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

ottb20170331_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 March 31, 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 Ottawa, Illinois	61350 (Zip Code)
(Address of principal executive offices)

(815) 433-2525

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

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

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

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

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

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

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

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


Class	Outstanding as of May 10, 2017
Common Stock, $0.01 par value		3,467,402

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended March 31, 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	23
Item 3	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4	Controls and Procedures	31


PART II – OTHER INFORMATION

Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults upon Senior Securities	31
Item 4	Mine Safety Disclosures	32
Item 5	Other Information	32
Item 6	Exhibits	32


SIGNATURES		33

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

March 31, 2017 and December 31, 2016

(Unaudited)

	March 31,			December 31,
	2017			2016
Assets
Cash and due from banks	$	3,328,141		$	3,916,559
Interest bearing deposits		1,650,426			2,030,090
Total cash and cash equivalents		4,978,567			5,946,649
Time deposits		250,000			250,000
Federal funds sold		2,784,000			1,690,000
Securities available for sale		43,992,718			44,560,680
Non-marketable equity securities		753,321			753,321
Loans, net of allowance for loan losses of $2,183,681 and $2,247,449 at March 31, 2017 and December 31, 2016, respectively		167,099,818			160,586,129
Loans held for sale		689,000			305,072
Premises and equipment, net		6,797,793			6,843,906
Accrued interest receivable		798,243			785,484
Foreclosed real estate		-			33,000
Deferred tax assets		2,395,646			2,593,786
Cash value of life insurance		2,257,603			2,245,578
Goodwill		649,869			649,869
Core deposit intangible		339,455			359,000
Other assets		2,662,932			2,558,910
Total assets	$	236,448,965		$	230,161,384
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	11,418,742		$	9,974,536
Interest bearing		166,649,854			162,572,485
Total deposits		178,068,596			172,547,021
Accrued interest payable		1,671			224
FHLB advances		1,122,890			1,121,153
Other liabilities		4,129,804			3,748,953
Total liabilities		183,322,961			177,417,351
Commitments and contingencies
Redeemable common stock held by ESOP plan		908,749			807,629
Stockholders' Equity
Common stock, $.01 par value, 12,000,000 shares authorized; 3,467,402 shares issued at March 31, 2017 and December 31, 2016, respectively		34,674			34,674
Additional paid-in-capital		37,134,699			37,117,311
Retained earnings		17,681,924			17,455,472
Unallocated ESOP shares		(1,888,144	)		(1,932,648	)
Accumulated other comprehensive income		162,851			69,224
		53,126,004			52,744,033
Less:
Maximum cash obligation related to ESOP shares		(908,749	)		(807,629	)
Total stockholders' equity		52,217,255			51,936,404
Total liabilities and stockholders' equity	$	236,448,965		$	230,161,384

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three Months Ended March 31, 2017 and 2016

(Unaudited)

	March 31,		March 31,
	2017		2016
Interest and dividend income:
Interest and fees on loans	$	1,972,750	$	1,723,298
Securities:
Residential mortgage-backed and related securities		135,868		152,077
State and municipal securities		130,629		134,980
Dividends on non-marketable equity securities		1,794		2,190
Interest-bearing deposits		9,321		7,344
Total interest and dividend income		2,250,362		2,019,889
Interest expense:
Deposits		205,269		202,470
Borrowings		6,996		4,620
Total interest expense		212,265		207,090
Net interest income		2,038,097		1,812,799
Provision for loan losses		90,000		120,000
Net interest income after provision for loan losses		1,948,097		1,692,799
Other income:
Gain on sale of securities		42		96
Gain on sale of loans		107,093		38,930
Gain on sale of foreclosed real estate		24,060		65,197
Gain on sale of repossessed assets		3,044		632
Loan origination and servicing income		100,991		58,622
Origination of mortgage servicing rights, net of amortization		15,411		2,130
Customer service fees		115,859		98,271
Income on bank owned life insurance		12,025		12,172
Other		27,965		24,819
Total other income		406,490		300,869
Other expenses:
Salaries and employee benefits		994,366		827,685
Directors fees		40,800		40,800
Occupancy		163,539		152,078
Deposit insurance premium		13,514		44,223
Legal and professional services		96,158		87,128
Data processing		138,493		135,022
Loan expense		118,323		58,542
Valuation adjustments and expenses on foreclosed real estate		5,462		36,513
Loss on sale of repossessed assets		274		-
Other		245,085		237,756
Total other expenses		1,816,014		1,619,747
Income before income tax expense		538,573		373,921
Income tax expense		181,273		115,015
Net income	$	357,300	$	258,906
Basic earnings per share	$	0.11	$	0.09
Diluted earnings per share	$	0.11	$	0.09
Dividends per share	$	0.04	$	-

