Exhibit 13.1

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth selected consolidated financial and other data of First Ottawa Bancshares, Inc. and its wholly owned subsidiary, the First National Bank of Ottawa (the Bank) and the Bank’s wholly owned subsidiary, First Ottawa Financial Corporation, together referred to as the Company. 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.

	Year Ended December 31,
	2005			2004			2003			2002			2001
Statement of Income Data:
Total interest income	$	13,908		$	13,537		$	12,651		$	13,092		$	14,921
Total interest expense	4,613			4,200			4,384			5,733			7,773
Net interest income	9,295			9,337			8,267			7,359			7,148
Provision for loan losses	300			300			120			120			300
Noninterest income	2,842			3,195			2,592			2,444			2,457
Noninterest expenses	8,501			8,807			7,413			6,718			6,732
Income before income taxes	3,336			3,425			3,326			2,965			2,573
Provision for income taxes	791			797			867			678			460

Net income	$	2,545		$	2,628		$	2,459		$	2,287		$	2,113

Per Share Data:
Net income – basic	$	3.92		$	4.03		$	3.75		$	3.47		$	3.19
Net income – diluted	3.90			4.03			3.75			3.47			3.19
Cash dividends declared	3.00			3.00			3.00			3.00			3.00
Book value at end of year (1)	37.43			36.54			35.54			34.97			34.53

Selected Financial Ratios:
Return on average assets (1)	.87		%	.88		%	1.00		%	.99		%	.94		%
Return on average equity (1)	10.50			11.05			10.50			9.73			9.18
Dividend payout ratio	76.53			74.44			79.79			86.46			94.04
Average equity to average assets (1)	8.30			7.96			9.56			10.20			10.29
Net interest margin (tax equivalent)	3.70			3.60			3.89			3.77			3.74
Allowance for loan losses to total loans at the end of period	.88			.88			.80			1.06			1.01
Nonperforming loans to total loans at the end of period (2)	.87			1.55			2.04			1.83			1.15
Net loans charged off to average total loans	.09			.13			.21			.06			.25

Balance Sheet Data:
Total assets	$	278,739		$	288,659		$	294,490		$	240,662		$	232,565
Total earning assets	253,641			262,618			276,767			223,324			216,927
Average assets	290,765			299,665			247,961			232,335			224,653
Gross loans, including loans held for sale	152,860			134,493			131,948			111,454			109,508
Allowance for loan losses	1,344			1,174			1,049			1,167			1,109
Total deposits	239,881			253,964			264,921			193,767			165,267
Federal funds purchased and securities sold under agreements to repurchase	12,700			6,350			—			16,322			25,899
Shareholders’ equity	22,858			23,852			24,655			25,183			22,907

(1) Excludes unrealized gain (loss) on securities available—for–sale.

(2) Includes total nonaccrual loans, impaired loans, and all other loans 90 days past due and still accruing interest.

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, including under “Risk Factors” in Item I.A. of our Form 10-K.

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 (losses), gains (losses) on sales of loans, and other income. 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.

Net income was $2.5 million for the year ended December 31, 2005 compared to $2.6 million for the year ended December 31, 2004. The return on average assets was .87% in 2005 compared to .88% in 2004. The return on average equity decreased to 10.50% in 2005 from 11.05% in 2004. This resulted primarily from the decrease in net income partially offset by the change in average equity due to stock repurchases in 2005 and 2004.

Net income was $2.6 million for the year ended December 31, 2004 compared to $2.5 million for the year ended December 31, 2003. The return on average assets was .88% in 2004 compared to 1.00% in 2003. The return on average equity increased to 11.05% in 2004 from 10.50% in 2003. This resulted primarily from the increase in net income and the change in average equity due to stock repurchases in 2004 and 2003.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the Company’s consolidated financial statements for the year ended December 31, 2005. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Credit Losses– The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer–specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge–offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral–dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer–specific conditions affecting the identification and estimation of losses for larger non–homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecise risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Mortgage Servicing Rights– Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.

Derivatives– As a part of the Company’s funding strategy, derivative financial instruments, all of which are interest rate swap arrangements, are used to reduce exposure to changes in interest rates for certain financial instruments. These derivatives are accounted for by recognizing the fair value of the contracts on the balance sheet. The valuation of these derivatives is considered critical because carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for the interest rate swaps and related deposit products are provided by third parties.

Additionally, the Company has purchased certificate of deposits which contain an equity related embedded derivative component. The initial investment in the certificate of deposit is not at risk but the return on the investment is based on appreciation in the S&P 500 Index. Accordingly, the fair value of the embedded derivative is recorded at fair value as an adjustment to the certificate of deposit and interest income.

Stock Compensation– Grants under the Company’s stock incentive plan are accounted for under the provisions of Statement of Accounting Standards (SFAS) No. 123, applying the fair value method and the use of an option pricing model to estimate the value of the options granted. The stock options are granted with an exercise price equal to the market price at the date of grant. Resulting compensation expense, under the stock options, is measured and recorded based on the estimated value of the options.

Consolidated Financial Condition

Total assets at December 31, 2005 were $278.7 million compared to $288.7 million at December 31, 2004, a decrease of $10.0 million, or 3.5%. Despite the decrease in our total assets, our total loans increased 15.11% in 2005. Commercial and agricultural loans increased $5.3 million during 2005 due to an effort by management to increase the size of the commercial loan portfolio. Real estate loans also increased by $21.2 million during 2005, again due to an effort by management to increase the size of the portfolio. These increases were partially offset by the decrease in installment loans of $6.0 million due to a general decline in indirect lending volume and more stringent underwriting guidelines on consumer loans. Loans held for sale decreased by $1.7 million as refinancing activity cooled during 2005 as a result of the increase in interest rates throughout 2005 from the historical low levels of 2003. Contributing to the decrease in total assets was a $1.1 million decrease in cash and cash equivalents due to a reduction in the reserve amount required by the Federal Reserve Bank. Investment securities decreased by $14.0 million, and certificates of deposit held for investment purposes decreased by $13.1 million. Premises and equipment increased by $400,000 due to capital expenditures on existing buildings and the construction of a new Yorkville, Illinois branch facility. The increase in loans was funded by a decrease in securities and increases in federal funds purchased. Total borrowings increased $5.8 million as a result of a $7.1 million increase in federal funds purchased, a $559,000 decrease in other borrowings, and a $750,000 decrease in securities sold under repurchase agreements. Total deposits decreased $14.1 million. This decrease was primarily a result of management’s decision to reduce the number of special rate deposit products which were offered to attract customers in new markets in 2004.

Total equity was $22.9 million at December 31, 2005 compared to $23.9 million at December 31, 2004. The decrease was primarily the result of a decrease in the unrealized gain on securities available–for–sale, net of tax, of $1.5 million, dividends declared of $1.9 million and by the repurchase of Company common stock for $89,000. The decrease was partially offset by net income of $2.5 million.

Consolidated Results of Operations

2005 Compared to 2004

Net Interest Income. Net interest income was $9.3 million in 2005 and 2004. Interest income on earning assets increased $371,000 in 2005 from 2004. This increase was primarily attributable to increased interest income earned on the loan portfolio of $1.1 million, tax exempt securities of $50,000, and federal funds sold of $193,000. The increases were attributable to increases in average balances and also average tax–equivalent yields available in the marketplace in 2005. Increases were offset by decreased interest income earned on taxable securities of $904,000, and certificates of deposit held for investment of $78,000. Interest expense on interest–bearing liabilities increased $413,000 as a result of an increase in the average rate paid on liabilities of 25 basis points, from 1.73% in 2004 to 1.98% in 2005. The net interest margin on a tax equivalent basis increased to 3.70% in 2005 from 3.60% in 2004. The primary reason for the increase in the net interest margin was the result of a gradual reallocation to loans which earn at higher rates than other types of interest-bearing assets.

