Ottawa Bancorp Inc - Quarter Report: 2018 September (Form 10-Q)

ottb20180930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to_______

Commission File Number 001-37914

OTTAWA BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(815) 433-2525

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒	Smaller Reporting Company ☒
	Emerging Growth Company ☐

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

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

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

Class	Outstanding as of November 14, 2018
Common Stock, $0.01 par value	3,385,057

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended September 30, 2018

INDEX

		Page
		Number

PART I – FINANCIAL INFORMATION

Item 1	Financial Statements		3
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3	Quantitative and Qualitative Disclosures about Market Risk		40
Item 4	Controls and Procedures		40


PART II – OTHER INFORMATION

Item 1	Legal Proceedings		40
Item 1A	Risk Factors		40
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3	Defaults upon Senior Securities		41
Item 4	Mine Safety Disclosures		41
Item 5	Other Information		41
Item 6	Exhibits		42


SIGNATURES			43

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

September 30, 2018 and December 31, 2017

(Unaudited)

	September 30,			December 31,
	2018			2017
Assets
Cash and due from banks	$	3,705,861		$	2,426,924
Interest bearing deposits		7,039,083			1,328,893
Total cash and cash equivalents		10,744,944			3,755,817
Time deposits		250,000			250,000
Federal funds sold		198,000			939,000
Securities available for sale		24,591,561			26,045,675
Non-marketable equity securities		835,368			918,387
Loans, net of allowance for loan losses of $2,594,433 and $2,472,446 at September 30, 2018 and December 31, 2017, respectively		224,089,736			207,035,091
Loans held for sale		543,000			499,375
Premises and equipment, net		6,632,149			6,670,088
Accrued interest receivable		842,124			794,449
Foreclosed real estate		-			84,100
Deferred tax assets		2,092,546			1,870,490
Cash surrender value of life insurance		2,329,421			2,293,800
Goodwill		649,869			649,869
Core deposit intangible		242,500			286,000
Other assets		3,695,089			3,307,734
Total assets	$	277,736,307		$	255,399,875
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	11,911,007		$	11,562,801
Interest bearing		196,951,697			171,211,823
Total deposits		208,862,704			182,774,624
Accrued interest payable		8,693			661
FHLB advances		12,097,677			15,105,287
Other liabilities		4,120,214			4,416,368
Total liabilities		225,089,288			202,296,940
Stockholders' Equity
Common stock, $.01 par value, 12,000,000 shares authorized; 3,383,160 and 3,451,802 shares issued at September 30, 2018 and December 31, 2017, respectively		33,832			34,518
Additional paid-in-capital		35,923,153			36,949,508
Retained earnings		18,450,924			17,720,962
Unallocated ESOP shares		(1,621,120	)		(1,754,632	)
Accumulated other comprehensive (loss) income		(139,770	)		152,579
Total stockholders' equity		52,647,019			53,102,935
Total liabilities and stockholders' equity	$	277,736,307		$	255,399,875

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Interest and dividend income:
Interest and fees on loans	$	2,596,019	$	2,204,397	$	7,541,652	$	6,291,581
Securities:
Residential mortgage-backed and related securities		67,156		98,541		205,975		360,557
State and municipal securities		102,269		116,431		305,920		373,999
Dividends on non-marketable equity securities		5,079		1,812		14,473		5,154
Interest-bearing deposits		30,516		5,357		75,864		21,403
Total interest and dividend income		2,801,039		2,426,538		8,143,884		7,052,694
Interest expense:
Deposits		454,352		247,897		1,187,481		676,374
Borrowings		46,584		20,564		143,129		35,624
Total interest expense		500,936		268,461		1,330,610		711,998
Net interest income		2,300,103		2,158,077		6,813,274		6,340,696
Provision for loan losses		65,000		210,000		377,500		460,000
Net interest income after provision for loan losses		2,235,103		1,948,077		6,435,774		5,880,696
Other income:
Gain on sale of securities		-		77,028		-		98,230
Gain on sale of loans		155,656		205,375		464,527		522,360
Gain on sale of foreclosed real estate		59,511		5,182		101,546		29,242
Gain on sale of repossessed assets		8,911		1,123		13,094		15,419
Loan origination and servicing income		244,351		159,078		615,369		462,787
Origination of mortgage servicing rights, net of amortization		4,124		21,293		26,977		55,405
Customer service fees		135,710		123,288		384,717		360,359
Increase in cash surrender value of life insurance		11,986		11,999		35,621		36,182
Other		23,973		28,940		72,607		89,044
Total other income		644,222		633,306		1,714,458		1,669,028
Other expenses:
Salaries and employee benefits		1,139,592		1,047,416		3,255,532		3,124,939
Directors fees		43,000		40,800		137,750		122,400
Occupancy		159,892		158,716		494,353		484,496
Deposit insurance premium		17,107		15,437		49,933		41,648
Legal and professional services		89,623		92,007		279,273		282,129
Data processing		169,316		144,137		485,210		435,244
Loss on sale of securities		-		47,603		-		55,169
Loan expense		189,814		152,645		552,483		403,088
Valuation adjustments and expenses on foreclosed real estate		4,465		2,662		25,265		10,184
Loss on sale of OREO		-		336		2,438		336
Loss on sale of repossessed assets		3,745		-		8,166		274
Other		280,830		269,710		957,569		807,889
Total other expenses		2,097,384		1,971,469		6,247,972		5,767,796
Income before income tax expense		781,941		609,914		1,902,260		1,781,928
Income tax expense		191,798		155,163		476,662		504,332
Net income	$	590,143	$	454,751	$	1,425,598	$	1,277,596
Basic earnings per share	$	0.18	$	0.14	$	0.44	$	0.39
Diluted earnings per share	$	0.18	$	0.14	$	0.44	$	0.39
Dividends per share	$	0.05	$	0.04	$	0.215	$	0.12

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net income	$	590,143		$	454,751		$	1,425,598		$	1,277,596
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period		(98,287	)		(62,663	)		(408,908	)		354,599
Reclassification adjustment for (gains) included in net income		-			(29,425	)		-			(43,061	)
Other comprehensive (loss) income, before tax		(98,287	)		(92,088	)		(408,908	)		311,538
Income tax (benefit) expense related to items of other comprehensive (loss) income		(28,017	)		(31,109	)		(116,559	)		126,770
Other comprehensive (loss) income, net of tax		(70,270	)		(60,979	)		(292,349	)		184,768
Comprehensive income	$	519,873		$	393,772		$	1,133,249		$	1,462,364

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

													Accumulated
				Additional						Unallocated			Other
	Common			Paid-in			Retained			ESOP			Comprehensive
	Stock			Capital			Earnings			Shares			Income (Loss)			Total
Balance, December 31, 2016	$	34,674		$	37,117,311		$	17,455,472		$	(1,932,648	)	$	69,224		$	52,744,033
Net income		-			-			1,277,596			-			-			1,277,596
Other comprehensive income		-			-			-			-			184,768			184,768
Allocation 14,085 of ESOP shares		-			56,765			-			133,512			-			190,277
RRP options exercised		20			7,120			-			-			-			7,140
Cash dividends paid, $0.08 per share		-			-			(392,265	)		-			-			(392,625	)
Balance, September 30, 2017	$	34,694		$	37,181,196		$	18,340,443		$	(1,799,136	)	$	253,992		$	54,011,189

