<PAGE>
- --------------------------------------------------------------------------------
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, 1999
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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
701-705 LASALLE STREET 61350
OTTAWA, ILLINOIS (ZIP Code)
(Address of Principal Executive Offices)
(815) 434-0044
(Registrant Telephone Number,
including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF
THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF
THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to 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 X No
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.
The aggregate market value of the voting shares held by non-affiliates of
the Registrant is $30,439,368 as of March 24, 2000. Solely for the purpose of
this computation, it has been assumed that executive officers and directors of
the Registrant are "affiliates" and that the last price known to management was
a sale of 4,900 shares on March 23, 2000 at $57.00 per share.
663,627 shares of common stock were outstanding as of March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Parts II and IV are incorporated by reference from the
Registrant's 1999 Annual Report to Stockholders; and a portion of Part III is
incorporated by reference from the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 17, 2000.
Except for those portions of the 1999 Annual Report incorporated by
reference, the Annual Report is not deemed filed as part of this Report.
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<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I PAGE NO.
- ------- --------
<S> <C> <C>
Item 1 Business 1
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
- -------
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 19
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk 19
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements on
Accounting and Financial Disclosure 20
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners
and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules and 22
Reports on Form 8-K
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
First Ottawa Bancshares, Inc. ("Bancshares") is a community-based bank
holding company. Bancshares and its wholly-owned subsidiary, First National Bank
of Ottawa (the "Bank"), are together referred to as "the Company." Bancshares
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, 1999, the Company had total assets of $240 million, total deposits
of $184 million, loans and loans held for sale, net of unearned income, of $129
million and total Stockholders' equity of $26 million. For the year ended
December 31, 1999, the Company had interest income of $16 million and net income
of $2.2 million, which amounted to net income per share of $2.87.
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 significantly 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.
1
<PAGE>
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 Ottawa area 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.
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.
Ten 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 Vice Presidents, the Senior Vice President, the Executive Vice
President and the President of the Bank) which approves loans of up to $150,000.
All loans between $150,000 and $500,000 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; and
establishing interest rate and fee guidelines. All loans in excess of $500,000
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 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, including
loans held for sale, totaled $129 million at December 31, 1999, representing 70%
of the Company's total deposits at that date. The Company's loan portfolio at
December 31, 1999 included $60 million for real estate purposes, $53 million for
consumer purposes, and $15 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
2
<PAGE>
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.
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.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans $ 59,560 $ 58,136 $ 57,491 $ 56,766 $ 48,023
Commercial and
agricultural loans 15,222 15,013 12,910 12,581 14,782
Installment loans, net of
unearned income 48,751 41,898 46,776 39,361 31,301
Home equity lines of credit 4,219 3,812 4,286 2,718 -
------------ ------------ ------------ ------------ -------------
Total loans 127,752 118,859 121,463 111,426 94,106
Deferred loan fees (46) (58) (37) (34) (38)
------------ ------------ ------------ ------------ -------------
Loans, net of deferred
loan fees 127,706 118,801 121,426 111,392 94,068
Allowance for loan losses (1,059) (1,029) (800) (779) (667)
------------ ------------ ------------ ------------ -------------
Loans, net $ 126,647 $ 117,772 $ 120,626 $ 110,613 $ 93,401
============ ============ ============ ============ =============
Loans held for sale $ 1,738 $ 563 $ - $ - $ -
============ ============ ============ ============ =============
</TABLE>
3
<PAGE>
For years prior to 1996, the amount of home equity lines of credit are not
separately available but are included with real estate loans.
Maturities (based on contractual terms) of the Company's commercial and
construction loan portfolio at December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
One Year One to Over
or Less Five Years Five Years Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 7,743 $ 5,226 $ 1,752 $ 14,721
Real estate - construction 501 - - 501
----------- ----------- ----------- -----------
Total $ 8,244 $ 5,226 $ 1,752 $ 15,222
=========== =========== =========== ===========
</TABLE>
At December 31, 1999, of the total loans that mature in more than one year,
$77.5 million, or 88.6%, bear interest at fixed rates and $9.9 million, or
11.4%, bear interest at variable rates.
CONSUMER LOANS. Generally, three of the Company's ten lending officers
process consumer installment 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 $53 million at December 31, 1999, or
approximately 41% of the Company's total loan portfolio. Approximately 90% of
the Company's consumer loans are automobile loans, and of these loans,
approximately 81% are made indirectly by the Company through automobile dealers.
The Company's consumer loans are fixed-rate loans with final maturities of five
years or less. At December 31, 1999, the Company had 41 consumer loans totaling
$283,000 that were past due in excess of 90 days. The past due consumer loans
totaled $1.6 million.
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.
4
<PAGE>
Unsecured consumer loans are granted to borrowers based upon satisfactory
income, indebtedness levels, and credit records and experience.
COMMERCIAL, AGRICULTURAL, AND REAL ESTATE LENDING. Six of the Company's ten
lending officers service most of the commercial, agricultural, and real estate
loans. One loan officer principally services commercial loans, two officers
principally service agricultural loans, and three officers principally service
residential mortgage loans. However, because of the Company's flexible lending
practices, any of the loan officers may service loans in the commercial,
agricultural, and real estate areas.
COMMERCIAL AND AGRICULTURAL. At December 31, 1999, the Company's commercial
and agricultural non-real estate loans totaled $15 million or approximately 12%
of the total loan portfolio of the Company. The primary lending area of the
Company is within a five-mile radius of the Company's offices. 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. The fixed rate generally is established by the
Company's Real Estate Department 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 greatly from
monthly, quarterly, semi-annually, and annually. At December 31, 1999, the
Company had eight commercial non-real-estate loans totaling $49,000 past due in
excess of 90 days. There were no past due agricultural non-real-estate loans at
December 31, 1999.
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
residential loans with a small portion in agricultural and commercial real
estate loans. Real estate loans at December 31, 1999 totaled approximately $60
million or approximately 47% 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
5
<PAGE>
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 and 20-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 43% 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 occasionally originates 25-year and 30-year fixed-rate loans
which are sold into the secondary market through Federal Home Loan Mortgage
Corporation ("Freddie Mac"). These loans are underwritten to meet all Freddie
Mac requirements. The Company retains all servicing rights on loans sold into
the secondary market, and at December 31, 1999, mortgage loans serviced for the
secondary market totaled approximately $14.7 million.
At December 31, 1999, the Company had 18 real estate mortgage loans
totaling $1.2 million past due in excess of 90 days.
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, 1999, the Company had 218 loans delinquent for 30 to 90
days in an aggregate principal amount of $3.1 million and representing 2.4% of
the total loan portfolio. At December 31, 1999, the Company had 70 loans
totaling $1.5 million delinquent for more than 90 days.
6
<PAGE>
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 has been 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, 1999, there were four loans totaling $397,000 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.
The nonperforming assets of the Company as of December 31 are indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 397 $ 299 $ 653 $ 465 $ 98
Loans ninety days past due and
still accruing interest 1,543 1,140 349 330 87
Other real estate owned 113 94 43 - -
--------- --------- --------- --------- ---------
Total nonperforming assets $ 2,053 $ 1,533 $ 1,045 $ 795 $ 185
========= ========= ========= ========= =========
Nonperforming loans as a percentage
of total loans, net of unearned
income and deferred loan fees 1.52% 1.21% .83% .71% .20%
Nonperforming assets as a percentage
of total assets .85 .62 .43 .34 .08
Nonperforming loans as a percentage
of the allowance for loan losses 183.19 139.84 125.25 102.10 27.74
</TABLE>
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, 1999, there were no other loans classified as problem loans that were not
included above. At December 31, 1999, there were no other assets classified as
problem assets other than the loans shown above. Management alsomaintains a
loans requiring attention report 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, 1999 was $2,591,332.
ALLOWANCE FOR LOSSES ON LOANS. The Company maintains an allowance for loan
losses, which includes losses relating to particular identified assets, if
appropriate, and an unallocated portion. The allowance for loan losses is
established through a charge to operations at the time loan value, in the
judgment of management, becomes impaired. As noted in the previous table,
nonperforming assets increased by $520,000 in 1999 after increasing by $488,000
during 1998.
7
<PAGE>
Management considered this information along with other portfolio trends in
concluding on the adequacy of the allowance for loan losses at December 31,
1999. The allowance for loan losses is an amount that management believes will
be adequate to absorb losses on existing loans, based upon an analysis of the
loan portfolio, including such factors as prior loan loss experience, economic
conditions affecting the area's economy, regulatory considerations and other
factors which management believes deserve consideration. At December 31, 1999,
the balance in the allowance was $1.1 million, or .83% of gross loans
outstanding. Management has concluded that the allowance for loan losses is
adequate at December 31, 1999.
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, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 1,029 $ 800 $ 779 $ 667 $ 614
Charge-offs
Commercial 121 123 221 20 64
Installment 351 231 341 163 86
--------- --------- --------- --------- ---------
Total charge-offs 472 354 562 183 150
Recoveries
Commercial 21 19 33 39 16
Installment 97 104 70 76 67
--------- --------- --------- --------- ---------
Total recoveries 118 123 103 115 83
--------- --------- --------- --------- ---------
Net charge-offs 354 231 459 68 67
Provision 384 460 480 180 120
--------- --------- --------- --------- ---------
Balance at end of year $ 1,059 $ 1,029 $ 800 $ 779 $ 667
========= ========= ========= ========= =========
Net charge-offs to average
total loans .29% .19% .40% .07% .08%
Allowance for loan losses to
total loans at year-end .83 .87 .66 .70 .71
</TABLE>
8
<PAGE>
The Company's allocation of the allowance for loan losses as of
December 31 is presented below:
<TABLE>
<CAPTION>
-------1999------ -------1998----- -----1997------- -------1996------- -------1995--------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- -------- ------ ------- ------ -------- ------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans $ 175 46.62% $ 184 48.91% $ 192 47.33% $ 135 50.94% $ 166 51.03%
Commercial
and agricultural
loans 458 11.92 371 12.63 240 10.63 318 11.30 208 15.71
Installment loans 328 41.46 333 38.46 342 42.04 248 37.76 191 33.26
Unallocated 98 N/A 141 N/A 26 N/A 78 N/A 102 N/A
------- ------- ------ ------- ------ ------- ------- -------- ------- ----------
Balance at
end of year $ 1,059 100.00% $1,029 100.00% $ 800 100.00% $ 779 100.00% $ 667 100.00%
======= ======= ====== ======= ====== ======== ======= ========= ======= ==========
</TABLE>
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, and equity securities.
Approximately $39 million of the United States government agency notes held at
December 31, 1999 are callable at the option of the issuer, which present
prepayment risk to the Company.
As of December 31, 1999, the Company had approximately $4,840,000 invested in
LaSalle County, Illinois municipal bonds.
9
<PAGE>
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, 1999. The carrying amounts of the portfolio at
December 31, 1999 are found in Note 2 to the financial statements included in
the Annual Report to Stockholders.
<TABLE>
<CAPTION>
Weighted One to Weighted Five Weighted
One Year Average Five Average to Ten Average
or Less Yield Years Yield Years Yield
---------- -------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 3,995 4.94% $ 7,939 5.44% $ - -%
U.S. Government agencies 1,065 6.00 10,213 6.25 28,922 6.44
States and political subdivisions 2,017 6.80 16,351 8.44 7,393 7.99
Mortgage-backed securities and
collateralized obligations (1) 19 8.02 4,219 8.23 814 6.24
Equity securities 193 N/A - - - -
---------- -------- ---------- -------- ----------- -------
Total securities $ 7,289 5.63% $ 38,722 7.20% $ 37,129 6.74%
========== ======== ========== ======== =========== =======
</TABLE>
<TABLE>
<CAPTION>
Over Weighted Weighted
Ten Average Average
Years Yield Total Yield
-------- -------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - -% $ 11,934 5.27%
U.S. Government agencies - - 40,200 6.38
States and political subdivisions 6,843 7.31 32,604 7.98
Mortgage-backed securities and
collateralized obligations (1) - - 5,052 7.90
Equity securities - - 193 N/A
---------- ------- ---------- --------
Total securities $ 6,843 7.31% $ 89,983 6.89%
========== ======= ========== ========
</TABLE>
(1) Mortgage-backed securities reflect the contractual maturity of the related
instrument.
10
<PAGE>
DEPOSITS
The principal deposit services offered by the Company are 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.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
Percent Percent Percent
Average of Average of Average of
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing
demand
deposits $ 20,686 10.8% -% $ 20,533 10.6% -% $ 19,433 10.2% -%
Interest-bearing
demand deposits 41,941 21.8 2.58 37,554 19.4 2.53 35,357 18.5 2.30
Savings accounts 19,710 10.3 2.47 19,594 10.1 2.52 20,413 10.7 2.51
Time deposits
accounts 109,682 57.1 5.41 115,824 59.9 5.66 115,838 60.6 5.79
---------- ------- -------- ---------- ------- ------ ---------- ------ -------
$ 192,019 100.0% 4.38% $ 193,505 100.0% 4.62% $ 191,041 100.0% 4.68%
========== ======= ======== ========== ======= ======= ========== ====== =======
</TABLE>
The distribution of the major components of deposits as of December
31, 1999 and 1998 is summarized in the balance sheets included in the 1999
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, 1999:
<TABLE>
<CAPTION>
Balance Percentage
------- ----------
<S> <C> <C>
Maturity
Three months or less $ 11,935 51.7%
Over three months to six months 2,343 10.2
Over six months to one year 3,190 13.8
Over one year 5,605 24.3
----------- -------
Total $ 23,073 100.0%
=========== =======
</TABLE>
11
<PAGE>
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. Physical control is
maintained for all securities sold under repurchase agreements. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at December 31 $ 18,665 $ 15,046 $ 8,209
Weighted average interest rate
during the year 4.51% 4.88% 4.66%
Weighted average interest rate at the
end of the year
Maximum month-end balance $ 18,665 $ 15,046 $ 9,059
Average balance for the year 11,690 11,000 7,034
</TABLE>
TRUST
The Company's trust department primarily services LaSalle County and
surrounding counties. At December 31, 1999, the trust department had 324 trust
accounts under management, 283 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 $55.1 million at December 31, 1999, of which $45.5 million was
in discretionary accounts.
The Company, in conjunction with its trust department, also provides
farm management services. At December 31, 1999, the department managed 50 farms.
