Tableof Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

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

** **

**For thefiscal year ended December 31, 2008**

 

**Commissionfile number:  000-30495**

 

**FIRST OTTAWA BANCSHARES, INC.**

(Exact name ofRegistrant as 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**

(Registrant Telephone Number,

including Area Code)

 

Securitiesregistered under Section 12(b) of the Exchange Act:

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**CommonStock, par value $1.00 per share**

(Title of Class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes o                    No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.

Yes o                    No x

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes x                    Noo

 

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 markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o                    No x

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant, based on the last known sales price on or prior to June 30, 2008,the last business day of the Company’s most recently completed second fiscalquarter, was $33,713,640.

 

644,849 shares of commonstock were outstanding as of February 28, 2009.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

** **

The Company’s 2008Annual Report to Stockholders is incorporated by reference in Parts II and IV,and the Company’s Proxy Statement for the Annual Meeting of Stockholders to beheld May 20, 2009 is incorporated by reference in Part III.

 

Except for those portions of the 2008 Annual Report incorporated byreference, the Annual Report is not deemed 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                                                                                                           |       | 23                |
| Item 3        |       | Legal Proceedings                                                                                                    |       | 23                |
| Item 4        |       | Submission of  Matters to a Vote of Security Holders                                                                 |       | 23                |
|          |       |                                                                                                                 |       |              |
| PART II  |       |                                                                                                                 |       |              |
|          |       |                                                                                                                 |       |              |
| Item 5        |       | Market for the  Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities |       | 24                |
| Item 6        |       | Selected Financial  Data                                                                                             |       | 24                |
| Item 7        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |       | 24                |
| Item 7A       |       | Quantitative  and Qualitative Disclosures about Market Risk                                                          |       | 25                |
| Item 8        |       | Financial  Statements and Supplementary Data                                                                         |       | 25                |
| Item 9        |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                |       | 25                |
| Item 9A       |       | Controls and  Procedures                                                                                             |       | 26                |
| Item 9B       |       | Other Information                                                                                                    |       | 26                |
|          |       |                                                                                                                 |       |              |
| PART III |       |                                                                                                                 |       |              |
|          |       |                                                                                                                 |       |              |
| Item 10       |       | Directors,  Executive Officers and Corporate Governance                                                              |       | 27                |
| Item 11       |       | Executive  Compensation                                                                                              |       | 27                |
| Item 12       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     |       | 27                |
| Item 13       |       | Certain  Relationships and Related Transactions and Director Independence                                            |       | 28                |
| Item 14       |       | Principal  Accountant Fees and Services                                                                              |       | 28                |
|          |       |                                                                                                                 |       |              |
| PART IV  |       |                                                                                                                 |       |              |
|          |       |                                                                                                                 |       |              |
| Item 15       |       | Exhibits and  Financial Statement Schedules                                                                          |       | 29                |

 

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**Table ofContents**

 

**PART I**

** **

**Item 1.        Business**.

 

**General**

 

FirstOttawa Bancshares, Inc. (the “Company”) is a bank holding company for itswholly-owned subsidiary, First National Bank of Ottawa (the “Bank”), and theBank’s wholly owned subsidiary, First Ottawa Financial Corporation.  The Company was organized as a Delawarecorporation in 1999.  As of December 31,2008, the Company had total assets of $275.2 million, total deposits of $240.7million, loans, including loans held for sale, of $158.0 million and totalstockholders’ equity of $24.7 million. For the year ended December 31, 2008, the Company had interestincome of $14.0 million and net income of $1.9 million, which amounted to basicnet income per share of $2.87, and diluted net income per share of $2.86.

 

The Company conducts a general banking businessembracing most of the services, both commercial and consumer, which banks maylawfully provide, including the following principal services:  the acceptance of deposits for demand,savings, and time accounts and the servicing of such accounts; commercial,agricultural, consumer, and real estate lending, including installment loans,personal lines of credit, and overdraft protection; trust operations; farmmanagement; safe deposit operations; and an extensive variety of additionalservices tailored to the needs of individual customers, including the sale oftraveler’s checks, cashier’s checks, and foreign currency and other specialservices.  Loans, both commercial andconsumer, are provided on either a secured or unsecured basis to corporations,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 islocated in north-central Illinois, with corporate offices in Ottawa, Illinoisin LaSalle County, approximately 80 miles southwest of Chicago.  All branches, including, Streator, LaSalleCounty, Morris and Minooka, Grundy County, and Yorkville, Kendall County, arelocated in Illinois within 45 miles of the corporate offices.  Ottawa, Morris, and Yorkville are the countyseats of their respective counties, all with associated governmental officesand workforce.  Ottawa and Streator arethe 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 tointerest in the region for developers and those exploring relocation orexpansion. The market areas are served by major transportation routes,Interstates 80, 88, 39, and 55, as well as rail, and the Illinois Riverwaterway system.

 

The Company’s marketareas incorporate diverse economic sectors, including agriculture,transportation, industry, and mining, primarily mining of high quality silicasand.  

 

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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.

 

The Company opened a full service banking facilityin 2005 in the city of Yorkville, Illinois. The Company also opened a loanproduction office in 2006 in the city of Minooka, Illinois. The Companycontinues to explore expansion opportunities within its existing market areaand in surrounding areas.

 

**LendingActivities**

 

***General.***The Company relies on interest income from lending activities as a major sourceof revenue.  The Company has a communitybank focus — serving the credit needs of the local community.  Because of this local focus, the Company hasa flexible process for handling loan requests rather than being tied to rigidstandards.  The discussions belowregarding lending policies reflect general guidelines and may vary on acase-by-case basis depending on the borrower’s credit history and the type andsize of loan.  During the approvalprocess for loans it originates, the Company assesses both the applicant’sability to repay the loan and the value of any collateral securing theloan.  The Company verifies the applicant’sability to repay the loan by using credit reports, financial statements,confirmations, and other items, including appraisals.

 

Ten loan officers have the authority to handle alllending activities of the Company.  Eachlending officer has authority to approve extensions of credit up to theirindividual lending limit.  The Companyhas an Officers Loan Committee (consisting of Loan Officers, the Chief LendingOfficer, and the President of the 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.

 

***Loan Portfolio Composition***.  The Company’s gross loan portfolio, totaled$159.6 million at December 31, 2008, representing 66.3% of the Company’stotal deposits at that date.  The Company’sloan portfolio at December 31, 2008 included $112.5 million for realestate purposes, $13.5 million for consumer purposes, and $33.6 million forcommercial and agricultural purposes.

 

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Certain risks, including the risk of non-payment, are associated witheach type of loan.  The primary risksassociated with consumer loans relate to the borrower, such as the risk of aborrower’s unemployment as a result of deteriorating economic conditions or theamount and nature of a borrower’s other existing indebtedness, and the value ofthe collateral securing the loan if the Company must take possession of thecollateral.  Consumer loans also haverisks associated with concentrations of loans in a single type of loan.  The primary risks associated with commercialloans are the experience and quality of the borrower’s management, the businessclimate, and the impact of economic factors. With respect to agricultural loans, the primary risks are weather,market conditions, and, like commercial loans, the quality of the borrower’smanagement.  Risks associated with realestate loans include concentrations of loans in a single type of loan  such as commercial or agricultural andfluctuating land values.

 

The Company’s strategy in addressing and managing these types of risksis to follow its loan policies and underwriting practices, which include: (i) grantingloans on a sound and collectible basis; (ii) investing funds profitablyfor the benefit of the Company’s stockholders and the protection of itsdepositors; (iii) serving the legitimate needs of the community and theCompany’s general market area while maintaining a balance between maximum yieldand minimum risk; (iv) ensuring that primary and secondary sources ofrepayment are adequate in relation to amount of the loan; (v) developingand maintaining adequate diversification of the loan portfolio as a whole andof the loans within each loan category; (vi) ensuring that each loan isproperly documented and, if appropriate, secured or guaranteed by governmentagencies; and (vii) developing and applying adequate collectionsprocedures.

 

**All tableamounts throughout the Form 10-K are in thousands except share and pershare data.**

** **

The following table presents the components of theCompany’s loan portfolio as of December 31 for each year shown.

