Ottawa Bancorp Inc - Quarter Report: 2017 September (Form 10-Q)

ottb20170930_10q.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 September 30, 2017

☐ 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 (Address of principal executive offices)	(Zip Code)

(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 November 14, 2017
Common Stock, $0.01 par value	3,469,402

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended September 30, 2017

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	25
Item 3	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4	Controls and Procedures	37


PART II – OTHER INFORMATION

Item 1	Legal Proceedings	37
Item 1A	Risk Factors	37
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3	Defaults upon Senior Securities	38
Item 4	Mine Safety Disclosures	38
Item 5	Other Information	38
Item 6	Exhibits	38


SIGNATURES		39

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

September 30, 2017 and December 31, 2016

(Unaudited)

	September 30,			December 31,
	2017			2016
Assets
Cash and due from banks	$	2,093,049		$	3,916,559
Interest bearing deposits		845,235			2,030,090
Total cash and cash equivalents		2,938,284			5,946,649
Time deposits		250,000			250,000
Federal funds sold		3,705,000			1,690,000
Securities available for sale		30,176,272			44,560,680
Non-marketable equity securities		752,221			753,321
Loans, net of allowance for loan losses of $2,366,245 and $2,247,449 at September 30, 2017 and December 31, 2016, respectively		190,754,189			160,586,129
Loans held for sale		659,099			305,072
Premises and equipment, net		6,725,000			6,843,906
Accrued interest receivable		781,619			785,484
Foreclosed real estate		83,500			33,000
Deferred tax assets		2,505,692			2,593,786
Cash value of life insurance		2,281,760			2,245,578
Goodwill		649,869			649,869
Core deposit intangible		303,818			359,000
Other assets		3,165,409			2,558,910
Total assets	$	245,731,732		$	230,161,384
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	12,693,586		$	9,974,536
Interest bearing		166,196,571			162,572,485
Total deposits		178,890,157			172,547,021
Accrued interest payable		3,693			224
FHLB advances		9,114,999			1,121,153
Other liabilities		3,711,694			3,748,953
Total liabilities		191,720,543			177,417,351
Commitments and contingencies
Redeemable common stock held by ESOP plan		1,098,101			807,629
Stockholders' Equity
Common stock, $.01 par value, 100,000,000 shares authorized; 3,469,402 and 3,467,402 shares issued at September 30, 2017 and December 31, 2016, respectively		34,694			34,674
Additional paid-in-capital		37,181,196			37,117,311
Retained earnings		18,340,443			17,455,472
Unallocated ESOP shares		(1,799,136	)		(1,932,648	)
Accumulated other comprehensive income		253,992			69,224
		54,011,189			52,744,033
Less:
Maximum cash obligation related to ESOP shares		(1,098,101	)		(807,629	)
Total stockholders' equity		52,913,088			51,936,404
Total liabilities and stockholders' equity	$	245,731,732		$	230,161,384

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Interest and dividend income:
Interest and fees on loans	$	2,204,397	$	1,857,478	$	6,291,581	$	5,432,531
Securities:
Residential mortgage-backed and related securities		98,541		122,919		360,557		423,463
State and municipal securities		116,431		133,429		373,999		404,133
Dividends on non-marketable equity securities		1,812		1,058		5,154		5,218
Interest-bearing deposits		5,357		11,903		21,403		22,301
Total interest and dividend income		2,426,538		2,126,787		7,052,694		6,287,646
Interest expense:
Deposits		247,897		205,843		676,374		611,533
Borrowings		20,564		15,181		35,624		26,921
Total interest expense		268,461		221,024		711,998		638,454
Net interest income		2,158,077		1,905,763		6,340,696		5,649,192
Provision for loan losses		210,000		25,000		460,000		302,500
Net interest income after provision for loan losses		1,948,077		1,880,763		5,880,696		5,346,692
Other income:
Gain on sale of securities		77,028		-		98,230		8,418
Gain on sale of loans		205,375		142,646		522,360		330,316
Gain on sale of foreclosed real estate		5,182		76,759		29,242		188,207
Gain on sale of repossessed assets		1,123		-		15,419		1,680
Loan origination and servicing income		159,078		102,652		462,787		239,186
Origination of mortgage servicing rights, net of amortization		21,293		14,879		55,405		42,433
Customer service fees		123,288		118,761		360,359		318,688
Income on bank owned life insurance		11,999		12,560		36,182		37,287
Other		28,940		29,269		89,044		77,885
Total other income		633,306		497,526		1,669,028		1,244,100
Other expenses:
Salaries and employee benefits		1,047,416		840,038		3,124,939		2,504,956
Directors fees		40,800		40,800		122,400		122,400
Occupancy		158,716		171,425		484,496		477,615
Deposit insurance premium		15,437		37,122		41,648		127,114
Legal and professional services		92,007		83,012		282,129		257,957
Data processing		144,137		130,864		435,244		386,597
Loss on sale of securities		47,603		-		55,169		3,261
Loan expense		152,645		124,851		403,088		284,672
Valuation adjustments and expenses on foreclosed real estate		2,662		31,703		10,184		100,639
Loss on sale of OREO		336		4,716		336		4,716
Loss on sale of repossessed assets		-		-		274		-
Other		269,710		269,245		807,889		747,318
Total other expenses		1,971,469		1,733,776		5,767,796		5,017,245
Income before income tax expense		609,914		644,513		1,781,928		1,573,547
Income tax expense		155,163		223,251		504,332		520,063
Net income	$	454,751	$	421,262	$	1,277,596	$	1,053,484
Basic earnings per share	$	0.14	$	0.15	$	0.39	$	0.37
Diluted earnings per share	$	0.14	$	0.15	$	0.39	$	0.36
Dividends per share	$	0.04	$	-	$	0.12	$	-

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Net income	$	454,751		$	421,262		$	1,277,596		$	1,053,484
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period		(62,663	)		(80,126	)		354,599			372,176
Reclassification adjustment for (gains) included in net income		(29,425	)		-			(43,061	)		(5,157	)
Other comprehensive (loss) income, before tax		(92,088	)		(80,126	)		311,538			367,019
Income tax (benefit) expense related to items of other comprehensive (loss) income		(31,109	)		(31,341	)		126,770			143,560
Other comprehensive (loss) income, net of tax		(60,979	)		(48,785	)		184,768			223,459
Comprehensive income	$	393,772		$	372,477		$	1,462,364		$	1,276,943