Balance, December 31, 2017	$	34,518		$	36,949,508		$	17,720,962		$	(1,754,632	)	$	152,579		$	53,102,935
Net income		-			-			1,425,598			-			-			1,425,598
Other comprehensive income		-			-			-			-			(292,349	)		(292,349	)
Allocation 9,390 of ESOP shares		-			61,945			-			133,512			-			195,457
RRP options exercised		140			64,995			-			-			-			65,135
Cash dividends paid, $0.165 per share		-			-			(695,636	)		-			-			(695,636	)
Repurchase 82,635 shares for retirement		(826	)		(1,153,295	)		-			-			-			(1,154,121	)
Balance, September 30, 2018	$	33,832		$	35,923,153		$	18,450,924		$	(1,621,120	)	$	(139,770	)	$	52,647,019

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	2018			2017
Cash Flows from Operating Activities
Net income	$	1,425,598		$	1,277,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		182,464			184,080
Provision for loan losses		377,500			460,000
Provision for deferred income taxes		(105,497	)		(38,676	)
Net amortization of premiums and discounts on securities		172,302			382,730
Gain on sale of securities, net		-			(43,061	)
Origination of mortgage loans held for sale		(15,368,636	)		(16,894,581	)
Proceeds from sale of mortgage loans held for sale		15,789,538			17,062,914
Gain on sale of loans, net		(464,527	)		(522,360	)
Origination of mortgage servicing rights, net of amortization		(25,876	)		(55,405	)
Gain on sale of foreclosed real estate, net		(99,108	)		(29,242	)
Loss (gain) on sale of repossessed assets, net		(4,928	)		(15,145	)
ESOP compensation expense		195,457			190,277
Amortization of core deposit intangible		43,500			55,182
Amortization (accretion) of fair value adjustments on acquired:
Loans		22,366			184,879
Certificates of deposit		-			(14,000	)
Federal Home Loan Bank Advances		3,922			5,209
Increase in cash surrender value of life insurance		(35,621	)		(36,182	)
Change in assets and liabilities:
Increase in accrued interest receivable		(47,675	)		3,865
Increase in other assets		(348,479	)		(553,594	)
Increase in accrued interest payable and other liabilities		(288,122	)		(33,790	)
Net cash provided by operating activities		1,424,178			1,570,696
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(2,259,494	)		(1,308,450	)
Sales, calls, maturities and paydowns		3,132,398			15,664,727
Sale of non-marketable equity securities		83,019			1,100
Net increase in loans		(17,647,718	)		(31,066,772	)
Net decrease (increase) in federal funds sold		741,000			(2,015,000	)
Proceeds from sale of foreclosed real estate		247,408			193,075
Proceeds from sale of repossessed assets		120,935			57,145
Purchase of premises and equipment		(144,525	)		(65,174	)
Net cash used in investing activities		(15,726,977	)		(18,539,349	)
Cash Flows from Financing Activities
Net increase in deposits		26,088,080			6,357,136
Proceeds from Federal Home Loan Bank advances		9,750,000			8,000,000
Principal reduction of Federal Home Loan Bank advances		(12,761,532	)		(11,363	)
Proceeds from stock options exercised		65,135			7,140
Shares repurchased and cancelled		(1,154,121	)		-
Dividends paid		(695,636	)		(392,625	)
Net cash provided by financing activities		21,291,926			13,960,288
Net increase (decrease) in cash and cash equivalents		6,989,127			(3,008,365	)
Cash and cash equivalents:
Beginning of period		3,755,817			5,946,649
End of period	$	10,744,944		$	2,938,284
(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	2018		2017
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	1,179,449	$	672,905
Interest paid on borrowings		143,129		35,624
Income taxes paid, net of refunds received		359,077		515,444
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		64,200		218,256
Other assets acquired in settlement of loans		129,007		39,500
Sale of foreclosed real estate through loan origination		44,800		3,923

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, 2017. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. Some items in the prior year financial statements were reclassified to conform to the current presentation with no impact on previously reported net income.

Prior to the quarter ended June 30, 2018, the Company presented a maximum cash obligation related to ESOP shares within the temporary or mezzanine equity section of the Consolidated Balance Sheet. In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 480-10-S99–3A - Distinguishing Liabilities from Equity, any equity securities that the holders can demand cash in exchange for their securities must be classified outside of permanent equity if by their terms they can be put to the sponsor for cash.

For the year ended December 31, 2017, the Company has revised the Consolidated Statement of Shareholders’ Equity to reclassify the maximum cash obligation related to ESOP shares in the amount of $1,202,014 from temporary equity to permanent equity. Per the terms of the ESOP plan document, the put right shall not apply to the extent that the Company stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. Since the marketability of the Company’s stock was enhanced by their listing on the NASDAQ in 4th quarter 2016, the put right no longer applied as of December 31, 2016 and thereafter. This reclassification impacted total equity for 2017 and 2016. In addition, this change did not impact the Consolidated Statements of Income or Comprehensive Income, earnings per share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor requires amendment of, any previously filed annual or quarterly consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 3 – USE OF ESTIMATES

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

At September 30, 2018, there were no material changes in the Company’s significant accounting policies from those disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 28, 2018.

NOTE 4 – CRITICAL ACCOUNTING POLICIES

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

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

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

NOTE 5 – EARNINGS PER SHARE

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net income available to common stockholders	$	590,143		$	454,751		$	1,425,598		$	1,277,596
Basic potential common shares:
Weighted average shares outstanding		3,393,111			3,468,228			3,409,674			3,467,680
Weighted average unallocated ESOP shares		(166,430	)		(185,243	)		(171,113	)		(189,903	)
Basic weighted average shares outstanding		3,226,681			3,282,985			3,238,561			3,277,777
Dilutive potential common shares:
Weighted average options outstanding		8,606			14,726			8,638			14,419
Dilutive weighted average shares outstanding		3,235,287			3,297,711			3,247,199			3,292,196
Basic earnings per share	$	0.18		$	0.14		$	0.44		$	0.39
Diluted earnings per share	$	0.18		$	0.14		$	0.44		$	0.39

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 6 – EMPLOYEE STOCK OWNERSHIP PLAN

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

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

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

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

	September 30,			December 31,
	2018			2017
Shares allocated		118,356			104,272
Shares withdrawn from the plan		(21,260	)		(21,030	)
Unallocated shares		163,334			177,418
Total ESOP shares		260,430			260,660
Fair value of unallocated shares	$	2,262,176		$	2,561,916

NOTE 7 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2018:
Securities Available for Sale
State and municipal securities	$	13,489,528	$	76,744	$	58,591	$	13,507,681
Residential mortgage-backed securities		11,297,528		44,328		257,976		11,083,880
	$	24,787,056	$	121,072	$	316,567	$	24,591,561
December 31, 2017:
Securities Available for Sale
State and municipal securities	$	13,756,573	$	221,320	$	7,460	$	13,970,433
Residential mortgage-backed securities		12,075,689		121,840		122,287		12,075,242
	$	25,832,262	$	343,160	$	129,747	$	26,045,675

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The amortized cost and fair value at September 30, 2018, by contractual maturity, are shown below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without penalties. Therefore, stated maturities of residential mortgage-backed securities are not disclosed.