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Real estate  loans                         |       | $        | 112,237    |     | $          | 120,581  |       | $        | 102,516    |     | $          | 95,469 |   | $ | 74,225 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Commercial and agricultural  loans         |       | 33,632   |       | 28,354   |       | 39,610   |       | 33,686   |       | 28,341   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Installment  loans, net of unearned income |       | 3,772    |       | 5,439    |       | 7,401    |       | 11,585   |       | 17,575   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Home equity  lines of credit               |       | 9,721    |       | 11,051   |       | 11,411   |       | 12,120   |       | 12,651   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Total Loans                                |       | 159,363  |       | 165,425  |       | 160,938  |       | 152,860  |       | 132,792  |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Allowance for  loan losses                 |       | (1,612   | )          | (1,588   | )          | (1,463   | )          | (1,344   | )          | (1,174   | )          |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans, net                                 |       | $        | 157,751    |     | $          | 163,837  |       | $        | 159,475    |     | $          | 151,516 |   | $ | 131,618 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans held for  sale                       |       | $        | 229        |     | $          | —   |       | $        | —     |     | $          | — |   | $ | 1,701 |   |

 

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Maturities (based on contractual terms) of theCompany’s commercial and construction loan portfolio at December 31, 2008are summarized below:

 
| ** **                   | ** ** | **One Year** | ** ** | **One to**     | ** ** | **Over**            | ** ** | ** ** | ** ** |
|------------------------------|------------|-------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                   | ** ** | **or Less**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
|                         |       |              |       |                |       |                |       |       |       |
| Commercial and  agricultural |       | $                 | 15,573     |                | $          | 11,030              |       | $          | 7,029      |   | $ | 33,632 |   |
|                         |       |              |       |                |       |                |       |       |       |
| Construction                 |       | 9,066             |       | 7,571               |       | 167                 |       | 16,804     |       |
|                         |       |              |       |                |       |                |       |       |       |
| Total                        |       | $                 | 24,639     |                | $          | 18,601              |       | $          | 7,196      |   | $ | 50,436 |   |

 

At December 31, 2008, of the total loans thatmature in more than one year, $74.4 million, or 75.1%, bear interest at fixedrates and $24.7 million, or 24.9%, bear interest at variable rates.

 

***Consumer Loans***. The Company makes consumer loans for various purposes, includingpersonal, family, and nonbusiness reasons such as automobile and recreationalvehicle purchases, on both a direct and indirect basis.  Consumer loans totaled approximately $13.5million at December 31, 2008, or approximately 8.5% of the Company’s totalloan portfolio.  Approximately 13.5% ofthe Company’s consumer loans were automobile loans, and of these loans,approximately 38.0% were made indirectly by the Company through automobiledealers.  At December 31, 2008, theCompany had one consumer loan totaling $440,000 that was past due in excess of90 days. Management feels the Company is well collateralized and expects noloss in excess of specific allocations on the loan.

 

In approving consumer loans, lending officersconsider the borrower’s past credit history, the borrower’s ability to repaythe debt, the collateral offered, and local economic conditions that couldaffect the borrower’s income.  Loansbeing originated for new borrowers must be accompanied by a completedapplication dated and signed by the borrower, giving the details of the loanrequest.  Total debt, along with thegross monthly income of the borrower, are required to be shown on theapplication.  A brief cash flow analysisis performed by the loan officer showing the amount of the borrower’s incomeavailable for debt service based on current debts plus the new loanrequest.  Generally, debt service togross income should not exceed 40%. New credit reports are obtained on allborrowers with each loan request.  Thevalue of collateral on loans secured by used automobiles is generallydetermined by using industry-accepted used car guides.  In connection with used automobile loans, theCompany generally requires a 90% loan-to-value ratio; however, depending uponvarious factors, including the credit experience of the Company with theborrower, the Company may extend credit in excess of the value of the usedautomobile.  A loan-to-value ratio of 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 uponsatisfactory income, 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 lendingconsists of commercial loans with a small portion in residential andagricultural real estate loans.  Realestate loans at December 31, 2008 totaled approximately $112.2 million orapproximately 70.5% of the Company’s total loan portfolio.  All borrowers requesting a real estate loanare required to submit an application which is reviewed by the lendingofficer.  A credit investigation isperformed and an analysis of the borrower’s ability to repay is conducted.  Subsequently, an inspection and appraisal ofthe real property is conducted to determine whether or not the property is ofsufficient value to meet the Company’s suggested maximum loan-to-value ratio of80% to 85% of the lesser of the appraised value or the purchase price of theproperty securing the loan.  Undercertain federal guaranteed loan programs utilized by the Company, the maximumloan-to-value ratio is higher.  Withrespect to loans secured by commercial or industrial real estate, the Companyanalyzes the potential for environmental liability concerns and, depending uponthe circumstances, the Company may require additional information ortesting.  Commercial and agriculturalreal estate loans are generally originated under the same policies andprocedures as discussed above for commercial and agricultural non-real estateloans.

 

The Company’s residential real estate loans consist of 15-year, 20-yearand 30-year fixed-rate and variable-rate loans with amortization periods equalto the maturity of the loan.  The Company’sfixed-rate loans with biweekly payments account for approximately 46.6% of allthe residential real estate loans of the Company. The biweekly loan programamortizes 25 year loans in approximately 18.9 years.  The Company also originates a variety ofloans that are sold into the secondary market through Federal Home LoanMortgage Corporation (“Freddie Mac”) and private investors.  These loans are underwritten to meet allFreddie Mac requirements.  The Companyretains servicing rights on loans sold into the secondary market.  At December 31, 2008, mortgage loansserviced for the secondary market totaled approximately $26.5 million.

 

At December 31, 2008, the Companyhad no residential real estate mortgage loans past due in excess of 90 days,and ten commercial real estate loans totaling $2.6 million, past due in excessof 90 days. Management feels the Company is well collateralized and expects noloss in excess of specific allocations on the loans.

 

**Commercial and Agricultural.**  At December 31,2008, the Company’s commercial and agricultural loans totaled $33.6 million, orapproximately 21.1% of the total loan portfolio of the Company.  The majority of agricultural and commercialnon-real estate loans are written for one to five years. These loans may bearinterest at a fixed or variable rate and are amortized over a 15-year to20-year period. Fixed rates are established by the Company’s management afterconsidering the cost 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, 2008, the Company had two commercial non-realestate loans totaling $59,000 thatwere past due inexcess of 90 days. There were no agricultural non-real estate loans at December 31,2008 that were past due in excess of 90 days. Management feels 

 

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the Company iswell collateralized and expects no loss in excess of specific allocations onthe loans.

 

All commercial andagricultural borrowers, both existing and new, are required by a Company policyto have a current financial statement no older than one year.  Borrowers also are required to provide theCompany with recent tax returns and pro forma projections.  Using certain computer programs and the datasupplied by borrowers, the loan officers produce additional financialinformation utilized in analyzing the loans and the borrowers.  The general nature of the collateral securingthe Company’s commercial and agricultural loans consists of equipment, farmproducts, crops, inventory, chattel paper, accounts receivable, and generalintangibles.  The Company’s loan-to-valueratio with respect to agricultural and commercial non-real estate loansaverages 66 2/3% to 75% of the value of the collateral securing the loan.

 

***InterestRates and Fees***.  Interest rates and fees charged on theCompany’s loans are affected primarily by the market demand for loans and thesupply of money available for lending purposes. These factors are affected by, among other things, general economicconditions and the policies of the federal government, including the FederalReserve Board, legislative tax policies, and governmental budgetary matters.

 

***Non-PerformingLoans***.  When a borrower fails to make a requiredpayment on a loan and does not cure the delinquency within 30 days, the loan isclassified as delinquent.  In this event,the normal procedure followed by the Company is to make contact with theborrower at prescribed intervals in an effort to bring the loan to a currentstatus.  In most cases, delinquencies arecured promptly, but, if not, the Company normally records a notice of default,subject to any required prior notice to the borrower, and commences foreclosureproceedings when loan payments are 120 days past due.

 

At December 31,2008, the Company had 51 loans delinquent for 30 to 90 days in an aggregateprincipal amount of $2.8 million, representing 1.7% of the total loanportfolio.  At December 31, 2008,the Company had thirteen loans totaling $3.1 million delinquent for more than90 days.

