SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer ý |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last known sales price on or prior to June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, was $39,458,020.
649,349 shares of common stock were outstanding as of March 14, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s 2005 Annual Report to Stockholders is incorporated by reference in Parts II and IV and the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 17, 2006 is incorporated by reference in Part III.
Except for those portions of the 2005 Annual Report incorporated by reference, the Annual Report is not deemed filed as part of this Report.
PART I
Item 1. Business.
First Ottawa Bancshares, Inc. (the “Company”) is a bank holding company for its wholly-owned subsidiary, First National Bank of Ottawa (the “Bank”), and the Bank’s wholly owned subsidiary, First Ottawa Financial Corporation. The Company was organized during 1999 and on October 1, 1999 exchanged 100% of its common stock for 100% of the Bank’s common stock. This exchange was accounted for as an internal reorganization. All references to the combined Company, unless otherwise indicated, at or before October 1, 1999, refer to the Bank. As of December 31, 2005, the Company had total assets of $278.7 million, total deposits of $239.9 million, loans, including loans held for sale, of $152.9 million and total stockholders’ equity of $22.9 million. For the year ended December 31, 2005, the Company had interest income of $13.9 million and net income of $2.5 million, which amounted to basic net income per share of $3.92, and diluted net income per share of $3.90.
The Company conducts a general banking business embracing most of the services, both commercial and consumer, which banks may lawfully provide, including the following principal services: the acceptance of deposits for demand, savings, and time accounts and the servicing of such accounts; commercial, agricultural, consumer, and real estate lending, including installment loans, personal lines of credit, and overdraft protection; trust operations; farm management; safe deposit operations; and an extensive variety of additional services tailored to the needs of individual customers, including the sale of traveler’s checks, cashier’s checks, and foreign currency and other special services. Loans, both commercial and consumer, are provided on either a secured or unsecured basis to corporations, partnerships, and individuals. Commercial lending covers such areas as business, industry, capital, agriculture, inventory, and real estate, with the latter including residential properties. Consumer loans are made for a variety of purposes including automobile purchases, recreational vehicle purchases, consumer goods, installment loans, and other types of loans.
The Company is located in the city of Ottawa, Illinois (population 17,500) in LaSalle County in Illinois. A substantial portion of the Company’s business is dependent upon the economic conditions in this market area. LaSalle County is the second largest county by area in the state of Illinois. Ottawa is located in northeastern Illinois approximately 80 miles southwest of Chicago and approximately 65 miles north of Bloomington. Ottawa may be accessed by Interstate 80; U.S. Route 6; State Routes 23 and 71; and recently completed Interstate 39, which is located 11 miles west of Ottawa. The city is also serviced by two railroads and the Ottawa Airport.
Ottawa is the county seat of LaSalle County. Accordingly, many county, state, and other governmental offices are located in Ottawa.
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LaSalle County has a diverse economy with a balance in agriculture, transportation and industry. Grain terminals on the Illinois Deep Waterway at Ottawa provide a direct distribution point for agricultural products to overseas markets via the Gulf of Mexico and the St. Lawrence Seaway. LaSalle County annually ranks in the top 10 counties in Illinois for corn and soybean production. LaSalle County, the site of the largest producer of silica sand in the United States, has a diverse manufacturing sector which includes, in addition to the production of silica sand, the manufacture of residential glass, automotive and industrial belts and equipment, electronic typewriters and computer printers, plastics, office supplies, and rubber products. Many of these companies conduct business in national and, in some instances, international markets.
The LaSalle County economy is continuing to expand. Many developments have had a significant impact on the area economy, including a new County Office Building on the north edge of Ottawa and several new and expanded shopping center projects.
The Bank purchased and assumed substantially all of the deposit liabilities of two branch offices located in Streator, Illinois from First Midwest Bank (collectively, the “Branches”) on November 14, 2003. Approximately $69.3 million of deposits and the related cash balances were transferred to the Bank via cash transfers from First Midwest Bank. In connection with the acquisition of such deposit liabilities and related cash balances, the Bank also acquired certain other assets of the Branches, including real estate, furniture and fixtures and approximately $11.8 million of the loans carried on the books of the Branches. Many of the employees remained with the Branches and became employees of the Bank.
The Company opened full service banking facilities in 2003 in the city of Morris, Illinois, and in 2005 in the city of Yorkville, Illinois. The Company continues to explore expansion opportunities within its existing market area and in surrounding areas.
Lending Activities. The Company relies on interest income from lending activities as a major source of revenue. The Company has a community bank focus — serving the credit needs of the local community. Because of this local focus, the Company has a flexible process for handling loan requests rather than being tied to rigid standards. The discussions below regarding lending policies reflect general guidelines and may vary on a case-by-case basis depending on the borrower’s credit history and the type and size of loan. During the approval process for loans it originates, the Company assesses both the applicant’s ability to repay the loan and the value of any collateral securing the loan. The Company verifies the applicant’s ability to repay the loan by using credit reports, financial statements, confirmations, and other items, including appraisals.
Twelve loan officers have the authority to handle all lending activities of the Company. Each lending officer has authority to approve extensions of credit up to their individual lending limit. The Company has an Officers Loan Committee (consisting of Loan Officers, the Chief Lending Officer, and the President of the Bank) which approves loans of up to $1,000,000. All loans between $1,000,000 and $2,000,000 are sent to the Director’s Loan Committee for approval. The Director’s Loan Committee is also responsible for monitoring concentration of credits, problem and past due loans, and charge-offs of uncollectible loans; formulating recommendations for the Board of Directors regarding loan policy modifications, loan classifications, and charge-offs. All loans in excess of $2,000,000 are reviewed and approved by the Board of Directors. The Board of Directors also is responsible for directing and supervising the Director’s Loan Committee, policy
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review, and oversight of the loan and investment functions of the Company. The Board of Directors also monitors the adequacy of the Company’s loan loss reserves.
