**Exhibit10.6**

 

# **SUPPLEMENTAL NONQUALIFIED RETIREMENT AGREEMENT**

 

THIS AGREEMENT, made as of this31st day of March, 2004, between First National Bank of Ottawa (the “Bank”) and                                   (the “Director”).  The Bank and theDirector shall be individually referred to as a “Party” and collectivelyreferred to as the “Parties”

 

WITNESSETH:

 

WHEREAS, the Director is currently a valuedmember of the Bank’s board or directors; and

 

WHEREAS, the Bank wishes to induce theDirector’s continued service as a director by supplementing the Director’sretirement income; and

 

WHEREAS, the Bank desires to adopt andestablish, effective as of March 31, 2004, a non-qualified unfundedsupplemental retirement agreement with the Director with such agreement andcertain other agreements with other employees and directors of the Banktogether constituting the First National Bank of Ottawa Executive RetirementPlan.

 

NOW, THEREFORE, the Bank and theDirector do hereby adopt and approve this Agreement consisting of the terms andprovisions set forth below:

 

Section 1.                                            Definitions.  A number of terms are definedthroughout this Agreement when the term is first used. In addition, unless thecontext clearly indicates otherwise, the following terms shall have the followingmeanings:

 

(a)                                  “After-Tax Factor” for a given Plan Year means thepercentage determined by subtracting the Bank’s top marginal income tax ratefor the tax year that ends with or during the Plan Year from one (1).  For example, if the Bank’s top marginalincome tax rate for the Bank’s taxable year ending with or within a given PlanYear equaled 35%, the After-Tax Factor for such Plan Year would equal 65% (1minus 35%).

 

(b)                                 “Annual After-Tax Cost of Funds” for a Plan Yearmeans the product of the Cumulative Costs as of the last day of the Plan Yearmultiplied by the Annual After-Tax Cost-of-Funds Rate for the Plan Year.  An example of the computation of theAfter-Tax Cost of Funds is attached to this Agreement on Exhibit A.

 

(c)                                  “Annual After-Tax Cost-of-Funds Rate” for a PlanYear means the product of (i) the Lehman Brothers Aggregate Bond Index yield ineffect on the first day of the Plan Year, multiplied by (ii) the After-TaxFactor for such Plan Year.

 

(d)                                 “AnnualBenefit Credit” means the annual benefit credit as described in Section 2below.

 

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(e)                                  “AnnualEarnings on Bank-Owned Life Insurance” means, with respect to a Plan Year, thesum of (i) the increases in cash value of the Bank Owned Life Insurance duringsuch Plan Year in excess of premiums paid for such Plan Year, plus (ii) deathbenefits received by the Bank (to the extent not paid to a Director under asplit-dollar plan agreement) from such Bank Owned Life Insurance during thePlan Year in excess of cash values released at death during such Plan Year.

 

(f)                                    “Bank-OwnedLife Insurance” means the life insurance policies listed on Schedule I.

 

(g)                                 “Benefit Credit Balance” means the sum of (1) plus(2) minus (3), where (1) is the Director’s Opening Benefit Credit Balance, (2)is the sum of the Annual Benefit Credits for the current Plan Year and allprevious Plan Years, and (3) is the sum of the Installment Payments paid duringthe current Plan Year and all previous Plan Years.

 

(h)                                 “Cause” means: (1) Material failure to performduties; or (2) Committing an act of fraud injurious to the Holding Company orthe Bank; or (3) the conviction for or the plea of no contest with respect to afelony; or (4) the conviction for or the plea of no contest with respect tocrime involving moral turpitude; or (5) Committing an act of personal profit,and self-dealing, respectively, injurious to the Holding Company or the Bank; or (6)  Breach of material provision of thisAgreement.

 

(i)                                     “Cumulative Costs” means with respect to the initialPlan Year, the difference between (i) the premiums paid under the Bank-OwnedLife Insurance during the initial Plan Year minus (ii) the death benefitsreceived by the Bank from the Bank-Owned Life Insurance during the initial PlanYear.