Provision for Loan Losses. The provision for loan losses remained constant at $300,000 in 2005 and 2004. As of December 31, 2005, the allowance for loan losses totaled $1.3 million, or ..88% of total loans, compared to $1.2 million, or .88% of total loans, at December 31, 2004. The increase in the allowance for loan losses in 2005 was influenced by the continued growth in the loan portfolio.

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 the loan portfolio. Along with other financial institutions, management shares a concern for the outlook of the economy for 2006. Even though there are indications of emerging strength, it is uncertain if this strength is sustainable. If it is not sustainable, borrowers may experience difficulty, and the level of non–performing loans, charge-offs, and delinquencies could rise and require increases in the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions.

Management has concluded that the allowance for loan losses is adequate at December 31, 2005. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

Noninterest Income. The Company’s noninterest income decreased $353,000, or 11.0%, compared to 2004. Noninterest income decreased primarily due to gains on securities sold of $172,000 in 2005, a decrease of $293,000 compared to 2004, as the Company sold a large amount of securities for a gain in 2004. Gains on loan sales to the secondary market decreased $163,000 to $91,000 in 2005 compared to 2004 as a result of fewer originations of residential real estate loans in 2004 because of the general increase in interest rates in 2005. Service charges on deposit accounts increased modestly by $23,000, or 2.1%, to $1.1 million. Other income increased by $68,000, or 7.5%, compared to 2004. This increase is primarily due to a $188,000 increase in the market value of derivatives related to index powered certificates of deposit held for investments and for customers of the Bank. Trust and farm management fee income increased modestly by $12,000, to $496,000 in 2005 compared to 2004.

Noninterest Expense. The Company’s noninterest expense was $8.5 million in 2005 and $8.8 million for 2004. Salaries and benefits, which is the largest component of noninterest expense, remained constant at $4.7 million. Increases in occupancy and equipment expense of $10,000, data expense of $37,000, and supplies expense of $46,000 were offset by decreases in professional fees of $40,000, amortization of core deposit intangible expense of $80,000, and other expenses of $279,000. Other expense was reduced due to decreased collection expenses, decreased secondary mortgage market expenses, decreased directors’ life insurance expense and decreased miscellaneous loan expenses. Income tax expense decreased by $6,000 compared to the prior year. The Company’s effective tax rate increased slightly due to an increase in state income tax expense.

Income Taxes. The Company’s tax rate varied from statutory rates principally due to interest income from tax–exempt securities and loans. The Company’s effective tax rate was 23.7% and 23.3% for 2005 and 2004.

2004 Compared to 2003

Net Interest Income. Net interest income was $9.3 million in 2004 compared to $8.3 million in 2003, an increase of $1.0 million, or 12.9%. Interest income on earning assets increased $886,000 in 2004 from 2003. All classifications of interest earning assets experienced growth in 2004 when compared to 2003. The increases were attributable to increases in average balances and also average tax–equivalent yields available in the marketplace in 2004. Interest expense on interest–bearing liabilities decreased $184,000 as a result of a decrease in the average rate paid on liabilities of 54 basis points, from 2.26% in 2003 to 1.72% in 2004. The net interest margin on a tax equivalent basis decreased to 3.60% in 2004 from 3.89% in 2003. The primary reason for the decrease in the net interest margin was the result of lower rates earned on interest-bearing assets during the low rate environment experienced throughout 2004.

Provision for Loan Losses. The provision for loan losses increased to $300,000 in 2004 compared to $120,000 in 2003. As of December 31, 2004, the allowance for loan losses totaled $1.2 million, or .88% of total loans, compared to $1.1 million, or .80% of total loans, at December 31, 2003. The increase in the provision for loan losses in 2004 was influenced heavily by the acquisition of $11.4 million of Streator branch loans in the fourth quarter of 2003.

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 the loan portfolio. Along with other financial institutions, management shares a concern for the outlook of the economy for 2005. Even though there are indications of emerging strength, it is uncertain if this strength is sustainable. If it is not sustainable, borrowers may experience difficulty, and the level of non–performing loans, charge-offs, and delinquencies could rise and require increases in the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions.

Management has concluded that the allowance for loan losses is adequate at December 31, 2004. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

Noninterest Income. The Company’s noninterest income increased $603,000, or 23.3% compared to 2003. Noninterest income increased primarily due to gains on securities sold of $465,000 in 2004, an increase of $448,000 over 2003. Service charges on deposit accounts increased by $223,000, or 25.8%, to $1.1 million. Increases in service charge income are attributable to higher average balances and an increase in the average number of accounts during 2004. Other income increased by $399,000, or 79.2% compared to 2003. This increase is primarily due to a $301,000 increase in the market value of derivatives related to index powered certificates of deposit held for investments and for customers of the bank. Trust and farm management fee income increased modestly by $12,000, to $484,000 in 2004 compared to 2003. Gains on loan sales to the secondary market decreased $479,000 to $254,000 in 2004 compared to 2003. Due to the rate structure in early 2004 and the large amount of loans that refinanced during 2002 and 2003, gains on sale of loans during 2004 were significantly less than 2003.

Noninterest Expense. The Company’s noninterest expense was $8.8 million in 2004 and $7.4 million for 2003. Salaries and benefits, which is the largest component of noninterest expense, increased $529,000, or 12.8%, to $4.7 million. Increases in occupancy and equipment expense of $327,000, professional fees of $65,000 and other expenses of $299,000, contributed to the $1.4 million increase in noninterest expense for the year. Increased salaries and benefits were primarily a result of additional personnel retained in the acquisition of the two branches in Streator in November 2003. The increase in occupancy and equipment expenses was due primarily to increased depreciation on capital expenditures related to the renovation of the main banking facility in Ottawa, the acquisition of the Streator facilities, and the construction of the Morris facility. Increased professional fees were a result of the increase in audit costs and consulting costs associated with establishing new banking branches. Increases in other expenses resulted primarily from increased mortgage banking expenses of $53,000, and additional insurance expenses related to added facilities of $98,000. Data expenses decreased $166,000, or 33.2% from 2003, and were a result of a platform conversion which was completed in November 2003. The Company also experienced decreases in supplies expense of $25,000, and advertising expense of $72,000, during 2004.

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)

	2005 – 2004									2004 – 2003
	Increase (Decrease)									Increase (Decrease)
	Total Change			Change Due to Volume			Change Due to Rate			Total Change			Change Due to Volume			Change Due to Rate
INTEREST INCOME

Loans	$	1,136		$	708		$	428		$	242		$	1,019		$	(777	)
Investment CDs	(78		)	(101		)	23			276			290			(14		)
Securities	(828		)	(701		)	(127		)	441			989			(548		)
Federal funds sold	193			107			86			8			3			5
Total interest income	423			13			410			967			2,301			(1,334		)

INTEREST EXPENSE

NOW and money market	116			(114		)	230			546			441			105
Savings	(31		)	(11		)	(20		)	(36		)	47			(83		)
Time deposits	297			9			288			(555		)	336			(891		)
Repurchase agreements	2			—			2			(8		)	(2		)	(6		)
Borrowings	(4		)	(20		)	16			(134		)	(195		)	61
Federal funds purchased	33			18			15			2			3			(1		)
Total interest expense	413			(118		)	531			(185		)	630			(815		)

Net interest earnings	10			131			(121		)	1,152			1,671			(519		)
Tax equivalent adjustment	(52		)	—			(52		)	(82		)	—			(82		)

Net interest earnings after tax equivalent adjustment	$	(42	)	$	131		$	(173	)	$	1,070		$	1,671		$	(601	)

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.

