock from the participating public institutionswith an aggregate market price equal to 15% of the preferred stock investment.  Participating financial institutions arerequired to adopt the Treasury’s standards for executive compensation andcorporate governance for the period during which the Treasury holds equityissued under the CPP.  The Treasurydetermined specific eligibility and allocations for an interested financialinstitution after consultation with the appropriate federal bankingagency.  The deadline for publiccompanies to submit an application to participate in the CPP was November 14,2008.  The Company did not file anapplication to participate in the CPP.

 

***Dividend Payments******.**** *TheCompany’s ability to pay dividends to its stockholders may be affected by bothgeneral corporate law considerations and policies of the Federal Reserveapplicable to bank holding companies*.* As a Delawarecorporation, the Company is subject to the limitations of the Delaware GeneralCorporation Law (the “DGCL”). The DGCL allows the Company to pay dividendsonly out of its surplus (as defined and computed in accordance with theprovisions of the DGCL) or if the Company has no such surplus, out of its netprofits for the fiscal year in which the dividend is declared and/or thepreceding fiscal year. Additionally, as a bank holding company, the Company’sability to declare and pay dividends is subject to the guidelines of theFederal Reserve regarding capital adequacy and dividends.  The Federal Reserve guidelines generallyrequire the Company to review the effects of the cash payment of dividends oncommon stock and other Tier 1 capital instruments (*i.e.*, perpetual preferred stock and trustpreferred securities) in light of our earnings, capital adequacy and financialcondition.  In addition, as a matter ofpolicy, the Federal Reserve has indicated that bank holding companies should notpay dividends on common stock (or make distributions on trust preferredsecurities) using funds from the CPP.  Asa general matter, the Federal Reserve indicates that the board of directors ofa bank holding company should eliminate,defer or significantly reduce thedividends if:  (i) the company’s netincome available to stockholders for the past four quarters, net of dividendspreviously paid during that period, is not

 

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sufficient to fully fund the dividends; (ii) theprospective rate of earnings retention is inconsistent with the company’scapital needs and overall current and prospective financial condition; or (iii) thecompany will not meet, or is in danger of not meeting, its minimum regulatorycapital adequacy ratios.  The FederalReserve also possesses enforcement powers over bank holding companies and theirnon-bank subsidiaries to prevent or remedy actions that represent unsafe orunsound practices or violations of applicable statutes and regulations.  Among these powers is the ability toproscribe the payment of dividends by banks and bank holding companies.

 

***Federal Securities Regulation******.***  The Company’scommon stock is registered with the SEC under the Securities Act of 1933, asamended, and the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Consequently, the Company issubject to the information, proxy solicitation, insider trading and otherrestrictions and requirements of the SEC under the Exchange Act.

 

**The Bank**

 

***General.***  The Bank is a national bank, chartered by theOCC under the National Bank Act. The deposit accounts of the Bank are insured by the FDIC’s DepositInsurance Fund (the “DIF”) to the maximum extent provided under federal law andFDIC regulations, and the Bank is a member of the Federal Reserve System.  As a national bank, the Bank is subject tothe examination, supervision, reporting and enforcement requirements of theOCC, the chartering authority for national banks. The FDIC, as administrator ofthe DIF, also has regulatory authority over the Bank.

 

***Deposit Insurance.*** As an FDIC-insuredinstitution, the Bank is required to pay deposit insurance premium assessmentsto the FDIC. The FDIC has adopted a risk-based assessment system wherebyFDIC-insured depository institutions pay insurance premiums at rates based ontheir risk classification.  Aninstitution’s risk classification is assigned based on its capital levels andthe level of supervisory concern the institution poses to the regulators.  Under the regulations of the FDIC, aspresently in effect, insurance assessments range from 0.07% to 0.78% of totaldeposits, depending on an institution’s risk classification, its levels ofunsecured debt and secured liabilities, and, in certain cases, its level ofbrokered deposits.