 

Cumulative Costs means, withrespect to each subsequent Plan Year, the sum of (x), (y), and (z) where:

 

(x)                                   is the Cumulative Cost of the prior Plan Year, and

 

(y)                                 is the difference between (i) the premiums paidunder the Bank-Owned Life Insurance during such Plan Year minus (ii) the deathbenefits received from the Bank-Owned Life Insurance during such Plan Year, and

 

(z)                                   is the Annual After-Tax Cost of Funds of the priorPlan Year.

 

An example of the computation ofCumulative Costs is attached to this Agreement on Exhibit A.

 

(j)                                     “DesignatedBeneficiary” means any person or persons (who may be

 

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designated contingently or successively) towhom payments are to be made under Sections 3(b) or 3(c) and which are sodesignated by the Director signing a form provided by the Bank for suchpurpose.  A beneficiary designation formwill be effective only after the signed form is filed with the Bank while theDirector is alive and such form will cancel all beneficiary designation formssigned and filed earlier with the Bank. If the Director fails to designate a beneficiary as provided herein, orif all the designated beneficiaries of the Director die before the Director orbefore complete payment of all amounts due hereunder, the Bank shall pay theunpaid amount to the legal representative or representatives of the estate ofthe last to die of the Director and the Designated Beneficiary (orbeneficiaries).

 

(k)                                  “Holding Company” means First Ottawa Bancshares,Inc. or such successor corporation.

 

(l)                                     “InstallmentPayments” means the periodic payments of benefits made under this Agreement tothe Director or to a Designated Beneficiary.

 

(m)                               “OpeningBenefit Credit Balance” means the value, as of the effective date of thisAgreement, of the Director’s accrued benefit under the Director SupplementalRetirement Plan dated September 26, 2000. See Schedule II for a list of Opening Benefit Credit Balances.

 

(n)                                 “PlanYear” means January 1, through December 31, with the exception ofyear 1, which is March 31, through December 31.

 

Section 2.                                            Creditingof Benefits.    (a) OpeningBenefit Credit Balance.  As of theeffective date of this Agreement, the Director will be credited with hisOpening Benefit Credit Balance.  Uponexecution and delivery of this Agreement, the Director’s benefit, and the Bank’sliability, under the Director Supplemental Retirement Plan dated September 26,2000 is extinguished. Any benefits accrued under the Director SupplementalRetirement Plan dated September 26, 2000 shall become a part of thebenefits payable hereunder, and no further benefits shall be payable under theDirectors Supplemental Retirement Plan.

 

(b)                                 Additional AccrualsUnder this Agreement.  As of the lastday of each Plan Year with respect to which the Director is entitled to theaccrual of a benefit under this Agreement, the Bank shall credit to a notionalbook reserve account maintained for the Director an amount equal to theDirector’s Annual Benefit Credit for such Plan Year.  The Annual Benefit Credit for a given PlanYear shall be an amount equal to the difference between  (1) and (2), where:

 

(1)                                  isthe Annual Earnings on Bank-Owned Life Insurance for such Plan Year , and

 

(2)                                  isthe Annual After-Tax Cost-of-Funds for such Plan Year .

 

If the aforementioned calculation results ina negative number, the Annual Benefit Credit

 

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will be a reduction.

An example of the crediting of benefits isattached to this Agreement on Exhibit A.

 

The Director’s Benefit Credit Balance shall accumulatewithout interest.  The Partiesacknowledge that the notional book reserve account is used solely to measurethe amount that accrues for the Director’s benefit under this Agreement andthat the Bank shall have no duty to set aside assets in such account to coverits obligations hereunder.  The right ofthe Director or any designated beneficiary to receive a distribution under thisAgreement is an unsecured claim against the general assets of the Bank.