 

It is the Company’spolicy to discontinue the accrual of interest income on any loan when, inaccordance with banking regulations or in the opinion of management, there isreasonable doubt as to the collectibility of interest or principal.  Interest on these loans is credited to incomeonly when the collection of principal is reasonably assured and only to theextent interest payments are received. If management feels collection of both interest and principal isprobable, the loan is not transferred to nonaccrual status.  At December 31, 2008, there were sevenloans totaling $965,000, on nonaccrual status. Management feels theCompany is well collateralized and expects no loss in excess of specificallocations on the loans.

 

As a result of economicconditions and other factors beyond the Company’s control, the Company’s futureloss and delinquency experience cannot be predicted with certainty.

 

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

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonaccrual loans                                                      |       | $        | 965        |     | $          | 1,163    |       | $        | 362        |     | $          | — |   | $ | 161 |   |
| Loans 90 days  past due and still accruing interest                   |       | 2,098    |       | 701      |       | 305      |       | 1,337    |       | 727      |       |
| Other real  estate owned                                              |       | 310      |       | 325      |       | 118      |       | 88       |       | —   |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Total  nonperforming assets                                           |       | $        | 3,373      |     | $          | 2,189    |       | $        | 785        |     | $          | 1,425 |   | $ | 888 |   |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of total loans                   |       | 2.11     | %          | 1.13     | %          | .49      | %          | .88      | %          | .66      | %          |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  assets as a percentage of total assets                 |       | 1.23     |       | .81      |       | .28      |       | .51      |       | .31      |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of the allowance for loan losses |       | 209.24   |       | 117.38   |       | 48.59    |       | 99.48    |       | 75.64    |       |

 

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 31,2008, there were other impaired loans with specific reserve allocationsclassified as problem loans that were not included above.  Management also maintains a report on loansrequiring attention that includes loans greater than 60 days delinquent orother loans as deemed necessary by the Company’s internal loan review or theloan committee.  The total of loansrequiring attention as of December 31, 2008 was $10.8 million.

 

***Allowancefor Losses on Loans***.  In originating loans, the Companyrecognizes that losses will be experienced on loans and that the risk of losswill 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, estimatedcollateral values, and economic conditions.

 

The loan portfolio and other credit exposures areregularly reviewed by management to evaluate the adequacy of the allowance forloan losses.  The methodology forassessing the appropriateness of the allowance includes comparisons to actuallosses, industry data and economic conditions. In addition, the regulatory agencies, as an integral part of their 

 

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examination process, periodically review the Company’s allowance forloan losses.  Such agencies may requirethe Company to make additional provisions for estimated losses based uponjudgments different from those of management.

 

In connection with assessing the allowance, lossfactors are applied to various pools of outstanding loans.  The Company segregates the loan portfolioaccording to risk characteristics (i.e., mortgage loans, commercial realestate, agricultural, business, consumer, etc.) and risk gradings.  Loss factors are derived using the Company’shistorical loss experience and may be adjusted for significant factors that, inmanagement’s judgment, affect the collectibility of the portfolio as of theevaluation date.  Commercial real estateand commercial business loans are individually evaluated for impairment andspecific reserves are allocated as needed in accordance with Statement ofFinancial Accounting Standards No. 114 and No. 118.

 

In addition, management assesses the allowance usingfactors that cannot be associated with specific credit or loan categories.  These factors include management’s subjectiveevaluation of local and economic and business conditions, portfolioconcentration and changes in the character and size of the loan portfolio.  The allowance methodology reflects management’sobjective that the overall allowance appropriately reflects a margin for theimprecision necessarily inherent in the estimates of expected credit losses.

 

The allowance for loanlosses is established through a charge to operations at the time loan valuebecomes impaired or, in the judgment of management, other subjective factorswarrant additional reserves. As noted in the previous table, nonperformingloans increased by $1.2 million in 2008 after increasing by $1.4 million during2007.  Management considered this informationalong with other portfolio trends when considering the adequacy of theallowance for loan losses at December 31, 2008 to absorb probable losseson existing loans. At December 31, 2008, the balance in the allowance forloan losses was $1.6 million, or 1.01% of gross loans outstanding.  Management has concluded that the allowancefor loan losses is adequate at December 31, 2008. However, there can be noassurance that the allowance for loan losses is adequate to cover such losses.

 

The Company had twoproperties valued at a total of $310,000, resulting from foreclosure,classified as other real estate owned at December 31, 2008. Other realestate is generally carried at the lower of cost or estimated market value.

 

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***Summaryof 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, general economic conditions,information about specific borrower situations, including their financialposition and collateral values, and other factors and estimates which aresubject to change over time.

 

Loan loss experience forthe five years ended December 31, 2008 is summarized as follows:

 
| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance of the  allowance for loan losses at beginning of year |       | $        | 1,588      |     | $          | 1,463    |       | $        | 1,344      |     | $          | 1,174 |   | $ | 1,049 |   |
| Charge-offs                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 77       |       | 16       |       | 2        |       | —   |       | 63       |       |
| Commercial                                                     |       | 41       |       | 67       |       | 34       |       | 71       |       | —   |       |
| Installment                                                    |       | 89       |       | 55       |       | 81       |       | 145      |       | 210      |       |
| Total  charge-offs                                             |       | 207      |       | 138      |       | 117      |       | 216      |       | 273      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Recoveries                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 1        |       | —   |       | 1        |       | 8        |       | —   |       |
| Commercial                                                     |       | 16       |       | 56       |       | 9        |       | 16       |       | 4        |       |
| Installment                                                    |       | 44       |       | 27       |       | 46       |       | 62       |       | 94       |       |
| Total recoveries                                               |       | 61       |       | 83       |       | 56       |       | 86       |       | 98       |       |
| Net charge-offs                                                |       | 146      |       | 55       |       | 61       |       | 130      |       | 175      |       |
| Provision                                                      |       | 170      |       | 180      |       | 180      |       | 300      |       | 300      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance at end  of year                                        |       | $        | 1,612      |     | $          | 1,588    |       | $        | 1,463      |     | $          | 1,344 |   | $ | 1,174 |   |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net charge-offs  to average total loans                        |       | .09      | %          | .03      | %          | .04      | %          | .09      | %          | .13      | %          |
| Allowance for  loan losses to total loans at year-end          |       | 1.01     |       | .96      |       | .91      |       | .88      |       | .87      |       |

 

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The Company’s allocation of theallowance for loan losses as of December 31 is presented below:

 
| ** **                         | ** ** | **2008**   | ** ** | **2007**          | ** ** | **2006**   | ** ** | **2005**          | ** ** | **2004**   | ** ** |
|------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Percent**       | ** ** | ** ** | ** ** | **Percent**       | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** |
| ** **                         | ** ** | **Amount** | ** ** | **Loans**         | ** ** | **Amount** | ** ** | **Loans**         | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Real estate loans                  |       | $          | 1,196      |              | 74.2       | %          | $          | 1,179             |       | 72.9       | %          | $ | 253 |   | 63.7 | % | $ | 131 |   | 62.5 | % | $ | 234 |   | 19.9 | % |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial and  agricultural loans |       | 336        |       | 20.8              |       | 248        |       | 17.1              |       | 633        |       | 24.6 |   | 613 |   | 22.0 |   | 519 |   | 44.2 |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Installment  loans                 |       | 51         |       | 3.2               |       | 74         |       | 10.0              |       | 97         |       | 11.7 |   | 141 |   | 15.5 |   | 185 |   | 15.8 |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unallocated                        |       | 29         |       | 1.8               |       | 87         |       | N/A               |       | 480        |       | N/A |   | 459 |   | N/A |   | 236 |   | N/A |   |
|                               |       |       |       |              |       |       |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Balance at end  of year            |       | $          | 1,612      |              | 100.0      | %          | $          | 1588              |       | 100.0      | %          | $ | 1,463 |   | 100.0 | % | $ | 1,344 |   | 100.0 | % | $ | 1,174 |   | 100.0 | % |

 

**Investment Activities**

** **

**The investmentpolicies of the Company, as established by the Board of Directors, attempt toprovide and maintain liquidity, generate a favorable return on investmentswithout incurring undue interest rate and credit risk, and complement theCompany’s lending activities.  Thepolicies provide the authority to invest in United States Treasury and federalagency securities, mortgage-backed securities, municipal securities, equitysecurities, and certificates of deposits.**

** **

Approximately $3.8million of the States and political subdivisions bonds held at December 31,2008 are callable at the option of the issuer, which represent limitedprepayment risk to the Company.