 

Furthermore,as a result of the increased volume of bank failures in 2008 and 2009, on May 22,2009, the FDIC approved a final rule imposing a special assessment on alldepository institutions whose deposits are insured by the FDIC.  This one-time special assessment was imposedon institutions in the second quarter, and was collected on September 30,2009.  Pursuant to the final rule, theFDIC imposed on the Bank a special assessment in the amount of $126,000, whichwas due and payable on September 30, 2009.

 

On November 12, 2009,the FDIC adopted a final rule that required insured depositoryinstitutions to prepay on December 30, 2009, their estimated quarterlyrisk-based assessments for the fourth quarter of 2009 and for all of 2010,2011, and 2012.  On December 31,2009, the Bank paid the FDIC $1.6 million in prepaid assessments.  The FDIC determined each institution’sprepaid assessment based on the institution’s: (i) actual September 30,2009 assessment base, increased quarterly by a five percent annual growth ratethrough the fourth quarter of 2012; and (ii) total base assessment rate ineffect on September 30, 2009, increased by an annualized three basispoints beginning in 2011.  The FDIC willbegin to offset prepaid assessments on March 30, 2010, representingpayment of the regular quarterly risk-based deposit insurance assessment forthe fourth quarter of 2009.  Any prepaidassessment not exhausted after collection of the amount

 

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due on June 30, 2013, will be returned to the institution.

 

***FDIC Temporary Liquidity Guarantee Program***.  In conjunction with the Treasury’sactions to address the credit and liquidity crisis in financial markets, on October 14,2008, the FDIC announced the Temporary Liquidity Guarantee Program.  One component of the Temporary LiquidityGuarantee Program is the Transaction Account Guarantee Program, whichtemporarily provides participating institutions with unlimited depositinsurance coverage for non-interest bearing and certain low-interest bearingtransaction accounts maintained at FDIC insured institutions.  All institutions that did not opt out of theTransaction Account Guarantee Program were subject to a 10 basis point perannum assessment on amounts in excess of $250,000 in covered transactionaccounts through December 31, 2009. On August 26, 2009, the FDIC extended the Transaction AccountGuarantee Program for an additional six months through June 30, 2010.  Beginning January 1, 2010, theassessment levels increased to 15 basis points, 20 basis points or 25 basispoints per annum, based on the risk category to which an institution isassigned for purposes of the risk-based premium system.  The Bank did not opt out of the six-monthextension of the Transaction Account Guarantee Program.  As a result, the Bank, like every otherFDIC-insured depository institution in the United States that did not opt outof the Transaction Account Guarantee Program, is incurring fees on amounts inexcess of $250,000 in covered transaction accounts.

 

***FICO Assessments.***  The Financing Corporation (“FICO”) is a mixed-ownership governmentalcorporation chartered by the former Federal Home Loan Bank Board pursuant tothe Federal Savings and Loan Insurance Corporation Recapitalization Act of 1987to function as a financing vehicle for the recapitalization of the formerFederal Savings and Loan Insurance Corporation. FICO issued 30-year non-callable bonds of approximately $8.2 billionthat mature by 2019.  Since 1996, federallegislation has required that all FDIC-insured depository institutions payassessments to cover interest payments on FICO’s outstanding obligations.  These FICO assessments are in addition toamounts assessed by the FDIC for deposit insurance. During the year ended December 31,2009, the FICO assessment rate was approximately 0.01% of deposits.

 

***Supervisory Assessments.***  National banks are required to paysupervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculatedusing a formula that takes into account the bank’s size and its supervisorycondition.** **Duringthe year ended December 31, 2009, the Bank paid supervisory assessments tothe OCC totaling $85,000.

 

***Capital Requirements.***** **Banks are generally requiredto maintain capital levels in excess of other businesses. Under federalregulations, the Bank is subject to the following minimum capital standards fornational banks, such as the Bank: (i) a leverage requirement consisting ofa minimum ratio of Tier 1 capital to total assets of 3% for the mosthighly-rated banks with a minimum requirement of at least 4% for all others;and (ii) a risk-based capital requirement consisting of a minimum ratio oftotal capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are thesame as those for bank holding companies discussed above.