 

Any insurance policy or other assetacquired by the Bank shall be deemed to not be held in trust for the benefit ofthe Director nor to be collateral security for the performance of theobligations of the Bank, but shall remain a general, unpledged and unrestrictedasset of the Bank.   The Director anddesignated beneficiaries have the status of general unsecured creditors of theBank.  This Agreement constitutes a merepromise by the Bank to make benefit payments in the future.

 

Section 3.                                            Paymentof Benefits.                                  (a)Termination of Service. Upon the Director’s termination of service, theBank shall pay the Director 120 monthly Installment Payments equal to theBenefit Credit Balance, as of the Director’s termination date, divided by120.  Installment Payments will commencenot later than thirty days after the Director terminates service.

 

(b)                                 In the Event of Death Prior to Commencement ofInstallment Payments.  If the Director dies while employed by orserving as a director with respect to the Bank, and prior to the commencementof any Installment Payments under this Agreement, the Bank shall pay to theDirector’s Designated Beneficiary a lump sum equal to the Benefit CreditBalance as of his date of death.  Thelump sum will be within thirty days of the Director’s death.  Upon payment of the amounts described in thissubsection, the Bank shall have no further obligation under this Agreement.

 

(c)                                  In the Event ofDeath After the Commencement of Installment Payments.  If the Director dies after InstallmentPayments have commenced, as described in subsection 3(a), the Bank shallcontinue Installment Payments to the Director’s Designated Beneficiary for thenumber of months equal to the difference between (a) 120 minus (b) the numberof Installment Payments previously paid to the Director.  Upon payment of the amounts described in thissubsection, the Bank shall have no further obligation under this Agreement.

 

Section 4.                                            Forfeitureand Change in Control.  (a) Forfeitures.  The Director’s benefits under this Agreementshall be forfeited upon termination of the Director’s employment or service forCause, or upon the Director’s entering into “competition” with the Bank at anytime after his employment is terminated for any reason.  For purposes of this section, “competition”shall mean the Director’s engaging in any manner, directly or indirectly,individually, as a stockholder, partner, member, consultant, or agent of anycompany or other business organization or otherwise that engages in thedevelopment, marketing, selling or maintenance of any line of business that theBank actively conducts (the “Company Business”) in any county in which theHolding Company,

 

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the Bank or an affiliated entity has an office or facility (the “NoncompeteArea”).

 

Notwithstanding the previous sentence, “competition”shall not include the Director’s ownership of no more than 2% of the debt orequity securities of corporations listed on a registered securities exchangethat directly or indirectly engage in the Company Business in the NoncompeteArea.  In addition, the provisions ofthis Section 4(a) shall not apply if the Director is terminated after aChange in Control (as defined in Section 4(c)) for reasons other thanCause.

 

(b)                                 Establishment of aGrantor Trust upon a Change in Control. Upon a Change in Control, the Bank shall establish a grantor trust whichshall be used exclusively for the funding of benefits under the First NationalBank of Ottawa Executive Retirement Plan and satisfying the claims of generalcreditors of the Bank in the event the Bank becomes insolvent.

 

(c)                                  Change in Control.  For purposes of this Agreement, a “Change inControl” shall mean:

 

(1)                                  Any“person” (as that term is used in Sections 13(d) and 14(d)(2) of the SecuritiesExchange Act of 1934, as amended), other than (A) a trustee or other fiduciaryholding securities under an employee benefit plan of the Holding Company or (B)Director or a group of persons including Director, is or becomes the beneficialowner (as that term is used in Section 13(d) of the Securities ExchangeAct of 1934), directly or indirectly, of 50% or more of the common voting stockof the Holding Company, the Bank or their successors;

 

(2)                                  Thereshall be any consolidation or merger of the Holding Company or the Bank inwhich such entity is not the continuing or surviving corporation or as a resultof which the holders of the voting capital stock of the Holding Company or theBank (as the case may be) immediately prior to the consummation of thetransaction do not own more than 50% of the voting capital stock of thesurviving corporation; or

 

(3)                                  Thereoccurs the sale of all or substantially all of the assets of the HoldingCompany or the Bank.