Loan Portfolio Composition. The Company’s gross loan portfolio, totaled $152.9 million at December 31, 2005, representing 63.7% of the Company’s total deposits at that date. The Company’s loan portfolio at December 31, 2005 included $95.5 million for real estate purposes, $23.7 million for consumer purposes, and $33.7 million for commercial and agricultural purposes.
Certain risks, including the risk of non-payment, are associated with each type of loan. The primary risks associated with consumer loans relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating economic conditions or the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral securing the loan if the Company must take possession of the collateral. Consumer loans also have risks associated with concentrations of loans in a single type of loan. The primary risks associated with commercial loans are the experience and quality of the borrower’s management, the business climate, and the impact of economic factors. With respect to agricultural loans, the primary risks are weather, market conditions, and, like commercial loans, the quality of the borrower’s management. Risks associated with real estate loans include concentrations of loans in a loan type such as commercial or agricultural and fluctuating land values.
The Company’s strategy in addressing and managing these types of risks is to follow its loan policies and underwriting practices, which include (i) granting loans on a sound and collectible basis; (ii) investing funds profitably for the benefit of the stockholders and the protection of depositors; (iii) serving the legitimate needs of the community and the Company’s general market area while maintaining a balance between maximum yield and minimum risk; (iv) ensuring that primary and secondary sources of repayment are adequate in relation to amount of the loan; (v) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category; (vi) ensuring that each loan is properly documented and, if appropriate, secured or guaranteed by government agencies; and (vii) developing and applying adequate collections procedures.
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All table amounts throughout the Form 10-K are in thousands except share and per share data.
The following table presents the components of the Company’s loan portfolio as of December 31 for each year shown.
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | | | | | | | | | |
Real estate loans | | $ | 95,469 | | $ | 74,225 | | $ | 70,839 | | $ | 46,622 | | $ | 47,282 | |
| | | | | | | | | | | |
Commercial and agricultural loans | | 33,686 | | 28,341 | | 24,197 | | 33,950 | | 29,361 | |
| | | | | | | | | | | |
Installment loans, net of unearned income | | 11,585 | | 17,575 | | 22,812 | | 19,951 | | 24,595 | |
| | | | | | | | | | | |
Home equity lines of credit | | 12,120 | | 12,651 | | 12,456 | | 9,120 | | 6,795 | |
| | | | | | | | | | | |
Total Loans | | 152,860 | | 132,792 | | 130,304 | | 109,643 | | 108,033 | |
| | | | | | | | | | | |
Allowance for loan losses | | (1,344 | ) | (1,174 | ) | (1,049 | ) | (1,167 | ) | (1,109 | ) |
| | | | | | | | | | | |
Loans, net | | $ | 151,516 | | $ | 131,618 | | $ | 129,255 | | $ | 108,476 | | $ | 106,924 | |
| | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 1,701 | | $ | 1,644 | | $ | 1,811 | | $ | 1,475 | |
Maturities (based on contractual terms) of the Company’s commercial and construction loan portfolio at December 31, 2005 are summarized below:
| | One Year
or Less | | One to
Five Years | | Over
Five Years | | Total | |
| | | | | | | | | |
Commercial and agricultural | | $ | 15,634 | | $ | 8,856 | | $ | 9,196 | | $ | 33,686 | |
| | | | | | | | | |
Construction | | 7,950 | | 4,133 | | 2,332 | | 14,415 | |
| | | | | | | | | |
Total | | $ | 23,584 | | $ | 12,989 | | $ | 11,528 | | $ | 48,101 | |
At December 31, 2005, of the total loans that mature in more than one year, $65.8 million, or 65.7%, bear interest at fixed rates and $34.3 million, or 34.3%, bear interest at variable rates.
Consumer Loans. The Company makes consumer loans for various purposes, including personal, family, and nonbusiness reasons such as automobile loans and recreational vehicle loans, on both a direct and indirect basis. Consumer loans totaled approximately $23.7 million at December 31, 2005, or approximately 15.5% of the Company’s total loan portfolio. Approximately 40.0% of the Company’s consumer loans were automobile loans, and of these loans, approximately 67.8% were made indirectly by the Company through automobile dealers. At December 31, 2005, the Company had 11 consumer loans totaling $101,000 that were past due in excess of 90 days. Management feels the Company is well collateralized and expects no loss in excess of specific allocations on the loans.
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In approving consumer loans, lending officers consider the borrower’s past credit history, the borrower’s ability to repay the debt, the collateral offered, and local economic conditions that could affect the borrower’s income. Loans being originated for new borrowers must be accompanied by a completed application dated and signed by the borrower, giving the details of the loan request. Total debts, along with the gross monthly income of the borrower, are required to be shown on the application. A brief cash flow analysis is performed by the loan officer showing the amount of the borrower’s income available for debt service based on current debts plus the new loan request. Generally, debt service to gross income should not exceed 40%. New credit reports are obtained on all borrowers with each loan request. The value of collateral on loans secured by used automobiles is generally 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, depending upon various factors, including the credit experience of the Company with the borrower, the Company may extend credit in excess of the value of the used automobile. A loan-to-value ratio of 90% of sticker price is generally required for new automobile loans. Boats, mobile homes, recreational vehicles, and similar items generally require a loan-to-value ratio of 70% to 80% of the current market value of the collateral. Unsecured consumer loans are granted to borrowers based upon satisfactory income, indebtedness levels, and credit records and experience.
Commercial, Agricultural, and Real Estate Lending.