	Securities Available for Sale
	Amortized		Fair
	Cost		Value

Due in three months or less	$	53,143	$	53,105
Due after three months through one year		654,100		660,097
Due after one year through five years		5,117,303		5,132,712
Due after five years through ten years		3,984,363		3,991,949
Due after ten years		3,680,619		3,669,818
Residential mortgage-backed securities		11,297,528		11,083,880
	$	24,787,056	$	24,591,561

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at September 30, 2018 and December 31, 2017:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2018
Securities Available for Sale
State and municipal securities	$	6,586,417	$	58,591	$	-	$	-	$	6,586,417	$	58,591
Residential mortgage-backed securities		3,548,309		62,293		5,513,265		195,683		9,061,574		257,976
	$	10,134,726	$	120,884	$	5,513,265	$	195,683	$	15,647,991	$	316,567

December 31, 2017
Securities Available for Sale
State and municipal securities	$	1,435,888	$	7,460	$	-	$	-	$	1,435,888	$	7,460
Residential mortgage-backed securities		2,035,206		12,564		6,209,019		109,723		8,244,225		122,287
	$	3,471,094	$	20,024	$	6,209,019	$	109,723	$	9,680,113	$	129,747

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

At September 30, 2018, 55 securities had unrealized losses with an aggregate depreciation of 1.98% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at September 30, 2018 due to the following:

●

Decline in value is attributable to interest rates.

●

The value did not decline due to credit quality.

●

The Company does not intend to sell these securities.

●

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

There were no proceeds from the sales of securities for the three months ended September 30, 2018 and proceeds of $6.6 million for the three months ended September 30, 2017. The sales during the three months ended September 30, 2017 resulted in gross realized gains of $77,028 and gross realized losses of $47,603, for net realized gains of $29,425. The tax provision applicable to the net realized gains amounted to $0 and $11,422 respectively, for the three months ended September 30, 2018 and 2017.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

There were no proceeds from the sales of securities for the nine months ended September 30, 2018 and proceeds of $11.6 million for the nine months ended September 30, 2017. The sales during the nine months ended September 30, 2017 resulted in gross realized gains of $98,230 and gross realized losses of $55,169, for net realized gains of $43,061. The tax provision applicable to the net realized gains amounted to $0 and $16,715 respectively, for the nine months ended September 30, 2018 and 2017.

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	September 30,			December 31,
	2018			2017
Mortgage loans:
One-to-four family residential loans	$	132,990,216		$	124,118,335
Multi-family residential loans		6,347,040			5,664,524
Total mortgage loans		139,337,256			129,782,859

Other loans:
Non-residential real estate loans		34,715,050			32,133,094
Commercial loans		16,556,093			20,759,262
Consumer direct		11,525,881			6,281,712
Purchased auto		24,549,889			20,550,610
Total other loans		87,346,913			79,724,678
Gross loans		226,684,169			209,507,537
Less: Allowance for loan losses		(2,594,433	)		(2,472,446	)
Loans, net	$	224,089,736		$	207,035,091

Loans acquired in the Merger with deteriorated credit quality and accounted for under FASB ASC Topic 310-30 as of the acquisition date, which was December 31, 2014, had a contractual balance due of approximately $3,194,000 and an estimated fair value of approximately $1,324,000. The estimate of the contractual cash flows not expected to be collected due to credit quality was approximately $1,870,000 which consists of an accretable discount of $(362,000) and non-accretable discount of $(1,508,000).

The following table reflects activity for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Balance, beginning of period	$	131,233		$	255,747		$	144,528		$	461,334
Payment activity		(6,593	)		(131,108	)		(28,774	)		(482,073	)
Accretion into interest income		213			24,931			9,099			170,309
	$	124,853		$	149,570		$	124,853		$	149,570

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $460,000 and $468,000 as of September 30, 2018 and December 31, 2017, respectively.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects activity in the accretable yield for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Balance, beginning of period	$	706		$	35,668		$	9,592		$	82,869
Net reclassification from non-accretable yield		-			3,292			-			101,469
Accretion into interest income		(213	)		(24,931	)		(9,099	)		(170,309	)
	$	493		$	14,029		$	493		$	14,029

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Purchased auto loans	$	1,309,729	$	4,979,707	$	10,012,800	$	10,035,353

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
One-to-four family	$	6,461		$	(84,240	)	$	(202,491	)	$	(251,231	)
Multi-family		3,972			3,972			11,915			12,148
Non-residential		-			(1,726	)		-			(53,686	)
Consumer direct		2,948			(1,756	)		6,766			(2,503	)
Purchased auto		(29,934	)		(591	)		(71,703	)		(45,932	)
Net (charge-offs)/recoveries	$	(16,553	)	$	(84,341	)	$	(255,513	)	$	(341,204	)

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 and 2017:

	One-to-
	four		Multi-			Non-					Consumer		Purchased
September 30, 2018	family		family			residential		Commercial			direct		Auto			Total
Balance at beginning of period	$	1,643,589	$	24,636		$	326,934	$	133,812		$	57,812	$	359,203		$	2,545,986
Provision charged to income		34,878		(3,190	)		21,694		(1,209	)		2,706		10,121			65,000
Loans charged off		-		-			-		-			-		(38,764	)		(38,764	)
Recoveries of loans previously charged off		6,461		3,972			-		-			2,948		8,830			22,211
Balance at end of period	$	1,684,928	$	25,418		$	348,628	$	132,603		$	63,466	$	339,390		$	2,594,433

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 and 2017:

	One-to-
	four			Multi-			Non-						Consumer			Purchased
September 30, 2018	family			family			residential			Commercial			direct			Auto			Total
Balance at beginning of period	$	1,477,419		$	21,970		$	371,093		$	153,596		$	140,269		$	308,099		$	2,472,446
Provision charged to income		410,000			(8,467	)		(22,465	)		(20,993	)		(83,569	)		102,994			377,500
Loans charged off		(217,210	)		-			-			-			-			(90,250	)		(307,460	)
Recoveries of loans previously charged off		14,719			11,915			-			-			6,766			18,547			51,947
Balance at end of period	$	1,684,928		$	25,418		$	348,628		$	132,603		$	63,466		$	339,390		$	2,594,433

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of September 30, 2018 and December 31, 2017:

	One-to-
	four		Multi-		Non-				Consumer		Purchased
September 30, 2018	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for impairment	$	991,939	$	-	$	324,104	$	-	$	-	$	14,279	$	1,330,322
Loans acquired with deteriorated credit quality		124,853		-		-		-		-		-		124,853
Loans collectively evaluated for impairment		131,873,424		6,347,040		34,390,946		16,556,093		11,525,881		24,535,610		225,228,994
Balance at end of period	$	132,990,216	$	6,347,040	$	34,715,050	$	16,556,093	$	11,525,881	$	24,549,889	$	226,684,169

Period-end amount allocated to:
Loans individually evaluated for impairment	$	130,541	$	-	$	49,386	$	-	$	-	$	7,140	$	187,067
Loans acquired with deteriorated credit quality		8,254		-		-		-		-		-		8,254
Loans collectively evaluated for impairment		1,546,133		25,418		299,242		132,603		63,466		332,250		2,399,112
Balance at end of period	$	1,684,928	$	25,418	$	348,628	$	132,603	$	63,466	$	339,390	$	2,594,433

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	One-to-
	four		Multi-		Non-				Consumer		Purchased
December 31, 2017	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for impairment	$	986,321	$	-	$	355,203	$	10,454	$	-	$	985	$	1,352,963
Loans acquired with deteriorated credit quality		144,528		-		-		-		-		-		144,528
Loans collectively evaluated for impairment		122,987,486		5,664,524		31,777,891		20,748,808		6,281,712		20,549,625		208,010,046
Balance at end of period	$	124,118,335	$	5,664,524	$	32,133,094	$	20,759,262	$	6,281,712	$	20,550,610	$	209,507,537

Period-end amount allocated to:
Loans individually evaluated for impairment	$	78,820	$	-	$	110,055	$	-	$	-	$	493	$	189,368
Loans acquired with deteriorated credit quality		40,408		-		-		-		-		-		40,408
Loans collectively evaluated for impairment		1,358,191		21,970		261,038		153,596		140,269		307,606		2,242,670
Balance at end of period	$	1,477,419	$	21,970	$	371,093	$	153,596	$	140,269	$	308,099	$	2,472,446

