Ottawa Bancorp Inc - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Ottawa Bancorp Inc	ex_112900.htm
EX-31.2 - EXHIBIT 31.2 - Ottawa Bancorp Inc	ex_112899.htm
EX-31.1 - EXHIBIT 31.1 - Ottawa Bancorp Inc	ex_112898.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to_______

Commission File Number 001-37914

OTTAWA BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)	81-2959182 (I.R.S. Employer Identification Number)

925 LaSalle Street	61350
Ottawa, Illinois	(Zip Code)
(Address of principal executive offices)

(815) 433-2525

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ☐	Accelerated filer ☐
Non-Accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller Reporting Company ☒
	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Outstanding as of May 10, 2018
Common Stock, $0.01 par value	3,407,440

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended March 31, 2018

INDEX

		Page Number

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4	Controls and Procedures	32


PART II – OTHER INFORMATION

Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3	Defaults upon Senior Securities	33
Item 4	Mine Safety Disclosures	33
Item 5	Other Information	33
Item 6	Exhibits	33


SIGNATURES		34

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

(Unaudited)

	March 31,			December 31,
	2018			2017
Assets
Cash and due from banks	$	2,598,874		$	2,426,924
Interest bearing deposits		576,308			1,328,893
Total cash and cash equivalents		3,175,182			3,755,817
Time deposits		250,000			250,000
Federal funds sold		1,758,000			939,000
Securities available for sale		25,453,506			26,045,675
Non-marketable equity securities		817,137			918,387
Loans, net of allowance for loan losses of $2,570,533 and $2,472,446 at March 31, 2018 and December 31, 2017, respectively		220,221,604			207,035,091
Loans held for sale		208,484			499,375
Premises and equipment, net		6,616,841			6,670,088
Accrued interest receivable		812,928			794,449
Foreclosed real estate		24,000			84,100
Deferred tax assets		1,943,254			1,870,490
Cash surrender value of life insurance		2,305,570			2,293,800
Goodwill		649,869			649,869
Core deposit intangible		271,500			286,000
Other assets		3,458,293			3,307,734
Total assets	$	267,966,168		$	255,399,875
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	11,814,608		$	11,562,801
Interest bearing		185,927,881			171,211,823
Total deposits		197,742,489			182,774,624
Accrued interest payable		6,890			661
FHLB advances		12,857,023			15,105,287
Other liabilities		4,900,205			4,416,368
Total liabilities		215,506,607			202,296,940
Commitments and contingencies
Redeemable common stock held by ESOP plan		1,203,326			1,202,014
Stockholders' Equity
Common stock, $.01 par value, 12,000,000 shares authorized; 3,415,490 and 3,451,802 shares issued at March 31, 2018 and December 31, 2017, respectively		34,155			34,518
Additional paid-in-capital		36,329,217			36,949,508
Retained earnings		17,828,165			17,720,962
Unallocated ESOP shares		(1,710,128	)		(1,754,632	)
Accumulated other comprehensive (loss) income		(21,848	)		152,579
		52,459,561			53,102,935
Less:
Maximum cash obligation related to ESOP shares		(1,203,326	)		(1,202,014	)
Total stockholders' equity		51,256,235			51,900,921
Total liabilities and stockholders' equity	$	267,966,168		$	255,399,875

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three Months Ended March 31, 2018 and 2017

(Unaudited)

	Three Months Ended
	March 31,
	2018		2017
Interest and dividend income:
Interest and fees on loans	$	2,398,669	$	1,972,750
Securities:
Residential mortgage-backed and related securities		67,466		135,868
State and municipal securities		100,448		130,629
Dividends on non-marketable equity securities		4,186		1,794
Interest-bearing deposits		15,794		9,321
Total interest and dividend income		2,586,563		2,250,362
Interest expense:
Deposits		332,524		205,269
Borrowings		48,144		6,996
Total interest expense		380,668		212,265
Net interest income		2,205,895		2,038,097
Provision for loan losses		125,500		90,000
Net interest income after provision for loan losses		2,080,395		1,948,097
Other income:
Gain on sale of securities		-		42
Gain on sale of loans		133,211		107,093
Gain on sale of foreclosed real estate		42,035		24,060
Gain on sale of repossessed assets		557		3,044
Loan origination and servicing income		162,872		100,991
Origination of mortgage servicing rights, net of amortization		12,854		15,411
Customer service fees		122,995		115,859
Increase in cash surrender value of life insurance		11,770		12,025
Other		24,938		27,965
Total other income		511,232		406,490
Other expenses:
Salaries and employee benefits		1,012,444		994,366
Directors fees		48,000		40,800
Occupancy		174,071		163,539
Deposit insurance premium		16,396		13,514
Legal and professional services		88,701		96,158
Data processing		154,773		138,493
Loan expense		168,807		118,323
Valuation adjustments and expenses on foreclosed real estate		9,012		5,462
Loss on sale of repossessed assets		3,265		274
Other		264,416		245,085
Total other expenses		1,939,885		1,816,014
Income before income tax expense		651,742		538,573
Income tax expense		172,160		181,273
Net income	$	479,582	$	357,300
Basic earnings per share	$	0.15	$	0.11
Diluted earnings per share	$	0.15	$	0.11
Dividends per share	$	0.115	$	0.04

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2018 and 2017

(Unaudited)

	Three Months Ended
	March 31,
	2018			2017
Net income	$	479,582		$	357,300
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period		(243,971	)		153,819
Reclassification adjustment for (gains) included in net income		-			(42	)
Other comprehensive (loss) income, before tax		(243,971	)		153,777
Income tax (benefit) expense related to items of other comprehensive (loss) income		(69,544	)		60,150
Other comprehensive (loss) income, net of tax		(174,427	)		93,627
Comprehensive income	$	305,155		$	450,927

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2018 and 2017

(Unaudited)

	2018			2017
Cash Flows from Operating Activities
Net income	$	479,582		$	357,300
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		59,806			60,785
Provision for loan losses		125,500			90,000
Provision for deferred income taxes		(3,220	)		137,990
Net amortization of premiums and discounts on securities		62,550			139,549
Gain on sale of securities, net		-			(42	)
Origination of mortgage loans held for sale		(4,481,167	)		(4,083,851	)
Proceeds from sale of mortgage loans held for sale		4,905,269			3,807,016
Gain on sale of loans, net		(133,211	)		(107,093	)
Origination of mortgage servicing rights, net of amortization		(12,854	)		(15,411	)
Gain on sale of foreclosed real estate, net		(42,035	)		(24,060	)
Loss (gain) on sale of repossessed assets, net		2,708			(2,770	)
ESOP compensation expense		65,773			61,892
Amortization of core deposit intangible		14,500			19,545
Amortization (accretion) of fair value adjustments on acquired:
Loans		9,487			69,554
Certificates of deposit		-			(8,000	)
Federal Home Loan Bank Advances		1,736			1,737
Increase in cash surrender value of life insurance		(11,770	)		(12,025	)
Change in assets and liabilities:
Increase in accrued interest receivable		(18,479	)		(12,759	)
Increase in other assets		(111,124	)		(83,111	)
Increase in accrued interest payable and other liabilities		117,687			382,298
Net cash provided by operating activities		1,030,738			778,544
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(665,765	)		(1,223,896	)
Sales, calls, maturities and paydowns		951,413			1,806,128
Sale of non-marketable equity securities		101,250			-
Net increase in loans		(13,393,000	)		(6,716,676	)
Net increase in federal funds sold		(819,000	)		(1,094,000	)
Proceeds from sale of foreclosed real estate		126,135			84,493
Proceeds from sale of repossessed assets		18,211			13,270
Purchase of premises and equipment		(6,559	)		(14,672	)
Net cash used in investing activities		(13,687,315	)		(7,145,353	)
Cash Flows from Financing Activities
Net increase in deposits		14,967,865			5,529,575
Proceeds from Federal Home Loan Bank advances		3,250,000			-
Principal reduction of Federal Home Loan Bank advances		(5,500,000	)		-
Proceeds from stock options exercised		65,135			-
Shares repurchased and cancelled		(707,058	)		-
Dividends paid		-			(130,848	)
Net cash provided by financing activities		12,075,942			5,398,727
Net decrease in cash and cash equivalents		(580,635	)		(968,082	)
Cash and cash equivalents:
Beginning of period		3,755,817			5,946,649
End of period	$	3,175,182		$	4,978,567

