**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2004**

 

**Commissionfile number:  005-57237**

 

**FIRST OTTAWA BANCSHARES, INC.**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                              | ** ** | **36-4331185**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State or  Other Jurisdiction             |       | (I.R.S.  Employer Identification No.) |
| of  Incorporation or Organization)        |       |                                  |
|                                      |       |                                  |
| **701-705  LaSalle Street**               | ** ** | **61350**                             |
| **Ottawa,  Illinois**                     |       | (ZIP Code)                            |
| (Address of  Principal Executive Offices) |       |                                  |

 

**(815)434-0044**

(Registrant Telephone Number,

including Area Code)

 

Securities registered under Section 12(b)of the Exchange Act:

**None**

 

Securities registered under Section 12(g)of the Exchange Act:

 

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

(Title of Class)

 

Indicate by check mark whether theregistrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90days.                                           Yesý  No o

 

Indicateby check mark if disclosure of delinquent filers in response to Item 405of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes o  No ý

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the registrant, based on the last known sales priceon or prior to June 30, 2004, the last business day of the registrant’smost recently completed second fiscal quarter, was $28,704,480.

 

649,989 shares of common stock wereoutstanding as of March 14, 2005.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of Parts II and IV are incorporatedby reference from the Registrant’s 2003 Annual Report to Stockholders; and aportion of Part III is incorporated by reference from the Registrant’s ProxyStatement for the Annual Meeting of Stockholders to be held May 18, 2005.

 

Except for those portions of the 2004 AnnualReport incorporated by reference, the Annual Report is not deemed filed as partof this Report.

 

 

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INDEX

 
| PART I   |                                                                                                                   |   |
|----------|------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                   |   |
| Item 1   | Business                                                                                                               |   |
| Item 2   | Properties                                                                                                             |   |
| Item 3   | Legal Proceedings                                                                                                      |   |
| Item 4   | Submission of Matters to a Vote of Security Holders                                                                    |   |
|     |                                                                                                                   |   |
| PART II  |                                                                                                                   |   |
|     |                                                                                                                   |   |
| Item 5   | Market for the Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
| Item 6   | Selected Financial Data                                                                                                |   |
| Item 7   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            |   |
| Item 7A  | Quantitative and Qualitative Disclosures about Market Risk                                                             |   |
| Item 8   | Financial Statements and Supplementary Data                                                                            |   |
| Item 9   | Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure                                  |   |
| Item 9A  | Controls and Procedures                                                                                                |   |
| Item 9B  | Other Information                                                                                                      |   |
|     |                                                                                                                   |   |
| PART III |                                                                                                                   |   |
|     |                                                                                                                   |   |
| Item 10  | Directors and Executive Officers of the Registrant                                                                     |   |
| Item 11  | Executive Compensation                                                                                                 |   |
| Item 12  | Security Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters                        |   |
| Item 13  | Certain Relationships and Related Transactions                                                                         |   |
| Item 14  | Principal Accountant Fees and Services                                                                                 |   |
|     |                                                                                                                   |   |
| PART IV  |                                                                                                                   |   |
|     |                                                                                                                   |   |
| Item 15  | Exhibits and Financial Statement Schedules                                                                             |   |

 

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**PARTI**

 

**Item 1****.****           Business**.

 

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 during 1999 and on October 1,1999 exchanged 100% of its common stock for 100% of the Bank’s common stock.  This exchange was accounted for as aninternal reorganization.  All referencesto the combined Company, unless otherwise indicated, at or before October 1,1999, refer to the Bank.  As of December 31,2004, the Company had total assets of $288.7 million, total deposits of $254.0million, loans, including loans held for sale, of $134.5 million and totalstockholders’ equity of $23.9 million. For the year ended December 31, 2004, the Company had interestincome of $13.5 million and net income of $2.6 million, which amounted to basicand diluted net income per share of $4.03.

 

TheCompany conducts a general banking business embracing most of the services,both commercial and consumer, which banks may lawfully provide, including thefollowing principal services:  theacceptance of deposits for demand, savings, and time accounts and the servicingof such accounts; commercial, agricultural, consumer, and real estate lending,including installment loans, personal lines of credit, and overdraftprotection; trust operations; farm management; safe deposit operations; and anextensive variety of additional services tailored to the needs of individualcustomers, including the sale of traveler’s checks, cashier’s checks, andforeign currency and other special services. Loans, both commercial and consumer, are provided on either a secured orunsecured basis to corporations, partnerships, and individuals.  Commercial lending covers such areas asbusiness, industry, capital, agriculture, inventory, and real estate, with thelatter including residential properties. Consumer loans are made for a variety of purposes including automobilepurchases, recreational vehicle purchases, consumer goods, installment loans,and other types of loans.

 

The Company is located in the city of Ottawa,Illinois (population 17,500) in LaSalle County in Illinois.  A substantial portion of the Company’sbusiness is dependent upon the economic conditions in this market area.  LaSalle County is the second largest countyby area in the state of Illinois.  Ottawais located in northeastern Illinois approximately 80 miles southwest of Chicagoand approximately 65 miles north of Bloomington. Ottawa may be accessed byInterstate 80; U.S. Route 6; State Routes 23 and 71; and recently completedInterstate 39, which is located 11 miles west of Ottawa.  The city is also serviced by two railroadsand the Ottawa Airport.

 

Ottawais the county seat of LaSalle County. Accordingly, many county, state, and other governmental offices arelocated in Ottawa.

 

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LaSalleCounty has a diverse economy with a balance in agriculture, transportation andindustry.  Grain terminals on theIllinois Deep Waterway at Ottawa provide a direct distribution point foragricultural products to overseas markets via the Gulf of Mexico and the St.Lawrence Seaway.  LaSalle County annuallyranks in the top 10 counties in Illinois for corn and soybean production.  LaSalle County, the site of the largestproducer of silica sand in the United States, has a diverse manufacturingsector which includes, in addition to the production of silica sand, themanufacture of residential glass, automotive and industrial belts andequipment, electronic typewriters and computer printers, plastics, office supplies,and rubber products.  Many of thesecompanies conduct business in national and, in some instances, internationalmarkets.

 

LaSalleCounty is continuing to expand.  Manydevelopments have had a significant impact on the area economy, including a newCounty Office Building on the north edge of Ottawa and several new and expandedshopping center projects.

 

The First National Bank of Ottawa (the “Bank”)purchased and assumed substantially all of the deposit liabilities of twobranch offices located in Streator, Illinois from First Midwest Bank(collectively, the “Branches”) on November 14, 2003. Approximately $69.3million of deposits and the related cash balances were transferred to the Bankvia cash transfers from First Midwest Bank. In connection with the acquisitionof such deposit liabilities and related cash balances, the Bank also acquiredcertain other assets of the Branches, including real estate, furniture andfixtures and approximately $11.8 million of the loans carried on the books ofthe Branches.  Many of the employeesremained with the Branches and became employees of the Bank.

 

TheCompany opened a full service banking facility in July 2003 in the city ofMorris, Illinois and has purchased real estate in Yorkville, Illinois with theintention of establishing a full service branch facility in thatcommunity.  Construction completion andthe branch opening are expected to occur in early 2005. The Company continuesto explore expansion opportunities within its existing market area and insurrounding areas.