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

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 September 30, 2018 and December 31, 2017:

September 30, 2018	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	1,116,791	$	341,951	$	774,841	$	1,116,792	$	138,795	$	1,084,645
Multi-family		-		-		-		-		-		-
Non-residential		324,104		-		324,104		324,104		49,386		338,325
Commercial		-		-		-		-		-		1,709
Consumer direct		-		-		-		-		-		-
Purchased auto		14,279		-		14,279		14,279		7,140		4,437
	$	1,455,174	$	341,951	$	1,113,224	$	1,455,175	$	195,321	$	1,429,116

December 31, 2017	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	1,130,849	$	746,579	$	384,270	$	1,130,849	$	119,228	$	1,795,888
Multi-family		-		-		-		-		-		-
Non-residential		355,203		-		355,203		355,203		110,055		749,271
Commercial		10,454		10,454		-		10,454		-		5,341
Consumer direct		-		-		-		-		-		-
Purchased auto		985		-		985		985		493		11,205
	$	1,497,491	$	757,033	$	740,458	$	1,497,491	$	229,776	$	2,561,705

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

For the three and nine months ended September 30, 2018, the Company recognized no cash basis interest income on impaired loans. For the three and nine months ended September 30, 2017, the Company recognized approximately $3,000 and $6,000 in cash basis interest income on impaired loans.

At September 30, 2018 there were 18 impaired loans totaling approximately $1.5 million, compared to 19 impaired loans totaling approximately $1.5 million at December 31, 2017. The change in impaired loans was a result of writing down and moving three impaired loans totaling approximately $226,000 to OREO/repossessed assets, upgrading three loans of approximately $388,000 due to improved performance, pay-offs of approximately $94,000, and payments of approximately $96,000, offset by the addition of eight loans totaling approximately $761,000 to the impaired loan list.

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

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

Impaired loans at September 30, 2018 included one loan of $73,000 whose term had been modified in troubled debt restructurings, compared to four loans of $473,000 at December 31, 2017. The amount of TDR loans included in impaired loans decreased approximately $400,000 as a result of upgrading three loans of approximately $388,000 due to improved performance and payments of approximately $12,000. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

There were no new loans classified as TDRs during the three or nine months ended September 30, 2018 and 2017.

There were no TDR loans that were restructured during the twelve months prior to September 30, 2018 and 2017 that had payment defaults (i.e., 60 days or more past due following a modification) during the three or nine months ended September 30, 2018 and 2017.

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

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as of September 30, 2018 and December 31, 2017:

September 30, 2018	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,116,792	$	-
Multi-family		-		-
Non-residential		324,104		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		14,279		-
	$	1,455,174	$	-

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

The following table presents the aging of the recorded investment in loans, by class of loans, as of September 30, 2018 and December 31, 2017:

September 30, 2018	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	$	582,899	$	56,871	$	753,897	$	1,393,667	$	131,596,549	$	132,990,216
Multi-family		-		-		-		-		6,347,040		6,347,040
Non-residential		129,464		197,688		-		327,152		34,387,898		34,715,050
Commercial		-		-		-		-		16,556,093		16,556,093
Consumer direct		593		-		-		593		11,525,288		11,525,881
Purchased auto		51,907		-		14,279		66,186		24,483,703		24,549,889
	$	764,863	$	254,559	$	768,176	$	1,787,598	$	224,896,571	$	226,684,169

December 31, 2017	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	860,502	$	985,661	$	99,601	$	1,945,764	$	122,172,571	$	124,118,335
Multi-family		-		-		-		-		5,664,524		5,664,524
Non-residential		478,930		394,634		-		873,564		31,259,530		32,133,094
Commercial		-		10,454		-		10,454		20,748,808		20,759,262
Consumer direct		-		-		-		-		6,281,712		6,281,712
Purchased auto		30,352		-		985		31,337		20,519,273		20,550,610
	$	1,369,784	$	1,390,749	$	100,586	$	2,861,119	$	206,646,418	$	209,507,537

Credit Quality Indicators:

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

For residential real estate loans, multi-family, consumer direct and purchased auto loans, the Company’s credit quality indicator is 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.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

At September 30, 2018 and December 31, 2017, the risk category of loans by class is as follows:

September 30, 2018	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	-	$	339,081	$	1,116,792	$	-	$	131,534,343	$	132,990,216
Multi-family		-		-		-		-		6,347,040		6,347,040
Non-residential		34,261,482		129,464		324,104		-		-		34,715,050
Commercial		16,556,093		-		-		-		-		16,556,093
Consumer direct		-		-		-		-		11,525,881		11,525,881
Purchased auto		-		-		14,279		-		24,535,610		24,549,889
Total	$	50,817,575	$	468,545	$	1,455,175	$	-	$	173,942,874	$	226,684,169

December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	-	$	529,738	$	1,130,849	$	-	$	122,457,748	$	124,118,335
Multi-family		-		-		-		-		5,664,524		5,664,524
Non-residential		31,531,886		246,005		355,203		-		-		32,133,094
Commercial		20,748,808		-		10,454		-		-		20,759,262
Consumer direct		-		-		-		-		6,281,712		6,281,712
Purchased auto		-		-		985		-		20,549,625		20,550,610
Total	$	52,280,694	$	775,743	$	1,497,491	$	-	$	154,953,609	$	209,507,537

At September 30, 2018, the Company held no foreclosed residential real estate property, compared to $84,100 at December 31, 2017. In addition, the Company also held $276,000 and $23,000 in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at September 30, 2018 and December 31, 2017, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was $0 for both of the nine-month periods ended September 30, 2018 and 2017, respectively. In accordance with FASB ASC 718, Compensation-Stock Compensation, compensation expense is recognized on a straight-line basis over the grantees’ vesting period or to the grantees’ retirement eligibility date, if earlier. During the nine months ended September 30, 2018 and 2017, the Company did not grant additional options or shares under the Management Recognition Plan (MRP).

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

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

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

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

●

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

●

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

●

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

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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

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

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (820). This ASU changes the fair value measurement disclosure requirements of ASC 820. The amendments are part of a broad disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting to improve the effectiveness of ASC 820’s disclosure requirements for level three investments. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years beginning after December 15, 2019. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 11 – BORROWINGS

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

	September 30,		December 31,
	2018		2017
Open lines of credit at 1.46%	$	-	$	4,000,000
Matured 02/15/2018 at 1.27%, fixed		-		1,000,000
Matured 03/30/2018 at 1.72%, fixed		-		499,357
Matured 05/15/2018 at 1.34%, fixed		-		2,000,000
Matured 09/25/2018 at 1.46%, fixed		-		2,000,000
Matures 03/15/2019 at 2.42%, fixed		1,500,000		-
Matures 04/01/2019 at 2.00%, fixed		498,727		497,089
Matures 08/30/2019 at 1.56%, fixed		3,000,000		3,000,000
Matures 12/16/2019 at 2.08%, fixed		2,000,000		2,000,000
Matures 03/22/2021 at 3.03%, fixed		1,000,000		-
Matures 09/21/2021 at 3.07%, fixed		1,000,000		-
Matures 03/21/2022 at 3.09%, fixed		1,000,000		-
Matures 09/21/2022 at 3.11%, fixed		1,000,000		-
Matures 10/03/2022 at 1.48%, fixed		98,950		108,841
Matures 03/21/2023 at 3.15%, fixed		500,000		-
Matures 09/21/2023 at 3.18%, fixed		500,000		-
	$	12,097,677	$	15,105,287

NOTE 12 – FAIR VALUE MEASUREMENT AND DISCLOSURE

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

Basis of Fair Value Measurement:

•

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

•

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

•

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

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

Securities Available for Sale

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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Foreclosed Assets

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

Impaired Loans

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

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2018 or the year ended December 31, 2017. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfers between levels.