(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Three Months Ended March 31, 2018 and 2017

(Unaudited)

	2018		2017
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	326,295	$	203,822
Interest paid on borrowings		48,144		6,996
Income taxes paid, net of refunds received		300		-
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		24,000		31,356
Other assets acquired in settlement of loans		47,500		16,000
Sale of foreclosed real estate through loan origination		-		3,923
Increase in ESOP put option liability		1,312		101,120

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 1 – NATURE OF BUSINESS

Ottawa Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in May 2016 to be the successor to Ottawa Savings Bancorp, Inc. (“Ottawa Savings Bancorp”) upon completion of the second-step conversion of Ottawa Savings Bank (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. Ottawa Savings Bancorp MHC was the former mutual holding company for Ottawa Savings Bancorp prior to completion of the second-step conversion. In conjunction with the second-step conversion, Ottawa Savings Bancorp MHC merged into Ottawa Savings Bancorp (and ceased to exist), and Ottawa Savings Bancorp merged into the Company, with the Company as the surviving entity.

On December 31, 2014, Ottawa Savings Bancorp completed a merger with Twin Oaks Savings Bank (“Twin Oaks”), whereby Twin Oaks was merged with and into the Bank, with the Bank as the surviving institution (the “Merger”). As a result of the Merger, the Bank increased its market share in the LaSalle County market and expanded into Grundy County.

The primary business of the Company is the ownership of the Bank. Through the Bank, the Company is engaged in providing a variety of financial services to individual and corporate customers in the Ottawa, Marseilles, and Morris, Illinois areas, which are primarily agricultural areas consisting of several rural communities with small to medium sized businesses. The Bank’s primary source of revenue is interest and fees related to single-family residential loans to middle-income individuals.

NOTE 2 – BASIS OF PRESENTATION

The consolidated financial statements presented in this quarterly report include the accounts of the Company and the Bank. The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and predominant practices followed by the financial services industry and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, which the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows have been recorded. The interim financial statements should be read in conjunction with the audited financial statements and accompanying notes of the Company for the year ended December 31, 2017. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

NOTE 3 – USE OF ESTIMATES

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and, thus, actual results could differ from the amounts reported and disclosed herein.

At March 31, 2018, there were no material changes in the Company’s significant accounting policies from those disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 28, 2018.

NOTE 4 – CRITICAL ACCOUNTING POLICIES

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses to be our critical accounting policy.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Allowance for Loan Losses. The allowance for loan losses is an amount necessary to absorb known or inherent losses that are both probable and reasonably estimable and is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect each borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and non-residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

NOTE 5 – EARNINGS PER SHARE

Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released Employee Stock Ownership Plan (“ESOP”) shares. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.

	Three Months Ended
	March 31,
	2018			2017
Net income available to common stockholders	$	479,582		$	357,300
Basic potential common shares:
Weighted average shares outstanding		3,429,002			3,467,402
Weighted average unallocated ESOP shares		(175,801	)		(194,580	)
Basic weighted average shares outstanding		3,253,201			3,272,822
Dilutive potential common shares:
Weighted average RRP options outstanding		8,679			15,559
Dilutive weighted average shares outstanding		3,261,880			3,288,381
Basic earnings per share	$	0.15		$	0.11
Diluted earnings per share	$	0.15		$	0.11

NOTE 6 – EMPLOYEE STOCK OWNERSHIP PLAN

On May 6, 2005, the Company adopted an employee stock ownership plan (“ESOP”) for the benefit of substantially all employees. On July 8, 2005, the ESOP borrowed $763,140 from the Company and used those funds to acquire 76,314 shares of the Company’s stock in the initial public offering at a price of $10.00 per share. On October 11, 2016, the ESOP borrowed $1,907,160 from the Company and used those funds to acquire 190,716 shares of the Company’s stock in its conversion to a fully-public stock holding company at a price of $10.00 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of approximately $239,000 are to be made by the ESOP.

As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares, and the shares will become outstanding for earnings-per-share (“EPS”) computations. Dividends on allocated ESOP shares reduce retained earnings, and dividends on unallocated ESOP shares reduce accrued interest.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

A terminated participant or the beneficiary of a deceased participant who received a distribution of employer stock from the ESOP has the right to require the Company to purchase such shares at their fair market value any time within 60 days of the distribution date. If this right is not exercised, an additional 60-day exercise period is available in the year following the year in which the distribution is made and begins after a new valuation of the stock has been determined and communicated to the participant or beneficiary. At March 31, 2018, 87,706 shares at a fair value of $13.72 have been classified as mezzanine capital.

The following table reflects the status of the shares held by the ESOP:

	March 31,			December 31,
	2018			2017
Shares allocated		108,966			104,272
Shares withdrawn from the plan		(21,260	)		(21,030	)
Unallocated shares		172,724			177,418
Total ESOP shares		260,430			260,660
Fair value of unallocated shares	$	2,369,773		$	2,561,916

NOTE 7 – INVESTMENT SECURITIES

The amortized cost and fair values of securities, with gross unrealized gains and losses, follows:

Gross

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

March 31, 2018:

Securities Available for Sale

State and municipal securities

14,167,731

126,910

34,288

14,260,353

Residential mortgage-backed securities

11,316,333

85,535

208,715

11,193,153

25,484,064

212,445

243,003

25,453,506

December 31, 2017:

Securities Available for Sale

State and municipal securities

13,756,573

221,320

7,460

13,970,433

Residential mortgage-backed securities

12,075,689

121,840

122,287

12,075,242

25,832,262

343,160

129,747

26,045,675

The amortized cost and fair value at March 31, 2018, by contractual maturity, are shown below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without penalties. Therefore, stated maturities of residential mortgage-backed securities are not disclosed.

	Securities Available for Sale
	Amortized		Fair
	Cost		Value

Due in three months or less	$	656,688	$	657,797
Due after three months through one year		53,577		53,392
Due after one year through five years		5,463,925		5,520,054
Due after five years through ten years		3,984,336		4,008,977
Due after ten years		4,009,205		4,020,133
Residential mortgage-backed securities		11,316,333		11,193,153
	$	25,484,064	$	25,453,506

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at March 31, 2018 and December 31, 2017:

Less than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

March 31, 2018

Securities Available for Sale

State and municipal securities

3,251,485

34,288

3,251,485

34,288

Residential mortgage-backed securities

2,697,169

41,502

5,714,098

167,213

8,411,267

208,715

5,948,654

75,790

5,714,098

167,213

11,662,752

243,003

December 31, 2017

Securities Available for Sale

State and municipal securities

1,435,888

7,460

1,435,888

7,460

Residential mortgage-backed securities

2,035,206

12,564

6,209,019

109,723

8,244,225

122,287

3,471,094

20,024

6,209,019

109,723

9,680,113

129,747

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability to retain and whether it is not more likely than not the Company will be required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.