The department manages or directs approximately 9,000 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. There are approximately 15 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.
REGULATION AND SUPERVISION. Banking is a complex, highly regulated
industry. The primary goals of the bank regulatory scheme are to maintain a safe
and sound banking system and to facilitate the conduct of monetary policy. In
furtherance of those goals, Congress has created several largely autonomous
regulatory agencies and enacted much legislation that governs banks, bank
holding companies, and the banking industry. Descriptions of and references to
the statutes and regulations below are brief summaries and do not purport to be
complete. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.
12
<PAGE>
THE COMPANY
As a bank holding company under the BHC Act, the Company is registered
with, and is subject to, regulation by the Federal Reserve. Among other things,
applicable statutes and regulations require the Company to file annual and other
reports with and furnish information to the Federal Reserve, which may make
inspections of the Company.
The BHC Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve to acquire more than 5 percent of the voting
stock or substantially all the assets of any bank or bank holding company. The
Company currently has no formal agreement or commitments about any such
transaction. In addition, the BHC Act restricts the Bank's extension of credit
to the Company. The BHC Act also provides that, with certain exceptions, a bank
holding company may not (i) engage in any activities other than those of banking
or managing or controlling banks and other authorized subsidiaries or (ii) own
or control more than 5 percent of the voting shares of any company that is not a
bank, including any foreign company. A bank holding company is permitted,
however, to acquire shares of any company, the activities of which the Federal
Reserve, after due notice and opportunity for hearing, has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The Federal Reserve's regulations state specific activities
that are permissible under that exception. The Company does not currently have
any agreements or commitments to engage in any nonbanking activities.
A bank holding company may also acquire shares of a company which
furnishes or performs services for a bank holding company and acquire shares of
the kinds and in the amounts eligible for investment by national banking
associations. The Board of Directors of the Company at this time has no plans
for these investments.
THE BANK
The Bank is subject to various requirements and restrictions under
federal and state laws, and to regulation, supervision, and regular examination
by the Comptroller. The Bank is subject to the Comptroller's power to enforce
compliance with applicable banking statutes and regulations. These requirements
and restrictions include requirements to maintain reserves against deposits,
restrictions on the nature and amount of loans and the interest charged thereon,
and restrictions relating to investments and other activities of the Bank. In
1999, President Clinton signed the Gramm-Leach-Bliley Act which makes
substantial changes in the permitted relationships between banks, securities
firms, insurance companies and their holding companies. The statute is too new
to be able to fully evaluate its effects on the Company and the Bank. However,
the Company believes most of the direct effects of the statute will be minimal
because it primarily affects the operations of much larger institutions.
DIVIDENDS. The Bank may generally pay dividends on its stock as long as
their payment complies with applicable law and regulations. A national bank may
not pay dividends from its stated capital. Additionally, if losses have been
sustained at any time by a national bank equal to or exceeding its undivided
profits then on hand, it can pay no dividend, and all dividends must be paid out
of net profits then on hand, after deducting expenses, including losses and
provisions for loan losses. The payment of dividends out of net profits of a
national
13
<PAGE>
bank is further limited by a provision of the National Bank Act that prohibits
it from declaring a dividend on its shares of its stock until 10 percent of its
net profits are transferred to the surplus each time dividends are declared,
unless the transfer would increase the bank's surplus to an amount greater than
its capital. In addition, the prior approval of the Comptroller is required if
the total of all dividends declared by a national bank in any calendar year
exceeds the total of its net profits for that year combined with its net profits
for the two preceding years, less any required transfers to surplus or to funds
to retire any preferred stock. Additionally, under 12 U.S.C. ss.1818, the
Comptroller has the right to prohibit the payment of dividends by a national
bank if the payment is deemed to be an unsafe and unsound banking practice.
TRANSACTIONS WITH AFFILIATES. The Federal Reserve Act, as amended by
the Competitive Equality Banking Act of 1987, prohibits the Bank from engaging
in specified transactions (including, for example, loans) with certain
affiliates unless the terms and conditions of the transactions are substantially
the same or at least as favorable to the Bank as those prevailing at the time
for comparable transactions with or involving other non-affiliated entities. In
the absence of comparable transactions, any transaction between a bank and its
affiliates must be on terms and under circumstances, including credit standards,
that in good faith would be offered or would apply to non-affiliated companies.
In addition, certain transactions, referred to as "covered transactions,"
between the Bank and its affiliates may not exceed 10 percent of the Bank's
capital and surplus per affiliate and an aggregate of 20 percent of its capital
and surplus for covered transactions with all affiliates. Certain transactions
with affiliates, such as loans, also must be secured by collateral of specific
types and amounts. Finally, the Bank may not purchase low-quality assets from an
affiliate. The Company is an affiliate of the Bank.
LOANS TO INSIDERS. Federal law also constrains the types and amounts of
loans that any bank may make to its executive officers, directors, and principal
shareholders. Among other things, the loans must be approved by the Bank's Board
of Directors in advance and must be on terms and conditions as favorable to the
Bank as those available to unrelated persons.
REGULATION OF LENDING ACTIVITIES. Loans made by the Bank are also
subject to numerous federal and state laws and regulations, including
truth-in-lending statutes, the Federal Consumer Credit Protection Act, the Equal
Credit Opportunity Act, the Real Estate Settlement Procedures Act, and
adjustable rate mortgage disclosure requirements. Remedies to the borrower and
penalties to the Bank are provided for the Bank's failure to comply with these
laws and regulations, whose scope and requirements have expanded significantly
in recent years.
GOVERNMENTAL MONETARY POLICIES. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the Federal Reserve. Changes in the discount rate on member bank
borrowings, control of borrowings, control of borrowings at the "discount
window," open market operations, the imposition of and changes in reserve
requirements against member banks, deposits and assets of foreign branches, the
imposition of and changes in reserve requirements against certain borrowings by
banks and their affiliates, and the limits on interest rates which member banks
may pay on time and savings deposits are some of the instruments of monetary
policy available to the Federal Reserve. Those policies influence significantly
the overall growth of bank loans, investments,
14
<PAGE>
deposits, and interest rates charged on loans or paid on time and savings
deposits. Any future monetary policies and their effect on the Bank's business
and earnings, therefore, cannot be predicted accurately.
CAPITAL ADEQUACY. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the Comptroller to
establish minimum levels of capital for national banks and to require national
banks to achieve and maintain adequate capital. Pursuant to this authority, the
Comptroller has promulgated capital-adequacy regulations to which all national
banks, such as the Bank, are subject.
The Comptroller's capital-adequacy regulations are based upon a
risk-based capital determination, whereby a bank's capital adequacy is
determined in light of the risk, both on- and off-balance sheet, in the bank's
assets. Different categories of assets are assigned risk weightings and, based
thereon, are counted at a percentage (from 0 to 100 percent) of their book
value. The regulations divide capital between Tier 1 capital, or core capital,
and Tier 2 capital, or supplemental capital. Tier I capital consists primarily
of common stock, noncumulative perpetual preferred stock, related surplus, and
minority interests in consolidated subsidiaries. Goodwill and certain other
intangibles are excluded from Tier 1 capital. Tier 2 capital consists of varying
percentages of the allowance for loan and lease losses, all other types of
preferred stock not included in Tier 1 capital, hybrid capital instruments, and
term-subordinated debt. Investments in and loans to unconsolidated banking and
finance subsidiaries that constitute capital of those subsidiaries are excluded
from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50 percent of qualifying
total capital.
Every national bank must maintain a certain ratio of Tier 1 capital to
risk-weighted assets (a "Core Capital Ratio") and a ratio of Tier 1 plus Tier 2
capital to risk-weighted assets (a "Risk-Based Capital Ratio"). All banks must
achieve and maintain a minimum Core Capital Ratio of at least 4 percent and a
minimum Risk-Based Capital Ratio of 8 percent.
As of December 31, 1999, the Bank's Core Capital Ratio was 20.8
percent, and its Risk-Based Capital Ratio was 20.1 percent. In addition,
national banks generally must achieve and maintain a Leverage Ratio of at least
4 percent. As of December 31, 1999, the Bank's Leverage Ratio was 11.7 percent.
THE FDIC IMPROVEMENT ACT. The FDIC Improvement Act of 1991, enacted on
December 19, 1991 ("FDICIA"), makes many reforms addressing the safety and
soundness of the deposit insurance system, supervision of domestic and foreign
depository institutions, and improvement of accounting standards. This statute
also limits deposit insurance coverage, implements changes in consumer
protection laws, and calls for least-cost resolution and prompt regulatory
action for troubled institutions.
FDICIA requires every national bank with total assets over $500,000,000
to have an annual independent audit of its financial statements by a certified
public accountant to verify that the financial statements are presented in
accordance with generally accepted accounting principles and comply with other
disclosure requirements prescribed by the Comptroller.
15
<PAGE>
FDICIA also places certain restrictions on activities of banks
depending on their level of capital. FDICIA divides banks into five different
categories, depending on their level of capital.
Under regulations adopted by the Comptroller, a bank is "well
capitalized" if it has a total Risk-Based Capital Ratio of 10 percent or more, a
Core Capital Ratio of 6 percent or more, and a Leverage Ratio of 5 percent or
more, and the bank is not subject to an order or capital directive to meet and
maintain a certain capital level. A bank is "adequately capitalized" if it has a
total Risk- Based Capital Ratio of 8 percent or more, a Core Capital Ratio of 4
percent or more, and a Leverage Ratio of 4 percent or more (unless it receives
the highest composite rating at its most recent examination and is not
experiencing or anticipating significant growth, in which instance it must
maintain a Leverage Ratio of 3 percent or more). A bank is "undercapitalized" if
it has a total Risk-Based Capital Ratio of less than 8 percent, a Core Capital
Ratio of less than 4 percent, or a Leverage Ratio of less than 4 percent. A bank
is "significantly undercapitalized" if it has a Risk-Based Capital Ratio of less
than 6 percent, a Core Capital Ratio of less than 3 percent, and a Leverage
Ratio of less than 3 percent. A bank is "critically undercapitalized" if it has
a Leverage Ratio of 2 percent or less. In addition, the Comptroller may
downgrade a bank's classification (but not to "critically undercapitalized")
based on other considerations even if the Bank meets the capital guidelines.
According to these guidelines, the Bank was classified as "well capitalized" as
of December 31, 1999.
A bank's capital classification affects the frequency of its
examinations, impacts its ability to engage in certain activities, and affects
the deposit insurance premiums it pays. Under FDICIA, the Comptroller must
conduct a full-scope, on-site examination of every national bank at least once
every 12 months. An exception to this rule is made, however, for national banks
(i) with assets of less than $100,000,000, (ii) categorized as "well
capitalized," (iii) found to be well managed with an outstanding composite
rating, and (iv) not subject to a change in control during the last 12 months;
these banks will be examined by the Comptroller once every 18 months.
Under FDICIA, banks may be restricted in their ability to accept
brokered deposits, depending on their capital classification. "Well-capitalized"
banks are permitted to accept brokered deposits, but all banks that are not well
capitalized cannot accept those deposits. The FDIC may, on a case-by-case basis,
permit banks that are adequately capitalized to accept brokered deposits if it
determines that the deposits would not constitute an unsafe or unsound practice
for the bank.
In addition, under FDICIA, the FDIC can assess insurance premiums on a
bank's deposits at a variable rate depending on the probability that the deposit
insurance fund will incur a loss for the bank. (Under prior law, the deposit
insurance assessment was a flat rate, regardless of the likelihood of loss.) In
this regard, the FDIC has issued regulations for a transitional risk-based
deposit assessment that determines the deposit insurance assessment rates on the
basis of the bank's capital classification and supervisory evaluations. Each of
these categories has three subcategories, resulting in nine assessment risk
classifications. The three subcategories about capital are "well capitalized,"
"adequately capitalized," and "less than adequately capitalized" (includes
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" banks). The three subcategories for supervisory concerns are
16
<PAGE>
"healthy," "supervisory concern," and "substantial supervisory concern." A bank
is deemed "healthy" if it is financially sound with only a few minor weaknesses.
A bank is deemed subject to "supervisory concern" if it has weaknesses that, if
not corrected, could result in significant deterioration of the bank and
increased risk to the Bank Insurance Fund. A bank is deemed subject to
"substantial supervisory concern" if it poses a substantial probability of loss
to the Bank Insurance Fund of the FDIC (the "BIF").
The federal banking agencies have established guidelines, effective
August 9, 1995, which prescribe standards for depository institutions relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
management compensation. The agencies may require an institution which fails to
meet these standards to submit a compliance plan. The agencies are also
currently proposing standards for asset quality and earnings. The Company cannot
predict what effect these guidelines will have on the Bank.
Management of the Company and the Bank cannot predict any other
legislation or regulations and their effects.
THE FOREGOING SUMMARIZES SOME OF THE RELEVANT LAWS, RULES, AND
REGULATIONS GOVERNING NATIONAL BANKS AND BANK HOLDING COMPANIES, BUT DOES NOT
PURPORT TO BE A COMPLETE SUMMARY OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS
GOVERNING BANKS AND BANK HOLDING COMPANIES.
EMPLOYEES. As of December 31, 1999, the Company had 96 employees,
consisting of 84 full-time employees and 12 part-time employees. None of the
employees are subject to a collective bargaining agreement, and management
believes it has excellent relations with its staff.
TENDER OFFER. On December 6, 1999, the Company commenced a tender
offer ("the Offer") to acquire up to 87,719 common shares at $57 per share. The
Offer expired on January 20, 2000 and the Company purchased 86,373 shares,
representing approximately 11.51% of its outstanding common shares for an
aggregate purchase price of $4,923,261. On March 6, 2000, the Company commenced
a tender offer (the "Odd-lot Officer") to acquire up to 1,346 common shares at
$57.00 per share from stockholders who own fewer than 100 shares. The Odd-lot
Offer is scheduled to expire on March 30, 2000. As of March 24, 2000, 1,400
shares had been tendered pursuant to the Odd-lot Offer.
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 three branch office
facilities. A limited service branch, which contains eight drive-in lanes, is
located at 300 West Madison Street, Ottawa, Illinois, and two full-service
17
<PAGE>
branches are located at 601 State Street, Ottawa, Illinois and 2771 North
Columbus Street, Ottawa, Illinois.