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	2017			2016
Cash Flows from Operating Activities
Net income	$	1,277,596		$	1,053,484
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		184,080			178,279
Provision for loan losses		460,000			302,500
Provision for deferred income taxes		(38,676	)		484,450
Net amortization of premiums and discounts on securities		382,730			493,126
Gain on sale of securities, net		(43,061	)		(5,157	)
Origination of mortgage loans held for sale		(16,894,581	)		(12,746,064	)
Proceeds from sale of mortgage loans held for sale		17,062,914			12,365,680
Gain on sale of loans, net		(522,360	)		(330,316	)
Origination of mortgage servicing rights, net of amortization		(55,405	)		(42,433	)
Gain on sale of foreclosed real estate, net		(29,242	)		(183,491	)
Write down of foreclosed real estate		-			28,551
Gain on sale of repossessed assets, net		(15,145	)		(1,680	)
ESOP compensation expense		190,277			44,258
MRP compensation expense		-			3,304
Compensation expense on RRP options granted		-			4,371
Amortization of core deposit intangible		55,182			69,000
Amortization (accretion) of fair value adjustments on acquired:
Loans		184,879			90,729
Certificates of deposit		(14,000	)		(53,000	)
Federal Home Loan Bank Advances		5,209			2,777
Increase in cash surrender value of life insurance		(36,182	)		(37,287	)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable		3,865			(24,608	)
Increase in other assets		(553,594	)		(1,296,435	)
Increase in accrued interest payable and other liabilities		(33,790	)		(449,093	)
Net cash provided by (used in) operating activities		1,570,696			(49,055	)
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(1,308,450	)		(3,806,910	)
Sales, calls, maturities and paydowns		15,664,727			6,521,328
Sale of non-marketable equity securities		1,100			604,800
Net increase in loans		(31,066,772	)		(15,380,158	)
Net decrease in federal funds sold		(2,015,000	)		(52,747,000	)
Proceeds from sale of foreclosed real estate		193,075			490,062
Proceeds from sale of repossessed assets		57,145			22,805
Purchase of premises and equipment		(65,174	)		(16,489	)
Net cash used in investing activities		(18,539,349	)		(64,311,562	)
Cash Flows from Financing Activities
Net increase in deposits		6,357,136			55,205,102
Proceeds from Federal Home Loan Bank advances		8,000,000			10,000,000
Principal reduction of Federal Home Loan Bank advances		(11,363	)		(3,511,197	)
Proceeds from stock options exercised		7,140			-
Dividends paid		(392,625	)		-
Net cash provided by financing activities		13,960,288			61,693,905
Net decrease in cash and cash equivalents		(3,008,365	)		(2,666,712	)
Cash and cash equivalents:
Beginning of period		5,946,649			7,135,719
End of period	$	2,938,284		$	4,469,007
(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	2017		2016
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	672,905	$	610,230
Interest paid on borrowings		35,624		26,921
Income taxes paid, net of refunds received		515,444		-
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		218,256		235,190
Other assets acquired in settlement of loans		39,500		46,000
Sale of foreclosed real estate through loan origination		3,923		128,000
Increase in ESOP put option liability		290,472		184,906

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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. The second-step conversion was completed on October 11, 2016, at which time the Company sold, for gross proceeds of $23.8 million, a total of 2,383,950 shares of common stock at $10.00 per share, including 190,716 shares purchased by the Bank’s employee stock ownership plan. Capital increased an additional $126,000 due to cash contributed by Ottawa Savings Bancorp MHC upon merging into Ottawa Savings Bancorp, Inc. Also as part of the second-step conversion, treasury shares held by Ottawa Savings Bancorp, Inc. were retired and each of the existing outstanding shares of Ottawa Savings Bancorp common stock owned by persons other than Ottawa Savings Bancorp MHC was converted into 1.1921 of a share of Company common stock.

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, 2016. 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 September 30, 2017, 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 29, 2017.

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 and vested Management Recognition Plan (“MRP”) shares. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Net income available to common stockholders	$	454,751		$	421,262		$	1,277,596		$	1,053,484
Basic potential common shares:
Weighted average shares outstanding		3,468,228			2,894,123			3,467,680			2,894,123
Weighted average unallocated ESOP shares		(185,243	)		(17,374	)		(189,903	)		(18,638	)
Weighted average unvested MRP shares		-			(1,047	)		-			(1,047	)
Basic weighted average shares outstanding		3,282,985			2,875,702			3,277,777			2,874,438
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		-			890			-			913
Weighted average RRP options outstanding		14,726			21,017			14,419			14,963
Dilutive weighted average shares outstanding		3,297,711			2,897,609			3,292,196			2,890,314
Basic earnings per share	$	0.14		$	0.15		$	0.39		$	0.37
Diluted earnings per share	$	0.14		$	0.15		$	0.39		$	0.36

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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

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 September 30, 2017, 78,548 shares at a fair value of $13.98 have been classified as mezzanine capital.

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

	September 30,			December 31,
	2017			2016
Shares allocated		99,578			85,493
Shares withdrawn from the plan		(21,030	)		(21,030	)
Unallocated shares		182,112			196,197
Total ESOP shares		260,660			260,660
Fair value of unallocated shares	$	2,545,926		$	2,497,588

NOTE 7 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2017:
Securities Available for Sale
State and municipal securities	$	14,127,744	$	362,444	$	-	$	14,490,188
Residential mortgage-backed securities		15,623,293		169,900		107,109		15,686,084
	$	29,751,037	$	532,344	$	107,109	$	30,176,272
December 31, 2016:
Securities Available for Sale
State and municipal securities	$	18,019,050	$	200,924	$	63,836	$	18,156,138
Residential mortgage-backed securities		26,427,933		242,541		265,932		26,404,542
	$	44,446,983	$	443,465	$	329,768	$	44,560,680

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The amortized cost and fair value at September 30, 2017, 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	$	51,165	$	51,201
Due after three months through one year		719,463		725,446
Due after one year through five years		3,400,877		3,491,427
Due after five years through ten years		4,222,380		4,371,933
Due after ten years		5,733,859		5,850,181
Residential mortgage-backed securities		15,623,293		15,686,084
	$	29,751,037	$	30,176,272

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at September 30, 2017 and December 31, 2016:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2017
Securities Available for Sale
State and municipal securities	$	-	$	-	$	-	$	-	$	-	$	-
Residential mortgage-backed securities		6,567,434		54,427		3,740,463		52,682		10,307,897		107,109
	$	6,567,434	$	54,427	$	3,740,463	$	52,682	$	10,307,897	$	107,109

December 31, 2016
Securities Available for Sale
State and municipal securities	$	4,734,681	$	63,836	$	-	$	-	$	4,734,681	$	63,836
Residential mortgage-backed securities		13,364,755		187,191		4,422,865		78,741		17,787,620		265,932
	$	18,099,436	$	251,027	$	4,422,865	$	78,741	$	22,522,301	$	329,768

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 September 30, 2017, 20 securities had unrealized losses with an aggregate depreciation of 1.03% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at September 30, 2017 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 proceeds of $6.6 million from the sales of securities for the three months ended September 30, 2017 and no sales proceeds for the three months ended September 30, 2016. The sales during the three months ended September 30, 2017 resulted in gross realized gains of $77,028 and gross realized losses of $47,603, for net realized gains of $29,425. The tax provision applicable to the realized gains amounted to $11,422 and $0 respectively, for the three months ended September 30, 2017 and 2016.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

There were proceeds of $11.6 million from the sales of securities for the nine months ended September 30, 2017 and proceeds of $1.7 million for the nine months ended September 30, 2016. The sales during the nine months ended September 30, 2017 resulted in gross realized gains of $98,230 and gross realized losses of $55,169, for net realized gains of $43,061. The sales during the nine months ended September 30, 2016 resulted in gross realized gains of $8,418 and gross realized losses of $3,261, for net realized gains of $5,157. The tax provision applicable to the realized gains amounted to $16,715 and $2,002, respectively, for the nine months ended September 30, 2017 and 2016.