 

As of December 31,2008, the Company had approximately $14.5 million invested in municipalitieslocated within LaSalle County, Illinois.

 

The Company purchased$2.0 million of index powered certificates of deposit between 2003 and 2008.These deposits were placed with multiple issuers so that all of the principaldeposited is insured through the FDIC. Income returns are not guaranteed forthese instruments, however principal is guaranteed if held to 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, 2008.

 
| ** **                                                     | ** ** | ** **        | ** ** | **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                                      |       | $                 | —     |         | —     | %               | $          | 1,084        |       | 3.62            | %          | $            | —     |       | —     | %            | $          | —     |       | —       | %          | $ | 1,084 |   | 3.62 | % |
| U.S. Government  agencies                                      |       | 10,240            |       | 3.97         |       | 1,550           |       | 3.94         |       | —          |       | —       |       | —     |       | —       |       | 11,790     |       | 3.97         |       |
| States and  political subdivisions                             |       | 10,145            |       | 3.76         |       | 24,783          |       | 3.22         |       | 4,160           |       | 4.82         |       | —     |       | —       |       | 39,088     |       | 3.53         |       |
| Mortgage-backed  securities and collateralized obligations (1) |       | 1,175             |       | 3.71         |       | 3,536           |       | 4.29         |       | 125             |       | 8.54         |       | 134        |       | 8.06         |       | 4,970      |       | 4.36         |       |
|                                                           |       |              |       |         |       |            |       |         |       |            |       |         |       |       |       |         |       |       |       |         |       |
| Corporate bonds                                                |       | —            |       | —       |       | —          |       | —       |       | —          |       | —       |       | —     |       | —       |       | —     |       | —       |       |
| Equity securities                                              |       | 893               |       | N/A          |       | —          |       | —       |       | —          |       | —       |       | —     |       | —       |       | 893        |       | N/A          |       |
|                                                           |       |              |       |         |       |            |       |         |       |            |       |         |       |       |       |         |       |       |       |         |       |
| Total securities                                               |       | $                 | 22,453     |         | 3.86       | %               | $          | 30,953       |       | 3.39            | %          | $            | 4,285      |       | 4.92       | %            | $          | 134        |       | 8.06         | %          | $ | 57,825 |   | 3.69 | % |

----

(1) Mortgage-backed securities reflect the contractual maturity of the relatedinstrument.

 

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**Deposits*.***

 

The Company offersdeposit services, including demand, savings, and time deposit accounts andprograms, which include interest-bearing and non-interest-bearing demanddeposits and individual retirement accounts. The Company believes it has a stable deposit base.  Management believes that this stability isdue to the Company’s emphasis on being a locally owned and operated bank and byproviding quality, personalized service to its customers.

 

The followingtable shows the Company’s average balances and rates paid during the yearsshown.

 
| ** **                                        | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **Average  Balance**                                          | ** ** | **Percent  of  Deposits** | ** ** | ** ** | ** ** | **Average  Balance** | ** ** | **Percent  of  Deposits** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Percent  of  Deposits** | ** ** | **Rate** | ** ** |
| ** **                                        | ** ** | ** **                                                    | ** ** |
| ** **                                        | ** ** | **Rate**                                                      | ** ** |
|                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits               |       | $                                                             | 33,961     |   | 14.0 | % | — | % | $ | 31,759 |   | 13.0 | % | — | % | $ | 30,173 |   | 11.8 | % | — | % |
| Interest-bearing demand and money market accounts |       | 95,138                                                        |       | 39.2 |   | 1.07 |   | 98,592 |   | 40.3 |   | 2.25 |   | 93,042 |   | 36.5 |   | 2.19 |   |
| Savings accounts                                  |       | 22,739                                                        |       | 9.4 |   | .51 |   | 23,418 |   | 9.5 |   | .53 |   | 25,067 |   | 9.8 |   | .52 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Time deposit accounts                             |       | 90,715                                                        |       | 37.4 |   | 3.86 |   | 90,970 |   | 37.2 |   | 4.22 |   | 106,750 |   | 41.9 |   | 3.81 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                              |       | $                                                             | 242,553    |   | 100.0 | % | 2.24 | % | $ | 244,739 |   | 100.0  | % | 2.92 | % | $ | 255,032 |   | 100.0 | % | 2.80 | % |

 

The distribution of the major components of deposits as of December 31,2008 and 2007 is summarized in the balance sheets included in the 2008consolidated financial statements, which consolidated financial statements areincorporated herein by reference. The following is a maturity distribution oftime certificates of deposit of $100,000 or more at December 31, 2008:

 
| ** **                      | ** ** | **Balance** | ** ** | **Percentage** | ** ** |
|---------------------------------|------------|-------------|------------|----------------|------------|
| Maturity                        |       |        |       |           |       |
| Three months or less            |       | $           | 10,822     |           | 35.1       | % |
| Over three months to six months |       | 4,265       |       | 13.8           |       |
| Over six months to one year     |       | 6,373       |       | 20.6           |       |
| Over one year                   |       | 9,408       |       | 30.5           |       |
|                            |       |        |       |           |       |
| Total                           |       | $           | 30,868     |           | 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, an unsecured line of credit with Marshall & IlsleyBank and Federal Home Loan Bank borrowings. Total borrowings increased $6.0million in 2008 as a result of $6.0 million in Federal Home Loan Bank advancesin 2008.Total borrowings increased $17,000 in 2007 as a result of a draw on theline of credit in December 2007. The Bank maintains physical control ofall securities sold under repurchase agreements. There were no outstandingsecurities sold under agreements to repurchase during 2008 or 2007. Informationconcerning securities sold under agreements to repurchase is summarized asfollows:

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| 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 department primarily services LaSalle County and surroundingcounties.  At December 31, 2008, thetrust department had 350 accounts under management, 177 of which werediscretionary accounts.  The trustdepartment provides a full complement of asset management services for personaltrusts, estates, and agencies.  At December 31,2008, the trust department had assets under management of approximately $80.4million, of which $72.2 million was in discretionary accounts.

 

The Company, inconjunction with its trust department, also provides farm management services.  At December 31, 2008, the departmentmanaged 42 farms.  The department managesor directs approximately 5,916 acres of farmland in LaSalle County, Illinoisand surrounding counties.

 

**Competition**

 

The Company hasactive competition 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 County.  Many of these competitors may not be subjectto the same regulatory restrictions as the Company. There are approximately 18commercial banks and 6 savings institutions with offices in LaSalle County, 10commercial banks and 3 savings institutions in Grundy County, and 18 commercialbanks and 2 savings institution in Kendall County.  In addition there are 10 credit unionslocated in the same city 

 

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markets. The principal methods of competition in the banking andfinancial services industry are quality of services to the customer; ease ofaccess to services; and pricing of services, including interest rates paid ondeposits, interest rates charged on borrowings, and fees charged for fiduciaryservices. The financial services industry is also likely to become more competitiveas further technological advances enable more companies to provide financialservices.

 

**Employees**

 

As of December 31,2008, the Company had 95 employees, consisting of 79 full-time employees and 16part-time employees.  The Company’semployees are not subject to a collective bargaining agreement, and managementbelieves it has excellent relations with its staff.

 

**Stock Repurchases**

 

During 2008 and 2007,the Company repurchased 2,526 and 4,269 shares of its common stock foraggregate purchase prices of $197,000 and $335,000, respectively.

 

## **Website**

##  

## The Companymaintains a website at www.firstottawa.com. The Company makes available free of charge on or through its website,the annual report on Form 10K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Actas soon as reasonably practicable after the Company electronically files suchmaterial with, or furnishes it to, the Securities and Exchange Commission.  The Company will also provide copies of itsfilings free of charge upon written request to: Ms. Cheryl Gage, CorporateSecretary, First Ottawa Bancshares, Inc. 701-705 LaSalle Street, P.O. Box657, Ottawa, Illinois 61350. Additionally, all of the Company’s filings withthe Securities and Exchange Commission are also available, free of charge,through the SEC’s website at www.sec.gov.

