**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**For the fiscal year ended December 31,2007**

 

**Commission file number:  005-57237**

 

**FIRST OTTAWA BANCSHARES, INC.**

(Exact name of Registrant as specified in itscharter)

 

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

 

**(815)434-0044**

(RegistrantTelephone Number,

includingArea Code)

 

Securities registered under Section 12(b) ofthe Exchange Act:

None

 

Securities registered under Section 12(g) ofthe Exchange Act:

 

**Common Stock, par value $1.00 pershare**

(Title of Class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  

|   |   | Yes o |   | No x |
|--------|--------|-------|--------|------|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.            

|   |   | Yes o |   | No x |
|--------|--------|-------|--------|------|

 

        Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.                                                                    

|   | Yes x |   | No o |
|--------|-------|--------|------|

        Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

|                       |   |                 |   |                                             |   |                         |
|----------------------------|--------|----------------------|--------|--------------------------------------------------|--------|------------------------------|
| Large  accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer o                         |   | Smaller reporting  company x |
|                       |   |                 |   | (Do not check if a 

smaller  reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).                             

|   | Yes o |   | No  x |
|--------|-------|--------|------------|

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant, based on the last known sales price on or prior to June 30,2007, the last business day of the Company’s most recently completed secondfiscal quarter, was $43,813,678.

 

646,286 shares of common stock were outstanding as of February 29,2008.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

                The Company’s 2007 Annual Report to Stockholders isincorporated by reference in Parts II and IV, and the Company’s Proxy Statementfor the Annual Meeting of Stockholders to be held May 21, 2008 isincorporated by reference in Part III.

 

            Except for those portions of the 2007 Annual Reportincorporated by reference, the Annual Report is not deemed filed as part ofthis Report.

 

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INDEX

 

 
| ** **    | ** **                                                                                                           | **Page No.** |
|---------------|----------------------------------------------------------------------------------------------------------------------|-------------------|
| PART I   |                                                                                                                 |              |
|          |                                                                                                                 |              |
| Item 1        | Business                                                                                                             | 1                 |
| Item 1A       | Risk Factors                                                                                                         | 21                |
| Item 1B       | Unresolved Staff Comments                                                                                            | 21                |
| Item 2        | Properties                                                                                                           | 21                |
| Item 3        | Legal Proceedings                                                                                                    | 21                |
| Item 4        | Submission of  Matters to a Vote of Security Holders                                                                 | 21                |
|          |                                                                                                                 |              |
|          |                                                                                                                 |              |
| PART II  |                                                                                                                 |              |
|          |                                                                                                                 |              |
| Item 5        | Market for the  Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities | 22                |
| Item 6        | Selected Financial  Data                                                                                             | 22                |
| Item 7        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 23                |
| Item 7A       | Quantitative  and Qualitative Disclosures about Market Risk                                                          | 23                |
| Item 8        | Financial  Statements and Supplementary Data                                                                         | 23                |
| Item 9        | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                | 23                |
| Item 9A       | Controls and  Procedures                                                                                             | 24                |
| Item 9B       | Other Information                                                                                                    | 24                |
|          |                                                                                                                 |              |
|          |                                                                                                                 |              |
| PART III |                                                                                                                 |              |
|          |                                                                                                                 |              |
| Item 10       | Directors,  Executive Officers and Corporate Governance                                                              | 25                |
| Item 11       | Executive  Compensation                                                                                              | 25                |
| Item 12       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 25                |
| Item 13       | Certain  Relationships and Related Transactions and Director Independence                                            | 26                |
| Item 14       | Principal  Accountant Fees and Services                                                                              | 26                |
|          |                                                                                                                 |              |
|          |                                                                                                                 |              |
| PART IV  |                                                                                                                 |              |
|          |                                                                                                                 |              |
| Item 15       | Exhibits and  Financial Statement Schedules                                                                          | 27                |

 

 

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** **

**PART I**

** **

**Item 1.        Business**.

 

**General**

 

First Ottawa Bancshares, Inc.(the “Company”) is a bank holding company for its wholly-owned subsidiary,First National Bank of Ottawa (the “Bank”), and the Bank’s wholly ownedsubsidiary, First Ottawa Financial Corporation. The Company was organized as a Delaware Corporation in 1999.  As of December 31, 2007, the Company hadtotal assets of $269.3 million, total deposits of $240.4 million, loans,including loans held for sale, of $165.4 million and total stockholders’ equityof $24.6 million.  For the year ended December 31,2007, the Company had interest income of $15.2 million and net income of $2.4million, which amounted to basic net income per share of $3.72, and diluted netincome per share of $3.71.

 

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

 

**MarketArea**

 

The Company is located innorth-central Illinois, with corporate offices in Ottawa, Illinois in LaSalleCounty, approximately 80 miles southwest of Chicago.  All branches, including, Streator, LaSalleCounty, Morris and Minooka, Grundy County, and Yorkville, Kendall County, arelocated in Illinois within 45 miles of the corporate offices.  Ottawa, Morris, and Yorkville are the countyseats of their respective counties, all with associated governmental officesand workforce.  Ottawa and Streator arethe principal cities of the 5th largestMicropolitan Statistical Area in the United States, by population, as determinedby the 2000 U.S. census. The population concentration in the Company’s marketareas, which is larger than many metropolitan areas, has added to interest inthe region for developers and those exploring relocation or expansion. Themarket areas are served by major transportation routes, Interstates 80, 88, 39,and 55, as well as rail, and the Illinois River waterway system. 

 

The Company’s market areasincorporate diverse economic sectors including agriculture, transportation,industry, and mining, primarily mining of high quality silica sand. The sand

 

1

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deposits have encouragedextensive glass manufacturing activity in the area.  The various economies in these market areasare generally expanding with development, both commercial and residential, duein part to relatively inexpensive real estate costs and the proximity to themetropolitan urban and suburban concentrations in the Chicago, Naperville, andthe Joliet corridor.  The centrallocation, transportation routes, and lack of congestion also make the areadesirable for distribution and warehousing operations.  The Illinois River waterway providespreferable market opportunities and pricing for the agricultural sector.  The unusual geographic terrain and parklandshave spurred tourism in the area, which attracts in excess of 1 millionvisitors per year.

 

The Company opened a full servicebanking facility in 2005 in the city of Yorkville, Illinois. The Company alsoopened a loan production office in 2006 in the city of Minooka, Illinois. TheCompany continues to explore expansion opportunities within its existing marketarea and in surrounding areas.

 

**Lending Activities**

 

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

 

Twelve loan officers have theauthority to handle all lending activities of the Company.  Each lending officer has authority to approveextensions of credit up to their individual lending limit.  The Company has an Officers Loan Committee(consisting of Loan Officers, the Chief Lending Officer, and the President ofthe Bank) which approves loans of up to $1,000,000.  All loans between $1,000,000 and $2,000,000are sent to the Director’s Loan Committee for approval.  The Director’s Loan Committee is also responsiblefor monitoring concentration of credits, problem and past due loans, andcharge-offs of uncollectible loans, as well as, formulating recommendations for the Board of Directors regarding loanpolicy modifications, loan classifications, and charge-offs. All loans inexcess of $2,000,000 are reviewed and approved by the entire Board ofDirectors.  The Board of Directors alsois responsible for directing and supervising the Director’s Loan Committee,policy review, and oversight of the loan and investment functions of theCompany.  The Board of Directors alsomonitors the adequacy of the Company’s loan loss reserves.

 

***Loan Portfolio Composition***.  The Company’s gross loan portfolio, totaled$165.5 million at December 31, 2007, representing 68.8% of the Company’stotal deposits at that date.  The Company’sloan portfolio at December 31, 2007 included $120.6 million for realestate purposes, $16.5 million for consumer purposes, and $28.4 million forcommercial and agricultural purposes.

 

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

 

The Company’s strategy inaddressing and managing these types of risks is to follow its loan policies andunderwriting practices, which include: (i) granting loans on a sound andcollectible basis; (ii) investing funds profitably for the benefit of theCompany’s stockholders and the protection of its depositors; (iii) servingthe legitimate needs of the community and the Company’s general market areawhile maintaining a balance between maximum yield and minimum risk; (iv) ensuringthat primary and secondary sources of repayment are adequate in relation toamount of the loan; (v) developing and maintaining adequatediversification of the loan portfolio as a whole and of the loans within eachloan category; (vi) ensuring that each loan is properly documented and, ifappropriate, secured or guaranteed by government agencies; and (vii) developingand applying adequate collections procedures.