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2017 and 2016

(Unaudited)

	Three Months Ended
	March 31,
	2017			2016
Net income	$	357,300		$	258,906
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding gains arising during the period		153,819			163,649
Reclassification adjustment for (gains) included in net income		(42	)		(96	)
Other comprehensive income, before tax		153,777			163,553
Income tax expense related to items of other comprehensive income		60,150			63,974
Other comprehensive income, net of tax		93,627			99,579
Comprehensive income	$	450,927		$	358,485

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2017 and 2016

(Unaudited)

	2017			2016
Cash Flows from Operating Activities
Net income	$	357,300		$	258,906
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		60,785			58,535
Provision for loan losses		90,000			120,000
Provision for deferred income taxes		137,990			109,190
Net amortization of premiums and discounts on securities		139,549			163,362
Gain on sale of securities, net		(42	)		(96	)
Origination of mortgage loans held for sale		(4,083,851	)		(1,473,405	)
Proceeds from sale of mortgage loans held for sale		3,807,016			1,412,335
Gain on sale of loans, net		(107,093	)		(38,930	)
Origination of mortgage servicing rights, net of amortization		(15,411	)		(2,130	)
Gain on sale of foreclosed real estate, net		(24,060	)		(65,197	)
Write down of foreclosed real estate		-			14,550
Gain on sale of repossessed assets, net		(2,770	)		(632	)
ESOP compensation expense		61,892			13,121
MRP compensation expense		-			1,102
Compensation expense on RRP options granted		-			1,457
Amortization of core deposit intangible		19,545			23,000
Amortization (accretion) of fair value adjustments on acquired:
Loans		69,554			30,796
Certificates of deposit		(8,000	)		(19,000	)
Federal Home Loan Bank Advances		1,737			(695	)
Increase in cash surrender value of life insurance		(12,025	)		(12,172	)
Change in assets and liabilities:
Increase in accrued interest receivable		(12,759	)		(26,205	)
Increase in other assets		(83,111	)		(654,907	)
Increase in accrued interest payable and other liabilities		382,298			240,143
Net cash provided by operating activities		778,544			153,128
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(1,223,896	)		(3,613,482	)
Sales, calls, maturities and paydowns		1,806,128			2,153,769
Net increase in loans		(6,716,676	)		(4,896,715	)
Net (increase) decrease in federal funds sold		(1,094,000	)		655,000
Proceeds from sale of foreclosed real estate		84,493			102,099
Proceeds from sale of repossessed assets		13,270			17,509
Purchase of premises and equipment		(14,672	)		(6,000	)
Net cash used in investing activities		(7,145,353	)		(5,587,820	)
Cash Flows from Financing Activities
Net increase in deposits		5,529,575			3,459,615
Principal reduction of Federal Home Loan Bank advances		-			(1,000,000	)
Dividends paid		(130,848	)		-
Net cash provided by financing activities		5,398,727			2,459,615
Net decrease in cash and cash equivalents		(968,082	)		(2,975,077	)
Cash and cash equivalents:
Beginning of period		5,946,649			7,135,719
End of period	$	4,978,567		$	4,160,642

(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Three Months Ended March 31, 2017 and 2016

(Unaudited)

	2017		2016
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	203,822	$	200,962
Interest paid on borrowings		6,996		4,620
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		31,356		109,190
Other assets acquired in settlement of loans		16,000		3,500
Sale of foreclosed real estate through loan origination		3,923		-
Increase in ESOP put option liability		101,120		45,712

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 1 – NATURE OF BUSINESS

Ottawa Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in May 2016 to be the successor to Ottawa Savings Bancorp, Inc. (“Ottawa Savings Bancorp”) upon completion of the second-step conversion of Ottawa Savings Bank (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. Ottawa Savings Bancorp MHC was the former mutual holding company for Ottawa Savings Bancorp prior to completion of the second-step conversion. In conjunction with the second-step conversion, Ottawa Savings Bancorp MHC merged into Ottawa Savings Bancorp (and ceased to exist), and Ottawa Savings Bancorp merged into the Company, with the Company as the surviving entity. 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 March 31, 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
	March 31,
	2017			2016
Net income available to common stockholders	$	357,300		$	258,906
Basic potential common shares:
Weighted average shares outstanding		3,467,402			2,894,123
Weighted average unallocated ESOP shares		(194,580	)		(19,912	)
Weighted average unvested MRP shares		-			(1,047	)
Basic weighted average shares outstanding		3,272,822			2,873,164
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		-			919
Weighted average RRP options outstanding		15,559			7,752
Dilutive weighted average shares outstanding		3,288,381			2,881,835
Basic earnings per share	$	0.11		$	0.09
Diluted earnings per share	$	0.11		$	0.09