 

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

 

Sixloan officers have the authority to handle all lending activities of theCompany.  Each lending officer hasauthority to approve extensions of credit up to their individual lendinglimit.  The Company has an Officers LoanCommittee (consisting of Assistant Vice Presidents, Vice Presidents, ExecutiveVice Presidents 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; formulating recommendations forthe Board of Directors regarding loan policy modifications, loan 

 

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classifications, andcharge-offs; and establishing interest rate and fee guidelines. All loans inexcess of $2,000,000 are reviewed and approved by the Board of Directors.  The Board of Directors also is responsiblefor directing and supervising the Director’s Loan Committee, policy review, andoversight of the loan and investment functions of the Company.  The Board of Directors also monitors theadequacy of the Company’s loan loss reserves.

 

***Loan Portfolio Composition***.  The Company’s gross loan portfolio, includingloans held for sale, totaled $134.5 million at December 31, 2004,representing 52.9% of the Company’s total deposits at that date.  The Company’s loan portfolio at December 31,2004 included $74.2 million for real estate purposes, $30.2 million forconsumer purposes, and $28.3 million for commercial and agricultural purposes.

 

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

 

The Company’s strategy in addressing andmanaging these types of risks is to follow its loan policies and underwritingpractices, which include (i) granting loans on a sound and collectiblebasis; (ii) investing funds profitably for the benefit of the stockholdersand the protection of depositors; (iii) serving the legitimate needs ofthe community and the Company’s general market area while maintaining a balancebetween maximum yield and minimum risk; (iv) ensuring that primary andsecondary sources of repayment are adequate in relation to amount of the loan;(v) developing and maintaining adequate diversification of the loanportfolio as a whole and of the loans within each loan category;(vi) ensuring that each loan is properly documented and, if appropriate,secured or guaranteed by government agencies; and (vii) developing andapplying adequate collections procedures.

 

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**All table amounts throughout the Form10-K are in thousands except share and per share data.**

 

Thefollowing table presents the components of the Company’s loan portfolio as of December 31for each year shown.

 
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Real estate  loans                         |       | $        | 74,225     |     | $          | 70,839   |       | $        | 46,622     |     | $          | 47,282 |   | $ | 56,069 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Commercial  and agricultural loans         |       | 28,341   |       | 24,197   |       | 33,950   |       | 29,361   |       | 16,266   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Installment  loans, net of unearned income |       | 17,575   |       | 22,812   |       | 19,951   |       | 24,595   |       | 39,441   |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Home equity  lines of credit               |       | 12,651   |       | 12,456   |       | 9,120    |       | 6,795    |       | 5,143    |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Total Loans                                |       | 132,792  |       | 130,304  |       | 109,643  |       | 108,033  |       | 116,919  |       |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Allowance  for loan losses                 |       | (1,174   | )          | (1,049   | )          | (1,167   | )          | (1,109   | )          | (1,108   | )          |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans, net                                 |       | $        | 131,618    |     | $          | 129,255  |       | $        | 108,476    |     | $          | 106,924 |   | $ | 115,811 |   |
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Loans held  for sale                       |       | $        | 1,701      |     | $          | 1,644    |       | $        | 1,811      |     | $          | 1,475 |   | $ | 693 |   |

 

Maturities(based on contractual terms) of the Company’s commercial and construction loanportfolio at December 31, 2004 are summarized below:

 
| ** **                   | ** ** | **One Year  or Less** | ** ** | **One to  Five Years** | ** ** | **Over  Five Years** | ** ** | **Total** | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
|                         |       |                  |       |                   |       |                 |       |      |       |
| Commercial  and agricultural |       | $                     | 11,368     |                   | $          | 10,976               |       | $         | 5,997      |   | $ | 28,341 |   |
|                         |       |                  |       |                   |       |                 |       |      |       |
| Construction                 |       | 1,588                 |       | —                 |       | —               |       | 1,588     |       |
|                         |       |                  |       |                   |       |                 |       |      |       |
| Total                        |       | $                     | 12,956     |                   | $          | 10,976               |       | $         | 5,997      |   | $ | 29,929 |   |

 

At December 31,2004, of the total loans that mature in more than one year, $66.9 million, or78.9%, bear interest at fixed rates and $17.9 million, or 21.1%, bear interestat variable rates.

 

***ConsumerLoans***.  The Company makes consumer loans for variouspurposes, including personal, family, and nonbusiness reasons such asautomobile loans and recreational vehicle loans, on both a direct and indirectbasis.  Consumer loans totaledapproximately $30.2 million at December 31, 2004, or approximately 22.5%of the Company’s total loan portfolio. Approximately 50.7% of the Company’s consumer loans were automobileloans, and of these loans, approximately 77.8% were made indirectly by theCompany through automobile dealers.  TheCompany’s consumer loans are fixed-rate loans with final maturities of fiveyears or less.  At December 31,2004, the Company had 12 consumer loans totaling $147,000 that were past due inexcess of 90 days. Management feels the Company is well collateralized andexpects no loss in excess of specific allocations on the loans.

 

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Inapproving consumer loans, lending officers consider the borrower’s past credithistory, the borrower’s ability to repay the debt, the collateral offered, andlocal economic conditions that could affect the borrower’s income.  Loans being originated for new borrowers mustbe accompanied by a completed application dated and signed by the borrower,giving the details of the loan request. Total debts, along with the gross monthly income of the borrower, arerequired to be shown on the application. A brief cash flow analysis is performed by the loan officer showing theamount of the borrower’s income available for debt service based on currentdebts plus the new loan request. Generally, debt service to gross income should not exceed 40%. Newcredit reports are obtained on all borrowers with each loan request.  The value of collateral on loans secured byused automobiles is generally determined by using industry-accepted used carguides.  In connection with usedautomobile loans, the Company generally requires a 90% loan-to-value ratio;however, depending upon various factors, including the credit experience of theCompany with the borrower, the Company may extend credit in excess of the valueof the used automobile.  A loan-to-valueratio of 90% of sticker price is generally required for new automobileloans.  Boats, mobile homes, recreationalvehicles, and similar items generally require a loan-to-value ratio of 70% to80% of the current market value of the collateral.  Unsecured consumer loans are granted toborrowers based upon satisfactory income, indebtedness levels, and creditrecords and experience.

 

***Commercial, Agricultural, andReal Estate Lending***.

 

Commercial and Agricultural.  At December 31, 2004, the Company’scommercial and agricultural loans totaled $28.3 million, or approximately 21.0%of the total loan portfolio of the Company. The majority of agricultural and commercial non-real estate loans arewritten for one to five years, may bear interest at a fixed or variable rateand are amortized over a 15-year to 20-year period. Fixed rates are establishedby the Company’s management after considering the cost of funds to the Companyas well as the rates of competing institutions. The variable rate is generally based upon the national prime rate asdisclosed in *The Wall Street Journal*.  Principal and interest payments on commercialloans generally are required monthly; whereas, payments on agricultural loansvary from monthly, quarterly, semi-annually, and annually.  At December 31, 2004, the Company had nocommercial non-real estate loans past due in excess of 90 days. There were 2agricultural non-real estate loans totaling $337,000 at December 31, 2004that were past due in excess of 90 days. Management feels the Company is wellcollateralized and expects no loss in excess of specific allocations on theloans.