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	September 30,			December 31,
	2017			2016
Mortgage loans:
One-to-four family residential loans	$	118,518,298		$	103,871,686
Multi-family residential loans		5,012,752			5,182,611
Total mortgage loans		123,531,050			109,054,297

Other loans:
Non-residential real estate loans		29,962,862			22,560,167
Commercial loans		17,051,906			16,645,226
Consumer direct		4,636,078			2,859,703
Purchased auto		17,938,538			11,714,185
Total other loans		69,589,384			53,779,281
Gross loans		193,120,434			162,833,578
Less: Allowance for loan losses		(2,366,245	)		(2,247,449	)
Loans, net	$	190,754,189		$	160,586,129

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.

	September 30,			December 31,
	2017			2016
Mortgage loans:
One-to-four family residential loans	$	15,618,555		$	18,062,672
Multi-family residential loans		267,322			272,378
Total mortgage loans		15,885,877			18,335,050

Other loans:
Non-residential real estate loans		2,187,087			2,352,952
Commercial loans		746,014			779,595
Consumer direct		71,065			196,340
Total other loans		3,004,166			3,328,887
Gross loans		18,890,043			21,663,937
Less: Allowance for loan losses		(100,000	)		(100,000	)
Loans, net	$	18,790,043		$	21,563,937

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).

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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).

The following table reflects activity for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Balance, beginning of period	$	255,747		$	498,912		$	461,334		$	575,605
Payment activity		(131,108	)		(42,422	)		(482,073	)		(134,325	)
Transfer to OREO		-			-			-			(44,417	)
Accretion into interest income		24,931			23,345			170,309			82,972
	$	149,570		$	479,835		$	149,570		$	479,835

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $470,000 and $1,108,000 as of September 30, 2017 and December 31, 2016, respectively.

The following table reflects activity in the accretable yield for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Balance, beginning of period	$	35,668		$	124,583		$	82,869		$	175,342
Net reclassification from non-accretable yield		3,292			-			101,469			8,868
Accretion into interest income		(24,931	)		(23,345	)		(170,309	)		(82,972	)
	$	14,029		$	101,238		$	14,029		$	101,238

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Purchased auto loans	$	4,979,707	$	1,010,717	$	10,035,353	$	9,351,997

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
One-to-four family	$	(84,240	)	$	17,802		$	(251,231	)	$	(173,225	)
Multi-family		3,972			3,972			12,148			11,915
Non-residential		(1,726	)		-			(53,686	)		-
Consumer direct		(1,756	)		1,551			(2,503	)		5,005
Purchased auto		(591	)		(28,212	)		(45,932	)		(62,047	)
Net (charge-offs)/recoveries	$	(84,341	)	$	(4,887	)	$	(341,204	)	$	(218,352	)

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 September 30, 2017 and 2016:

September 30, 2017	One-to- four family			Multi- family			Non- residential			Commercial		Consumer direct			Purchased auto			Total
Balance at beginning of period	$	1,430,917		$	101,473		$	233,492		$	111,904	$	117,500		$	245,300		$	2,240,586
Provision charged to income		148,036			(6,870	)		27,876			12,134		(17,583	)		46,407			210,000
Loans charged off		(86,439	)		-			(1,726	)		-		(3,282	)		(2,685	)		(94,132	)
Recoveries of loans previously charged off		2,199			3,972			-			-		1,526			2,094			9,791
Balance at end of period	$	1,494,713		$	98,575		$	259,642		$	124,038	$	98,161		$	291,116		$	2,366,245

September 30, 2016	One-to- four family			Multi- family			Non- residential		Commercial		Consumer direct		Purchased auto			Total
Balance at beginning of period	$	1,574,598		$	167,485		$	275,347	$	53,256	$	60,491	$	156,864		$	2,288,041
Provision charged to income		(28,679	)		(132,076	)		98,221		21,914		22,610		43,010			25,000
Loans charged off		(2,698	)		-			-		-		-		(29,718	)		(32,416	)
Recoveries of loans previously charged off		20,500			3,972			-		-		1,551		1,506			27,529
Balance at end of period	$	1,563,721		$	39,381		$	373,568	$	75,170	$	84,652	$	171,662		$	2,308,154

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2017 and 2016:

September 30, 2017	One-to- four family			Multi- family			Non- residential			Commercial		Consumer direct			Purchased 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		318,990			(7,054	)		(53,998	)		27,215		21,411			153,436			460,000
Loans charged off		(259,356	)		-			(61,686	)		-		(8,633	)		(63,848	)		(393,523	)
Recoveries of loans previously charged off		8,125			12,148			8,000			-		6,130			17,916			52,319
Balance at end of period	$	1,494,713		$	98,575		$	259,642		$	124,038	$	98,161		$	291,116		$	2,366,245

September 30, 2016	One-to- four family			Multi- family			Non- residential		Commercial		Consumer direct		Purchased auto			Total
Balance at beginning of period	$	1,727,582		$	142,237		$	198,340	$	51,306	$	37,187	$	67,354		$	2,224,006
Provision charged to income		9,364			(114,771	)		175,228		23,864		42,460		166,355			302,500
Loans charged off		(233,264	)		-			-		-		-		(68,011	)		(301,275	)
Recoveries of loans previously charged off		60,039			11,915			-		-		5,005		5,964			82,923
Balance at end of period	$	1,563,721		$	39,381		$	373,568	$	75,170	$	84,652	$	171,662		$	2,308,154

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016:

	One-to-
	four		Multi-		Non-				Consumer		Purchased
September 30, 2017	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for impairment	$	1,375,976	$	-	$	368,020	$	12,970	$	-	$	3,468	$	1,760,434
Loans acquired with deteriorated credit quality		149,571		-		-		-		-		-		149,571
Loans collectively evaluated for impairment		116,992,751		5,012,752		29,594,842		17,038,936		4,636,078		17,935,070		191,210,429
Balance at end of period	$	118,518,298	$	5,012,752	$	29,962,862	$	17,051,906	$	4,636,078	$	17,938,538	$	193,120,434

Period-end amount allocated to:
Loans individually evaluated for impairment	$	50,861	$	-	$	62,471	$	-	$	-	$	1,734	$	115,066
Loans acquired with deteriorated credit quality		23,638		-		-		-		-		-		23,638
Loans collectively evaluated for impairment		1,420,214		98,575		197,171		124,038		98,161		289,382		2,227,541
Balance at end of period	$	1,494,713	$	98,575	$	259,642	$	124,038	$	98,161	$	291,116	$	2,366,245