 

Section 5.                                            UnfundedArrangement.  The Bank’s obligationto make payments to any person under this Agreement is purely contractual.  Except as provided in section 4(b), theParties do not intend that the amounts payable hereunder be held by the Bank intrust or as a segregated fund for the Director, the Designated Beneficiary, orother person entitled to payments hereunder. Except as provided in section 4(b), the benefits provided underthis Agreement shall be payable solely from the general assets of theBank.  Neither the Director nor any otherperson entitled to payments hereunder shall have any interest in any assets ofthe Bank by virtue of this Agreement. The Bank’s obligation under this Agreement shall be merely that of anunfunded and unsecured promise of the Bank to pay money in the future.  To the extent that this Agreement should bedeemed to be a “pension plan,” the Parties intend that it be unfunded forfederal income tax purposes, as well as for Title I of the Employee RetirementIncome Security Act of 1974, as amended (“ERISA”).

 

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Section 6.                                            Administration.  (a) Named Fiduciary and Administrator.  The named fiduciary shall be the Bank.  The named fiduciary shall have the authorityto control and manage the operation and administration of this Agreement.  The administration of this Agreement shall beunder the supervision of a Director, officer or employee of the Bank(hereinafter referred to as the “Administrator”) designated by the Board ofDirectors of the Bank (the “Board”).  Itshall be a principal duty of the Administrator to see that the Agreement iscarried out, in accordance with the terms of the Agreement.

 

(b)                                 Power of the Boardor Designee.  The Board, and anypersons designated to act for the Board shall have such powers as are necessaryto discharge their duties, including but not limited to interpretation andconstruction of the Agreement, the determination of all questions ofeligibility, benefits and all other related or incidental matters.  The Board, and any persons designated to act forthe Board shall decide all questions in accordance with the terms of thecontrolling legal documents and applicable law and their good faith decisionwill be binding on the Bank, the Director, and all other interested parties,subject to review or correction only when the interpretation or determinationis arbitrary, capricious, contrary to law, or not supported by substantialevidence.

 

(c)                                  Expenses of Board,or Designee.  The reasonable expensesof the Board or the Board’s designee, if any, incurred by such persons in theperformance of their duties under the Agreement, including, without limitation,reasonable counsel fees and expense of other agents, shall be paid by the Bank.

 

Section 7.                                            Claimsfor Benefits.  (a) Any claim forspecific benefits under this Agreement shall be made in writing to theAdministrator. If any claim for benefits under this Agreement is wholly orpartially denied, notice of the decision shall be furnished to the claimantwithin a reasonable period of time, not to exceed 90 days after receipt of theclaim by the Administrator, unless special circumstances require an extensionof time for processing the claim.  Ifsuch an extension of time is required, written notice of the extension shall befurnished to the claimant prior to the termination of the initial 90-day period.  In no event shall such extension exceed theperiod of 90 days from the end of such initial period.  The extension notice shall indicate thespecial circumstances requiring an extension of time and the date on which theadministrator expects to render a decision.

 

(b)                                 The Administratorshall provide every claimant who is denied a claim for benefits written noticesetting forth, in a manner calculated to be understood by the claimant, thefollowing: (1)             specificreasons for the denial;  (2) specificreference to pertinent provisions upon which the denial is based;  (3) a description of any additional materialor information necessary for the claimant to perfect the claim and anexplanation of why such material or information is necessary; and (4) an explanationof the Agreement’s claims review procedure as set forth below.

 

(c)                                  The claimant mayappeal the denial of his claim to the named fiduciary for a full and fairreview.  The claimant or his dulyauthorized representative may request a review upon written application to theAdministrator, review pertinent documents, and submit issues and

 

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comments in writing.  A claimant(or his duly authorized representative) shall request a review by filing awritten application for review with the Board or its designee (the “Reviewer”)at any time within 60 days after receipt by the claimant of written notice ofthe denial of his claim.