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.

Analysis of Average Balances, Tax Equivalent Yields and Rates

Years Ended December 31, 2005, 2004, and 2003

(in Thousands)

	2005						2004						2003
	Average Balance (4)		Interest		Average Rate		Average Balance (4)		Interest		Average Rate		Average Balance (4)		Interest		Average Rate
ASSETS

Loans (1) (3)	$	141,807	$	9,467	6.68	%	$	131,191	$	8,331	6.35	%	$	115,140	$	8,089	7.03	%
Investment CDs	17,685		555		3.14		20,910		633		3.03		11,341		357		3.15
Securities (2) (5)	100,187		4,209		4.20		116,892		5,037		4.31		93,944		4,596		4.89
Federal funds sold	6,635		233		3.51		3,589		40		1.11		3,308		32		.97
Interest–earning assets	266,314		14,464		5.43		272,582		14,041		5.15		223,733		13,074		5.84
Noninterest–earning assets (6)	29,365						27,083						24,228

Average assets	$	295,679					$	299,665					$	247,961

LIABILITIES AND SHAREHOLDERS’ EQUITY

NOW and money market	$	98,826	1,370		1.39		$	107,136	1,254		1.17		$	69,435	708		1.02
Savings	27,083		140		.52		29,121		171		.59		21,158		207		.98
Time deposits	105,301		3,034		2.88		105,002		2,737		2.61		92,110		3,292		3.57
Repurchase agreements	232		4		1.72		215		2		.93		475		10		2.11
Federal funds purchased	1,715		57		3.32		1,175		24		2.04		10,713		158		1.47
Borrowings	126		8		6.35		438		12		2.74		313		10		3.19
Interest–bearing liabilities	233,283		4,613		1.98		243,087		4,200		1.73		194,204		4,385		2.26

Net interest income (2)			9,851						9,841						8,689
Net yield on interest– earning assets					3.70						3.61						3.88
Interest–bearing liabilities to earning assets ratio					87.60						89.18						86.80
Noninterest–bearing liabilities	38,959						32,185						28,331

Shareholders’ equity	23,487						24,393						24,426
Average liabilities and shareholders’ equity	$	295,679					$	299,665					$	246,961
Tax equivalent adjustment			556						504						422
Net interest income as reported in the consolidated statements of income			$	9,295					$	9,337					$	8,267

(1) Interest income on loans includes loan origination and other fees of $136 for 2005, $168 for 2004, and $275 for 2003.

(2) Loan and securities income is reflected on a fully tax–equivalent basis utilizing a 34% rate for municipal securities and tax–exempt loans.

(3) Non–accrual loans are included in average loans.

(4) Average balances are derived from the average daily balances.

(5) Rate information is calculated based upon average amortized cost.

(6) Average balance information includes an average valuation allowance for securities of $(1,228), $909, and $3,375, respectively.

Impact of Accounting Changes

Shared-Based Payment

In December 2004, the FASB issued SFAS No. 123, Revised, Share-Based Payment (SFAS 123(R)), which requires all public companies to record compensation cost for stock options and other awards provided to employees in return for employee service. The cost of the options is measured at the fair value of the options when granted and is expensed over the employee service period, which is normally the vesting period of the options granted. The Company adopted SFAS 123(R) on January 1, 2006. Future compensation cost and the impact on the Company’s results of operation as a result of any future option grants will depend on the level of any future option grants, the related vesting period, and the calculation of the fair value of the options granted as of the grant date. As such, the Company cannot currently estimate compensation expense relating to future awards.

Since the Company previously accounted for its stock options in accordance with SFAS No. 123, the adoption of SFAS No. 123(R) is not expected to have a significant impact on the Company’s financial condition or results of operations.

The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

In January 2003, the Emerging Issues Task Force (EITF) began a project to provide additional guidance on when a market value decline on debt and marketable equity securities should be considered other-than-temporary. Currently, declines in market value that are considered to be other-than-temporary require that a loss be recognized through the income statement. In March 2004, the FASB ratified the consensus reached by the EITF in Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. In September 2004, the FASB issued a staff position (FSP 03-1-1) which delayed the effective date for the measurement and recognition guidance of EITF 03-1 due to additional proposed guidance.

In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the FASB staff to issue a FASB Staff Position (FSP) titled FSP 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The final FSP supersedes EITF 03-1 and EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment Upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. FSP FAS 115-1 replaces guidance in EITF 03-1 on loss recognition with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). FSP FAS 115-1 also clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made.

FSP FAS 115-1 was effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company has consistently followed the loss recognition guidance in SFAS No. 115, so the adoption of FSP FAS 115-1 did not have a significant impact on the Company’s financial condition or results of operations.

Earnings Per Share

On September 30, 2005, the FASB issued a proposed amendment to SFAS No. 128, Earnings per Share, to clarify guidance for mandatorily convertible instruments, the treasury stock method, contingently issuable shares, and contracts that may be settled in cash or shares. The primary impact on the Company of the proposed Statement would be a change to the treasury stock method for year-to-date diluted earnings per share.

FIRST OTTAWA BANCSHARES, INC. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company uses overall risk sensitivity to monitor and manage exposure to sudden changes in interest rates. The Company’s overall interest rate sensitivity is demonstrated by a net interest income 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 1.0% increases and decreases in market interest rates. The tables below present the Company’s projected changes in net income for the various rate shock levels for the periods ended December 31, 2005 and 2004.

	2005 Net Interest Income
	Amount		Change			Percentage Change
	(Dollars in Thousands)
+100 bp	$	2,812	$	(68	)	(2.4	)%
Base	2,880		—			—
–100 bp	2,943		63			2.2	%

	2004 Net Interest Income
	Amount		Change			Percentage Change
	(Dollars in Thousands)
+100 bp	$	2,045	$	(100	)	(4.7	)%
Base	2,145		—			—
–100 bp	2,287		142			6.6	%

As shown above, at December 31, 2005, the effect of an immediate 100 basis point increase in interest rates would decrease the Company’s net income by 2.4%, or approximately $68,000. The effect of an immediate 100 basis point decrease in rates would increase the Company’s net interest income by 2.2%, or approximately $63,000. The Company’s Board of Directors has set a risk tolerance limit of 10% of estimated net interest income for the succeeding 12 months based on an immediate 200 basis point change in market prices.

Interest rate sensitivity reflected modest exposure in an increasing rate environment at the end of 2005 and 2004. Overall net interest income sensitivity decreased in 2005 compared to 2004.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, repurchase agreements, and proceeds from principal and interest payments on loans and securities. While maturities and scheduled amortization of loans and securities and calls of 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 $4.6 million, $4.4 million, and $1.9 million for the years ended December 31, 2005, 2004, and 2003. Net cash from investing activities consisted primarily of principal collections on loans and proceeds from maturation and sales of securities offset by disbursements for loan originations and the purchase of securities. In 2003, cash flows from investing activities were also affected by the $51.2 million in cash received in connection with the branch acquisition. Net cash from financing activities consisted primarily of changes in net deposits and short–term borrowings partially offset by dividends paid and the purchase of Company stock.

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, 2005, cash and short–term investments totaled $6.9 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, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago and Marshall and Ilsley Bank.

The following table discloses contractual obligations and commercial commitments of the Company as of December 31, 2005:

				Less Than						After
	Total			1 Year		1 – 3 Years		4 – 5 Years		5 Years
Lines of credit(1)	$		13,143	$	7,900	$	3,143	$	751	$	1,349
Data processing contract payable	688			198		490		—		—
Standby letters of credit(1)	721			721		—		—		—

	$	14,552		$	8,819	$	3,633	$	751	$	1,349

(1) Represents amounts committed to customers.

