**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended December 31, 2003**

 

**Commission file number:  005-57237**

 

| **FIRST OTTAWA BANCSHARES, INC.**                                    |
|----------------------------------------------------------------------|
| (Exact name of Registrant as specified in  its charter)              |
|                                                                 |   |   |
| **Delaware**                                                         |   | **36-4331185** |
| (State or Other Jurisdiction  of Incorporation or Organization)      |   | (I.R.S. Employer Identification No.) |
|                                                                 |   |   |
| **701-705 LaSalle Street  Ottawa, Illinois**                         |   | **61350** |
| (Address of Principal Executive Offices)                             |   | (ZIP Code) |
|                                                                 |   |   |
| **(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:      |
|                                                                 |   |   |
| **Common Stock, par value $1.00 per share**                          |
| (Title of Class)                                                     |

 

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

 

Indicate by check markif disclosure of delinquent filers in response to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

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

 

The aggregate market value ofthe voting and non-voting common equity held by non-affiliates of theregistrant, based on the last known sales price on or prior to June 30, 2003,the last business day of the registrant’s most recently completed second fiscalquarter, was $28,867,830.

 

651,627 shares of common stock were outstanding as of March  29, 2004.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions ofParts II and IV are incorporated by reference from the Registrant’s 2003 AnnualReport to Stockholders; and a portion of Part III is incorporated by referencefrom the Registrant’s Proxy Statement for the Annual Meeting of Stockholders tobe held May 19, 2004.

 

Except for those portions of the 2003 Annual Report incorporated byreference, the Annual Report is not deemed filed as part of 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 and  Related Stockholder Matters             |   |
| 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 on Accounting  and Financial Disclosure                        |   |
| Item 9A   | Controls and Procedures                                                                     |   |
|      |                                                                                        |   |
| 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                             |   |
| Item 13   | Certain Relationships and Related  Transactions                                             |   |
| Item 14   | Principal Accountant Fees and Services                                                      |   |
|      |                                                                                        |   |
| PART IV   |                                                                                        |   |
|      |                                                                                        |   |
| Item 15   | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                            |   |

 

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**PARTI**

 

**Item1.****    Business.**

 

First OttawaBancshares, Inc. (the “Company”) is a bank holding company for its wholly-ownedsubsidiary, First National Bank of Ottawa (the “Bank”), and the Bank’s whollyowned subsidiary, First Ottawa Financial Corporation.  The Company was organized during 1999 and on October 1, 1999exchanged 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 December31, 2003, the Company had total assets of $294.5 million, total deposits of$264.9 million, loans, including loans held for sale of $131.9 million andtotal stockholders’ equity of $24.7 million. For the year ended December 31, 2003, the Company had interest income of$12.7 million and net income of $2.5 million, which amounted to basic anddiluted net income per share of $3.75.

 

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

 

The Company is located in the City of Ottawa, Illinois (population17,500) in LaSalle County.  Asubstantial portion of the Company’s business is dependent upon the economicconditions in this market area.  LaSalleCounty is the second largest county by area in the state of Illinois.  Ottawa is located in northeastern Illinoisapproximately 80 miles southwest of Chicago and approximately 65 miles north ofBloomington. Ottawa may be accessed by Interstate 80; U.S. Route 6; StateRoutes 23 and 71; and recently completed Interstate 39, which is located 11miles west of Ottawa.  The city is alsoserviced by two railroads and the Ottawa Airport.

 

Ottawa is the countyseat of LaSalle County.  Accordingly,many county, state, and other governmental offices are located in Ottawa.

 

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LaSalle Countyhas 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 Countyannually ranks in the top 10 counties in Illinois for corn and soybeanproduction.  LaSalle County, the site ofthe largest producer of silica sand in the United States, has a diversemanufacturing sector which includes, in addition to the production of silicasand, the manufacture of residential glass, automotive and industrial belts andequipment, electronic typewriters and computer printers, plastics, officesupplies, and rubber products.  Many ofthese companies conduct business in national and, in some instances,international markets.

 

The Ottawa area iscontinuing to expand.  Many developmentshave had a significant impact on the area economy, including a new CountyOffice Building on the north edge of Ottawa and several new and expandedshopping center projects.

 

The FirstNational Bank of Ottawa (the “Bank”) purchased and assumed substantially all ofthe deposit liabilities of two branch offices located in Streator, Illinoisfrom First Midwest Bank (collectively, the “Branches”) on November 14, 2003.Approximately $69.3 million of deposits and the related cash balances weretransferred to the Bank via cash transfers from First Midwest Bank. Inconnection with the acquisition of such deposit liabilities and related cashbalances, the Bank also acquired certain other assets of the Branches,including real estate, furniture and fixtures and approximately $11.8 millionof the loans carried on the books of the Branches.  Many of the employees remained with the Branches and becameemployees of the Bank.

 

The Company opened afull service banking facility in July 2003 in the city of Morris, Illinois andhas purchased real estate in Yorkville, Illinois with the intention ofestablishing a full service branch facility in that community.  Construction completion and the branchopening are expected to occur in early 2005. The Company continues to exploreexpansion opportunities within its existing market area and in surroundingareas.

 

***Lending Activities***.  The Company relies on interest income fromlending activities as a major source of revenue.  The Company has a community bank focus, serving the credit needsof the local community.  Because of thislocal focus, the Company has a flexible process for handling loan requestsrather than being tied to rigid standards. The discussions below regarding lending policies reflect generalguidelines and may vary on a case-by-case basis depending on the borrower’scredit history and the type and size of loan. During the approval process for loans it originates, the Companyassesses both the applicant’s ability to repay the loan and the value of anycollateral securing the loan.  TheCompany verifies the applicant’s ability to repay the loan by using creditreports, financial statements, confirmations, and other items, including appraisals.

 

Nine loan officershave the authority to handle all lending activities of the Company.  Each lending officer has authority toapprove extensions of credit up to their individual lending limit.  The Company has an Officers Loan Committee(consisting of Assistant Vice Presidents, Vice Presidents, Executive VicePresidents and the President of the Bank) which approves loans of up to$500,000.  All loans between $500,000and $1,500,000 are 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, and charge-offs; and establishing interestrate and fee guidelines. All loans in excess of $1,500,000 are reviewed andapproved by the Board of Directors.  TheBoard of Directors also is responsible for directing and supervising the Director’sLoan Committee, policy review, and oversight of the loan and investmentfunctions of the Company.  The Board ofDirectors also monitors the adequacy of the Company’s loan loss reserves.

 

***Loan PortfolioComposition***. The Company’s gross loan portfolio, including loans held for sale,totaled $131.9 million at December 31, 2003, representing 49.8% of theCompany’s total deposits at that date. The Company’s loan portfolio at December 31, 2003 included $72.5 millionfor real estate purposes, $35.3 million for consumer purposes, and $24.2million for commercial and agricultural purposes.