At March 31, 2018, 40 securities had unrealized losses with an aggregate depreciation of 2.04% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at March 31, 2018 due to the following:

●

Decline in value is attributable to interest rates.

●

The value did not decline due to credit quality.

●

The Company does not intend to sell these securities.

●

The Company has adequate liquidity such that it will not more likely than not have to sell these securities before recovery of the amortized cost basis, which may be at maturity.

There were no proceeds from the sales of securities for the three months ended March 31, 2018 and proceeds of $0.4 million for the three months ended March 31, 2017. The sales during the three months ended March 31, 2017 resulted in gross realized gains of $42 and gross no realized losses. The tax provision applicable to the realized gains amounted to $0 and $16 respectively, for the three months ended March 31, 2018 and 2017.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

The components of loans, net of deferred loan costs (fees), are as follows:

	March 31,			December 31,
	2018			2017
Mortgage loans:
One-to-four family residential loans	$	130,287,273		$	124,118,335
Multi-family residential loans		6,510,667			5,664,524
Total mortgage loans		136,797,940			129,782,859

Other loans:
Non-residential real estate loans		33,710,232			32,133,094
Commercial loans		20,922,937			20,759,262
Consumer direct		8,529,670			6,281,712
Purchased auto		22,831,358			20,550,610
Total other loans		85,994,197			79,724,678
Gross loans		222,792,137			209,507,537
Less: Allowance for loan losses		(2,570,533	)		(2,472,446	)
Loans, net	$	220,221,604		$	207,035,091

The following table reflects the carrying amount of loans acquired in the Twin Oaks merger, which are included in the loan categories above as of the dates indicated.

	March 31,			December 31,
	2018			2017
Mortgage loans:
One-to-four family residential loans	$	13,501,289		$	14,811,329
Multi-family residential loans		263,894			265,625
Total mortgage loans		13,765,183			15,076,954

Other loans:
Non-residential real estate loans		1,982,720			2,120,630
Commercial loans		576,293			571,538
Consumer direct		47,551			59,353
Total other loans		2,606,564			2,751,521
Gross loans		16,371,747			17,828,475
Less: Allowance for loan losses		(135,000	)		(135,000	)
Loans, net	$	16,236,747		$	17,693,475

Total loans acquired in the Merger were recorded at a fair value of $29,795,910 and had a contractual amount due of $31,831,910 as of the acquisition date which was December 31, 2014. FASB ASC 310-20, Nonrefundable Fees and Other Costs, specifies the approach that needs to be used when the Bank expects to receive all of the contractual principal and interest payments due under an individual loan. Loans not considered to have deteriorated credit quality at the acquisition date had a contractual balance due of approximately $28,638,000 and an estimated fair value of approximately $28,472,000. The loan discount recorded at the date of the acquisition consisted of an accretable yield component of approximately $407,000 and an accretable credit component of approximately $(573,000), for a net fair value adjustment of approximately $(166,000).

Loans acquired with deteriorated credit quality and accounted for under FASB ASC Topic 310-30 as of the acquisition date had a contractual balance due of approximately $3,194,000 and an estimated fair value of approximately $1,324,000. The estimate of the contractual cash flows not expected to be collected due to credit quality was approximately $1,870,000 which consists of an accretable discount of $(362,000) and non-accretable discount of $(1,508,000).

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects activity for the loans acquired with deteriorated credit quality for the three months ended March 31, 2018 and 2017:

	Three Months Ended
	March 31,
	2018			2017
Balance, beginning of period	$	144,528		$	461,334
Payment activity		(11,438	)		(225,489	)
Transfer to foreclosed real estate		-			-
Accretion into interest income		4,443			64,791
	$	137,533		$	300,636

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $465,000 and $468,000 as of March 31, 2018 and December 31, 2017, respectively.

The following table reflects activity in the accretable yield for the loans acquired with deteriorated credit quality for the three months ended March 31, 2018 and 2017:

	Three Months Ended
	March 31,
	2018			2017
Balance, beginning of period	$	9,592		$	82,869
Net reclassification from non-accretable yield		-			29,891
Accretion into interest income		(4,443	)		(64,791	)
	$	5,149		$	47,969

Purchases of loans receivable, segregated by class of loans, for the periods indicated were as follows:

	Three Months Ended March 31,
	2018		2017
Purchased auto loans	$	4,034,864	$	1,534,937

Net (charge-offs) / recoveries, segregated by class of loans, for the periods indicated were as follows:

	Three Months Ended March 31,
	2018			2017
One-to-four family	$	(2,283	)	$	(86,067	)
Multi-family		3,972			-
Non-residential		-			(51,960	)
Consumer direct		1,727			2,327
Purchased auto		(30,829	)		(18,068	)
Net (charge-offs)/recoveries	$	(27,413	)	$	(153,768	)

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017:

One-to-

four

Multi-

Non-

Consumer

Purchased

March 31, 2018

family

residential

Commercial

direct

auto

Total

Balance at beginning of period

1,477,419

21,970

371,093

153,596

140,269

308,099

2,472,446

Provision charged to income

114,187

(816

)

1,187

(521

)

(44,411

)

55,874

125,500

Loans charged off

(6,724

)

(36,194

)

(42,918

)

Recoveries of loans previously charged off

4,441

3,972

1,727

5,365

15,505

Balance at end of period

1,589,323

25,126

372,280

153,075

97,585

333,144

2,570,533

One-to-

four

Multi-

Non-

Consumer

Purchased

March 31, 2017

family

residential

Commercial

direct

auto

Total

Balance at beginning of period

1,426,954

93,481

367,326

96,823

79,253

183,612

2,247,449

Provision charged to income

108,120

2,219

(64,902

)

4,280

17,471

22,812

90,000

Loans charged off

(89,515

)

(59,960

)

(30,312

)

(179,787

)

Recoveries of loans previously charged off

3,448

8,000

2,327

12,244

26,019

Balance at end of period

1,449,007

95,700

250,464

101,103

99,051

188,356

2,183,681

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of March 31, 2018 and December 31, 2017:

One-to-

four

Multi-

Non-

Consumer

Purchased

March 31, 2018

family

residential

Commercial

direct

auto

Total

Loans individually evaluated for impairment

759,861

344,837

3,235

12,828

1,120,761

Loans acquired with deteriorated credit quality

137,532

Loans collectively evaluated for impairment

129,389,880

6,510,667

33,365,395

20,919,702

8,529,670

22,818,530

221,533,844

Balance at end of period

130,287,273

6,510,667

33,710,232

20,922,937

8,529,670

22,831,358

222,792,137

Period-end amount allocated to:

Loans individually evaluated for impairment

125,076

102,225

6,414

233,715

Loans acquired with deteriorated credit quality

12,843

Loans collectively evaluated for impairment

1,451,404

25,126

270,055

153,075

97,585

326,730

2,323,975

Balance at end of period

1,589,323

25,126

372,280

153,075

97,585

333,144

2,570,533

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

One-to-

four

Multi-

Non-

Consumer

Purchased

December 31, 2017

family

residential

Commercial

direct

auto

Total

Loans individually evaluated for impairment

986,321

355,203

10,454

985

1,352,963

Loans acquired with deteriorated credit quality

144,528

Loans collectively evaluated for impairment

122,987,486

5,664,524

31,777,891

20,748,808

6,281,712

20,549,625

208,010,046

Balance at end of period

124,118,335

5,664,524

32,133,094

20,759,262

6,281,712

20,550,610

209,507,537

Period-end amount allocated to:

Loans individually evaluated for impairment

78,820

110,055

493

189,368

Loans acquired with deteriorated credit quality

40,408

Loans collectively evaluated for impairment

1,358,191

21,970

261,038

153,596

140,269

307,606

2,242,670

Balance at end of period

1,477,419

21,970

371,093

153,596

140,269

308,099

2,472,446

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2018 and December 31, 2017:

March 31, 2018

Unpaid Contractual

Principal Balance

Recorded

Investment with

No Allowance

Recorded

Investment with

Allowance

Total Recorded

Investment

Related Allowance

Average Recorded

Investment

One-to-four family

897,393

402,755

494,638

897,393

137,919

1,120,597

Multi-family

Non-residential

344,837

102,225

348,337

Commercial

3,235

3,839

Consumer direct

Purchased auto

12,828

6,414

4,276

1,258,293

405,990

852,303

1,258,293

246,558

1,477,049

December 31, 2017

Unpaid Contractual

Principal Balance

Recorded

Investment with

No Allowance

Recorded

Investment with

Allowance

Total Recorded

Investment

Related Allowance

Average Recorded

Investment

One-to-four family

1,130,849

746,579

384,270

1,130,849

119,228

1,795,888

Multi-family

Non-residential

355,203

110,055

749,271

Commercial

10,454

5,341

Consumer direct

Purchased auto

985

493

11,205

1,497,491

757,033

740,458

1,497,491

229,776

2,561,705

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

For the three months ended March 31, 2018, the Company recognized no cash basis interest income on impaired loans. For the three months ended March 31, 2017, the Company recognized approximately $3,000 in cash basis interest income on impaired loans.

At March 31, 2018 there were 19 impaired loans totaling approximately $1.3 million, compared to 19 impaired loans totaling approximately $1.5 million at December 31, 2017. The change in impaired loans was a result of writing down and moving two impaired loans totaling approximately $28,000 to foreclosed real estate/repossessed assets, upgrading and returning one loan of approximately $323,000 to accrual status, and payments of approximately $38,000, offset by the addition of three loans totaling approximately $149,000 to the impaired loan list.

Our loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance or other actions. TDRs are classified as non-performing at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less estimated selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

Impaired loans at March 31, 2018 included approximately $145,000 of loans whose terms have been modified in troubled debt restructurings, compared to approximately $473,000 at December 31, 2017. The amount of TDR loans included in impaired loans decreased approximately $328,000 as a result of upgrading and returning one loan of approximately $323,000 to accrual status and payments of approximately $5,000. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

There were no new loans classified as TDRs during the three months ended March 31, 2018 and 2017.

There were no TDR loans that were restructured during the twelve months prior to March 31, 2018 and 2017 that had payment defaults (i.e., 60 days or more past due following a modification) during the three months ended March 31, 2018 and 2017.

All TDRs are evaluated for possible impairment and any impairment identified is recognized through the allowance. Additionally, the qualitative factors are updated quarterly for trends in economic and non-performing factors, including collateral securing TDRs.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as of March 31, 2018 and December 31, 2017:

March 31, 2018	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	897,393	$	-
Multi-family		-		-
Non-residential		344,837		-
Commercial		3,235		-
Consumer direct		-		-
Purchased auto		12,828		-
	$	1,258,293	$	-

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

December 31, 2017	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,213,662	$	-
Multi-family		-		-
Non-residential		355,203		-
Commercial		10,454		-
Consumer direct		-		-
Purchased auto		985		-
	$	1,580,304	$	-

The following table presents the aging of the recorded investment in loans, by class of loans, as of March 31, 2018 and December 31, 2017:

March 31, 2018

Loans 30-59

Days Past Due

Loans 60-8

9 Days Past

Due

Loans 90 or

More Days

Past Due

Total Past

Due Loans

Current Loans

Total Loans

One-to-four family

864,289

473,875

438,946

1,777,110

128,510,163

130,287,273

Multi-family

6,510,667

Non-residential

344,837

33,365,395

33,710,232

Commercial

23,991

20,898,946

20,922,937

Consumer direct

75,521

8,454,149

8,529,670

Purchased auto

17,099

12,828

29,927

22,801,431

22,831,358

1,325,737

473,875

451,774

2,251,386

220,540,751

222,792,137

December 31, 2017

Loans 30-59

Days Past Due

Loans 60-89

Days Past

Due

Loans 90 or

More Days

Past Due

Total Past

Due Loans

Current Loans

Total Loans

One-to-four family

860,502

985,661

99,601

1,945,764

122,172,571

124,118,335

Multi-family

5,664,524

Non-residential

478,930

394,634

873,564

31,259,530

32,133,094

Commercial

10,454

20,748,808

20,759,262

Consumer direct

6,281,712

Purchased auto

30,352

985

31,337

20,519,273

20,550,610

1,369,784

1,390,749

100,586

2,861,119

206,646,418

209,507,537

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. For commercial and non-residential real estate loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial and non-residential real estate loan is assigned a risk rating upon origination. The risk rating is reviewed annually, at a minimum, and on an as needed basis depending on the specific circumstances of the loan.

For residential real estate loans, multi-family, consumer direct and purchased auto loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated regularly by the Company’s loan system for real estate loans, multi-family and consumer direct loans. The Company receives monthly reports on the delinquency status of the purchased auto loan portfolio from the servicing company. Generally, when residential real estate loans, multi-family and consumer direct loans become over 90 days past due, they are classified as substandard. Periodically, based on subsequent performance over 6-12 months, these loans could be upgraded to special mention.

The Company uses the following definitions for risk ratings:

●

Pass – loans classified as pass are of a higher quality and do not fit any of the other “rated” categories below (e.g., special mention, substandard or doubtful). The likelihood of loss is considered remote.

●

Special Mention – loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

●

Substandard – loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

●

Doubtful – loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

●

Not Rated – loans in this bucket are not evaluated on an individual basis.

At March 31, 2018 and December 31, 2017, the risk category of loans by class is as follows:

March 31, 2018

Pass

Special

Mention

Substandard

Doubtful

Not rated

Total Loans

One-to-four family

1,213,262

897,393

128,176,618

130,287,273

Multi-family

6,510,667

Non-residential

33,127,423

237,972

344,837

33,710,232

Commercial

20,919,702

3,235

20,922,937

Consumer direct

8,529,670

Purchased auto

12,828

22,818,530

22,831,358

Total

54,047,125

1,451,234

1,258,293

166,035,485

222,792,137

December 31, 2017

Pass

Special

Mention

Substandard

Doubtful

Not rated

Total Loans

One-to-four family

529,738

1,130,849

122,457,748

124,118,335

Multi-family

5,664,524

Non-residential

31,531,886

246,005

355,203

32,133,094

Commercial

20,748,808

10,454

20,759,262

Consumer direct

6,281,712

Purchased auto

985

20,549,625

20,550,610

Total

52,280,694

775,743

1,497,491

154,953,609

209,507,537

At March 31, 2018, the Company held $24,000 in foreclosed residential real estate property, compared to $84,100 at December 31, 2017. In addition, the Company also held $0 and $23,000 in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at March 31, 2018 and December 31, 2017, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was $0 for both of the three-month periods ended March 31, 2018 and 2017, respectively. In accordance with FASB ASC 718, Compensation-Stock Compensation, compensation expense is recognized on a straight-line basis over the grantees’ vesting period or to the grantees’ retirement eligibility date, if earlier. During the three months ended March 31, 2018 and 2017, the Company did not grant additional options or shares under the Management Recognition Plan (MRP).