During 2005 and 2004, the Company repurchased 1,260 and 1,018 shares of common stock for $89,000 and $71,000.

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. At December 31, 2005, all of the Company’s ratios exceeded the levels required under regulatory guidelines as shown in Note 15 of the Consolidated Financial Statements.

Facilities

First Ottawa Bancshares, Inc. is the holding company for First National Bank of Ottawa. The Company is headquartered in Ottawa, Illinois and operates four offices in Ottawa, two branches in Streator, a branch in Morris and a recently opened branch in Yorkville.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, 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.

SAFE HARBOR STATEMENT

This document contains, and future oral and written statements of the Company and its management may contain, forward–looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward–looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward–looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

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 its subsidiaries include, but are not limited to, the following:

• The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

• The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

• The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

• The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

• The inability of the Company to obtain new customers and to retain existing customers.

• The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

• Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

• The ability of the Company to develop and maintain secure and reliable electronic systems.

• The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

• Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.

• The costs, effects and outcomes of existing or future litigation.

• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

• The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward–looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s Form 10-K under Item I.A. entitled “Risk Factors” and in other filings with the Securities and Exchange Commission.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

First Ottawa Bancshares, Inc.

Ottawa, Illinois

We have audited the accompanying consolidated balance sheets of First Ottawa Bancshares, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.



BKD, LLP

Indianapolis, Indiana
January 20, 2006

FIRST OTTAWA BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

(In thousands, except share and per share data)

	2005			2004
Assets
Cash and due from banks	$	6,857		$	7,930
Interest–bearing demand deposits	—			—
Cash and cash equivalents	6,857			7,930
Certificates of deposit	11,494			24,647
Investment securities available for sale	90,631			104,652
Loans held for sale	—			1,701
Loans, net of allowance for loan losses of $1,344 and $1,174	151,516			131,618
Premises and equipment	8,024			7,624
Interest receivable and other assets	10,217			10,487

Total assets	$	278,739		$	288,659

Liabilities and Shareholders’ Equity

Liabilities
Deposits	$	239,881		$	253,964
Federal funds purchased	12,700			5,600
Securities sold under agreement to repurchase	—			750
Other borrowings	—			559
Other liabilities	3,300			3,934
Total liabilities	255,881			264,807

Commitments and Contingencies

Shareholders’ Equity
Preferred stock, $1 par value Authorized and unissued – 20,000 shares	—			—
Common stock, $1 par value, 1,000,000 shares authorized and 750,000 issued	750			750
Additional paid–in capital	4,039			4,018
Retained earnings	25,258			24,662
Treasury stock, at cost – 100,651 and 99,391 shares	(5,745		)	(5,656		)
Accumulated other comprehensive income (loss)	(1,444		)	78
Total shareholders’ equity	22,858			23,852

Total liabilities and shareholders’ equity	$	278,739		$	288,659

See notes to consolidated financial statements.

FIRST OTTAWA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2005, 2004 and 2003

(In thousands, except share and per share data)

	2005		2004		2003
Interest and Dividend Income
Loans receivable	$	9,428	$	8,318	$	8,057
Investment securities
Taxable	2,688		3,592		3,457
Exempt from federal tax	1,004		954		748
Federal funds sold	233		40		32
Interest–bearing deposits	555		633		357
Total interest and dividend income	13,908		13,537		12,651

Interest Expense
Deposits	4,544		4,162		4,207
Repurchase agreements	4		2		10
Federal funds purchased	57		24		158
Other interest expense	8		12		9
Total interest expense	4,613		4,200		4,384

Net Interest Income	9,295		9,337		8,267
Provision for loan losses	300		300		120
Net Interest Income After Provision for Loan Losses	8,995		9,037		8,147

Noninterest Income
Service fee income	1,112		1,089		866
Trust and farm management fee income	496		484		472
Net realized gains on sales of available–for–sale securities	172		465		—
Net gains on sales of loans	91		254		733
Other income	971		903		521
Total noninterest income	2,842		3,195		2,592

Noninterest Expenses
Salaries and employee benefits	4,651		4,651		4,122
Occupancy and equipment expense	1,280		1,270		943
Data processing fees	371		334		500
Supplies	211		165		190
Professional fees	444		484		419
Amortization of core deposit intangibles	319		399		34
Other expenses	1,225		1,504		1,205
Total noninterest expenses	8,501		8,807		7,413

Income Before Income Tax	3,336		3,425		3,326
Income tax expense	791		797		867

Net Income	$	2,545	$	2,628	$	2,459

Earnings Per Share – Basic	$	3.92	$	4.03	$	3.75

Earnings Per Share – Diluted	$	3.90	$	4.03	$	3.75

Average Shares Outstanding	649,830		651,561		655,243

See notes to consolidated financial statements.

FIRST OTTAWA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003

(In thousands, except share and per share data)

	Common Stock		Additional Paid–in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances, January 1, 2003	$	750	$	4,000	$	23,491		$	(5,270	)	$	2,212		$	25,183
Comprehensive income
Net income					2,459									2,459
Other comprehensive income, net of tax – unrealized losses on securities											(718		)	(718		)
Comprehensive income														1,741
Cash dividends ($3.00 per share)					(1,962		)							(1,962		)
Stock options vested			8											8
Purchase of 5,329 treasury shares								(315		)				(315		)

Balances, December 31, 2003	750		4,008		23,988			(5,585		)	1,494			24,655
Comprehensive income
Net income					2,628									2,628
Other comprehensive income, net of tax – unrealized losses on securities											(1,416		)	(1,416		)
Comprehensive income														1,212
Cash dividends ($3.00 per share)					(1,954		)							(1,954		)
Stock options vested			10											10
Purchase of 1,018 treasury shares								(71		)				(71		)

Balances, December 31, 2004	750		4,018		24,662			(5,656		)	78			23,852
Comprehensive income
Net income					2,545									2,545
Other comprehensive income, net of tax – unrealized losses on securities											(1,522		)	(1,522		)
Comprehensive income														1,023
Cash dividends ($3.00 per share)					(1,949		)							(1,949		)
Stock options vested			21											21
Purchase of 1,260 treasury shares								(89		)				(89		)

Balances, December 31, 2005	$	750	$	4,039	$	25,258		$	(5,745	)	$	(1,444	)	$	22,858

See notes to consolidated financial statements.

FIRST OTTAWA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

(In thousands, except per share data)

	2005			2004			2003
Operating Activities
Net income	$	2,545		$	2,628		$	2,459
Items not requiring (providing) cash
Provision for loan losses	300			300			120
Premium amortization on securities, net	421			502			189
Derivative valuation adjustment	(373		)	(411		)	—
Depreciation and amortization	822			871			335
Loans originated for sale, net	518			197			900
Gains on sales of securities, net	(172		)	(465		)	—
Gains on sales of loans held for sale	(91		)	(254		)	(733		)
Change in
Interest receivable and other assets	419			791			(1,465		)
Interest payable and other liabilities	151			241			70
Net cash provided by operating activities	4,540			4,400			1,875

Investing Activities
Purchases of securities available for sale	(4,729		)	(32,247		)	(43,703		)
Proceeds from maturities and paydowns of securities available for sale	9,364			21,616			27,879
Proceeds from sales of securities available for sale	6,830			17,230			—
Purchases of certificates of deposit	(3,460		)	(18,086		)	(8,090		)
Proceeds from maturities of certificates of deposit	16,986			7,040			7,885
Net change in loans	(19,392		)	(2,804		)	(9,295		)
Purchases of premises and equipment	(903		)	(543		)	(2,537		)
Cash received in branch acquisition	—			—			52,163
Net cash provided by (used in) investing activities	4,696			(7,794		)	24,302