The Company believes that its facilities are adequate to serve its
present needs. 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, 1999.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See page 32 of the 1999 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 Data" on page 1 of the 1999 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 10 of the 1999 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 8 of the 1999 Annual Report
to Stockholders (filed as Exhibit 13.1 of this report) is incorporated herein by
reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and the
Independent Auditors' Report as set forth on pages 11 through 31 of the 1999
Annual Report to Stockholders (filed as Exhibit 13.1 of this report) are
incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report to
Stockholders Page
<S> <C>
Independent Auditors' Report 11
Consolidated Balance Sheets as of December 31, 1999 and 1998 12
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 13
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997 14
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 15
Notes to the Consolidated Financial Statements 16
Parent Company Only Financial Statements 30
</TABLE>
The portions of the 1999 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 ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AT THE REGISTRANT.
The information set forth under the captions "Information Regarding
Nominees and Executive Officers" and "Section 16 Beneficial Ownership Reporting
Compliance" of the Registrant's Proxy Statement, relating to the May 17, 2000
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 May 17, 2000 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" of the Registrant's Proxy Statement,
relating to the May 17, 2000 Annual Meeting of Stockholders is incorporated
herein by reference.
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
May 17, 2000 Annual Meeting of Stockholders is incorporated herein by reference.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
All financial statements of the Registrant are incorporated herein by
reference as set forth under Item 8, Part II of this report on Form
10-K.
2. FINANCIAL STATEMENT SCHEDULES Not applicable.
3. EXHIBITS (Numbered in accordance with Item 601 of Regulation S-K)
The following exhibits are filed as part of this report:
2.1 Agreement to Merge dated September 23, 1999 between Ottawa
Interim Bank, National Association (In Organization) and
The First National Bank of Ottawa
3(i) Certificate of Incorporation of First Ottawa Bancshares, Inc.
3(ii) By-Laws of First Ottawa Bancshares, Inc.
*10.1 Employment Agreement dated as of October 27, 1999 for J. Brown
13.1 1999 Annual Report to Stockholders
21.1 Subsidiaries
24.1 Power of Attorney
* Indicates management contract or compensation plan or arrangement.
22
<PAGE>
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.
(Registrant)
Date: March 30, 2000 By: /s/ Joachim Brown
-----------------
Joachim Brown
President/Chief
Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Joachim Brown* Director and President/Chief March 30, 2000
Executive Officer (Principal
Executive and Financial Officer)
Bradley J. Armstrong* Director March 30, 2000
John L. Cantlin* Director March 30, 2000
Eugene P. Daugherity* Director March 30, 2000
Thomas F. Godfrey* Director March 30, 2000
Thomas E. Haeberle* Director March 30, 2000
Howard E. Jameson* Director March 30, 2000
Erika S. Kuiper* Director March 30, 2000
Thomas P. Rooney* Director March 30, 2000
William J. Walsh* Director March 30, 2000
Donald J. Harris* Executive Vice President, March 30, 2000
Cashier and Trust Officer
(Principal Accounting Officer)
*By: /s/ Joachim Brown Individually and as March 30, 2000
-----------------------
Joachim Brown Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE*
------ ----------- --------------
<S> <C> <C>
2.1 Agreement to Merge dated September 23, 1999 between
Ottawa Interim Bank, National Association (In Organization)
and The First National Bank of Ottawa
3(i) Certificate of Incorporation of First Ottawa Bancshares,
Inc.
3(ii) By-Laws of First Ottawa Bancshares, Inc.
10.1 Employment Agreement dated as of October 27, 1999 for J. Brown
13.1 1999 Annual Report to Stockholders
21.1 Subsidiaries
24.1 Power of Attorney
</TABLE>
E-1
<PAGE>
Exhibit 2.1
AGREEMENT TO MERGE BETWEEN
OTTAWA INTERIM BANK, NATIONAL ASSOCIATION
(IN ORGANIZATION) AND THE FIRST NATIOAL BANK OF OTTAWA
This agreement made between OTTAWA INTERIM BANK, NATIONAL ASSOCIATION
(IN ORGANIZATION) (hereinafter referred to as "Interim"), a banking association
organized under the laws of the United States, being located at 701 LaSalle
Street, City of Ottawa, County of LaSalle, in the state of Illinois, and THE
FIRST NATIONAL BANK OF OTTAWA (hereinafter referred to as "Ottawa"), a banking
association organized under the laws of the United States, being located at 701
LaSalle Street, City of Ottawa, County of LaSalle, in the state of Illinois,
each acting pursuant to a resolution of its board of directors, adopted by the
vote of a majority of its directors, pursuant to the authority given by and in
accordance with the provisions of the Act of November 7, 1918, as amended (12
U.S.C. 215(a)),
SECTION 1.
THE FIRST NATIONAL BANK OF OTTAWA shall be merged into OTTAWA INTERIM
BANK, NATIONAL ASSOCIATION (IN ORGANIZATION) under the charter of the latter.
SECTION 2.
The name of the resulting association (hereinafter referred to as the
"Association") shall be THE FIRST NATIONAL BANK OF OTTAWA.
SECTION 3.
The business of the Association shall be that of a national banking
association. This business shall be conducted by the Association at its main
office which shall be located at 701 LaSalle Street, Ottawa, Illinois, and at
its legally established branches.
SECTION 4.
The amount of capital stock of the Association shall be $750,000, and
at the time the merger shall become effective, the Association shall have a
surplus of $4,000,000, and undivided profits, including capital reserves, which
when combined with the capital and surplus will be equal to the combined capital
structures of the merging banks as of the effective time of the merger.
SECTION 5.
Of the capital stock of Ottawa, the holders of the presently
outstanding 750,000 shares of capital stock shall be entitled to receive 750,000
shares of capital stock of First Ottawa Bancshares, Inc. on a one for one basis.
<PAGE>
SECTION 6.
The present board of directors of Ottawa shall continue to serve as the
board of directors of the Association until the next annual meeting or until
such time as their successors have been elected and have qualified.
SECTION 7.
Effective as of the time this merger shall become effective as
specified in the merger approval to be issued by the Comptroller of the Currency
of the United States, the articles of association of the resulting bank shall
read in their entirety as provided in Exhibit A hereto.
SECTION 8.
This agreement may be terminated by the unilateral action of the board
of directors of either merging bank at any time whether prior to or after the
approval of stockholders.
SECTION 9.
The merger shall become effective at the time specified in a merger
approval to be issued by the Comptroller of the Currency of the United States.
SECTION 10.
All assets as they exist at the effective time of the merger shall pass
to and vest in the Association without any conveyance or other transfer. The
Association shall be responsible for all of the liabilities of every kind and
description, including liabilities arising from the operation of a trust
department, of each of the merging banks existing as of the effective time of
the merger.
SECTION 11.
Stockholders of Ottawa who perfected their dissenter's rights shall
have the appraisal rights of dissenters as prescribed by law.
2
<PAGE>
WITNESS, the signatures and seals of said merging banks this 23rd day
of September, 1999, each set by an officer and attested to by another officer,
pursuant to a resolution of its board of directors, acting by a majority.
OTTAWA INTERIM BANK, NATIONAL ASSOCIATION
(IN ORGANIZATION)
By: /s/ Donald J. Harris
------------------------------------
Name: Donald J. Harris
Title: President
ATTEST:
By: /s/ Cheryl D. Gage
------------------------------------
Name: Cheryl D. Gage
Title: Secretary
(Seal of Bank)
THE FIRST NATIONAL BANK OF OTTAWA
By: /s/ Donald J. Harris
------------------------------------
Name: Donald J. Harris
Title: Interim Chief Executive Officer
ATTEST:
By: /s/ Cheryl D. Gage
------------------------------------
Name: Cheryl D. Gage
Title: Secretary
(Seal of Bank)
3
<PAGE>
State of Illinois )
) ss:
County of LaSalle )
On this 23rd day of September,1999, before me, a notary public for this
state and county, personally came Donald J. Harris, as President, and Cheryl D.
Gage as Secretary, of OTTAWA INTERIM BANK, NATIONAL ASSOCIATION (IN
ORGANIZATION), and each in his/her capacity acknowledged this instrument to be
the act and deed of the association and the seal affixed to it to be its seal.
WITNESS my official seal and signature this day and year.
/s/ Judy Reynolds
-----------------------------------
(Seal of Notary) Notary Public, LaSalle County
Commission Expires: Feb. 3, 2003
State of Illinois )
) ss:
County of LaSalle )
On this 23rd day of September,1999, before me, a notary public for this
state and county, personally came Donald J. Harris, as Interim Chief Executive
Officer, and Cheryl D. Gage as Secretary, of THE FIRST NATIONAL BANK OF OTTAWA,
and each in his/her capacity acknowledged this instrument to be the act and deed
of the association and the seal affixed to it to be its seal.
WITNESS my official seal and signature this day and year.
/s/ Judy Reynolds
-----------------------------------
(Seal of Notary) Notary Public, LaSalle County
Commission Expires: Feb. 3, 2003
4
<PAGE>
Exhibit 3(i)
CERTIFICATE OF INCORPORATION
OF
FIRST OTTAWA BANCSHARES, INC.
FIRST: The name of the corporation is First Ottawa Bancshares, Inc.
(hereinafter the "Corporation").
SECOND: The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation is
authorized to issue is Seven Hundred Fifty Thousand (750,000) shares at $1.00
par value.
FIFTH: The name and address of the Incorporator is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- --------
<S> <C>
Timothy W. Smith Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601-9703.
</TABLE>
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The number of directors of the Corporation shall be such
as
<PAGE>
from time to time shall be fixed by, or in the manner provided in, the
by-laws. Election of directors shall be by cumulative voting.
(2) The Board of Directors shall have the power to alter,
amend, change, add to or repeal the by-laws of the Corporation in the
manner provided in the by-laws; to fix and vary the amount to be
reserved for any proper purpose; to authorize and cause to be executed
mortgages and liens upon all or any part of the property of the
Corporation; to determine the use and disposition of any surplus or net
profits; and to fix the times for the declaration and payment of
dividends.
(3) The directors in their discretion may submit any contract
or act for approval or ratification at any annual meeting of the
stockholders or at any meeting of the stockholders called for the
purpose of considering any such act or contract, and any contract or
act that shall be approved or be ratified by the vote of the holders of
a majority of the stock of the Corporation which is represented in
person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in
person or by proxy) shall be as valid and as binding upon the
Corporation and upon all the stockholders as though it had been
approved or ratified by every stockholder of the Corporation, whether
or not the contract or act would otherwise be open to legal attack
because of directors' interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore or
by
2
<PAGE>
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation; subject, nevertheless,
to the provisions of the statutes of Delaware, of this Certificate, and
to any by-laws of the Corporation from time to time made; provided,
however, that no by-laws so made shall invalidate any prior act of the
directors which would have been valid if such by-law had not been made.
SEVENTH: The Corporation shall, to the full extent permitted by Section
145 of the Delaware General Corporation Law, as amended from time to time,
indemnify all persons whom it may indemnify pursuant thereto.
EIGHTH: No director of this Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article EIGHTH
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derives an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended to further eliminate or limit the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended. No amendment to or
repeal of this Article EIGHTH shall apply to or have any
3
<PAGE>
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors, or any class of them and/or between this
Corporation and its stockholders, or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this
4
<PAGE>
reserved power.
I, the undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this certificate, hereby declaring and certifying
that this is my actual deed and that the facts stated herein are true, and
accordingly have hereunto set my hand this 28th day of July, 1999.
/s/ Timothy W. Smith
Timothy W. Smith
Sole Incorporator
5
<PAGE>
Exhibit 3(ii)
BY-LAWS
OF
FIRST OTTAWA BANCSHARES, INC.
AS AMENDED MARCH 8, 2000
ARTICLE I. NAME
Section 1. The name of this Corporation is "First Ottawa Bancshares,
Inc.", organized under the laws of Delaware.
ARTICLE II. SEAL
Section 1. The seal of this Corporation shall be as follows:
First Ottawa Bancshares, Inc.
Ottawa, Illinois [IMPRESSION OF SEAL]
ARTICLE III SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the shareholders of
the Corporation for the election of a Board of Directors and the transaction of
such other business, as in the judgment of the shareholders may be necessary for
the welfare of the Corporation, shall be held at the office of the Corporation
in the City of Ottawa, Illinois, on the third Wednesday of May in each year at
three o'clock p.m. If from any cause an election of directors shall not be made
at the time appointed, the Corporation shall cause the election to be held on
any subsequent day, thirty days' notice thereof to be given my publication in a
newspaper published in Ottawa, Illinois. All elections shall be by ballot and
the name and number of shares of each shareholder shall be endorsed on his or
her ballot. Voting may be by person or by proxy. Any person representing two or
more shareholders by proxy may cast one ballot for all the shares of stock which
the said proxy represents, indicating on the ballot which shall be signed by the
proxy, the total number of shares of stock so voted. No proxy shall be valid
after eleven months from the date of its execution except where the stock is
pledged as a security for a debt to the person holding the proxy. In deciding
all questions at meetings of shareholders, each shareholder shall be entitled to
one vote for each share held, and in case of election of directors, each
shareholder shall have the right to vote the number of shares owned by him or
her for as many persons as there are directors to be elected or to cumulate such
shares and give one candidate as many votes as the number of directors
multiplied by the number of his shares shall equal, or to distribute them on the
same principle among as many candidates as he shall think fit. No shareholder
whose liability to any subsidiary of the Corporation is past due and unpaid
shall be allowed to vote at any meeting of the shareholders.
<PAGE>
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President, or a Vice President, or by the Board of Directors or
by one or more of the shareholders holding an aggregate of not less than
one-fifth of the stock outstanding.
Section 3. NOTICES. A written or printed notice stating the place, day
and hour of the annual and of all special meetings shall be mailed by the
Secretary of the Board or a designated officer at least ten days before such
meeting to each shareholder at his or her last known Post Office address as the
same appears upon the books of the Corporation and in case of special meetings
the notice shall state the purpose for which the meeting is called.
Section 4. ORGANIZATION. The President shall act as Chairman and a duly
appointed person as Secretary of all meetings of the shareholders. In the
absence of the President, a Vice President shall act as Chairman and in the
absence of the duly appointed Secretary, a Vice President or any director
designated by the Board shall act as secretary.
Section 5. LIST OF SHAREHOLDERS. The duly appointed Secretary shall
present to the meeting a complete alphabetical list of the shareholders entitled
to vote with the number of shares held by each, and the President and Secretary,
or a designated officer, shall cause to be kept at all times an accurate list of
the full names and residences of all shareholders.