 

Thecapital requirements described above are minimum requirements.  Higher capital levels will be required ifwarranted by the particular circumstances or risk profiles of individualinstitutions.  For example, OCCregulations provide that additional capital may be required to take adequateaccount of, among other things, interest rate risk or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.

 

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Further,federal law and regulations provide various incentives for financial institutionsto maintain regulatory capital at levels in excess of minimum regulatoryrequirements. For example, a financial institution that is “well-capitalized”may qualify for exemptions from prior notice or application requirementsotherwise applicable to certain types of activities and may qualify forexpedited processing of other required notices or applications. Additionally,one of the criteria that determines a bank holding company’s eligibility tooperate as a financial holding company is a requirement that all of itsfinancial institution subsidiaries be “well-capitalized.”  Under OCC regulations, in order to be “well-capitalized”a financial institution must maintain a ratio of total capital to totalrisk-weighted assets of 10% or greater, a ratio of Tier 1 capital to totalrisk-weighted assets of 6% or greater and a ratio of Tier 1 capital to totalassets of 5% or greater.

 

Federallaw also provides the federal banking regulators with broad power to takeprompt corrective action to resolve the problems of undercapitalizedinstitutions.  The extent of theregulators’ powers depends on whether the institution in question is “adequatelycapitalized,” “undercapitalized,” “significantly undercapitalized” or “criticallyundercapitalized,” in each case as defined by regulation.  Depending upon the capital category to whichan institution is assigned, the regulators’ corrective powers include: (i) requiringthe institution to submit a capital restoration plan; (ii) limiting theinstitution’s asset growth and restricting its activities; (iii) requiringthe institution to issue additional capital stock (including additional votingstock) or to be acquired; (iv) restricting transactions between theinstitution and its affiliates; (v) restricting the interest rate theinstitution may pay on deposits; (vi) ordering a new election of directorsof the institution; (vii) requiring that senior executive officers ordirectors be dismissed; (viii) prohibiting the institution from acceptingdeposits from correspondent banks; (ix) requiring the institution todivest certain subsidiaries; (x) prohibiting the payment of principal orinterest on subordinated debt; and (xi) ultimately, appointing a receiver forthe institution.

 

Asof December 31, 2009: (i) the Bank was not subject to a directivefrom the OCC to increase its capital to an amount in excess of the minimumregulatory capital requirements; (ii) the Bank exceeded its minimumregulatory capital requirements under OCC capital adequacy guidelines; and (iii) theBank was “well-capitalized,” as defined by OCC regulations.

 

***Dividends.***  The primary source of funds for the Companyis dividends from the Bank. Under the National Bank Act, a national bank maypay dividends out of its undivided profits in such amounts and at such times asthe bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not paydividends in any calendar year that, in the aggregate, exceed the bank’syear-to-date net income plus the bank’s retained net income for the twopreceding years.

 

Thepayment of dividends by any financial institution is affected by therequirement to maintain adequate capital pursuant to applicable capitaladequacy guidelines and regulations, and a financial institution generally isprohibited from paying any dividends if, following payment thereof, theinstitution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirementsunder applicable guidelines as of December 31, 2009.  As of December 31, 2009, approximately$731,000 was available to be paid as dividends by the Bank.  Notwithstanding the availability of funds fordividends, however, the OCC may prohibit the payment of dividends by the Bankif it determines such payment would constitute an unsafe or unsound practice.

 

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***Insider Transactions.***** **The Bank is subject tocertain restrictions imposed by federal law on extensions of credit to theCompany, on investments in the stock or other securities of the Company and theacceptance of the stock or other securities of the Company as collateral forloans made by the Bank. Certain limitations and reporting requirements are alsoplaced on extensions of credit by the Bank to its directors and officers, tothe directors and officers of the Company, to principal stockholders of theCompany, and to “related interests” of such directors, officers and principalstockholders.  In addition, federal lawand regulations may affect the terms upon which any person who is a director orofficer of the Company or the Bank or a principal stockholder of the Companymay obtain credit from banks with which the Bank maintains a correspondentrelationship.