 

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

 

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

 

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

 

The following tablepresents the components of the Company’s loan portfolio as of December 31for each year shown.

 
|                                      |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|-------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Real estate loans                         |   | $        | 70,859  |     | $      | 46,699   |   | $        | 47,322  |     | $      | 56,109 |   | $ | 59,560 |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Commercial and agricultural loans         |   | 24,197   |    | 33,950   |   | 29,361   |   | 16,266   |    | 15,222   |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Installment loans, net of unearned income |   | 22,812   |    | 19,951   |   | 24,595   |   | 39,441   |    | 48,751   |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Home equity lines of credit               |   | 12,456   |    | 9,120    |   | 6,795    |   | 5,143    |    | 4,219    |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Total loans                               |   | 130,324  |    | 109,720  |   | 108,073  |   | 116,959  |    | 127,752  |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Deferred loan fees                        |   | (20      | )       | (77      | )      | (40      | )      | (40      | )       | (46      | )      |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Loans, net of deferred loan fees          |   | 130,304  |    | 109,643  |   | 108,033  |   | 116,919  |    | 127,706  |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Allowance for loan losses                 |   | (1,049   | )       | (1,167   | )      | (1,109   | )      | (1,108   | )       | (1,059   | )      |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Loans, net                                |   | $        | 129,255 |     | $      | 108,476  |   | $        | 106,924 |     | $      | 115,811 |   | $ | 126,647 |   |
|                                      |   |     |    |     |   |     |   |     |    |     |   |
| Loans held for sale                       |   | $        | 1,644   |     | $      | 1,811    |   | $        | 1,475   |     | $      | 693 |   | $ | 1,738 |   |

 

Maturities(based on contractual terms) of the Company’s commercial and construction loanportfolio at December 31, 2003 are summarized below:

 
|                        |   | **One Year  or Less** |   | **One to  Five Years** |   | **Over  Five Years** |   | **Total** |   |
|-----------------------------|--------|-----------------------|--------|------------------------|--------|----------------------|--------|-----------|--------|
|                        |   |                  |   |                   |   |                 |   |      |   |
| Commercial and agricultural |   | $                     | 8,297  |                   | $      | 8,082                |   | $         | 7,670  |   | $ | 24,049 |   |
|                        |   |                  |   |                   |   |                 |   |      |   |
| Construction                |   | 148                   |   | —                 |   | —               |   | 148       |   |
|                        |   |                  |   |                   |   |                 |   |      |   |
| Total                       |   | $                     | 8,445  |                   | $      | 8,082                |   | $         | 7,670  |   | $ | 24,197 |   |

 

At December 31,2003, of the total loans that mature in more than one year, $73.2 million, or64.5%, bear interest at fixed rates and $40.3 million, or 35.5%, bear interestat variable rates.

 

***Consumer Loans***.  Generally, three of the Company’s ninelending officers process consumer installment loans.  The Company makes consumer loans for various purposes, includingpersonal, family, and nonbusiness reasons such as automobile loans andrecreational vehicle loans, on both a direct and indirect basis.  Consumer loans totaled approximately $35.3million at December 31, 2003, or approximately 26.7% of the Company’stotal loan portfolio.  Approximately62.9% of the Company’s consumer loans were automobile loans, and of theseloans, approximately

 

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78.8% were made indirectly bythe Company through automobile dealers. The Company’s consumer loans are fixed-rate loans with final maturitiesof five years or less.  At December 31,2003, the Company had 13 consumer loans totaling $180,000 that were past due inexcess of 90 days.

 

In approving consumerloans, lending officers consider the borrower’s past credit history, theborrower’s ability to repay the debt, the collateral offered, and localeconomic conditions that could affect the borrower’s income.  Loans being originated for new borrowersmust be accompanied by a completed application dated and signed by theborrower, giving the details of the loan request.  Total debts, along with the gross monthly income of the borrower,are required 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%. New credit reports areobtained on all borrowers with each loan request.  The value of collateral on loans secured by used automobiles isgenerally determined by using industry-accepted used car guides.  In connection with used automobile loans,the Company generally requires a 90% loan-to-value ratio; however, dependingupon various factors, including the credit experience of the Company with theborrower, the Company may extend credit in excess of the value of the usedautomobile.  A loan-to-value ratio of90% of sticker price is generally required for new automobile loans.  Boats, mobile homes, recreational vehicles, andsimilar items generally require a loan-to-value ratio of 70% to 80% of the currentmarket value of the collateral. Unsecured consumer loans are granted to borrowers based uponsatisfactory income, indebtedness levels, and credit records and experience.

 

***Commercial,Agricultural, and Real Estate Lending***.  Six of the Company’s nine lending officersservice most of the commercial, agricultural, and real estate loans.  Three loan officers principally servicecommercial loans, one officer principally services agricultural loans, and twoofficers principally service residential mortgage loans.  However, because of the Company’s flexiblelending practices, any of the loan officers may service loans in thecommercial, agricultural, and real estate areas.

 

Commercial and Agricultural.  At December 31, 2003, the Company’scommercial and agricultural loans totaled $24.2 million or approximately 18.3%of the total loan portfolio of the Company. The primary lending area of the Company is within a five-mile radius ofthe Company’s offices.  The majority ofagricultural and commercial non-real estate loans are written for one to fiveyears, may bear interest at a fixed or variable rate and are amortized over a15-year to 20-year period.  The fixedrate generally is established by the Company’s Real Estate Department afterconsidering the cost of funds to the Company as well as the rates of competinginstitutions.  The variable rate isgenerally based upon the national prime rate as disclosed in *The Wall Street Journal*.  Principal and interest payments oncommercial loans generally are required monthly; whereas, payments onagricultural loans vary greatly from monthly, quarterly, semi-annually, andannually.  At December 31, 2003, theCompany had 1 commercial non-real–estate loan totaling $37,000 past due in excessof 90 days. There were no agricultural non-real–estate loans at December 31,2003 that were past due in excess of 90 days.

 

All commercial and agricultural borrowers, both existing and new, arerequired by policy to have a current financial statement no older than oneyear.  Borrowers also are required toprovide

 

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the Companywith recent tax returns and pro forma projections.  Using certain computer programs and the data supplied byborrowers, the loan officers produce additional financial information utilizedin analyzing the loans and the borrowers. The general nature of the collateral securing the Company’s commercialand agricultural loans consists of equipment, farm products, crops, inventory,chattel paper, accounts receivable, and general intangibles.  The Company’s loan-to-value ratio withrespect to agricultural and commercial non-real–estate loans averages 66 2/3%to 75% of the value of the collateral securing the loan.

 

Real Estate Lending. The Company’s primaryreal estate lending consists of commercial loans with a small portion inresidential and agricultural real estate loans.  Real estate loans at December 31, 2003 totaled approximately$70.9 million or approximately 53.7% of the Company’s total loanportfolio.  All borrowers requesting areal estate loan are required to submit an application which is reviewed by thelending officer.  A credit investigationis performed and an analysis of the borrower’s ability to repay is conducted.  Subsequently, an inspection and appraisal ofthe real property is conducted to determine whether or not the property is ofsufficient value to meet the Company’s suggested maximum loan-to-value ratio of80% to 85% of the lesser of the appraised value or the purchase price of theproperty securing the loan.  Undercertain federal guaranteed loan programs utilized by the Company, the maximumloan-to-value ratio is higher.  Withrespect to loans secured by commercial or industrial real estate, the Companyanalyzes the potential for environmental liability concerns and, depending uponthe circumstances, the Company may require additional information ortesting.  Commercial and agriculturalreal estate loans are generally originated under the same policies and proceduresas discussed above for commercial and agricultural non-real–estate loans.

 

The Company’s residential real estate loans consist of 15-year, 20-yearand 30-year fixed-rate and variable-rate loans with amortization periods equalto the maturity of the loan.  TheCompany’s fixed-rate loans with biweekly payments account for approximately26.5% of all the residential real estate loans of the Company. The biweeklyloan program amortizes 25year loans in approximately 18.9 years.  The Company also originates a variety ofloans that are sold into the secondary market through Federal Home LoanMortgage Corporation (“Freddie Mac”) and private investors.  These loans are underwritten to meet allFreddie Mac requirements.  The Companyretains servicing rights on loans sold into the secondary market.  At December 31, 2003, mortgage loansserviced for the secondary market totaled approximately $34.0 million.

 

At December 31, 2003, the Company had 4 real estate mortgage loanstotaling $213,000 past due in excess of 90 days.

 

***Interest Rates andFees***. Interest rates and fees charged on the Company’s loans are affectedprimarily by the market demand for loans and the supply of money available forlending purposes.  These factors areaffected by, among other things, general economic conditions and the policies ofthe federal government, including the Federal Reserve Board, legislative taxpolicies, 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 thisevent, the normal procedure followed by the Company is to make contact with theborrower at prescribed

 

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intervals inan effort to bring the loan to a current status.  In most cases, delinquencies are cured promptly, but, if not, theCompany normally records a notice of default, subject to any required priornotice to the borrower, and commences foreclosure proceedings when loanpayments are 120 days past due.