##  

**SUPERVISIONAND REGULATION**

 

# **General**

#  

Financial institutions, their holding companies andtheir affiliates are extensively regulated under federal and state law.  As a result, the growth and earningsperformance of the Company may be affected not only by management decisions andgeneral economic conditions, but also by the requirements of federal and statestatutes and by the regulations and policies of various bank regulatoryauthorities, including the Office of the Comptroller of the Currency (the “OCC”),the Board of Governors of the Federal Reserve System (the “Federal Reserve”)and the Federal Deposit Insurance Corporation (the “FDIC”).  Furthermore, taxation laws administered bythe Internal Revenue Service and state taxing authorities and securities lawsadministered by the Securities and Exchange Commission (the “SEC”) andstate securities authorities have an impact on the business of the Company. Theeffect of these statutes, regulations and regulatory policies may besignificant, and cannot be predicted with a high degree of certainty.

 

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Federal and state laws and regulations generally applicable tofinancial institutions regulate, among other things, the scope of business, thekinds and amounts of investments, reserve requirements, capital levels relativeto operations, the nature and amount of collateral for loans, the establishmentof branches, mergers and consolidations and the payment of dividends. Thissystem of supervision and regulation establishes a comprehensive framework forthe respective operations of the Company and its subsidiaries and is intendedprimarily for the protection of the FDIC-insured deposits and depositors of theBank, rather than stockholders. In addition to this generally applicableregulatory framework, recent turmoil in the credit markets prompted theenactment of unprecedented legislation that has allowed the U.S. Treasury tomake equity capital available to qualifying financial institutions to helprestore confidence and stability in the U.S. financial markets, which imposesadditional requirements on institutions in which the U.S. Treasury Departmentinvests.

 

***EmergencyEconomic Stabilization Act of 2008.***  Recent events in the U.S. and globalfinancial markets, including the deterioration of the worldwide credit markets,have created significant challenges for financial institutions such as theBank.  Dramatic declines in the housingmarket during the past year, marked by falling home prices and increasinglevels of mortgage foreclosures, have resulted in significant write-downs ofasset values by financial institutions, including government-sponsored entitiesand major commercial and investment banks. In addition, many lenders and institutional investors have reduced, andin some cases, ceased to provide funding to borrowers, including otherfinancial institutions, as a result of concern about the stability of thefinancial markets and the strength of counterparties.

 

In response to thecrises affecting the U.S. banking system and financial markets and to bolsterthe distressed economy and improve consumer confidence in the financial system,on October 3, 2008, the U.S. Congress passed, and the President signedinto law, the Emergency Economic Stabilization Act of 2008 (the “EESA”).  The EESA authorizes the Secretary of the U.S.Treasury (the “Treasury”) to implement various temporary emergency programsdesigned to strengthen the capital positions of financial institutions andstimulate the availability of credit within the U.S. financial system.  Financial institutions participating incertain of the programs established under the EESA will be required to adoptthe Treasury’s standards for executive compensation and corporate governance.

 

**The TARP Capital Purchase Program**

 

On October 14,2008, the Treasury announced that it will provide Tier 1 capital (in the formof perpetual preferred stock) to eligible financial institutions.  This program, known as the TARP CapitalPurchase Program (the “CPP”), allocates $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”).  Eligible institutions will be able to sellequity interests to the Treasury in amounts equal to between 1% and 3% of theinstitution’s risk-weighted assets.  TheCPP Preferred Stock will generally be non-voting and will pay dividends at therate of 5% per annum for the first five years and thereafter at a rate of 9%per annum.  For public companies, in conjunctionwith the purchase of the CPP Preferred Stock, the Treasury will receivewarrants to purchase common stock from the participating public institutionswith an aggregate market price equal to 15% of the preferred stock investment.  Participating financial institutions will berequired to adopt the Treasury’s 

 

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standards for executivecompensation and corporate governance for the period during which the Treasuryholds equity issued under the CPP.  TheTreasury will determine specific eligibility and allocations for an interestedfinancial institution after consultation with the appropriate federal bankingagency. The deadline for public companies to submit an application toparticipate in the CPP was November 14, 2008.  The Company did not file an application toparticipate in the CPP.

 

The following is a summary of the material elements of the regulatoryframework that 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 statutes, regulations and regulatory policies that are described.As such, the following is qualified in its entirety by reference to applicablelaw.  Any change in applicable statutes,regulations or regulatory policies may have a material effect on the businessof the Company and its subsidiaries.

 

**TheCompany**

 

***General.**** *The Company, as the sole stockholder of theBank, is a bank holding company.  As abank holding company, the Company is registered with, and is subject toregulation by, the Federal Reserve under the Bank Holding Company Act of 1956,as amended (the “BHCA”). In accordance with Federal Reserve policy, the Company is expectedto act as a source of financial strength to the Bank and to commit resources tosupport the Bank in circumstances where the Company might not otherwise doso.  Under the BHCA, the Company issubject to periodic examination by the Federal Reserve.  The Company is also required to file with theFederal Reserve periodic reports of the Company’s operations and suchadditional information regarding the Company and its subsidiaries as theFederal Reserve may require.

 

***Acquisitions, Activities and Change in Control.***** **The primary purposeof a bank 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 periodof time (not to exceed five years) before being acquired by an out-of-statebank holding company.

 

The BHCA generally prohibits the Company from acquiring direct orindirect ownership or control of more than 5% of the voting shares of anycompany that is not a bank and from engaging in any business other than that ofbanking, managing and controlling banks or furnishing services to banks andtheir subsidiaries.  This general prohibitionis subject to a number of exceptions. The principal exception allows bankholding companies to engage in, and 

 

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toown shares of companies engaged in, certain businesses found by the FederalReserve to be “so closely related to banking ... as to be a proper incidentthereto.”  This authority would permitthe Company to engage in a variety of banking-related businesses, including theownership and operation of a thrift, or other entity engaged in consumerfinance, equipment leasing, the operation of a computer service bureau(including software development), and mortgage banking and brokerage. The BHCAgenerally does not place territorial restrictions on the domestic activities ofnon-bank subsidiaries of bank holding companies.

 

Additionally, bank holding companies that meet certain eligibilityrequirements prescribed by the BHCA and elect to operate as financial holdingcompanies may engage in, or own shares in companies engaged in, a wider rangeof nonbanking activities, including securities and insurance underwriting andsales, merchant banking and any other activity that the Federal Reserve, inconsultation with the Secretary of the Treasury, determines by regulation ororder is financial in nature, incidental to any such financial activity orcomplementary to any such financial activity and does not pose a substantialrisk to the safety or soundness of depository institutions or the financialsystem generally.  As of the date of thisfiling, the Company has not applied for approval to operate as a financialholding company.

 

Federal law also prohibits any person or company from acquiring “control”of an FDIC-insured depository institution or its holding company without priornotice to the appropriate federal bank regulator.  “Control” is conclusively presumed to existupon the acquisition of 25% or more of the outstanding voting securities of abank or bank holding company, but may arise under certain circumstances between10% and 24.99% ownership.

 

***Capital Requirements.***  Bankholding companies are required to maintain minimum levels of capital inaccordance with Federal Reserve capital adequacy guidelines.  If capital levels fall below the minimumrequired levels, a bank holding company, among other things, may be deniedapproval to acquire or establish additional banks or non-bank businesses.

 

The Federal Reserve’s capital guidelines establish the followingminimum regulatory capital requirements for bank holding companies: (i) arisk-based requirement expressed as a percentage of total assets weightedaccording to risk; and (ii) a leverage requirement expressed as apercentage of total assets.  The risk-basedrequirement consists of a minimum ratio of total capital to total risk-weightedassets of 8% and a minimum ratio of Tier 1 capital to total risk-weightedassets of 4%.  The leverage requirementconsists of a minimum ratio of Tier 1 capital to total assets of 3% for themost highly rated companies, with a minimum requirement of 4% for allothers.  For purposes of these capitalstandards, Tier 1 capital consists primarily of permanent stockholders’ equityless intangible assets (other than certain loan servicing rights and purchasedcredit card relationships). Total capital consists primarily of Tier 1 capitalplus certain other debt and equity instruments that do not qualify as Tier 1capital and a portion of the company’s allowance for loan and lease losses.