	One-to-
	four		Multi-		Non-				Consumer		Purchased
December 31, 2016	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for impairment	$	2,142,851	$	-	$	2,264,763	$	-	$	-	$	24,564	$	4,432,178
Loans acquired with deteriorated credit quality		461,334		-		-		-		-		-		461,334
Loans collectively evaluated for impairment		101,267,501		5,182,611		20,295,404		16,645,226		2,859,703		11,689,621		157,940,066
Balance at end of period	$	103,871,686	$	5,182,611	$	22,560,167	$	16,645,226	$	2,859,703	$	11,714,185	$	162,833,578

Period-end amount allocated to:
Loans individually evaluated for impairment	$	208,186	$	-	$	185,172	$	-	$	-	$	12,282	$	405,640
Loans acquired with deteriorated credit quality		34,401		-		-		-		-		-		34,401
Loans collectively evaluated for impairment		1,184,367		93,481		182,154		96,823		79,253		171,330		1,807,408
Balance at end of period	$	1,426,954	$	96,481	$	367,326	$	96,823	$	79,253	$	183,612	$	2,247,449

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 September 30, 2017 and December 31, 2016:

September 30, 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	$	1,570,305	$	984,882	$	540,665	$	1,525,547	$	74,499	$	1,896,563
Multi-family		-		-		-		-		-		-
Non-residential		368,020		-		368,020		368,020		62,471		879,038
Commercial		12,970		12,970		-		12,970		-		3,222
Consumer direct		-		-		-		-		-		-
Purchased auto		3,468		-		3,468		3,468		1,734		14,830
	$	1,954,763	$	997,852	$	912,153	$	1,910,005	$	138,704	$	2,793,653

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

December 31, 2016	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	$	2,688,197	$	1,428,073	$	1,176,112	$	2,604,185	$	242,587	$	2,634,763
Multi-family		-		-		-		-		-		-
Non-residential		2,435,424		-		2,264,763		2,264,763		185,172		2,030,894
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		24,564		-		24,564		24,564		12,282		9,261
	$	5,148,185	$	1,428,073	$	3,465,439	$	4,893,512	$	440,041	$	4,674,918

For the three and nine months ended September 30, 2017, the Company recognized approximately $3,000 and $9,000, respectively in cash basis interest income on impaired loans. For the three and nine months ended September 30, 2016, the Company recognized approximately $3,000 in cash basis interest income on impaired loans.

At September 30, 2017, there were 28 impaired loans totaling approximately $1.9 million, compared to 38 impaired loans totaling approximately $4.9 million at December 31, 2016. The change in impaired loans was a result of the pay-off of eight impaired loans totaling approximately $2.4 million, write-downs on four impaired loans totaling approximately $0.2 million, writing down and moving seven impaired loans totaling approximately $351,000 to OREO/repossessed assets, upgrading and returning two loans totaling approximately $83,000 to accrual status, and payments of approximately $298,000, offset by the addition of seven loans totaling approximately $376,000 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 September 30, 2017 included $0.5 million of loans whose terms have been modified in troubled debt restructurings, compared to $2.4 million at December 31, 2016. The amount of TDR loans included in impaired loans decreased approximately $1.9 million as a result of pay-offs on three TDRs totaling $1.7 million and charge-offs totaling $0.2 million on three TDRs. 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 September 30, 2017 and 2016.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Loans classified as TDRs during the nine months ended September 30, 2017 and 2016, segregated by class, are shown in the tables below.

	Nine Months Ended						Nine Months Ended
	September 30, 2017						September 30, 2016

	Number of Modifications		Recorded Investment		Increase in Allowance		Number of Modifications		Recorded Investment		Increase in Allowance
	(as of period end)						(as of period end)
One-to-four family		-	$	-	$	-		2	$	80,814	$	-
Multi-family		-		-		-		-		-		-
Non-residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		-
		-	$	-	$	-		2	$	80,814	$	-

There were no TDR loans that were restructured during the twelve months prior to September 30, 2017 and 2016 that had payment defaults (i.e., 60 days or more past due following a modification) during the three or nine months ended September 30, 2017 and 2016.

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 September 30, 2017 and December 31, 2016:

September 30, 2017	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,609,874	$	-
Multi-family		-		-
Non-residential		368,020		-
Commercial		12,970		-
Consumer direct		-		-
Purchased auto		3,468		-
	$	1,994,332	$	-

December 31, 2016	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,693,055	$	-
Multi-family		-		-
Non-residential		2,264,763		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		24,564		-
	$	4,982,382	$	-

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the aging of the recorded investment in loans, by class of loans, as of September 30, 2017 and December 31, 2016:

September 30, 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	$	2,098,295	$	244,158	$	110,260	$	2,452,713	$	116,065,585	$	118,518,298
Multi-family		-		-		-		-		5,012,752		5,012,752
Non-residential		490,913		-		-		490,913		29,471,949		29,962,862
Commercial		12,970		-		-		12,970		17,038,936		17,051,906
Consumer direct		-		-		-		-		4,636,078		4,636,078
Purchased auto		-		-		3,468		3,468		17,935,070		17,938,538
	$	2,602,178	$	244,158	$	113,728	$	2,960,064	$	190,160,370	$	193,120,434

December 31, 2016	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	$	1,879,438	$	22,562	$	1,089,635	$	2,991,635	$	100,880,051	$	103,871,686
Multi-family		-		-		-		-		5,182,611		5,182,611
Non-residential		118,132		-		680,802		798,934		21,761,233		22,560,167
Commercial		-		-		-		-		16,645,226		16,645,226
Consumer direct		1,105		-		-		1,105		2,858,598		2,859,703
Purchased auto		4,364		-		24,564		28,928		11,685,257		11,714,185
	$	2,003,039	$	22,562	$	1,795,001	$	3,820,602	$	159,012,976	$	162,833,578

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.