Section 6. JUDGES OF ELECTION. The Board of Directors shall prior to
the annual meeting appoint three shareholders as judges of election. The judges
shall count the ballots and certify in writing to the Secretary or any
designated officer the result thereof. The judges of election shall pass on the
validity of all proxies. No officer or employee of the bank shall act as proxy.
Section 7. QUORUM. A quorum at any annual or special meeting shall
consist of a majority of all outstanding shares.
Section 8. VOTING BY EXECUTORS, ETC. Each executor, administrator,
conservator, guardian, receiver or trustee may vote the stock in his hands as
such at all meetings.
ARTICLE IV. BOARD OF DIRECTORS
Section 1. NUMBER AND TERM OF OFFICE. The Board of Directors shall
consist of eleven directors, to be elected annually by the shareholders at the
annual meeting described in Article III Section 1, each of whom shall serve in
that capacity until the subsequent annual meeting.
Section 2. QUALIFICATIONS. No person shall be elected a director
unless and until he or she has purchased and fully paid for not less than 1,000
shares of the common stock of the company.
Section 3. PROCEDURE FOR NOMINATION. Not less than 20 days prior to the
annual meeting of shareholders, the Board of Directors shall nominate a slate of
candidates including one nominee for each available seat and shall notify the
shareholders of the slate of nominees with the proxy material submitted prior to
the annual meeting.
-2-
<PAGE>
Other nominations of qualified directors may be made by an
shareholders so long as they are received by the Secretary of the Corporation,
in writing, on a form provided for that purpose, not less than ten days prior to
the annual meeting.
Section 4. NOTIFICATION AND OATH. The Secretary or designated officer
shall notify the Directors of their election and they shall thereupon take such
oath of office as is required by law.
Section 5. REGULAR ANNUAL MEETING. The regular annual meeting of the
Board of Directors shall be held immediately after the annual meeting of
shareholders, at which meeting the duly appointed Secretary or designated
officer shall preside until a President is elected.
Section 6. MONTHLY MEETINGS. Regular monthly Meetings of the Board of
Directors shall be held at the Corporation's office on the second Wednesday of
each month at 1:30 p.m., unless some other hour be determined by the Board.
Section 7. SPECIAL MEETING. Special meetings of the Board may be
called by the President or a Vice President on twenty-four hours' notice by mail
or telephone.
Section 8. QUORUM. A majority of the directors elected shall
constitute a quorum for the transaction of business.
Section 9. VACANCIES. A vacancy in the Board may be filled by
appointment by the remaining directors and any director so appointed shall hold
office until the next annual meeting of the shareholders or until his successor
is elected and qualified.
Section 10. CHAIRMAN AND SECRETARY. The Chairman of the Board shall
preside at all meetings and in his absence the President shall preside. To the
absence of both the Chairman and the President, the duly appointed Secretary or
any designated officer shall preside. In the absence of the Secretary, a Vice
President or any one of the directors shall act as Secretary.
Section 11. COMPENSATION. The compensation of the directors as such
shall be fixed by resolution of the Board.
ARTICLE V. OFFICERS
Section 1. APPOINTMENT OF OFFICERS. The Board of Directors shall
appoint a Chairman of the Board, a President, one or more Vice Presidents, one
or more Assistant Vice Presidents, a Secretary and one or more Assistant
Secretaries, one or more Administrative Assistants and certain other officers,
the exact number to be decided upon at the time of appointment. The Board shall
define their duties and shall have power to dismiss such officers or any of them
at pleasure and appoint others to fill their places. All officers shall be
appointed annually by the Board and shall hold office until their successors are
elected and qualified.
Section 2. DUTIES OF THE PRESIDENT. The President shall be the chief
executive officer of the Corporation. He shall have the administrative control
of the affairs of the Corporation under the direction of the Board, except that
the general routine control and administration of the Corporation may be
delegated by him to another on consent of the Board of Directors.
-3-
<PAGE>
In the absence or disability of the President, a Vice President shall
perform the duties appertaining to the office of President. The Vice President
to so act shall be selected by the Board at the necessary time.
Section 2a. DUTIES OF THE CHAIRMAN OF THE BOARD. He shall preside at all
meetings of the Board. He shall keep himself informed of the general operation
of the Corporation and shall keep the Board informed of all matters pertaining
to the welfare of the Corporation.
Section 2b. DUTIES OF THE VICE CHAIRMAN, if applicable. The Vice
Chairman, if applicable, shall preside at all meetings of the Board of Directors
in the absence of the Chairman, and do such things as in his judgment will
promote good public relations for the bank and thereby increase the business
thereof. Also, he shall do such specific things as may be assigned to him from
time to time by the Board of Directors.
Section 2c. DUTIES OF ASST. VICE PRESIDENTS. It shall be the duty of an
Asst. Vice President to assist the President and Vice Presidents when called
upon to do so by either of them or the Board of Directors.
Section 3. DUTIES OF THE VICE PRESIDENT. It shall be the duty of a Vice
President to assist the President when called upon to do so by either him or the
Board of Directors.
Section 4. DUTIES OF THE SECRETARY. The Secretary, under the direction
of the President and the Board of Directors, shall assist in administering the
affairs of the Corporation. An Assistant Secretary shall act in the absence or
disability of the Secretary and shall perform such other duties as may be
imposed upon him by the President, Vice President, Secretary or Board of
Directors, the Assistant Secretary to so act to be selected by the Board at the
necessary time.
Section 4a. DUTIES OF THE ADMINISTRATIVE ASSISTANTS AND ANY OTHER
DESIGNATED OFFICERS. It shall be the duty of an Administrative Assistant or any
other designated officer to assist the President, Vice Presidents and Assistant
Vice Presidents when called upon to do so by either them or the Board of
Directors.
Section 5. BONDS. All officers of the Corporation shall be bonded in
such sums as may be determined from time to time by the Board and the Board
shall determine whether such bonds be personal or Surety Company bonds.
Section 6. VACANCIES. Vacancies may be filled by appointment by the
Board of Directors.
Section 7. OFFICERS. Any person, his/her heirs, executors or
administrators, may be indemnified or reimbursed by the Corporation for
reasonable expenses actually incurred in connection with any action, suit or
proceeding, civil or criminal, to which he/she or they shall be made a party by
reason of his/her being or having been a director, officer, or employee of the
Corporation or of any firm, Corporation or organization which he/she served in
any such capacity at the request of the Corporation: PROVIDED HOWEVER, that no
person shall be so indemnified or reimbursed in relation to any matter in such
action suit or proceeding as to which he/she shall finally be adjudged to have
been guilty of or liable for willful misconduct or
-4-
<PAGE>
criminal acts in the performance of his/her duties to the Corporation. The
foregoing rights of indemnification or reimbursement shall not be exclusive of
other rights to which such person, his/her heirs, executors or administrators
may be entitled as a matter of law.
The Corporation may, upon the affirmative vote of the majority of its Board
of Directors, purchase insurance for the purpose of indemnifying its directors,
officers and other employees to the extent that such indemnification is allowed
in the preceding paragraph.
ARTICLE VI. STOCK
Section 1. ISSUE OF STOCK. The stock of this Corporation shall be
divided into shares of $1.00 each. Certificates of stock shall be numbered
consecutively and registered as they are issued. They shall exhibit the date of
issue, par value of each share, the name of the owner and the number of shares.
Certificates shall be signed by the President or in his absence or disability by
a Vice President and countersigned by the Secretary or in his absence or
disability by any one of the Vice Presidents and shall bear the Corporate seal.
Section 2. TRANSFERS OF STOCK. Transfers of stock shall be registered
in a stock book of the Corporation kept for that purpose by a duly appointed
officer. In case of transfer the original certificate shall be returned marked
cancelled and a new certificate issued. The possession of a Certificate of
Stock, as between the holder and the Corporation, shall not be regarded for
voting purpose, or for the receipt of dividends as vesting ownership of the same
in any person other than the registered owner until transfer is duly made on the
books of the Corporation or due demand for transfer has been made upon, and
refused by, the officers authorized to issue Certificates of Stock. The stock
transfer books may be closed for the meetings of the stockholders and for the
payment of dividends during such periods as from time to time may be fixed by
the Board of Directors and during such periods, no stock shall be transferable.
Section 3. DATES OF RECORD. Dates of Record on the shares of the Common
Stock shall be June 1 and December 1.
ARTICLE VII. AMENDMENTS
Section 1. AMENDMENTS. These by-laws or any or either of them may be
altered, amended or repealed at any regular or special meeting of the Board by
the affirmative vote of at least two-thirds of the directors; provided, that if
amended or repealed at a special meeting, due notice of the proposed action
shall be given in the notice of the meeting.
-5-
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of
October 27, 1999, by and between JOCK BROWN ("Executive") and FIRST NATIONAL
BANK OF OTTAWA, an Illinois banking institution (the "Bank") and FIRST OTTAWA
BANCSHARES, INC. (the "Holding Company") (the Bank and the Holding Company
shall collectively be referred to as the "Corporation," which shall be deemed
to include any affiliate or related entity of the Bank or the Holding Company
whether currently in existence or later created or acquired), the terms of
which are as follows:
1. EMPLOYMENT TERM. Subject to the terms and conditions set forth herein,
including Section 9, the Corporation will employ Executive for a term
commencing on November 1, 1999, and ending on October 31, 2002 (the
"Employment Term").
2. EMPLOYMENT DUTIES. During the Employment Term, Executive will serve as
President and Chief Officer of the Bank and the Holding Company,
subject to the terms of this Agreement and to the direction of the
Board of Directors of the Corporation (the "Board"), and to the
direction of the Chairman of the Board (the "Chairman"). Executive
shall, during the Employment Term, perform such duties commensurate
with his position and title as are reasonable and customary, including,
but not limited to personnel and expense occasions, pricing, loan
approval, etc. and shall, on a full-time basis, serve the Corporation
faithfully, diligently and competently and to the best of his ability.
Executive shall serve as a member of the Board of Directors of the Bank
and the Holding Company (a "Director"), and as an ex-officio member of
each committee of each of such Boards, excepting audit committee.
3. COMPENSATION. In exchange for Executive's services as President and
Chief Executive Officer and as a Director, Executive shall be
compensated as follows:
(a) The Corporation shall pay Executive an annual base salary of
$180,000 (the "Base Salary"), which amount shall be deemed to
be inclusive of any and all fees normally paid to Directors.
The Base Salary shall be adjusted on January 1, 2001 and
annually thereafter to the greater of the previous year's Base
Salary or the average of the third quartile for a president
and chief executive officer of an independent bank for
similarly-situated institutions in Illinois as reported in the
most recent Illinois Banker's Association Annual Survey. The
Base Salary shall be payable in accordance with the
Corporation's ordinary payment practices and shall be subject
to withholding and employment taxes.
(b) The Corporation will establish an employee bonus plan in which
the Executive will participate, for calendar year 2000 and
thereafter. The plan will be similar to a stock appreciation
rights plan, to consist of 150,000
<PAGE>
phantom shares. Employees will receive annual bonuses based on
the appreciation in book value of those shares. Executive
shall be a participant in the "Impact Group" for allocation of
those bonuses, the "Impact Group" shall be entitled an
allocation of 50% of the total, and Executive shall receive
and shall be entitled to 50% of the "Impact Group" allocation.
The Corporation may adjust the allocation, as necessary, to
accommodate non-operating fluctuations in book value.
(c) The Corporation shall arrange for and pay all reasonable
moving expenses for Executive and his wife's relocation to the
Ottawa, Illinois area, which move shall be completed by July
1, 2000.
(d) The Corporation shall make available to Executive, for
purchase within twelve (12) months of the date hereof, up to
4,000 shares of common stock of the Holding Company at fair
market value.
4. BENEFITS.
(a) Executive also shall be entitled to participate in all
coverages, including life, health, and disability insurance
and employee benefit plans and programs as offered from time
to time to executive officers of the Corporation or to
directors. Executive's and his dependents' participation in
any such plan or program shall be subject to the provisions,
rules, regulations and laws applicable thereto.
(b) Executive shall be entitled to paid vacation in accordance
with Corporation policies applicable to its executive
officers, during each twelve (12) month period of the
Employment Term and any extension thereof.
(c) The Corporation shall provide Executive with a monthly
automobile allowance of $600.00 through the Employment Term
and any extension thereof.
(d) The Corporation shall pay reasonable expenses related to
Executive's participation in business and business-related
social events and for such club, community and professional
association dues and expenses that Executive and the Chairman
agree are in the best interests of the Corporation, including,
but not limited to, the CEO Network Program.
(e) The Board shall consider the adoption of an employee stock
option plan in which Executive would be allowed to
participate.
5. RESTRICTIVE COVENANTS. Executive acknowledges and agrees that in the
course of his employment he will learn valuable trade secrets and other
proprietary information, and that the Corporation would be irreparably
damaged if Executive were to use or disclose such information and/or to
provide services to any person or entity in violation of the
restrictions contained in this Agreement. Accordingly,
-2-
<PAGE>
Executive agrees that duing the term of this Agreement and for twelve
(12) months thereafter (the "Restricted Period"), Executive shall not,
directly or indirectly, either for himself or for any other person or
entity:
(a) engage or participate in any activity or business, or assist,
advise or be connected with (including as an employee, owner,
partner, shareholder, officer, directs, advisor, consultant,
agent or otherwise), or permit his name to be used by or
otherwise render services, directly or indirectly, for any
person or entity which directly competes with the Corporation
and which has a facility located within twenty (20) miles of
any facility of the Corporation or within twenty (20) miles of
any facility that the Corporation plans to acquire, merge
with, or establish within the twelve (12)- month period
following Executive's termination of employment, the location
of such future facilities are identified to Executive in
writing by the Corporation within sixty (60) days following
Executive's termination (a "Competitor");
(b) solicit or attempt to solicit business from any customer of
the Corporation with which Executive has had contact during
the six (6) months prior to Executive's termination of
employment with the Corporation for the purpose of having such
customer or other business relation of the Corporation to
cease doing business with the Corporation; or
(c) solicit or attempt to solicit any officer, employee or
agent of the Corporation who is an officer, employee or agent
of the Corporation as of the effective date of Executive's
termination to cease employment or association with the
Corporation.