Commercial and Agricultural. At December 31, 2005, the Company’s commercial and agricultural loans totaled $33.7 million, or approximately 22.0% of the total loan portfolio of the Company. The majority of agricultural and commercial non-real estate loans are written for one to five years, may bear interest at a fixed or variable rate and are amortized over a 15-year to 20-year period. Fixed rates are established by the Company’s management after considering the cost of funds to the Company as well as the rates of competing institutions. The variable rate is generally based upon the national prime rate as disclosed in The Wall Street Journal. Principal and interest payments on commercial loans generally are required monthly; whereas, payments on agricultural loans vary from monthly, quarterly, semi-annually, and annually. At December 31, 2005, the Company had 3 commercial non-real estate loans totaling $29,000 that were past due in excess of 90 days. There were 4 agricultural non-real estate loans totaling $513,000 at December 31, 2005 that were past due in excess of 90 days. Management feels the Company is well collateralized and expects no loss in excess of specific allocations on the loans.
All commercial and agricultural borrowers, both existing and new, are required by policy to have a current financial statement no older than one year. Borrowers also are required to provide the Company with recent tax returns and pro forma projections. Using certain computer programs and the data supplied by borrowers, the loan officers produce additional financial information utilized in analyzing the loans and the borrowers. The general nature of the collateral securing the Company’s commercial and agricultural loans consists of equipment, farm products, crops, inventory, chattel paper, accounts receivable, and general intangibles. The Company’s loan-to-value ratio with respect 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 primary real estate lending consists of commercial loans with a small portion in residential and agricultural real estate loans. Real estate loans at
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December 31, 2005 totaled approximately $95.5 million or approximately 62.5% of the Company’s total loan portfolio. All borrowers requesting a real estate loan are required to submit an application which is reviewed by the lending officer. A credit investigation is performed and an analysis of the borrower’s ability to repay is conducted. Subsequently, an inspection and appraisal of the real property is conducted to determine whether or not the property is of sufficient value to meet the Company’s suggested maximum loan-to-value ratio of 80% to 85% of the lesser of the appraised value or the purchase price of the property securing the loan. Under certain federal guaranteed loan programs utilized by the Company, the maximum loan-to-value ratio is higher. With respect to loans secured by commercial or industrial real estate, the Company analyzes the potential for environmental liability concerns and, depending upon the circumstances, the Company may require additional information or testing. Commercial and agricultural real estate loans are generally originated under the same policies and procedures as discussed above for commercial and agricultural non-real estate loans.
The Company’s residential real estate loans consist of 15-year, 20-year and 30-year fixed-rate and variable-rate loans with amortization periods equal to the maturity of the loan. The Company’s fixed-rate loans with biweekly payments account for approximately 59.7% of all the residential real estate loans of the Company. The biweekly loan program amortizes 25 year loans in approximately 18.9 years. The Company also originates a variety of loans that are sold into the secondary market through Federal Home Loan Mortgage Corporation (“Freddie Mac”) and private investors. These loans are underwritten to meet all Freddie Mac requirements. The Company retains servicing rights on loans sold into the secondary market. At December 31, 2005, mortgage loans serviced for the secondary market totaled approximately $32.8 million.
At December 31, 2005, the Company had 8 personal real estate mortgage loans totaling $627,000, and 3 commercial real estate loans totaling $67,000, past due in excess of 90 days. Management feels the Company is well collateralized and expects no loss in excess of specific allocations on the loans.
Interest Rates and Fees. Interest rates and fees charged on the Company’s loans are affected primarily by the market demand for loans and the supply of money available for lending purposes. These factors are affected by, among other things, general economic conditions and the policies of the federal government, including the Federal Reserve Board, legislative tax policies, and governmental budgetary matters.
Non-Performing Loans. When a borrower fails to make a required payment on a loan and does not cure the delinquency within 30 days, the loan is classified as delinquent. In this event, the normal procedure followed by the Company is to make contact with the borrower at prescribed intervals in an effort to bring the loan to a current status. In most cases, delinquencies are cured promptly, but, if not, the Company normally records a notice of default, subject to any required prior notice to the borrower, and commences foreclosure proceedings when loan payments are 120 days past due.
At December 31, 2005, the Company had 59 loans delinquent for 30 to 90 days in an aggregate principal amount of $2.0 million and representing 1.3% of the total loan portfolio. At
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December 31, 2005, the Company had 29 loans totaling $1.3 million delinquent for more than 90 days.
It is the Company’s policy to discontinue the accrual of interest income on any loan when, in accordance with banking regulations or in the opinion of management, there is reasonable doubt as to the collectibility of interest or principal. Interest on these loans is credited to income only when the collection of principal is reasonably assured and only to the extent interest payments are received. If management feels collection of both interest and principal is probable, the loan is not transferred to nonaccrual status. At December 31, 2005, there were no loans on nonaccrual status.
As a result of economic conditions and other factors beyond the Company’s control, the Company’s future loss and delinquency experience cannot be predicted with certainty.
The nonperforming assets of the Company as of December 31 are indicated below:
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | | | | | | | | | |
Non-accrual loans | | $ | — | | $ | 161 | | $ | 137 | | $ | 364 | | $ | 387 | |
Loans ninety days past due and still accruing interest | | 1,337 | | 727 | | 293 | | 757 | | 860 | |
Other real estate owned | | 88 | | — | | — | | 204 | | — | |
| | | | | | | | | | | |
Total nonperforming assets | | $ | 1,425 | | $ | 888 | | $ | 430 | | $ | 1,325 | | $ | 1,247 | |
| | | | | | | | | | | |
Nonperforming loans as a percentage of total loans | | .88 | % | .66 | % | .33 | % | 1.02 | % | 1.17 | % |
| | | | | | | | | | | |
Nonperforming assets as a percentage of total assets | | .51 | | .31 | | .15 | | .55 | | .54 | |
| | | | | | | | | | | |
Nonperforming loans as a percentage of the allowance for loan losses | | 99.48 | | 75.64 | | 40.99 | | 96.06 | | 112.44 | |
The effect of nonaccrual loans upon interest income is not deemed to be material by management. Loans are placed in nonaccrual status when 90 days past due, unless they are fully secured and in the process of collection. At December 31, 2005, there were other impaired loans with specific reserve allocations classified as problem loans that were not included above. Management also maintains a report on loans requiring attention that includes loans greater than 60 days delinquent or other loans as deemed necessary by the Company’s internal loan review or the loan committee. The total of loans requiring attention as of December 31, 2005 was $4.3 million.