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and might require additional disclosures, depending on the impact of the adoption of the standard. The new authoritative guidance was originally effective for reporting periods after December 15, 2016. In August 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606) was issued to delay the effective date of ASU 2014-09 by one year. The FASB issued four subsequent ASUs in 2016 which are intended to improve and clarify the implementation guidance related to ASU 2014-09. The standard does not apply to the majority of the Company’s revenue, including revenue associated with financial instruments such as loans, investment securities, and certain non-interest income, such as bank-owned life insurance, dividends on Federal Home Loan Bank (“FHLB”) stock, and gains or losses on sales of investment securities. The Company has completed its overall assessment of non-interest income and review of related contracts potentially affected by the guidance. The Company adopted the guidance on January 1, 2018 and a cumulative effect adjustment to retained earnings was not necessary.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The standard allowed the use of either the full retrospective or modified retrospective transition method. We elected to apply the modified retrospective transition method to incomplete contracts as of the initial date of application on January 1, 2018. The adoption of the new standards did not have a material impact on our financial condition or results of operations as the revenue recognition patterns under the new standards did not change significantly from our current practice of recognizing the in-scope non-interest income. In addition, we did not retroactively revise prior period amounts or record a cumulative adjustment to retained earnings upon adoption. We considered the nature, amount, timing, and uncertainty of revenue from contracts with customers and determined that significant revenue streams are sufficiently disaggregated in the consolidated statements of income.

Descriptions of our significant revenue-generating transactions that are within the scope of the new revenue recognition standards, which are presented in the consolidated statements of income as components of non-interest income, are as follows:

●

Service charges on deposit accounts. The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly, overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's account balance.

●

Gains/losses on sale of foreclosed real estate and repossessed assets. The Company records a gain or loss from the sale of foreclosed real estate and repossessed assets when control of the property transfers to the buyer, which generally occurs at the time of the executed deed or title. When the Company finances the sale of foreclosed real estate and repossessed assets to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed real estate or repossessed asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant component is present.

●

Other. Other noninterest income consists of other recurring revenue streams such as transaction fees, safe deposit rental income, and insurance commissions. Transaction fees primarily include check printing sales commissions, collection fees, and wire transfer fees which arise from in-branch transactions. Insurance commissions are agent commissions earned by the Company and earned upon the effective date of the bound coverage. Merchant referral income is associated with a program whereby the Company receives a share of processing revenue that is generated from clients that were referred by the Company to the service provider. Revenue is recognized at the point in time when the transaction occurs.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018. The adoption of the new financial instruments standard did not have a material impact on the consolidated financial statements. There was no cumulative effect adjustment recorded with the adoption of this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance in this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee`s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the effect that this standard will have on its financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Currently, generally accepted accounting principles (“GAAP”) excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. ASU 2017-08 requires that premiums on certain callable debt securities be amortized to the shortest call date. Securities within the scope of this ASU are those that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The impact of adopting this ASU is dependent on the materiality of callable debt securities at the time of adoption.

NOTE 11 – BORROWINGS

A summary of outstanding advances from the Federal Home Loan Bank of Chicago is as follows:

	March 31,		December 31,
	2018		2017
Open lines of credit at 1.46%	$	-	$	4,000,000
Open lines of credit at 1.82%		3,250,000		-
Matured 02/15/2018 at 1.27%, fixed		-		1,000,000
Matured 03/30/2018 at 1.72%, fixed		-		499,357
Matures 05/15/2018 at 1.34%, fixed		2,000,000		2,000,000
Matures 09/25/2018 at 1.46%, fixed		2,000,000		2,000,000
Matures 04/01/2019 at 2.00%, fixed		497,635		497,089
Matures 08/30/2019 at 1.56%, fixed		3,000,000		3,000,000
Matures 12/16/2019 at 2.08%, fixed		2,000,000		2,000,000
Matures 10/03/2022 at 1.48%, fixed		109,388		108,841
	$	12,857,023	$	15,105,287

NOTE 12 – FAIR VALUE MEASUREMENT AND DISCLOSURE

FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is not adjusted for transaction costs. This guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement inputs) and the lowest priority to unobservable inputs (Level 3 measurement inputs). The three levels of the fair value hierarchy under FASB ASC 820 are described below:

Basis of Fair Value Measurement:

•

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

•

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.

•

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities Available for Sale

Securities classified as available for sale are recorded at fair value on a recurring basis using pricing obtained from an independent pricing service. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, the pricing service estimates the fair values by using pricing models or quoted prices of securities with similar characteristics. For these securities, the inputs used by the pricing service to determine fair value consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and bonds’ terms and conditions, among other things resulting in classification within Level 2. Level 2 securities include state and municipal securities, and residential mortgage-backed securities. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3. The Company has no securities classified within Level 3.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Foreclosed Assets

Foreclosed assets, consisting of foreclosed real estate and repossessed assets, are adjusted to fair value less estimated costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of cost or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as non-recurring Level 3.

Impaired Loans

Impaired loans are evaluated and adjusted to the lower of carrying value or fair value less estimated costs to sell at the time the loan is identified as impaired. Impaired loans are carried at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2018 and the year ended December 31, 2017. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfers between levels.

The tables below present the recorded amounts of assets measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017.

Total

March 31, 2018

Level 1

Level 2

Level 3

Fair Value

State and municipal securities available for sale

14,260,353

Residential mortgage-backed securities available for sale

11,193,153

25,453,506

Total

December 31, 2017

Level 1

Level 2

Level 3

Fair Value

State and municipal securities available for sale

13,970,433

Residential mortgage-backed securities available for sale

12,075,242

26,045,675

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017.

Total

March 31, 2018

Level 1

Level 2

Level 3

Fair Value

Foreclosed assets

50,581

Impaired loans, net

605,745

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value.

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

March 31, 2018

Foreclosed assets

50,581

Appraisal of collateral

Appraisal adjustments

-40%

-64%

Impaired loans, net

594,956

Appraisal of collateral

Appraisal adjustments

-15%

-64.4%

Impaired loans, net

10,789

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

December 31, 2017

Foreclosed assets

84,100

Appraisal of collateral

Appraisal adjustments

-42

Impaired loans, net

415,567

Appraisal of collateral

Appraisal adjustments

-50%

61.5%

Impaired loans, net

95,115

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of March 31, 2018 and December 31, 2017, are as follows:

Fair Value Measurements at

Carrying

March 31, 2018 using:

Amount

Level 1

Level 2

Level 3

Total

Financial Assets:

Cash and cash equivalents

3,175,182

Time deposits

250,000

Federal funds sold

1,758,000

Securities

26,270,643

25,453,506

817,137

26,270,643

Net loans

220,221,604

217,146,000

Loans held for sale

208,484

Accrued interest receivable

812,928

Mortgage servicing rights

436,376

Financial Liabilities:

Non-interest bearing deposits

11,814,608

Interest bearing deposits

185,927,881

186,856,000

Accrued interest payable

6,890

FHLB advances

12,857,023

12,799,000

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Carrying

December 31, 2017 using:

Amount

Level 1

Level 2

Level 3

Total

Financial Assets:

Cash and cash equivalents

3,755,817

Time deposits

250,000

Federal funds sold

939,000

Securities

26,964,062

26,045,675

918,387

26,964,062

Net loans

207,035,091

208,823,729

Loans held for sale

499,375

Accrued interest receivable

794,449

Mortgage servicing rights

423,522

Financial Liabilities:

Non-interest bearing deposits

11,562,801

Interest bearing deposits

171,211,823

171,915,595

Accrued interest payable

661

FHLB advances

15,105,287

15,080,025

The following methods and assumptions were used by the Bank in estimating the fair value of financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair values.