 

At December 31, 2003, the Company had 140 loans delinquent for 30 to 90days in an aggregate principal amount of $3.4 million and representing 1.6% ofthe total loan portfolio.  At December31, 2003, the Company had 18 loans totaling $430,000 delinquent for more than90 days.

 

It is the Company’s policy to discontinue the accrual of interestincome on any loan when, in accordance with banking regulations or in theopinion of management, there is reasonable doubt as to the collectibility ofinterest or principal.  Interest onthese loans is credited to income only when the collection of principal hasbeen reasonably assured and only to the extent interest payments arereceived.  If management feelscollection of both interest and principal is probable, the loan is nottransferred to nonaccrual status.  AtDecember 31, 2003, there were 5 loans totaling $137,000 on nonaccrual status.

 

As a result of economic conditions and other factors beyond theCompany’s control, the Company’s future loss and delinquency experience cannotbe predicted with certainty.

 

The nonperformingassets of the Company as of December 31 are indicated below:

 
|                                                                                               |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Non-accrual loans                                                                                  |   | $        | 137    |     | $      | 364      |   | $        | 387    |     | $      | 467 |   | $ | 397 |   |
| Loans ninety days past due and still  accruing interest                                            |   | 293      |   | 757      |   | 860      |   | 2,177    |   | 1,543    |   |
| Other real estate owned                                                                            |   | —   |   | 204      |   | —   |   | 169      |   | 113      |   |
|                                                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Total nonperforming assets                                                                         |   | $        | 430    |     | $      | 1,325    |   | $        | 1,247  |     | $      | 2,813 |   | $ | 2,053 |   |
|                                                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Nonperforming loans as a percentage of  total loans, net of unearned income and deferred loan fees |   | .33      | %      | 1.02     | %      | 1.17     | %      | 2.26     | %      | 1.52     | %      |
|                                                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Nonperforming assets as a percentage of  total assets                                              |   | .15      |   | .55      |   | .54      |   | 1.25     |   | .85      |   |
|                                                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Nonperforming loans as a percentage of the  allowance for loan losses                              |   | 40.99    |   | 96.06    |   | 112.44   |   | 238.63   |   | 183.19   |   |

 

The effect of nonaccrual loans upon interest income is notdeemed to be material by management. Loans are placed in nonaccrual status when 90 days past due, unless theyare fully secured and in the process of collection.  At December 31, 2003, there were no other loans classified asproblem loans that were not included above. At December 31, 2003, there were no

 

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other assets classified as problem assets other than theloans shown above.  Management alsomaintains a loans requiring attention report that includes loans greater than60 days delinquent or other loans as deemed necessary by the Company’s internalloan review or the loan committee.  Thetotal of loans requiring attention as of December 31, 2003 was $3.8 million.

 

***Allowance for Losseson Loans***. In originating loans, the Company recognizes that losses will beexperienced on loans and that the risk of loss will vary with, among otherthings, the type of loan being made, the creditworthiness of the borrower overthe term of the loan, general economic conditions and, in the case of a securedloan, the quality of the security for the loan.  The Company maintains an allowance for loan losses to absorbprobable incurred credit losses inherent in the loan portfolio.  The allowance for loan losses representsmanagement’s estimate of probable incurred losses based on informationavailable as of the date of the financial statements.  The allowance for loan losses is based on management’s evaluationof the collectibility of the loan portfolio, including past loan lossexperience, known and inherent risks in the nature and volume of the portfolio,information about specific borrower situations and estimated collateral values,and economic conditions.

 

The loanportfolio and other credit exposures are regularly reviewed by management toevaluate the adequacy of the allowance for loan losses.  The methodology for assessing theappropriateness of the allowance includes comparisons to actual losses,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 connectionwith assessing the allowance, loss factors are applied to various pools ofoutstanding loans.  The Companysegregates the loan portfolio according to risk characteristics (i.e., mortgageloans, commercial real estate, agricultural, business, consumer, etc.) and riskgradings.  Loss factors are derivedusing the Company’s historical loss experience and may be adjusted forsignificant factors that, in management’s judgment, affect the collectibilityof the portfolio as of the evaluation date. Commercial real estate and commercial business loans are individuallyevaluated for impairment and specific reserves are allocated as needed inaccordance with Statement of Financial Accounting Standards No. 114 and No.118.

 

In addition,management assesses the allowance using factors that cannot be associated withspecific credit or loan categories. These factors include management’s subjective evaluation of local andeconomic and business conditions, portfolio concentration and changes in thecharacter and size of the loan portfolio. The allowance methodology reflects management’s objective that theoverall allowance appropriately reflects a margin for the imprecisionnecessarily inherent in the estimates of expected credit losses.

 

The allowance for loan losses is established through a charge tooperations at the time loan value becomes impaired or, in the judgment ofmanagement, other subjective factors warrant additional reserves. As noted inthe previous table, nonperforming loans decreased by $691,000 in 2003 afterdecreasing by $126,000 during 2002.  Managementconsidered this information along with other portfolio trends in concluding onthe adequacy of the allowance for

 

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loan losses atDecember 31, 2003. At December 31, 2003, the balance in the allowancewas $1.0 million, or .80% of gross loans outstanding.  Management has concluded that the allowance for loan losses isadequate at December 31, 2003. However, there can be no assurance that theallowance for loan losses is adequate to cover all losses.

 

The Company had no properties resulting from foreclosures classified asother real estate owned at December 31, 2003. Other real estate is carried atthe lower of cost or estimated market value.

 

***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 ended December 31, 2003 issummarized as follows:

 
|                                                  |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                  |   |     |   |     |   |     |   |     |   |     |   |
| Balance at beginning of year                          |   | $        | 1,167  |     | $      | 1,109    |   | $        | 1,108  |     | $      | 1,059 |   | $ | 1,029 |   |
| Charge-offs                                           |   |     |   |     |   |     |   |     |   |     |   |
| Real Estate                                           |   | 66       |   | 46       |   | 111      |   | 135      |   | —   |   |
| Commercial                                            |   | 50       |   | 6        |   | 35       |   | 39       |   | 121      |   |
| Installment                                           |   | 303      |   | 181      |   | 254      |   | 341      |   | 351      |   |
| Total charge-offs                                     |   | 419      |   | 233      |   | 400      |   | 515      |   | 472      |   |
|                                                  |   |     |   |     |   |     |   |     |   |     |   |
| Recoveries                                            |   |     |   |     |   |     |   |     |   |     |   |
| Real Estate                                           |   | 16       |   | 39       |   | 4        |   | —   |   | —   |   |
| Commercial                                            |   | 57       |   | 63       |   | 6        |   | 27       |   | 21       |   |
| Installment                                           |   | 108      |   | 69       |   | 91       |   | 177      |   | 97       |   |
| Total recoveries                                      |   | 181      |   | 171      |   | 101      |   | 204      |   | 118      |   |
| Net charge-offs                                       |   | 238      |   | 62       |   | 299      |   | 311      |   | 354      |   |
| Provision                                             |   | 120      |   | 120      |   | 300      |   | 360      |   | 384      |   |
|                                                  |   |     |   |     |   |     |   |     |   |     |   |
| Balance at end of year                                |   | $        | 1,049  |     | $      | 1,167    |   | $        | 1,109  |     | $      | 1,108 |   | $ | 1,059 |   |
|                                                  |   |     |   |     |   |     |   |     |   |     |   |
| Net charge-offs to average total loans                |   | .21      | %      | .06      | %      | .26      | %      | .25      | %      | .29      | %      |
| Allowance for loan losses to total loans at  year-end |   | .80      |   | 1.06     |   | 1.03     |   | .95      |   | .83      |   |

 

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

 