Allowance for Losses on Loans. In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan.
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The Company maintains an allowance for loan losses to absorb probable incurred credit losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by management to evaluate the adequacy of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes comparisons to actual losses, industry data and economic conditions. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for estimated losses based upon judgments different from those of management.
In connection with assessing the allowance, loss factors are applied to various pools of outstanding loans. The Company segregates the loan portfolio according to risk characteristics (i.e., mortgage loans, commercial real estate, agricultural, business, consumer, etc.) and risk gradings. Loss factors are derived using the Company’s historical loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. Commercial real estate and commercial business loans are individually evaluated for impairment and specific reserves are allocated as needed in accordance with Statement of Financial Accounting Standards No. 114 and No. 118.
In addition, management assesses the allowance using factors that cannot be associated with specific credit or loan categories. These factors include management’s subjective evaluation of local and economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The allowance methodology reflects management’s objective that the overall allowance appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses.
The allowance for loan losses is established through a charge to operations at the time loan value becomes impaired or, in the judgment of management, other subjective factors warrant additional reserves. As noted in the previous table, nonperforming loans increased by $449,000 in 2005 after increasing by $458,000 during 2004. Management considered this information along with other portfolio trends when considering the adequacy of the allowance for loan losses at December 31, 2005. At December 31, 2005, the balance in the allowance was $1.3 million, or .88% of gross loans outstanding. Management has concluded that the allowance for loan losses is adequate at December 31, 2005. However, there can be no assurance that the allowance for loan losses is adequate to cover all losses.
The Company had 1 property valued at $88,000, resulting from foreclosure, classified as other real estate owned at December 31, 2005. Other real estate is generally carried at the lower of cost or estimated market value.
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Summary of Loan Loss Experience. The allowance for loan losses is maintained by management at a level considered adequate to cover losses that are currently anticipated based upon past loss experience, general economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time.
Loan loss experience for the five years ended December 31, 2005 is summarized as follows:
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | | | | | | | | | |
Balance of the allowance for loan losses at beginning of year | | $ | 1,174 | | $ | 1,049 | | $ | 1,167 | | $ | 1,109 | | $ | 1,108 | |
Charge-offs | | | | | | | | | | | |
Real Estate | | — | | 63 | | 66 | | 46 | | 111 | |
Commercial | | 71 | | — | | 50 | | 6 | | 35 | |
Installment | | 145 | | 210 | | 303 | | 181 | | 254 | |
Total charge-offs | | 216 | | 273 | | 419 | | 233 | | 400 | |
| | | | | | | | | | | |
Recoveries | | | | | | | | | | | |
Real Estate | | 8 | | — | | 16 | | 39 | | 4 | |
Commercial | | 16 | | 4 | | 57 | | 63 | | 6 | |
Installment | | 62 | | 94 | | 108 | | 69 | | 91 | |
Total recoveries | | 86 | | 98 | | 181 | | 171 | | 101 | |
Net charge-offs | | 130 | | 175 | | 238 | | 62 | | 299 | |
Provision | | 300 | | 300 | | 120 | | 120 | | 300 | |
| | | | | | | | | | | |
Balance at end of year | | $ | 1,344 | | $ | 1,174 | | $ | 1,049 | | $ | 1,167 | | $ | 1,109 | |
| | | | | | | | | | | |
Net charge-offs to average total loans | | .09 | % | .13 | % | .21 | % | .06 | % | .26 | % |
Allowance for loan losses to total loans at year-end | | .88 | | .87 | | .80 | | 1.06 | | 1.03 | |
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The Company’s allocation of the allowance for loan losses as of December 31 is presented below:
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | 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 | | $ | 131 | | 62.45 | % | $ | 234 | | 19.88 | % | $ | 444 | | 54.37 | % | $ | 281 | | 42.56 | % | $ | 308 | | 43.78 | % |
| | | | | | | | | | | | | | | | | | | | | |
Commercial and agricultural loans | | 613 | | 22.04 | | 519 | | 44.24 | | 209 | | 18.57 | | 307 | | 30.94 | | 380 | | 27.62 | |
| | | | | | | | | | | | | | | | | | | | | |
Installment loans | | 141 | | 15.51 | | 185 | | 15.79 | | 242 | | 27.06 | | 236 | | 26.50 | | 287 | | 28.60 | |
| | | | | | | | | | | | | | | | | | | | | |
Unallocated | | 459 | | N/A | | 236 | | N/A | | 154 | | N/A | | 343 | | N/A | | 134 | | N/A | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at end of year | | $ | 1,344 | | 100.00 | % | $ | 1,174 | | 100.00 | % | $ | 1,049 | | 100.00 | % | $ | 1,167 | | 100.00 | % | $ | 1,109 | | 100.00 | % |
Investment Activities. The investment policies of the Company as established by the Board of Directors attempt to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company’s lending activities. The policies provide the authority to invest in United States Treasury and federal agency securities, mortgage-backed securities, municipal securities, equity securities, and Certificates of Deposits.