 

All table amounts throughout the Form 10-Kare in thousands except share and per share data.

** **

The following table presents thecomponents of the Company’s loan portfolio as of December 31 for each yearshown.

 
| ** **                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Real estate loans                         |       | $        | 120,581    |     | $          | 102,516  |       | $        | 95,469     |     | $          | 74,225 |   | $ | 70,839 |   |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Commercial and agricultural loans         |       | 28,354   |       | 39,610   |       | 33,686   |       | 28,341   |       | 24,197   |       |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Installment loans, net of unearned income |       | 5,439    |       | 7,401    |       | 11,585   |       | 17,575   |       | 22,812   |       |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Home equity lines of credit               |       | 11,051   |       | 11,411   |       | 12,120   |       | 12,651   |       | 12,456   |       |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Total Loans                               |       | 165,425  |       | 160,938  |       | 152,860  |       | 132,792  |       | 130,304  |       |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Allowance for loan losses                 |       | (1,588   | )          | (1,463   | )          | (1,344   | )          | (1,174   | )          | (1,049   | )          |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Loans, net                                |       | $        | 163,837    |     | $          | 159,475  |       | $        | 151,516    |     | $          | 131,618 |   | $ | 129,255 |   |
|                                      |       |     |       |     |       |     |       |     |       |     |       |
| Loans held for sale                       |       | $        | —     |     | $          | —   |       | $        | —     |     | $          | 1,701 |   | $ | 1,644 |   |

 

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Maturities (based on contractualterms) of the Company’s commercial and construction loan portfolio at December 31,2007 are summarized below:

 
| ** **                  | ** ** | **One Year** | ** ** | **One to**     | ** ** | **Over**       | ** ** | ** ** | ** ** |
|-----------------------------|------------|--------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                  | ** ** | **or Less**  | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| Commercial and agricultural |       | $            | 14,557     |           | $          | 7,890          |       | $          | 5,907      |   | $ | 28,354 |   |
|                        |       |         |       |           |       |           |       |       |       |
| Construction                |       | 11,931       |       | 9,832          |       | 177            |       | 21,940     |       |
|                        |       |         |       |           |       |           |       |       |       |
| Total                       |       | $            | 26,488     |           | $          | 17,722         |       | $          | 6,084      |   | $ | 50,294 |   |

 

At December 31, 2007, of thetotal loans that mature in more than one year, $101.4 million, or 78.8%, bearinterest at fixed rates and $27.3 million, or 21.2%, bear interest at variablerates.

 

***Consumer Loans***.  The Company makes consumer loans for variouspurposes, including personal, family, and nonbusiness reasons such asautomobile loans and recreational vehicle loans, on both a direct and indirectbasis.  Consumer loans totaledapproximately $16.5 million at December 31, 2007, or approximately 10.0%of the Company’s total loan portfolio. Approximately 19.6% of the Company’s consumer loans were automobileloans, and of these loans, approximately 45.2% were made indirectly by theCompany through automobile dealers.  At December 31,2007, the Company had four consumer loans totaling $700,000 that were past duein excess of 90 days. Management feels the Company is well collateralized andexpects no loss in excess of specific allocations on the loans.

 

In approving consumer loans,lending officers consider the borrower’s past credit history, the borrower’sability to repay the debt, the collateral offered, and local economicconditions that could affect the borrower’s income.  Loans being originated for new borrowers mustbe accompanied by a completed application dated and signed by the borrower, givingthe details of the loan request.  Totaldebt, along with the gross monthly income of the borrower, are required to beshown on the application.  A brief cashflow analysis is performed by the loan officer showing the amount of theborrower’s income available for debt service based on current debts plus thenew loan request.  Generally, debtservice to gross income should not exceed 40%. New credit reports are obtainedon all borrowers with each loan request. The value of collateral on loans secured by used automobiles isgenerally determined by using industry-accepted used car guides.  In connection with used automobile loans, theCompany generally requires a 90% loan-to-value ratio; however, depending uponvarious factors, including the credit experience of the Company with theborrower, the Company may extend credit in excess of the value of the usedautomobile.  A loan-to-value ratio of 90%of sticker price is generally required for new automobile loans.  Boats, mobile homes, recreational vehicles, andsimilar items generally require a loan-to-value ratio of 70% to 80% of thecurrent market value of the collateral. Unsecured consumer loans are granted to borrowers based uponsatisfactory income, indebtedness levels, and credit records and experience.

 

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***Commercial, Agricultural,and Real Estate Lending***.

 

**Commercialand Agricultural.**  At December 31, 2007, the Company’scommercial and agricultural loans totaled $28.4 million, or approximately 17.1%of the total loan portfolio of the Company. The majority of agricultural and commercial non-real estate loans arewritten for one to five years. These loans may bear interest at a fixed orvariable rate and are amortized over a 15-year to 20-year period. Fixed ratesare established by the Company’s management after considering the cost of fundsto the Company as well as the rates of competing institutions.  The variable rate is generally based upon thenational prime rate as disclosed in *The Wall Street Journal*.  Principal and interest payments on commercialloans generally are required monthly; whereas, payments on agricultural loansvary from monthly, quarterly, semi-annually, and annually.  At December 31, 2007, the Company hadone commercial non-real estate loan totaling $25,000 that was past due in excess of 90 days. There were no agricultural non-real estateloans at December 31, 2007 that were past due in excess of 90 days.Management feels the Company is well collateralized and expects no loss inexcess of specific allocations on the loans.

 

All commercial and agriculturalborrowers, both existing and new, are required by a Company policy to have acurrent financial statement no older than one year.  Borrowers also are required to provide theCompany with recent tax returns and pro forma projections.  Using certain computer programs and the datasupplied by borrowers, the loan officers produce additional financialinformation utilized in analyzing the loans and the borrowers.  The general nature of the collateral securingthe Company’s commercial and agricultural loans consists of equipment, farmproducts, crops, inventory, chattel paper, accounts receivable, and generalintangibles.  The Company’s loan-to-valueratio with respect to agricultural and commercial non-real estate loansaverages 66 2/3% to 75% of the value of the collateral securing the loan.

 

**Real Estate Lending**.  The Company’s primary real estate lendingconsists of commercial loans with a small portion in residential andagricultural real estate loans.  Realestate loans at December 31, 2007 totaled approximately $120.6 million orapproximately 72.9% of the Company’s total loan portfolio.  All borrowers requesting a real estate loanare required to submit an application which is reviewed by the lendingofficer.  A credit investigation isperformed and an analysis of the borrower’s ability to repay is conducted.  Subsequently, an inspection and appraisal ofthe real property is conducted to determine whether or not the property is ofsufficient value to meet the Company’s suggested maximum loan-to-value ratio of80% to 85% of the lesser of the appraised value or the purchase price of theproperty securing the loan.  Undercertain federal guaranteed loan programs utilized by the Company, the maximumloan-to-value ratio is higher.  Withrespect to loans secured by commercial or industrial real estate, the Companyanalyzes the potential for environmental liability concerns and, depending uponthe circumstances, the Company may require additional information ortesting.  Commercial and agriculturalreal estate loans are generally originated under the same policies andprocedures as discussed above for commercial and agricultural non-real estateloans.

 

The Company’s residential realestate loans consist of 15-year, 20-year and 30-year fixed-rate andvariable-rate loans with amortization periods equal to the maturity of theloan.  The Company’s fixed-rate loanswith biweekly payments account for approximately 51.2% of all the residentialreal estate loans of the Company. The biweekly loan program amortizes 25 yearloans in

 

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approximately 18.9 years.  TheCompany also originates a variety of loans that are sold into the secondarymarket through Federal Home Loan Mortgage Corporation (“Freddie Mac”) andprivate investors.  These loans areunderwritten to meet all Freddie Mac requirements.  The Company retains servicing rights on loanssold into the secondary market.  At December 31,2007, mortgage loans serviced for the secondary market totaled approximately$27.9 million.

 

At December 31,2007, the Company had three residential real estate mortgage loans totaling$168,000, and six commercial real estate loans totaling $908,000, past due inexcess of 90 days. Management feels the Company is well collateralized andexpects no loss in excess of specific allocations on the loans.