●

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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

At September 30, 2017 and December 31, 2016, the risk category of loans by class is as follows:

September 30, 2017	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	-	$	409,575	$	1,525,547	$	-	$	116,583,176	$	118,518,298
Multi-family		-		122,073		-		-		4,890,679		5,012,752
Non-residential		29,346,282		248,560		368,020		-		-		29,962,862
Commercial		17,038,936		-		12,970		-		-		17,051,906
Consumer direct		-		-		-		-		4,636,078		4,636,078
Purchased auto		-		-		3,468		-		17,935,070		17,938,538
Total	$	46,385,218	$	780,208	$	1,910,005	$	-	$	144,045,003	$	193,120,434

December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	-	$	562,215	$	2,604,185	$	-	$	100,705,286	$	103,871,686
Multi-family		-		127,987		-		-		5,054,624		5,182,611
Non-residential		20,102,176		193,228		2,264,763		-		-		22,560,167
Commercial		16,645,226		-		-		-		-		16,645,226
Consumer direct		-		-		-		-		2,859,703		2,859,703
Purchased auto		-		-		24,564		-		11,689,621		11,714,185
Total	$	36,747,402	$	883,430	$	4,893,512	$	-	$	120,309,234	$	162,833,578

At September 30, 2017, the Company held approximately $0.1 million in foreclosed residential real estate property, compared to approximately $33,000 at December 31, 2016. In addition, the Company also held approximately $0.1 million and $0.5 million in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at September 30, 2017 and December 31, 2016, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was approximately $0 and $8,000 for the nine-month periods ended September 30, 2017 and 2016, 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 nine months ended September 30, 2017 and 2016, 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 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and will also require additional disclosures. 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 Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. ASU 2014-09 may require the Company to change how it recognizes certain recurring revenues related to non-interest income; however, it is not expected to have a material impact on its Consolidated Financial Statements and related disclosures. The Company expects to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

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 will be effective for the Company on January 1, 2018. The Company does not believe the adoption of the new financial instruments standard will have a material impact on its consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the treatment and accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. ASU 2016-09 became effective for us on January 1, 2017 and did not have a material impact on our consolidated financial statements. The Company believes that in the future the adoption of this update may result in a marginal amount of volatility within income tax expense, depending on the amount and timing of share-based compensation award activity such as the vesting of restricted stock awards and restricted stock units, as well as the exercise of stock options.

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 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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 11 – BORROWINGS

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

	September 30,		December 31,
	2017		2016
Matures 02/15/2018 at 1.27%, fixed	$	1,000,000	$	-
Matures 03/30/2018 at 1.72%, fixed		498,714		496,784
Matures 05/15/2018 at 1.34%, fixed		2,000,000		-
Matures 09/25/2018 at 1.46%, fixed		2,000,000		-
Matures 04/01/2019 at 2.00%, fixed		496,543		494,906
Matures 08/30/2019 at 1.56%, fixed		3,000,000		-
Matures 10/03/2022 at 1.48%, fixed		119,742		129,463
	$	9,114,999	$	1,121,153

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.

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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 nine months ended September 30, 2017 and the year ended December 31, 2016. 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 September 30, 2017 and December 31, 2016.

							Total
September 30, 2017	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	14,490,188	$	-	$	14,490,188
Residential mortgage-backed securities available for sale		-		15,686,084		-		15,686,084
	$	-	$	30,176,272	$	-	$	30,176,272

							Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	18,156,138	$	-	$	18,156,138
Residential mortgage-backed securities available for sale		-		26,404,542		-		26,404,542
	$	-	$	44,560,680	$	-	$	44,560,680

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016.

							Total
September 30, 2017	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	83,500	$	83,500
Impaired loans, net		-		-		773,449		773,449

							Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	35,500	$	35,500
Impaired loans, net		-		-		3,025,398		3,025,398

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

September 30, 2017

Foreclosed assets

83,500

Appraisal of collateral

Appraisal adjustments

-81.4%

Impaired loans, net

662,195

Appraisal of collateral

Appraisal adjustments

-36.3

-55.9%

Impaired loans, net

111,254

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

December 31, 2016

Foreclosed assets

35,500

Appraisal of collateral

Appraisal adjustments

-23%

-50%

Impaired loans, net

2,856,621

Appraisal of collateral

Appraisal adjustments

-14.5

-86.5%

Impaired loans, net

168,777

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 September 30, 2017 and December 31, 2016, are as follows:

			Fair Value Measurements at
	Carrying		September 30, 2017 using:
	Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	2,938,284	$	2,938,284	$	-	$	-	$	2,938,284
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		3,705,000		3,705,000		-		-		3,705,000
Securities		30,928,493		-		30,176,272		752,221		30,928,493
Net loans		190,754,189		-		-		193,127,599		193,127,599
Loans held for sale		659,099		659,099		-		-		659,099
Accrued interest receivable		781,619		781,619		-		-		781,619
Mortgage servicing rights		406,949		-		-		406,949		406,949
Financial Liabilities:
Non-interest bearing deposits		12,693,586		12,693,586		-		-		12,693,586
Interest bearing deposits		166,196,571		-		-		166,823,607		166,823,607
Accrued interest payable		3,693		3,693		-		-		3,693
FHLB advances		9,114,999		-		8,270,081		-		8,270,081

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	Carrying		December 31, 2016 using:
	Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	5,946,649	$	5,946,649	$	-	$	-	$	5,946,649
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		1,690,000		1,690,000		-		-		1,690,000
Securities		45,314,001		-		44,560,680		753,321		45,314,001
Net loans		160,586,129		-		-		161,967,000		161,967,000
Loans held for sale		305,072		305,072		-		-		305,072
Mortgage servicing rights		351,544		-		-		351,544		351,544
Accrued interest receivable		785,484		785,484		-		-		785,484
Financial Liabilities:
Non-interest bearing deposits		9,974,536		9,974,536		-		-		9,974,536
Interest bearing deposits		162,572,485		-		-		155,963,464		155,963,464
Accrued interest payable		224		224		-		-		224
FHLB advances		1,121,153		-		1,151,000		-		1,151,000

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 11 - 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 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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 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 (including Twin Oaks), 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. 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 29, 2017.

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 Joliet and Peru, Illinois. Ottawa Savings Bank’s market area includes all of LaSalle County and parts of Grundy County 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 (the “Merger”).

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 SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

The Company's total assets increased $15.6 million, or 6.8%, to $245.7 million at September 30, 2017, from $230.2 million at December 31, 2016. The increase was primarily due to increases in the net loan portfolio of $30.2 million and federal funds sold of $2.0 million. These increases were partially offset by a decrease in securities available for sale of $14.4 million and a decrease in cash and cash equivalents of $3.0 million.

Cash and cash equivalents decreased $3.0 million, or 50.6%, to $2.9 million at September 30, 2017 from $5.9 million at December 31, 2016. The decrease in cash and cash equivalents was primarily a result of cash used in investing activities of $18.5 million exceeding cash provided by financing activities of $13.9 million and cash provided by operating activities of $1.6 million. The cash used in investing activities included a gross increase in loans of $31.1 million and the purchase of $1.3 million in securities available for sale, offset by security sales, maturities and pay-downs of $15.7 million and an increase in federal funds sold of $2.0 million.

Federal funds sold increased to $3.7 million at September 30, 2017, from $1.7 million at December 31, 2016.

Securities available-for-sale decreased $14.4 million, or 32.3%, to $30.2 million at September 30, 2017 from $44.6 million at December 31, 2016. The decrease was primarily due to sales and maturities of $11.6 million and pay-downs of $4.1 million, exceeding new securities purchases of $1.3 million. Cash proceeds from the sales and maturities of securities were used to fund the loan growth, as the yield earned on the loan originations was higher than those earned in the security portfolio.