NOTE 6 – EMPLOYEE STOCK OWNERSHIP PLAN

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

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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 March 31, 2017, 69,159 shares at a fair value of $13.14 have been classified as mezzanine capital.

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

	March 31,			December 31,
	2017			2016
Shares allocated		90,189			85,493
Shares withdrawn from the plan		(21,030	)		(21,030	)
Unallocated shares		191,501			196,197
Total ESOP shares		260,660			260,660
Fair value of unallocated shares	$	2,516,323		$	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
March 31, 2017:
Available for Sale
State and municipal securities	$	17,620,913	$	270,409	$	37,665	$	17,853,657
Residential mortgage-backed securities		26,104,331		229,436		194,706		26,139,061
	$	43,725,244	$	499,845	$	232,371	$	43,992,718
December 31, 2016:
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

The amortized cost and fair value at March 31, 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	$	700,489	$	703,309
Due after three months through one year		553,702		557,591
Due after one year through five years		4,848,564		4,964,629
Due after five years through ten years		4,338,874		4,404,239
Due after ten years		7,179,284		7,223,889
Residential mortgage-backed securities		26,104,331		26,139,061
	$	43,725,244	$	43,992,718

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at March 31, 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
March 31, 2017
Securities Available for Sale
State and municipal securities	$	3,730,461	$	37,665	$	-	$	-	$	3,730,461	$	37,665
Residential mortgage-backed securities		10,798,425		132,308		4,591,883		62,398		15,390,308		194,706
	$	14,528,886	$	169,973	$	4,591,883	$	62,398	$	19,120,769	$	232,371

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 March 31, 2017, 47 securities had unrealized losses with an aggregate depreciation of 1.20% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at March 31, 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 $0.4 million from the sales of securities for the three months ended March 31, 2017 and proceeds of $0.6 million for the three months ended March 31, 2016. The sales during the three months ended March 31, 2017 resulted in gross realized gains of $42 and no realized losses. The sales during the three months ended March 31, 2016 resulted in gross realized gains of $96 and no realized losses. The tax provision applicable to the realized gains amounted to $16 and $38, respectively, for the three months ended March 31, 2017 and 2016.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	March 31,			December 31,
	2017			2016
Mortgage loans:
One-to-four family residential loans	$	108,408,504		$	103,871,686
Multi-family residential loans		5,051,480			5,182,611
Total mortgage loans		113,459,984			109,054,297

Other loans:
Non-residential real estate loans		22,837,045			22,560,167
Commercial loans		17,276,909			16,645,226
Consumer direct		3,566,585			2,859,703
Purchased auto		12,142,976			11,714,185
Total other loans		55,823,515			53,779,281
Gross loans		169,283,499			162,833,578
Less: Allowance for loan losses		(2,183,681	)		(2,247,449	)
Loans, net	$	167,099,818		$	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.

	March 31,			December 31,
	2017			2016
Mortgage loans:
One-to-four family residential loans	$	17,064,172		$	18,062,672
Multi-family residential loans		270,716			272,378
Total mortgage loans		17,334,888			18,335,050

Other loans:
Non-residential real estate loans		2,299,078			2,352,952
Commercial loans		721,691			779,595
Consumer direct		148,022			196,340
Total other loans		3,168,791			3,328,887
Gross loans		20,503,679			21,663,937
Less: Allowance for loan losses		(100,000	)		(100,000	)
Loans, net	$	20,403,679		$	21,563,937

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

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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects activity for the loans acquired with deteriorated credit quality for the three months ended March 31, 2017 and 2016:

	Three Months Ended
	March 31,
	2017			2016
Balance, beginning of year	$	461,334		$	575,605
Payment activity		(225,489	)		(31,852	)
Transfer to OREO		-			(44,417	)
Accretion into interest income		64,791			27,099
	$	300,636		$	526,435