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|                              |   | **2003**   |   | **2002**                     |   | **2001**   |   | **2000**                     |   | **1999**   |   |
|-----------------------------------|--------|------------|--------|------------------------------|--------|------------|--------|------------------------------|--------|------------|--------|
|                              |   | **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                 |   | $          | 444    |                         | 54.37  | %          | $      | 281                          |   | 42.56      | %      | $ | 308 |   | 43.78 | % | $ | 378 |   | 47.97 | % | $ | 175 |   | 46.62 | % |
|                              |   |       |   |                         |   |       |   |                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Commercial and agricultural loans |   | 209        |   | 18.57                        |   | 307        |   | 30.94                        |   | 380        |   | 27.62 |   | 291 |   | 13.91 |   | 458 |   | 11.92 |   |
|                              |   |       |   |                         |   |       |   |                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Installment loans                 |   | 242        |   | 27.06                        |   | 236        |   | 26.50                        |   | 287        |   | 28.60 |   | 297 |   | 38.12 |   | 328 |   | 41.46 |   |
|                              |   |       |   |                         |   |       |   |                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Unallocated                       |   | 154        |   | N/A                          |   | 343        |   | N/A                          |   | 134        |   | N/A |   | 142 |   | N/A |   | 98 |   | N/A |   |
|                              |   |       |   |                         |   |       |   |                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Balance at end of year            |   | $          | 1,049  |                         | 100.00 | %          | $      | 1,167                        |   | 100.00     | %      | $ | 1,109 |   | 100.00 | % | $ | 1,108 |   | 100.00 | % | $ | 1,059 |   | 100.00 | % |

 

***Investment Activities***. Theinvestment policies of the Company as established by the Board of Directorsattempt to provide and maintain liquidity, generate a favorable return oninvestments without incurring undue interest rate and credit risk, andcomplement the Company’s lending activities. The policies provide the authority to invest in United States Treasuryand federal agency securities, mortgage-backed securities, municipalsecurities, equity securities, and Certificates of Deposits.

 

Approximately$9.0 million of the United States government agency notes held at December 31,2003 are callable at the option of the issuer, which present prepayment risk tothe Company.

 

As of December31, 2003, the Company had approximately $6.9 million invested in municipalitieslocated within LaSalle County, Illinois.

 

The Companypurchased $5.9 million of Index Powered Certificates of Deposit during 2001,2002 and 2003. These deposits were placed with multiple issuers so that $5.0million of the principal deposited is insured through the FDIC and theremaining $900,000 is collateralized with a letter of credit from the singleissuing institution. Income returns are not guaranteed for these instruments,however principal is guaranteed if held to maturity.

 

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***Securities Portfolio***.The following table shows the maturity distribution of the available-for-salesecurities portfolio and the weighted average yield of the portfolio atDecember 31, 2003.  The carrying amountsof the portfolio at December 31, 2003 are found in Note 3 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                                      |   | $                     | 1,511  |                         | 5.53   | %                       | $      | 9,053                        |   | 3.22                    | %      | $                            | 1,125  |                 | 3.62   | %                            | $      | —    |   | —                       | %      | $ | 11,689 |   | 3.56% |   |
| U.S. Government agencies                                      |   | 13,407                |   | 4.83                         |   | 43,649                  |   | 4.31                         |   | 10,802                  |   | 3.89                         |   | —               |   | —                       |   | 67,858    |   | 4.35                         |   |
| States and political subdivisions                             |   | 3,594                 |   | 7.66                         |   | 5,106                   |   | 7.48                         |   | 1,884                   |   | 6.18                         |   | 4,210                |   | 6.56                         |   | 14,794    |   | 7.11                         |   |
| Mortgage-backed securities and collateralized obligations (1) |   | 147                   |   | -3.27                        |   | 8,214                   |   | 4.81                         |   | 5,031                   |   | 4.05                         |   | —               |   | —                       |   | 13,393    |   | 4.43                         |   |
|                                                          |   |                  |   |                         |   |                    |   |                         |   |                    |   |                         |   |                 |   |                         |   |      |   |                         |   |
| Corporate bonds                                               |   | 509                   |   | 5.71                         |   | 1,814                   |   | 5.99                         |   | —                  |   | —                       |   | —               |   | —                       |   | 2,323     |   | 5.93                         |   |
| Equity securities                                             |   | 3,376                 |   | N/A                          |   | —                  |   | —                       |   | —                  |   | —                       |   | —               |   | —                       |   | 3,376     |   | N/A                          |   |
|                                                          |   |                  |   |                         |   |                    |   |                         |   |                    |   |                         |   |                 |   |                         |   |      |   |                         |   |
| Total securities                                              |   | $                     | 22,544 |                         | 5.38   | %                       | $      | 67,836                       |   | 4.51                    | %      | $                            | 18,842 |                 | 4.15   | %                            | $      | 4,210     |   | 6.56                         | %      | $ | 113,433 |   | 4.68 | % |

 

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

 

11

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***Deposits***.The principal deposit services offered by the Company are demand, savings, andtime deposit accounts and programs, which include interest-bearing andnon-interest-bearing demand deposits and individual retirement accounts.  The Company has had a stable depositbase.  Management believes that this stabilityis due to the Company’s emphasis on being a locally owned and operated bank andby providing quality, personalized service to its customers.

 

The following shows the Company’s average balances and rates paidduring the years shown.

 
|                                 |   | **For the  Years Ended December 31,** |    |
|--------------------------------------|--------|---------------------------------------|---------|
|                                 |   | **2003**                              |    | **2002** |   | **2001** |   |
|                                 |   | **Average  Balance**                  |    | **Percent  of  Deposits** |   | **Rate** |   | **Average  Balance** |   | **Percent  of  Deposits** |   | **Rate** |   | **Average  Balance** |   | **Percent  of  Deposits** |   | **Rate** |   |
|                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest- bearing demand deposits |   | $                                     | 20,775  |   | 10.2 | % | — | % | $ | 19,879 |   | 11.6 | % | — | % | $ | 18,782 |   | 11.3 | % | — | % |
| Interest-bearing demand deposits     |   | 69,435                                |    | 34.1 |   | 1.02 |   | 42,056 |   | 24.6 |   | 1.39 |   | 33,607 |   | 20.3 |   | 1.86 |   |
| Savings accounts                     |   | 21,158                                |    | 10.4 |   | 0.98 |   | 18,388 |   | 10.7 |   | 1.70 |   | 16,654 |   | 10.1 |   | 1.96 |   |
| Time deposits accounts               |   | 92,110                                |    | 45.3 |   | 3.57 |   | 90,909 |   | 53.1 |   | 4.61 |   | 96,615 |   | 58.3 |   | 5.71 |   |
|                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | $                                     | 203,478 |   | 100.0 | % | 2.07 | % | $ | 171,232 |   | 100.0 | % | 2.79 | % | $ | 165,658 |   | 100.0 | % | 3.90 | % |
|                                      |        |                                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The distribution ofthe major components of deposits as of December 31, 2003 and 2002 is summarizedin the balance sheets included in the 2003 consolidated financial statements,which consolidated financial statements are incorporated herein by reference.The following is a maturity distribution of time certificates of deposit of$100,000 or more at December 31, 2003:

 
|                            |   | **Balance** |   | **Percentage** |   |
|---------------------------------|--------|-------------|--------|----------------|--------|
| Maturity                        |   |        |   |           |   |
| Three months or less            |   | $           | 8,153  |           | 30.8   | % |
| Over three months to six months |   | 3,195       |   | 12.1           |   |
| Over six months to one year     |   | 6,075       |   | 23.0           |   |
| Over one year                   |   | 9,002       |   | 34.1           |   |
|                            |   |        |   |           |   |
| Total                           |   | $           | 26,425 |           | 100.0  | % |

 