Approximately $1.0 million of the United States government agency notes held at December 31, 2005 are callable at the option of the issuer, which present limited prepayment risk to the Company.
As of December 31, 2005, the Company had approximately $4.3 million invested in municipalities located within LaSalle County, Illinois.
The Company purchased $7.9 million of Index Powered Certificates of Deposit between 2002 and 2005. These deposits were placed with multiple issuers so that $7.0 million of the principal deposited is insured through the FDIC and the remaining $900,000 is collateralized with a letter of credit from the single issuing 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-sale securities portfolio and the weighted average yield of the portfolio at December 31, 2005.
| | 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 | | $ | — | | — | % | $ | 9,802 | | 3.26 | % | $ | — | | — | % | $ | — | | — | % | $ | 9,802 | | 3.26 | % |
U.S. Government agencies | | 4,253 | | 4.37 | | 35,152 | | 3.51 | | — | | — | | — | | — | | 39,405 | | 3.60 | |
States and political subdivisions | | 2,022 | | 7.59 | | 19,411 | | 4.49 | | 838 | | 6.38 | | 2,925 | | 6.75 | | 25,196 | | 3.54 | |
Mortgage-backed securities and collateralized obligations (1) | | 137 | | 4.29 | | 9,732 | | 4.46 | | — | | — | | — | | — | | 9,869 | | 4.46 | |
| | | | | | | | | | | | | | | | | | | | | |
Corporate bonds | | 100 | | 5.98 | | 3,219 | | 2.87 | | — | | — | | — | | — | | 3,319 | | 2.96 | |
Equity securities | | 3,040 | | N/A | | — | | — | | — | | — | | — | | — | | 3,040 | | N/A | |
| | | | | | | | | | | | | | | | | | | | | |
Total securities | | $ | 9,552 | | 5.41 | % | $ | 77,316 | | 3.82 | % | $ | 838 | | 6.38 | % | $ | 2,925 | | 6.75 | % | $ | 90,631 | | 3.61 | % |
(1) Mortgage-backed securities reflect the contractual maturity of the related instrument.
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Deposits. The Company offers deposit services including demand, savings, and time deposit accounts and programs, which include interest-bearing and non-interest-bearing demand deposits and individual retirement accounts. The Company has had a stable deposit base. Management believes that this stability is due to the Company’s emphasis on being a locally owned and operated bank and by providing quality, personalized service to its customers.
The following shows the Company’s average balances and rates paid during the years shown.
| | For the Years Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | Average
Balance | | Percent
of
Deposits | | Rate | | Average
Balance | | Percent
of
Deposits | | Rate | | Average
Balance | | Percent
of
Deposits | | Rate | |
| | | | | | | | | | | | | | | | | | | |
Noninterest- bearing demand deposits | | $ | 31,153 | | 11.9 | % | — | % | $ | 29,815 | | 11.0 | % | — | % | $ | 20,775 | | 10.2 | % | — | % |
Interest-bearing demand and money market accounts | | 98,826 | | 37.7 | | 1.39 | | 107,136 | | 39.5 | | 1.17 | | 69,435 | | 34.1 | | 1.02 | |
Savings accounts | | 27,083 | | 10.3 | | .52 | | 29,121 | | 10.8 | | .59 | | 21,158 | | 10.4 | | .98 | |
Time deposits accounts | | 105,301 | | 40.1 | | 2.88 | | 105,002 | | 38.7 | | 2.60 | | 92,110 | | 45.3 | | 3.57 | |
| | $ | 262,363 | | 100.0 | % | 1.73 | % | $ | 271,074 | | 100.0 | % | 1.53 | % | $ | 203,478 | | 100.0 | % | 2.07 | % |
The distribution of the major components of deposits as of December 31, 2005 and 2004 is summarized in the balance sheets included in the 2005 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, 2005:
| | Balance | | Percentage | |
| | | | | |
Maturity | | | | | |
Three months or less | | $ | 10,357 | | 33.0 | % |
Over three months to six months | | 3,630 | | 11.6 | |
Over six months to one year | | 5,041 | | 16.0 | |
Over one year | | 12,392 | | 39.4 | |
| | | | | |
Total | | $ | 31,420 | | 100.0 | % |
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Borrowings. The Company’s other available sources of funds include financing arrangements for securities sold under agreements to repurchase, federal funds purchased lines, and Federal Home Loan Bank borrowings. Total borrowings increased $5.8 million in 2005. This increase was a result of a $7.1 million increase in federal funds purchased, partially offset by a $559,000 decrease in other borrowings and a $750,000 decrease in repurchase agreements. The Bank maintains physical control of all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase is summarized as follows:
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Balance at December 31 | | $ | — | | $ | 750 | | $ | — | |
Weighted average interest rate during the year | | 1.63 | % | 1.63 | % | 2.11 | % |
Weighted average interest rate at the end of the year | | — | % | 1.63 | % | — | % |
Maximum month-end balance | | $ | 750 | | $ | 750 | | $ | 1,545 | |
Average balance for the year | | 232 | | 215 | | 475 | |
Trust. The Company’s trust department primarily services LaSalle County and surrounding counties. At December 31, 2005, the trust department had 250 accounts under management, 158 of which were discretionary accounts. The trust department provides a full complement of asset management services for personal trusts, estates, and agencies. The trust department had assets under management of approximately $60.3 million at December 31, 2005, of which $51.1 million was in discretionary accounts.
The Company, in conjunction with its trust department, also provides farm management services. At December 31, 2005, the department managed 44 farms. The department manages or directs approximately 6,582 acres of farmland in LaSalle County, Illinois and surrounding counties.