6. CONFIDENTIAL INFORMATION. Executive recognizes that, as a result of his
employment by the Corporation, he will gain possession of Confidential
Information as defined below. Accordingly, Executive agrees as follows:
(a) Executive shall not at any time during or after termination of
this Agreement, in any form or manner, whether directly or
indirectly, disclose or communicate any Confidential
Information to any third party, or otherwise utilize any
Confidential Information for Executive's benefit or for the
benefit of any third party. For purposes of this Agreement,
"Confidential Information" shall include, any financial data,
business plans and strategies, and lists of actual or
potential customers of the Corporation and information
concerning relationships therewith, any of which (i) derives
independent economic value, actual or potential, from not
being generally known to the public and (ii) is the subject of
efforts that are reasonably under the circumstances to
maintain its secrecy. "Confidential information" shall also
include any information concerning a third party that has been
disclosed to the Corporation in confidence which the
Corporation has an obligation to treat as confidential.
-3-
<PAGE>
(b) Executive shall, immediately following a request from the
Corporation, return to the Corporation, without retaining
copies, all tangible items of Corporation property which are
or which contain Confidential Information. Executive shall
destroy any Confidential Information stored in electronic,
magnetic, or other mechanical medium.
7. SPECIFIC PERFORMANCE. Executive agrees that any violation by him of
Section 5 or 6 of this Agreement, as applicable, would be highly
injurious to the Corporation and would cause irreparable harm to the
Corporation. By reason of the foregoing, Executive consents and agrees
that if he violates any provision of Section 5 or 6 of this Agreement,
the Corporation shall be entitled, in addition to any other rights and
remedies that it may have, to apply to any court of competent
jurisdiction for specific performance and/or injunctive or other
equitable relief in order to enforce, or prevent any continuing
violation of, the provisions of such Section. In the event Executive
breaches Section 5 of this Agreement, the Restricted Period shall be
extended to include the period of such breach.
8. ENFORCEMENT. Executive acknowledges that the territorial, time and
scope limitations set forth in Sections 5 and 6, as applicable, are
reasonable and are properly required for the protection of the
Corporation and in the event that any such territorial, time or scope
limitation is deemed to be unreasonable by a court of competent
jurisdiction, the Corporation and Executive agree, and Executive
submits, to the reduction of any or all of said territorial, time or
scope limitations to such an area, period or scope as said court shall
deem reasonable and enforceable under the circumstances.
9. TERMINATION; SEVERANCE. Notwithstanding the provisions of Section 1 and
the other provisions of this Agreement, Executive's employment with the
Corporation and this Agreement may be terminated prior to the
expiration of the Employment Term or any extension thereof:
(a) by the Board at any time for "cause," which shall be defined
as (i) Executive's conviction for, or plea of nolo contendere
to, a felony or crime involving moral turpitude; (ii)
Executive's commission of an act involving self-dealing, fraud
or personal profit that is injurious to the Corporation; (iii)
Executive's commission of an act of willful and wanton
misconduct of his duties hereunder; and (iv) Executive's
breach of any material provision of this Agreement. Any
termination by the Corporation under this Section 9(a) shall
be in writing. In the event of termination under this Section
9(a), the Corporation's obligations under this Agreement and
this Agreement shall cease, except that Executive shall be
entitled to his Base Salary for services performed through the
date of such termination.
(b) by the Board at any time, without cause, upon ninety (90)
days' written notice to Executive. In the event of termination
pursuant to this Section 9(b), Executive shall be entitled to
his Base Salary and all other compensation and benefits for
the remainder of the Employment Term.
-4-
<PAGE>
(c) in the event of Executive's death or "total disability", which
for purposes of this Section 9(c) shall be defined as
Executive's inability to perform the essential functions of
his job, with or without reasonable accommodation, due to
illness, injury or other physical or mental incapacity, for a
period of ninety (90) or more days in any twelve (12) month
period.
(d) by Executive or the Board in the event Executive elects to
resign or the Board terminates Executive's employment within
ninety (90) days of a "change of control", which for purposes
of this Section 9(d) shall be defined as: (i) the acquisition
by one or more persons or entitles of 50% or more of the
outstanding capital stock of the corporation or of all or
substantially all of the Corporation's assets within a twelve
(12) month period; (ii) any other transaction or series of
transactions the result of which is the loss of control of the
Corporation of the Bank or the Holding Company by its current
shareholders. In the event of Executive's termination pursuant
to this Section 9(d), Executive shall be entitled to receive
his Base Salary and all other compensation and benefits for
the remainder of the Employment Term, including any extension
thereof.
10. PRIOR BUSINESS RELATIONSHIPS. Executive represents that there are no
claims or actions, whether pending, threatened or potential, with
respect to any of his prior employment, independent contractor or other
business relationships that prevent him, or that would prevent him,
from carrying out his duties under this Agreement or that subjects the
Corporation to any potential or actual liability. Executive agrees and
understands that any such claim or action shall be reviewed by the
Board and may be grounds for his termination of employment.
Notwithstanding the foregoing, this Section 10 shall not prevent the
Corporation from pursuing any other remedy available at law or in
equity.
11. MISCELLANEOUS.
(a) All notices hereunder shall be in writing and shall be deemed
given when delivered in person or when telecopied with hard
copy to follow, or three business days after being deposited
in the United States mail, postage prepaid, registered or
certified mail, or two business days after delivery to a
nationally recognized express courier, expenses prepaid,
addressed as follows:
If to Executive:
Jock Brown
231 S. 7th
La Grange
-5-
<PAGE>
If the Corporation:
and/or at such addresses as may be designated by notice given
in accordance with the provisions hereof.
(b) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors
and permitted assigns. No party shall assign this Agreement or
its rights hereunder without the prior written consent of the
other party hereto; provided, however, that the Corporation
will require any person or entity acquiring all or
substantially all of the business of the Corporation (whether
by sale of stock, sale of assets, merger, consolidation or
otherwise) to assume its obligations pursuant to this
Agreement upon closing.
(c) This Agreement contains all of the agreements between the
patties with respect to the subject matter hereof and this
Agreement supersedes all other agreements, oral or written,
between the parties hereto with respect to the subject matter
hereof.
(d) No change or modification of this Agreement shall be valid
unless the same shall be in writing and signed by the parties
hereto. No waiver of any provision of this Agreement shall be
valid unless in writing and signed by the waiving party. No
waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision,
nor shall any waiver constitute a continuing waiver, unless so
provided in the waiver.
(e) If any provision of this Agreement (or portion thereof) shall,
for any reason, be considered invalid or unenforceable by any
court of competent jurisdiction and such provision is not
subject to revision pursuant to Section 9, such provision (or
portion thereof) shall be ineffective only to the extent of
such invalidity or unenforceability, and the remaining
provisions of this Agreement (or portions thereof) shall
nevertheless be valid, enforceable and of full force and
effect.
(f) The section headings or titles herein are for convenience of
reference only and shall not be deemed a part of this
Agreement.
(g) This Agreement shall be governed and controlled as a validity,
enforcement, interpretation, construction, effect and in all
other respects by the laws of the State of Illinois applicable
to contracts made in that State (other than any conflict of
laws rule which might result in the application of the laws of
any other jurisdiction).
-6-
<PAGE>
The parties have executed this Agreement on the date first above
written.
FIRST NATIONAL BANK OF OTTAWA
(the "Bank")
/s/ W.J. Walsh
-----------------------------
-----------------------------
-----------------------------
(the "Holding Company")
-----------------------------
-----------------------------
-----------------------------
EXECUTIVE
/s/ Jock Brown
-----------------------------
JOCK BROWN
-7-
<PAGE>
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial and other data of
First Ottawa Bancshares, Inc. ("Bancshares") and its wholly owned subsidiary,
First National Bank of Ottawa ("the Bank"). Bancshares 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.
Accordingly, all information reflects the internal reorganization as if it had
occurred as of the beginning of the earliest reporting period. This information
should be read in conjunction with the Consolidated Financial Statements and
notes thereto included herein. All dollar amounts are in thousands, except per
share information.
<TABLE>
<CAPTION>
--------------------------------Year ended December 31,------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income $ 16,492 $ 17,055 $ 16,989 $ 16,754 $ 16,264
Total interest expense 8,265 8,651 8,519 8,545 8,499
-------- -------- -------- -------- --------
Net interest income 8,227 8,404 8,470 8,209 7,765
Provision for loan losses 384 460 480 180 120
Noninterest income 1,496 1,905 1,372 1,281 1,167
Noninterest expenses 6,736 6,347 5,884 5,718 5,772
-------- -------- -------- -------- --------
Income before income taxes 2,603 3,502 3,478 3,592 3,040
Provision for income taxes 449 543 696 800 528
-------- -------- -------- -------- --------
Net income $ 2,154 $ 2,959 $ 2,782 $ 2,792 $ 2,512
======== ======== ======== ======== ========
PER SHARE DATA:
Net income $ 2.87 $ 3.95 $ 3.71 $ 3.72 $ 3.35
Cash dividends declared 3.00 3.00 3.00 2.50 2.00
Book value at end of year 34.64 39.01 37.99 36.31 36.24
SELECTED FINANCIAL RATIOS:
Return on average assets (3) .90% 1.23% 1.20% 1.21% 1.11%
Return on average equity (3) 7.55 10.11 9.94 10.44 10.30
Dividend payout ratio 104.46 76.04 80.88 67.16 59.71
Average equity to average assets (3) 11.92 12.16 12.08 11.62 10.82
Net interest margin (tax equivalent) 4.11 4.09 4.25 4.11 4.01
Allowance for loan losses to total loans
at the end of period .83 .87 .66 .70 .71
Nonperforming loans to total loans at
the end of period (1) 1.52 1.21 .83 .71 .20
Net loans charged off to average
total loans .29 .19 .40 .07 .08
BALANCE SHEET DATA:
Total assets $240,490 $249,674 $243,417 $230,780 $228,615
Total earning assets 219,427 236,187 228,789 218,835 215,897
Average assets (2) 239,524 240,612 231,804 230,073 225,411
Gross loans, including loans held for sale 129,444 119,364 121,426 111,392 94,068
Allowance for loan losses 1,059 1,029 800 779 667
Total deposits 183,889 194,629 194,502 187,013 189,063
Federal funds sold and securities sold
under agreements to repurchase 26,265 21,496 16,059 12,526 8,200
Shareholders' equity 25,983 29,259 28,492 27,234 27,178
</TABLE>
- ------------
(1) Includes total nonaccrual loans, impaired loans, and all other loans 90 days
past due and still accruing interest.
(2) Average for the year ended.
(3) Includes unrealized gain (loss) as securities available-for-sale.
1.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant
factors affecting the financial condition and results of operations of the
Company for the periods indicated. The discussion should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and the Selected
Consolidated Financial Data presented herein. In addition to historical
information, the following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors discussed elsewhere in this report.
OVERVIEW
The Company's principal business is conducted by the Bank and consists of a full
range of community-based financial services, including commercial and retail
banking. The profitability of the Company's operations depends primarily on its
net interest income, provision for loan losses, other income, and other
expenses. Net interest income is the difference between the income the Company
receives on its loan and securities portfolios and its cost of funds, which
consists of interest paid on deposits and borrowings. The provision for loan
losses reflects the cost of credit risk in the Company's loan portfolio. Other
income consists of service charges on deposit accounts, trust and farm
management fee income, securities gains, and other fees and commissions. Other
expenses include salaries and employee benefits, as well as occupancy and
equipment expenses and other noninterest expenses.
Net interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts of and rates on interest-bearing liabilities.
Net interest income is sensitive to changes in market rates of interest and the
Company's asset/liability management procedures in coping with such changes. The
provision for loan losses is dependent upon management's assessment of the
collectibility of the loan portfolio under current economic conditions.
CONSOLIDATED FINANCIAL CONDITION
Total assets at December 31, 1999 were $240.5 million compared to $249.7 million
at December 31, 1998, a decrease of $9.2 million, or 3.7%. The decrease in total
assets was a result of an intentional plan by management to decrease the cost of
funds through lower deposit interest rates offered, resulting in a decrease in
total deposits of $10.7 million. The securities portfolio was reduced as sales
and maturities of securities available-for-sale exceeded purchases by $21.9
million. This was partially offset by an increase in loans of $9.3 million
primarily in installment loans due to continued market demand. Rather than
leveraging through borrowings and reinvesting funds in securities, the Company
has opted to maintain liquidity and borrowing power to utilize for the
repurchase of Company shares at the expiration of the OFFER TO PURCHASE, which
is discussed in Liquidity and Capital Resources below and in more detail in the
Notes to the Consolidated Financial Statements.
Total equity was $26.0 million at December 31, 1999 compared to $29.3 million at
December 31, 1998. The decrease was primarily a result of a decrease in the
unrealized gain (loss) on securities available-for-sale, net of tax, of $3.2
million, and dividends declared of $2.3 million. This was partially offset by
net income of $2.2 million. Shareholders' equity was further reduced by
$4,923,261 in January 2000 when the Company repurchased 86,373 shares of common
stock at $57 per share. (See Note 12 to the Consolidated Financial Statements.)
CONSOLIDATED RESULTS OF OPERATIONS
2.
<PAGE>
Net income was $2.2 million for the year ended December 31, 1999 compared to
$3.0 million for the year ended December 31, 1998, a decrease of $805,000, or
27.2%. The return on average assets was .90% in 1999 compared to 1.23% in 1998.
The return on average equity decreased to 7.55% in 1999 from 10.11% in 1998.
Net income was $3.0 million for the year ended December 31, 1998, an increase of
$177,000 from $2.8 million for the year ended December 31, 1997. The return on
average assets increased to 1.23% in 1998 from 1.20% in 1997. The return on
average equity was 10.11% in 1998 with a return on average equity of 9.94% in
1997.