 

(d)                                 The decision on reviewshall be made by the Reviewer, who may, in his discretion, hold a hearing onthe denied claim; the Reviewer shall make his decision promptly, and not laterthan 60 days after the Administrator receives the request for review, unlessspecial circumstances require extension of time for processing, in which case adecision shall be rendered as soon as possible, but not later than 120 daysafter receipt of the request for review. If such an extension of time for review is required, written notice ofthe extension (including the special circumstances requiring the extension oftime) shall be furnished to the claimant prior to the commencement of theextension. In the event that the decision on review is not furnished within thetime period set forth in this paragraph, the claim shall be deemed denied onreview.

 

The decision on review shall be inwriting and shall include reasons for the decision, written in a mannercalculated to be understood by the claimant, and specific references to thepertinent provisions in the relevant documents on which the decision is based.

 

Section 8.                                            Amendment and Termination. The Bank reserves the right to amend, terminate orextend this Agreement at any time. The Bank has established this Agreement witha bona fide intention and expectation that from year to year it will deem itadvisable to continue it in effect. However, the Board of the Bank, in its sole discretion, reserves theright to terminate this Agreement in its entirety at any time.  However, no such amendment or terminationshall deprive the Director of any benefit that has accrued hereunder prior tothe date of such amendment or termination.

 

Section 9.                                            Miscellaneous.  (a)  SpendthriftClause.  To the extent permitted bylaw, no benefits payable under this Agreement shall be subject to the claim ofany creditor of the Director (or Designated Beneficiary, if applicable) or toany legal process by any creditor of any such person.  The Director or Designated Beneficiary, ifapplicable, shall have no right to alienate, anticipate, pledge or assign anybenefits under the Agreement.

 

(b)                                 Successors inInterest.  The Bank will require anysuccessor (whether direct or indirect, by purchase, merger, consolidation orotherwise) to all or substantially all of the business and/or assets of theBank, to expressly assume and agree to perform the Agreement in the same mannerand to the same extent that the Bank would be required to perform if nosuccession had taken place.

 

(c)                                  Rules of Construction.  Section andsubsection headings have been inserted for convenience of reference onlyand are to be ignored in any construction of the provisions hereof.  If any provision of this Agreement shall forany reason be invalid or unenforceable, the remaining provisions shallnevertheless be valid, enforceable and fully effective.  The Agreement shall be construed,administered and governed in all respects under and by the law of the State ofIllinois to the extent applicable, and to the extent such laws are notapplicable or superseded, by the law of the United States.

 

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(d)                                 Arbitration.  After exhausting the administrativeprocedures contained in Section 7, any dispute or controversy arisingunder, or in connection with, the Agreement shall be settled exclusively byarbitration in accordance with the rules of the American ArbitrationAssociation then in effect.  Judgment maybe entered on the arbitrator’s award in any court having jurisdiction.

 

(e)                                  No Contract ofEmployment.  This Agreement in no wayconstitutes a contract of employment between the Bank and the Director andcontinued employment of the Director by the Bank is not guaranteed.

 

(f)                                    SurvivorAnnuities and QDROs.  Nothingcontained in this Agreement is intended to give or shall give any spouse orformer spouse of the Director or any other person any right to benefits underthis Agreement by virtue of sections 401(a)(11) and 417 of the Internal RevenueCode of 1986, as amended (the “Code”) (relating to qualified preretirementsurvivor annuities and qualified joint and survivor annuities) or Code sections401(a)(13)(B) and 414(p) (relating to qualified domestic relations orders).