Financing Activities
Net change in
Deposits	(14,083		)	(10,957		)	1,866
Federal funds purchased	7,100			5,600			(14,700		)
Securities sold under agreements to repurchase	(750		)	750			(1,622		)
Proceeds from borrowings	27			70			—
Repayment of borrowings	(586		)	(1		)	(162		)
Purchase of treasury stock	(89		)	(71		)	(315		)
Stock options vested	21			10			—
Cash dividends	(1,949		)	(1,954		)	(1,973		)
Net cash used in financing activities	(10,309		)	(6,553		)	(16,906		)

Net Change in Cash and Cash Equivalents	(1,073		)	(9,947		)	9,271

Cash and Cash Equivalents, Beginning of Year	7,930			17,877			8,606

Cash and Cash Equivalents, End of Year	$	6,857		$	7,930		$	17,877

Additional Cash Flows Information
Interest paid	$	4,482		$	4,460		$	4,552
Income tax paid, net of refunds	729			158			821
Transfers from loans to foreclosed real estate	468			141			174

Assets acquired and liabilities assumed in branch acquisition:
Loans	—			—			11,774
Premises and equipment	—			—			780
Goodwill and core deposit intangibles	—			—			4,553
Other assets, net	—			—			18
Deposits	—			—			(69,288		)

See notes to consolidated financial statements.

FIRST OTTAWA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Table dollar amounts in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: First Ottawa Bancshares, Inc. is a bank holding company whose principal activity is the ownership and management of its wholly–owned subsidiary, First National Bank of Ottawa (Bank). The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in LaSalle, Grundy and surrounding counties in Illinois. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The consolidated financial statements include First Ottawa Bancshares, Inc. and the Bank, and the Bank’s wholly owned subsidiary, First Ottawa Financial Corporation, together referred to as the Company. Intercompany transactions and balances are eliminated in consolidation.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, 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, derivatives, and status of contingencies are particularly subject to change.

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. Equity securities include Federal Home Loan Bank stock and Federal Reserve Bank stock, which are restricted securities that are carried at cost, and a mutual fund investment that is carried at fair value. 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.

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Derivatives: All derivative instruments are recorded at their fair values and the change in the fair value of a derivative is included in interest income. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

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.

Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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 judgment, 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.

Premises and Equipment: Asset cost is reported net of accumulated depreciation. Buildings and related components are depreciated using the straight–line method with useful lives ranging from 7 to 39 years. Furniture, fixtures and equipment are depreciated using the straight–line method with useful lives ranging from 5 to 15 years. 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.

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.

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 using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. Any impairment of a grouping is reported as a valuation allowance. There was no such valuation allowance recorded at December 31, 2005 and 2004, and mortgage servicing rights were not material at either date.

Intangible Assets: Core deposit intangibles are being amortized on an accelerated basis over 11 years and are periodically evaluated as to the recoverability of their carrying value.

Goodwill: Goodwill is reviewed for impairment annually with any loss recognized through the income statement.

Stock Options: The Company has a stock–based compensation plan, which is more fully described in Note 12. The Company accounts for this plan under the recognition and measurement principles of Statement of Financial Accounting Standards No. 123, Accounting for Stock–Based Compensation, using the fair value method. The value of options granted under this plan is charged to expense over the vesting period of the grants.

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.

Earnings Per Share: Basic earnings per share is calculated based on the weighted-average common shares outstanding during the year.

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.

Comprehensive Income: Comprehensive income includes both net income and other comprehensive income (loss). Other comprehensive income (loss) includes the changes in unrealized gains and losses on securities available–for–sale, and minimum pension liability, net of deferred income taxes.

Reclassifications: Some items in the prior years’ financial statements were reclassified to conform to the current presentation.

Pending Accounting Pronouncements

Shared-Based Payment

The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

Earnings Per Share

NOTE 2 – BUSINESS COMBINATION

On November 14, 2003, the Company assumed substantially all of the deposit liabilities and certain loans and other assets of two branch offices located in Streator, Illinois from First Midwest Bank. As a result of the acquisition, the Company has an opportunity to increase its customer base and continue to increase its market share.

The acquisition was accounted for under the purchase method of accounting. All assets and liabilities were recorded at their fair values as of November 14, 2003, including goodwill of $2,446,000 which is deductible for tax purposes. Additionally, core deposit intangibles totaling $2,027,000 were recognized and will be amortized over 11 years using a declining balance method. The purchase accounting adjustments are being amortized over the life of the respective asset or liability. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Loans	$	11,774
Premises and equipment	780
Goodwill and core deposit intangibles	4,553
Other assets, net	18
Deposits	(69,288		)

Net liabilities assumed and cash received	$	(52,163	)

The accumulated amortization of the core deposit intangibles at December 31, 2005 totaled $751,000. Estimated amortization expense for each of the following three years is $255,000, $204,000 and $163,000.

NOTE 3 – SECURITIES AVAILABLE FOR SALE

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2005
U. S. Treasury	$	10,086	$	—	$	(284	)	$	9,802
Federal agencies	40,364		2		(961		)	39,405
State and municipal	25,455		225		(484		)	25,196
Mortgage–backed securities and collateralized mortgage obligations	10,082		43		(256		)	9,869
Corporate obligations	3,416		—		(97		)	3,319
Marketable equity securities	3,086		—		(46		)	3,040

Total investment securities	$	92,489	$	270	$	(2,128	)	$	90,631

	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2004
U. S. Treasury	$		10,103	$	1	$	(45	)	$	10,059
Federal agencies	47,482			345		(226		)	47,601
State and municipal	26,250			576		(244		)	26,582
Mortgage–backed securities and collateralized mortgage obligations	12,252			120		(32		)	12,340
Corporate obligations	4,686			20		(53		)	4,653
Marketable equity securities	3,431			14		(28		)	3,417

Total investment securities	$	104,204		$	1,076	$	(628	)	$	104,652

As of December 31, 2005 and 2004, the Company had approximately $4,269,000 and $4,505,000 invested in bonds issued by municipalities located within LaSalle County, Illinois.

Securities with an approximate carrying value of $58,012,000 and $59,097,000 were pledged at December 31, 2005 and 2004 to secure trust and public deposits, repurchase agreements, and for other purposes as required or permitted by law.

The fair value of contractual maturities of securities available for sale at December 31, 2005 were as follows. Securities not due at a single maturity date, primarily mortgage–backed and equity securities, are shown separately.

	Amortized Cost		Fair Value
Within one year	$	6,366	$	5,975
One to five years	69,309		67,133
Five to ten years	815		1,689
After ten years	2,831		2,925
	79,321		77,722
Mortgage–backed securities and collateralized mortgage obligations	10,082		9,869
Marketable equity securities	3,086		3,040
Totals	$	92,489	$	90,631

Information regarding realized gains and losses on sales of securities available for sale follows:

	2005		2004		2003
Gross gains	$	178	$	465	$	—
Gross losses	6		—		—
Tax expense	58		158		—

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2005 and 2004 was $79.3 million and $48.9 million, which was approximately 87.4% and 47.1% of the Company’s available–for–sale investment portfolio at those dates. These declines primarily resulted from increases in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other–than–temporary impairment is identified.