1999 COMPARED TO 1998
NET INTEREST INCOME. Net interest income was $8.2 million in 1999 compared to
$8.4 million in 1998, a decrease of $177,000, or 2.1%. Interest income on
earning assets decreased $563,000 in 1999 from 1998. Interest income on loans
decreased slightly as a result of a decrease in average tax-equivalent loan
rates from 8.81% to 8.48%, offsetting an increase in the average balance of
loans of $3.0 million. In addition, securities income decreased $317,000
primarily as a result of a decrease in the average balance of $1.8 million and a
shift in securities from taxable to nontaxable resulting in a decrease in the
average yield. However, the overall yield on securities on a tax-equivalent
basis remained relatively stable. Interest expense on interest-bearing
liabilities decreased $386,000 as a result of a decrease in the average rate
paid on liabilities of 25 basis points from 4.65% in 1998 to 4.40% in 1999,
which was partially offset by an increase in the average balance of
interest-bearing liabilities of $1.6 million. The net interest margin on a tax
equivalent basis increased to 4.11% in 1999 from 4.09% in 1998. The primary
reason for the increase in the net interest margin was the decrease in the
average rate paid on interest-bearing liabilities exceeding the decrease in the
average yield on earning assets.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $76,000 from
$460,000 in 1998 to $384,000 in 1999. The decrease in the provision was due to a
general improvement in the credit quality of the loan portfolio in 1999 compared
to 1998. As of December 31, 1999, the allowance for loan losses totaled $1.1
million, or .82% of total loans. The amounts of the provision and allowance for
loan losses are influenced by current economic conditions, actual loss
experience, industry trends and other factors, including real estate values in
the Company's market area and management's assessment of current collection
risks within its loan portfolio.
NONINTEREST INCOME. The Company's noninterest income totaled $1.5 million in
1999 compared to $1.9 million in 1998. The decrease was primarily a result of a
gain on proceeds from life insurance of $261,000 in 1998. In addition, the
Company had net gains on sales of securities of $255,000 in 1998 compared to net
losses of $9,000 in 1999. These 1999 decreases in noninterest income were
partially offset by increases in service charges on deposit accounts and other
fees and commissions.
NONINTEREST EXPENSE. The Company's noninterest expenses increased to $6.7
million in 1999 from $6.3 million in 1998. The increase was due to increases in
salaries and employee benefits, occupancy and equipment expense, advertising and
promotions, and professional fees. The most significant expense increase was
$599,000 which related to the payment of early retirement packages to certain
employees and also as a result of the curtailment of the defined benefit pension
plan, as more fully disclosed in Note 8 to the 1999 consolidated financial
statements. This increase in salaries and employee benefits was largely offset
by decreased insurance costs as a result of changes in insurance benefit plans.
Occupancy expenses increased as a result of the purchase of new computers as
part of the Company's Year 2000 readiness. Advertising and marketing expenses
increased as a response to competitive pricing and pressures, particularly for
deposit products and services. Professional fees increased as a result of the
formation of the Company during 1999 and due to consulting fees related to
strategic planning, Year 2000, and investment strategies.
3.
<PAGE>
INCOME TAXES. The Company's tax rate varies from statutory rates principally due
to interest income from tax-exempt securities and loans. The Company's effective
tax rate was 19.2% and 15.5% for 1999 and 1998.
1998 COMPARED TO 1997
NET INTEREST INCOME. Net interest income was $8.4 million in 1998 compared to
$8.5 million in 1997, a decrease of $66,000, or .8%. Interest income on total
earning assets increased $66,000 in 1998 from 1997. Interest income on loans
increased as a result of an increase in the average balance of loans of $4.5
million in addition to a slight increase in average tax-equivalent loan rates
from 8.77% to 8.81%. Securities income decreased $439,000 primarily as a result
of a decrease in the tax-equivalent average yield from 7.53% in 1997 to 6.96% in
1998. Interest expense on interest-bearing liabilities increased $132,000 as a
result of an increase in the average balance of interest-bearing liabilities of
$4.7 million, partially offset by a decrease in the average rate paid on
interest-bearing liabilities of 5 basis points from 4.70% in 1997 to 4.65% in
1998. The net interest margin on a tax equivalent basis decreased to 4.09% in
1998 from 4.25% in 1997. The primary reason for the decrease in the net interest
margin was the decrease in the average yield on earning assets exceeding the
decrease in the average rate paid on interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $20,000 from
$480,000 in 1997 to $460,000 in 1998. As of December 31, 1998, the allowance for
loan losses totaled $1.0 million, or .87% of total loans.
NONINTEREST INCOME. The Company's noninterest income totaled $1.9 million in
1998 compared to $1.4 million in 1997, an increase of $533,000. The increase was
primarily a result of the gain on proceeds from life insurance of $261,000 and
the net gains on sales of securities of $255,000, which was previously
discussed.
NONINTEREST EXPENSE. The Company's noninterest expenses increased to $6.3
million in 1998 from $5.9 million in 1997. The increase was primarily due to an
increase in salaries and employee benefits of $248,000 as a result of regular
pay increases and employee bonuses and an increase in other expenses of $245,000
primarily resulting from charitable donations of $147,000 in 1998.
INCOME TAXES. The Company's effective tax rate was 15.5% and 20.0% for 1998 and
1997.
4.
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the average balances, net interest income and
expense and average yields and rates for the Company's interest-earning assets
and interest-bearing liabilities for the indicated years on a tax-equivalent
basis assuming a 34% tax rate.
5.
<PAGE>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
Years ended December 31, 1999, 1998, and 1997
($000s)
<TABLE>
<CAPTION>
----------------1 9 9 9-------------- -----------------1 9 9 8--------------
Average Average Average Average
ASSETS Balance (4) Interest Rate Balance (4) Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans (1) (3) $ 122,002 $ 10,350 8.48% $ 118,995 $ 10,485 8.81%
Securities (2) (5) 102,806 7,125 6.93 104,584 7,278 6.96
Federal funds sold 119 6 5.04 2,114 116 5.49
----------- ---------- ----------- ---------
Interest-earning assets 224,927 17,481 7.77 225,693 17,879 7.92
Non-interest-earning assets (6) 14,597 14,919
----------- -----------
Average assets $ 239,524 $ 240,612
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
NOW and money market $ 41,941 1,080 2.58 $ 37,554 952 2.53
Savings 19,710 487 2.47 19,594 493 2.52
Time deposits 109,952 5,943 5.41 115,824 6,551 5.66
Repurchase agreements 11,690 527 4.51 11,000 537 4.88
Federal funds purchased 4,352 228 5.24 2,057 118 5.74
----------- ---------- ----------- ---------
Interest-bearing
liabilities 187,645 8,265 4.40 186,029 8,651 4.65
---------- ---------
Net interest income $ 9,216 $ 9,228
========== =========
Net yield on interest-
earning assets 4.11 4.09
Interest-bearing liabilities
to earning assets ratio 83.42 82.43
Non-interest-bearing
liabilities 23,334 25,319
Shareholders' equity 28,545 29,264
----------- -----------
Average liabilities and
shareholders' equity $ 239,524 $ 240,612
=========== ===========
<CAPTION>
-----------------1 9 9 7-------------
Average Average
ASSETS Balance (4) Interest Rate
-------- -------- ----
<S> <C> <C> <C>
Loans (1) (3) $ 114,540 $ 10,049 8.77%
Securities (2) (5) 101,327 7,633 7.53
Federal funds sold 381 21 5.51
----------- ----------
Interest-earning assets 216,248 17,703 8.19
Non-interest-earning assets (6) 15,556
-----------
Average assets $ 231,804
============
LIABILITIES AND
SHAREHOLDERS' EQUITY
NOW and money market $ 35,357 813 2.30
Savings 20,413 513 2.51
Time deposits 115,838 6,711 5.79
Repurchase agreements 7,034 328 4.66
Federal funds purchased 2,666 154 5.78
----------- ----------
Interest-bearing
liabilities 181,308 8,519 4.70
----------
Net interest income $ 9,184
==========
Net yield on interest-
earning assets 4.25
Interest-bearing liabilities
to earning assets ratio 83.84
Non-interest-bearing
liabilities 22,499
Shareholders' equity 27,997
-----------
Average liabilities and
shareholders' equity $ 231,804
============
</TABLE>
- -----------
(1) Interest income on loans includes loan origination and other fees of $149
for 1999, $182 for 1998, and $110 for 1997.
(2) Loan and securities income is reflected on a fully tax-equivalent basis
utilizing a 34% rate for municipal securities and tax-exempt loans and a 70%
rate for dividends received.
(3) Non-accrual loans are included in average loans.
(4) Average balances are derived from the average daily balances.
(5) The 1999, 1998, and 1997 rate information was calculated based upon average
amortized cost.
(6) The 1999, 1998, and 1997 average balance information includes an average
valuation allowance for securities of $192, $2,766, and $2,133,
respectively.
6.
<PAGE>
The components of the changes in net interest income are shown below. Changes in
net interest income are allocated between amounts attributed to changes in rate
and changes in volume for the various categories of interest-earning assets and
interest-bearing liabilities.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
($000s)
<TABLE>
<CAPTION>
1999 - 1998 1998 - 1997
--------Increase (Decrease)-------- ---------Increase (Decrease)--------
Change Change Change Change
Total Due to Due to Total Due to Due to
INTEREST INCOME Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Loans $ (135) $ 261 $ (396) $ 436 $ 392 $ 44
Securities (153) (123) (30) (355) 240 (595)
Federal funds sold (110) (101) (9) 95 95 -
-------- --------- --------- --------- --------- ---------
Total interest income (398) 37 (435) 176 727 (551)
-------- --------- --------- --------- --------- ---------
INTEREST EXPENSE
NOW and money market 128 113 15 139 52 87
Savings (6) 3 (9) (20) (21) 1
Time deposits (608) (324) (284) (160) (1) (159)
Repurchase agreements (10) 33 (43) 209 193 16
Federal funds purchased 110 121 (11) (36) (35) (1)
-------- --------- --------- --------- --------- ---------
Total interest expense (386) (54) (332) 132 188 (56)
-------- --------- --------- --------- --------- ---------
Net interest
earnings $ (12) $ 91 $ (103) $ 44 $ 539 $ (495)
======== ========= ========= ========= ========= =========
</TABLE>
Volume/rate variances are allocated to the volume variance and the rate variance
on an absolute basis.
Tax exempt income is reflected on a fully tax-equivalent basis utilizing a 34%
rate for municipal securities and tax-exempt loans and a 70% rate for dividends
received.
7.
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's overall interest rate sensitivity is demonstrated by net interest
income analysis and "Gap" analysis. Net interest income analysis measures the
change in net interest income in the event of hypothetical changes in interest
rates. This analysis assesses the risk of change in net interest income in the
event of sudden and sustained 2.0% increases and decreases in market interest
rates. The tables below present the Company's projected changes in net interest
income for the various rate shock levels at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
--------------------1999 Net Interest Income----------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp $ 1,811 $ (637) (26.0)%
Base 2,448 - -
- -200 bp 3,033 585 23.9%
</TABLE>
<TABLE>
<CAPTION>
--------------------1998 Net Interest Income----------------
Amount Change Change
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp $ 2,771 $ (491) (15.1)%
Base 3,262 - -
- -200 bp 3,718 456 (14.0)%
</TABLE>
As shown above, at December 31, 1999, the effect of an immediate 200 basis point
increase in interest rates would decrease the Company's net interest income by
26.0% or approximately $637,000. The effect of an immediate 200 basis point
decrease in rates would increase the Company's net interest income by 23.9% or
approximately $585,000.
The interest rate sensitivity has shifted from an exposure in a declining rate
environment at the end of 1998 to a modest exposure in substantially higher rate
market at the end of 1999. Overall net interest income sensitivity has increased
from 1998 to 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and proceeds from principal
and interest payments on loans and securities. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Company generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships.
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-earning deposits and securities, and (iv) the
objectives of its asset/liability management program. Excess liquid assets are
invested generally in interest-earning overnight deposits and short- and
intermediate-term U.S. government and agency obligations.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities, and financing activities.
Cash flows provided by operating activities were $1.6 million, $2.6 million, and
$3.5 million for the years ended December 31, 1999, 1998, and 1997. Net
8.
<PAGE>
cash from investing activities consisted primarily of disbursements for loan
originations and the purchase of securities and offset by principal collections
on loans and proceeds from maturation and sales of securities. Net cash from
financing activities consisted primarily of changes in net deposits and
short-term borrowings partially offset by dividends paid.
The Company's most liquid assets are cash and short-term investments. The levels
of these assets are dependent on the Company's operating, financing, lending,
and investing activities during any given year. At December 31, 1999, cash and
short-term investments totaled $13.2 million. The Company has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Company may also utilize the
sale of securities available-for-sale and federal funds lines of credit from
correspondent banks.
On December 6, 1999, the Company commenced a tender offer ("the Offer") to
acquire up to 87,719 common shares at $57 per share. The Offer expired on
January 20, 2000 and the Company purchased 86,373 shares, representing
approximately 11.51% of its outstanding common shares for an aggregate purchase
price of $4,923,261.
On March 6, 2000, the Company commenced a tender offer (the "Odd-lot Offer") to
acquire up to 1,346 common shares at $57.00 per share from stockholders who own
fewer than 100 shares. The Odd-lot Offer is scheduled to expire on March 30,
2000. As of March 24, 2000, 1,400 shares had been tendered pursuant to the
Odd-lot Offer.
Capital provides the foundation for future growth. Regulatory agencies have
developed minimum guidelines by which the adequacy of a financial institution's
capital may be evaluated. All of the Company's ratios exceed the levels required
under regulatory guidelines as shown in Note 12 of the Consolidated Financial
Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary impact of inflation on the operations of
the Company is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
9.
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 on derivatives will, in the
year 2001, require all derivatives to be recorded at fair value in the balance
sheet, with changes in fair value run through income. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
be offset by an equal change in the fair value of the hedged item. Under the new
standard, securities held-to-maturity can no longer be hedged, except for
changes in the issuer's creditworthiness. Therefore, upon adoption of the
Statement, companies will have another one-time window of opportunity to
reclassify held-to-maturity securities to either trading or available-for-sale,
provided certain criteria are met. The Statement may be adopted early, at the
start of a calendar quarter. The Company does not plan to adopt the Statement
early and adoption is not expected to have a material impact since the Company
does not have significant derivative instruments or hedging activity and all
securities are classified as available-for-sale.
YEAR 2000
The Company did not experience any problems in its core business processes as a
result of the Year 2000 changeover. The Company has confirmed normal operations
across all products on a sustained basis.
While management believes that it is unlikely, problems associated with
non-compliant third parties could still occur. Management will continue to
monitor all business processes and relationships with third parties during 2000
to ensure that all processes continue to function properly.
Actual internal costs of the Company's Year 2000 project were approximately
$181,202.