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $823,000 and $1,108,000 as of March 31, 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 months ended March 31, 2017 and 2016:

	Three Months Ended
	March 31,
	2017			2016
Balance, beginning of year	$	82,869		$	175,342
Net reclassification from non-accretable yield		29,891			8,868
Accretion into interest income		(64,791	)		(27,099	)
	$	47,969		$	157,111

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

	Three Months Ended March 31,
	2017		2016
Purchased auto loans	$	1,534,937	$	5,007,392

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

	Three Months Ended March 31,
	2017			2016
One-to-four family	$	(86,067	)	$	(151,015	)
Multi-family		-			3,972
Non-residential		(51,960	)		-
Consumer direct		2,327			1,727
Purchased auto		(18,068	)		(6,846	)
Net (charge-offs)/recoveries	$	(153,768	)	$	(152,162	)

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016:

	One-to-
	four			Multi-		Non-					Consumer		Purchased
March 31, 2017	family			family		residential			Commercial		direct		auto			Total
Balance at beginning of period	$	1,426,954		$	93,481	$	367,326		$	96,823	$	79,253	$	183,612		$	2,247,449
Provision charged to income		108,120			2,219		(64,902	)		4,280		17,471		22,812			90,000
Loans charged off		(89,515	)		-		(59,960	)		-		-		(30,312	)		(179,787	)
Recoveries of loans previously charged off		3,448			-		8,000			-		2,327		12,244			26,019
Balance at end of period	$	1,449,007		$	95,700	$	250,464		$	101,103	$	99,051	$	188,356		$	2,183,681

	One-to-
	four			Multi-		Non-					Consumer		Purchased
March 31, 2016	family			family		residential		Commercial			direct		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		26,052			15,940		7,910		(1,863	)		12,683		59,278			120,000
Loans charged off		(189,894	)		-		-		-			-		(8,680	)		(198,574	)
Recoveries of loans previously charged off		38,879			3,972		-		-			1,727		1,834			46,412
Balance at end of period	$	1,602,619		$	162,149	$	206,250	$	49,443		$	51,597	$	119,786		$	2,191,844

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

	One-to-
	four		Multi-		Non-				Consumer		Purchased
March 31, 2017	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for impairment	$	1,787,025	$	-	$	618,192	$	-	$	-	$	25,638	$	2,430,855
Loans acquired with deteriorated credit quality		300,636		-		-		-		-		-		300,636
Loans collectively evaluated for impairment		106,320,843		5,051,480		22,218,853		17,276,909		3,566,585		12,117,338		166,552,008
Balance at end of period	$	108,408,504	$	5,051,480	$	22,837,045	$	17,276,909	$	3,566,585	$	12,142,976	$	169,283,499

Period-end amount allocated to:
Loans individually evaluated for impairment	$	162,726	$	-	$	63,806	$	-	$	-	$	12,819	$	239,351
Loans acquired with deteriorated credit quality		39,724		-		-		-		-		-		39,724
Loans collectively evaluated for impairment		1,246,557		95,700		186,658		101,103		99,051		175,537		1,904,606
Balance at end of period	$	1,449,007	$	95,700	$	250,464	$	101,103	$	99,051	$	188,356	$	2,183,681

	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	$	93,481	$	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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2017 and December 31, 2016:

March 31, 2017	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	2,246,673	$	1,157,952	$	929,709	$	2,087,661	$	202,450	$	2,233,641
Multi-family		-		-		-		-		-		-
Non-residential		658,192		232,722		385,470		618,192		63,806		1,686,159
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		25,638		-		25,638		25,638		12,819		24,922
	$	2,930,503	$	1,390,674	$	1,340,817	$	2,731,491	$	279,075	$	3,944,722

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 months ended March 31, 2017, the Company recognized approximately $3,000 in cash basis interest income on impaired loans. For the three months ended March 31, 2016, the Company recognized no accrued or cash basis interest income on impaired loans.

At March 31, 2017, there were 34 impaired loans totaling approximately $2.7 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 four impaired loans totaling approximately $2.0 million, write-downs on two impaired loans totaling approximately $0.1 million, writing down and moving an impaired loan totaling approximately $43,000 to OREO, upgrading and returning a loan totaling approximately $32,000 to accrual status, and payments of approximately $66,000, offset by the addition of two loans totaling approximately $52,000 to the impaired loan list.