Time deposits: The carrying amounts reported in the balance sheets for time deposits approximate fair values.

Federal funds sold: The carrying amounts reported in the balance sheets for federal funds sold approximate fair values.

Securities: The Company obtains fair value measurements of available for sale securities from an independent pricing service. See Note 12 - Fair Value Measurement and Disclosure for further detail on how fair values of securities available for sale are determined. The carrying value of non-marketable equity securities approximates fair value.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates represent an exit price for 2018, but do not necessarily represent an exit price for years prior. Loan fair value estimates also include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using underlying collateral values, where applicable or discounted cash flows.

Loans held for sale: The carrying amounts reported in the balance sheets for loans held for sale approximate fair values, as usually these loans are originated with the intent to sell and funding of the sales usually occurs within three days.

Accrued interest receivable and payable: The carrying amounts of accrued interest receivable and payable approximate fair values.

Mortgage servicing rights: The carrying amounts of mortgage servicing rights approximate their fair values.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

FHLB advances: The fair value of FHLB advances is estimated by discounting future cash flows at the currently offered rates for borrowings of similar remaining maturities.

Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. At March 31, 2018 and December 31, 2017, the fair values of the commitments are immaterial in nature.

In addition, other assets and liabilities of the Bank that are not defined as financial instruments, such as property and equipment, are not included in the above disclosures. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill and similar items.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to March 31, 2018 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, our ability to realize estimated benefits (including, but not limited to, cost savings, synergies and growth) from acquired or merged entities, our ability to successfully integrate acquired or merged entities with us, legislative or regulatory changes that adversely affect our business, adverse developments or changes in the composition of our loan or investment portfolios, significant increases in competition, changes in real estate values, difficulties in identifying attractive acquisition opportunities or strategic partners to complement our Company’s approach and the products and services the Company offers, the possible dilutive effect of potential acquisitions or expansion, and our ability to raise new capital as needed and the timing, amount and type of such capital raises. The consequence of these factors, many of which could hurt our business, could include, among other things, increased loan delinquencies, an escalation in problem assets and foreclosures, a decline in demand for our products and services, a reduction in the value of certain assets held by us, an inability to meet our liquidity needs and an inability to engage in certain lines of business. These risks and uncertainties should be considered in evaluating forward-looking statements. Except to the extent required by applicable law or regulation the Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on form 10-K as filed with the Securities and Exchange Commission on March 28, 2018.

GENERAL

Our business activities are primarily conducted through Ottawa Savings Bank, headquartered in Ottawa, Illinois, which is located in north-central Illinois approximately 80 miles southwest of Chicago. Ottawa Savings Bank conducts business from its main office in Ottawa and through its branch offices located in Marseilles and Morris, Illinois and loan production offices located in Shorewood and Peru, Illinois. Ottawa Savings Bank’s market area includes LaSalle County, Grundy County and parts of contiguous counties in Illinois. On December 31, 2014, Ottawa Savings Bancorp acquired Twin Oaks Savings Bank (“Twin Oaks”) and merged Twin Oaks with and into Ottawa Savings Bank, which facilitated Ottawa Savings Bank’s expansion into Grundy County.

Ottawa Savings Bank’s principal business consists of originating one-to-four family residential real estate mortgage loans and home equity lines of credit, and to a lesser extent, non-residential real estate, multi-family and construction loans. We also offer commercial and industrial loans and other consumer loans. We offer a variety of retail deposits to the general public in the areas surrounding our main office and our branch offices. We offer our customers a variety of deposit products with interest rates that are competitive with those of similar products offered by other financial institutions in our market area. We also utilize borrowings as a source of funds. Our revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment securities and mortgage-backed securities. We also generate revenues from other income including realized gains on sales of loans associated with loan production, deposit fees and service charges, realized gains on sales of other real estate owned, realized gains on sales of securities and loan fees.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2018 AND DECEMBER 31, 2017

The Company's total assets increased $12.6 million, or 4.9%, to $268.0 million at March 31, 2018, from $255.4 million at December 31, 2017. The increase was primarily due to an increase of $13.2 million in the net loan portfolio and an increase in federal funds sold of $0.8 million, offset by decreases in securities available for sale of $0.6 million and decreases in cash and cash equivalents of $0.6 million.

Cash and cash equivalents decreased $0.6 million, or 15.5%, to $3.2 million at March 31, 2018 from $3.8 million at December 31, 2017. The decrease in cash and cash equivalents was primarily a result of cash used in investing activities of $13.7 million exceeding cash provided by financing activities of $12.1 million and cash provided by operating activities of $1.0 million. The cash used in investing activities included a net increase in loans of $13.4 million, an increase in federal funds sold of $0.8 million and the purchase of $0.7 million in securities available for sale, offset by available for sale security maturities and pay-downs of $1.0 million, the sale of non-marketable equity securities of $0.1 million and proceeds from the sale of foreclosed real estate of $0.1 million. The net cash provided by financing activities includes increases in deposits of $15.0 million, proceeds from Federal Home Loan Bank advances of $3.2 million and proceeds from stock options exercised of $0.1 million, partially offset by a principal reduction in Federal Home Loan Bank advances of $5.5 million, and shares repurchased and cancelled of $0.7 million.

Federal funds sold increased $0.8 million, or 87.2%, to $1.8 million at March 31, 2018, from $1.0 million at December 31, 2017.

Securities available-for-sale decreased $0.6 million, or 2.3%, to $25.4 million at March 31, 2018, from $26.0 million at December 31, 2017. The decrease was due to pay-downs of $0.7 million, calls and maturities of $0.3 million and amortization and unrealized losses totaling $0.3 million, exceeding new securities purchases of $0.7 million.

Net loans increased by $13.2 million, or 6.4% to $220.2 million at March 31, 2018, compared to $207.0 million at December 31, 2017, primarily as a result of a $6.2 million increase in one-to-four family loans, a $2.3 million increase in purchased auto loans, a $2.2 million increase in consumer direct loans and a $1.6 million increase in non-residential real estate loans. The Company also experienced growth in all other loan categories during the three months ended March 31, 2018. The increases were slightly off-set by an increase in the allowance for loan losses of $0.1 million.

Total deposits increased $15.0 million, or 8.2%, to $197.7 million at March 31, 2018, from $182.8 million at December 31, 2017. At March 31, 2018 checking accounts increased by $6.3 million, savings accounts increased by $0.8 million and certificates of deposit increased by $8.1 million as compared to December 31, 2017. The increases were off-set by a decrease in money market accounts of $0.2 million. Management is focusing efforts on growing core deposits to improve the deposit mix in the portfolio. Additionally, management continues to strategically price deposit rates as interest rates begin to rise in order to retain certificate of deposit customers, while still maintaining a healthy interest rate spread.

FHLB advances decreased $2.2 million, or 14.9% to $12.9 million at March 31, 2018, compared to $15.1 million at December 31, 2017.

Stockholders’ equity decreased approximately $0.6 million, or 1.2% to $51.3 million at March 31, 2018, from $51.9 million at December 31, 2017. The decrease reflects $0.7 million to repurchase and cancel 50,305 outstanding shares, $0.4 million in declared dividends and a decrease in other comprehensive income of $0.2 million related to a decrease in the fair value of securities available for sale. These decreases were partially off-set by net income of $0.5 million for the three months ended March 31, 2018 and proceeds from stock options exercised and the allocation of ESOP shares totaling approximately $0.1 million.