 

***Safety and Soundness Standards.***  The federal banking agencies have adoptedguidelines that establish operational and managerial standards to promote thesafety and soundness of federally insured depository institutions.  The guidelines set forth standards forinternal controls, information systems, internal audit systems, loandocumentation, credit underwriting, interest rate exposure, asset growth,compensation, fees and benefits, asset quality and earnings.

 

Ingeneral, the safety and soundness guidelines prescribe the goals to be achievedin each area, and each institution is responsible for establishing its ownprocedures to achieve those goals.  If aninstitution fails to comply with any of the standards set forth in theguidelines, the institution’s primary federal regulator may require theinstitution to submit a plan for achieving and maintaining compliance. If aninstitution fails to submit an acceptable compliance plan, or fails in anymaterial respect to implement a compliance plan that has been accepted by itsprimary federal regulator, the regulator is required to issue an orderdirecting the institution to cure the deficiency. Until the deficiency cited inthe regulator’s order is cured, the regulator may restrict the institution’srate of growth, require the institution to increase its capital, restrict therates the institution pays on deposits or require the institution to take anyaction the regulator deems appropriate under the circumstances. Noncompliancewith the standards established by the safety and soundness guidelines may alsoconstitute grounds for other enforcement action by the federal bankingregulators, including cease and desist orders and civil money penaltyassessments.

 

***Branching Authority.***  National banks headquartered in Illinois,such as the Bank, have the same branching rights in Illinois as banks charteredunder Illinois law, subject to OCC approval. Illinois law grants Illinois-chartered banks the authority to establishbranches anywhere in the State of Illinois, subject to receipt of all requiredregulatory approvals.

 

Federallaw permits state and national banks to merge with banks in other statessubject to: (i) regulatory approval; (ii) federal and state depositconcentration limits; and (iii) state law limitations requiring themerging bank to have been in existence for a minimum period of time (not toexceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individualbranches of a bank in another state (rather than the acquisition of anout-of-state bank in its entirety) is permitted only in those states the lawsof which expressly authorize such expansion.

 

***Financial Subsidiaries. ***Under Federal law and OCC regulations, nationalbanks are authorized to engage, through “financial subsidiaries,” in anyactivity that is permissible for a financial holding company and any activitythat the Secretary of the Treasury, in consultation with the Federal Reserve,determines is financial in nature or incidental to any such financial activity,except (i) insurance underwriting, (ii) real estate development or realestate investment activities (unless otherwise permitted by law), (iii) insurancecompany portfolio investments and

 

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(iv) merchant banking.  The authority of a national bank to invest ina financial subsidiary is subject to a number of conditions, including, amongother things, requirements that the bank must be well-managed andwell-capitalized (after deducting from capital the bank’s outstandinginvestments in financial subsidiaries). The Bank has not applied for approval to establish any financialsubsidiaries.

 

***Federal Reserve System.***  Federal Reserve regulations, as presently ineffect, require depository institutions to maintain reserves against theirtransaction accounts (primarily NOW and regular checking accounts), as follows:for transaction accounts aggregating $55.2 million or less, the reserverequirement is 3% of total transaction accounts; and for transaction accountsaggregating in excess of $55.2 million, the reserve requirement is $1.335million plus 10% of the aggregate amount of total transaction accounts inexcess of $55.2 million.  The first$10.7 million of otherwise reservable balances are exempted from the reserverequirements.  These reserve requirementsare subject to annual adjustment by the Federal Reserve.  The Bank is in compliance with the foregoingrequirements.

 

**Item 1.A.    Risk Factors.**

 

We are a smaller reporting company as defined by Rule 12b-2of the Exchange Act and are not required to provide the information under thisitem.