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

December 31, 2005

U. S. Treasury	$	—	$	—	$	9,802	$	284	$	9,802	$	284
Federal agencies	14,711		238		23,691		723		38,402		961
State and municipal	4,774		34		11,646		450		16,420		484
Mortgage–backed securities and collateralized mortgage obligations	4,970		151		3,388		105		8,358		256
Corporate obligations	—		—		3,319		97		3,319		97
Marketable equity securities	—		—		3,040		46		3,040		46
Total temporarily impaired securities	$	24,455	$	423	$	54,886	$	1,705	$	79,341	$	2,128

December 31, 2004

U. S. Treasury	$	8,062	$	45	$	—	$	—	$	8,062	$	45
Federal agencies	20,130		226		—		—		20,130		226
State and municipal	11,353		244		—		—		11,353		244
Mortgage–backed securities and collateralized mortgage obligations	5,458		31		6		1		5,464		32
Corporate obligations	3,328		53		—		—		3,328		53
Marketable equity securities	—		—		546		28		546		28
Total temporarily impaired securities	$	48,331	$	599	$	552	$	29	$	48,883	$	628

NOTE 4 – LOANS

Major classifications of loans as of December 31, 2005 and 2004 are summarized as follows:

	2005			2004
Real estate	$	95,469		$	74,225
Commercial and agricultural	33,686			28,341
Installment	11,585			17,575
Home equity lines of credit	12,120			12,651
Total loans	152,860			132,792
Allowance for loan losses	(1,344		)	(1,174		)

Net loans	$	151,516		$	131,618

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 and made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons is as follows:

Balance at January 1, 2005	$	1,655
New loans	1,511
Repayments	(715		)

Balance at December 31, 2005	$	2,451

Information regarding impaired loans at December 31, 2005 and 2004 is as follows:

	2005		2004
Impaired loans with an allowance	$	2,342	$	2,017
Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan	87		44

Total impaired loans	$	2,429	$	2,061

Allowance for impaired loans included in the Company’s allowance for loan losses	$	497	$	493

	2005		2004		2003
Average balance of impaired loans	$	2,039	$	2,074	$	1,599
Interest income recognized on impaired loans	169		127		157
Interest income recognized on impaired loans – cash basis	126		107		153

Nonperforming loans were as follows at December 31:

	2005		2004
Loans past due over 90 days still on accrual	$	1,337	$	727
Nonaccrual loans	—		161

NOTE 5 – ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is summarized as follows for the years ended December 31:

	2005				2004			2003
Allowance for loan losses
Balances, January 1	$		1,174		$	1,049		$	1,167
Provision for losses	300				300			120
Recoveries on loans	86				98			181
Loans charged off	(216			)	(273		)	(419		)

Balances, December 31	$	1,344			$	1,174		$	1,049

NOTE 6 – LOAN SALES AND SERVICING

The Company sells mortgage loans with servicing retained to the Federal Home Loan Mortgage Corporation (FHLMC) and the Illinois Housing Development Authority (IHDA). The Company realized gross proceeds from the sales of mortgage loans totaling $4,637,000, $9,133,000 and $26,296,000 in 2005, 2004 and 2003. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans are summarized as follows:

	2005		2004

Loans serviced for
Freddie Mac	$	32,757	$	35,698
IHDA	—		732

	$	32,757	$		36,430

Following is an analysis of the changes in originated mortgage servicing rights:

	2005				2004			2003
Mortgage Servicing Rights
Balances, January 1	$		380		$	445		$	301
Servicing rights capitalized	49				89			256
Amortization of servicing rights	(101			)	(154		)	(112		)

Balances, December 31	$	328			$	380		$	445

NOTE 7 – PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31:

	2005			2004
Cost
Land	$	1,791		$	1,816
Buildings and land improvements	7,428			6,809
Equipment	4,606			4,307
Construction in progress	—			46
Total cost	13,825			12,978
Accumulated depreciation and amortization	(5,801		)	(5,354		)

Net	$	8,024		$	7,624

NOTE 8 – DEPOSITS

Deposits consisted of the following at December 31:

	2005			2004
Noninterest–bearing demand	$	30,436		$	31,582
Interest–bearing demand	57,624			61,613
Savings	24,847			28,235
Money market savings	26,184			38,252
Certificates and other time deposits of $100,000 or more	31,420			22,462
Other certificates and time deposits	69,370			71,820

Total deposits	$		239,881	$	253,964

At December 31, 2005, the scheduled maturities of certificates of deposit were as follows:

2006	$	57,698
2007	19,630
2008	15,803
2009	5,626
2010	2,033

	$	100,790

Deposits held by the Company from related parties at December 31, 2005 and 2004 totaled $2.3 million and $2.2 million, respectively.

NOTE 9 – BORROWINGS

The Company has a note payable that consists of a $2,000,000 unsecured line of credit with Marshall & Ilsley Bank, maturing on August 25, 2006. The outstanding balance under the line of credit was $0 and $559,000 at December 31, 2005 and 2004. Interest is payable quarterly at LIBOR plus 165 basis points (5.96% and 4.07% at December 31, 2005 and 2004).

NOTE 10 – 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. The average balance during 2005 and 2004 was $232,000 and $215,000 with an interest rate of 1.63% for both years. The maximum month–end balance during 2005 and 2004 was $750,000 for both years.

NOTE 11 – BENEFIT PLANS

The Bank has a noncontributory defined-benefit pension plan covering all employees who meet the eligibility requirements. In 1999, all plan benefits were frozen. The Bank’s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Bank may determine to be appropriate from time to time. The Bank expects to contribute approximately $200,000 to the plan in 2005. The Bank uses a December 31 measurement date for the plan.

The following tables set forth the Bank’s pension plan’s funded status and amounts actuarially determined for the years indicated:

	2005			2004
Change in benefit obligation
Beginning benefit obligation	$	1,868		$	1,842
Interest cost	112			117
Actuarial loss	141			146
Settlements	(108		)	(107		)
Benefits paid	(126		)	(130		)

Ending benefit obligation	$	1,887		$	1,868

Change in plan assets
Beginning fair value	$	1,507		$	1,431
Actual return	49			113
Employer contribution	209			200
Settlements	(108		)	(107		)
Benefits paid	(126		)	(130		)

Ending fair value	$	1,531		$	1,507

Funded status	$	(356	)	$	(361	)
Unrecognized net actuarial loss	(436		)	(269		)

Prepaid (accrued) benefit cost	$	80		$	(92	)

Accumulated benefit obligation	$	1,887		$	1,868

Other amounts recognized in the balance sheets:

	2005			2004
Accumulated other comprehensive loss	$	(217	)	$	(217	)

	2005		2004		2003
Assumptions used to determine benefit obligations
Discount rate	5.75	%	6.00	%	6.25	%
Expected return on plan assets	7.0		7.0		7.0

Assumptions used to determine benefit costs
Discount rate	6.00	%	6.25	%	6.25	%
Expected return on plan assets	7.0		7.0		7.0

The Company has estimated the long–term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations and recent changes in long–term interest rates based on publicly available information.

	2005			2004			2003
Components of net periodic benefit cost
Interest cost	$	112		$	117		$	114
Return on plan assets	(106		)	(97		)	(82		)
Amortization	8			3			9

Net expense	$	14		$	23		$	41

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2005:

	Pension Benefits
2005	$	132
2006	126
2007	119
2008	118
2009	112
Thereafter	553

Plan assets are held by a bank–administered trust fund, which invests the plan assets in accordance with the provisions of the plan agreement. The permitted investments as established by the plan agreement include, but are not limited to, common and preferred stocks, open–end or closed–end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein.