 

The risk-based and leverage standards described above are minimumrequirements. Higher capital levels will be required if warranted by theparticular circumstances or risk profiles of individual banking organizations.For example, the Federal Reserve’s capital guidelines contemplate thatadditional capital may be required to take adequate account of, among otherthings, interest rate risk, or the risks posed by concentrations of credit,

 

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nontraditionalactivities or securities trading activities. Further, any banking organization experiencing or anticipatingsignificant growth would be expected to maintain capital ratios, includingtangible capital positions (*i.e.*, Tier 1capital less all intangible assets), well above the minimum levels.  As of December 31, 2008, the Company hadregulatory capital in excess of the Federal Reserve’s minimum requirements.

 

***Dividend Payments******.**** *The Company’s abilityto pay dividends to its stockholders may be affected by both general corporatelaw considerations and policies of the Federal Reserve applicable to bankholding companies*.* As a Delaware corporation, theCompany is subject to the limitations of the Delaware General Corporation Law(the “DGCL”). The DGCL allows the Company to pay dividends only out of itssurplus (as defined and computed in accordance with the provisions of the DGCL)or if the Company has no such surplus, out of its net profits for the fiscalyear in which the dividend is declared and/or the preceding fiscal year.Additionally, policies of the Federal Reserve caution that a bank holdingcompany should not pay cash dividends unless its net income available to commonstockholders over the past year has been sufficient to fully fund the dividendsand the prospective rate of earnings retention appears consistent with itscapital needs, asset quality, and overall financial condition.  The Federal Reserve also possessesenforcement powers over bank holding companies and their non-bank subsidiariesto prevent or remedy actions that represent unsafe or unsound practices orviolations of applicable statutes and regulations.  Among these powers is the ability to proscribethe payment of dividends by banks and bank holding companies.

 

***Federal Securities Regulation******.***  TheCompany’s common stock is registered with the SEC under the Securities Act of1933, as amended, 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.

 

**TheBank**

 

***General.***  TheBank is a national bank, chartered by the OCC under the National Bank Act.  The deposit accounts of the Bank areinsured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extentprovided under federal law and FDIC regulations, and the Bank is a member ofthe Federal Reserve System.  As a nationalbank, the Bank is subject to the examination, supervision, reporting andenforcement requirements of the OCC, the chartering authority for nationalbanks. The FDIC, as administrator of the DIF, also has regulatory authorityover the Bank.

 

***Deposit Insurance.***** **As an FDIC-insured institution, the Bank is required to paydeposit insurance premium assessments to the FDIC. The FDIC has adopted arisk-based assessment system whereby FDIC – insured depository institutions payinsurance premiums at rates based on their risk classification. An institution’srisk classification is assigned based on it’s capital levels, and the level ofsupervisory concern the institution poses to theregulators. Under theregulations of the FDIC, as presently in effect, insurance assessments rangefrom 0.12% to 0.50% of total deposits for the first quarter 2009 assessmentperiod only (subject to the application of assessment credits, if any, issuedby the FDIC in 2008).

 

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Effective April 1,2009, insurance assessments will range from 0.07% to 0.78% of total deposits,depending on an institution’s risk classification, its levels of unsecured debtand secured liabilities, and, in certain cases, its level of brokereddeposits.  In addition, the FDIC recentlypassed an interim rule authorizing the FDIC to impose an emergency specialassessment equal to 0.20% of total deposits on June 30, 2009 (that will becollected on September 30, 2009), and further authorizing the FDIC toimpose additional emergency special assessments after June 30, 2009, of upto 0.10% of total deposits, whenever the FDIC estimates that the reserve ratioof the DIF will fall to a level that the FDIC believes would adversely affectpublic confidence in federal deposit insurance or to a level that will be closeto zero or negative at the end of a calendar quarter.  The interim rule, however, is subject to a30-day comment period that will expire on April 2, 2009, and may besubject to change before any special assessments are imposed on insureddepository institutions.

 

***FDICTemporary Liquidity Guarantee Program***.  In connection with the recently enacted EESAand in conjunction with the Treasury’s actions to address the current creditand liquidity crisis in financial markets, the FDIC announced the TemporaryLiquidity Guarantee Program, which will temporarily provide to participatinginstitutions unlimited deposit insurance coverage for non-interest bearingtransaction accounts maintained at FDIC insured institutions (the “transactionaccount guarantee program”), and provide a limited guarantee on certainnewly-issued senior unsecured debt (the “debt guarantee program”).  For an initial 30-day period, all eligiblefinancial institutions were automatically covered under this program withoutincurring any fees.  Institutions thatdid not opt out by December 5, 2008, will be subject to the followingpotential assessments for participation: (i) for the debt guaranteeprogram, between 50 and 100 basis points per annum for eligible seniorunsecured debt (depending on the maturity date) issued between October 14,2008 and June 30, 2009; and (ii) for the transaction accountguarantee program, 10 basis points per annum on amounts in excess of $250,000in non-interest bearing transaction accounts from November 13, 2008through and including December 31, 2009. The Bank decided to continue to participate in these programs and didnot opt out.  As a result, the Bankexpects to incur fees associated with the programs.

 

***FICO Assessments.***     The FinancingCorporation (“FICO”) is a mixed-ownership governmental corporation chartered bythe former Federal Home Loan Bank Board pursuant to the Federal Savings andLoan Insurance Corporation Recapitalization Act of 1987 to function as afinancing vehicle for the recapitalization of the former Federal Savings andLoan Insurance Corporation.  FICO issued30-year non-callable bonds of approximately $8.2 billion that mature by2019.  Since 1996, federal legislationhas required that all FDIC-insured depository institutions pay assessments tocover interest payments on FICO’s outstanding obligations.  These FICO assessments are in addition toamounts assessed by the FDIC for deposit insurance. During the yearended December 31, 2008, the FICO assessment rate was approximately 0.01%of deposits.

 

***Supervisory Assessments.*** National banks are required to pay supervisory assessments to the OCC tofund the operations of the OCC.  Theamount of the assessment is calculated using a formula that takes into accountthe bank’s size and its supervisory condition. During the year ended December 31,2008, the Bank paid supervisory assessments to the OCC totaling $83,000.

 

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***Capital Requirements.***Banks are generally required to maintaincapital levels in excess of other businesses. The OCC has established thefollowing minimum capital standards for national banks, such as the Bank: (i) aleverage requirement consisting of a minimum ratio of Tier 1 capital to totalassets of 3% for the most highly-rated banks with a minimum requirement of atleast 4% for all others; and (ii) a risk-based capital requirementconsisting of a minimum ratio of total capital to total risk-weighted assets of8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. Ingeneral, the components of Tier 1 capital and total capital are the same asthose for bank holding companies discussed above.

 

The capital requirements described above are minimumrequirements. Higher capital levels will be required if warranted by theparticular circumstances or risk profiles of individual institutions. For example,regulations of the OCC provide that additional capital may be required to takeadequate account of, among other things, interest rate risk or the risks posedby concentrations of credit, nontraditional activities or securities tradingactivities.

 

Further, federal law and regulations provide variousincentives for financial institutions to maintain regulatory capital at levelsin excess of minimum regulatory requirements. For example, a financialinstitution that is “well-capitalized” may qualify for exemptions from priornotice or application requirements otherwise applicable to certain types ofactivities and may qualify for expedited processing of other required noticesor applications. Additionally, one of the criteria that determines a bank holdingcompany’s eligibility to operate as a financial holding company is arequirement that all of its financial institution subsidiaries be “well-capitalized.”  Under the regulations of the OCC, in order tobe “well-capitalized” a financial institution must maintain a ratio oftotal capital to total risk-weighted assets of 10% or greater, a ratio of Tier1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1capital to total assets 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 the regulators’ powers depends on whether theinstitution in question is “adequately capitalized,” “undercapitalized,” “significantlyundercapitalized” or “critically undercapitalized,” in each case as defined byregulation. Depending upon the capital category to which an institution isassigned, the regulators’ corrective powers include: (i) requiring theinstitution 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.