 

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

 

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Real Estate Lending.The Company’s primary real estate lending consists of commercial loans with asmall portion in residential and agricultural real estate loans.  Real estate loans at December 31, 2004totaled approximately $74.2 million or approximately 55.1% of the Company’stotal loan portfolio.  All borrowersrequesting a real estate loan are required to submit an application which isreviewed by the lending officer.  Acredit investigation is performed and an analysis of the borrower’s ability torepay is conducted.  Subsequently, aninspection and appraisal of the real property is conducted to determine whetheror not the property is of sufficient value to meet the Company’s suggestedmaximum loan-to-value ratio of 80% to 85% of the lesser of the appraised valueor the purchase price of the property securing the loan.  Under certain federal guaranteed loanprograms utilized by the Company, the maximum loan-to-value ratio ishigher.  With respect to loans secured bycommercial or industrial real estate, the Company analyzes the potential forenvironmental liability concerns and, depending upon the circumstances, theCompany may require additional information or testing.  Commercial and agricultural real estate loansare generally originated under the same policies and procedures as discussedabove for commercial and agricultural non-real estate loans.

 

The Company’s residential real estate loansconsist of 15-year, 20-year and 30-year fixed-rate and variable-rate loans withamortization periods equal to the maturity of the loan.  The Company’s fixed-rate loans with biweeklypayments account for approximately 68.6% of all the residential real estateloans of the Company. The biweekly loan program amortizes 25year loans inapproximately 18.9 years.  The Companyalso originates a variety of loans that are sold into the secondary marketthrough Federal Home Loan Mortgage Corporation (“Freddie Mac”) and privateinvestors.  These loans are underwrittento meet all Freddie Mac requirements. The Company retains servicing rights on loans sold into the secondarymarket.  At December 31, 2004,mortgage loans serviced for the secondary market totaled approximately $36.4million.

 

At December 31, 2004, the Company had 6real estate mortgage loans totaling $404,000 past due in excess of 90 days.Management feels the Company is well collateralized and expects no loss inexcess of specific allocations on the loans.

 

***Interest Rates 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-Performing Loans***.  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, 2004, the Company had 65loans delinquent for 30 to 90 days in an aggregate principal amount of $1.8million and representing 1.3% of the total loan portfolio.  At 

 

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December 31, 2004, the Company had 22 loans totaling $888,000delinquent for more than 90 days.

 

It is the Company’s policy to discontinue theaccrual of interest income on any loan when, in accordance with bankingregulations or in the opinion of management, there is reasonable doubt as tothe collectibility of interest or principal. Interest on these loans is credited to income only when the collectionof principal has been reasonably assured and only to the extent interestpayments are received.  If managementfeels collection of both interest and principal is probable, the loan is nottransferred to nonaccrual status.  At December 31,2004, there were 6 loans totaling $161,000 on nonaccrual status.

 

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

 

Thenonperforming assets of the Company as of December 31 are indicated below:

 
| ** **                                                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Non-accrual  loans                                                                                  |       | $        | 161        |     | $          | 137      |       | $        | 364        |     | $          | 387 |   | $ | 467 |   |
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Loans ninety  days past due and still accruing interest                                             |       | 727      |       | 293      |       | 757      |       | 860      |       | 2,177    |       |
| Other real  estate owned                                                                            |       | —   |       | —   |       | 204      |       | —   |       | 169      |       |
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Total  nonperforming assets                                                                         |       | $        | 888        |     | $          | 430      |       | $        | 1,325      |     | $          | 1,247 |   | $ | 2,813 |   |
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of total loans, net of unearned income and deferred  loan fees |       | .66      | %          | .33      | %          | 1.02     | %          | 1.17     | %          | 2.26     | %          |
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  assets as a percentage of total assets                                               |       | .31      |       | .15      |       | .55      |       | .54      |       | 1.25     |       |
|                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming  loans as a percentage of the allowance for loan losses                               |       | 75.64    |       | 40.99    |       | 96.06    |       | 112.44   |       | 238.63   |       |

 

The effect ofnonaccrual loans upon interest income is not deemed to be material bymanagement.  Loans are placed innonaccrual status when 90 days past due, unless they are fully secured and inthe process of collection.  At December 31,2004, there were other impaired loans with specific reserve allocationsclassified as problem loans that were not included above.  Management also maintains a loans requiringattention report that includes loans greater than 60 days delinquent or otherloans as deemed necessary by the Company’s internal loan review or the loancommittee.  The total of loans requiringattention as of December 31, 2004 was $4.7 million.

 

***Allowance for Losses on Loans***.  In originating loans, the Company recognizesthat losses will be experienced on loans and that the risk of loss will varywith, among other things, the type of loan being made, the creditworthiness ofthe borrower over the term of the loan, general 

 

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economic conditions and, in the case of a secured loan, the quality ofthe security for the loan.  The Companymaintains an allowance for loan losses to absorb probable incurred creditlosses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate ofprobable incurred losses based on information available as of the date of thefinancial statements.  The allowance forloan losses is based on management’s evaluation of the collectibility of theloan portfolio, including past loan loss experience, known and inherent risksin the nature and volume of the portfolio, information about specific borrowersituations and estimated collateral values, and economic conditions.

 

The loan portfolio and other credit exposuresare regularly reviewed by management to evaluate the adequacy of the allowancefor loan 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 theirexamination process, periodically review the Company’s allowance for loanlosses.  Such agencies may require theCompany to make additional provisions for estimated losses based upon judgmentsdifferent from those of management.

 

In connection with assessing the allowance,loss factors 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 theallowance using factors that cannot be associated with specific credit or loancategories.  These factors includemanagement’s subjective evaluation of local and economic and businessconditions, portfolio concentration and changes in the character and size ofthe loan portfolio.  The allowancemethodology reflects management’s objective that the overall allowanceappropriately reflects a margin for the imprecision necessarily inherent in theestimates of expected credit losses.

 

The allowance for loan losses is establishedthrough a charge to operations at the time loan value becomes impaired or, inthe judgment of management, other subjective factors warrant additionalreserves. As noted in the previous table, nonperforming loans increased by$458,000 in 2004 after decreasing by $895,000 during 2003.  Management considered this information alongwith other portfolio trends in concluding on the adequacy of the allowance forloan losses at December 31, 2004. At December 31, 2004, the balancein the allowance was $1.2 million, or .87% of gross loans outstanding.  Management has concluded that the allowancefor loan losses is adequate at December 31, 2004. However, there can be noassurance that the allowance for loan losses is adequate to cover all losses.

 

The Company had no properties resulting fromforeclosures classified as other real estate owned at December 31, 2004.Other real estate is generally carried at the lower of cost or estimated marketvalue.

 

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***Summary of Loan LossExperience.***The allowance for loan losses ismaintained by management at a level considered adequate to cover losses thatare currently anticipated based upon past loss experience, general economicconditions, information about specific borrower situations, including theirfinancial position and collateral values, and other factors and estimates whichare subject to change over time.