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

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

Impaired loans at March 31, 2017 included $0.7 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 $1.6 million as a result of the pay-off of one TDR and as a result of $75,000 charged off on another TDR. 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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Loans classified as TDRs during the three months ended March 31, 2017 and 2016, segregated by class, are shown in the tables below.

	Three Months Ended						Three Months Ended
	March 31, 2017						March 31, 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	$	82,400	$	-
Multi-family		-		-		-		-		-		-
Non-residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		-
		-	$	-	$	-		2	$	82,400	$	-

There were no TDR loans that were restructured during the twelve months prior to March 31, 2017 and 2016 that had payment defaults (i.e., 60 days or more past due following a modification) during the three months ended March 31, 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 March 31, 2017 and December 31, 2016:

March 31, 2017	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,175,017	$	-
Multi-family		-		-
Non-residential		618,182		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		25,638		-
	$	2,818,837	$	-

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 March 31, 2017 and December 31, 2016:

March 31, 2017	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	871,727	$	-	$	633,996	$	1,505,723	$	106,902,781	$	108,408,504
Multi-family		-		-		-		-		5,051,480		5,051,480
Non-residential		89,099		-		232,722		321,821		22,515,224		22,837,045
Commercial		-		-		-		-		17,276,909		17,276,909
Consumer direct		257		-		-		257		3,566,328		3,566,585
Purchased auto		45,195		-		25,638		70,833		12,072,143		12,142,976
	$	1,006,278	$	-	$	892,356	$	1,898,634	$	167,384,865	$	169,283,499

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)

As of March 31, 2017 and December 31, 2016, the risk category of loans by class is as follows:

March 31, 2017	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	-	$	538,648	$	2,087,661	$	-	$	105,782,195	$	108,408,504
Multi-family		-		126,036		-		-		4,925,444		5,051,480
Non-residential		22,028,624		190,229		618,192		-		-		22,837,045
Commercial		17,276,909		-		-		-		-		17,276,909
Consumer direct		-		-		-		-		3,566,585		3,566,585
Purchased auto		-		-		25,638		-		12,117,338		12,142,976
Total	$	39,305,533	$	854,913	$	2,731,491	$	-	$	126,391,562	$	169,283,499

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 March 31, 2017, the Company held no foreclosed residential real estate property, compared to approximately $33,000 at December 31, 2016. In addition, the Company also held approximately $0.2 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 March 31, 2017 and December 31, 2016, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was approximately $0 and $3,000 for the three- month periods ended March 31, 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 three months ended March 31, 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. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

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.

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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

NOTE 11 – 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).

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

Impaired Loans

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

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 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 March 31, 2017 and December 31, 2016.

							Total
March 31, 2017	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	17,853,657	$	-	$	17,853,657
Residential mortgage-backed securities available for sale		-		26,139,061		-		26,139,061
	$	-	$	43,992,718	$	-	$	43,992,718

							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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

							Total
March 31, 2017	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	8,000	$	8,000
Impaired loans, net		-		-		1,061,742		1,061,742

							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

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

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

March 31, 2017

Foreclosed assets

8,000

Appraisal of collateral

Appraisal adjustments

-50%

Impaired loans, net

835,241

Appraisal of collateral

Appraisal adjustments

-36.5

-86.5%

Impaired loans, net

226,501

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%

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of March 31, 2017 and December 31, 2016, are as follows:

			Fair Value Measurements at
	Carrying		March 31, 2017 using:
	Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	4,978,567	$	4,978,567	$	-	$	-	$	4,978,567
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		2,784,000		2,784,000		-		-		2,784,000
Securities		44,746,039		-		43,992,718		753,321		44,746,039
Accrued interest receivable		798,243		798,243		-		-		798,243
Net loans		167,099,818		-		-		169,119,895		169,119,895
Loans held for sale		689,000		689,000		-		-		689,000
Mortgage servicing rights		366,955		-		-		366,955		366,955
Financial Liabilities:
Non-interest bearing deposits		11,418,742		11,418,742		-		-		11,418,742
Interest bearing deposits		166,649,854		-		-		167,182,990		167,182,990
Accrued interest payable		1,671		1,671		-		-		1,671
FHLB advances		1,122,890		-		1,126,155		-		1,126,115

	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
Accrued interest receivable		785,484		785,484		-		-		785,484
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
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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

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

Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. At March 31, 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 March 31, 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 MARCH 31, 2017 AND DECEMBER 31, 2016

The Company's total assets increased $6.2 million, or 2.7%, to $236.4 million at March 31, 2017, from $230.2 million at December 31, 2016. The increase was primarily due to net increases in the loan portfolio of $6.5 million, federal funds sold of $1.1 million, and loans held for sale of $0.4 million. These increases were partially offset by decreases in securities available-for-sale of $0.6 million, cash and cash equivalents of $0.9 million, and deferred tax assets of $0.2 million.