The tables below present the recorded amounts of assets measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.

							Total
September 30, 2018	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	13,507,681	$	-	$	13,507,681
Residential mortgage-backed securities available for sale		-		11,083,880		-		11,083,880
	$	-	$	24,591,561	$	-	$	24,591,561

							Total
December 31, 2017	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	13,970,433	$	-	$	13,970,433
Residential mortgage-backed securities available for sale		-		12,075,242		-		12,075,242
	$	-	$	26,045,675	$	-	$	26,045,675

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at September 30, 2018 and December 31, 2017.

							Total
September 30, 2018	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	12,963	$	12,963
Impaired loans, net		-		-		917,902		917,902

							Total
December 31, 2017	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	84,100	$	84,100
Impaired loans, net		-		-		510,682		510,682

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

September 30, 2018

Foreclosed assets

12,963

Appraisal of collateral

Appraisal adjustments

-50%

Impaired loans, net

818,062

Appraisal of collateral

Appraisal adjustments

-19.0%

-68.68%

Impaired loans, net

99,840

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

December 31, 2017

Foreclosed assets

84,100

Appraisal of collateral

Appraisal adjustments

-42%

Impaired loans, net

415,567

Appraisal of collateral

Appraisal adjustments

-50%

-61.5%

Impaired loans, net

95,115

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of September 30, 2018 and December 31, 2017, are as follows:

			Fair Value Measurements at
	Carrying		September 30, 2018 using:
	Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	10,744,944	$	10,744,944	$	-	$	-	$	10,744,944
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		198,000		198,000		-		-		198,000
Securities		25,426,929		-		24,591,561		835,368		25,426,929
Net loans		224,089,736		-		-		221,309,547		221,309,547
Loans held for sale		543,000		-		543,000		-		543,000
Accrued interest receivable		842,124		842,124		-		-		842,124
Mortgage servicing rights		446,375		-		-		446,375		446,375
Financial Liabilities:
Non-interest bearing deposits		11,911,007		11,911,007		-		-		11,911,007
Interest bearing deposits		196,951,697		-		-		197,740,480		197,740,480
Accrued interest payable		8,693		8,693		-		-		8,693
FHLB advances		12,097,697		-		12,061,374		-		12,061,374

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	Carrying		December 31, 2017 using:
	Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	3,755,817	$	3,755,817	$	-	$	-	$	3,755,817
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		939,000		939,000		-		-		939,000
Securities		26,964,062		-		26,045,675		918,387		26,964,062
Net loans		207,035,091		-		-		208,823,729		208,823,729
Loans held for sale		499,375		-		499,375		-		499,375
Accrued interest receivable		794,449		794,449		-		-		794,449
Mortgage servicing rights		423,522		-		-		423,522		423,522
Financial Liabilities:
Non-interest bearing deposits		11,562,801		11,562,801		-		-		11,562,801
Interest bearing deposits		171,211,823		-		-		171,915,595		171,915,595
Accrued interest payable		661		661		-		-		661
FHLB advances		15,105,287		-		15,080,025		-		15,080,025

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

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

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

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

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

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using underlying collateral values, where applicable or discounted cash flows.

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

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

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

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

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. At September 30, 2018 and December 31, 2017, the fair values of the commitments are immaterial in nature.

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

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

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

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to September 30, 2018 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, our ability to realize estimated benefits (including, but not limited to, cost savings, synergies and growth) from acquired or merged entities, our ability to successfully integrate acquired or merged entities with us, legislative or regulatory changes that adversely affect our business, adverse developments or changes in the composition of our loan or investment portfolios, significant increases in competition, changes in real estate values, difficulties in identifying attractive acquisition opportunities or strategic partners to complement our Company’s approach and the products and services the Company offers, the possible dilutive effect of potential acquisitions or expansion, and our ability to raise new capital as needed and the timing, amount and type of such capital raises. The consequence of these factors, many of which could hurt our business, could include, among other things, increased loan delinquencies, an escalation in problem assets and foreclosures, a decline in demand for our products and services, a reduction in the value of certain assets held by us, an inability to meet our liquidity needs and an inability to engage in certain lines of business. These risks and uncertainties should be considered in evaluating forward-looking statements. Except to the extent required by applicable law or regulation the Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. Additionally, other risks and uncertainties are described in the Company’s Annual Report on form 10-K as filed with the Securities and Exchange Commission on March 28, 2018.

GENERAL

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

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

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

Total consolidated assets as of September 30, 2018 were $277.7 million, an increase of $22.3 million, or 8.75%, from $255.4 million at December 31, 2017. The increase was primarily due to an increase of $17.1 million in the net loan portfolio, an increase in cash and cash equivalents of $7.0 million, an increase in other assets of $0.4 million, and an increase in deferred tax assets of $0.2 million, partially off-set by decreases in securities available for sale of $1.5 million, decreases in non-marketable equity securities of $0.1 million, a decrease in federal funds sold of $0.7 million and a decrease in foreclosed real estate of $0.1 million.

Cash and cash equivalents increased $7.0 million, or 186.1%, to $10.7 million at September 30, 2018 from $3.7 million at December 31, 2017. The increase in cash and cash equivalents was primarily a result of cash provided by financing activities of $21.3 million and cash provided by operating activities of $1.4 million exceeding cash used in investing activities of $15.7 million. The net cash provided by financing activities includes increases in deposits of $26.1 million, proceeds from Federal Home Loan Bank advances of $9.75 million, and proceeds from stock options exercised of $0.1 million, partially offset by a principal reduction in Federal Home Loan Bank advances of $12.8 million, shares repurchased and cancelled of $1.2 million and dividends of $0.7 million. The cash used in investing activities included a gross increase in loans of approximately $17.7 million, purchases of premises and equipment of $0.1 million and the purchase of $2.3 million in securities available for sale, offset by available for sale security maturities and pay-downs of $3.1 million, a decrease in federal funds sold of $0.7 million, the sale of non-marketable equity securities of $0.1 million, proceeds from sale of repossessed assets of $0.1 million and proceeds from the sale of foreclosed real estate of $0.2 million.

Federal funds sold decreased $0.7 million, or 78.9%, to $0.2 million at September 30, 2018, from $0.9 million at December 31, 2017.

Securities available for sale decreased $1.5 million, or 5.6%, to $24.6 million at September 30, 2018 from $26.0 million at December 31, 2017. The decrease was due to pay-downs of $2.2 million, calls and maturities of $0.9 million and depreciation and unrealized losses totaling $0.6 million, which exceeded new securities purchases of $2.3 million.

Net loans increased by $17.1 million, or 8.2% to $224.1 million at September 30, 2018 compared to $207.0 million at December 31, 2017 primarily as a result of an $8.9 million increase in one-to-four family loans, a $4.0 million increase in purchased auto loans, a $5.2 million increase in consumer direct loans, a $2.6 million increase in non-residential real estate loans, and a $0.7 million increase in multi-family residential loans, partially off-set by a $4.2 million decrease in commercial loans.