 

***Interest Rates and Fees***.  Interest rates and fees charged on theCompany’s loans are affected primarily by the market demand for loans and thesupply of money available for lending purposes. These factors are affected by, among other things, general economicconditions and the policies of the federal government, including the FederalReserve Board, legislative tax policies, and governmental budgetary matters.

 

***Non-Performing Loans***.  When a borrower fails to make a requiredpayment on a loan and does not cure the delinquency within 30 days, the loan isclassified as delinquent.  In this event,the normal procedure followed by the Company is to make contact with theborrower at prescribed intervals in an effort to bring the loan to a currentstatus.  In most cases, delinquencies arecured promptly, but, if not, the Company normally records a notice of default,subject to any required prior notice to the borrower, and commences foreclosureproceedings when loan payments are 120 days past due.

 

At December 31, 2007, theCompany had 54 loans delinquent for 30 to 90 days in an aggregate principalamount of $2.9 million, representing 1.7% of the total loan portfolio.  At December 31, 2007, the Company hadfifteen loans totaling $1.9 million delinquent for more than 90 days.

 

It is the Company’s policy todiscontinue the accrual of interest income on any loan when, in accordance withbanking regulations or in the opinion of management, there is reasonable doubtas to the collectibility of interest or principal.  Interest on these loans is credited to incomeonly when the collection of principal is reasonably assured and only to theextent interest payments are received. If management feels collection of both interest and principal isprobable, the loan is not transferred to nonaccrual status.  At December 31, 2007, there were sevenloans totaling $1.2 million on nonaccrual status.Management feels the Company is well collateralized and expects no loss inexcess of specific allocations on the loans.

 

As a result of economic conditionsand other factors beyond the Company’s control, the Company’s future loss anddelinquency experience cannot be predicted with certainty.

 

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The nonperforming assets of theCompany as of December 31 are indicated below:

 
| ** **                                                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Nonaccrual loans                                                      |       | $        | 1,163      |     | $          | 362      |       | $        | —     |     | $          | 161 |   | $ | 137 |   |
| Loans 90 days past due and still accruing interest                    |       | 701      |       | 305      |       | 1,337    |       | 727      |       | 293      |       |
| Other real estate owned                                               |       | 325      |       | 118      |       | 88       |       | —   |       | —   |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Total nonperforming assets                                            |       | $        | 2,189      |     | $          | 785      |       | $        | 1,425      |     | $          | 888 |   | $ | 430 |   |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming loans as a percentage of total loans                    |       | 1.13     | %          | .49      | %          | .88      | %          | .66      | %          | .33      | %          |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming assets as a percentage of total assets                  |       | .81      |       | .28      |       | .51      |       | .31      |       | .15      |       |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Nonperforming loans as a percentage of the allowance  for loan losses |       | 117.38   |       | 48.59    |       | 99.48    |       | 75.64    |       | 40.99    |       |

 

The effect of nonaccrual loans uponinterest income is not deemed to be material by management.  Loans are placed in nonaccrual status when 90days past due, unless they are fully secured and in the process of collection.  At December 31, 2007, there were otherimpaired loans with specific reserve allocations classified as problem loansthat were not included above.  Managementalso maintains a report on loans requiring attention that includes loansgreater than 60 days delinquent or other loans as deemed necessary by theCompany’s internal loan review or the loan committee.  The total of loans requiring attention as of December 31,2007 was $10.3 million.

 

***Allowance for Losses onLoans***.  In originatingloans, the Company recognizes that losses will be experienced on loans and thatthe risk of loss will vary with, among other things, the type of loan beingmade, the creditworthiness of the borrower over the term of the loan, generaleconomic conditions and, in the case of a secured loan, the quality of thesecurity for the loan.  The Companymaintains an allowance for loan losses to absorb probable incurred creditlosses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate ofprobable incurred losses based on information available as of the date of thefinancial statements.  The allowance forloan losses is based on management’s evaluation of the collectibility of theloan portfolio, including past loan loss experience, known and inherent risksin the nature and volume of the portfolio, information about specific borrowersituations, estimated collateral values, and economic conditions.

 

The loan portfolio and other creditexposures are regularly reviewed by management to evaluate the adequacy of theallowance for loan losses.  The methodologyfor assessing the appropriateness of the allowance includes comparisons toactual losses, industry data and economic conditions.  In addition, the regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses.  Such

 

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agencies may require theCompany to make additional provisions for estimated losses based upon judgmentsdifferent from those of management.

 

In connection with assessing theallowance, loss factors are applied to various pools of outstanding loans.  The Company segregates the loan portfolioaccording to risk characteristics (i.e., mortgage loans, commercial realestate, agricultural, business, consumer, etc.) and risk gradings.  Loss factors are derived using the Company’shistorical loss experience and may be adjusted for significant factors that, inmanagement’s judgment, affect the collectibility of the portfolio as of theevaluation date.  Commercial real estateand commercial business loans are individually evaluated for impairment andspecific reserves are allocated as needed in accordance with Statement ofFinancial Accounting Standards No. 114 and No. 118.

 

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

 

The allowance for loan losses isestablished through a charge to operations at the time loan value becomesimpaired or, in the judgment of management, other subjective factors warrantadditional reserves. As noted in the previous table, nonperforming loansincreased by $1.2 million in 2007 after decreasing by $670,000 during2006.  Management considered thisinformation along with other portfolio trends when considering the adequacy ofthe allowance for loan losses at December 31, 2007. At December 31,2007, the balance in the allowance for loan losses was $1.6 million, or .96% ofgross loans outstanding.  Management hasconcluded that the allowance for loan losses is adequate at December 31,2007. However, there can be no assurance that the allowance for loan losses isadequate to cover all losses.

 

The Company had three propertiesvalued at $325,000, resulting from foreclosure, classified as other real estateowned at December 31, 2007. Other real estate is generally carried at thelower of cost or estimated market value.

 

8

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***Summary of Loan LossExperience.***** **The allowance for loanlosses is maintained by management at a level considered adequate to coverlosses that are currently anticipated based upon past loss experience, generaleconomic conditions, information about specific borrower situations, includingtheir financial position and collateral values, and other factors and estimateswhich are subject to change over time.

 

Loan loss experience for the fiveyears ended December 31, 2007 is summarized as follows:

 
| ** **                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Balance of the allowance for loan losses at  beginning of year |       | $        | 1,463      |     | $          | 1,344    |       | $        | 1,174      |     | $          | 1,049 |   | $ | 1,167 |   |
| Charge-offs                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | 16       |       | 2        |       | —   |       | 63       |       | 66       |       |
| Commercial                                                     |       | 67       |       | 34       |       | 71       |       | —   |       | 50       |       |
| Installment                                                    |       | 55       |       | 81       |       | 145      |       | 210      |       | 303      |       |
| Total  charge-offs                                             |       | 138      |       | 117      |       | 216      |       | 273      |       | 419      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Recoveries                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Real Estate                                                    |       | —   |       | 1        |       | 8        |       | —   |       | 16       |       |
| Commercial                                                     |       | 56       |       | 9        |       | 16       |       | 4        |       | 57       |       |
| Installment                                                    |       | 27       |       | 46       |       | 62       |       | 94       |       | 108      |       |
| Total recoveries                                               |       | 83       |       | 56       |       | 86       |       | 98       |       | 181      |       |
| Net charge-offs                                                |       | 55       |       | 61       |       | 130      |       | 175      |       | 238      |       |
| Provision                                                      |       | 180      |       | 180      |       | 300      |       | 300      |       | 120      |       |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Balance at end of year                                         |       | $        | 1,588      |     | $          | 1,463    |       | $        | 1,344      |     | $          | 1,174 |   | $ | 1,049 |   |
|                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net charge-offs to average total loans                         |       | .03      | %          | .04      | %          | .09      | %          | .13      | %          | .21      | %          |
| Allowance for loan losses to total loans at year-end           |       | .96      |       | .91      |       | .88      |       | .87      |       | .80      |       |

 