 

As of December 31, 2008: (i) the Bank wasnot subject to a directive from the OCC to increase its capital to an amount inexcess of the minimum regulatory capital requirements; (ii) the Bankexceeded its minimum regulatory capital requirements under OCC capital adequacyguidelines; and (iii) the Bank was “well-capitalized,” as defined by OCCregulations.

 

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***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 pay dividends in any calendar year that, inthe aggregate, exceed the bank’s year-to-date net income plus the bank’sretained net income for the two preceding years.

 

The payment of dividends by any financialinstitution is affected by the requirement to maintain adequate capitalpursuant to applicable capital adequacy guidelines and regulations, and afinancial institution generally is prohibited from paying any dividends if,following payment thereof, the institution would be undercapitalized. Asdescribed above, the Bank exceeded its minimum capital requirements underapplicable guidelines as of December 31, 2008. As of December 31,2008, approximately $342,000 was available to be paid as dividends by the Bank.Notwithstanding the availability of funds for dividends, however, the OCC mayprohibit the payment of any dividends by the Bank if the OCC determines suchpayment would constitute an unsafe or unsound practice.

 

***Insider Transactions.***The Bank is subject to certain restrictionsimposed by federal law on extensions of credit to the Company, on investmentsin the stock or other securities of the Company and the acceptance of the stockor other securities of the Company as collateral for loans made by the Bank.Certain limitations and reporting requirements are also placed on extensions ofcredit by the Bank to its directors and officers, to the directors and officersof the Company, to principal stockholders of the Company, and to “relatedinterests” of such directors, officers and principal stockholders. In addition,federal law and regulations may affect the terms upon which any person who is adirector or officer of the Company or the Bank or a principal stockholder ofthe Company may obtain credit from banks with which the Bank maintainscorrespondent relationships.

 

***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. Theguidelines set forth standards for internal controls, information systems,internal audit systems, loan documentation, credit underwriting, interest rateexposure, asset growth, compensation, fees and benefits, asset quality andearnings.

 

In general, the safety and soundness guidelinesprescribe the goals to be achieved in each area, and each institution isresponsible for establishing its own procedures 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

 

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federalbanking regulators, 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 grantsIllinois-chartered banks the authority to establish branches anywhere in theState of Illinois, subject to receipt of all required regulatory approvals.

 

Federal law permits state and national banks tomerge with banks in other states subject to: (i) regulatory approval; (ii) federaland state deposit concentration limits; and (iii) state law limitationsrequiring the merging bank to have been in existence for a minimum period oftime (not to exceed five years) prior to the merger. The establishment of newinterstate branches or the acquisition of individual branches of a bank inanother state (rather than the acquisition of an out-of-state bank in itsentirety) is permitted only in those states the laws of which expresslyauthorize such expansion.

 

***Financial Subsidiaries.***Under Federal law and OCC regulations, national banks are authorized toengage, through “financial subsidiaries,” in any activity that is permissiblefor a financial holding company and any activity that the Secretary of theTreasury, in consultation with the Federal Reserve, determines is financial innature or incidental to any such financial activity, except (i) insuranceunderwriting, (ii) real estate development or real estate investmentactivities (unless otherwise permitted by law), (iii) insurance companyportfolio investments and (iv) merchant banking. The authority of anational bank to invest in a financial subsidiary is subject to a number ofconditions, including, among other things, requirements that the bank must bewell-managed and well-capitalized (after deducting from capital the bank’soutstanding investments in financial subsidiaries). The Bank has not appliedfor approval to establish any financial subsidiaries.

 

***Federal Reserve System.***FederalReserve regulations, as presently in effect, require depository institutions tomaintain reserves against their transaction accounts (primarily NOW and regularchecking accounts), as follows: for transaction accounts aggregating $44.4million or less, the reserve requirement is 3% of total transaction accounts;and for transaction accounts aggregating in excess of $44.4 million, the reserverequirement is $1.023 million plus 10% of the aggregate amount of totaltransaction accounts in excess of $44.4 million. The first $10.3 millionof otherwise reservable balances are exempted from the reserve requirements. Thesereserve requirements are subject to annual adjustment by the Federal Reserve. TheBank is in compliance with the foregoing requirements.

 

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

 

We are a smallerreporting company as defined by Rule 12b-2 of the Exchange Act and are notrequired to provide the information under this item.

 

**Item 1.B.    UnresolvedStaff Comments.**

 

None

 

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**Item 2.        Properties**.

 

TheCompany’s main office is located at 701-705 LaSalle Street, Ottawa, Illinois. Thebuilding is comprised of approximately 15,000 square feet. The main officebuilding is a two-story structure constructed principally of masonry which wasopened in 1865. The Company also operates eight branch office facilities. Alimited service branch, which contains eight drive-thru lanes, is located at300 West Madison Street, Ottawa, Illinois, a loan production office located at426 Mondamin Street, Unit 1, Minooka, Illinois, and six full-service branchesare located at 601 State Street, Ottawa, Illinois; 2771 North Columbus Street,Ottawa, Illinois; 1771 North Division Street, Morris, Illinois; 2324 NorthBloomington Street, Streator, Illinois; 401 East Main Street, Streator, Illinois;and 1459 Cannonball Trail, Yorkville, Illinois. The Company has submitted anapplication with the Office of the Comptroller of Currency to relocate thebranch located at 401 East Main Street in Streator, Illinois, to 409 EastBridge Street in Streator, Illinois. This relocation would be considered ashort distance relocation as defined in 12 CFR 5.3(i) if and when it isapproved. The main banking office and branch offices are owned by the Companyin fee and are unencumbered. The loan production office space is leased for athree year term with renewal options for years four and five.

 

**Item 3.        LegalProceedings.**

 

TheCompany is from time to time a party to legal proceedings in the ordinarycourse of business that are incidental to the business of banking. Neither theCompany nor the Bank is engaged in any legal proceedings of a material natureas of the date of this 10K.

 

**Item 4.        Submissionof Matters to a Vote of Security Holders.**

 

Nomatters were submitted to a vote of security holders during the quarter ended December 31,2008.

 

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**PART II**

 

**Item 5.****                       MarketFor Company’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities**

 

Theinformation set forth under the caption “Price Range of Common Stock” on page 44of the 2008 Annual Report to Stockholders (filed as Exhibit 13.1 of this Form 10K)which is incorporated 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 andRegulation — The Company — Dividends” and “Business - Supervision andRegulation — The Bank — Dividends” for a more detailed description of theselimitations.

 

**Issuer Purchases of Equity Securities**

 
| **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  2008 through October 31, 2008    |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |       |
| November 1,  2008 through November 30, 2008 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |       |
| December 1,  2008 through December 31, 2008 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |       |
| Total                                                 |       | 0                                                    |       | 0                                                |       | 0                                                                                                                                |       | 0                                                                                                                                   |       |

 

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(1)          Repurchasedby the Company in open market purchases with third parties.

 

**Item 6.**                       Selected Financial Data

** **

Theinformation set forth under the caption “Selected Consolidated FinancialInformation” on page 1 of the 2008 Annual Report to Stockholders (filed asExhibit 13.1 of this Form 10K) is incorporated herein by reference.

 

**Item 7.****                      ****Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Theinformation set forth under the caption “Management’s Discussion and Analysisof Financial Condition and Results of Operations” on pages 2 through 12 ofthe 2008 Annual Report to Stockholders (filed as Exhibit 13.1 of this Form 10K)is incorporated herein by reference.

 

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** **

**Item 7A.****             ****Quantitative and Qualitative Disclosuresabout Market Risk**

 

Theinformation set forth under the caption “Quantitative and QualitativeDisclosures about Market Risk” on page 13 of the 2008 Annual Report toStockholders (filed as Exhibit 13.1 of this Form 10K) is incorporatedherein by reference.