Total deposits increased $26.1 million, or 14.3%, to $208.9 million at September 30, 2018 from $182.8 million at December 31, 2017. At September 30, 2018 checking accounts increased by $14.6 million, and certificates of deposit increased by $14.3 million as compared to December 31, 2017. Offsetting these increases, money market accounts decreased by $2.2 million, and savings accounts decreased by $0.9 million since December 31, 2017. 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 continue to rise in order to retain certificate of deposit customers, while still maintaining a healthy interest rate spread.

FHLB advances decreased $3.0 million, or 19.9% to $12.1 million at September 30, 2018 compared to $15.1 million at December 31, 2017.

Stockholders’ equity decreased approximately $0.5 million, or 0.9% to $52.6 million at September 30, 2018 from $53.1 million at December 31, 2017. The decrease reflects $1.2 million to repurchase and cancel 82,635 outstanding shares of Company common stock, $0.7 million in dividends and a decrease in other comprehensive income of $0.3 million related to a decrease in the fair value of securities available for sale. These decreases were partially off-set by net income of $1.4 million for the nine months ended September 30, 2018 and proceeds from stock options exercised and the allocation of ESOP shares totaling approximately $0.2 million.

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

The non-performing assets to total assets ratio was 0.52% at September 30, 2018 which is down from 0.62% at December 31, 2017. During the first nine months of 2018, non-performing assets decreased 17.6% to $1.4 million from $1.7 million as of December 31, 2017. The decrease in non-performing assets was primarily due to the decrease in non-accrual loans as a result of writing down and moving three impaired loans totaling approximately $226,000 to OREO/repossessed assets, upgrading three loans of approximately $388,000 due to improved performance, pay-offs of approximately $94,000, and payments of approximately $96,000, offset by the addition of eight loans totaling approximately $761,000 to the impaired loan list. Additionally, foreclosed real estate decreased approximately $84,000, while other repossessed assets increased approximately $13,000.

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

	September 30,		June 30,		March 31,		December 31,		September 30,
	2018		2018		2018		2017		2017
Non-accrual:			(In Thousands)
One-to-four family	$	1,117	$	951	$	896	$	1,214	$	1,610
Multi-family		-		-		-		-		-
Non-residential real estate		324		335		345		355		368
Commercial		-		1		3		10		13
Consumer direct		-		-		-		-		-
Purchased auto		14		-		13		1		3
Total non-accrual loans		1,455		1,287		1,257		1,580		1,994
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		1,455		1,287		1,257		1,580		1,994
Foreclosed real estate		-		85		24		84		83
Other repossessed assets		13		12		27		-		-
Total nonperforming assets	$	1,468	$	1,384	$	1,308	$	1,664	$	2,077

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

	September 30,			June 30,			March 31,			December 30,			September 30,
	2018			2018			2018			2017			2017
Allowance for loan losses as a percent of gross loans receivable		1.14	%		1.14	%		1.15	%		1.18	%		1.23	%
Allowance for loan losses as a percent of total nonperforming loans		178.29	%		197.82	%		204.53	%		156.46	%		118.66	%
Nonperforming loans as a percent of gross loans receivable		0.63	%		0.58	%		0.56	%		0.75	%		1.00	%
Nonperforming loans as a percent of total assets		0.51	%		0.47	%		0.47	%		0.62	%		0.81	%
Nonperforming assets as a percent of total assets		0.52	%		0.51	%		0.49	%		0.65	%		0.85	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

General. Net income for the three months ended September 30, 2018 was $0.6 million compared to net income of $0.5 million for the three months ended September 30, 2017. The increase in net income of $0.1 million, or 29.8%, was primarily attributed to an increase in net interest income after provision for loan losses of $0.2 million, partially offset by an increase in total other expenses of $0.1 million.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2018 and 2017.

	Three Months Ended
	September 30,
	2018		2017		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,596	$	2,204	$	392			17.79	%
Securities:
Residential mortgage-backed securities		67		99		(32	)		(32.32	)
State and municipal securities		102		116		(14	)		(12.07	)
Dividends on non-marketable equity securities		5		2		3			150.00
Interest-bearing deposits		31		5		26			520.00
Total interest and dividend income		2,801		2,426		375			15.46

Interest expense:
Deposits		454		248		206			83.06
Borrowings		47		20		27			135.00
Total interest expense		501		268		233			86.94
Net interest income	$	2,300	$	2,158	$	142			6.58	%

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

	Three Months Ended September 30,
	2018							2017
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	222,436	$	2,596		4.67	%	$	187,221	$	2,204		4.71	%
Securities, net (2)		24,989		169		2.71	%		35,044		215		2.45	%
Non-marketable equity securities		791		5		2.53	%		752		2		1.06	%
Interest-bearing deposits		6,333		31		1.96	%		2,589		5		0.77	%
Total interest-earning assets		254,549		2,801		4.40	%		225,606		2,426		4.30	%
Non-interest-earning assets		19,875							18,692
Total assets		274,424							244,298

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	26,407	$	19		0.29	%	$	30,312	$	21		0.28	%
Savings accounts		25,902		4		0.06	%		26,200		5		0.08	%
Certificates of Deposit accounts		101,496		381		1.50	%		82,258		218		1.06	%
Checking accounts		42,311		50		0.47	%		28,643		4		0.06	%
Advances and borrowed funds		10,097		47		1.86	%		7,558		20		1.06	%
Total interest-bearing liabilities		206,213		501		0.97	%		174,971		268		0.61	%
Non-interest-bearing liabilities		15,520							16,443
Total liabilities		221,733							191,414
Equity		52,691							52,884
Total liabilities and equity		274,424							244,298
Net interest income			$	2,300						$	2,158
Net interest rate spread (3)						3.43	%						3.69	%
Net interest margin (4)						3.61	%						3.83	%
Ratio of average interest-earning assets to average interest-bearing liabilities						123.44	%						128.94	%

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

The following table summarizes the changes in net interest income due to rate and volume for the three months ended September 30, 2018 and 2017. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

	Three Months Ended September 30,
	2018 Compared to 2017
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	412		$	(20	)	$	392
Securities, net		(68	)		22			(46	)
Non-marketable equity securities		-			3			3
Interest-bearing deposits		18			8			26
Total interest-earning assets	$	362		$	13		$	375
Interest expense on
Money Market accounts	$	(2	)	$	-		$	(2	)
Passbook accounts		-			(1	)		(1	)
Certificates of Deposit accounts		72			91			163
Checking		16			30			46
Advances and borrowed funds		13			14			27
Total interest-bearing liabilities		99			134			233
Change in net interest income	$	263		$	(121	)	$	142

Net interest income increased by $0.1 million, or 6.6%, to $2.3 million for the three months ended September 30, 2018, from $2.2 million for the three months ended September 30, 2017. Interest and dividend income increased $0.4 million, or 15.4%, primarily due to an increase in the average balances of interest-earning assets of $28.9 million. The increase in net interest income was partially off-set by an increase in interest expense as the average cost of funds increased 36 basis points to 0.97%, due to higher interest rates for the three months ended September 30, 2018. The net interest margin decreased 22 basis points, or 5.6% during the three months ended September 30, 2018 to 3.61% from 3.83% for the three months ended September 30, 2017.