 

Loan loss experience for the five years endedDecember 31, 2004 is summarized as follows:

 
| ** **                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance of  the allowance for loan losses at beginning of year |       | $        | 1,049      |     | $          | 1,167    |       | $        | 1,109      |     | $          | 1,108 |   | $ | 1,059 |   |
| Charge-offs                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 63       |       | 66       |       | 46       |       | 111      |       | 135      |       |
| Commercial                                                     |       | —   |       | 50       |       | 6        |       | 35       |       | 39       |       |
| Installment                                                    |       | 210      |       | 303      |       | 181      |       | 254      |       | 341      |       |
| Total  charge-offs                                             |       | 273      |       | 419      |       | 233      |       | 400      |       | 515      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Recoveries                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | —   |       | 16       |       | 39       |       | 4        |       | —   |       |
| Commercial                                                     |       | 4        |       | 57       |       | 63       |       | 6        |       | 21       |       |
| Installment                                                    |       | 94       |       | 108      |       | 69       |       | 91       |       | 177      |       |
| Total  recoveries                                              |       | 98       |       | 181      |       | 171      |       | 101      |       | 204      |       |
| Net  charge-offs                                               |       | 175      |       | 238      |       | 62       |       | 299      |       | 311      |       |
| Provision                                                      |       | 300      |       | 120      |       | 120      |       | 300      |       | 360      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance at  end of year                                        |       | $        | 1,174      |     | $          | 1,049    |       | $        | 1,167      |     | $          | 1,109 |   | $ | 1,108 |   |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net  charge-offs to average total loans                        |       | .13      | %          | .21      | %          | .06      | %          | .26      | %          | .25      | %          |
| Allowance  for loan losses to total loans at year-end          |       | .87      |       | .80      |       | 1.06     |       | 1.03     |       | .95      |       |

 

9

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TheCompany’s allocation of the allowance for loan losses as of December 31 ispresented below:

 
| ** **                        | ** ** | **2004**   | ** ** | **2003**                     | ** ** | **2002**   | ** ** | **2001**                     | ** ** | **2000**   | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Amount** | ** ** | **Percent  of Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total  Loans** | ** ** |
|                              |       |       |       |                         |       |       |       |                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Real estate loans                 |       | $          | 234        |                         | 19.88      | %          | $          | 444                          |       | 54.37      | %          | $ | 281 |   | 42.56 | % | $ | 308 |   | 43.78 | % | $ | 378 |   | 47.97 | % |
|                              |       |       |       |                         |       |       |       |                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial and agricultural loans |       | 519        |       | 44.24                        |       | 209        |       | 18.57                        |       | 307        |       | 30.94 |   | 380 |   | 27.62 |   | 291 |   | 13.91 |   |
|                              |       |       |       |                         |       |       |       |                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Installment loans                 |       | 185        |       | 15.79                        |       | 242        |       | 27.06                        |       | 236        |       | 26.50 |   | 287 |   | 28.60 |   | 297 |   | 38.12 |   |
|                              |       |       |       |                         |       |       |       |                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unallocated                       |       | 236        |       | N/A                          |       | 154        |       | N/A                          |       | 343        |       | N/A |   | 134 |   | N/A |   | 142 |   | N/A |   |
|                              |       |       |       |                         |       |       |       |                         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Balance at end of year            |       | $          | 1,174      |                         | 100.00     | %          | $          | 1,049                        |       | 100.00     | %          | $ | 1,167 |   | 100.00 | % | $ | 1,109 |   | 100.00 | % | $ | 1,108 |   | 100.00 | % |

 

 

***InvestmentActivities****.*The investment policies of the Company asestablished by the Board of Directors attempt to provide and maintainliquidity, generate a favorable return on investments without incurring undueinterest rate and credit risk, and complement the Company’s lendingactivities.  The policies provide theauthority to invest in United States Treasury and federal agency securities,mortgage-backed securities, municipal securities, equity securities, andCertificates of Deposits.

 

Approximately $3.8 million of the UnitedStates government agency notes held at December 31, 2004 are callable atthe option of the issuer, which present prepayment risk to the Company.

 

As of December 31, 2004, the Company hadapproximately $4.5 million invested in municipalities located within LaSalleCounty, Illinois.

 

The Company purchased $7.1 million of IndexPowered Certificates of Deposit over the course of 2002, 2003 and 2004. Thesedeposits were placed with multiple issuers so that $6.2 million of theprincipal deposited is insured through the FDIC and the remaining $900,000 iscollateralized with a letter of credit from the single issuing institution.Income returns are not guaranteed for these instruments, however principal isguaranteed if held to maturity.

 

10

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***Securities Portfolio.***Thefollowing table shows the maturity distribution of the available-for-salesecurities portfolio and the weighted average yield of the portfolio at December 31,2004.  The carrying amounts of theportfolio at December 31, 2004 are found in Note 2 to the financialstatements included in the Annual Report to Stockholders.

 
| ** **                                                     | ** ** | **One Year  or Less** | ** ** | **Weighted  Average  Yield** | ** ** | **One to  Five  Years** | ** ** | **Weighted  Average  Yield** | ** ** | **Five  to Ten  Years** | ** ** | **Weighted  Average  Yield** | ** ** | **Over  Ten  Years** | ** ** | **Weighted  Average  Yield** | ** ** | **Total** | ** ** | **Weighted  Average  Yield** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------|------------|------------------------------|------------|----------------------|------------|------------------------------|------------|-----------|------------|------------------------------|------------|
|                                                           |       |                  |       |                         |       |                    |       |                         |       |                    |       |                         |       |                 |       |                         |       |      |       |                         |       |
| U.S. Treasury securities                                       |       | $                     | —     |                         | —     | %                       | $          | 8,955                        |       | 3.22                    | %          | $                            | 1,104      |                 | 3.62       | %                            | $          | —    |       | —                       | %          | $ | 10,059 |   | 3.26 | % |
| U.S. Government agencies                                       |       | —                |       | —                       |       | 46,119                  |       | 3.74                         |       | 1,482                   |       | 3.94                         |       | —               |       | —                       |       | 47,601    |       | 3.75                         |       |
| States and political subdivisions                              |       | 1,316                 |       | 6.93                         |       | 8,091                   |       | 6.07                         |       | 14,196                  |       | 4.18                         |       | 2,979                |       | 6.75                         |       | 26,582    |       | 5.17                         |       |
| Mortgage-backed securities and collateralized  obligations (1) |       | 635                   |       | 3.47                         |       | 10,028                  |       | 4.57                         |       | 1,677                   |       | 3.96                         |       | —               |       | —                       |       | 12,340    |       | 4.43                         |       |
|                                                           |       |                  |       |                         |       |                    |       |                         |       |                    |       |                         |       |                 |       |                         |       |      |       |                         |       |
| Corporate bonds                                                |       | 1,223                 |       | 5.93                         |       | 3,430                   |       | 2.96                         |       | —                  |       | —                       |       | —               |       | —                       |       | 4,653     |       | 3.75                         |       |
| Equity securities                                              |       | 3,417                 |       | N/A                          |       | —                  |       | —                       |       | —                  |       | —                       |       | —               |       | —                       |       | 3,417     |       | N/A                          |       |
|                                                           |       |                  |       |                         |       |                    |       |                         |       |                    |       |                         |       |                 |       |                         |       |      |       |                         |       |
| Total securities                                               |       | $                     | 6,591      |                         | 5.86       | %                       | $          | 76,623                       |       | 4.00                    | %          | $                            | 18,459     |                 | 4.11       | %                            | $          | 2,979     |       | 6.75                         | %          | $ | 104,652 |   | 4.16 | % |

 

----

(1)  Mortgage-backed securitiesreflect the contractual maturity of the related instrument.

 

11

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***Deposits****.*The principal deposit services offered by the Company aredemand, savings, and time deposit accounts and programs, which includeinterest-bearing and non-interest-bearing demand deposits and individualretirement accounts.  The Company has hada stable deposit base.  Managementbelieves that this stability is due to the Company’s emphasis on being a locallyowned and operated bank and by providing quality, personalized service to itscustomers.