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***Borrowings***. The Company’s other available sources of funds includefinancing arrangements for securities sold under agreements to repurchase,federal funds purchased lines, and Federal Home Loan Bank borrowings. Totalborrowings decreased $16.3 million in 2003. This decrease was a result of a$14.7 million decrease in borrowed funds, due to the repayment of federal fundspurchased and $1.6 million decrease in repurchase agreements due to a change inproducts offered by the Bank. Physical control is maintained for all securitiessold under repurchase agreements. Information concerning securities sold underagreements to repurchase is summarized as follows:

 
|                                                   |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                   |   |     |   |     |   |     |   |
| Balance at December 31                                 |   | $        | — |     | $      | 1,622    |   | $ | 30,849 |   |
| Weighted average interest rate during the  year        |   | 2.11     | %      | 1.86     | %      | 4.16     | %      |
| Weighted average interest rate at the end  of the year |   | —   | %      | 2.04     | %      | 2.31     | %      |
| Maximum month-end balance                              |   | $        | 1,545  |     | $      | 37,594   |   | $ | 33,203 |   |
| Average balance for the year                           |   | 475      |   | 25,567   |   | 27,062   |   |

 

***Trust***. The Company’s trust department primarily services LaSalleCounty and surrounding counties.  AtDecember 31, 2003, the trust department had 211 trust accounts under management,136 of which were discretionary accounts. The trust department provides a full complement of asset managementservices for personal trusts, estates, and agencies.  The trust department had assets under management of approximately$44.4 million at December 31, 2003, of which $36.3 million was in discretionaryaccounts.

 

The Company, in conjunction with its trust department, also providesfarm management services.  At December31, 2003, the department managed 45 farms. The department manages or directs approximately 6,600 acres of farmlandin LaSalle County, Illinois and 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.  There areapproximately 15 commercial banks and 6 savings institutions with offices inLaSalle County, Illinois.  The principalmethods of competition in the banking and financial services industry arequality of services to the customer; ease of access to services; and pricing ofservices, including interest rates paid on deposits, interest rates charged onborrowings, and fees charged for fiduciary services.

 

***Employees***.  As of December 31, 2003, the Company had 104employees, consisting of 90 full-time employees and 14 part-time employees.  None of the employees are subject to acollective bargaining agreement, and management believes it has excellentrelations with its staff.

 

***Stock Repurchases***. During 2003 and 2002,the Company repurchased 5,329 and 1,400 shares of its common stock for anaggregate purchase price of $315,000 and $74,000.

 

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## **Website**. The Company maintains awebsite at www.firstottawa.com.  TheCompany makes available free of charge on or through its website, the annualreport on Form 10K, quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the 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

 

**Codeof Business Conduct and Ethics**. The Company has a code of business conduct and ethics in placethat applies to all of its directors and employees.  The code sets forth the standard of ethics that the Companyexpects all of its directors and employees to follow, including the ChiefExecutive Officer and Chief Financial Officer. The code of business conduct and ethics is posted on the Company’swebsite at www.firstottawa.com.  TheCompany intends to satisfy the disclosure requirements under Item 10 of Form8-K regarding any amendment to or waiver of the code with respect to the ChiefExecutive Officer and Chief Financial Officer, and persons performing similarfunctions, by posting such information on its website.

 

**Supervision and Regulation**

 

# **General**

 

Financial institutions, their holding companies and theiraffiliates are extensively regulated under federal and state law.  As a result, the growth and earningsperformance of the Company may be affected not only by management decisions andgeneral economic conditions, but also by the requirements of federal and statestatutes and by the regulations and policies of various bank regulatoryauthorities, including the Office of the Comptroller of the Currency (the“OCC”), the Board of Governors of the Federal Reserve System(the “Federal Reserve”) and the Federal Deposit Insurance Corporation(the “FDIC”).  Furthermore, taxationlaws administered by the Internal Revenue Service and state taxing authoritiesand securities laws administered by the Securities and Exchange Commission(the “SEC”) 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 andstate laws and regulations generally applicable to financial institutionsregulate, among other things, the scope of business, the kinds and amounts ofinvestments, reserve requirements, capital levels relative to operations, thenature and amount of collateral for loans, the establishment of branches,mergers and consolidations and the payment of dividends. This system ofsupervision and regulation establishes a comprehensive framework for the respectiveoperations of the Company and its subsidiaries and is intended primarily forthe protection of the FDIC-insured deposits and depositors of the Bank, ratherthan shareholders.

 

The following is a summary of the material elements of the regulatoryframework that applies to the Company and its subsidiaries.  It does not describe all of the statutes,regulations and regulatory policies that apply, nor does it restate all of therequirements of those statutes,

 

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regulationsand regulatory policies that are described. As such, the following is qualifiedin its entirety by reference to applicable law.  Any change in applicable statutes, regulations or regulatorypolicies may have a material effect on the business of the Company and itssubsidiaries.

 

**Recent RegulatoryDevelopments**

 

***National BankPreemption***.  OnJanuary 7, 2004, the OCC issued two final rules that clarify the federalcharacter of the national banking system. The first rule provides that, except where made applicable by federallaw, state laws that obstruct, impair or condition national banks’ ability tofully exercise their deposit-taking, lending and operational powers are notapplicable to national banks.  That rulefurther provides that the following types of state laws apply to national banksto the extent that they only incidentally affect the exercise of nationalbanks’ deposit-taking, lending and operational powers: contract, criminal,taxation, tort, zoning and laws relating to certain homestead rights, rights tocollect debts, acquisitions and transfers of property and other laws asdetermined to apply to national banks by the OCC.  The second rule affirms that, under federal law, with some exceptions,the OCC has exclusive visitorial authority (the power to inspect, examine,supervise and regulate) with respect to the content and conduct of activitiesauthorized for national banks.  Thesecontroversial rules give national banks, especially those that operate inmultiple states, a significant competitive advantage over state-chartered banksand are therefore likely to be challenged by individuals and organizations thatrepresent the interests of individual states and state-chartered banks.  Both the U.S. House Committee on Financial Servicesand the New York Attorney General have already initiated such challenges.

 

***FACT Act***.  On December 4, 2003, President Bushsigned into law the Fair and Accurate Credit Transactions Act of 2003 (the“FACT Act”), which contains numerous amendments to the Fair CreditReporting Act relating to matters including identity theft and privacy.  Among its other provisions, the FACT Actrequires financial institutions: (i) to establish an identity theft prevention program;(ii) to enhance the accuracy and integrity of information furnished to consumerreporting agencies; and (iii) to allow customers to prevent financialinstitution affiliates from using, for marketing solicitation purposes,transaction and experience information about the customers received from thefinancial institution.  The FACTAct also requires the federal banking regulators, and certain other agencies,to promulgate regulations to implement its provisions.  The various provisions of the FACT Actcontain different effective dates including March 31, 2004, for thoseprovisions of the FACT Act that do not require significant changes to businessprocedures and December 1, 2004, for certain other provisions that will requiresignificant business procedure changes.

 

**The Company**

 

***General***.  The Company, as the sole shareholder of theBank, is a bank holding company.  As abank holding company, the Company is registered with, and is subject toregulation by, the Federal Reserve under the Bank Holding Company Act of 1956,as amended (the “BHCA”).  In accordancewith Federal Reserve policy, the Company is expected to act as a source offinancial strength to the Bank and to commit resources to support the Bank incircumstances where the Company might not otherwise do so.  Under the BHCA, the Company is subject toperiodic

 

15

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examination by the FederalReserve.  The Company is also requiredto file with the Federal Reserve periodic reports of the Company’s operationsand such additional information regarding the Company and its subsidiaries asthe Federal Reserve may require.