Provision for Loan Losses. Management recorded a loan loss provision of approximately $0.1 million for the three-month period ended September 30, 2018 compared to $0.2 million for the three-month period ended September 30, 2017. The allowance for loan losses was $2.6 million, or 1.14% of total gross loans at September 30, 2018 compared to $2.4 million, or 1.23% of gross loans at September 30, 2017. Net charge-offs during the third quarter of 2018 were approximately $17 thousand compared to $0.1 million during the third quarter of 2017. General reserves were higher at September 30, 2018, when compared to September 30, 2017, as the balances in most loan categories increased during the twelve months ended September 30, 2018. These increases to the allowance were partially off-set by improvements in historical loss levels and augmented by changes in qualitative factors during the twelve months ended September 30, 2018, as compared to the same period ended September 30, 2017. Additionally, specific reserves as of September 30, 2018 were higher than they were as of September 30, 2017. Collateral values of real estate have stabilized and are increasing from recessionary valuation levels, but economic conditions in the local markets continue to lag national indicators, including higher levels of unemployment locally of 5.3% in LaSalle County, 4.6% in Grundy County, and 4.1% for the State of Illinois, versus the national level of 3.9%. Based on a review of the loans that were in the loan portfolio at September 30, 2018, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

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

Other Income. The following table summarizes other income for the three months ended September 30, 2018 and 2017.

	Three months ended
	September 30,
	2018		2017		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	-	$	77	$	(77	)		(100.00	%)
Gain on sale of loans		156		205		(49	)		(23.90	)
Gain on sale of foreclosed real estate		59		5		54			1,080.00
Gain on sale of repossessed assets		9		1		8			800.00
Loan origination and servicing income		244		159		85			53.46
Origination of mortgage servicing rights, net of amortization		4		21		(17	)		(80.95	)
Customer service fees		136		123		13			10.57
Increase in cash surrender value of life insurance		12		12		-			-
Other		24		30		(6	)		(20.00	)
Total other income	$	644	$	633	$	11			1.74	%

Total other income remained consistent at $0.6 million for the three months ended September 30, 2018 and September 30, 2017. There were higher revenues related to mortgage banking activity, as loan origination and servicing income increased as a result of increases in originations during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Additionally, there were higher gains on sales of foreclosed real estate during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Offsetting most of these increases, the areas that were lower during the three months ended September 30, 2018 as compared to September 30, 2017 were lower revenues for origination of mortgage servicing rights, gain on sale of securities and gain on sale of loans.

Other Expense. The following table summarizes other expense for the three months ended September 30, 2018 and 2017.

	Three months ended
	September 30,
	2018			2017			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,139		$	1,047		$	92			8.79	%
Directors fees		43			41			2			4.88
Occupancy		160			159			1			0.63
Deposit insurance premium		17			15			2			13.33
Legal and professional services		90			92			(2	)		(2.17	)
Data processing		169			144			25			17.36
Loss on sale of securities		-			48			(48	)		(100.00	)
Loan expense		190			153			37			24.18
Valuation adjustments and expenses on foreclosed real estate		4			3			1			33.33
Loss on sale of repossessed assets		4			-			4			100.00
Other		281			269			12			4.46
Total other expenses	$	2,097		$	1,971		$	126			6.39	%

Efficiency ratio (1)		71.23	%		70.62	%

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

Total other expense increased $0.1 million, or 6.4%, to $2.1 million for the three months ended September 30, 2018, as compared to $2.0 million for the three months ended September 30, 2017. The increase was primarily due to higher salaries and employee benefits which rose $0.1 million or 8.8%. Loan expense is slightly higher as is other expenses but these increases were offset by there being no loss on sale of securities in the 2018 period whereas there were losses on sales of securities for the three months ended September 30, 2017. The efficiency ratio increased due to increased total other expenses for the 2018 period.

Income Taxes. The Company recorded income tax expense of $0.2 million for the three-month period ended September 30, 2018, as compared to approximately $0.2 million for the three-month period ended September 30, 2017.

The Company’s income tax differed from the maximum statutory federal rate of 21% and 35% for the three months ended September 30, 2018 and 2017, respectively, as follows:

	Three Months Ended
	September 30,
	2018			2017

Expected income taxes	$	164,208		$	213,470
Income tax effect of:
State taxes, net of federal tax benefit		55,260			(23,717	)
Tax exempt interest		(19,218	)		(38,407	)
Income taxed at lower rates		(7,819	)		(6,099	)
Other		(633	)		9,916
	$	191,798		$	155,163

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

General. Net income was $1.4 million for the nine-month period ended September 30, 2018 compared to $1.3 million for the nine-month period ended September 30, 2017. The increase in net income of $0.1 million or 11.6% was primarily attributed to an increase in net interest income after provision for loan losses of $0.6 million partially offset by an increase in total other expenses of $0.5 million.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2018 and 2017.

	Nine Months Ended
	September 30,
	2018		2017		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	7,542	$	6,292	$	1,250			19.87	%
Securities:
Residential mortgage-backed securities		206		361		(155	)		(42.94	)
State and municipal securities		306		374		(68	)		(18.18	)
Dividends on non-marketable equity securities		14		5		9			180.00
Interest-bearing deposits		76		21		55			261.90
Total interest and dividend income		8,144		7,053		1,091			15.47
Interest expense:
Deposits		1,188		676		512			75.74
Borrowings		143		36		107			297.22
Total interest expense		1,331		712		619			86.94
Net interest income	$	6,813	$	6,341	$	472			7.44	%

	Nine Months Ended September 30,
	2018							2017
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	218,837	$	7,542		4.60	%	$	176,476	$	6,292		4.75	%
Securities, net (2)		25,287		512		2.70	%		40,063		735		2.45	%
Non-marketable equity securities		778		14		2.40	%		753		5		0.89	%
Interest-bearing deposits		5,127		76		1.98	%		2,692		21		1.04	%
Total interest-earning assets		250,029		8,144		4.34	%		219,984		7,053		4.27	%
Non-interest-earning assets		19,501							18,817
Total assets		269,530							238,801

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	27,290	$	58		0.28	%	$	30,464	$	54		0.24	%
Savings accounts		26,298		14		0.07	%		26,247		14		0.07	%
Certificates of Deposit accounts		99,419		1,032		1.38	%		81,544		597		0.98	%
Checking accounts		38,746		84		0.29	%		28,819		11		0.05	%
Advances and borrowed funds		10,444		143		1.83	%		3,488		36		1.38	%
Total interest-bearing liabilities		202,197		1,331		0.88	%		170,562		712		0.56	%
Non-interest-bearing liabilities		14,636							15,668
Total liabilities		216,833							186,230
Equity		52,697							52,571
Total liabilities and equity		269,530							238,801
Net interest income			$	6,813						$	6,341
Net interest rate spread (3)						3.47	%						3.71	%
Net interest margin (4)						3.63	%						3.84	%
Ratio of average interest-earning assets to average interest-bearing liabilities						123.66	%						128.98	%

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

The following table summarizes the changes in net interest income due to rate and volume for the nine months ended September 30, 2018 and 2017. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

	Nine Months Ended September 30,
	2018 Compared to 2017
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	1,455		$	(205	)	$	1,250
Securities, net		(299	)		76			(223	)
Non-marketable equity securities		-			9			9
Interest-bearing deposits		36			19			55
Total interest-earning assets	$	1,192		$	(101	)	$	1,091
Interest expense on
Money Market accounts	$	(6	)	$	10		$	4
Passbook accounts		-			-			-
Certificates of Deposit accounts		185			250			435
Checking		21			52			73
Advances and borrowed funds		95			12			107
Total interest-bearing liabilities		295			324			619
Change in net interest income	$	897		$	(425	)	$	472

Net interest income increased by $0.5 million, or 7.5%, to $6.8 million for the nine months ended September 30, 2018, from $6.3 million for the nine months ended September 30, 2017. Interest and dividend income increased $1.1 million, or 15.5%, primarily due to an increase in the average balances of interest-earning assets of $30.0 million. The increase in net interest income was partially off-set by an increase in interest expense as the average cost of funds increased 32 basis points to 0.88%, due to higher interest rates for the nine months ended September 30, 2018. The net interest margin decreased 21 basis points, or 5.5% during the nine months ended September 30, 2018 to 3.63% from 3.84%.