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company and the Bank include, but are not
limited to, changes in interest rates; general economic conditions; the
legislative/regulatory situation; monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or securities portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market area; and accounting principles, policies, and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
10.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Ottawa Bancshares, Inc.
Ottawa, Illinois
We have audited the accompanying consolidated balance sheets of First Ottawa
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Ottawa
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 18, 2000
11.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,243 $ 7,601
Securities available-for-sale 89,983 116,823
Loans held for sale 1,738 563
Loans, less allowance for loan losses of $1,059
and $1,029 126,647 117,772
Bank premises and equipment, net 2,494 2,463
Interest receivable and other assets 6,385 4,452
------------- -------------
Total assets $ 240,490 $ 249,674
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand - non-interest-bearing $ 17,917 $ 23,305
NOW accounts 30,338 29,943
Money market accounts 10,530 9,278
Savings 18,702 19,169
Time, $100,000 and over 23,073 22,808
Other time 83,329 90,126
------------- -------------
Total deposits 183,889 194,629
Federal funds purchased 7,600 6,450
Securities sold under agreements to repurchase 18,665 15,046
Interest payable and other liabilities 4,353 4,290
------------- -------------
Total liabilities 214,507 220,415
Shareholders' equity
Common stock - $1 par value, 750,000 shares
authorized, issued and outstanding 750 750
Additional paid-in capital 4,000 4,000
Retained earnings 22,947 23,043
Accumulated other comprehensive income (loss) (1,714) 1,466
------------- -------------
Total shareholders' equity 25,983 29,259
------------- -------------
Total liabilities and shareholders' equity $ 240,490 $ 249,674
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
12.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans (including fee income) $ 10,323 $ 10,459 $ 10,049
Securities
Taxable 4,295 4,931 5,533
Exempt from federal income tax 1,868 1,549 1,386
Federal funds sold 6 116 21
---------- ---------- ----------
Total interest income 16,492 17,055 16,989
Interest expense
NOW account deposits 686 649 627
Money market deposit accounts 394 303 186
Savings deposits 487 493 513
Time deposits 5,943 6,551 6,711
Repurchase agreements 527 537 328
Federal funds purchased 228 118 154
---------- ---------- ----------
Total interest expense 8,265 8,651 8,519
---------- ---------- ----------
NET INTEREST INCOME 8,227 8,404 8,470
Provision for loan losses 384 460 480
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,843 7,944 7,990
Noninterest income
Service charges on deposit accounts 586 538 567
Trust and farm management fee income 441 458 422
Other fees and commissions 478 393 371
Loss on sale of bank premises - - (9)
Gain on proceeds from life insurance - 261 -
Securities gains (losses), net (9) 255 21
---------- ---------- ----------
Total noninterest income 1,496 1,905 1,372
Noninterest expenses
Salaries and employee benefits 3,796 3,703 3,455
Occupancy and equipment expense 942 827 793
Data processing expense 474 444 420
Supplies 224 191 229
Advertising and promotions 254 169 193
Professional fees 341 216 242
Other expenses 705 797 552
---------- ---------- ----------
Total noninterest expenses 6,736 6,347 5,884
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,603 3,502 3,478
Provision for income taxes 449 543 696
---------- ---------- ----------
NET INCOME $ 2,154 $ 2,959 $ 2,782
========== ========== ==========
Earnings per share (750,000 shares outstanding) $ 2.87 $ 3.95 $ 3.71
========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
13.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(In thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Share-
Common Paid-in Retained Comprehensive Holders'
Stock Capital Earnings Income (Loss) Equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 750 $ 4,000 $ 21,802 $ 682 $ 27,234
Net income - - 2,782 - 2,782
Unrealized net gain on securities
available-for-sale, net of reclassi-
fication and tax effects - - - 726 726
----------
Comprehensive income 3,508
Cash dividends declared ($3.00 per share) - - (2,250) - (2,250)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 750 4,000 22,334 1,408 28,492
Net income - - 2,959 - 2,959
Unrealized net gain on securities
available-for-sale, net of reclassi-
fication and tax effects - - - 58 58
----------
Comprehensive income 3,017
Cash dividends declared ($3.00 per share) - - (2,250) - (2,250)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 750 4,000 23,043 1,466 29,259
Net income - - 2,154 - 2,154
Unrealized net loss on securities
available-for-sale, net of reclassi-
fication and tax effects - - - (3,180) (3,180)
----------
Comprehensive loss (1,026)
Cash dividends declared ($3.00 per share) - - (2,250) - (2,250)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 $ 750 $ 4,000 $ 22,947 $ (1,714) $ 25,983
========== ========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,154 $ 2,959 $ 2,782
Adjustments to reconcile net income to net cash
from operating activities
Change in deferred loan fees (12) 21 3
Provision for loan losses 384 460 480
Depreciation and amortization 325 242 231
Premium amortization on securities, net 71 29 531
Net real estate loans originated for sale (1,183) (498) -
(Gain) loss on loan sales 8 (65) (18)
Net (gains) losses on sales of securities available-
for-sale 9 (255) (21)
Loss on sale of bank premises - - 9
Change in interest receivable and other assets (954) (181) (449)
Change in interest payable and other liabilities 818 (104) (58)
----------- ----------- -----------
Net cash from operating activities 1,620 2,608 3,490
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 28,622 18,415 23,918
Proceeds from maturities of securities 18,551 33,838 11,933
Purchases of securities available-for-sale (25,231) (61,399) (35,180)
Net change in loans receivable (9,360) 2,413 (10,478)
Proceeds from sale of bank premises - - 73
Property and equipment expenditures (339) (295) (157)
----------- ----------- -----------
Net cash from investing activities 12,243 (7,028) (9,891)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits (10,740) 127 7,529
Change in federal funds purchased 1,150 (1,400) 3,300
Change in securities sold under agreements
to repurchase 3,619 6,837 233
Dividends paid (2,250) (2,250) (2,250)
----------- ----------- -----------
Net cash from financing activities (8,221) 3,314 8,812
----------- ----------- -----------
Change in cash and due from banks 5,642 (1,106) 2,411
Cash and due from banks at beginning of year 7,601 8,707 6,296
----------- ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 13,243 $ 7,601 $ 8,707
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 8,325 $ 8,699 $ 8,344
Income taxes 687 596 809
Noncash investing activities
Transfers made from loans to other real estate owned 113 40 -
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include First Ottawa Bancshares, Inc. ("Bancshares") and its wholly
owned subsidiary, First National Bank of Ottawa ("the Bank"), together referred
to as "the Company." Intercompany transactions and balances are eliminated in
consolidation. Bancshares 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. Accordingly, the
consolidated financial statements reflect the internal reorganization as if it
had occurred on January 1, 1997.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments, and status of contingencies are particularly subject to change.
CASH FLOW REPORTING: Net cash flows are reported for customer loan and deposit
transactions, federal funds purchased, and securities sold under repurchase
agreements.
SECURITIES: Securities are classified as available-for-sale when they might be
sold before maturity. Securities available-for-sale are carried at fair value,
with unrealized holding gains and losses reported, net of tax, as other
comprehensive income. Securities are written down to fair value, with a charge
to expense, when a decline in fair value is not temporary.
Realized gains and losses on sales are determined using the amortized cost of
the specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and the allowance for loan losses. Interest income is
reported on the interest method and includes amortization of net deferred loan
fees and costs over the loan term. Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost, net of deferred
loan fees, or estimated fair value in the aggregate.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature, such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the loan's observable
market price or the fair value of collateral if the loan is collateral
dependent. Loans are evaluated for impairment when payments are delayed,
typically 90 days or more, or when the internal grading system indicates a
doubtful classification.
BANK PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over the assets useful lives. These assets are reviewed for impairment when
events indicate that the carrying amount may not be recoverable. Maintenance and
repairs are charged to expense and improvements are capitalized.
MORTGAGE SERVICING RIGHTS: Servicing rights are recognized as assets for the
allocated value of servicing rights retained on loans sold and are classified
with interest receivable and other assets in the consolidated balance sheets.
Servicing rights are expensed in proportion to and over the period of estimated
net servicing revenues. Impairment is evaluated based on the fair value of the
rights. Any impairment of a grouping is reported as a valuation allowance. There
was no such valuation allowance recorded at year-end 1999 and mortgage servicing
rights were not material at that date.
OTHER REAL ESTATE: Real estate owned, other than that used in the normal course
of business, is carried at the lower of cost basis (fair value at date of
foreclosure) or fair value less estimated costs to sell. Any reduction to fair
value from a related loan at the time of acquisition is accounted for as a loan
loss. Any subsequent reductions in fair value less estimated costs to sell are
recorded by charges to expense and a corresponding valuation allowance on the
related real estate.
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EMPLOYEE BENEFITS: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Contributions to the plan are based on the maximum amount deductible
for income tax purposes. On November 10, 1999, all pension plan benefits were
frozen with the intent of considering alternative methods of providing
retirement benefits to employees.
A 401(k) profit sharing plan covers eligible employees with more than one year
of service (one thousand working hours) and who are at least 21 years of age.
The plan allows employee contributions. The Company may make a discretionary
matching contribution equal to a percentage of salary deferral. The matching
percentage is limited to match only up to 4% of compensation. The Company did
not make any contributions for 1999, 1998, or 1997.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance-sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.
EARNINGS PER SHARE: Basic earnings per share ("EPS") is calculated based on the
weighted average common shares outstanding during the year. The Company had no
dilutive securities during 1999, 1998, or 1997.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME: Comprehensive income includes both net income and other
comprehensive income (loss). Other comprehensive income (loss) includes the
change in unrealized gains and losses on securities available-for-sale, net of
taxes.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This new accounting
pronouncement is not expected to have a material effect, but the effect will
depend on derivative holdings when this standard applies.
RECLASSIFICATIONS: Certain items in the consolidated financial statements as of
and for the years ended December 31, 1998 and 1997 have been reclassified, with
no effect on net income, to conform with the current year presentation.
NOTE 2 - SECURITIES
Securities available-for-sale as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 12,106 $ - $ (172) $ 11,934
U.S. government agencies 42,370 - (2,170) 40,200
States and political subdivisions 32,944 505 (845) 32,604
Mortgage-backed securities and
collateralized mortgage obligations 4,967 90 (5) 5,052
Equity securities 193 - - 193
----------- ----------- ----------- -----------
$ 92,580 $ 595 $ (3,192) $ 89,983
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Securities available-for-sale as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 16,135 $ 180 $ (5) $ 16,310
U.S. government agencies 49,236 212 (44) 49,404
States and political subdivisions 33,494 1,527 (84) 34,937
Mortgage-backed securities and
collateralized mortgage obligations 15,544 435 - 15,979
Equity securities 193 - - 193
----------- ----------- ----------- -----------
$ 114,602 $ 2,354 $ (133) $ 116,823
=========== =========== =========== ===========
</TABLE>
As of December 31, 1999, the Company had approximately $4,840,000 invested in
LaSalle County, Illinois municipal bonds.
Securities with an approximate carrying value of $38,883,000 and $30,532,000
were pledged at December 31, 1999 and 1998 to secure trust and public deposits,
repurchase agreements, and for other purposes as required or permitted by law.
Contractual maturities of securities available-for-sale at year-end 1999 were as
follows. Securities not due at a single maturity date, primarily mortgage-backed
and equity securities, are shown separately.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 7,140 $ 7,077
Due after one year through five years 34,679 34,503
Due after five years through ten years 38,150 36,315
Due after ten years 7,451 6,843
Mortgage-backed securities and collateralized
mortgage obligations 4,967 5,052
Equity securities 193 193
----------- -----------
$ 92,580 $ 89,983
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Information regarding sales of securities available-for-sale follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds $28,622 $18,415 $23,918
Gross gains 125 255 66
Gross losses 134 - 45
</TABLE>
NOTE 3 - LOANS
Major classifications of loans as of December 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate $ 59,560 $ 58,136
Commercial and agricultural 15,222 15,013
Installment, net of unearned income 48,751 41,898
Home equity lines of credit 4,219 3,812
------------ ------------
127,752 118,859
Deferred loan fees (46) (58)
Allowance for loan losses (1,059) (1,029)
------------ ------------
$ 126,647 $ 117,772
============ ============
</TABLE>
Certain executive officers, directors, and their related interests are loan
customers of the Company. A summary of such loans made by the Company in the
ordinary course of business is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $ 782
New loans 449
Repayments (62)
Change due to change in directors 918
------------
Balance at December 31, 1999 $ 2,087
============
</TABLE>
Tax exempt commercial and agricultural loans totaled approximately $902,000 and
$801,000 at December 31, 1999 and 1998. The interest on these loans, which is
included in loan income and is exempt from federal income tax, totaled
approximately $52,000, $54,000, and $58,000 for the years ended December 31,
1999, 1998, and 1997.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Loans on which the accrual of interest has been discontinued or reduced amounted
to approximately $397,000 and $299,000 at December 31, 1999 and 1998. The
average balance of impaired loans for 1999, 1998, and 1997 was approximately
$1,303,000, $739,000, and $460,000. Interest income recognized on a cash basis
from impaired loans was not material for the years ended December 31, 1999,
1998, and 1997.
Information regarding impaired loans at December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Impaired loans with related allowance for loan losses $ 1,049 $ 572
Impaired loans with no related allowance for loan losses 33 -
---------- ----------
Total impaired loans $ 1,082 $ 572
========== ==========
Allowance for loan losses allocated to impaired loans $ 310 $ 175
========== ==========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 1,029 $ 800 $ 779
Recoveries on loans previously charged off 118 123 103
Loans charged off (472) (354) (562)
Provision for loan losses 384 460 480
----------- ----------- -----------
Balance at end of year $ 1,059 $ 1,029 $ 800
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 466 $ 466
Bank premises 3,160 3,134
Furniture and equipment 2,585 2,506
---------- ----------
Total cost 6,211 6,106
Less accumulated depreciation and amortization 3,717 3,643
---------- ----------
Net book value $ 2,494 $ 2,463
========== ==========
</TABLE>
NOTE 6 - DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<S> <C>
2000 $ 59,884
2001 13,712
2002 17,534
2003 10,917
2004 and thereafter 4,355
-----------
$ 106,402
===========
</TABLE>
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements.