9

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The Company’s allocation of theallowance for loan losses as of December 31 is presented below:

 
| ** **                         | ** ** | **2007**   | ** ** | **2006**     | ** ** | **2005**   | ** ** | **2004**     | ** ** | **2003**   | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Percent**  | ** ** | ** ** | ** ** | **Percent**  | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** | ** ** | ** ** | **of Total** | ** ** |
| ** **                         | ** ** | **Amount** | ** ** | **Loans**    | ** ** | **Amount** | ** ** | **Loans**    | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| Real estate loans                  |       | $          | 1,179      |         | 72.9       | %          | $          | 253          |       | 63.7       | %          | $ | 131 |   | 62.5 | % | $ | 234 |   | 19.9 | % | $ | 444 |   | 54.4 | % |
|                               |       |       |       |         |       |       |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial and  agricultural loans |       | 248        |       | 17.1         |       | 633        |       | 24.6         |       | 613        |       | 22.0 |   | 519 |   | 44.2 |   | 209 |   | 18.6 |   |
|                               |       |       |       |         |       |       |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Installment loans                  |       | 74         |       | 10.0         |       | 97         |       | 11.7         |       | 141        |       | 15.5 |   | 185 |   | 15.8 |   | 242 |   | 27.1 |   |
|                               |       |       |       |         |       |       |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unallocated                        |       | 87         |       | N/A          |       | 480        |       | N/A          |       | 459        |       | N/A |   | 236 |   | N/A |   | 154 |   | N/A |   |
|                               |       |       |       |         |       |       |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Balance at end of year             |       | $          | 1,588      |         | 100.0      | %          | $          | 1,463        |       | 100.0      | %          | $ | 1,344 |   | 100.0 | % | $ | 1,174 |   | 100.0 | % | $ | 1,049 |   | 100.0 | % |

 

**Investment Activities***.*

** **

Theinvestment policies of the Company, as established by the Board of Directors,attempt to provide and maintain liquidity, generate a favorable return oninvestments without incurring undue interest rate and credit risk, andcomplement the Company’s lending activities. The policies provide the authority toinvest in United States Treasury and federal agency securities, mortgage-backedsecurities, municipal securities, equity securities, and Certificates ofDeposits.

** **

Approximately $6.3 million of the States and political subdivisionsbonds held at December 31, 2007 are callable at the option of the issuer,which represent limited prepayment risk to the Company.

 

As of December 31, 2007, the Company had approximately $3.0million invested in municipalities located within LaSalle County, Illinois.

 

The Company purchased$3.0 million of index powered certificates of deposit between 2003 and 2007.These deposits were placed with multiple issuers so that all of the principaldeposited is insured through the FDIC. Income returns are not guaranteed forthese instruments, however principal is guaranteed if held to maturity.

 

10

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**SecuritiesPortfolio.**

 

The following tableshows the maturity distribution of the available-for-sale securities portfolioand the weighted average yield of the portfolio at December 31, 2007.

 
| ** **                                                     | ** ** | ** **   | ** ** | **Weighted** | ** ** | **One to** | ** ** | **Weighted** | ** ** | **Five**   | ** ** | **Weighted** | ** ** | **Over**  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|--------------|------------|------------|------------|--------------|------------|-----------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **                                                     | ** ** | **One Year** | ** ** | **Average**  | ** ** | **Five**   | ** ** | **Average**  | ** ** | **to Ten** | ** ** | **Average**  | ** ** | **Ten**   | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average**  | ** ** |
| ** **                                                     | ** ** | **or Less**  | ** ** | **Yield**    | ** ** | **Years**  | ** ** | **Yield**    | ** ** | **Years**  | ** ** | **Yield**    | ** ** | **Years** | ** ** | **Yield**    | ** ** | **Total**  | ** ** | **Yield**    | ** ** |
| U.S. Treasury  securities                                      |       | $            | 7,000      |         | 3.28       | %          | $          | 1,067        |       | 3.62       | %          | $            | —     |      | —     | %            | $          | —     |       | —       | %          | $ | 8,067 |   | 3.32 | % |
| U.S. Government  agencies                                      |       | 10,719       |       | 3.28         |       | 15,259     |       | 3.93         |       | —     |       | —       |       | —    |       | —       |       | 25,978     |       | 3.66         |       |
| States and  political subdivisions                             |       | 4,715        |       | 4.50         |       | 17,510     |       | 2.93         |       | 1,380      |       | 4.60         |       | —    |       | —       |       | 23,605     |       | 3.34         |       |
| Mortgage-backed  securities and collateralized obligations (1) |       | 208          |       | 5.66         |       | 5,815      |       | 4.22         |       | 138        |       | 8.44         |       | 138       |       | 8.07         |       | 6,299      |       | 4.45         |       |
| Corporate bonds                                                |       | 850          |       | 3.10         |       | —     |       | —       |       | —     |       | —       |       | —    |       | —       |       | 850        |       | 3.10         |       |
| Equity securities                                              |       | 3,016        |       | N/A          |       | —     |       | —       |       | —     |       | —       |       | —    |       | —       |       | 3,016      |       | N/A          |       |
|                                                           |       |         |       |         |       |       |       |         |       |       |       |         |       |      |       |         |       |       |       |         |       |
| Total securities                                               |       | $            | 26,508     |         | 3.54       | %          | $          | 39,651       |       | 3.52       | %          | $            | 1,518      |      | 4.93       | %            | $          | 138        |       | 8.07         | %          | $ | 67,815 |   | 3.57 | % |

----

(1)  Mortgage-backed securities reflect thecontractual maturity of the related instrument.

 

11

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**Deposits***.*

 

The Company offersdeposit services including demand, savings, and time deposit accounts andprograms, which include interest-bearing and non-interest-bearing demanddeposits and individual retirement accounts. The Company has had a stable deposit base.  Management believes that this stability is due to the Company’s emphasison being a locally owned and operated bank and by providing quality,personalized service to its customers.

 

The followingtable shows the Company’s average balances and rates paid during the yearsshown.

 
|                                               |   | **For the  Years Ended December 31,** |       |
|----------------------------------------------------|--------|---------------------------------------|------------|
|                                               |   | **2007**                              |       | **2006** |   | **2005** |   |
|                                               |   |                                  |       | **Percent** |   |   |   |   |   | **Percent** |   |   |   |   |   | **Percent** |   |   |   |
|                                               |   | **Average**                           | ** ** | **of** | ** ** | ** ** | ** ** | **Average** | ** ** | **of** | ** ** | ** ** | ** ** | **Average** | ** ** | **of** | ** ** | ** ** |   |
|                                               |   | **Balance**                           | ** ** | **Deposits** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Deposits** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Deposits** | ** ** | **Rate** |   |
| Noninterest-bearing  demand deposits               |   | $                                     | 31,759     |   | 13.0 | % | — | % | $ | 30,173 |   | 11.8 | % | — | % | $ | 31,153 |   | 11.9 | % | — | % |
| Interest-bearing  demand and money market accounts |   | 98,592                                |       | 40.3 |   | 2.25 |   | 93,042 |   | 36.5 |   | 2.19 |   | 98,826 |   | 37.7 |   | 1.39 |   |
| Savings accounts                                   |   | 23,418                                |       | 9.5 |   | .53 |   | 25,067 |   | 9.8 |   | .52 |   | 27,083 |   | 10.3 |   | .52 |   |
| Time deposits accounts                             |   | 90,970                                |       | 37.2 |   | 4.22 |   | 106,750 |   | 41.9 |   | 3.81 |   | 105,301 |   | 40.1 |   | 2.88 |   |
|                                               |   |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                               |   | $                                     | 244,739    |   | 100.0 | % | 2.80 | % | $ | 255,032 |   | 100.0 | % | 2.80 | % | $ | 262,363 |   | 100.0 | % | 1.73 | % |

 

The distributionof the major components of deposits as of December 31, 2007 and 2006 issummarized in the balance sheets included in the 2007 consolidated financialstatements, which consolidated financial statements are incorporated herein byreference. The following is a maturity distribution of time certificates ofdeposit of $100,000 or more at December 31, 2007:

 
| ** **                       | ** ** | **Balance** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|-------------|------------|----------------|------------|
| Maturity                         |       |        |       |           |       |
| Three months or  less            |       | $           | 17,586     |           | 39.5       | % |
| Over three  months to six months |       | 11,754      |       | 26.4           |       |
| Over six months  to one year     |       | 3,578       |       | 8.1            |       |
| Over one year                    |       | 11,573      |       | 26.0           |       |
|                             |       |        |       |           |       |
| Total                            |       | $           | 44,491     |           | 100.0      | % |

 

12

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**Borrowings.**

 