 

***Acquisitions,Activities and Change in Control***. The primarypurpose of a bank holding company is to control and manage banks. The BHCAgenerally requires the prior approval of the Federal Reserve for any mergerinvolving a bank holding company or any acquisition by a bank holding companyof another bank or bank holding company. Subject to certain conditions (including deposit concentration limitsestablished by the BHCA), the Federal Reserve may allow a bank holding companyto acquire banks located in any state of the United States. In approvinginterstate acquisitions, the Federal Reserve is required to give effect toapplicable state law limitations on the aggregate amount of deposits that maybe held by the acquiring bank holding company and its insured depositoryinstitution affiliates in the state in which the target bank is located(provided that those limits do not discriminate against out-of-state depositoryinstitutions or their holding companies) and state laws that require that thetarget bank have been in existence for a minimum period of time (not to exceedfive years) before being acquired by an out-of-state bank holding company.

 

The BHCA generally prohibits the Company from acquiring direct orindirect ownership or control of more than 5% of the voting shares of anycompany that is not a bank and from engaging in any business other than that ofbanking, managing and controlling banks or furnishing services to banks and theirsubsidiaries.  This general prohibitionis subject to a number of exceptions. The principal exception allows bankholding companies to engage in, and to own shares of companies engaged in,certain businesses found by the Federal Reserve to be “so closely related tobanking — as to be a proper incident thereto.” This authority would permit the Company to engage in a variety ofbanking-related businesses, including the operation of a thrift, consumerfinance, equipment leasing, the operation of a computer service bureau(including software development), and mortgage banking and brokerage. The BHCAgenerally does not place territorial restrictions on the domestic activities ofnon-bank subsidiaries of bank holding companies.

 

Additionally, bank holding companies that meet certain eligibilityrequirements prescribed by the BHCA and elect to operate as financial holdingcompanies may engage in, or own shares in companies engaged in, a wider rangeof nonbanking activities, including securities and insurance underwriting andsales, merchant banking and any other activity that the Federal Reserve, inconsultation with the Secretary of the Treasury, determines by regulation ororder is financial in nature, incidental to any such financial activity orcomplementary to any such financial activity and does not pose a substantialrisk to the safety or soundness of depository institutions or the financialsystem generally.  As of the date ofthis filing, the Company has neither applied for nor received approval tooperate as a financial holding company.

 

Federal lawalso prohibits any person or company from acquiring “control” of anFDIC-insured depository institution or its holding company without prior noticeto the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25%or more of the outstanding voting securities of a bank or bank holding company,but may arise under certain circumstances at 10% ownership.

 

16

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

 

The Federal Reserve’s capital guidelines establish the followingminimum regulatory capital requirements for bank holding companies:  (i) a risk-based requirement expressed as apercentage of total assets weighted according to risk; and (ii) a leveragerequirement expressed as a percentage of total assets.  The risk-based requirement consists of aminimum ratio of total capital to total risk-weighted assets of 8% and aminimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  The leverage requirement consists of aminimum ratio of Tier 1 capital to total assets of 3% for the most highly ratedcompanies, with a minimum requirement of 4% for all others.  For purposes of these capital standards,Tier 1 capital consists primarily of permanent stockholders’ equity lessintangible assets (other than certain loan servicing rights and purchasedcredit card relationships). Total capital consists primarily of Tier 1 capitalplus certain other debt and equity instruments that do not qualify as Tier 1capital and a portion of the company’s allowance for loan and lease losses.

 

The risk-basedand leverage standards described above are minimum requirements. Higher capitallevels will be required if warranted by the particular circumstances or riskprofiles of individual banking organizations. For example, the FederalReserve’s capital guidelines contemplate that additional capital may berequired to take adequate account of, among other things, interest rate risk,or the risks posed by concentrations of credit, nontraditional activities orsecurities trading activities.  Further,any banking organization experiencing or anticipating significant growth wouldbe expected to maintain capital ratios, including tangible capital positions (*i.e.*, Tier 1 capital less all intangibleassets), well above the minimum levels. As of December 31, 2003, the Company had regulatory capital in excess ofthe Federal Reserve’s minimum requirements.

 

***Dividend Payments***. The Company’s ability to pay dividends to its shareholders may beaffected by both general corporate law considerations and policies of theFederal Reserve applicable to bank holding companies. As a Delaware corporation,the Company is subject to the limitations of the Delaware General CorporationLaw (the “DGCL”). The DGCL allows the Company to pay dividends only out ofits surplus (as defined and computed in accordance with the provisions of theDGCL) or if the Company has no such surplus, out of its net profits for thefiscal year 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 SecuritiesRegulation***.  The Company’s common stock is registeredwith the SEC under the Securities Act of 1933, as amended, and the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  Consequently, the Company is subject to theinformation, proxy

17

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solicitation, insider tradingand other restrictions and requirements of the SEC under the Exchange Act.

 

**The Bank**

 

***General***.The Bank is a national bank, chartered by the OCC under the National BankAct.  The deposit accounts of theBank are insured by the FDIC’s Bank Insurance Fund (“BIF”), and the Bank is amember of the Federal Reserve System. As a national bank, the Bank is subject to the examination, supervision,reporting and enforcement requirements of the OCC, the chartering authority fornational banks. The FDIC, as administrator of the BIF, also has regulatoryauthority over the Bank.

 

***Deposit Insurance***.  As an FDIC-insured institution, the Bank isrequired 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, 2003, BIF assessments ranged from 0%of deposits to 0.27% of deposits.  Forthe semi-annual assessment period beginning January 1, 2004, BIF assessmentrates will continue to range from 0% of deposits to 0.27% of deposits.

 

***FICO Assessments***.  Since1987, a portion of the deposit insurance assessments paid by members of theFDIC’s Savings Association Insurance Fund (“SAIF”) has been used to coverinterest payments due on the outstanding obligations of the FinancingCorporation (“FICO”). FICO was created in 1987 to finance the recapitalizationof the Federal Savings and Loan Insurance Corporation, the SAIF’s predecessorinsurance fund. As a result of federal legislation enacted in 1996, beginningas of January 1, 1997, both SAIF members and BIF members became subject toassessments to cover the interest payments on outstanding FICO obligations untilthe final maturity of such obligations in 2019.  These FICO assessments are in addition to amounts assessed by theFDIC for deposit insurance. During the year ended December 31, 2003, theFICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits.

 

***SupervisoryAssessments***. National banks are required to pay supervisory assessments to the OCC tofund the operations of the OCC.  Theamount of the assessment is calculated using a formula that takes into accountthe bank’s size and its supervisory condition (as determined by the compositerating assigned to the bank as a result of its most recent OCCexamination).  During the year endedDecember 31, 2003, the Bank paid supervisory assessments to the OCC totaling$73,000.

 

18

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***Capital Requirements*.**  Banks are generally required to maintaincapital levels in excess of other businesses. The OCC has established thefollowing minimum capital standards for national banks, such as the Bank: (i) aleverage requirement consisting of a minimum ratio of Tier 1 capital to totalassets of 3% for the most highly-rated banks with a minimum requirement of atleast 4% for all others; and (ii) a risk-based capital 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 are minimum requirements.  Higher capital levels will be required ifwarranted by the particular circumstances or risk profiles of individualinstitutions.  For example, regulationsof the OCC provide that additional capital may be required to take adequateaccount of, among other things, interest rate risk or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.

 

Further, federal law and regulations provide various incentives forfinancial institutions to maintain regulatory capital at levels in excess ofminimum regulatory requirements. For example, a financial institution that is“well-capitalized” may qualify for exemptions from prior notice or applicationrequirements otherwise applicable to certain types of activities and mayqualify for expedited processing of other required notices or applications.Additionally, one of the criteria that determines a bank holding company’seligibility to operate as a financial holding company is a requirement that allof its financial institution subsidiaries be “well-capitalized.”   Under the regulations of the OCC, in orderto be “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.  Theextent of the regulators’ powers depends on whether the institution in questionis “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”or “critically undercapitalized,” in each case as defined by regulation.  Depending upon the capital category to whichan institution is assigned, the regulators’ corrective powers include:  (i) requiring the institution to submit acapital restoration plan; (ii) limiting the institution’s asset growth andrestricting its activities; (iii) requiring the institution to issue additionalcapital 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, 2003: (i) the Bank was not subject to a directivefrom the OCC to increase its capital to an amount in excess of the minimumregulatory capital requirements; (ii) the Bank exceeded its minimum regulatorycapital requirements under OCC capital adequacy guidelines; and (iii) the Bankwas “well-capitalized,” as defined by OCC regulations.