Competition. The Company has active competition in all product and service areas in which it presently engages. The Company not only competes for commercial and individual deposits, loans, and trust business with other LaSalle County, Illinois banks, but also with savings and loan associations, credit unions, and other financial service companies located in and around LaSalle County. Many of these competitors may not be subject to the same regulatory restrictions as the Company. There are approximately 16 commercial banks and 6 savings institutions with offices in LaSalle County, Illinois. The principal methods of competition in the banking and financial services industry are quality of services to the customer; ease of access to services; and pricing of services, including interest rates paid on deposits, interest rates charged on borrowings, and fees charged for fiduciary services. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services.
Employees. As of December 31, 2005, the Company had 99 employees, consisting of 86 full-time employees and 13 part-time employees. None of the employees are subject to a collective bargaining agreement, and management believes it has excellent relations with its staff.
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Stock Repurchases. During 2005 and 2004, the Company repurchased 1,260 and 1,018 shares of its common stock for an aggregate purchase price of $89,000 and $71,000.
Website. The Company maintains a website at www.firstottawa.com. The Company makes available free of charge on or through its website, the annual report on Form 10K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnish it to, the Securities and Exchange Commission. The Company will also provide copies of its filings free of charge upon written request to: Ms. Cheryl Gage, Corporate Secretary, First Ottawa Bancshares, Inc. 701-705 LaSalle Street, P.O. Box 657, Ottawa, Illinois 61350. Additionally, all of the Company’s filings with the Securities and Exchange Commission are also available, free of charge, through the SEC’s website at www.sec.gov.
Code of Business Conduct and Ethics. The Company has a code of business conduct and ethics in place that applies to all of its directors and employees. The code sets forth the standard of ethics that the Company expects all of its directors and employees to follow, including the Chief Executive Officer and Chief Financial Officer. The code of business conduct and ethics is posted on the Company’s website at www.firstottawa.com. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendment to or waiver of the code with respect to the Chief Executive Officer and Chief Financial Officer, and persons performing similar functions, by posting such information on its website.
Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Office of the Comptroller of the Currency (the ”OCC”), the Board of Governors of the Federal Reserve System (the ”Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the ”SEC”) and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Bank, rather than shareholders.
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The following is a summary of the material elements of the regulatory framework 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 the requirements of those statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to applicable law. Any change in applicable statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses, including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed
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by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has not applied for approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to 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.
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the company’s allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2005, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements.
Dividend Payments. The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the
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limitations of the Delaware General Corporation Law (the ”DGCL”). The DGCL allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the ”Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and 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 Bank Act. The deposit accounts of the Bank are insured by the FDIC’s Bank Insurance Fund (“BIF”), and the Bank is a member 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 for national banks. The FDIC, as administrator of the BIF, also has regulatory authority over the Bank.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions 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 insured institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2005, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2006, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC’s Savings Association Insurance Fund (“SAIF”) has been used to cover interest payments due on the outstanding obligations of the Financing Corporation (“FICO”). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF’s predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became
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subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in 2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2005, the FICO assessment rate for BIF and SAIF members was approximately 0.01% of deposits.
Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment is calculated using a formula that takes into account the bank’s size and its supervisory condition (as determined by the composite rating assigned to the bank as a result of its most recent OCC examination). During the year ended December 31, 2005, the Bank paid supervisory assessments to the OCC totaling $87,000.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. The OCC has established the following minimum capital standards for national banks, such as the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is “well-capitalized” may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding company’s eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be “well-capitalized.” Under the regulations of the OCC, in order to be “well-capitalized” a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;
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(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 that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
As of December 31, 2005: (i) the Bank was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) the Bank exceeded its minimum regulatory capital requirements under OCC capital adequacy guidelines; and (iii) the Bank was “well-capitalized,” as defined by OCC regulations.
Dividends. The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s retained net income for the two preceding years.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2005. As of December 31, 2005, approximately $536,000 was available to be paid as dividends by the Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by the Bank if the OCC determines such payment would constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company, on investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to the directors and officers of the Company, to principal stockholders of the Company, and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.
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If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds 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 same branching rights in Illinois as banks chartered under Illinois law, subject to OCC approval. Illinois law grants Illinois-chartered banks the authority to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those states the laws of which expressly authorize such expansion.
Financial Subsidiaries. Under Federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $48.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $48.3 million, the reserve requirement is $1.215 million plus 10% of the aggregate amount of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is in compliance with the foregoing requirements.
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Recent Regulatory Developments On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”) into law as part of the Deficit Reduction Act of 2005. On February 15, 2006, President Bush signed into law the technical and conforming amendments designed to implement FDIRA. FDIRA provides for legislative reforms to modernize the federal deposit insurance system.
Among other things, FDIRA: (i) merges the Bank Insurance Fund (the “BIF”) and the Savings Association Insurance Fund (the “SAIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) into a new Deposit Insurance Fund (the ”DIF”); (ii) allows the FDIC, after March 31, 2010, to increase deposit insurance coverage by an adjustment for inflation and requires the FDIC’s Board of Directors, not later than April 1, 2010 and every five years thereafter, to consider whether such an increase is warranted; (iii) increases the deposit insurance limit for certain employee benefit plan deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010, and provides for pass-through insurance coverage for such deposits; (iv) increases the deposit insurance limit for certain retirement account deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010; (v) allows the FDIC’s Board of Directors to set deposit insurance premium assessments in any amount the Board of Directors deems necessary or appropriate, after taking into account various factors specified in FDIRA; (vi) replaces the fixed designated reserve ratio of 1.25% with a reserve ratio range of 1.15%-1.50%, with the specific reserve ratio to be determined annually by the FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment system by regulation; (viii) requires the FDIC, at the end of any year in which the reserve ratio of the DIF exceeds 1.50% of estimated insured deposits, to declare a dividend payable to insured depository institutions in an amount equal to 100% of the amount held by the DIF in excess of the amount necessary to maintain the DIF’s reserve ratio at 1.50% of estimated insured deposits or to declare a dividend equal to 50% of the amount in excess of the amount necessary to maintain the reserve ratio at 1.35% if the reserve ratio is between 1.35%-1.50% of estimated insured deposits; and (ix) provides a one-time credit based upon the assessment base of the institution on December 31, 1996 to each insured depository institution that was in existence as of December 31, 1996 and paid a deposit insurance assessment prior to that date (or a successor to any such institution).