Loans, net of the allowance for loan losses, increased $30.2 million, or 18.8%, to $190.8 million at September 30, 2017, from $160.6 million at December 31, 2016. The increase in loans, net of the allowance for loan losses, was primarily due to a $14.6 million increase in one-to-four family loans, a $7.4 million increase in non-residential real estate loans, and a $6.2 million increase in the purchased auto portfolio. The Company also experienced growth in most other loan categories during the nine months ended September 30, 2017.

Total deposits increased $6.3 million, or 3.7%, to $178.9 million at September 30, 2017 from $172.5 million at December 31, 2016. At September 30, 2017 checking/money market accounts increased by $3.7 million, savings accounts increased by $1.8 million and certificates of deposit increased by $0.8 million as compared to December 31, 2016. 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 increased $8.0 million, to $9.1 million at September 30, 2017 compared to $1.1 million at December 31, 2016 to fund the loan growth experienced during the nine months ended September 30, 2017.

Stockholders’ equity increased $1.0 million, or 1.9%, to $52.9 million at September 30, 2017 from $51.9 million at December 31, 2016. The increase is primarily a result of net income of $1.3 million for the nine months ended September 30, 2017 and an increase in other comprehensive income of $0.2 million related to an increase in the fair value of securities available for sale, partially off-set by dividends of $0.4 million paid to stockholders and an approximately $0.1 million net decrease related to ESOP shares.

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 0.85% at September 30, 2017, which is down from 2.18% at December 31, 2016. During the first nine months of 2017, non-performing assets decreased 58.6% to $2.1 million from $5.0 million as of December 31, 2016. The decrease in non-performing assets was primarily due to the decrease in non-accrual loans as a result of the pay-off of eight impaired loans totaling approximately $2.4 million, write-downs on four impaired loans totaling approximately $0.2 million, writing down and moving seven impaired loans totaling approximately $351,000 to OREO/repossessed assets, upgrading and returning two loans totaling approximately $83,000 to accrual status, and payments of approximately $298,000, offset by the addition of seven loans totaling approximately $376,000 to the impaired loan list. Additionally, foreclosed real estate increased approximately $50,000, while other repossessed assets decreased approximately $2,000.

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

	September 30,		June 30,		March 31,		December 31,		September 30,
	2017		2017		2017		2016		2016
	(In Thousands)
Non-accrual:
One-to-four family	$	1,610	$	1,814	$	2,175	$	2,693	$	2,310
Multi-family		-		-		-		-		-
Non-residential real estate		368		458		618		2,265		1,880
Commercial		13		-		-		-		-
Consumer direct		-		-		-		-		-
Purchased auto		3		26		26		24		13
Total non-accrual loans		1,994		2,298		2,819		4,982		4,203
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		1,994		2,298		2,819		4,982		4,203
Foreclosed real estate		83		-		-		33		33
Other repossessed assets		-		13		8		2		42
Total nonperforming assets	$	2,077	$	2,311	$	2,827	$	5,017	$	4,278

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

	September 30,			June 30,			March 31,			December 31,			September 30,
	2017			2017			2017			2016			2016
Allowance for loan losses as a percent of gross loans receivable		1.23	%		1.21	%		1.26	%		1.35	%		1.45	%
Allowance for loan losses as a percent of total nonperforming loans		118.66	%		97.52	%		77.47	%		45.10	%		54.91	%
Nonperforming loans as a percent of gross loans receivable		1.00	%		1.24	%		1.63	%		3.00	%		2.64	%
Nonperforming loans as a percent of total assets		0.81	%		0.97	%		1.19	%		2.16	%		1.52	%
Nonperforming assets as a percent of total assets		0.85	%		0.98	%		1.20	%		2.18	%		1.55	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

General. Net income for the three months ended September 30, 2017 increased approximately $34,000, or 8.0%, to approximately $455,000 compared to net income of approximately $421,000 for the three months ended September 30, 2016. The increase was primarily attributed to an increase in net interest income after provision for loan losses of approximately $67,000, an increase in total other income of approximately $135,000, and a decrease in income tax expense of approximately $68,000, partially offset by an increase of approximately $237,000 in other expenses.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2017 and 2016.

	Three Months Ended
	September 30,
	2017		2016		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,204	$	1,858	$	346			18.62	%
Securities:
Residential mortgage-backed securities		99		123		(24	)		(19.51	)
State and municipal securities		116		133		(17	)		(12.78	)
Dividends on non-marketable equity securities		2		1		1			100.00
Interest-bearing deposits		5		12		(7	)		(58.33	)
Total interest and dividend income		2,426		2,127		299			14.06
Interest expense:
Deposits		248		206		42			20.39
Borrowings		20		15		5			33.33
Total interest expense		268		221		47			21.27
Net interest income	$	2,158	$	1,906	$	252			13.22	%

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 September 30,
	2017							2016
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	187,221	$	2,204		4.71	%	$	153,844	$	1,858		4.83	%
Securities, net (2)		35,044		215		2.45	%		44,714		256		2.29	%
Non-marketable equity securities		752		2		1.06	%		753		1		0.53	%
Interest-bearing deposits		2,589		5		0.77	%		19,523		12		0.25	%
Total interest-earning assets		225,606		2,426		4.30	%		218,834		2,127		3.89	%
Non-interest-earning assets		18,692							19,010
Total assets		244,298							237,844

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	30,312	$	21		0.28	%	$	30,654	$	16		0.21	%
Savings accounts		26,200		5		0.08	%		41,010		6		0.08	%
Certificates of Deposit accounts		82,258		218		1.06	%		83,908		181		0.86	%
Checking accounts		28,643		4		0.06	%		28,916		3		0.04	%
Advances and borrowed funds		7,558		20		1.06	%		8,238		15		0.73	%
Total interest-bearing liabilities		174,971		268		0.61	%		192,726		221		0.46	%
Non-interest-bearing liabilities		16,443							12,547
Total liabilities		191,414							205,273
Equity		52,884							32,571
Total liabilities and equity		244,298							237,844
Net interest income			$	2,158						$	1,906
Net interest rate spread (3)						3.69	%						3.43	%
Net interest margin (4)						3.83	%						3.48	%
Ratio of average interest-earning assets to average interest-bearing liabilities						128.94	%						113.55	%

(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 September 30, 2017 and 2016. 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 September 30,
	2017 Compared to 2016
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	393		$	(47	)	$	346
Securities, net		(59	)		18			(41	)
Non-marketable equity securities		-			1			1
Interest-bearing deposits		(33	)		26			(7	)
Total interest-earning assets	$	301		$	(2	)	$	299
Interest expense on
Money Market accounts	$	-		$	5		$	5
Passbook accounts		(1	)		-			(1	)
Certificates of Deposit accounts		(4	)		41			37
Checking		-			1			1
Advances and borrowed funds		(2	)		7			5
Total interest-bearing liabilities		(7	)		54			47
Change in net interest income	$	308		$	(56	)	$	252

Net interest income increased by $0.3 million, or 13.2%, to $2.2 million for the three months ended September 30, 2017, from $1.9 million for the three months ended September 30, 2016. Interest and dividend income increased $0.3 million, or 14.1%, primarily due to an increase in the average balances of interest-earning assets of $6.8 million. The increase in net interest income was partially off-set by a slight increase in interest expense as the average cost of funds increased 15 basis points to 0.61% for the three months ended September 30, 2017. The increase in cost of funds was partially off-set by a decrease in the average balance of interest-bearing liabilities of $17.8 million during the three months ended September 30, 2017. The average balance of interest-bearing liabilities was temporarily inflated at September 30, 2016, due to $50.1 million of funds received late in the third quarter as a result of the subscription and community offerings for shares of Company common stock in connection with the Bank’s second-step conversion completed on October 11, 2016. The net interest margin increased during the three months ended September 30, 2017 to 3.83% compared to 3.48% for the three months ended September 30, 2016.