 

19

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***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 thebank’s retained net income for the two preceding years.

 

The payment of dividends by any financial institution is affected bythe requirement to maintain adequate capital pursuant to applicable capitaladequacy guidelines and regulations, and a financial institution generally isprohibited from paying any dividends if, following payment thereof, theinstitution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirementsunder applicable guidelines as of December 31, 2003.  As of December 31, 2003, approximately $372,000 was available tobe paid as dividends by the Bank. Notwithstanding the availability of funds for dividends, however, theOCC may prohibit the payment of any dividends by the Bank if the OCC determinessuch payment would constitute an unsafe or unsound practice.

 

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

 

***Safety and SoundnessStandards*.** The federal banking agencies have adopted guidelines that establishoperational and managerial standards to promote the safety and soundness offederally insured depository institutions. The guidelines set forth standards for internal controls, informationsystems, internal audit systems, loan documentation, credit underwriting,interest rate exposure, asset growth, compensation, fees and benefits, assetquality and earnings.

 

In general, the safety and soundness guidelines prescribe the goals tobe achieved in each area, and each institution is responsible for establishingits own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth inthe guidelines, the institution’s primary federal regulator may require theinstitution to submit a plan for achieving and maintaining compliance. If aninstitution fails to submit an acceptable compliance plan, or fails in anymaterial respect to implement a compliance plan that has been accepted by itsprimary federal regulator, the regulator is required to issue an orderdirecting the institution to cure the deficiency. Until the deficiency cited inthe regulator’s order is cured, the regulator may restrict the institution’srate of growth, require the institution to increase its capital, restrict therates the institution pays on deposits or require the institution to take anyaction the regulator deems appropriate under the circumstances. Noncompliancewith the standards established by the safety and soundness guidelines may also

 

20

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constitutegrounds for other enforcement action by the federal banking regulators,including cease and desist orders and civil money penalty assessments.

 

***Branching Authority*.**National banks headquartered in Illinois, such as the Bank, have the samebranching rights in Illinois as banks chartered under Illinois law, subject toOCC approval.  Illinois law grantsIllinois-chartered banks the authority to establish branches anywhere in theState of Illinois, subject to receipt of all required regulatory approvals.

 

Federal law permits state and national banks to merge with banks inother states subject to: (i) regulatory approval; (ii) federal and statedeposit concentration limits; and (iii) state law limitations requiring themerging bank to have been in existence for a minimum period of time (not toexceed five years) prior to the merger. The establishment of new interstate branches or the acquisition ofindividual branches of a bank in another state (rather than the acquisition ofan out-of-state bank in its entirety) is permitted only in those few statesthat authorize such expansion.

 

***FinancialSubsidiaries*.** UnderFederal law and OCC regulations, national banks are authorized to engage,through “financial subsidiaries,” in any activity that is permissible for afinancial holding company and any activity that the Secretary of the Treasury,in consultation with the Federal Reserve, determines is financial in nature orincidental to any such financial activity, except (i) insurance underwriting,(ii) real estate development or real estate investment activities (unlessotherwise permitted by law), (iii) insurance company portfolio investments and(iv) merchant banking.  The authority ofa national 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’s outstandinginvestments in financial subsidiaries). The Bank has neither applied for nor received approval to establish anyfinancial subsidiaries.

 

***Federal ReserveSystem*.** Federal Reserve regulations, as presently in effect, require depositoryinstitutions to maintain non-interest earning reserves against theirtransaction accounts (primarily NOW and regular checking accounts), asfollows:  for transaction accountsaggregating $38.8 million or less, the reserve requirement is 3% of totaltransaction accounts; and for transaction accounts aggregating in excess of$38.8 million, the reserve requirement is $1.164 million plus 10% of theaggregate amount of total transaction accounts in excess of$38.8 million.  The first $6.6million of otherwise reservable balances are exempted from the reserverequirements.  These reserverequirements are subject to annual adjustment by the Federal Reserve.  The Bank is in compliance with the foregoingrequirements.

 

21

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**Item2.****    Properties.**

 

The Company’s main office is located at 701-705 LaSalle Street, Ottawa,Illinois.  The building is comprised ofapproximately 15,000 square feet.  Themain office building is a two-story structure constructed principally ofmasonry which was opened in 1865.  TheCompany also operates six branch office facilities. A limited service branch,which contains eight drive-in lanes, is located at 300 West Madison Street,Ottawa, Illinois, and five full-service branches are located at 601 StateStreet, Ottawa, Illinois; 2771 North Columbus Street, Ottawa, Illinois; 1771North Division Street, Morris, Illinois; 2324 North Bloomington Street,Streator, Illinois; and 401 East Main Street, Streator, Illinois.

 

The Company also purchased real estate in Yorkville, Illinois with theintention of establishing a full service branch facility in thatcommunity.  Estimated completion anddate of operation will be in early 2005. The main banking office and branchoffices are owned by the Company in fee and are unencumbered.

 

**Item3.****    Legal Proceedings.**

 

The Company is fromtime to time a party to legal proceedings in the ordinary course of businessthat are incident to the business of banking. The Company is not engaged in anylegal proceedings of a material nature at the present time.

 

**Item4.****    Submission of Matters to aVote of Security Holders.**

 

No matters were submitted to a vote of security holders during thequarter ended December 31, 2003.

 

22

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**PARTII**

 

**Item5.****    Market For Registrant’s CommonEquity and Related Stockholder Matters**

 

See page 41 of the2003 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) whichis incorporated herein by reference.

 

**Item6.****    Selected Financial Data**

 

The information set forthunder the caption “Selected Consolidated Financial Data” on page 1 of the 2003Annual Report to Stockholders (filed as Exhibit 13.1 of this report) isincorporated herein by reference.

 

**Item7.****    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

The information setforth under the caption “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” on pages 2 through 14 of the 2003 AnnualReport to Stockholders (filed as Exhibit 13.1 of this report) is incorporatedherein by reference.

 

**Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

 

The information setforth under the caption “Quantitative and Qualitative Disclosures about MarketRisk” on page 11 of the 2003 Annual Report to Stockholders (filed as Exhibit13.1 of this report) is incorporated herein by reference.

 

**Item 8.****    Financial Statements andSupplementary Data**

 

The consolidatedfinancial statements of the Registrant and the Independent Auditors’ Report asset forth on pages 15 through 40 of the 2003 Annual Report to Stockholders(filed as Exhibit 13.1 of this report) are incorporated herein by reference:

 
| Independent Auditors’  Report                                                                           |   |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                         |   |   |
| Consolidated Balance  Sheets as of December 31, 2003 and 2002                                                |   |   |
|                                                                                                         |   |   |
| Consolidated  Statements of Income for the years ended December 31, 2003, 2002, and 2001                     |   |   |
|                                                                                                         |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2003,  2002, and 2001 |   |   |

 

23

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| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002, and  2001 |   |   |
|-----------------------------------------------------------------------------------------------|--------|--------|
|                                                                                          |   |   |
| Notes to the  Consolidated Financial Statements                                               |   |   |
|                                                                                          |   |   |
| Parent Company Only  Financial Statements                                                     |   |   |

 

The portions of the2003 Annual Report to Stockholders which are not specifically incorporated byreference as a part of this Form 10-K are not deemed to be a part of thisreport.

 

**Item9.****    Changes in and Disagreementswith accountants on Accounting and Financial Disclosure**

 

None.

 

**Item9A. Controls and Procedures**

 

An evaluationwas performed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) promulgated underthe Securities and Exchange Act of 1934, as amended) as of December 31,2003. 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.