The Company’s other available sources of funds include financingarrangements for securities sold under agreements to repurchase, federal fundspurchased lines, an unsecured line of credit with Marshall & IlsleyBank and Federal Home Loan Bank borrowings. Total borrowings increased $17,000in 2007. This increase was a result of a draw on the line of credit in December 2007.The Bank maintains physical control of all securities sold under repurchaseagreements. There were no outstanding securities sold under agreements torepurchase during 2007 or 2006. Information concerning securities sold underagreements to repurchase is summarized as follows:

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Balance at December 31                            |       | $        | —     |     | $          | —   |       | $ | — |   |
| Weighted average interest rate during the year         |       | —   | %          | —   | %          | 1.63     | %          |
| Weighted average interest rate at the end of the  year |       | —   | %          | —   | %          | —   | %          |
| Maximum month-end balance                              |       | $        | —     |     | $          | —   |       | $ | 750 |   |
| Average balance for the year                           |       | —   |       | —   |       | 232      |       |

 

**Trust.**

 

The Company’s trust departmentprimarily services LaSalle County and surrounding counties.  At December 31, 2007, the trustdepartment had 343 accounts under management, 172 of which were discretionaryaccounts.  The trust department providesa full complement of asset management services for personal trusts, estates,and agencies.  At December 31, 2007,the trust department had assets under management of approximately $70.3million, of which $61.5 million was in discretionary accounts.

 

The Company, in conjunction withits trust department, also provides farm management services.  At December 31, 2007, the departmentmanaged 46 farms.  The department managesor directs approximately 6,460 acres of farmland in LaSalle County, Illinoisand surrounding counties.

 

**Competition**.

 

The Company has active competitionin all product and service areas in which it presently engages.  The Company not only competes for commercialand individual deposits, loans, and trust business with other LaSalle, Grundy,and Kendall County, Illinois banks, but also with savings and loanassociations, credit unions, and other financial service companies located inand around LaSalle, Grundy and Kendall County. Many of these competitors may not be subject to the same regulatoryrestrictions as the Company. There are approximately 18 commercial banks and 6savings institutions with offices in LaSalle County, 10 commercial banks and 3savings institutions in Grundy County, and 16 commercial banks and 1 savingsinstitution in Kendall County.  Theprincipal methods of competition in the banking and financial services industryare quality of services to the customer; ease of access to services; andpricing of services, including interest rates paid on deposits, interest ratescharged on borrowings, and fees charged for fiduciary services. The

 

13

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financial servicesindustry is also likely to become more competitive as further technologicaladvances enable more companies to provide financial services.

 

**Employees.**

 

As of December 31, 2007, theCompany had 94 employees, consisting of 78 full-time employees and 16 part-timeemployees.  None of the employees aresubject to a collective bargaining agreement, and management believes it hasexcellent relations with its staff.

 

**Stock Repurchases*.***

 

During2007 and 2006, the Company repurchased 4,269 and 300 shares of its common stockfor aggregate purchase prices of $335,000 and $22,000, respectively.

 

## **Website.**

##  

The Company maintains a website atwww.firstottawa.com.  The Company makesavailable free of charge on or through its website, the annual report on Form 10K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after theCompany electronically files such material with, or furnishes it to, theSecurities and Exchange Commission.  TheCompany will also provide copies of its filings free of charge upon writtenrequest to: Ms. Cheryl Gage, Corporate Secretary, First Ottawa Bancshares, Inc.701-705 LaSalle Street, P.O. Box 657, Ottawa, Illinois 61350.Additionally, all of the Company’s filings with the Securities and ExchangeCommission are also available, free of charge, through the SEC’s website atwww.sec.gov.

##  

**Code ofBusiness Conduct and Ethics.**

 

The Company has a code ofbusiness conduct and ethics in place that applies to all of its directors andemployees.  The code sets forth thestandard of ethics that the Company expects all of its directors and employeesto follow, including the Chief Executive Officer and Chief FinancialOfficer.  The code of business conductand ethics is posted on the Company’s website at www.firstottawa.com.  The Company intends to satisfy the disclosurerequirements under Item 5.05 of Form 8-K regarding any amendment to orwaiver of the code with respect to the Chief Executive Officer and ChiefFinancial Officer, and persons performing similar functions, by posting suchinformation on its website.

 

**SUPERVISION AND REGULATION**

 

# **General**

#  

Financialinstitutions, their holding companies and their affiliates are extensivelyregulated under federal and state law. As a result, the growth and earnings performance of the Company may beaffected not only by management decisions and general economic conditions, butalso by the requirements of federal and state statutes and by the regulationsand policies of various bank regulatory authorities, including the Office ofthe Comptroller of the Currency (the “OCC”), the

 

14

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Board of Governors of the Federal Reserve System(the “Federal Reserve”) and the Federal Deposit Insurance Corporation(the “FDIC”).  Furthermore, taxation lawsadministered by the Internal Revenue Service and state taxing authorities andsecurities laws administered by the Securities and Exchange Commission (the “SEC”)and state securities authorities have an impact on the business of the Company.The effect of these statutes, regulations and regulatory policies may besignificant, and cannot be predicted with a high degree of certainty.

 

Federaland state laws and regulations generally applicable to financial institutionsregulate, among other things, the scope of business, the kinds and amounts ofinvestments, reserve requirements, capital levels relative to operations, thenature and amount of collateral for loans, the establishment of branches,mergers and consolidations and the payment of dividends. This system of supervisionand regulation establishes a comprehensive framework for the respectiveoperations of the Company and its subsidiaries and is intended primarily forthe protection of the FDIC-insured deposits and depositors of the Bank, ratherthan stockholders.

 

Thefollowing is a summary of the material elements of the regulatory frameworkthat applies to the Company and its subsidiaries.  It does not describe all of the statutes,regulations and regulatory policies that apply, nor does it restate all of therequirements of those statutes, regulations and regulatory policies that aredescribed. As such, the following is qualified in its entirety by reference toapplicable law.  Any change in applicablestatutes, regulations or regulatory policies may have a material effect on thebusiness of the Company and its subsidiaries.

 

**TheCompany**

 

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

 

***Acquisitions, Activities and Change in Control.***** **The primary purpose of abank holding company is to control and manage banks.****TheBHCA generally requires the prior approval of the Federal Reserve for anymerger involving a bank holding company or any acquisition by a bank holdingcompany of another bank or bank holding company.  Subject to certain conditions (includingdeposit concentration limits established by the BHCA), the Federal Reserve mayallow a bank holding company to acquire banks located in any state of theUnited States. In approving interstate acquisitions, the Federal Reserve isrequired to give effect to applicable state law limitations on the aggregateamount of deposits that may be held by the acquiring bank holding company andits insured depository institution affiliates in the state in which the targetbank is located (provided that those limits do not discriminate against out-of-statedepository institutions or their holding companies) and state laws that requirethat the target bank have been in existence for a minimum period of time (notto exceed five years) before being acquired by an out-of-state bank holdingcompany.

 

15

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TheBHCA generally prohibits the Company from acquiring direct or indirectownership or control of more than 5% of the voting shares of any company thatis not a bank and from engaging in any business other than that of banking,managing and controlling banks or furnishing services to banks and theirsubsidiaries.  This general prohibitionis subject to a number of exceptions. The principal exception allows bankholding companies to engage in, and to own shares of companies engaged in,certain businesses found by the Federal Reserve to be “so closely related tobanking ... as to be a proper incident thereto.”  This authority would permit the Company toengage in a variety of banking-related businesses, including the operation of athrift, consumer finance, equipment leasing, the operation of a computerservice bureau (including software development), and mortgage banking andbrokerage. The BHCA generally does not place territorial restrictions on thedomestic activities of non-bank subsidiaries of bank holding companies.

 

Additionally,bank holding companies that meet certain eligibility requirements prescribed bythe BHCA and elect to operate as financial holding companies may engage in, orown shares in companies engaged in, a wider range of nonbanking activities,including securities and insurance underwriting and sales, merchant banking andany other activity that the Federal Reserve, in consultation with the Secretaryof the Treasury, determines by regulation or order is financial in nature,incidental to any such financial activity or complementary to any suchfinancial activity and does not pose a substantial risk to the safety orsoundness of depository institutions or the financial system generally.  As of the date of this filing, the Companyhas not applied for approval to operate as a financial holding company.