 

**Item 1.B.    Unresolved Staff Comments.**

 

None

 

**Item 2.        Properties**.

 

The Company’s main officeis located at 701-705 LaSalle Street, Ottawa, Illinois.  The building is comprised of approximately15,000 square feet.  The main officebuilding is a two-story structure constructed principally of masonry which wasopened in 1865.  The Company alsooperates eight branch office facilities. A limited service branch, whichcontains eight drive-thru lanes, is located at 300 West Madison Street, Ottawa,Illinois, a loan production office is located at 426 Mondamin Street, Unit 1,Minooka, Illinois, and six full-service branches are located at 601 StateStreet, Ottawa, Illinois; 2771 North Columbus Street, Ottawa, Illinois; 1771North Division Street, Morris, Illinois; 2324 North Bloomington Street,Streator, Illinois; 401 East Main Street, Streator, Illinois; and 1459Cannonball Trail, Yorkville, Illinois. The Company has submitted an applicationwith the Office of the Comptroller of Currency to relocate the branch locatedat 401 East Main Street in Streator, Illinois, to 409 East Bridge Street inStreator, Illinois. This relocation would be considered a short distancerelocation as defined in 12 CFR 5.3(i) if and when it is approved.  The main banking office and branch officesare owned by the Company in fee and are unencumbered. The loan productionoffice space was leased for a three year term expiring in 2009, with renewaloptions for 2010 and 2011.

 

**Item 3.        Legal Proceedings.**

 

The Company is from time to time aparty to legal proceedings in the ordinary course of business that areincidental to the business of banking. Neither the Company nor the Bank isengaged in any legal proceedings of a material nature as of the date of this Form 10-K.

 

**Item 4.        [Reserved]**

 

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**PART II**

 

**Item 5.****                      ****Market For Company’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

The information set forth under thecaption “Price Range of Common Stock” on page 45 of the 2009 Annual Reportto Stockholders (filed as Exhibit 13.1 of this Form 10K) which isincorporated herein by reference.

 

The Company’s ability topay dividends to stockholders is largely dependent upon the dividends itreceives from the Bank, and the Bank is subject to regulatory limitations onthe amount of cash dividends it may pay. See “Business — Supervision and Regulation — The Company — Dividends”and “Business - Supervision and Regulation — The Bank — Dividends” for a moredetailed description of these limitations.

 

**Issuer Purchases of EquitySecurities**

 
| **Period**                                            | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
| October 1  2009 through October 31, 2009    |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |
| November 1,  2009 through November 30, 2009 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |
| December 1,  2009 through December 31, 2009 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |
| Total                                                 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |

 

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(1)          Repurchased by the Company in open market purchaseswith third parties.

 

**Item6.**                       Selected FinancialData

 

The information set forth under thecaption “Selected Consolidated Financial Information” on page 1 of the2009 Annual Report to Stockholders (filed as Exhibit 13.1 of this Form 10-K)is incorporated herein by reference.

 

**Item 7.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

The information set forth under thecaption “Management’s Discussion and Analysis of Financial Condition andResults of Operations” on pages 2 through 9 of the 2009 Annual Report toStockholders (filed as Exhibit 13.1 of this Form 10-K) isincorporated herein by reference.

 

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**Item 7A.****             ****Quantitativeand Qualitative Disclosures about Market Risk**

 

The information set forth under thecaption “Quantitative and Qualitative Disclosures about Market Risk” on page 10of the 2009 Annual Report to Stockholders (filed as Exhibit 13.1 of this Form 10-K)is incorporated herein by reference.

 

**Item 8.****                      ****FinancialStatements and Supplementary Data**

 

The consolidated financialstatements of the Company and the Report of Independent Registered PublicAccounting Firm as set forth on pages 14 through 43 of the 2009 AnnualReport to Stockholders (filed as Exhibit 13.1 of this Form 10-K) areincorporated herein by reference:

 
| ** **                                                                                                 | ** ** | **Annual Report to**  |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| ** **                                                                                                 | ** ** | **Stockholders Page** |
|                                                                                                       |       |                  |
| Report of Independent  Registered Public Accounting Firm                                                   |       | 14                    |
|                                                                                                       |       |                  |
| Consolidated Balance  Sheets as of December 31, 2009 and 2008                                         |       | 15                    |
|                                                                                                       |       |                  |
| Consolidated Statements  of Income for the years ended December 31, 2009, and 2008                    |       | 16                    |
|                                                                                                       |       |                  |
| Consolidated Statements  of Stockholders’ Equity for the years ended December 31, 2009, and 2008 |       | 17                    |
|                                                                                                       |       |                  |
| Consolidated Statements  of Cash Flows for the years ended December 31, 2009, and 2008                |       | 18                    |
|                                                                                                       |       |                  |
| Notes to the  Consolidated Financial Statements                                                            |       | 19                    |

 

The portions of the 2009 AnnualReport to Stockholders which are not specifically incorporated by reference asa part of this Form 10-K are not deemed to be a part of this report.