Asset allocation is primarily based on a strategy to provide stable earnings while attempting to recognize potentially higher returns through limited investments in equity securities. Plan assets are rebalanced periodically. At December 31, 2005 and 2004, allocations by percentages were as follows:

	2005		2004
Equity mutual funds	64.2	%	63.8	%
Fixed income mutual funds	17.7		22.3
GNMA pool	.4		.6
Money market funds and other	4.8		13.3
Time Certificates of Deposit	13.0		—

At December 31, 2005 and 2004, market values of plan assets were as follows:

	2005		2004
Equity mutual funds	$	983	$	961
Fixed income mutual funds	271		336
GNMA pool	5		9
Money market funds and other	73		201
Time Certificates of Deposit	199		—

The Bank has a directors’ retirement plan which provides retirement benefits primarily to former members of the Board of Directors. The Bank also maintains a supplemental executive retirement plan that provides benefits to certain key executive officers and directors in accordance with the plan document. The Bank accrued expenses related to these plans totaling $105,000, $126,000 and $188,000 in 2005, 2004 and 2003.

The Company’s 401(k) profit-sharing plan covers eligible employees with more than one year of service, as defined, and who are at least 21 years of age. The plan allows employee contributions. The Company may make a matching contribution equal to a percentage of salary deferral and discretionary profit-sharing contributions. The matching percentage is limited to 6% of compensation. The Company’s contributions, which are made following the end of the calendar year, totaled $140,000, $140,000 and $122,000 for 2005, 2004 and 2003.

NOTE 12 – STOCK OPTION PLAN

The Company grants selected executives and other key employees and directors incentive and non–qualified stock option awards which vest and become fully exercisable at the discretion of the Board of Directors as the options are granted. The Company is authorized to grant options for up to 150,000 shares of the Company’s common stock. The exercise price of the options, which have a ten year life, may not be less than the market price of the Company’s stock on the date of grant.

The following is a summary of the status of the Company’s stock option plan and changes in that plan for 2005, 2004 and 2003. The Company had no grants outstanding prior to 2003.

	2005			2004			2003
Options	Shares	Weighted– Average Exercise Price		Shares	Weighted– Average Exercise Price		Shares	Weighted– Average Exercise Price
Outstanding, beginning of year	14,500	$	59.21	6,750	$	56.00	—	$
Granted	6,500	70.00		7,750	62.00		6,750	56.00

Outstanding, end of year	21,000	62.55		14,500	59.21		6,750	56.00

Options exercisable at year end	5,313			1,684			—

Weighted–average fair value of options granted during the year		$	3.26		$	1.30		$	7.36

At December 31, 2004, certain information by exercise price for options outstanding and exercisable is as follows:

Exercise Price		Number of Shares	Weighted– Average Remaining Contractual Life	Number of Shares Exercisable
$	56.00	6,750	7.5 years	3,375
62.00		7,750	8.5 years	1,938
70.00		6,500	9.5 years	—

The fair value of each option grant was estimated on the grant date using an option–pricing model with the following assumptions:

	2005		2004		2003

Risk–free interest rates	4.37	%	4.21	%	3.27	%
Dividend yields	4.29	%	4.35	%	4.96	%
Volatility factors of expected market price of common stock	5.37	%	3.06	%	23.55	%
Weighted–average expected life of the options	10 years		9.5 years		9.5 years

NOTE 13 – EARNINGS PER SHARE

Earnings per share (EPS) were computed as follows:

	Year Ended December 31, 2005
	Income			Weighted- Average Shares		Per Share Amount
Net income	$		2,545	$	649,830
Basic earnings per share
Income available to common stockholders						$	3.92

Effect of dilutive securities
Stock options	—			2,629
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	2,545		652,459		$	3.90

	Year Ended December 31, 2004
	Income			Weighted- Average Shares		Per Share Amount
Net income	$		2,628	$	651,561
Basic earnings per share
Income available to common stockholders						$	4.03

Effect of dilutive securities
Stock options	—			1,172
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	2,628		652,733		$	4.03

	Year Ended December 31, 2003
	Income			Weighted- Average Shares		Per Share Amount
Net income	$		2,459	$	655,243
Basic earnings per share
Income available to common stockholders						$	3.75

Effect of dilutive securities
Stock options	—			—
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	2,459		655,243		$	3.75

NOTE 14 – INCOME TAXES

The balance sheets included the following amounts of deferred tax assets and liabilities at December 31:

	2005			2004			2003
Income tax expense
Currently payable
Federal	$	721		$	337		$	619
State	88			(58		)	(8		)
Deferred	(18		)	518			256

Total income tax expense	$	791		$	797		$	867

Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34%	$	1,134		$	1,165		$	1,131
Tax–exempt income	(415		)	(330		)	(261		)
Nondeductible interest expense	—			24			21
Effect of state income taxes and other items, net	72			(62		)	(24		)

Actual tax expense	$	791		$	797		$	867

Effective tax rate	23.7		%	23.3		%	26.1		%

The components of the deferred asset (liability) included on the balance sheets are as follows:

	2005			2004
Assets
Unrealized losses on securities available for sale	$	632		$	—
Allowance for loan losses	341			270
Deferred compensation	278			259
Pension costs	—			201
Minimum pension liability	133			137
Other	52			49
Total assets	1,436			916

Liabilities
FHLB stock	(118		)	(98		)
Depreciation	(622		)	(584		)
Mortgage servicing rights	(135		)	(157		)
Unrealized gain on securities available for sale	—			(152		)
Other	(84		)	(112		)
Total liabilities	(959		)	(1,103		)

	$	(477	)	$	(187	)

NOTE 15 – DERIVATIVES

The Company uses derivatives to fix future cash flows for interest payments on some of its floating rate certificates of deposit. In this regard, the Company has entered into an interest rate swap with the FHLB of Chicago to fix the interest rate on a specific certificate of deposit product. At December 31, 2005, the Company had $2.8 million of certificates of deposit, which mature in 2006 through 2010, in which it pays the FHLB a weighted-average interest rate of 3.77% and will receive an interest rate from the FHLB based on the appreciation of the S&P 500 Index. This interest received from the FHLB will be paid to the customer. The assets and liabilities in this transaction are being netted and the expense recorded in interest expense on deposits.

In addition to the above, the Company also purchased $7.9 million of certificates of deposit which are included in the certificates of deposit caption on the consolidated balance sheet. These investments have a five year term from date of purchase. The investments that individually do not exceed $100,000 are insured by the FDIC. Investments that individually exceed $100,000 are guaranteed by a standby letter of credit issued by the FHLB of Pittsburgh with no interest. The initial investment is not at risk but the return on the investment is based on a calculation of the appreciation in the S&P 500 Index. The fair value of this embedded derivative is recorded in certificates of deposit and the fair value adjustment is included in other income. At December 31, 2005, the Bank had allocated $1.2 million to this asset and recorded a valuation allowance of $116,000.

NOTE 16 – 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 claims and legal actions is not expected to have a material effect on financial condition or results of operations.

The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2005 was $370,000.

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 amounts reported in the financial statements.

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 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:

	2005		2004

Unused lines of credit	$	13,143	$	12,163
Standby letter of credit	721		171

At December 31, 2005, all of the commitments to extend credit were at variable rates of interest.

NOTE 17 – 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. The fair value of loans held for sale and derivatives are based on quoted market prices. 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.

The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2005 and 2004 were as follows:

	2005				2004
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	6,857	$	6,857	$	7,930	$	7,930
Certificates of deposit and related derivative	11,494		11,209		24,647		24,647
Securities available for sale	90,631		90,631		104,652		104,652
Loans held for sale	—		—		1,701		1,701
Loans	151,516		151,460		131,618		132,474
Interest receivable	2,031		2,031		1,932		1,932

Liabilities
Deposits with no stated maturities	139,091		124,917		159,682		146,178
Time deposits	100,790		102,508		94,282		96,519
Federal funds purchased	12,700		12,700		5,600		5,600
Securities sold under agreement to repurchase	—		—		750		752
Other borrowings	—		—		559		559
Interest payable	702		702		571		571

NOTE 18 – REGULATORY AND CAPITAL MATTERS

The Company may pay dividends without restriction under the current Federal Reserve regulations so long as it remains “adequately capitalized” after such payment. The Bank is subject to statutory dividend restrictions which provide, in general, that the Bank may pay the current year’s earnings and the prior two years’ retained earnings without the prior approval of the Office of the Comptroller of Currency. At December 31, 2005, the Bank’s stockholder’s equity totaled $22,363,000, of which $21,827,000 was not available for payment of dividends, without prior regulatory approval.