 

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

 

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

 

TheFederal Reserve’s capital guidelines establish the following minimum regulatorycapital requirements for bank holding companies: (i) a risk-basedrequirement expressed as a percentage of total assets weighted according torisk; and (ii) a leverage requirement expressed as a percentage of totalassets.  The risk-based requirementconsists of a minimum ratio of total capital to total risk-weighted assets of8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of4%.  The leverage requirement consists ofa minimum ratio of Tier 1 capital to total assets of 3% for the most highlyrated companies, with a minimum requirement of 4% for all others.  For purposes of these capital standards, Tier1 capital consists primarily of permanent stockholders’ equity less intangibleassets (other than certain loan servicing rights and purchased credit cardrelationships). Total capital consists primarily of Tier 1 capital plus certainother debt and equity instruments that do not qualify as Tier 1 capital and aportion of the company’s allowance for loan and lease losses.

 

16

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                The risk-based and leveragestandards described above are minimum requirements. Higher capital levels willbe required if warranted by the particular circumstances or risk profiles ofindividual banking organizations. For example, the Federal Reserve’s capitalguidelines contemplate that additional capital may be required to take adequateaccount of, among other things, interest rate risk, or the risks posed byconcentrations of credit, nontraditional activities or securities tradingactivities.  Further, any bankingorganization experiencing or anticipating significant growth would be expectedto maintain capital ratios, including tangible capital positions (*i.e.*, Tier 1 capital less all intangible assets), well abovethe minimum levels.  As of December 31,2007, the Company had regulatory capital in excess of the Federal Reserve’sminimum requirements.

 

*                **DividendPayments.** *The Company’s ability to paydividends to its stockholders may be affected by both general corporate lawconsiderations and policies of the Federal Reserve applicable to bank holdingcompanies*.* As a Delaware corporation, the Companyis subject to the limitations of the Delaware General Corporation Law (the “DGCL”).The DGCL allows the Company to pay dividends only out of its surplus (asdefined and computed in accordance with the provisions of the DGCL) or if theCompany has no such surplus, out of its net profits for the fiscal year inwhich the dividend is declared and/or the preceding fiscal year. Additionally,policies of the Federal Reserve caution that a bank holding company should notpay cash dividends unless its net income available to common stockholders overthe past year has been sufficient to fully fund the dividends and theprospective rate of earnings retention appears consistent with its capitalneeds, asset quality, and overall financial condition.  The Federal Reserve also possessesenforcement powers over bank holding companies and their non-bank subsidiariesto prevent or remedy actions that represent unsafe or unsound practices orviolations of applicable statutes and regulations.  Among these powers is the ability toproscribe the payment of dividends by banks and bank holding companies.

 

*                **FederalSecurities Regulation.***  The Company’s common stock is registered withthe SEC under the Securities Act of 1933, as amended, and the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  Consequently, the Company is subject to theinformation, proxy solicitation, insider trading and other restrictions andrequirements of the SEC under the Exchange Act.

 

**TheBank**

 

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

 

***                DepositInsurance.***** **As an FDIC-insured institution, the Bank is requiredto pay deposit insurance premium assessments to the FDIC. The FDIC has adopteda risk-based assessment system whereby FDIC — insured depository institutionspay insurance premiums at rates based on their risk classification. Aninstitution’s risk classification is assigned based on its capital levels,

 

 

17

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and the level ofsupervisory concern the institution poses to regulators. Under the regulationsof the FDIC, as presently in effect, insurance assessments range from 0.05% to0.43% of total deposits (subject to adjustment by the FDIC and the applicationof assessment credits, if any, issued by the FDIC in 2007).

 

                ***FICO Assessments.***  The FinancingCorporation (“FICO”) is a mixed-ownership governmental corporation chartered bythe former Federal Home Loan Bank Board pursuant to the Federal Savings andLoan Insurance Corporation Recapitalization Act of 1987 to function as afinancing vehicle for the recapitalization of the former Federal Savings andLoan Insurance Corporation.  FICO issued30-year non-callable bonds of approximately $8.2 billion that mature by2019.  Since 1996, federal legislationhas required that all FDIC-insured depository institutions pay assessments tocover interest payments on FICO’s outstanding obligations.  These FICO assessments are in addition toamounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2007, theFICO assessment rate was approximately 0.01% of deposits.

 

***                Supervisory Assessments.***  National banks are required topay supervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculatedusing a formula that takes into account the bank’s size and its supervisorycondition. During the year ended December 31, 2007, the Bank paidsupervisory assessments to the OCC totaling $88,000.

 

***                Capital Requirements.***** **Banksare generally required to maintain capital levels in excess of otherbusinesses. The OCC has established the following minimum capital standards fornational banks, such as the Bank: (i) a leverage requirement consisting ofa minimum ratio of Tier 1 capital to total assets of 3% for the mosthighly-rated banks with a minimum requirement of at least 4% for all others;and (ii) a risk-based capital requirement consisting of a minimum ratio oftotal capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are thesame as those for bank holding companies discussed above.

 

                The capital requirements described above are minimumrequirements.  Higher capital levels willbe required if warranted by the particular circumstances or risk profiles ofindividual institutions.  For example,regulations of the OCC provide that additional capital may be required to takeadequate account of, among other things, interest rate risk or the risks posedby concentrations of credit, nontraditional activities or securities tradingactivities.

 

                Further, federal law and regulations providevarious incentives for financial institutions to maintain regulatory capital atlevels in excess of minimum regulatory requirements. For example, afinancial institution that is “well-capitalized” may qualify for exemptionsfrom prior notice or application requirements otherwise applicable to certaintypes of activities and may qualify for expedited processing of other requirednotices or applications. Additionally, one of the criteria that determines abank holding company’s eligibility to operate as a financial holding company isa requirement that all of its financial institution subsidiaries be “well-capitalized.”  Under the regulations of the OCC, in order tobe “well-capitalized” a financial institution must maintain a ratio oftotal capital to total risk-weighted assets of 10% or greater, a ratio of Tier1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1capital to total assets of 5% or greater.

 

 

18

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                Federal law alsoprovides the federal banking regulators with broad power to take promptcorrective action to resolve the problems of undercapitalizedinstitutions.  The extent of theregulators’ powers depends on whether the institution in question is “adequatelycapitalized,” “undercapitalized,” “significantly undercapitalized” or “criticallyundercapitalized,” in each case as defined by regulation.  Depending upon the capital category to whichan institution is assigned, the regulators’ corrective powers include: (i) requiringthe institution to submit a capital restoration plan; (ii) limiting theinstitution’s asset growth and restricting its activities; (iii) requiringthe institution to issue additional capital stock (including additional votingstock) or to be acquired; (iv) restricting transactions between the institutionand its affiliates; (v) restricting the interest rate the institution maypay on deposits; (vi) ordering a new election of directors of theinstitution; (vii) requiring that senior executive officers or directorsbe dismissed; (viii) prohibiting the institution from accepting depositsfrom correspondent banks; (ix) requiring the institution to divest certainsubsidiaries; (x) prohibiting the payment of principal or interest onsubordinated debt; and (xi) ultimately, appointing a receiver for theinstitution.

 

                As of December 31, 2007: (i) theBank was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimumregulatory capital requirements; (ii) the Bank exceeded its minimumregulatory capital requirements under OCC capital adequacy guidelines; and (iii) theBank was “well-capitalized,” as defined by OCC regulations.

 

**                *Dividends.***  The primary source of funds forthe Company is dividends from the Bank. Under the National Bank Act, a nationalbank may pay dividends out of its undivided profits in such amounts and at suchtimes as the bank’s board of directors deems prudent.  Without prior OCC approval, however, anational bank may not pay dividends in any calendar year that, in theaggregate, exceed the bank’s year-to-date net income plus the bank’s retainednet income for the two preceding years.

 

                The payment of dividends by any financial institutionis affected by the requirement to maintain adequate capital pursuant toapplicable capital adequacy guidelines and regulations, and a financialinstitution generally is prohibited from paying any dividends if, followingpayment thereof, the institution would be undercapitalized.  As described above, the Bank exceeded its minimumcapital requirements under applicable guidelines as of December 31,2007.  As of December 31, 2007,approximately $1.1 million was available to be paid as dividends by theBank.  Notwithstanding the availabilityof funds for dividends, however, the OCC may prohibit the payment of any dividendsby the Bank if the OCC determines such payment would constitute an unsafe orunsound practice.