Physical control is maintained for all securities sold under repurchase
agreements. Information concerning securities sold under agreements to
repurchase is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Average balance during the year $ 11,690 $ 11,000
Average interest rate during the year 4.52% 4.88%
Maximum month-end balance during the year $ 18,665 $ 15,046
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - PENSION PLAN
The following tables set forth the pension plan's funded status and amounts
actuarially determined:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Change in benefit obligation
Beginning benefit obligation $ 4,087 $ 3,623 $ 3,640
Service cost 169 174 175
Interest cost 281 254 247
Curtailment impact (738) - -
Special termination benefits - 459 -
Actuarial loss (gain) 896 (180) (77)
Benefits paid (2,046) (243) (362)
---------- ---------- ----------
Ending benefit obligation $ 2,649 $ 4,087 $ 3,623
========== ========== ==========
Change in plan assets
Beginning fair value $ 3,550 $ 3,400 $ 3,409
Actual return 91 195 155
Employer contribution 245 198 198
Benefits paid (2,046) (243) (362)
---------- ---------- ----------
Ending fair value $ 1,840 $ 3,550 $ 3,400
========== ========== ==========
Funded status $ (809) $ (537) $ (223)
Unrecognized net actuarial gain - 151 (178)
Unrecognized transition cost - 215 229
---------- ---------- ----------
Accrued benefit cost $ (809) $ (171) $ (172)
========== ========== ==========
Assumptions used
Discount rate 7.0% 7.0% 7.0%
Expected return on plan assets 7.0 7.0 7.0
Rate of compensation increase 4.5 5.5 5.5
Components of net periodic benefit cost
Service cost $ 169 $ 174 $ 175
Interest cost 281 254 247
Curtailment and settlement loss 599 - -
Return on plan assets (91) (245) (155)
Amortization of prior service cost (75) 14 (69)
---------- ---------- ----------
Net expense $ 883 $ 197 $ 198
========== ========== ==========
</TABLE>
During 1999, lump-sum distributions totaling $1,898,000 were paid out to
participants accepting early retirement benefits resulting in a settlement loss
of $408,000. In addition, in November 1999, the Company approved to freeze the
pension plan effective in January 2000, resulting in a curtailment loss of
$191,000. Settlement and curtailment losses are included in pension cost above.
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The components of the provision for income taxes for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently payable tax
Federal $ 467 $ 658 $ 617
State (32) (10) 63
Deferred tax (benefit) expense 14 (105) 16
---------- ---------- ----------
$ 449 $ 543 $ 696
========== ========== ==========
</TABLE>
The balance sheets include the following amounts of deferred tax assets and
liabilities at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS
Unrealized loss on securities
available-for-sale $ 883 $ -
Bad debt deduction 183 173
Pension plan 275 58
Deferred compensation 59 72
Deferred loan fees 13 14
Other 24 219
---------- ----------
1,437 536
DEFERRED TAX LIABILITIES
Unrealized gain on securities available-for-sale - (755)
Depreciation (76) (90)
Mortgage servicing rights (50) -
Other (3) (7)
---------- ----------
(129) (852)
---------- ----------
Net deferred tax asset (liability) $ 1,308 $ (316)
========== ==========
</TABLE>
No valuation allowance was required on deferred tax assets.
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The difference between the financial statement provision and the amounts
computed by applying the federal income tax rate of 34% to income before income
taxes is reconciled as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense at statutory rate $ 885 $ 1,190 $ 1,183
Increase (decrease) in taxes resulting from
Tax-exempt interest (642) (534) (458)
Nondeductible interest expense 79 72 65
Nontaxable proceeds from life insurance - (93) -
State income taxes and other items, net 127 (92) (94)
---------- ---------- ----------
$ 449 $ 543 $ 696
========== ========== ==========
</TABLE>
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on financial condition or results of
operations.
At year-end 1999 and 1998, reserves of $1,819,000 and $1,727,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit, and financial guarantees. These
involve, to varying degrees, credit and interest-rate risk in excess of the
amount reported in the financial statements.
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES
(Continued)
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit, and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. Collateral or
other security is normally required to support financial instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
A summary of the notional or contractual amounts of financial instruments with
off-balance-sheet risk at year-end follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 1,264 $ 915
Unused lines of credit 8,288 6,318
Standby letter of credit - 47
</TABLE>
At December 31, 1999, all of the commitments to extend credit were at variable
rates of interest.
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and due from banks, demand, NOW, money market and savings deposits,
federal funds purchased, securities sold under repurchase agreements, accrued
interest receivable and payable, and variable rate loans or deposits. Securities
fair values are based on quoted market prices or, if no quotes are available, on
the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits, the fair value is estimated by discounted cash flow
analysis using current market rates for the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values, where applicable. The fair value of
off-balance-sheet items is based on the fees or cost that would currently be
charged to enter into or terminate such agreements and is not material.
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 13,243 $ 13,243 $ 7,601 $ 7,601
Securities available-for-sale 89,983 89,983 116,823 116,823
Loans held for sale 1,738 1,738 563 563
Loans, net 126,647 124,951 117,772 121,079
Accrued interest receivable 2,075 2,075 2,180 2,180
FINANCIAL LIABILITIES
Deposits with no stated maturities (77,487) (77,487) (81,695) (81,695)
Time deposits and securities sold
under agreements to repurchase (125,067) (124,337) (127,980) (130,244)
Federal funds purchased (7,600) (7,600) (6,450) (6,450)
Accrued interest payable (1,594) (1,594) (1,654) (1,654)
</TABLE>
NOTE 12 - REGULATORY AND CAPITAL MATTERS
The Bank is subject to dividend restrictions set forth by the Office of the
Comptroller of the Currency ("OCC"). Under such restrictions, the Bank may not,
without the prior approval of the OCC, declare dividends, as of January 1, 2000,
that exceed $613,000 plus net income year-to-date.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measure of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgements by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action that
could have a direct material effect on the financial statements.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, actual capital levels and minimum required levels, which were the
same for the Company and the Bank, were:
<TABLE>
<CAPTION>
Minimum Required
Minimum Required to Be Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total capital (to risk-weighted assets) $28,756 20.8% $11,045 8.0% $13,806 10.0%
Tier I capital (to risk-weighted assets) 27,697 20.1 5,522 4.0 8,284 6.0
Tier I capital (to average assets) 27,697 11.7 9,512 4.0 11,890 5.0
December 31, 1998
Total capital (to risk-weighted assets) $28,822 22.4% $10,309 8.0% $12,886 10.0%
Tier I capital (to risk-weighted assets) 27,793 21.6 5,154 4.0 7,731 6.0
Tier I capital (to average assets) 27,793 11.2 9,943 4.0 12,428 5.0
</TABLE>
At December 31, 1999, the Company and the Bank were categorized as well
capitalized and management is not aware of any conditions or events since the
most recent notification that would change the Company's or Bank's category.
On December 6, 1999, the Company commenced a tender offer ("the Offer") to
acquire up to 87,719 common shares at $57 per share. The Offer expired on
January 20, 2000, and the Company purchased 86,373 shares, representing
approximately 11.51% of its outstanding common shares for an aggregate purchase
price of $4,923,261. The Board of Directors had the right to terminate the Offer
at any time prior to its closing, and accordingly, consolidated shareholders'
equity was not reduced for any shares tendered as of December 31, 1999.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains (losses) on
securities available-for-sale $ (4,827) $ 343 $ 1,122
Reclassification adjustments for gains and losses
recognized in income 9 (255) (21)
---------- ---------- ----------
Net unrealized gains (losses) (4,818) 88 1,101
Tax effect 1,638 (30) (375)
---------- ---------- ----------
Other comprehensive income (loss) $ (3,180) $ 58 $ 726
========== ========== ==========
</TABLE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed balance sheets and statements of income and cash
flows for First Ottawa Bancshares, Inc. without subsidiary.
Condensed balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Investment in subsidiary $ 25,983 $ 29,259
Dividends receivable 1,500 1,500
---------- ----------
Total assets $ 27,483 $ 30,759
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 1,500 $ 1,500
Shareholders' equity 25,983 29,259
---------- ----------
Total liabilities and shareholders' equity $ 27,483 $ 30,759
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed statements of income for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividends from Bank $ 2,250 $ 2,250 $ 2,250
Equity in (overdistributed) undistributed Bank income (96) 709 532
---------- ---------- ----------
NET INCOME $ 2,154 $ 2,959 $ 2,782
========== ========== ==========
</TABLE>
Condensed statements of cash flows for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,154 $ 2,959 $ 2,782
Adjustments to reconcile net income to
net cash from operating activities
Equity in overdistributed (undistributed)
Bank income 96 (709) (532)
---------- ---------- ----------
Net cash from operating activities 2,250 2,250 2,250
Cash flows from financing activities
Dividends paid (2,250) (2,250) (2,250)
---------- ---------- ----------
Net change in cash and cash equivalents - - -
Beginning cash and cash equivalents - - -
---------- ---------- ----------
Ending cash and cash equivalents $ - $ - $ -
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
31.
<PAGE>
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 3:00 p.m., local time on May
17, 2000 at the Banking House located at 701 LaSalle Street, Ottawa, Illinois
61350.
PRICE RANGE OF COMMON STOCK
As of March 24, 2000, there were approximately 597 shareholders of record and
663,627 outstanding shares of common stock.
The Company's Common Stock is not traded on any national or regional securities
exchange and there is no established public trading market for it. Transactions
in the Company's Common Stock have been infrequent. To the knowledge of the
Company's management, since January 1, 1998, an aggregate of approximately
155,924 shares of the Company's common stock were transferred in approximately
199 separate transactions, excluding the 86,373 shares purchased by the Company
at $57 per share on January 20, 2000 pursuant to a tender offer. See Note 12 to
the Company's Consolidated Financial Statements. These transfers represent both
transfers for consideration (i.e., sales) and transfers for no consideration
(e.g., gifts, estate transfers, etc.). The Company's management is unable to
differentiate such transfers and has limited knowledge of the sale prices for
transfers involving consideration. The last price known to the Company's
management was a sale of 4,900 shares on March 23, 2000 at $57 per share.
The following table sets forth dividends paid per share of the Company's common
stock on the dates indicated:
<TABLE>
<CAPTION>
Date Dividends
---- ---------
<S> <C>
January 1, 1998 $2.00
July 1, 1998 1.00
January 1, 1999 2.00
July 1, 1999 1.00
January 1, 2000 2.00
</TABLE>
<PAGE>
ANNUAL REPORT
A copy of First Ottawa Bancshares, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1999 as filed with the Securities and Exchange
Commission may be obtained without charge by contacting Cheryl Gage, First
Ottawa Bancshares, Inc., 701-705 LaSalle Street, Ottawa, Illinois 61350.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
INCORPORATION OR
PARENT SUBSIDIARY PERCENT OF OWNERSHIP ORGANIZATION
<S> <C> <C> <C>
The First
First Ottawa National Bank
Bancshares, Inc. of Ottawa 100% National Bank
</TABLE>
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of FIRST OTTAWA BANCSHARES, INC., a Delaware
Corporation ("First Ottawa"), does hereby constitute and appoint JOACHIM J.
BROWN and DONALD J. HARRIS, with full power to each of them to act alone, as the
true and lawful attorneys and agents of the undersigned, with full power of
substitution and resubstitution to each of said attorneys to execute, file, or
deliver any and all instruments and to do all acts and things which said
attorneys and agents, or any of them, deem advisable to enable First Ottawa to
comply with the Securities Exchange Act of 1934, as amended, and any
requirements or regulations of the Securities and Exchange Commission in respect
thereof, in connection with First Ottawa's filing of an annual report on Form
10-K for the Bank's fiscal year 1999 including specifically, but without
limitation of the general authority hereby granted, the power and authority to
sign his name as a director or officer, or both, of First Ottawa, as indicated
below opposite his signature, to the Form 10-K, and any amendment thereto; and
each of the undersigned does hereby fully ratify and confirm all that said
attorneys and agents, or any of them, or the substitute of any of them, shall do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power
of Attorney as of the 8th day of March 2000.
/s/ Joachim J. Brown
- -----------------------------------
JOACHIM J. BROWN Director and President/Chief
Executive Officer
(Principal Executive and Financial
Officer)
/s/ Bradley J. Armstrong
- -----------------------------------
BRADLEY J. ARMSTRONG Director
/s/ John L. Cantlin
- -----------------------------------
JOHN L. CANTLIN Director
/s/ Eugene P. Daugherity
- -----------------------------------
EUGENE P. DAUGHERITY Director
/s/ Thomas F. Godfrey
- -----------------------------------
THOMAS F. GODFREY Director
<PAGE>
/s/ Thomas E. Haeberle
- -----------------------------------
THOMAS E. HAEBERLE Director
/s/ Howard E. Jameson
- -----------------------------------
HOWARD E. JAMESON Director
/s/ Erika S. Kuiper
- -----------------------------------
ERIKA S. KUIPER Director
/s/ Thomas P. Rooney
- -----------------------------------
THOMAS P. ROONEY Director
/s/ William J. Walsh
- -----------------------------------
WILLIAM J. WALSH Director
/s/ Donald J. Harris
- -----------------------------------
DONALD J. HARRIS Executive Vice President, Cashier,
and Trust Officer (Principal
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,243
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,983
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 129,444
<ALLOWANCE> 1,059
<TOTAL-ASSETS> 240,490
<DEPOSITS> 183,889
<SHORT-TERM> 26,265
<LIABILITIES-OTHER> 4,353
<LONG-TERM> 0
0
0
<COMMON> 750
<OTHER-SE> 25,233
<TOTAL-LIABILITIES-AND-EQUITY> 240,490
<INTEREST-LOAN> 10,323
<INTEREST-INVEST> 6,163
<INTEREST-OTHER> 6
<INTEREST-TOTAL> 16,492
<INTEREST-DEPOSIT> 7,510
<INTEREST-EXPENSE> 8,265
<INTEREST-INCOME-NET> 8,227
<LOAN-LOSSES> 384
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 6,736
<INCOME-PRETAX> 2,603
<INCOME-PRE-EXTRAORDINARY> 2,603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,154
<EPS-BASIC> 2.87
<EPS-DILUTED> 2.87
<YIELD-ACTUAL> 4.11
<LOANS-NON> 397
<LOANS-PAST> 1,543
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,029
<CHARGE-OFFS> 472
<RECOVERIES> 118
<ALLOWANCE-CLOSE> 1,059
<ALLOWANCE-DOMESTIC> 1,059
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 98
</TABLE>