The merger of the BIF and the SAIF will take effect no later than July 1, 2006, while the remaining provisions are not effective until the FDIC issues final regulations. FDIRA requires the FDIC to issue final regulations no later than 270 days after enactment: (i) designating a reserve ratio; (ii) implementing increases in deposit insurance coverage; (iii) implementing the dividend requirement; (iv) implementing the one-time assessment credit; and (v) providing for assessments in accordance with FDIRA.
Item 1A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors:
Our business is concentrated in and dependent upon the continued growth and welfare of the LaSalle County market area.
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While we continue to expand our market area and presence into the surrounding counties of Grundy and Kendall, we operate primarily in LaSalle County, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in this market area. We have developed a particularly strong presence in Ottawa and its surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area. Although our customers’ business and financial interests may extend well beyond its market area, adverse economic conditions that affect the market area could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
We may experience difficulties in managing our growth and our growth strategy involves risks that may negatively impact our net income.
As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current market and in surrounding areas by opening new branches and acquiring existing branches of other financial institutions. To the extent that we undertake additional branch openings and acquisitions, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.
Although we do not have any current plans to do so, we may also acquire banks and related businesses that we believe provide a strategic fit with our business or engage in de novo bank formations. To the extent that we grow through acquisitions and de novo bank formations, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly associated with branching, but may also involve additional risks, including:
• potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
• exposure to potential asset quality issues of the acquired bank or related business;
• difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and
• the possible loss of key employees and customers of the banks and businesses we acquire.
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services business in our market is highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are
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and are able to provide customers with a feasible alternative to traditional banking services. Additionally, technological advances may enable more companies to provide financial services, increasing competition among financial service providers.
Increased competition in our market may also result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and larger lending limits and offer a broader range of financial services than we can offer.
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of the bank’s loan portfolio is invested in commercial real estate, residential real estate, general commercial, agricultural and consumer lending. We may assume greater lending risks than financial institutions that have a lesser concentration of such loans. Our lending
23
activity and the risks commonly associated with such lending, including the risk of non-payment, are further described in the “Business” section included under Item 1 of Part I of this Form 10-K.
Our allowance for credit losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We established our allowance for credit losses in consultation with management and maintain it at a level considered adequate by management to absorb credit losses that are inherent in the portfolio. The amount of future credit losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2005, our allowance for credit losses as a percentage of total loans was .88% and as a percentage of total non-performing loans was approximately 99.5%. Although management believes that the allowance for credit losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot predict credit losses with certainty, and we cannot assure you that our allowance for credit losses will prove sufficient to cover actual credit losses in the future. Credit losses in excess of our reserves may adversely affect our business, financial condition and results of operations. Additional information regarding our allowance for credit losses and the methodology we use to determine an appropriate level of reserves is located in the “Management’s Discussion and Analysis” section included under Item 7 of Part II of this Form 10-K.
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, we may at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, branching, de novo bank formations and/or acquisitions could be materially impaired.
Our community banking strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
Much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market area. Our ability to retain executive officers, the current management teams, branch managers and loan officers will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market area to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial
24
condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect profitability. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price shareholders paid for them.
The trading in our common shares has less liquidity than many other companies quoted on the national securities exchanges or markets. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of
25
cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Item 1B.
None
26
Item 2. Properties.
The Company’s main office is located at 701-705 LaSalle Street, Ottawa, Illinois. The building is comprised of approximately 15,000 square feet. The main office building is a two-story structure constructed principally of masonry which was opened in 1865. The Company 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 six full-service branches are located at 601 State Street, Ottawa, Illinois; 2771 North Columbus Street, Ottawa, Illinois; 1771 North Division Street, Morris, Illinois; 2324 North Bloomington Street, Streator, Illinois; 401 East Main Street, Streator, Illinois; and 1459 Cannonball Trail, Yorkville, Illinois. The main banking office and branch offices are owned by the Company in fee and are unencumbered.
Item 3. Legal Proceedings.
The Company is from time to time a party to legal proceedings in the ordinary course of business that are incident to the business of banking. The Company is not engaged in any legal proceedings of a material nature at the present time.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.
27
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
See page — of the 2005 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) which is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth under the caption “Selected Consolidated Financial Information” on page 1 of the 2005 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) is incorporated herein by reference.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 2 through 11 of the 2005 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) is incorporated herein by reference.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
The information set forth under the caption “Quantitative and Qualitative Disclosures about Market Risk” on page 12 of the 2005 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) is incorporated herein by reference.
28
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Registrant and the Report of Independent Registered Public Accounting Firm as set forth on pages 17 through 42 of the 2005 Annual Report to Stockholders (filed as Exhibit 13.1 of this report) are incorporated herein by reference:
| | Annual Report to
Stockholders Page | |
Report of Independent Registered Public Accounting Firm | | 17 | |
| | | |
Consolidated Balance Sheets as of December 31, 2005 and 2004 | | 18 | |
| | | |
Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003 | | 19 | |
| | | |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004, and 2003 | | 20 | |
| | | |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 | | 21 | |
| | | |
Notes to the Consolidated Financial Statements | | 22 | |
The portions of the 2005 Annual Report to Stockholders which are not specifically incorporated by reference as a part of this Form 10-K are not deemed to be a part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31, 2005. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.