Cash and cash equivalents decreased $0.9 million, or 16.3%, to $5.0 million at March 31, 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 $7.1 million exceeding cash provided by financing activities of $5.4 million and cash provided by operating activities of $0.8 million. The cash used in investing activities included a gross increase in loans of $6.7 million, the purchase of $1.2 million in securities available for sale, and an increase in federal funds sold of $1.1 million, offset by the security sales, maturities and pay-downs of $1.8 million.

Federal funds sold increased to $2.8 million at March 31, 2017, from $1.7 million at December 31, 2016, primarily as a result of cash provided by financing activities.

Securities available-for-sale decreased $0.6 million, or 1.3%, to $44.0 million at March 31, 2017 from $44.6 million at December 31, 2016. The decrease was primarily due to sales and maturities of $0.4 million and pay-downs of $1.4 million, exceeding new securities purchases of $1.2 million.

Loans, net of the allowance for loan losses, increased $6.5 million, or 4.1%, to $167.1 million at March 31, 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 $4.5 million increase in one-to-four family loans, a $0.6 million increase in commercial loans, a $0.3 million increase in non-residential real estate loans, a $0.4 million increase in the purchased auto portfolio and a $0.7 million increase in consumer loans. These increases were partially off-set by a $0.1 million decrease in multifamily loans.

Total deposits increased $5.5 million, or 3.2%, to $178.1 million at March 31, 2017 from $172.5 million at December 31, 2016. Certificates of deposit decreased $1.0 million, or 1.3%, to $80.2 million at March 31, 2017 from $81.2 million at December 31, 2016. Savings accounts increased by $1.8 million and checking/money market accounts increased by $4.8 million during the same period. 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.

Stockholders’ equity increased $0.3 million, or 0.5%, to $52.2 million at March 31, 2017 from $51.9 million at December 31, 2016. The increase is primarily a result of net income of $0.4 million for the three months ended March 31, 2017, partially off-set by dividends of $0.1 million paid to shareholders.

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 1.20% at March 31, 2017, which is down from 2.18% at December 31, 2016. During the first three months of 2017, non-performing assets decreased 44.0% to $2.8 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 four impaired loans totaling approximately $2.0 million, write-downs on two impaired loans totaling approximately $0.1 million, writing down and moving an impaired loan totaling approximately $43,000 to OREO and subsequently selling the property, upgrading and returning a loan totaling approximately $32,000 to accrual status, and payments of approximately $66,000, offset by the addition of two loans totaling approximately $52,000 to the impaired loan list. Additionally, foreclosed real estate decreased approximately $33,000, while other repossessed assets increased approximately $6,000.

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

	March 31,		December 31,		September 30,		June 30,		March 31,
	2017		2016		2016		2016		2016
	(In Thousands)
Non-accrual:
One-to-four family	$	2,175	$	2,693	$	2,310	$	2,418	$	2,988
Multi-family		-		-		-		-		-
Non-residential real estate		618		2,265		1,880		1,912		2,028
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Purchased auto		26		24		13		10		-
Total non-accrual loans		2,819		4,982		4,203		4,340		5,016
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		2,819		4,982		4,203		4,340		5,016
Foreclosed real estate		-		33		33		315		319
Other repossessed assets		8		2		42		19		3
Total nonperforming assets	$	2,827	$	5,017	$	4,278	$	4,674	$	5,338

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

	March 31,			December 31,			September 30,			June 30,			March 31,
	2017			2016			2016			2016			2016
Allowance for loan losses as a percent of gross loans receivable		1.26	%		1.35	%		1.45	%		1.50	%		1.49	%
Allowance for loan losses as a percent of total nonperforming loans		77.47	%		45.10	%		54.91	%		52.72	%		43.70	%
Nonperforming loans as a percent of gross loans receivable		1.63	%		3.00	%		2.64	%		2.84	%		3.41	%
Nonperforming loans as a percent of total assets		1.19	%		2.16	%		1.52	%		2.00	%		2.32	%
Nonperforming assets as a percent of total assets		1.20	%		2.18	%		1.55	%		2.16	%		2.46	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

General. Net income for the three months ended March 31, 2017 was $0.4 million compared to $0.3 for the three months ended March 31, 2016. The increase was primarily attributed to the increase in net interest income after provision for loan losses of $0.3 million and a $0.1 million increase in total other income. These favorable variances were partially offset by an increase of $0.2 million in other expenses and an increase of $0.1 million in income tax expense.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2017 and 2016.