Provision for Loan Losses. Management recorded a loan loss provision of approximately $0.4 million for the nine-month period ended September 30, 2018 and approximately $0.5 million for the nine months ended September 30, 2017. The allowance for loan losses was $2.6 million, or 1.14% of total gross loans at September 30, 2018 compared to $2.4 million, or 1.23% of gross loans at September 30, 2017. Net charge-offs during the first nine months of 2018 were comparable as they were $0.3 million during the same period for the first nine months of 2017 as well. General reserves were higher at September 30, 2018, when compared to September 30, 2017, as the balances in most loan categories increased during the twelve months ended September 30, 2018. These increases to the allowance were partially off-set by improvements in historical loss levels and augmented by changes in qualitative factors during the twelve months ended September 30, 2018, as compared to the same period ended September 30, 2017. Additionally, specific reserves as of September 30, 2018 were higher than they were as of September 30, 2017. Collateral values of real estate have stabilized and are increasing from recessionary valuation levels, but economic conditions in the local markets continue to lag national indicators, including higher levels of unemployment locally of 5.3% in LaSalle County, 4.6% in Grundy County, and 4.1% for the State of Illinois, versus the national level of 3.9%. Based on a review of the loans that were in the loan portfolio at September 30, 2018, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Other Income. The following table summarizes other income for the nine months ended September 30, 2018 and 2017.

	Nine months ended
	September 30,
	2018		2017		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	-	$	98	$	(98	)		(100.00	%)
Gain on sale of loans		464		522		(58	)		(11.11	)
Gain on sale of foreclosed real estate		101		29		72			248.28
Gain on sale of repossessed assets		13		15		(2	)		(13.33	)
Loan origination and servicing income		615		463		152			32.83
Origination of mortgage servicing rights, net of amortization		27		55		(28	)		(50.91	)
Customer service fees		385		360		25			6.94
Increase in cash surrender value of life insurance		36		36		-			-
Other		73		91		(18	)		(19.78	)
Total other income	$	1,714	$	1,669	$	45			2.70	%

Total other income was comparable for the nine months ended September 30, 2018 and 2017 as it was approximately $1.7 million for both periods. The increases in loan origination and servicing income due to loan growth and the gain on sale of foreclosed real estate were almost offset by decreases in gains on sale of securities, gain on sale of loans, origination of mortgage servicing rights and other income.

Other Expense. The following table summarizes other expense for the nine months ended September 30, 2018 and 2017.

	Nine months ended
	September 30,
	2018			2017			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	3,256		$	3,125		$	131			4.19	%
Directors fees		138			122			16			13.11
Occupancy		494			485			9			1.86
Deposit insurance premium		50			42			8			19.05
Legal and professional services		279			282			(3	)		(1.06	)
Data processing		485			436			49			11.24
Loss on sale of securities		-			55			(55	)		(100.00	)
Loan expense		553			403			150			37.22
Valuation adjustments and expenses on foreclosed real estate		25			10			15			150.00
Loss on sale of foreclosed real estate		2			-			2			100.00
Loss on sale of repossessed assets		8			-			8			100.00
Other		958			808			150			18.56
Total other expenses	$	6,248		$	5,768		$	480			8.32	%

Efficiency ratio (1)		73.27	%		72.01	%

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

The increase in other expense was primarily due to higher other expenses, increased loan expenses, and higher salaries and employee benefits. The higher loan expenses are primarily a result of the increase in purchased auto loans and in-house auto loans. The efficiency ratio increased due to increased total other expenses for the 2018 period.

Income Taxes. The Company recorded income tax expense of $0.5 million for both of the nine-month periods ended September 30, 2018 and 2017. The increase in pre-tax income from $1.8 million at September 30, 2017 to $1.9 million at September 30, 2018 was offset by a decrease in federal tax rates from 35% in 2017 to 21% in 2018. The reduction in tax exempt income and the increase in Illinois Corporate rates in July 2017 resulted in an effective tax rate of 25.06% for the nine months ended September 30, 2018 compared to 28.30% for the nine months ended September 30, 2017.

The Company’s income tax differed from the maximum statutory federal rate of 21% and 35% for the nine months ended September 30, 2018 and 2017, respectively as follows:

	Nine Months Ended
	September 30,
	2018			2017

Expected income taxes	$	399,475		$	623,675
Income tax effect of:
State taxes, net of federal tax benefit		134,731			31,581
Tax exempt interest		(58,296	)		(123,848	)
Income taxed at lower rates		(19,023	)		(17,819	)
Other		19,775			(9,257	)
	$	476,662		$	504,332

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 2018, the Bank had outstanding commitments to originate $12.9 million in loans, unfunded lines of credit of $18.6 million, and $8.3 million in commitments to fund construction loans. In addition, as of September 30, 2018, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $47.8 million. Based on prior experience, management believes that a majority of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago (“FHLBC”) advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. As of September 30, 2018, the Bank had $54.1 million of available credit from the FHLBC and there were $12.1 million in FHLBC advances outstanding. In addition, as of September 30, 2018 the Bank had $7.9 million of available credit from Bankers Bank of Wisconsin to purchase federal funds and $5.0 million of available credit from Midwest Independent Bank to purchase federal funds.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for any repurchased shares of its common stock. Whether dividends are declared, and the timing and amount of any dividends declared, is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors that our Board of Directors deems relevant to its analysis and decision making. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the regulatory agencies but with prior notice to the regulatory agencies, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At September 30, 2018, the Company had cash and cash equivalents of $10.7 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 September 30, 2018 of 21.05%, 19.84%, 19.84%, and 15.71%, respectively, compared to ratios at December 31, 2017 of 22.52%, 21.27%, 21.27% and 16.21%, respectively. As of January 1, 2018, the Bank must hold 1.875% of risk-weighted assets, with such amount increasing by 0.625% annually, until fully implemented at 2.5% in January 2019, as a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments. As a savings and loan holding company with less than $3.0 billion in assets, the Company is not subject to separate capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

For the nine months ended September 30, 2018, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

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

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

Part II – Other Information

ITEM 1 - LEGAL PROCEEDINGS

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

ITEM 1A - RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. As of September 30, 2018, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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

On November 7, 2018, the Company issued a press release announcing that it has approved a stock repurchase program authorizing the purchase of 337,440 shares, representing 10% of the Company’s outstanding shares of common stock. As of September 30, 2018, the Company had repurchased a total of 100,235 shares of its common stock at an average price of $14.08 per share as part of its previously approved stock repurchase program, which will expire on November 15, 2018. Repurchases will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time depending on market conditions and other factors.

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2018:

	Number of Shares Purchased		Average Price Paid Per Share		Number of Shares Purchased as Part of Publicly Announced Program		Maximum Number of Shares That May Yet Be Purchased Under The Program
July 1-31, 2018		3 ,845	$	13.86		3,845		259,660
August 1-31, 2018		6,750		13.85		6,750		252,910
September 1-30, 2018		6,405		13.94		6,405		246,505
Total		17,000	$	13.88		17,000		246,505

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 and six months ended September 30, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders' Equity (v) the Consolidated Statements of Cash Flows and (vi) related notes.

Signature

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

	OTTAWA BANCORP, INC.
	Registrant

Date: November 14, 2018	/s/ Jon L. Kranov
	Jon L. Kranov
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 14, 2018	/s/ Marc N. Kingry
	Marc N. Kingry
	Chief Financial Officer
	(Principal Financial Officer)