 

(g)                                 Early BenefitPayments.  Notwithstanding thepreceding provisions of this Agreement, the Bank may make payments before theywould otherwise be due if, based on a change in the federal or applicable statetax or revenue laws, a published ruling or similar announcement issued by theInternal Revenue Service, a regulation issued by the Secretary of the Treasury,or a closing agreement made under Code Section 7121 that is approved bythe Internal Revenue Service and involves the Director, it determines that theDirector has or will recognize income for federal or state income tax purposeswith respect to amounts that are or will be payable under the Agreement beforethey otherwise would be paid.  The amountof any payments pursuant to this Section shall not exceed the amount ofthe assessed or determined tax liability.

 

(h)                                 Taxes.              The Bank reservesthe right to withhold all applicable federal, state and local taxes on anymonies paid to the Director under this Agreement.

 

(i)                                     Representations.  This Agreement contains all representations,written or oral, made by the Bank to the Director regarding the specialretirement benefit.

 

The Bank and the Director, respectively, havecaused these presents to be signed by themselves or their duly authorizedofficers as of the day and year first above written.

 

 
| FIRST NATIONAL BANK OF OTTAWA | By:    |   |   |
|-------------------------------|--------|--------|--------|
|                          |   |
|                          |   |
| DIRECTOR                      | By:    |   |   |

 

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SCHEDULE I

 

Bank-Owned Life InsurancePolicies

 

Directorswill be allocated 8.889% of the Annual Benefit Credit for a given Plan Yearbased on the following BOLI policies:

 

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SCHEDULE II

 

Opening Benefit Credit Balances

 
| **Director** | ** ** | **Opening  Benefit Credit** |
|--------------|------------|-----------------------------|
| ** **   | ** ** | ** **                  |
| Armstrong    |       |                        |
| Brown        |       |                        |
| Cantlin      |       |                        |
| Godfrey      |       |                        |
| Haeberle     |       |                        |
| Harris       |       |                        |
| Schmidt      |       |                        |
| Rooney       |       |                        |
| Walsh        |       |                        |

 

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EXHIBIT A

 

(1)                                  Examplesof Cumulative Costs

 

If a single premium payment (for the Bank-Owned LifeInsurance) of $500,000 is made by the Bank during the initial Plan Year and theAnnual After-Tax Cost of Funds Rate for the initial Plan Year is 3%, and 2%,3%, and 4% for Plan Years 2, 3 and 4 respectively, the Cumulative Costcalculations are as follows:

 
| Initial Year | $500,000 x 1.03  = $515,000 |
|--------------|-----------------------------|
| Year 2       | $515,000 x 1.02  = $525,300 |
| Year 3       | $525,300 x 1.03  = $541,059 |
| Year 4       | $541,059 x 1.04  = $562,701 |

 

Further, assume that inYear 5 the Bank receives $75,000 in death benefits and the Annual After-TaxCost of Funds Rate is 2%. The Cumulative Cost calculation for Year 5 is asfollows:

 
| Year 5 | ($562,701 -  $75,000) x 1.02 = $497,455 |
|--------|-----------------------------------------|

 

(2)                                  Exampleof Annual After-Tax Cost of Funds

 

If theCumulative Costs and the Annual After-Tax Cost of Funds are the same as in item(1) above, the Annual After-Tax Costs of Funds are as follows:

 
| Initial Year | $500,000 x .03 = $15,000 |
|--------------|--------------------------|
| Year 2       | $515,000 x .02 = $10,300 |
| Year 3       | $525,300 x .03 = $15,759 |
| Year 4       | $541,059 x .04 = $21,642 |

 

(3)                                  Examplesof Crediting Benefits

 

If the Annual Earnings on the Bank-Owned LifeInsurance for Plan Year 11 equaled $85,000, the Cumulative Cost in Plan Year 11was $1,000,000, and the Annual After-Tax Cost-of-Funds Rate for Plan Year 11was 4%, then the following amount would be credited to the Director’s notionalbook reserve account for Plan Year 11:

 

[$85,000  -($1,000,000  x  .04)] = $45,000

 

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