 

24

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**PARTIII**

 

**Item 10.****Directors and Executive Officersat the Registrant**

 

The information set forth under the captions “Information RegardingNominees and Executive Officers”, “Corporate Governance and the Board ofDirectors” and “Section 16 Beneficial Ownership Reporting Compliance” of theRegistrant’s Proxy Statement, relating to the 2004 Annual Meeting ofStockholders is incorporated herein by reference.

 

**Item11.****Executive Compensation**

 

The information set forth under the caption “Executive Compensation” ofthe Registrant’s Proxy Statement, relating to the 2004 Annual Meeting ofStockholders is incorporated herein by reference, except for the “Stockholder’sPerformance Table” and the “Board Compensation Committee’s Report onCompensation”, which are not hereby incorporated.

 

**Item12.****Security Ownership of CertainBeneficial Owners and Management**

 

The information set forth under the caption “Security Ownership ofCertain Beneficial Owners and Management” of the Registrant’s Proxy Statement,relating to the 2004 Annual Meeting of Stockholders is incorporated herein byreference.

 

**EquityCompensation Plan Information**

 

Thetable below sets forth the following information as of December 31, 2003 for(i) all compensation plans previously approved by the Company’s stockholdersand (ii) all compensation plans not previously approved by the Company’sstockholders:

 
| (a)    |   | the number of securities to be issued upon the exercise of  outstanding options, warrants and rights;                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| (b)    |   | the weighted-average exercise price of such outstanding options,  warrants and rights;                                                                                                     |
|   |   |                                                                                                                                                                                       |
| (c)    |   | other than securities to be issued upon the exercise of such  outstanding options, warrants and rights, the number of securities remaining  available for future issuance under the plans. |

 

25

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EQUITY COMPENSATION PLAN INFORMATION

 
| **Plan category**                                           |   | **Number of  securities to  be issued upon exercise  of outstanding options** |   | **Weighted-average  exercise  price of outstanding  options** |   | **Number of  securities  remaining available for  future issuance** |    |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------------|---------|
| Equity compensation plans approved by  security holders     |   | 6,750                                                                         |   | $                                                             | 56.00  |                                                                | 143,250 |   |
| Equity compensation plans not approved by  security holders |   | 0                                                                             |   | 0                                                             |   | 0                                                                   |    |
| **Total**                                                   |   | 6,750                                                                         |   | $                                                             | 56.00  |                                                                | 143,250 |   |

 

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

 

The information set forth under the caption “Certain Relationships andRelated Transactions” of the Registrant’s Proxy Statement, relating to the 2004Annual Meeting of Stockholders is incorporated herein by reference.

 

**Item14.****Principal Accounting Fees andServices**

 

The information set forth under the caption “Independent PublicAccountants” of the registrant’s proxy statement relating to the 2004 AnnualMeeting of Shareholders is incorporated herein by reference.

 

26

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**PARTIV**

 

**Item15.  Exhibits, Financial StatementSchedules, and Reports on Form 8-k**

 
| (a)    |   | 1.     | Financial Statements                                                                                                                             |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   | All financial statements of the Registrant are incorporated herein by  reference as set forth under Item 8, Part II of this report on Form 10-K. |
|   |   |   |                                                                                                                                             |
|   |   | 2.     | Financial Statement Schedules Not  applicable.                                                                                                   |
|   |   |   |                                                                                                                                             |
|   |   | 3.     | Exhibits (Numbered in accordance with Item  601 of Regulation S-K)                                                                               |

 

The following exhibits are filed as part of this report:

 
| 3.1    |   | Certificate of Incorporation of First Ottawa Bancshares,  Inc.                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                |
| 3.2    |   | 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*                                                                                                          |
|   |   |                                                                                                                                                |
| 13.1   |   | Annual Report to Stockholders                                                                                                                       |
|   |   |                                                                                                                                                |
| 21.1   |   | Subsidiaries                                                                                                                                        |
|   |   |                                                                                                                                                |
| 23.1   |   | Consent of independent auditor                                                                                                                      |
|   |   |                                                                                                                                                |
| 23.2   |   | Consent of independent auditor                                                                                                                      |
|   |   |                                                                                                                                                |
| 31.1   |   | Certification of Chief Executive Officer  Pursuant to Rule 13a-14(a)/15d-14(a)                                                                      |
|   |   |                                                                                                                                                |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to Rule  13a-14(a)/15d-14(a)                                                                      |
|   |   |                                                                                                                                                |
| 32.1   |   | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                |
| 32.2   |   | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

----

* Indicates management contract or compensation plan or arrangement.

 

27

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(b)   Reports on Form 8K

 

A report on Form 8-K was filed on January 30, 2004 pursuant to Item 12that reported the Company’s fourth quarter and fiscal year end financialinformation in the form of a press release.

 

A report on Form 8-K was filed on November 19, 2003 under Item 2 thatreported the Company’s completion of its acquisition of two banking branches ofFirst Midwest Bank located in Streator, Illinois.

 

A report on Form 8-K was filed on October 24, 2003 pursuant to Item 12that reported the Company’s third quarter financial information in the form ofa press release.

 

28

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**SIGNATURE**

 

In accordancewith Section 13 or 15(d) of the Exchange Act, the registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |           | **FIRST OTTAWA BANCSHARES, INC.** |
|--------|----------------|-----------------------------------|
|   |           |                              |   |
|   |           | By:                               | /s/ Joachim Brown |
|   |           |                              | Joachim Brown,  President and Chief  Executive Officer (Principal Executive  Officer) |
|   |           |                              |   |
|   |           | By:                               | /s/ Vincent G. Easi |
|   |           |                              | Vincent G. Easi, Principal Financial Officer |
|   |           |                              |   |
| Date:  | March 29, 2004 |                              |   |

 

In accordancewith the Exchange Act, this report has been signed below by the following personson behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Signature**            |   | **Title**                                |                    | **Date** |
|--------------------------|--------|------------------------------------------|-------------------------|----------|
|                     |   |                                     |                    |     |
| /s/ Joachim Brown        |   |                                     | Director and President/ |     | March 29, 2004 |
| Joachim Brown            |   | Chief Executive Officer                  |                    |     |
|                     |   |                                     |                    |     |
| /s/ Bradley J. Armstrong |   |                                     | Director                |     | March 29, 2004 |
| Bradley J. Armstrong     |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ John L. Cantlin      |   |                                     | Director                |     | March 29, 2004 |
| John L. Cantlin          |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ Patty P. Godfrey     |   |                                     | Director                |     | March 29, 2004 |
| Patty P. Godfrey         |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ Thomas E. Haeberle   |   |                                     | Director                |     | March 29, 2004 |
| Thomas E. Haeberle       |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ Donald J. Harris     |   |                                     | Director and Executive  |     | March 29, 2004 |
| Donald J. Harris         |   | Vice President, Chief Operating  Officer |                    |     |
|                     |   |                                     |                    |     |
| /s/ Erika L. Schmidt     |   |                                     | Director                |     | March 29, 2004 |
| Erika L. Schmidt         |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ Thomas P. Rooney     |   |                                     | Director                |     | March 29, 2004 |
| Thomas P. Rooney         |   |                                     |                    |     |
|                     |   |                                     |                    |     |
| /s/ William J. Walsh     |   |                                     | Director                |     | March 29, 2004 |
| William J. Walsh         |   |                                     |                    |     |
|                          |        |                                          |                         |          |  |  |  |  |  |  |  |

 

29

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**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                             |   | **Incorporated  by Reference to**      |   | **Attached  Hereto** |
|---------------------|--------|-----------------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------|
| 3.1                 |   | Certificate of Incorporation of First Ottawa Bancshares, Inc. (as  amended) |   | Form 10K for the year ended 12/31/2002 |   |                 |
| 3.2                 |   | By-Laws of First Ottawa Bancshares, Inc.                                    |   |                                   |   | X                    |
| 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 |   |                 |
| 13.1                |   | 2003 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                    |

 

E-1

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