 

**Item 9.****                      ****Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

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**Item 9A. Controls andProcedures**

 

**Evaluation of Disclosure Controlsand Procedures**

 

The Chief ExecutiveOfficer and Chief Financial Officer of the Company have evaluated theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) promulgated under theExchange Act) as of December 31, 2009. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods indicated.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

The management of theCompany is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as defined in Rule 13a—15(f) underthe Exchange Act.  The Company’s internalcontrol over financial reporting is a process designed under the supervision ofthe Company’s Chief Executive Officer and Chief Financial Officer to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s financial statements for external reportingpurposes in accordance with U.S. generally accepted accounting principles.

 

As of December 31,2009, management assessed the effectiveness of the Company’s internal controlover financial reporting based on the framework established in “InternalControl - Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, management has determined that the Company’sinternal control over financial reporting was effective as of December 31,2009 based on the criteria specified.

 

This Form 10-K doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Form 10-K.

 

**Item 9B. Other Information**

 

None

 

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**PART III**

 

**Item 10.****               ****Directors and Executive Officersand Corporate Governance**

 

The information set forth under the captions “Electionof Directors”, “Corporate Governance and the Board of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” of the Company’s Proxy Statement relating tothe 2010 Annual Meeting of Stockholders is incorporated herein by reference.

 

**Code of Business Conduct and Ethics**

 

The Company has a code of business conduct and ethicsin place that applies to all of its directors and employees.  The code sets forth the standard of ethicsthat the Company expects all of its directors and employees to follow,including the Chief Executive Officer, Chief Financial Officer, and Principal AccountingOfficer.  The code of business conductand ethics is posted on the Company’s website at www.firstottawa.com.  The Company intends to satisfy the disclosurerequirements under Item 5.05 of Form 8-K regarding any amendment to orwaiver of the code with respect to the Chief Executive Officer, Chief FinancialOfficer, Principal Accounting Officer, and persons performing similarfunctions, by posting such information on its website.

 

**Item 11.****               ****Executive Compensation**

 

The information set forth under the captions “CorporateGovernance and the Board of Directors,” “Executive Compensation” and “DirectorCompensation” of the Company’s Proxy Statement relating to the 2010 AnnualMeeting of Stockholders is incorporated herein by reference.

 

**Item 12.**                Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters

** **

The informationset forth under the caption “Security Ownership of Certain Beneficial Owners”of the Company’s Proxy Statement relating to the 2010 Annual Meeting of Stockholdersis incorporated herein by reference.

 

**Equity Compensation PlanInformation**

 

The table below sets forth the followinginformation as of December 31, 2009 for (i) all compensation planspreviously approved by the Company’s stockholders and (ii) all compensationplans not previously approved by the Company’s stockholders:

 

(a)          the number of securities to be issued upon theexercise of outstanding options, warrants and rights;

 

(b)         the weighted-average exercise price of suchoutstanding options, warrants and rights; and

 

(c)          other than securities to be issued upon the exerciseof such outstanding options, warrants and rights, the number of securitiesremaining available for future issuance under the plans.

 

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**EQUITY COMPENSATION PLAN INFORMATION**

 
| **Plan category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise  price of outstanding  options** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  stockholders     |       | 61,040                                                                                                               |       | $                                                                       | 70.30      |                                                                                        | 83,300     |   |
| Equity compensation plans not approved by security  stockholders |       | 0                                                                                                                    |       | 0                                                                       |       | 0                                                                                           |       |
| **Total**                                                        |       | 61,040                                                                                                               |       | $                                                                       | 70.30      |                                                                                        | 83,300     |   |

 

**Item 13.****               ****Certain Relationships and RelatedTransactions and Director Independence**

 

The informationset forth under the caption “Certain Relationships and Related Transactions”and “Election of Directors” of the Company’s Proxy Statement relating to the2010 Annual Meeting of Stockholders is incorporated herein by reference.

