First Ottawa Bancshares, Inc.

What they do

The company operates a general commercial and consumer banking business through its wholly-owned subsidiary, The First National Bank of Ottawa. It offers deposit accounts, commercial, agricultural, consumer and real estate lending, trust operations, farm management, and safe deposit services. It has four offices in Ottawa, branches in Streator, Morris, and Yorkville, and a loan production office in Minooka.

Revenue drivers

• Loan portfolio — Net loans were $126.9 million at Dec. 31, 2011, generating interest and fee income of $1.9 million in Q1 2012, down from $2.1 million a year earlier.
• Securities and interest-bearing deposits — Taxable securities income was $185,000 and tax-exempt investment income was $88,000 in Q1 2012; interest on deposits with financial institutions was $226,000.
• Noninterest income — Total noninterest income was $528,000 in Q1 2012, including $157,000 in service fees on deposit accounts and $90,000 in mortgage sales and servicing activity.

Recent performance

Net income for Q1 2012 was $108,000, or $0.17 per share, down from $131,000, or $0.20 per share, in Q1 2011. Net interest income before provision fell to $2.0 million from $2.2 million. Provision for loan losses was $90,000 versus $300,000, while nonperforming loans increased to $7.4 million from $7.1 million. Nonaccrual loans decreased to $5.8 million from $6.1 million at year-end 2011. For full-year 2011, net income was $750,000, compared to a $2.1 million loss in 2010.

Strategy

Management continues to explore expansion within its existing market area and surrounding areas. The company is evaluating the effects of the JOBS Act and has filed a Form 15 to deregister its common stock, expecting cost savings from reduced audit, legal and filing expenses. The CEO stated that results were 'less than satisfactory' and noted continued adverse effects from real estate value declines, though there were positive trends in distressed asset sales. Management emphasizes collateral coverage on nonperforming loans, which they believe reduces exposure to credit losses.

Risks

• Credit risk from commercial real estate — Further declines in real estate values have adversely affected the company, increasing nonperforming loans to $7.4 million at March 31, 2012.
• Net interest margin compression — Lower interest rates and reduced loan volume drove total interest income down $276,000 in Q1 2012 compared to Q1 2011.
• Regulatory and reporting changes — The company expects to deregister under the Exchange Act after August 9, 2012, which will reduce reporting obligations but also reduce transparency for investors.
• Expense pressure — Noninterest expenses increased in Q1 2012, driven by higher salaries, other real estate owned costs, insurance, and professional fees.

Outlook

Management expects the deregistration to provide substantial cost savings. They are monitoring the JOBS Act and SEC rules. The company continues to assess loan portfolio risk and real estate conditions, looking for positive trends in distressed asset sales. No specific earnings guidance was provided.