 

**Item 8.****                      ****Financial Statements and Supplementary Data**

 

Theconsolidated financial statements of the Company and the Report of IndependentRegistered Public Accounting Firm as set forth on pages 17 through 43 ofthe 2008 Annual Report to Stockholders (filed as Exhibit 13.1 of this Form 10K)are incorporated herein by reference:

 
| ** **                                                                                                        | **Annual  Report to**  |
|-------------------------------------------------------------------------------------------------------------------|------------------------|
| ** **                                                                                                        | **Stockholders  Page** |
|                                                                                                              |                   |
| Report of Independent Registered  Public Accounting Firm                                                          | 18                     |
|                                                                                                              |                   |
| Consolidated Balance Sheets as of  December 31, 2008 and 2007                                                | 19                     |
|                                                                                                              |                   |
| Consolidated Statements of Income  for the years ended December 31, 2008, 2007, and 2006                     | 20                     |
|                                                                                                              |                   |
| Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2008, 2007, and  2006 | 21                     |
|                                                                                                              |                   |
| Consolidated Statements of Cash  Flows for the years ended December 31, 2008, 2007, and 2006                 | 22                     |
|                                                                                                              |                   |
| Notes to the Consolidated  Financial Statements                                                                   | 23                     |

 

Theportions of the 2008 Annual Report to Stockholders which are not specificallyincorporated by reference as a part of this Form 10-K are not deemed to bea part of this report.

 

**Item 9.****                      ****Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

 

None.

 

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**Item 9A.****             ****Controls and Procedures**

 

**Evaluation of DisclosureControls and 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, 2008. 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 internal control over financial reporting is aprocess designed under the supervision of the Company’s Chief Executive Officerand Chief Financial Officer to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Company’sfinancial statements for external reporting purposes in accordance with U.S.generally accepted accounting principles.

 

As of December 31,2008, 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, managementhas determined that the Company’s internal control over financial reporting waseffective as of December 31, 2008 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 reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this Form 10-K.

 

**Item 9B.****             ****Other Information**

 

None

 

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**PART III**

 

**Item 10.****                Directorsand Executive Officers and Corporate Governance**

 

The informationset forth under the captions “Election of Directors”, “Corporate Governance andthe Board of Directors” and “Section 16(a) Beneficial OwnershipReporting Compliance” of the Company’s Proxy Statement relating to the 2009Annual Meeting of Stockholders is incorporated herein by reference.

 

**Code ofBusiness Conduct and Ethics**

 

The Company has a code ofbusiness conduct and ethics in place that applies to all of its directors andemployees. The code sets forth the standard of ethics that the Company expectsall of its directors and employees to follow, including the Chief ExecutiveOfficer, Chief Financial Officer, and Principal Accounting Officer. The code ofbusiness conduct and ethics is posted on the Company’s website atwww.firstottawa.com. The Company intends to satisfy the disclosure requirementsunder Item 5.05 of Form 8-K regarding any amendment to or waiver of thecode with respect to the Chief Executive Officer, Chief Financial Officer,Principal Accounting Officer, and persons performing similar functions, byposting such information on its website.

 

**Item 11.****                ExecutiveCompensation**

 

The informationset forth under the caption “Executive Compensation” of the Company’s ProxyStatement relating to the 2009 Annual Meeting of Stockholders is incorporatedherein by reference.

 

**Item12.**                Security Ownership of Certain Beneficial Owners andManagement 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 2009 Annual Meeting ofStockholders is incorporated herein by reference.

 

** Equity Compensation Plan Information**

 

 The table below sets forth the followinginformation as of December 31, 2008 for (i) all compensation planspreviously approved by the Company’s stockholders and (ii) allcompensation plans not previously approved by the Company’s stockholders:

 

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

 

(b)     the weighted-average exercise price ofsuch outstanding options, warrants and rights; and

 

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(c)                other than securities to beissued upon the exercise of such outstanding options, warrants and rights, thenumber of securities remaining available for future issuance under the plans.

 

**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     |       | 50,829                                                                                                           |       | $                                                                       | 72.17      |                                                                                        | 95,700     |   |
|                                                             |       |                                                                                                             |       |                                                                    |       |                                                                                        |       |
| Equity  compensation plans not approved by security stockholders |       | 0                                                                                                                |       | 0                                                                       |       | 0                                                                                           |       |
|                                                             |       |                                                                                                             |       |                                                                    |       |                                                                                        |       |
| **Total**                                                        |       | 50,829                                                                                                           |       | $                                                                       | 72.17      |                                                                                        | 95,700     |   |

 

**Item 13.     CertainRelationships and Related Transactions and Director Independence**

 

Theinformation set forth under the caption “Certain Relationships and RelatedTransactions and Director Independence” of the Company’s Proxy Statementrelating to the 2009 Annual Meeting of Stockholders is incorporated herein byreference.

 

**Item 14.     PrincipalAccounting Fees and Services**

 

Theinformation set forth under the caption “Independent Registered PublicAccounting Firm” of the Company’s Proxy Statement relating to the 2009 AnnualMeeting of Stockholders 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                                                                                                                                                        |   | Executive Officer Bonus Plan*                                                                                                                                 |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 10.3                                                                                                                                                        |   | Employment Agreements for Executive Officers*                                                                                                                 |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 10.4                                                                                                                                                        |   | Stock Incentive Plan                                                                                                                                          |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 10.5                                                                                                                                                        |   | Summary of Director Fees                                                                                                                                      |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 10.6                                                                                                                                                        |   | Form of Supplemental Nonqualified Retirement Agreement                                                                                                   |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 10.7                                                                                                                                                        |   | Employment Agreement for Vincent Easi*                                                                                                                        |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 13.1                                                                                                                                                        |   | 2008 Annual Report to Stockholders                                                                                                                            |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 21.1                                                                                                                                                        |   | Subsidiaries                                                                                                                                                  |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 31.1                                                                                                                                                        |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                           |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 31.2                                                                                                                                                        |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)                                                                           |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 32.1                                                                                                                                                        |   | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                        |   |                                                                                                                                                          |
|   |   | 32.2                                                                                                                                                        |   | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|        |        |                                                                                                                                                             |        |                                                                                                                                                               |  |  |

 

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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 25,2009

 

 

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,  2009 |
| Joachim Brown             |       | Chief Executive  Officer         |       |                 |
|                      |       |                             |       |                 |
| /s/ Bradley J.  Armstrong |       | Director                         |       | March 25,  2009 |
| Bradley J. Armstrong      |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ John L.  Cantlin      |       | Director                         |       | March 25,  2009 |
| John L. Cantlin           |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Patty P.  Godfrey     |       | Director                         |       | March 25,  2009 |
| Patty P. Godfrey          |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Thomas E.  Haeberle   |       | Director                         |       | March 25,  2009 |
| Thomas E.  Haeberle       |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Donald J.  Harris     |       | Director and  Executive          |       | March 25,  2009 |
| Donald J. Harris          |       | Vice President,  Chief Operating |       |                 |
|                      |       | Officer                          |       |                 |

 

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| /s/ Thomas P. Rooney  |   | Director |   | March 25, 2009  |
|-----------------------|--------|----------|--------|----------------------|
| Thomas P. Rooney      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ William J.  Walsh |   | Director |   | March 25,  2009 |
| William J. Walsh      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ Brian P.  Zabel   |   | Director |   | March 25,  2009 |
| 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 10K for the year ended 12/31/2002 |       |                 |
| 3(ii)                     |       | By-Laws of First  Ottawa Bancshares, Inc.                                   |       | Form 10K for the year ended 12/31/2003 |       |                 |
| 10.1                      |       | Employment Agreement  for J. Brown                                               |       | Form 10K for the year ended 12/31/2002 |       |                 |
| 10.2                      |       | Executive  Officer Bonus Plan                                                    |       | Form 10K for the year ended 12/31/2002 |       |                 |
| 10.3                      |       | Employment  Agreements for Executive Officers                                    |       | Form 8K dated 6/10/05                  |       |                 |
| 10.4                      |       | Stock Incentive  Plan                                                            |       | Form S-8 dated 8/1/03                  |       |                 |
| 10.5                      |       | Summary of  Director Fees                                                        |       | Form 10K for the year ended 12/31/2004 |       |                 |
| 10.6                      |       | Form of  Supplemental Nonqualified Retirement Agreement                     |       | Form 10K for the year ended 12/31/2004 |       |                 |
| 10.7                      |       | Employment  Agreement for Vincent Easi                                           |       | Form 8K dated 10/10/2007               |       |                 |
| 13.1                      |       | 2008 Annual  Report to Stockholders                                              |       |                                        |       | X                    |
| 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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