 

**Item 14.****               ****Principal Accounting Fees andServices**

 

The informationset forth under the caption “Independent Registered Public Accounting Firm” ofthe Company’s Proxy Statement relating to the 2010 Annual Meeting ofStockholders is incorporated herein by reference.

 

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**PART IV**

 

**Item15.  Exhibits and Financial StatementSchedules**

 
| (a)    | 1.     | Financial Statements                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | All financial statements of the Registrant are incorporated herein by  reference as set forth under Item 8, Part II of this report on  Form 10-K. |
|   |   |                                                                                                                                                        |
|   | 2.     | Financial Statement Schedules                                                                                                                               |
|   |   | Not applicable.                                                                                                                                             |
|   |   |                                                                                                                                                        |
|   | 3.     | Exhibits (Numbered in accordance with Item 601 of  Regulation S-K)                                                                                          |
|   |   |                                                                                                                                                        |
|   |   | The following exhibits are filed as part of this report:                                                                                                    |
|   |   |                                                                                                                                                        |
|   |   | 3(i)                                                                                                                                                        |   | Certificate  of Incorporation of First Ottawa Bancshares, Inc. |
|   |   |                                                                                                                                                        |   |   |
|   |   | 3(ii)                                                                                                                                                       |   | By-Laws of First Ottawa Bancshares, Inc. |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.1                                                                                                                                                        |   | Employment Agreement for J. Brown* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.2                                                                                                                                                        |   | Amendment No. 1 to Employment Agreement for J. Brown* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.3                                                                                                                                                        |   | Amendment No. 2 to Employment Agreement for J. Brown* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.4                                                                                                                                                        |   | Employment Agreement for D. Harris* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.5                                                                                                                                                        |   | Amendment No. 1 to Employment Agreement for D. Harris* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.6                                                                                                                                                        |   | Employment Agreement for P. Fayhee* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.7                                                                                                                                                        |   | Amendment No. 1 to Employment Agreement for P. Fayhee* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.8                                                                                                                                                        |   | Employment Agreement for V. Easi* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.9                                                                                                                                                        |   | Amendment No. 1 to Employment Agreement for V. Easi* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.10                                                                                                                                                       |   | Executive Officer Bonus Plan* |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.11                                                                                                                                                       |   | Stock Incentive Plan |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.12                                                                                                                                                       |   | Summary of Director Fees |
|   |   |                                                                                                                                                        |   |   |
|   |   | 10.13                                                                                                                                                       |   | Form of Supplemental Nonqualified Retirement Agreement |
|   |   |                                                                                                                                                        |   |   |
|   |   | 13.1                                                                                                                                                        |   | 2009 Annual Report to Stockholders |
|   |   |                                                                                                                                                        |   |   |
|   |   | 21.1                                                                                                                                                        |   | Subsidiaries |
|   |   |                                                                                                                                                        |   |   |
|   |   | 31.1                                                                                                                                                        |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |

 

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|   |   | 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 |

 