 

The following shows the Company’s averagebalances and rates paid during the years shown.

 
| ** **                          | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                          | ** ** | **Average  Balance**                      | ** ** | **Percent  of  Deposits** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Percent  of  Deposits** | ** ** | **Rate** | ** ** | **Average  Balance** | ** ** | **Percent  of  Deposits** | ** ** | **Rate** | ** ** |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits |       | $                                         | 29,815     |   | 11.0 | % | — | % | $ | 20,775 |   | 10.2 | % | — | % | $ | 19,879 |   | 11.6 | % | — | % |
| Interest-bearing demand deposits    |       | 107,136                                   |       | 39.5 |   | 1.17 |   | 69,435 |   | 34.1 |   | 1.02 |   | 42,056 |   | 24.6 |   | 1.39 |   |
| Savings accounts                    |       | 29,121                                    |       | 10.8 |   | .59 |   | 21,158 |   | 10.4 |   | .98 |   | 18,388 |   | 10.7 |   | 1.70 |   |
| Time deposits accounts              |       | 105,002                                   |       | 38.7 |   | 2.60 |   | 92,110 |   | 45.3 |   | 3.57 |   | 90,909 |   | 53.1 |   | 4.61 |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |       | $                                         | 271,074    |   | 100.0 | % | 1.53 | % | $ | 203,478 |   | 100.0 | % | 2.07 | % | $ | 171,232 |   | 100.0 | % | 2.79 | % |

 

Thedistribution of the major components of deposits as of December 31, 2004and 2003 is summarized in the balance sheets included in the 2004 consolidatedfinancial statements, which consolidated financial statements are incorporatedherein by reference. The following is a maturity distribution of timecertificates of deposit of $100,000 or more at December 31, 2004:

 
| ** **                       | ** ** | **Balance** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|-------------|------------|----------------|------------|
| Maturity                         |       |        |       |           |       |
| Three months  or less            |       | $           | 4,597      |           | 20.5       | % |
| Over three  months to six months |       | 3,890       |       | 17.3           |       |
| Over six  months to one year     |       | 2,284       |       | 10.2           |       |
| Over one  year                   |       | 11,691      |       | 52.0           |       |
|                             |       |        |       |           |       |
| Total                            |       | $           | 22,462     |           | 100.0      | % |

 

12

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***Borrowings.***The Company’s otheravailable sources of funds include financing arrangements for securities soldunder agreements to repurchase, federal funds purchased lines, and Federal HomeLoan Bank borrowings. Total borrowings increased $6.4 million in 2004. Thisincrease was a result of a $5.6 million increase in federal funds purchased and$750,000 increase in repurchase agreements. Physical control is maintained forall securities sold under repurchase agreements. Information concerningsecurities sold under agreements to repurchase is summarized as follows:

 
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Balance at December 31                            |       | $        | 750        |     | $          | —   |       | $ | 1,622 |   |
| Weighted  average interest rate during the year        |       | 1.63     | %          | 2.11     | %          | 1.86     | %          |
| Weighted  average interest rate at the end of the year |       | 1.63     | %          | —   | %          | 2.04     | %          |
| Maximum  month-end balance                             |       | $        | 750        |     | $          | 1,545    |       | $ | 37,594 |   |
| Average  balance for the year                          |       | 215      |       | 475      |       | 25,567   |       |

 

***Trust.***The Company’s trustdepartment primarily services LaSalle County and surrounding counties.  At December 31, 2004, the trustdepartment had 184 trust accounts under management, 133 of which werediscretionary accounts.  The trustdepartment provides a full complement of asset management services for personaltrusts, estates, and agencies.  The trustdepartment had assets under management of approximately $52.6 million at December 31,2004, of which $44.0 million was in discretionary accounts.

 

The Company, in conjunction with its trustdepartment, also provides farm management services.  At December 31, 2004, the departmentmanaged 48 farms.  The department managesor directs approximately 6,523 acres of farmland in LaSalle County, Illinoisand surrounding counties.

 

***Competition***.The Company has active competition in all product and service areas in which itpresently engages.  The Company not onlycompetes for commercial and individual deposits, loans, and trust business withother LaSalle County, Illinois banks, but also with savings and loanassociations, credit unions, and other financial service companies located inand around LaSalle County.  Many of thesecompetitors may not be subject to the same regulatory restrictions as theCompany. There are approximately 16 commercial banks and 6 savings institutionswith offices in LaSalle County, Illinois. The principal methods of competition in the banking and financialservices industry are quality of services to the customer; ease of access toservices; and pricing of services, including interest rates paid on deposits,interest rates charged on borrowings, and fees charged for fiduciary services.

 

TheGramm-Leach-Bliley Act may significantly change the competitive environment inwhich the Company and the Bank conduct business.  The financial services industry is alsolikely to become more competitive as further technological  advances enable more companies to providefinancial services.

 

13

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***Employees.***  As of December 31, 2004, the Company had98 employees, consisting of 84 full-time employees and 14 part-timeemployees.  None of the employees aresubject to a collective bargaining agreement, and management believes it hasexcellent relations with its staff.

 

***StockRepurchases.***During 2004 and 2003,the Company repurchased 1,018 and 5,329 shares of its common stock for anaggregate purchase price of $71,000 and $315,000.

##  

## **Website.**The Company maintains a website atwww.firstottawa.com.  The Company makesavailable free of charge on or through its website, the annual report on Form10K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act as soon as reasonably practicable after the Companyelectronically files such material with, or furnish it to, the Securities andExchange Commission.  The Company willalso provide copies of its filings free of charge upon written request to: Ms.Cheryl Gage, Corporate Secretary, First Ottawa Bancshares, Inc. 701-705 LaSalleStreet, P.O. Box 657, Ottawa, Illinois 61350. Additionally, all of the Company’sfilings with the Securities and Exchange Commission are also available, free ofcharge, through the Securities and Exchange Commission’s website atwww.sec.gov.

 

**Code of BusinessConduct and Ethics.**The Company has a code of businessconduct and ethics in place that applies to all of its directors andemployees.  The code sets forth thestandard of ethics that the Company expect all of its directors and employeesto follow, including the Chief Executive Officer and Chief FinancialOfficer.  The code of business conductand ethics is posted on the Company’s website at www.firstottawa.com.  The Company intends to satisfy the disclosurerequirements under Item 5.05 ofForm 8-K regarding any amendment to or waiver of the code with respect to theChief Executive Officer and Chief Financial Officer, and persons performingsimilar functions, by posting such information on its website.

 

**Supervision and Regulation**

 

# **General**

 

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

 

Federal and state laws and regulationsgenerally applicable to financial institutions regulate, among other things,the scope of business, the kinds and amounts of investments, reserverequirements, capital levels relative to operations, the nature and amount ofcollateral for loans, the establishment of branches, mergers and consolidationsand the payment of dividends. 

 

14

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This system of supervision and regulation establishes a comprehensiveframework for the respective operations of the Company and its subsidiaries andis intended primarily for the protection of the FDIC-insured deposits anddepositors of the Bank, rather than shareholders.

 

The following is a summary of the materialelements of the regulatory framework that applies to the Company and itssubsidiaries.  It does not describe allof the statutes, regulations and regulatory policies that apply, nor does itrestate all of the requirements of those statutes, regulations and regulatorypolicies that are described. As such, the following is qualified in itsentirety by reference to applicable law. Any change in applicable statutes, regulations or regulatory policiesmay have a material effect on the business of the Company and its subsidiaries.

 

**The Company**

 

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

 

***Acquisitions, Activities andChange in Control.* **The primary purpose of a bank holding company is to control andmanage banks.****The BHCA generally requires theprior approval of the Federal Reserve for any merger involving a bank holdingcompany or any acquisition by a bank holding company of another bank or bankholding company.  Subject to certainconditions (including deposit concentration limits established by the BHCA),the Federal Reserve may allow a bank holding company to acquire banks locatedin any state of the United States. In approving interstate acquisitions, theFederal Reserve is required to give effect to applicable state law limitationson the aggregate amount of deposits that may be held by the acquiring bankholding company and its insured depository institution affiliates in the statein which the target bank is located (provided that those limits do notdiscriminate against out-of-state depository institutions or their holdingcompanies) and state laws that require that the target bank have been inexistence for a minimum period of time (not to exceed five years) before beingacquired by an out-of-state bank holding company.