Provision for Loan Losses. Management recorded a loan loss provision of $0.2 million and $25,000 for the three-month periods ended September 30, 2017 and 2016, respectively. General reserves at September 30, 2017 were higher when compared to September 30, 2016, as the balances in all loan categories increased during the twelve months ended September 30, 2017. Additionally, net charge-offs during the third quarter of 2017 were $84,000 compared to $5,000 during the third quarter of 2016. These increases were partially off-set by improvements in historical loss levels and changes in qualitative factors during the twelve months ended September 30, 2017, as compared to the same period in 2016. Additionally, specific reserves as of September 30, 2017 were lower than they were as of September 30, 2016, due to several large credits being resolved during 2017 that had larger reserves as of September 30, 2016. 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 4.6% in LaSalle County, 5.1% in Grundy County, and 5.0% for the State of Illinois, versus the national level of 4.2%. Based on a review of the loans that were in the loan portfolio at September 30, 2017, 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 September 30, 2017 and 2016.

	Three months ended
	September 30,
	2017		2016		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	77	$	-	$	77			100.00	%
Gain on sale of loans		205		143		62			43.36
Gain on sale of foreclosed real estate		5		77		(72	)		(93.51	)
Gain on sale of repossessed assets		1		-		1			100.00
Loan origination and servicing income		159		103		56			54.37
Origination of mortgage servicing rights, net of amortization		21		15		6			40.00
Customer service fees		123		119		4			3.36
Income on bank owned life insurance		12		12		-			-
Other		30		29		1			3.45
Total other income	$	633	$	498	$	135			27.11	%

The increase in total other income was primarily due to an increase in gains on sale of loans and an increase in loan origination and servicing income, as a result of increases in loan originations and loans originated for sale into the secondary market. There was also an increase in the gain on sale of securities. The increases were partially offset by a decrease in the gain on sale of foreclosed real estate due to the sale of fewer OREO properties during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.

Other Expense. The following table summarizes other expense for the three months ended September 30, 2017 and 2016.

	Three months ended
	September 30,
	2017			2016			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,047		$	840		$	207			24.64	%
Directors fees		41			41			-			-
Occupancy		159			171			(12	)		(7.02	)
Deposit insurance premium		15			37			(22	)		(59.46	)
Legal and professional services		92			83			9			10.84
Data processing		144			131			13			9.92
Loss on sale of securities		48			-			48			100.00
Loan expense		153			125			28			22.40
Valuation adjustments and expenses on foreclosed real estate		3			32			(29	)		(90.63	)
Loss on sale of foreclosed real estate		-			5			(5	)		(100.00	)
Other		269			269			-			-
Total other expenses	$	1,971		$	1,734		$	237			13.67	%

Efficiency ratio (1)		70.62	%		72.13	%

(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 an increase in salaries and employee benefits, which was due to both additional personnel to support our mortgage lending area as well as annual merit increases. The efficiency ratio decreased due to increased net interest income and other income for the 2017 period.

Income Taxes. The Company recorded income tax expense of $0.2 million for both the three months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017, the Company had net income of $0.5 million with approximately $0.1 million in tax exempt income, compared to net income of $0.4 million with approximately $0.1 million in tax exempt income for the three months ended September 30, 2016.

The Company’s income tax differed from the maximum statutory federal rate of 35% for the three months ended September 30, 2017 and 2016, as follows:

	Three Months Ended
	September 30,
	2017			2016

Expected income taxes	$	213,470		$	225,580
Income tax effect of:
State taxes, net of federal tax benefit		(23,717	)		32,218
Tax exempt interest		(38,407	)		(44,331	)
Income taxed at lower rates		(6,099	)		(6,445	)
Other		9,916			16,229
	$	155,163		$	223,251

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

General. Net income for the nine months ended September 30, 2017 was $1.3 million compared to $1.1 for the nine months ended September 30, 2016. The increase was primarily attributed to the increase in net interest income after provision for loan losses of $0.5 million and a $0.4 million increase in total other income. These favorable variances were partially offset by an increase of $0.7 million in other expenses.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2017 and 2016.

	Nine Months Ended
	September 30,
	2017		2016		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	6,292	$	5,433	$	859			15.81	%
Securities:
Residential mortgage-backed securities		361		424		(63	)		(14.86	)
State and municipal securities		374		404		(30	)		(7.43	)
Dividends on non-marketable equity securities		5		5		-			-
Interest-bearing deposits		21		22		(1	)		(4.55	)
Total interest and dividend income		7,053		6,288		765			12.17
Interest expense:
Deposits		676		612		64			10.46
Borrowings		36		27		9			33.33
Total interest expense		712		639		73			11.42
Net interest income	$	6,341	$	5,649	$	692			12.25	%

	Nine Months Ended September 30,
	2017							2016
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	176,476	$	6,292		4.75	%	$	147,498	$	5,433		4.91	%
Securities, net (2)		40,063		735		2.45	%		46,380		828		2.38	%
Non-marketable equity securities		753		5		0.89	%		955		5		0.70	%
Interest-bearing deposits		2,692		21		1.04	%		9,374		22		0.31	%
Total interest-earning assets		219,984		7,053		4.27	%		204,207		6,288		4.11	%
Non-interest-earning assets		18,817							18,559
Total assets		238,801							222,766

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	30,464	$	54		0.24	%	$	30,750	$	48		0.21	%
Savings accounts		26,247		14		0.07	%		29,754		15		0.07	%
Certificates of Deposit accounts		81,544		597		0.98	%		85,281		539		0.84	%
Checking accounts		28,819		11		0.05	%		27,835		10		0.05	%
Advances and borrowed funds		3,488		36		1.38	%		3,927		27		0.92	%
Total interest-bearing liabilities		170,562		712		0.56	%		177,547		639		0.48	%
Non-interest-bearing liabilities		15,668							13,544
Total liabilities		186,230							191,091
Equity		52,571							31,675
Total liabilities and equity		238,801							222,766
Net interest income			$	6,341						$	5,649
Net interest rate spread (3)						3.71	%						3.63	%
Net interest margin (4)						3.84	%						3.69	%
Ratio of average interest-earning assets to average interest-bearing liabilities						128.98	%						115.02	%

(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 nine months ended September 30, 2017 and 2016. 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.