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*  Indicates management contract or compensationplan or arrangement.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                       | **FIRST  OTTAWA BANCSHARES, INC.** |
|----------------------------|------------------------------------|
|                       |                               |
|                       | By:                                | /s/ Joachim  Brown |
|                       |                               | Joachim Brown,  President and Chief Executive Officer (Principal Executive Officer) |
|                       |                               |   |
|                       | By:                                | /s/ Vincent G.  Easi |
|                       |                               | Vincent G. Easi,  Chief Financial Officer (Principal Financial  and Accounting Officer) |
|                       |                               |
| Date: March 25,  2010 |                               |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**             | ** ** | **Title**                                | ** ** | **Date**             |
|---------------------------|------------|------------------------------------------|------------|----------------------|
|                      |       |                                     |       |                 |
| /s/ Joachim  Brown        |       | Director and  President/                 |       | March 25,  2010 |
| Joachim Brown             |       | Chief Executive  Officer                 |       |                 |
|                      |       |                                     |       |                 |
| /s/ Bradley J.  Armstrong |       | Director                                 |       | March 25,  2010 |
| Bradley J. Armstrong      |       |                                     |       |                 |
|                      |       |                                     |       |                 |
| /s/ John L. Cantlin       |       | Director                                 |       | March 25,  2010 |
| John L. Cantlin           |       |                                     |       |                 |
|                      |       |                                     |       |                 |
| /s/ Thomas E.  Haeberle   |       | Director                                 |       | March 25,  2010 |
| Thomas E.  Haeberle       |       |                                     |       |                 |
|                      |       |                                     |       |                 |
| /s/ Donald J.  Harris     |       | Director and  Executive                  |       | March 25,  2010 |
| Donald J. Harris          |       | Vice President,  Chief Operating Officer |       |                 |

 

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| /s/ Thomas P. Rooney  |   | Director |   | March 25, 2010  |
|-----------------------|--------|----------|--------|----------------------|
| Thomas P. Rooney      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ William J.  Walsh |   | Director |   | March 25, 2010  |
| William J. Walsh      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ Brian P.  Zabel   |   | Director |   | March 25,  2010 |
| Brian P. Zabel        |   |     |   |                 |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                  | ** ** | **Incorporated  by Reference to**            | ** ** | **Attached  Hereto** |
|---------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------|
| 3(i)                |       | Certificate of  Incorporation of First Ottawa Bancshares, Inc. (as amended) |       | Form 10-K for the year ended 12/31/2002 |       |                 |
| 3(ii)               |       | By-Laws of First  Ottawa Bancshares, Inc.                                   |       | Form 10-K for the year ended 12/31/2003 |       |                 |
| 10.1                |       | Employment  Agreement for J. Brown                                               |       | Form 10-K for the year ended 12/31/2002 |       |                 |
| 10.2                |       | Amendment No. 1 to  Employment Agreement for J. Brown                       |       |                                         |       | X                    |
| 10.3                |       | Amendment No. 2 to  Employment Agreement for J. Brown                       |       |                                         |       | X                    |
| 10.4                |       | Employment  Agreement for D. Harris                                              |       | Form 8-K dated 6/10/2005                |       |                 |
| 10.5                |       | Amendment  No. 1 to Employment Agreement for D. Harris                      |       |                                         |       | X                    |
| 10.6                |       | Employment  Agreement for P. Fayhee                                              |       | Form 8-K dated 6/10/2005                |       |                 |
| 10.7                |       | Amendment  No. 1 to Employment Agreement for P. Fayhee                      |       |                                         |       | X                    |
| 10.8                |       | Employment  Agreement for V. Easi                                                |       | Form 8-K dated 10/10/2007               |       |                 |
| 10.9                |       | Amendment  No. 1 to Employment Agreement for V. Easi                        |       |                                         |       | X                    |
| 10.10               |       | Executive  Officer Bonus Plan                                                    |       | Form 10-K for the year ended 12/31/2002 |       |                 |
| 10.11               |       | Stock Incentive  Plan                                                            |       | Form S-8 dated 8/1/03                   |       |                 |
| 10.12               |       | Summary of  Director Fees                                                        |       | Form 10-K for the year ended 12/31/2004 |       |                 |
| 10.13               |       | Form of  Supplemental Nonqualified Retirement Agreement                     |       | Form 10-K for the year ended 12/31/2004 |       |                 |
| 13.1                |       | 2009 Annual  Report to Stockholders                                              |       |                                         |       | X                    |

 

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| 21.1 |   | Subsidiaries                              |   |   |   | X |
|------|--------|-------------------------------------------|--------|--------|--------|---|
| 31.1 |   | Certification of  Chief Executive Officer |   |   |   | X |
| 31.2 |   | Certification of  Chief Financial Officer |   |   |   | X |
| 32.1 |   | Certification of  Chief Executive Officer |   |   |   | X |
| 32.2 |   | Certification of  Chief Financial Officer |   |   |   | X |

 

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