 

The BHCA generally prohibits the Company fromacquiring direct or indirect ownership or control of more than 5% of the votingshares of any company that is not a bank and from engaging in any businessother than that of banking, managing and controlling banks or furnishingservices to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. Theprincipal exception allows bank holding companies to engage in, and to ownshares of companies engaged in, certain businesses found by the Federal Reserveto be “so closely related to banking ... as to be a proper incident thereto.”  This authority would permit the Company toengage in a variety of banking-related businesses, including the operation of athrift, consumer finance, equipment leasing, the operation of a computerservice bureau (including software development), and 

 

15

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mortgage banking and brokerage. The BHCA generally does not placeterritorial restrictions on the domestic activities of non-bank subsidiaries ofbank holding companies.

 

Additionally, bank holding companies thatmeet certain eligibility requirements prescribed by the BHCA and elect tooperate as financial holding companies may engage in, or own shares incompanies engaged in, a wider range of nonbanking activities, includingsecurities and insurance underwriting and sales, merchant banking and any otheractivity that the Federal Reserve, in consultation with the Secretary of theTreasury, determines by regulation or order is financial in nature, incidentalto any such financial activity or complementary to any such financial activityand does not pose a substantial risk to the safety or soundness of depositoryinstitutions or the financial system generally. As of the date of this filing, the Company has neither applied for norreceived approval to operate as a financial holding company.

 

Federal law also prohibits any person orcompany from acquiring “control” of an FDIC-insured depository institution orits holding company without prior notice to the appropriate federal bankregulator.  “Control” is conclusivelypresumed to exist upon the acquisition of 25% or more of the outstanding votingsecurities of a bank or bank holding company, but may arise under certaincircumstances at 10% ownership.

 

***Capital Requirements.***  Bank holding companies are required to maintainminimum levels of capital in accordance with Federal Reserve capital adequacyguidelines.  If capital levels fall belowthe minimum required levels, a bank holding company, among other things, may bedenied approval to acquire or establish additional banks or non-bankbusinesses.

 

The Federal Reserve’s capital guidelinesestablish the following minimum regulatory capital requirements for bankholding companies: (i) a risk-based requirement expressed as a percentage oftotal assets weighted according to risk; and (ii) a leverage requirementexpressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capitalto total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital tototal risk-weighted assets of 4%.  Theleverage requirement consists of a minimum ratio of Tier 1 capital to totalassets of 3% for the most highly rated companies, with a minimum requirement of4% for all others.  For purposes of thesecapital standards, Tier 1 capital consists primarily of permanent stockholders’equity less intangible assets (other than certain loan servicing rights andpurchased credit card relationships). Total capital consists primarily of Tier1 capital plus certain other debt and equity instruments that do not qualify asTier 1 capital and a portion of the company’s allowance for loan and leaselosses.

 

The risk-based and leverage standardsdescribed above are minimum requirements. Higher capital levels will berequired if warranted by the particular circumstances or risk profiles ofindividual banking organizations. For example, the Federal Reserve’s capitalguidelines contemplate that additional capital may be required to take adequateaccount of, among other things, interest rate risk, or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.  Further, any bankingorganization experiencing or anticipating significant growth would be expectedto maintain capital ratios, including tangible capital positions (*i.e.*, Tier 1 capital less all intangible assets), well abovethe minimum levels.  As of December 31,2004, the Company had regulatory capital in excess of the Federal Reserve’sminimum requirements.

 

16

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***Dividend Payments.**** *The Company’s ability to paydividends to its shareholders may be affected by both general corporate lawconsiderations and policies of the Federal Reserve applicable to bank holdingcompanies*.* As a Delaware corporation, the Companyis 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 that exceed its net income or that canonly be funded in ways that weaken the bank holding company’s financial health,such as by borrowing.  The FederalReserve also possesses enforcement powers over bank holding companies and theirnon-bank subsidiaries to prevent or remedy actions that represent unsafe orunsound practices or violations of applicable statutes and regulations.  Among these powers is the ability toproscribe the payment of dividends by banks and bank holding companies.

 

***Federal Securities Regulation.***  The Company’s common stock is registered withthe SEC under the Securities Act of 1933, as amended, and the ExchangeAct.  Consequently, the Company issubject to the information, proxy solicitation, insider trading and otherrestrictions and requirements of the SEC under the Exchange Act.

 

**The Bank**

 

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

 

***Deposit Insurance.* **As an FDIC-insured institution, the Bankis required to pay deposit insurance premium assessments to the FDIC.  The FDIC has adopted a risk-based assessmentsystem under which all insured depository institutions are placed into one ofnine categories and assessed insurance premiums based upon their respectivelevels of capital and results of supervisory evaluations.  Institutions classified as well-capitalized(as defined by the FDIC) and considered healthy pay the lowest premium whileinstitutions that are less than adequately capitalized (as defined by the FDIC)and considered of substantial supervisory concern pay the highest premium.  Risk classification of all insuredinstitutions is made by the FDIC for each semi-annual assessment period.

 

During the year ended December 31, 2004,BIF assessments ranged from 0% of deposits to 0.27% of deposits.  For the semi-annual assessment periodbeginning January 1, 2005, BIF assessment rates will continue to rangefrom 0% of deposits to 0.27% of deposits.

 

***FICOAssessments.***  Since 1987, a portion ofthe deposit insurance assessments paid by members of the FDIC’s SavingsAssociation Insurance Fund (“SAIF”) has been used to cover interest paymentsdue on the outstanding obligations of the Financing Corporation (“FICO”). 

 

17

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FICO was created in 1987 to finance the recapitalization of the FederalSavings and Loan Insurance Corporation, the SAIF’s predecessor insurance fund.As a result of federal legislation enacted in 1996, beginning as of January 1,1997, both SAIF members and BIF members became subject to assessments to coverthe interest payments on outstanding FICO obligations until the final maturityof such obligations in 2019.  These FICOassessments are in addition to amounts assessed by the FDIC for depositinsurance. During the year ended December 31, 2004, the FICO assessmentrate for BIF and SAIF members was approximately 0.02% of deposits.

 

***Supervisory Assessments.***  National banks are required to paysupervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculatedusing a formula that takes into account the bank’s size and its supervisorycondition (as determined by the composite rating assigned to the bank as aresult of its most recent OCC examination).** **During the year ended December 31,2004, the Bank paid supervisory assessments to the OCC totaling $86,000.

 

***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 requirement consistingof a minimum ratio of total capital to total risk-weighted assets of 8% and aminimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  For purposes of these capital standards, thecomponents of Tier 1 capital and total capital are the same as those for bankholding companies discussed above.

 

The capital requirements described above areminimum requirements.  Higher capitallevels will be required if warranted by the particular circumstances or riskprofiles of individual institutions.  Forexample, regulations of the OCC provide that additional capital may be requiredto take adequate account of, among other things, interest rate risk or therisks posed by concentrations of credit, nontraditional activities orsecurities trading activities.

 

Further, federal law and regulations providevarious incentives for financial institutions to maintain regulatory capital atlevels in 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 bankholding company’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 of totalcapital to total risk-weighted assets of 10% or greater, a ratio of Tier 1capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1capital to total assets of 5% or greater.