	Three Months Ended
	March 31,
	2017		2016		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	1,973	$	1,724	$	249			14.44	%
Securities:
Residential mortgage-backed securities		136		152		(16	)		(10.53	)
State and municipal securities		130		135		(5	)		(3.70	)
Dividends on non-marketable equity securities		2		2		-			-
Interest-bearing deposits		9		7		2			28.57
Total interest and dividend income		2,250		2,020		230			11.39
Interest expense:
Deposits		205		202		3			1.49
Borrowings		7		5		2			40.00
Total interest expense		212		207		5			2.42
Net interest income	$	2,038	$	1,813	$	225			12.41	%

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

	Three Months Ended March 31,
	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)	$	164,672	$	1,973		4.79	%	$	140,570	$	1,724		4.90	%
Securities, net (2)		43,689		266		2.44	%		47,332		287		2.43	%
Non-marketable equity securities		753		2		1.06	%		1,358		2		0.59	%
Interest-bearing deposits		4,405		9		0.82	%		6,360		7		0.44	%
Total interest-earning assets		213,519		2,250		4.22	%		195,620		2,020		4.13	%
Non-interest-earning assets		18,955							18,540
Total assets		232,474							214,160

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	30,448	$	16		0.21	%	$	30,775	$	16		0.21	%
Savings accounts		25,182		4		0.06	%		23,895		4		0.07	%
Certificates of Deposit accounts		81,036		182		0.90	%		86,692		179		0.83	%
Checking accounts		27,710		3		0.04	%		26,705		3		0.04	%
Advances and borrowed funds		1,122		7		2.50	%		1,137		5		1.76	%
Total interest-bearing liabilities		165,498		212		0.51	%		169,204		207		0.49	%
Non-interest-bearing liabilities		14,776							13,904
Total liabilities		180,274							183,108
Equity		52,200							31,052
Total liabilities and equity		232,474							214,160
Net interest income			$	2,038						$	1,813
Net interest rate spread (3)						3.71	%						3.64	%
Net interest margin (4)						3.82	%						3.71	%
Ratio of average interest-earning assets to average interest-bearing liabilities						129.02	%						115.61	%

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

The following table summarizes the changes in net interest income due to rate and volume for the three months ended March 31, 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 March 31,
	2017 Compared to 2016
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	287		$	(38	)	$	249
Securities, net		(22	)		1			(21	)
Non-marketable equity securities		(2	)		2			-
Interest-bearing deposits		(4	)		6			2
Total interest-earning assets	$	259		$	(72	)	$	230
Interest expense on
Money Market accounts	$	-		$	-		$	-
Passbook accounts		-			-			-
Certificates of Deposit accounts		(12	)		15			3
Checking		-			-			-
Advances and borrowed funds		-			2			2
Total interest-bearing liabilities		(12	)		17			5
Change in net interest income	$	271		$	(46	)	$	225

Net interest income increased by $0.2 million, or 12.4%, to $2.0 million for the three months ended March 31, 2017, from $1.8 million for the three months ended March 31, 2016. Interest and dividend income increased $0.2 million, or 11.4%, due to an increase in the average balances of interest-earning assets of $17.9 million and an increase in the yield on interest-earning assets from 4.13% to 4.22% due to changes in the mix of the portfolio. Also contributing to the increase was approximately $86,000 of interest income from changes in cash flow and collections on two impaired loans acquired in the Merger that were previously thought to be uncollectible, but paid-off in full during the first quarter of 2017. The increase in net interest income was partially off-set by a $5,000, or 2.4%, increase in interest expense. The average cost of funds increased two basis points, from 0.49% to 0.51%, or 4.1%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, due to changes in the mix of lower costing deposit products and certificates of deposit. Additionally, the average balance of interest-bearing liabilities decreased by $3.7 million, or 2.2%. The net interest margin increased during the three months ended March 31, 2017 to 3.82% compared to 3.71% for the three months ended March 31, 2016, primarily as a result of the increase in average balances of interest-earning assets and the decrease in the balances of interest-bearing liabilities.