Item 9B.Other Information
None
29
PART III
Item 10. Directors and Executive Officers at the Registrant
The information set forth under the captions “Information Regarding Nominees and Executive Officers”, “Corporate Governance and the Board of Directors” and “Section 16 Beneficial Ownership Reporting Compliance” of the Registrant’s Proxy Statement, relating to the 2006 Annual Meeting of Stockholders is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption “Executive Compensation” of the Registrant’s Proxy Statement, relating to the 2006 Annual Meeting of Stockholders is incorporated herein by reference, except for the “Stockholder’s Performance Table” and the “Board Compensation Committee’s Report on Compensation”, which are not hereby incorporated.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” of the Registrant’s Proxy Statement, relating to the 2006 Annual Meeting of Stockholders is incorporated herein by reference.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2005 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:
(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.
30
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 | | 21,000 | | $ | 62.55 | | 129,000 | |
Equity compensation plans not approved by security holders | | 0 | | 0 | | 0 | |
Total | | 21,000 | | $ | 62.55 | | 129,000 | |
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption “Certain Relationships and Related Transactions” of the Registrant’s Proxy Statement, relating to the 2006 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information set forth under the caption “Independent Public Accountants” of the Registrant’s Proxy Statement relating to the 2006 Annual Meeting of Shareholders is incorporated herein by reference.
31
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by reference as set forth under Item 8, Part II of this report on Form 10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The following exhibits are filed as part of this report:
3(i) | | Certificate of Incorporation of First Ottawa Bancshares, Inc. |
| | |
3(ii) | | By-Laws of First Ottawa Bancshares, Inc. |
| | |
10.1 | | Employment Agreement for J. Brown* |
| | |
10.2 | | Executive Officer Bonus Plan* |
| | |
10.3 | | Employment Agreement for Donald Harris* |
| | |
10.4 | | Stock Incentive Plan |
| | |
10.5 | | Summary of Director Fees |
| | |
10.6 | | Form of Supplemental Nonqualified Retirement Agreement |
| | |
10.7 | | Employment Agreement for Patrick Fayhee* |
| | |
10.8 | | Employment Agreement for Steven Gonzalo* |
| | |
10.9 | | Employment Agreement for Vincent Easi* |
| | |
13.1 | | Annual Report to Stockholders |
| | |
21.1 | | Subsidiaries |
| | |
31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
| | |
31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
| | |
32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2 | | Certification of Chief 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.
32
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to 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 28, 2006 |
| | | | |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | |
/s/ Joachim Brown | | | Director and President/ | | March 28, 2006 |
Joachim Brown | | Chief Executive Officer | | |
| | | | |
/s/ Bradley J. Armstrong | | | Director | | March 28, 2006 |
Bradley J. Armstrong | | | | |
| | | | |
/s/ John L. Cantlin | | | Director | | March 28, 2006 |
John L. Cantlin | | | | |
| | | | |
/s/ Patty P. Godfrey | | | Director | | March 28, 2006 |
Patty P. Godfrey | | | | |
| | | | |
/s/ Thomas E. Haeberle | | | Director | | March 28, 2006 |
Thomas E. Haeberle | | | | |
| | | | |
/s/ Donald J. Harris | | | Director and Executive | | March 28, 2006 |
Donald J. Harris | | Vice President, Chief Operating | | |
| | Officer | | |
| | | | | | | |
33
/s/ Thomas P. Rooney | | | Director | | March 28, 2006 |
Thomas P. Rooney | | | | |
| | | | |
/s/ William J. Walsh | | | Director | | March 28, 2006 |
William J. Walsh | | | | |
| | | | | | |
34
EXHIBIT INDEX
Exhibit
Number | | Description | | Incorporated
by Reference to | | Attached
Hereto |
3(i) | | Certificate of Incorporation of First Ottawa Bancshares, Inc. (as amended) | | Form 10K for the year ended 12/31/2002 | | |
| | | | | | |
3(ii) | | By-Laws of First Ottawa Bancshares, Inc. | | Form 10K for the year ended 12/31/2003 | | |
| | | | | | |
10.1 | | Employment Agreement for J. Brown | | Form 10K for the year ended 12/31/2002 | | |
| | | | | | |
10.2 | | Executive Officer Bonus Plan | | Form 10K for the year ended 12/31/2002 | | |
| | | | | | |
10.3 | | Employment Agreement for Donald Harris | | Form 8-K filed on June 10, 2005 | | |
| | | | | | |
10.4 | | Stock Incentive Plan | | Form S-8 dated 8/1/03 | | |
| | | | | | |
10.5 | | Summary of Director Fees | | Form 10K for the year ended 12/31/2004 | | |
| | | | | | |
10.6 | | Form of Supplemental Nonqualified Retirement Agreement | | Form 10K for the year ended 12/31/2004 | | |
| | | | | | |
10.7 | | Employment Agreement for Patrick Fayhee | | Form 8-K filed on June 10, 2005 | | |
| | | | | | |
10.8 | | Employment Agreement for Steven Gonzalo | | Form 8-K filed on June 10, 2005 | | |
| | | | | | |
10.9 | | Employment Agreement for Vincent Easi | | Form 8-K filed on June 10, 2005 | | |
| | | | | | |
13.1 | | 2005 Annual Report to Stockholders | | | | X |
| | | | | | |
21.1 | | Subsidiaries | | | | X |
| | | | | | |
31.1 | | Certification of Chief Exectutive Officer | | | | X |
| | | | | | |
31.2 | | Certification of Chief Financial Officer | | | | X |
| | | | | | |
32.1 | | Certification of Chief Exectutive Officer | | | | X |
| | | | | | |
32.2 | | Certification of Chief Financial Officer | | | | X |
35