	Nine Months Ended September 30,
	2017 Compared to 2016
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	1,033		$	(174	)	$	859
Securities, net		(116	)		23			(93	)
Non-marketable equity securities		(1	)		1			-
Interest-bearing deposits		(52	)		51			(1	)
Total interest-earning assets	$	864		$	(99	)	$	765
Interest expense on
Money Market accounts	$	(1	)	$	7		$	6
Passbook accounts		(1	)		-			(1	)
Certificates of Deposit accounts		(27	)		85			58
Checking		1			-			1
Advances and borrowed funds		(4	)		13			9
Total interest-bearing liabilities		(32	)		105			73
Change in net interest income	$	896		$	(204	)	$	692

Net interest income increased by $0.7 million, or 12.2%, to $6.3 million for the nine months ended September 30, 2017, from $5.6 million for the nine months ended September 30, 2016. Interest and dividend income increased $0.8 million, or 12.2%, primarily due to an increase in the average balances of interest-earning assets of $15.8 million and a 3.9% increase in the yield on interest-earning assets to 4.27%. The increase in net interest income was partially off-set by an increase in interest expense as the average cost of funds increased eight basis points to 0.56% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in cost of funds was slightly off-set by a decrease in the average balance of interest-bearing liabilities of $7.0 million during the nine months ended September 30, 2017. The average balance of interest-bearing liabilities was temporarily inflated at September 30, 2016, due to $50.1 million of funds received late in the third quarter as a result of the subscription and community offerings for shares of Company common stock in connection with the Bank’s second-step conversion completed on October 11, 2016. The net interest margin increased during the nine months ended September 30, 2017 to 3.84% compared to 3.69% for the nine months ended September 30, 2016.

Provision for Loan Losses. Management recorded a loan loss provision of $0.5 million and $0.3 million for the nine-month periods ended September 30, 2017 and 2016, respectively. General reserves at September 30, 2017 were higher when compared to September 30, 2016, as the balances in all loan categories increased during the twelve months ended September 30, 2017. Additionally, net charge-offs during the nine months ended September 30, 2017 were $0.3 million compared to $0.2 million during the same period of 2016. These increases were partially off-set by improvements in historical loss levels and changes in qualitative factors during the twelve months ended September 30, 2017, as compared to the same period in 2016. Additionally, specific reserves as of September 30, 2017 were lower than they were as of September 30, 2016, due to several large credits being resolved during 2017 that had larger reserves as of September 30, 2016. 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 4.6% in LaSalle County, 5.1% in Grundy County, and 5.0% for the State of Illinois, versus the national level of 4.2%. Based on a review of the loans that were in the loan portfolio at September 30, 2017, 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.

Other Income. The following table summarizes other income for the nine months ended September 30, 2017 and 2016.

	Nine months ended
	September 30,
	2017		2016		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	98	$	8	$	90			1,125.00	%
Gain on sale of loans		522		331		191			57.70
Gain on sale of foreclosed real estate		29		188		(159	)		(84.57	)
Gain on sale of repossessed assets		15		2		13			650.00
Loan origination and servicing income		463		239		224			(93.72	)
Origination of mortgage servicing rights, net of amortization		55		42		13			(30.95	)
Customer service fees		360		319		41			12.85
Income on bank owned life insurance		36		37		(1	)		(2.70	)
Other		91		78		13			16.67
Total other income	$	1,669	$	1,244	$	425			34.16	%

The increase in total other income was primarily due to an increase in gains on sale of loans and an increase in loan origination and servicing income, as a result of increases in loan originations and loans originated for sale into the secondary market. Also contributing to the increase was an increase in gains on sale of securities, due to the sale of more securities during the current period, with the cash proceeds used to fund loan growth. The increases were partially offset by a decrease in the gain on sale of foreclosed real estate due to the sale of fewer foreclosed properties during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

Other Expense. The following table summarizes other expense for the nine months ended September 30, 2017 and 2016.

	Nine months ended
	September 30,
	2017			2016			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	3,125		$	2,505		$	620			24.75	%
Directors fees		122			122			-			-
Occupancy		485			478			7			1.46
Deposit insurance premium		42			127			(85	)		(66.93	)
Legal and professional services		282			258			24			9.30
Data processing		436			386			50			12.95
Loss on sale of securities		55			3			52			1,733.33
Loan expense		403			285			118			41.40
Valuation adjustments and expenses on foreclosed real estate		10			101			(91	)		(90.10	)
Loss on sale of foreclosed real estate		-			5			(5	)		(100.00	)
Other		808			747			61			8.17
Total other expenses	$	5,768		$	5,017		$	751			14.97	%

Efficiency ratio (1)		72.01	%		72.78	%

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

Income Taxes. The Company recorded income tax expense of $0.5 million for both the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, the Company had net income of $1.3 million with approximately $0.4 million in tax exempt income, compared to net income of $1.1 million with approximately $0.4 million in tax exempt income for the nine months ended September 30, 2016.

The Company’s income tax differed from the maximum statutory federal rate of 35% for the nine months ended September 30, 2017 and 2016, as follows:

	Nine Months Ended
	September 30,
	2017			2016

Expected income taxes	$	623,675		$	550,741
Income tax effect of:
State taxes, net of federal tax benefit		31,581			80,219
Tax exempt interest		(123,848	)		(134,320	)
Income taxed at lower rates		(17,819	)		(15,735	)
Other		(9,257	)		39,158
	$	504,332		$	520,063

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 September 30, 2017, the Bank had outstanding commitments to originate $5.4 million in loans, unfunded lines of credit of $14.7 million, and $6.3 million in commitments to fund construction loans. In addition, as of September 30, 2017, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $37.0 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 September 30, 2017, the Bank had $68.3 million of available credit from the FHLBC and there were $9.1 million in FHLBC advances outstanding. In addition, as of September 30, 2017 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 September 30 2017, the Company had cash and cash equivalents of $9.4 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 September 30, 2017 of 24.11%, 22.86%, 22.86%, and 17.07%, respectively, compared to ratios at December 31, 2016 of 26.76%, 25.51%, 25.51% and 16.84%, respectively. As of January 1, 2017, the Bank must hold 1.25% 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 nine months ended September 30, 2017, 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, 2016, which could materially affect our business, financial condition or future results. As of September 30, 2017, 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

Not applicable.

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) http://www.sec.gov/Archives/edgar/data/1675192/000119312516613800/d189351dex31.htm


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) http://www.sec.gov/Archives/edgar/data/1675192/000119312516613800/d189351dex32.htm


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 nine months ended September 30, 2017 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: November 14, 2017	/s/ Jon L. Kranov
	Jon L. Kranov
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 14, 2017	/s/ Marc N. Kingry
	Marc N. Kingry
	Chief Financial Officer
	(Principal Financial Officer)