 

***                Insider Transactions.***** **TheBank is subject to certain restrictions imposed by federal law on extensions ofcredit to the Company, on investments in the stock or other securities of theCompany and the acceptance of the stock or other securities of the Company ascollateral for loans made by the Bank. Certain limitations and reportingrequirements are also placed on extensions of credit by the Bank to its directorsand officers, to the directors and officers of the Company, to principalstockholders of the Company, and to “related interests” of such directors,officers and principal stockholders.  Inaddition, federal law and regulations may affect the terms upon which anyperson who is a director or officer of the Company or the Bank or a principalstockholder of the Company may obtain credit from banks with which the Bankmaintains correspondent relationships.

 

 

19

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***                Safety and Soundness Standards.***  The federal banking agencieshave adopted guidelines that establish operational and managerial standards topromote the safety and soundness of federally insured depository institutions.  The guidelines set forth standards forinternal controls, information systems, internal audit systems, loandocumentation, credit underwriting, interest rate exposure, asset growth,compensation, fees and benefits, asset quality and earnings.

 

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

 

***                Branching Authority.***  National banks headquartered inIllinois, such as the Bank, have the same branching rights in Illinois as bankschartered under Illinois law, subject to OCC approval.  Illinois law grants Illinois-chartered banksthe authority to establish branches anywhere in the State of Illinois, subjectto receipt of all required regulatory approvals.

 

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

 

                ***FinancialSubsidiaries. ***Under Federal lawand OCC regulations, national banks are authorized to engage, through “financialsubsidiaries,” in any activity that is permissible for a financial holdingcompany and any activity that the Secretary of the Treasury, in consultationwith the Federal Reserve, determines is financial in nature or incidental to anysuch financial activity, except (i) insurance underwriting, (ii) realestate development or real estate investment activities (unless otherwisepermitted by law), (iii) insurance company portfolio investments and (iv) merchantbanking.  The authority of a nationalbank to invest in a financial subsidiary is subject to a number of conditions,including, among other things, requirements that the bank must be well-managedand well-capitalized (after deducting from capital the bank’s outstandinginvestments in financial subsidiaries). The Bank has not applied for approval to establish any financialsubsidiaries.

 

20

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***                Federal Reserve System.***  Federal Reserve regulations, as presently in effect,require depository institutions to maintain non-interest earning reservesagainst their transaction accounts (primarily NOW and regular checkingaccounts), as follows: for transaction accounts aggregating $43.9 million orless, the reserve requirement is 3% of total transaction accounts; and fortransaction accounts aggregating in excess of $43.9 million, the reserverequirement is $1.038 million plus 10% of the aggregate amount of totaltransaction accounts in excess of $43.9 million.  The first $9.3 million of otherwisereservable balances are exempted from the reserve requirements.  These reserve requirements are subject toannual adjustment by the Federal Reserve. The Bank is in compliance with theforegoing requirements.

 

**Item 1.A.   ****Risk****Factors**

 

We are a smaller reportingcompany as defined by Rule 12b-2 of the Exchange Act and are not requiredto provide the information under this item.

 

**Item 1.B.**

 

None

 

**Item 2.        Properties**

 

                    TheCompany’s main office is located at 701-705 LaSalle Street, Ottawa,Illinois.  The building is comprised ofapproximately 15,000 square feet.  Themain office building is a two-story structure constructed principally ofmasonry which was opened in 1865.  TheCompany also operates eight branch office facilities. A limited service branch,which contains eight drive-in lanes, is located at 300 West Madison Street,Ottawa, Illinois, a loan production office located at 426 Mondamin Street, Unit1, Minooka, Illinois, and six full-service branches are located at 601 StateStreet, Ottawa, Illinois; 2771 North Columbus Street, Ottawa, Illinois; 1771North Division Street, Morris, Illinois; 2324 North Bloomington Street,Streator, Illinois; 401 East Main Street, Streator, Illinois; and 1459Cannonball Trail, Yorkville, Illinois. The main banking office and branchoffices are owned by the Company in fee and are unencumbered. The loanproduction office space is leased for a three year term with renewal optionsfor years four and five.

 

**Item 3.        Legal Proceedings**

 

                    The Company isfrom time to time a party to legal proceedings in the ordinary course ofbusiness that are incidental to the business of banking. The Company is notengaged in any legal proceedings of a material nature at the present time.

 

**Item 4.        Submission of Matters to a Vote ofSecurity Holders**

 

                    Nomatters were submitted to a vote of security holders during the quarter ended December 31,2007.

 

 

21

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**PART II**

 

**Item 5.****                      ****Market For Company’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

                    Theinformation set forth under the caption “Price Range of Common Stock” on page 44of the 2007 Annual Report to Stockholders (filed as Exhibit 13.1 of thisreport) which is incorporated herein by reference.

 

The Company’s ability topay dividends to stockholders is largely dependent upon the dividends itreceives from the Bank, and the Bank is subject to regulatory limitations onthe amount of cash dividends it may pay. See “Business — Supervision and Regulation — The Company — DividendPayments” and “Business - Supervision and Regulation — The Bank — Dividends”for a more detailed description of these limitations.

 
| **Issuer Purchases of Equity Securities**            | ** ** |
|------------------------------------------------------|------------|
| **Period**                                           | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
| October 1 2007 through October 31, 2007    |       | 0 |   | 0 |   | 0 |   | 0 |   |
| November 1, 2007 through November 30, 2007 |       | 1,147 | (1) | $ | 79.51 |   | 0 |   | 0 |   |
| December 1, 2007 through December 31, 2007 |       | 1,238 | (1) | $ | 79.57 |   | 0 |   | 0 |   |
| Total                                                |       | 2,385 |   | $ | 79.54 |   | 0 |   | 0 |   |

----

(1)  Repurchasedby the Company in open market purchases with third parties.

 

**Item 6.        Selected Financial Data**

** **

                    Theinformation set forth under the caption “Selected Consolidated FinancialInformation” on page 1 of the 2007 Annual Report to Stockholders (filed asExhibit 13.1 of this report) is incorporated herein by reference.

 

 

22

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**Item 7.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

                    Theinformation set forth under the caption “Management’s Discussion and Analysisof Financial Condition and Results of Operations” on pages 2 through 12 ofthe 2007 Annual Report to Stockholders (filed as Exhibit 13.1 of thisreport) is incorporated herein by reference.

 

**Item 7A.     Quantitativeand Qualitative Disclosures about Market Risk**

 

                    Theinformation set forth under the caption “Quantitative and QualitativeDisclosures about Market Risk” on page 13 of the 2007 Annual Report toStockholders (filed as Exhibit 13.1 of this report) is incorporated hereinby reference.

 

**Item 8.        FinancialStatements and Supplementary Data**

 

                    Theconsolidated financial statements of the Company and the Report of IndependentRegistered Public Accounting Firm as set forth on pages 17 through 43 ofthe 2007 Annual Report to Stockholders (filed as Exhibit 13.1 of thisreport) are incorporated herein by reference:

 
| ** **                                                         | ** ** | **Annual Report to**  |
|--------------------------------------------------------------------|------------|-----------------------|
| ** **                                                         | ** ** | **Stockholders Page** |
|                                                               |       |                  |
| Report of  Independent Registered Public Accounting Firm           |       | 17                    |
|                                                               |       |                  |
| Consolidated  Balance Sheets as of December 31, 2007 and 2006 |       | 18                    |
|                                                               |       |                  |
| Consolidated  Statements of Income for the years ended             |       |                  |
| December 31, 2007, 2006, and 2005                             |       | 19                    |
|                                                               |       |                  |
| Consolidated  Statements of Stockholders’ Equity for the      |       |                  |
| years ended December 31, 2007, 2006, and 2005                 |       | 20                    |
|                                                               |       |                  |
| Consolidated  Statements of Cash Flows for the years ended         |       |                  |
| December 31, 2007, 2006, and 2005                             |       | 21                    |
|                                                               |       |                  |
| Notes to the  Consolidated Financial Statements                    |       | 22                    |

 

                    The portionsof the 2007 Annual Report to Stockholders which are not specificallyincorporated by reference as a part of this Form 10-K are not deemed to bea part of this report.

 

**Item 9.        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

                    None.