The Company’s non-performing assets consist of non-accrual loans, foreclosed real estate and other repossessed assets. Loans are generally placed on non-accrual status when it is apparent all of the contractual payments (i.e. principal and interest) will not be received; however, they may be placed on non-accrual status sooner if management has significant doubt as to the collection of all amounts due. Interest previously accrued but uncollected is reversed and charged against interest income.

The non-performing assets to total assets ratio was 0.49% at March 31, 2018 which is down from 0.65% at December 31, 2017. During the first three months of 2018, non-performing assets decreased 21.4% to $1.3 million from $1.7 million as of December 31, 2017. The decrease in non-performing assets was primarily due to the decrease in non-accrual loans as a result of writing down and moving two impaired loans totaling approximately $28,000 to foreclosed real estate/repossessed assets, upgrading and returning one loan of approximately $323,000 to accrual status, and payments of approximately $38,000, offset by the addition of three loans totaling approximately $149,000 to the impaired loan list. Additionally, foreclosed real estate decreased approximately $60,000, while other repossessed assets increased approximately $27,000.

The following table summarizes non-performing assets for the prior five quarters.

	March 31,		December 31,		September 30,		June 30,		March 31,
	2018		2017		2017		2017		2017
	(In Thousands)
Non-accrual:
One-to-four family	$	896	$	1,214	$	1,610	$	1,814	$	2,175
Multi-family		-		-		-		-		-
Non-residential real estate		345		355		368		458		618
Commercial		3		10		13		-		-
Consumer direct		-		-		-		-		-
Purchased auto		13		1		3		26		26
Total non-accrual loans		1,257		1,580		1,994		2,298		2,819
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		1,257		1,580		1,994		2,298		2,819
Foreclosed real estate		24		84		83		-		-
Other repossessed assets		27		-		-		13		8
Total nonperforming assets	$	1,308	$	1,664	$	2,077	$	2,311	$	2,827

The table below presents selected asset quality ratios for the prior five quarters.

	March 31,			December 31,			September 30,			June 30,			March 31,
	2018			2017			2017			2017			2017
Allowance for loan losses as a percent of gross loans receivable		1.15	%		1.18	%		1.23	%		1.21	%		1.26	%
Allowance for loan losses as a percent of total nonperforming loans		204.53	%		156.46	%		118.66	%		97.52	%		77.47	%
Nonperforming loans as a percent of gross loans receivable		0.56	%		0.75	%		1.00	%		1.24	%		1.63	%
Nonperforming loans as a percent of total assets		0.47	%		0.62	%		0.81	%		0.97	%		1.19	%
Nonperforming assets as a percent of total assets		0.49	%		0.65	%		0.85	%		0.98	%		1.20	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

General. Net income for the three months ended March 31, 2018 was $0.5 million compared to net income of $0.4 million for the three months ended March 31, 2017. The increase in income of $0.1 million or 34.2%, was primarily attributed to an increase in net interest income after provision for loan losses of $0.1 million and an increase in total other income of $0.1 million, partially off-set by an increase in total other expenses of $0.1 million.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2018 and 2017.

	Three Months Ended
	March 31,
	2018		2017		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,399	$	1,973	$	426			21.59	%
Securities:
Residential mortgage-backed securities		68		136		(68	)		(50.00	)
State and municipal securities		100		130		(30	)		(23.08	)
Dividends on non-marketable equity securities		4		2		2			100.00
Interest-bearing deposits		16		9		7			77.78
Total interest and dividend income		2,587		2,250		337			14.98
Interest expense:
Deposits		333		205		128			62.44
Borrowings		48		7		41			585.71
Total interest expense		381		212		169			79.72
Net interest income	$	2,206	$	2,038	$	168			8.24	%

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. The amortization of loan fees is included in computing interest income; however, such fees are not material.

	Three Months Ended March 31,
	2018							2017
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	212,991	$	2,399		4.51	%	$	164,672	$	1,973		4.79	%
Securities, net (2)		25,298		168		2.66	%		43,689		266		2.44	%
Non-marketable equity securities		774		4		2.07	%		753		2		1.06	%
Interest-bearing deposits		4,047		16		1.58	%		4,405		9		0.82	%
Total interest-earning assets		243,110		2,587		4.26	%		213,519		2,250		4.22	%
Non-interest-earning assets		18,692							18,955
Total assets		261,802							232,474

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	27,185	$	19		0.28	%	$	30,448	$	16		0.21	%
Savings accounts		26,335		5		0.08	%		25,182		4		0.06	%
Certificates of Deposit accounts		96,849		303		1.25	%		81,036		182		0.90	%
Checking accounts		32,583		6		0.07	%		27,710		3		0.04	%
Advances and borrowed funds		11,361		48		1.69	%		1,122		7		2.50	%
Total interest-bearing liabilities		194,313		381		0.78	%		165,498		212		0.51	%
Non-interest-bearing liabilities		8,265							14,776
Total liabilities		202,578							180,274
Equity		59,224							52,200
Total liabilities and equity		261,802							232,474
Net interest income			$	2,206						$	2,038
Net interest rate spread (3)						3.47	%						3.71	%
Net interest margin (4)						3.63	%						3.82	%
Ratio of average interest-earning assets to average interest-bearing liabilities						125.11	%						129.02	%

(1)	Amount is net of deferred loan origination (costs) fees, undisbursed loan funds, unamortized discounts and allowance for loan losses and includes non-performing loans.
(2)	Includes unamortized discounts and premiums.
(3)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net interest margin represents net interest income divided by average interest-earning assets.

The following table summarizes the changes in net interest income due to rate and volume for the three months ended March 31, 2018 and 2017. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

	Three Months Ended March 31,
	2018 Compared to 2017
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	543		$	(117	)	$	426
Securities, net		(122	)		24			(98	)
Non-marketable equity securities		-			2			2
Interest-bearing deposits		(1	)		8			7
Total interest-earning assets	$	420		$	(83	)	$	337
Interest expense on
Money Market accounts	$	(2	)	$	5		$	3
Passbook accounts		-			1			1
Certificates of Deposit accounts		50			71			121
Checking		1			2			3
Advances and borrowed funds		43			(2	)		41
Total interest-bearing liabilities		92			77			169
Change in net interest income	$	328		$	(160	)	$	168

Net interest income increased by $0.2 million, or 8.2%, to $2.2 million for the three months ended March 31, 2018, from $2.0 million for the three months ended March 31, 2017. Interest and dividend income increased $0.3 million, or 15.0%, primarily due to an increase in the average balances of interest-earning assets of $29.6 million. The increase in net interest income was partially off-set by an increase in interest expense as the average cost of funds increased 27 basis points to 0.78% for the three months ended March 31, 2018. The net interest margin decreased 5.0% during the three months ended March 31, 2018 to 3.63% from 3.82%.

Provision for Loan Losses. Management recorded a loan loss provision of approximately $0.1 million for both of the three-month periods ended March 31, 2018 and 2017. The allowance for loan losses was $2.6 million, or 1.15% of total gross loans at March 31, 2018, compared to $2.2 million, or 1.26% of gross loans at March 31, 2017. Net charge-offs during the first quarter of 2018 were approximately $27,000 compared to $0.2 million during the first quarter of 2017. General reserves were higher at March 31, 2018, when compared to March 31, 2017, as the balances in all loan categories increased during the twelve months ended March 31, 2018. The general reserve increases to the allowance due to loan volume increases were partially off-set by improvements in historical loss levels and changes in qualitative factors during the twelve months ended March 31, 2018, as compared to the same period ended March 31, 2017. Additionally, specific reserves as of March 31, 2018 were lower than they were as of March 31, 2017. Collateral values of real estate have stabilized and are increasing from recessionary valuation levels, but economic conditions in the local markets continue to lag national indicators, including higher levels of unemployment locally of 5.6% in LaSalle County, 7.6% in Grundy County, and 4.6% for the State of Illinois, versus the national level of 4.1%. Based on a review of the loans that were in the loan portfolio at March 31, 2018, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Management uses available information to establish the appropriate level of the allowance for loan losses. Future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Other Income. The following table summarizes other income for the three months ended March 31, 2018 and 2017.