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 measures of assets, liabilities, and certain off–balance–sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments 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.

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.

The Company’s only activity is ownership of the Bank, and, therefore, its capital, capital ratios, and minimum required levels of capital are materially the same as the Bank’s. The actual capital levels and minimum required levels for the Company were:

	Actual				Required for Adequate Capital				To Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2005
Total risk–based capital (to risk–weighted assets)	$	21,786	11.9	%	$	14,672	8.0	%	$	18,340	10.0	%
Tier 1 capital (to risk–weighted assets)	20,442		11.2	%	7,336		4.0	%	11,004		6.0	%
Tier 1 capital (to average assets)	20,442		7.2	%	11,331		4.0	%	14,163		5.0	%

December 31, 2004
Total risk–based capital (to risk–weighted assets)	$	20,769	12.2	%	$	13,600	8.0	%	$	16,991	10.0	%
Tier 1 capital (to risk–weighted assets)	19,595		11.5	%	6,800		4.0	%	10,200		6.0	%
Tier 1 capital (to average assets)	19,595		6.7	%	11,670		4.0	%	14,588		5.0	%

At December 31, 2005, 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.

NOTE 19 – OTHER COMPREHENSIVE LOSS

	2005			2004			2003
Unrealized losses on securities
Unrealized holding losses arising during the year	$	(2,135	)	$	(1,680	)	$	(1,086	)
Less: reclassification adjustment for gains realized in net income	172			465			—
Tax effect	785			729			368

Other comprehensive loss	$	(1,522	)	$	(1,416	)	$	(718	)

NOTE 20 – PARENT COMPANY FINANCIAL STATEMENTS

The following are the condensed balance sheets, statements of income and cash flows for First Ottawa Bancshares, Inc.

Condensed Balance Sheets

	2005		2004
Assets
Cash on deposit with Bank	$	1,733	$	1,304
Investment in common stock of Bank	22,364		24,031
Other assets	59		404

Total assets	$	24,156	$	25,739

Liabilities
Note payable	$	—	$	559
Dividends payable	1,298		1,303
Other liabilities	—		25
	1,298		1,887

Shareholders’ Equity	22,858		23,852

Total liabilities and shareholders’ equity	$	24,156	$	25,739

Condensed Statements of Income

	2005			2004		2003
Income - dividends from Bank	$	2,649		$	2,003	$	2,502

Other income - gain on the sale of investments	124			—		—

Expenses	83			85		109

Income before income tax and equity in undistributed income of subsidiary	2,690			1,918		2,393

Income tax benefit	—			29		33

Income before equity in undistributed income of subsidiary	2,690			1,947		2,426

Equity in undistributed income of subsidiary	(145		)	681		33

Net Income	$	2,545		$	2,628	$	2,459

Condensed Statements of Cash Flows

	2005			2004			2003
Operating Activities
Net income	$	2,545		$	2,628		$	2,459
Item not requiring (providing) cash
Equity in undistributed earnings of Bank	145			(681		)	(33		)
Gains on sales of securities, net	(124		)	—			—
Other	14			1,295			(1,302		)
Net cash provided by operating activities	2,580			3,242			1,124

Investing Activity - proceeds from sales of securities available for sale	469			—			—

Financing Activities
Purchase of treasury shares	(89		)	(71		)	(315		)
Loan proceeds (payments), net	(603		)	69			(161		)
Cash dividends	(1,949		)	(1,954		)	(1,973		)
Vested stock options	21			10			8
Net cash used in financing activities	(2,620		)	(1,946		)	(2,441		)

Net Change in Cash and Cash Equivalents	429			1,296			(1,317		)

Cash and Cash Equivalents, Beginning of Year	1,304			8			1,325

Cash and Cash Equivalents, End of Year	$	1,733		$	1,304		$	8

NOTE 21 – QUARTERLY FINANCIAL DATA (UNAUDITED)

	Interest Income		Interest Expense		Net Interest Income	Provision		Securities Gains		Net Income		Basic		Diluted
2005
First quarter	$	3,278	$	1,013	2,265	$	75	$	30	$	495	$	0.76	$	0.76
Second quarter	3,375		1,101		2,274	75		24		571		0.88		0.88
Third quarter	3,635		1,224		2,411	75		—		660		1.02		1.01
Fourth quarter	3,620		1,275		2,345	75		118		819		1.26		1.25
2004
First quarter	$	3,369	1,097		2,272	$	75	$	111	$	479	$	0.74	$	0.74
Second quarter	3,373		1,041		2,332	75		72		578		0.88		0.88
Third quarter	3,398		1,035		2,363	75		159		677		1.04		1.04
Fourth quarter	3,397		1,027		2,370	75		123		894		1.37		1.37

FIRST OTTAWA BANCSHARES, INC.

SHAREHOLDERS INFORMATION

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at 3 p.m., local time on May 17, 2006 at the corporate headquarters located at 701 LaSalle Street, Ottawa, Illinois 61350.

PRICE RANGE OF COMMON STOCK

As of February 7, 2006, there were approximately 539 shareholders of record and 649,349 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, during 2004, 2005 and the first month of 2006, an aggregate of approximately 129,603 shares of the Company’s common stock was transferred in approximately 117 separate transactions, excluding the 1,018 shares purchased by the Company in 2004 at $70 per share, and the 620 shares purchased at $70 per share and the 640 shares purchased at $72 per share by the Company in 2005. These transfers represented 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 30 shares on February 6, 2006 at $78 per share.

The following dividends per share were paid on the Company’s common stock on the dates indicated: January 1, 2004 – $2.00; July 1, 2004 – $1.00; January 1, 2005 – $2.00; July 1, 2005 – $1.00; January 1, 2006 – $2.00.

WEB SITE FOR UNITED STATES SECURITIES AND EXCHANGE COMMISSION FILINGS

All reports filed electronically by the Company with the United Stated Securities Exchange Commission (the “SEC”), including the annual report on Form 10–K, quarterly reports on Form 10–Q, and current events reports on Form 8–K, as well as any amendments to those reports are accessible at no cost on our internet site at www.firstottawa.com and on the SEC’s web site at www.sec.gov. We will also provide you with a copy free of charge by contacting Cheryl Gage, Corporate Secretary, First Ottawa Bancshares, Inc., 701 LaSalle Street, Ottawa, Illinois 61350.

CORPORATE GOVERNANCE

The Company’s corporate governance practices are described in the following documents, which are available on the Company’s Web site at www.firstottawa.com or which may be obtained in print form through the investor relations department: Code of Business Conduct and Ethics, Audit Committee Charter, Nominating and Corporate Governance Committee Charter, and Compensation Committee Charter.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

First Ottawa Bancshares (FOTB) 10-K2005 FY Annual report

Content analysis

Overview

Critical Accounting Policies

Consolidated Results of Operations

2005 Compared to 2004

2004 Compared to 2003

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.

Interest–Earning Assets and Interest–Bearing Liabilities

Analysis of Average Balances, Tax Equivalent Yields and Rates

Impact of Accounting Changes

Pending Accounting Pronouncements