 

 

23

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**Item 9A.     Controlsand Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

                    The ChiefExecutive Officer and Chief Financial Officer, have evaluated the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) promulgated under the Exchange Act) asof December 31, 2007. Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by the Company in reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods indicated.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

                    The managementof the Company is responsible for establishing and maintaining adequateinternal control over financial reporting, as defined in Rule 13a — 15(f) underthe Exchange Act.  The Company’s internalcontrol over financial reporting is a process designed under the supervision ofthe Company’s Chief Executive Officer and Chief Financial Officer to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s financial statements for external reportingpurposes in accordance with U.S. generally accepted accounting principles.

 

                    As of December 31,2007, management assessed the effectiveness of the Company’s internal controlover financial reporting based on the framework established in “InternalControl - Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, management has determined that the Company’sinternal control over financial reporting was effective as of December 31,2007 based on the criteria specified.

 

                    This Form 10-Kdoes not include an attestation report of the Company’s registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Form 10-K.

 

**Item 9B.     OtherInformation**

 

                    None

 

 

24

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**PART III**

 

**Item 10.     Directors and Executive Officers andCorporate Governance**

 

                    Theinformation set forth under the captions “Election of Directors”, “CorporateGovernance and the Board of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” of the Company’s Proxy Statement, relating tothe 2008 Annual Meeting of Stockholders is incorporated herein by reference.

 

**Item 11.     Executive Compensation**

 

                    Theinformation set forth under the caption “Executive Compensation” of the Company’sProxy Statement, relating to the 2008 Annual Meeting of Stockholders isincorporated herein by reference, except for the “Stockholder ReturnPerformance Graph,” which is not hereby incorporated.

 

**Item12.**                Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters

** **

                    The information set forth under the caption “SecurityOwnership of Certain Beneficial Owners” of the Company’s Proxy Statement,relating to the 2008 Annual Meeting of Stockholders is incorporated herein byreference.

 

** Equity CompensationPlan Information**

 

 The table below sets forth the followinginformation as of December 31, 2007 for (i) all compensation planspreviously approved by the Company’s stockholders and (ii) allcompensation plans not previously approved by the Company’s stockholders:

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

 

 

 

25

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| **EQUITY COMPENSATION PLAN INFORMATION**                    | ** ** |
|-------------------------------------------------------------|------------|
| **Plan category**                                           | ** ** | **Number  of securities to  be issued upon exercise   of outstanding options** | ** ** | **Weighted-average  exercise  price of outstanding  options** | ** ** | **Number  of securities  remaining available for  future issuance** | ** ** |
| Equity compensation  plans approved by security holders     |       | 39,192 |   | $ | 70.34 |   | 107,900 |   |
| Equity  compensation plans not approved by security holders |       | 0 |   | 0 |   | 0 |   |
| **Total**                                                   |       | 39,192 |   | $ | 70.34 |   | 107,900 |   |
|                                                             |            |  |  |  |  |  |  |  |  |  |

 

**Item 13.     CertainRelationships and Related Transactions and Director Independence**

 

                    The information set forth under the caption “CertainRelationships and Related Transactions and Director Independence” of theCompany’s Proxy Statement, relating to the 2008 Annual Meeting of Stockholdersis incorporated herein by reference.

 

**Item 14.     PrincipalAccounting Fees and Services**

 

                    The information set forth under the caption “IndependentRegistered Public Accounting Firm” of the Company’s Proxy Statement relating tothe 2008 Annual Meeting of Stockholders is incorporated herein by reference.

 

 

26

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**PART IV**

 

**Item 15.  Exhibits and Financial Statement Schedules**

** **

(a)          1.     Financial Statements

Allfinancial statements of the Registrant are incorporated herein by reference asset forth under Item 8, Part II of this report on Form 10-K.

 

2.     Financial Statement Schedules

Notapplicable.

 

3.     Exhibits (Numbered in accordancewith Item 601 of Regulation S-K)

 

Thefollowing exhibits are filed as part of this report:

 

3(i)          Certificate of Incorporation of First Ottawa Bancshares, Inc.

 

3(ii)         By-Laws of First Ottawa Bancshares, Inc.

 

10.1         Employment Agreement for J. Brown*

 

10.2         Executive Officer Bonus Plan*

 

10.3         Employment Agreements for ExecutiveOfficers*

 

10.4         Stock Incentive Plan

 

10.5         Summary of Director Fees

 

10.6         Form of Supplemental NonqualifiedRetirement Agreement

 

10.7         Employment Agreement for Vincent Easi*

 

13.1         2007 Annual Report to Stockholders

 

21.1         Subsidiaries

 

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

 

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

 

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

 

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

----

*  Indicatesmanagement contract or compensationplan or arrangement.

 

 

27

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

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

 

Date:           March 25,2008

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**             | ** ** | **Title**                        | ** ** | **Date**             |
|---------------------------|------------|----------------------------------|------------|----------------------|
| ** **                | ** ** | ** **                       | ** ** | ** **           |
| /s/ Joachim  Brown        |       | Director and  President/         |       | March 25,  2008 |
| Joachim Brown             |       | Chief Executive  Officer         |       |                 |
|                      |       |                             |       |                 |
| /s/ Bradley J.  Armstrong |       | Director                         |       | March 25,  2008 |
| Bradley J. Armstrong      |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ John L.  Cantlin      |       | Director                         |       | March 25,  2008 |
| John L. Cantlin           |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Patty P.  Godfrey     |       | Director                         |       | March 25,  2008 |
| Patty P. Godfrey          |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Thomas E.  Haeberle   |       | Director                         |       | March 25,  2008 |
| Thomas E.  Haeberle       |       |                             |       |                 |
|                      |       |                             |       |                 |
| /s/ Donald J.  Harris     |       | Director and  Executive          |       | March 25,  2008 |
| Donald J. Harris          |       | Vice President,  Chief Operating |       |                 |
|                      |       | Officer                          |       |                 |

 

 

28

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| /s/ Thomas P.  Rooney |   | Director |   | March 25,  2008 |
|-----------------------|--------|----------|--------|----------------------|
| Thomas P. Rooney      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ William J.  Walsh |   | Director |   | March 25,  2008 |
| William J. Walsh      |   |     |   |                 |
|                  |   |     |   |                 |
| /s/ Brian P.  Zabel   |   | Director |   | March 25,  2008 |
| Brian P. Zabel        |   |     |   |                 |
|                  |   |     |   |                 |
|                  |   |     |   |                 |
|                  |   |     |   |                 |

 

 

29

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                  | ** ** | **Incorporated  by Reference to**            | ** ** | **Attached****Hereto** |
|---------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------|
| 3(i)                |       | Certificate of Incorporation of First Ottawa Bancshares, Inc.  (as amended) |       | Form 10K for the year  ended 12/31/2002 |       |                   |
| 3(ii)               |       | By-Laws of First Ottawa Bancshares, Inc.                                    |       | Form 10K for the year  ended 12/31/2003 |       |                   |
| 10.1                |       | Employment Agreement for J. Brown                                                |       | Form 10K for the year  ended 12/31/2002 |       |                   |
| 10.2                |       | Executive Officer Bonus Plan                                                     |       | Form 10K for the year  ended 12/31/2002 |       |                   |
| 10.3                |       | Employment Agreements for Executive Officers                                     |       | Form 8K dated 6/10/05                   |       |                   |
| 10.4                |       | Stock Incentive Plan                                                             |       | Form S-8 dated 8/1/03                   |       |                   |
| 10.5                |       | Summary of Director Fees                                                         |       | Form 10K for the year  ended 12/31/2004 |       |                   |
| 10.6                |       | Form of Supplemental Nonqualified Retirement Agreement                      |       | Form 10K for the year  ended 12/31/2004 |       |                   |
| 10.7                |       | Employment Agreement for Vincent Easi                                            |       | Form 8K dated 10/10/2007                |       |                   |
| 13.1                |       | 2007 Annual Report to Stockholders                                               |       |                                         |       | X                      |
| 21.1                |       | Subsidiaries                                                                     |       |                                         |       | X                      |
| 31.1                |       | Certification of Chief Executive Officer                                         |       |                                         |       | X                      |
| 31.2                |       | Certification of Chief Financial Officer                                         |       |                                         |       | X                      |
| 32.1                |       | Certification of Chief Executive Officer                                         |       |                                         |       | X                      |
| 32.2                |       | Certification of Chief Financial Officer                                         |       |                                         |       | X                      |

 

 

30

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