 

Federal law also provides the federal banking regulatorswith broad power to take prompt corrective action to resolve the problems ofundercapitalized institutions.  The extentof the regulators’ powers depends on whether the institution in question is “adequatelycapitalized,” “undercapitalized,” “significantly undercapitalized” or “criticallyundercapitalized,” in each case as defined by regulation.  Depending upon the capital category to whichan institution is assigned, the 

 

18

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regulators’ corrective powers include: (i) requiring the institution tosubmit a capital restoration plan; (ii) limiting the institution’s asset growthand restricting its activities; (iii) requiring the institution to issueadditional capital stock (including additional voting stock) or to be acquired;(iv) restricting transactions between the institution and its affiliates; (v)restricting the interest rate the institution may pay on deposits; (vi)ordering a new election of directors of the institution; (vii) requiring thatsenior executive officers or directors be dismissed; (viii) prohibiting theinstitution from accepting deposits from correspondent banks; (ix) requiringthe institution to divest certain subsidiaries; (x) prohibiting the payment ofprincipal or interest on subordinated debt; and (xi) ultimately, appointing areceiver for the institution.

 

As of December 31, 2004: (i) the Bankwas not subject to a directive from the OCC to increase its capital to anamount in excess 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.

 

***Dividends.***The primary source of funds for the Company is dividends from the Bank. Underthe National Bank Act, a national bank may pay dividends out of its undividedprofits in such amounts and at such times as the bank’s board of directorsdeems prudent.  Without prior OCCapproval, however, a national bank may not pay dividends in any calendar yearthat, in the 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.  As described above, the Bank exceeded itsminimum capital requirements under applicable guidelines as of December 31,2004.  As of December 31, 2004,approximately $714,000 was available to be paid as dividends by the Bank.  Notwithstanding the availability of funds fordividends, however, the OCC may prohibit the payment of any dividends by theBank if the OCC determines such payment would constitute an unsafe or unsoundpractice.

 

***Insider Transactions.* **The Bank is subject to certainrestrictions imposed by federal law on extensions of credit to the Company, oninvestments in the stock or other securities of the Company and the acceptanceof the stock or other securities of the Company as collateral for loans made bythe Bank. Certain limitations and reporting requirements are also placed onextensions of credit by the Bank to its directors and officers, to thedirectors and officers of the Company, to principal stockholders of theCompany, and to “related interests” of such directors, officers and principalstockholders.  In addition, federal lawand regulations may affect the terms upon which any person who is a director orofficer of the Company or the Bank or a principal stockholder of the Companymay obtain credit from banks with which the Bank maintains correspondentrelationships.

 

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

 

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In general, the safety and soundnessguidelines prescribe the goals to be achieved in each area, and each institutionis responsible for establishing its own procedures to achieve those goals.  If an institution fails to comply with any ofthe standards set forth in the guidelines, the institution’s primary federalregulator may require the institution to submit a plan for achieving andmaintaining compliance. If an institution fails to submit an acceptablecompliance plan, or fails in any material respect to implement a complianceplan that has been accepted by its primary federal regulator, the regulator is requiredto issue an order directing the institution to cure the deficiency. Until thedeficiency cited in the regulator’s order is cured, the regulator may restrictthe institution’s rate of growth, require the institution to increase itscapital, restrict the rates the institution pays on deposits or require theinstitution to take any action the regulator deems appropriate under thecircumstances. Noncompliance with the standards established by the safety andsoundness guidelines may also constitute grounds for other enforcement actionby the federal banking regulators, including cease and desist orders and civilmoney penalty assessments.

 

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

 

Federal law permits state and national banksto merge with banks in other states subject to: (i) regulatory approval;(ii) federal and state deposit concentration limits; and (iii) state lawlimitations requiring the merging bank to have been in existence for a minimumperiod of time (not to exceed five years) prior to the merger.  The establishment of new interstate branchesor the acquisition of individual branches of a bank in another state (ratherthan the acquisition of an out-of-state bank in its entirety) is permitted onlyin those states that authorize such expansion.

 

***Financial Subsidiaries. ***Under Federal lawand OCC regulations, national banks are authorized to engage, through “financialsubsidiaries,” in any activity that is permissible for a financial holdingcompany and any activity that the Secretary of the Treasury, in consultationwith the Federal Reserve, determines is financial in nature or incidental toany such financial activity, except (i) insurance underwriting, (ii) realestate development or real estate investment activities (unless otherwisepermitted by law), (iii) insurance company portfolio 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 neither applied for nor receivedapproval to establish any financial subsidiaries.

 

***Federal Reserve System.***  Federal Reserve regulations, as presently ineffect, require depository institutions to maintain non-interest earningreserves against their transaction accounts (primarily NOW and regular checkingaccounts), as follows: for transaction accounts aggregating $47.6 million orless, the reserve requirement is 3% of total transaction accounts; and fortransaction accounts aggregating in excess of $47.6 million, the reserverequirement is $1.218 million plus 10% of the aggregate amount of totaltransaction accounts in excess of $47.6 million.  The first $7.0 million of otherwisereservable balances are exempted from the 

 

20

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reserve requirements.  Thesereserve requirements are subject to annual adjustment by the FederalReserve.  The Bank is in compliance withthe foregoing requirements.

 

**Item 2****.****           Properties**.

 

The Company’s main office is located at 701-705LaSalle Street, Ottawa, Illinois.  Thebuilding is comprised of approximately 15,000 square feet.  The main office building is a two-storystructure constructed principally of masonry which was opened in 1865.  The Company also operates six branch officefacilities. A limited service branch, which contains eight drive-in lanes, islocated at 300 West Madison Street, Ottawa, Illinois, and five full-servicebranches are located at 601 State Street, Ottawa, Illinois; 2771 North ColumbusStreet, Ottawa, Illinois; 1771 North Division Street, Morris, Illinois; 2324 NorthBloomington Street, Streator, Illinois; and 401 East Main Street, Streator,Illinois.

 

The Company also purchased real estate inYorkville, Illinois with the intention of establishing a full service branchfacility in that community.  Estimatedcompletion and date of operation will be in early 2005. The main banking officeand branch offices are owned by the Company in fee and are unencumbered.

 

**Item 3****.****           Legal Proceedings.**

 

TheCompany is from time to time a party to legal proceedings in the ordinary courseof business that are incident to the business of banking. The Company is notengaged in any legal proceedings of a material nature at the present time.

 

**Item 4****.****           Submission of Mattersto a Vote of Security Holders.**

 

No matters were submitted to a vote ofsecurity holders during the quarter ended December 31, 2004.

 

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**PART II**

 

**Item 5****.****           Market For Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Seepage 40 of the 2004 Annual Report to Stockholders (filed as Exhibit 13.1 ofthis report) which is incorporated herein by reference.

 

**IssuerPurchases 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** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| November 1,  2004 through November 30, 2004 |       | 18                                     |       | $                                  | 70.00      |                                                                                        | 0          |                                                                                       | 0          |   |
| December 1,  2004 through December 31, 2004 |       | 1,000                                  |       | $                                  | 70.00      |                                                                                        | 0          |                                                                                       | 0          |   |
| Total                                                 |       | 1,018                                  |       | $                                  | 70.00      |                                                                                        | 0          |                                                                                       | 0          |   |

 

**Item 6****.****           Selected Financial Data**

 

Theinformation set forth under the caption “Selected Consolidated Financial Data”on page 1 of the 2004 Annual Report to Stockholders (filed as Exhibit 13.1 ofthis report) is incorporated herein by reference.