Provision for Loan Losses. Management recorded a loan loss provision of $90,000 and $120,000 for the three-month periods ended March 31, 2017 and 2016, respectively. The decrease was the result of lower general reserves at March 31, 2017 when compared to March 31, 2016, due to improvements in the historical loss levels and qualitative factors during 2017, as compared to 2016, which lowered many of the loss factors applied to the loan categories in the general reserve. These favorable variances were partially off-set by increases in the balances of most loan categories and higher specific reserves. 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 6.9% in LaSalle County, 6.8% in Grundy County, and 5.5% for the State of Illinois, versus the national level of 4.9%. Based on a review of the loans that were in the loan portfolio at March 31, 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 March 31, 2017 and 2016.

	Three months ended
	March 31,
	2017		2016		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans	$	107	$	39	$	68			174.36	%
Gain on sale of foreclosed real estate		24		65		(41	)		(63.08	)
Gain on sale of repossessed assets		3		1		2			200.00
Loan origination and servicing income		101		59		42			71.19
Origination of mortgage servicing rights, net of amortization		15		2		13			650.00
Customer service fees		116		98		18			18.37
Income on bank owned life insurance		12		12		-			-
Other		28		25		3			12.00
Total other income	$	406	$	301	$	105			34.88	%

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 an increases in loan originations and loans originated for sale into the secondary market. The increases were partially offset by a decrease in the gain on sale of OREO due to the sale of fewer OREO properties during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

Other Expense. The following table summarizes other expense for the three months ended March 31, 2017 and 2016.

	Three months ended
	March 31,
	2017			2016			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	994		$	828		$	166			20.05	%
Directors fees		41			41			-			-
Occupancy		164			152			12			7.89
Deposit insurance premium		14			44			(30	)		(68.18	)
Legal and professional services		96			87			9			10.34
Data processing		139			135			4			2.96
Loan expense		118			59			59			100.00
Valuation adjustments and expenses on foreclosed real estate		5			36			(31	)		(86.11	)
Other		245			238			7			2.94
Total other expenses	$	1,816		$	1,620		$	196			12.10	%

Efficiency ratio (1)		74.30	%		76.63	%

(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 and $0.1 million for the three months ended March 31, 2017 and 2016, respectively. For the three months ended March 31, 2017, the Company had net income of $0.4 million with approximately $0.1 million in tax exempt income, compared to net income of $0.3 million with approximately $0.1 million in tax exempt income for the three months ended March 31, 2016.

The Company’s income tax differed from the maximum statutory federal rate of 35% for the three months ended March 31, 2017 and 2016, as follows:

	Three Months Ended
	March 31,
	2017			2016

Expected income taxes	$	188,501		$	130,872
Income tax effect of:
State taxes, net of federal tax benefit		27,747			19,526
Tax exempt interest		(43,363	)		(44,862	)
Income taxed at lower rates		(5,386	)		(3,739	)
Other		13,774			13,218
	$	181,273		$	115,015

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 2017, the Bank had outstanding commitments to originate $6.0 million in loans, unfunded lines of credit of $11.5 million, and $3.5 million in commitments to fund construction loans. In addition, as of March 31, 2017, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $33.9 million. Based on prior experience, management believes that a majority of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago (“FHLBC”) advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. As of March 31, 2017, the Bank had $67.8 million of available credit from the FHLBC and there were $1.1 million in FHLBC advances outstanding. In addition, as of March 31, 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 March 31, 2017, the Company had cash and cash equivalents of $9.7 million.

Capital. The Bank is required to maintain regulatory capital sufficient to meet Total capital, Tier 1 capital, Common equity Tier 1 capital, and Tier 1 Leverage ratios of at least 8.0%, 6.0%, 4.5% and 4.0%, respectively. The Bank exceeded each of its minimum capital requirements for capital adequacy purposes and was considered “well capitalized” within the meaning of federal regulatory requirements with ratios at March 31, 2017 of 26.28%, 25.03%, 25.03%, and 17.41%, 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 three months ended March 31, 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 March 31, 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)

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

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

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

32.1		Section 1350 Certifications

101.0		The following materials from the Ottawa Bancorp, Inc. Quarterly Report on Form 10-Q for the three months ended March 31, 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: May 10, 2017	/s/ Jon L. Kranov
	Jon L. Kranov President and Chief Executive Officer (Principal Executive Officer)

Date: May 10, 2017	/s/ Marc N. Kingry
	Marc N. Kingry Chief Financial Officer (Principal Financial Officer)