	Three months ended
	March 31,
	2018		2017		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans	$	133	$	107	$	26			24.30
Gain on sale of foreclosed real estate		42		24		18			75.00
Gain on sale of repossessed assets		-		3		(3	)		(100.00	)
Loan origination and servicing income		163		101		62			61.39
Origination of mortgage servicing rights, net of amortization		13		15		(2	)		(13.33	)
Customer service fees		123		116		7			6.03
Increase in cash surrender value of life insurance		12		12		-			-
Other		25		28		(3	)		(10.71	)
Total other income	$	511	$	406	$	105			25.86	%

The increase in total other income was primarily due to higher revenues related to mortgage banking activity, as gain on sale of loans and loan origination and servicing income increased as a result of increases in originations and sales during the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. Additionally, gains on sales of foreclosed real estate increased as a result of selling one property at a gain of $42,000 during the three months ended March 31, 2018 as compared to selling two properties at gains totaling $24,000 during the three months ended March 31, 2017.

Other Expense. The following table summarizes other expense for the three months ended March 31, 2018 and 2017.

	Three months ended
	March 31,
	2018			2017			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,012		$	994		$	18			1.81	%
Directors fees		48			41			7			17.07
Occupancy		174			164			10			6.10
Deposit insurance premium		16			14			2			14.29
Legal and professional services		89			96			(7	)		(7.29	)
Data processing		155			139			16			11.51
Loan expense		169			118			51			43.22
Valuation adjustments and expenses on foreclosed real estate		9			5			4			80.00
Loss on sale of foreclosed real estate		3			-			3			100.00
Other		265			245			20			8.16
Total other expenses	$	1,940		$	1,816		$	124			6.83	%

Efficiency ratio (1)		71.40	%		74.30	%

(1) Computed as other expenses divided by the sum of net interest income and other income.

The increase in other expense was primarily due to increased loan expenses, higher data processing expense, and higher other expenses. The higher loan expenses are primarily a result of the increase in purchased auto loans and in-house auto loans, while the increase in data processing expense is due to the increase in accounts processed and annual increases. The efficiency ratio decreased due to increased net interest income and other income for the 2018 period.

Income Taxes. The Company recorded income tax expense of $0.2 million for both the three-month periods ended March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018, the Company had net income of $0.5 million with approximately $0.1 million in tax exempt income and an Illinois tax rate of 9.5%, compared to net income of $0.4 million with approximately $0.1 million in tax exempt income and an Illinois tax rate of 7.75% for the three months ended March 31, 2017.

The Company’s income tax differed from the maximum statutory federal rate of 21% and 35% for the three months ended March 31, 2018 and 2017, respectively as follows:

	Three Months Ended
	March 31,
	2018			2017

Expected income taxes	$	136,866		$	188,501
Income tax effect of:
State taxes, net of federal tax benefit		49,318			27,747
Tax exempt interest		(19,676	)		(43,363	)
Income taxed at lower rates		(6,517	)		(5,386	)
Other		12,169			13,774
	$	172,160		$	181,273

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. Liquidity management for the Bank is measured and monitored on both a short and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to the Bank. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed and related securities, and other short-term investments, and funds provided from operations. While scheduled payments from amortization of loans and mortgage-backed related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We invest excess funds in short-term interest-earning assets, including federal funds sold, which enable us to meet lending requirements or long-term investments when loan demand is low.

At March 31, 2018, the Bank had outstanding commitments to originate $4.4 million in loans, unfunded lines of credit of $16.6 million, and $5.5 million in commitments to fund construction loans. In addition, as of March 31, 2018, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $40.1 million. Based on prior experience, management believes that a majority of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago (“FHLBC”) advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. As of March 31, 2018, the Bank had $66.3 million of available credit from the FHLBC and there were $12.9 million in FHLBC advances outstanding. In addition, as of March 31, 2018 the Bank had $7.9 million of available credit from Bankers Bank of Wisconsin to purchase federal funds.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for any repurchased shares of its common stock. Whether dividends are declared, and the timing and amount of any dividends declared, is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the regulatory agencies but with prior notice to the regulatory agencies, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At March 31, 2018, the Company had cash and cash equivalents of $8.5 million.

Capital. The Bank is required to maintain regulatory capital sufficient to meet Total capital, Tier 1 capital, Common equity Tier 1 capital, and Tier 1 Leverage ratios of at least 8.0%, 6.0%, 4.5% and 4.0%, respectively. The Bank exceeded each of its minimum capital requirements for capital adequacy purposes and was considered “well capitalized” within the meaning of federal regulatory requirements with ratios at March 31, 2018 of 21.66%, 20.41%, 20.41%, and 16.08%, respectively, compared to ratios at December 31, 2017 of 22.52%, 21.27%, 21.27% and 16.21%, respectively. As of January 1, 2018, the Bank must hold 1.875% of risk-weighted assets, with such amount increasing by 0.625% annually, until fully implemented at 2.5% in January 2019, as a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments. As a savings and loan holding company with less than $1.0 billion in assets, the Company is not subject to separate capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

For the three months ended March 31, 2018, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This Item is not applicable as the Company is a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including, its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

In addition, there have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

ITEM 1 - LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business that, in the aggregate, are believed by management to be material to the financial condition and results of operations of the Company.

ITEM 1A - RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. As of March 31, 2018, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On November 15, 2017, the Company announced that it has authorized a stock repurchase program to acquire up to 346,740 shares of the Company’s outstanding common stock, or approximately 10% of its outstanding shares. Repurchases will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time depending on market conditions and other factors.

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended March 31, 2018:

					Number of Shares		Maximum Number
					Purchased as Part		of Shares that
	Number		Average		of Publicly		may yet be
	of Shares		Price Paid		Announced		Purchased Under
	Purchased		per Share		Programs		the Program
January 1-31, 2018		10,640		14.50		10,640		318,500
February 1-28, 2018		29,400		13.92		29,400		289,100
March 1-31, 2018		10,265		13.96		10,265		278,835
Total		50,305		14.06		50,305		278,835

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 - OTHER INFORMATION

Not applicable.

ITEM 6 - EXHIBITS

Exhibit No.		Description

3.1		Articles of Incorporation of Ottawa Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed with the Securities and Exchange Commission on June 6, 2016)

3.2		Bylaws of Ottawa Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed on June 6, 2016)

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

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

32.1		Section 1350 Certifications

101.0		The following materials from the Ottawa Bancorp, Inc. Quarterly Report on Form 10-Q for the three months ended March 31, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Statements of Comprehensive Income; (iv) The Condensed Consolidated Statements of Cash Flows and (v) related notes.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	OTTAWA BANCORP, INC.
	Registrant

Date: May 11, 2018	/s/ Jon L. Kranov
	Jon L. Kranov
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 11, 2018	/s/ Marc N. Kingry
	Marc N. Kingry
	Chief Financial Officer
	(Principal Financial Officer)

Attached files

Ottawa Bancorp Inc Reports

Also read