 

**Item 7****.****           Management’s Discussionand Analysis of Financial 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 11 of the2004 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) isincorporated herein by reference.

 

**Item 7A****. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

Theinformation set forth under the caption “Quantitative and QualitativeDisclosures about Market Risk” on page 12 of the 2004 Annual Report toStockholders (filed as Exhibit 13.1 of this report) is incorporated herein byreference.

 

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**Item 8****.****           Financial Statementsand Supplementary Data**

 

Theconsolidated financial statements of the Registrant and theReport ofIndependent Registered Public Accounting Firm as set forth on pages 17 through39 of the 2004 Annual Report to Stockholders (filed as Exhibit 13.1 of thisreport) are incorporated herein by reference:

 
| Report of  Independent Registered Public Accounting Firm                                                          |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                              |   |
| Consolidated Balance Sheets as of December 31,  2004 and 2003                                                |   |
|                                                                                                              |   |
| Consolidated Statements of Income  for the years ended December 31, 2004, 2003, and 2002                     |   |
|                                                                                                              |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2004, 2003, and 2002 |   |
|                                                                                                              |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003,  and 2002                |   |
|                                                                                                              |   |
| Notes to the  Consolidated Financial Statements                                                                   |   |

 

Theportions of the 2004 Annual Report to Stockholders which are not specificallyincorporated by reference as a part of this Form 10-K are not deemed to be apart of this report.

 

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

 

None.

 

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

 

An evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31,2004. Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective. There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls.

 

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

 

None

 

23

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**PART III**

 

**Item 10****.****    Directors and ExecutiveOfficers at the Registrant**

 

The information set forth under the captions “InformationRegarding Nominees and Executive Officers”, “Corporate Governance and the Boardof Directors” and “Section 16 Beneficial Ownership Reporting Compliance”of the Registrant’s Proxy Statement, relating to the 2005 Annual Meeting ofStockholders is incorporated herein by reference.

 

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

 

The information set forth under the caption “ExecutiveCompensation” of the Registrant’s Proxy Statement, relating to the 2005 AnnualMeeting of Stockholders is incorporated herein by reference, except for the “Stockholder’sPerformance Table” and the “Board Compensation Committee’s Report onCompensation”, which are not hereby incorporated.

 

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

 

The information set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management” of the Registrant’sProxy Statement, relating to the 2005 Annual Meeting of Stockholders isincorporated herein by reference.

 

**EquityCompensation Plan Information**

 

Thetable below sets forth the following information as of December 31, 2005for (i) all compensation plans previously approved by the Company’sstockholders and (ii) all compensation plans not previously approved by theCompany’s stockholders:

 

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

 

(b)                   theweighted-average exercise price of such outstanding options, warrants andrights;

 

(c)                    otherthan securities to be issued upon the exercise of such outstanding options,warrants and rights, the number of securities remaining available for futureissuance under the plans.

 

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**EQUITYCOMPENSATION 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 holders     |       | 14,500                                                                         |       | $                                                                | 59.21      |                                                                 | 135,500    |   |
| Equity  compensation plans not approved by security holders |       | 0                                                                              |       | 0                                                                |       | 0                                                                    |       |
| **Total**                                                   |       | 14,500                                                                         |       | $                                                                | 59.21      |                                                                 | 135,500    |   |

 

**Item 13****.****    Certain Relationships andRelated Transactions**

 

The information set forth under the caption “CertainRelationships and Related Transactions” of the Registrant’s Proxy Statement,relating to the 2005 Annual Meeting of Stockholders is incorporated herein byreference.

 

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

 

The information set forth under the caption “IndependentPublic Accountants” of the registrant’s proxy statement relating to the 2005Annual Meeting of Shareholders is incorporated herein by reference.

 

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**PART IV**

 

**Item15**. Exhibits and Financial Statement Schedules

 

(a)             1.                                                   Financial Statements

All financial statements of the Registrant areincorporated herein by reference as set forth under Item 8, Part II of thisreport 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 arefiled 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                         Severance Agreement with Donald J. Harris*

 

10.4                         Stock Incentive Plan

 

10.5                         Summary of Director Fees

 

10.6                         Form of Supplemental Nonqualified RetirementAgreement

 

13.1                         Annual Report to Stockholders

 

21.1                         Subsidiaries

 

23.1                         Consent of independent auditor

 

31.1                         Certification of Chief Executive OfficerPursuant to Rule 13a-14(a)/15d-14(a)

 

31.2                         Certification of Chief Financial OfficerPursuant to Rule 13a-14(a)/15d-14(a)

 

32.1                         Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

32.2                         Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

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*  Indicatesmanagement contract or compensation plan or arrangement.

 

26

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** SIGNATURE**

 

In accordance with Section 13 or 15(d)of the Exchange Act, the registrant caused this report to be signed on itsbehalf 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, Principal Financial  Officer |

 

Date:                    March 29,2005

 

In accordance with the Exchange Act, thisreport 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 29,  2005 |   |
| Joachim Brown            |       | Chief Executive Officer         |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ Bradley J. Armstrong |       |                            | Director                |     | March 29,  2005 |   |
| Bradley J. Armstrong     |       |                            |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ John L. Cantlin      |       |                            | Director                |     | March 29,  2005 |   |
| John L. Cantlin          |       |                            |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ Patty P. Godfrey     |       |                            | Director                |     | March 29,  2005 |   |
| Patty P. Godfrey         |       |                            |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ Thomas E. Haeberle   |       |                            | Director                |     | March 29,  2005 |   |
| Thomas E. Haeberle       |       |                            |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ Donald J. Harris     |       |                            | Director and Executive  |     | March 29,  2005 |   |
| Donald J. Harris         |       | Vice President, Chief Operating |                    |     |                 |
|                     |       | Officer                         |                    |     |                 |
|                     |       |                            |                    |     |                 |
| /s/ Erika L. Schmidt     |       |                            | Director                |     | March 29,  2005 |   |
| Erika L. Schmidt         |       |                            |                    |     |                 |
|                          |            |                                 |                         |          |                      |  |  |

 

27

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| /s/ Thomas P. Rooney |   |   | Director |   | March 29,  2005 |   |
|----------------------|--------|--------|----------|--------|----------------------|--------|
| Thomas P. Rooney     |   |   |     |   |                 |
|                 |   |   |     |   |                 |
| /s/ William J. Walsh |   |   | Director |   | March 29,  2005 |   |
| William J. Walsh     |   |   |     |   |                 |

 

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**EXHIBIT INDEX**

 
| **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       |            | Severance  Agreement with Donald J. Harris                                  |                                | Form 10K for  the year ended 12/31/2001 |                  |   |
|                 | 10.4       |            | Stock  Incentive Plan                                                       |                                | Form S-8  dated 8/1/03                  |                  |   |
|                 | 10.5       |            | Summary of  Director Fees                                                   |                                |                                    |                  | X |
|                 | 10.6       |            | Form of  Supplemental Nonqualified Retirement Agreement                     |                                |                                    |                  | X |
|                 | 13.1       |            | 2004 Annual  Report to Stockholders                                         |                                |                                    |                  | X |
|                 | 21.1       |            | Subsidiaries                                                                |                                |                                    |                  | X |
|                 | 23.1       |            | Consent of  independent auditor                                             |                                |                                    |                  | X |
|                 | 23.2       |            | Consent of  independent auditor                                             |                                |                                    |                  | 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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