Ottawa Bancorp Inc - Quarter Report: 2019 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(mark one)

 

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

 

or

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______to_______

 

Commission File Number 001-37914

 

OTTAWA BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland (State or other jurisdiction of incorporation or  organization)	81-2959182 (I.R.S. Employer Identification Number)
925 LaSalle Street Ottawa, Illinois (Address of principal executive offices)	61350 (Zip Code)

 

(815) 433-2525

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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, 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 ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	OTTW	The Nasdaq Stock Market LLC

 

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

 

Class	Outstanding as of May 14, 2019
Common Stock, $0.01 par value	3,326,554

 

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OTTAWA BANCORP, INC.

 

FORM 10-Q

 

For the quarterly period ended March 31, 2019

 

 

 

INDEX

  

		Page Number
PART I – FINANCIAL INFORMATION
Item 1	Financial Statements	3
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4	Controls and Procedures	30
PART II – OTHER INFORMATION
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	31
Item 6	Exhibits	32
SIGNATURES		33

 

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		March 31,				December 31,
		2019				2018
Assets
Cash and due from banks		$	4,460,551			$	2,416,568
Interest bearing deposits			2,842,078				6,013,890
Total cash and cash equivalents			7,302,629				8,430,458
Time deposits			250,000				250,000
Federal funds sold			4,409,000				5,663,000
Securities available for sale			24,469,999				25,533,767
Loans, net of allowance for loan losses of $2,628,365 and $2,627,738 at March 31, 2019 and December 31, 2018, respectively			235,793,257				235,926,419
Loans held for sale			250,505				-
Premises and equipment, net			6,695,952				6,621,080
Accrued interest receivable			841,005				824,542
Foreclosed real estate			196,000				-
Deferred tax assets			1,847,488				1,898,141
Cash surrender value of life insurance			2,353,387				2,341,453
Goodwill			649,869				649,869
Core deposit intangible			213,500				228,000
Other assets			4,232,700				4,469,350
Total assets		$	289,505,291			$	292,836,079
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing		$	13,747,615			$	14,057,719
Interest bearing			207,494,542				209,390,810
Total deposits			221,242,157				223,448,529
Accrued interest payable			16,146				5,648
FHLB advances			10,588,245				12,087,152
Other liabilities			4,715,995				4,470,384
Total liabilities			236,562,543				240,011,713
Stockholders' Equity
Common stock, $0.01 par value, 12,000,000 shares authorized; 3,336,459 and 3,358,922 shares issued at March 31, 2019 and December 31, 2018, respectively			33,365				33,589
Additional paid-in-capital			35,260,770				35,579,606
Retained earnings			19,058,192				18,859,232
Unallocated ESOP shares			(1,532,112	)			(1,576,616	)
Unearned management recognition plan shares			(36,998	)			(40,361	)
Accumulated other comprehensive income (loss)			159,531				(31,084	)
Total stockholders' equity			52,942,748				52,824,366
Total liabilities and stockholders' equity		$	289,505,291			$	292,836,079

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		Three Months Ended
		March 31,
		2019				2018
Interest and dividend income:
Interest and fees on loans		$	2,860,592			$	2,398,669
Securities:
Residential mortgage-backed and related securities			82,461				67,466
State and municipal securities			97,411				100,448
Dividends on non-marketable equity securities			6,434				4,186
Interest-bearing deposits			45,378				15,794
Total interest and dividend income			3,092,276				2,586,563
Interest expense:
Deposits			608,390				332,524
Borrowings			72,701				48,144
Total interest expense			681,091				380,668
Net interest income			2,411,185				2,205,895
Provision for loan losses			130,000				125,500
Net interest income after provision for loan losses			2,281,185				2,080,395
Other income:
Gain on sale of loans			84,957				133,211
Gain on sale of foreclosed real estate			-				42,035
Loan origination and servicing income			154,283				162,872
Origination of mortgage servicing rights, net of amortization			(9,690	)			12,854
Customer service fees			115,866				122,995
Increase in cash surrender value of life insurance			11,934				11,770
Other			21,762				24,938
Total other income			379,112				510,675
Other expenses:
Salaries and employee benefits			1,098,558				1,012,444
Directors fees			43,000				48,000
Occupancy			170,950				174,071
Deposit insurance premium			17,100				16,396
Legal and professional services			95,535				88,701
Data processing			186,588				154,773
Loan expense			164,412				168,807
Valuation adjustments and expenses on foreclosed real estate			5,584				9,012
Loss on sale of repossessed assets			748				2,708
Other			282,887				264,416
Total other expenses			2,065,362				1,939,328
Income before income tax expense			594,935				651,742
Income tax expense			194,865				172,160
Net income		$	400,070			$	479,582
Basic earnings per share		$	0.13			$	0.15
Diluted earnings per share		$	0.13			$	0.15
Dividends per share		$	0.060			$	0.115

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		Three Months Ended
		March 31,
		2019				2018
Net income		$	400,070			$	479,582
Other comprehensive income (loss), before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period			167,621				(243,971	)
Other comprehensive income (loss) , before tax			167,621				(243,971	)
Income tax expense (benefit) related to items of other comprehensive income (loss)			(22,994	)			(69,544	)
Other comprehensive income (loss) , net of tax			190,615				(174,427	)
Comprehensive income		$	590,685			$	305,155

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																						Accumulated
						Additional								Unallocated				Unearned				Other
		Common				Paid-in				Retained				ESOP				MRP				Comprehensive
		Stock				Capital				Earnings				Shares				Shares				Income (Loss)				Total
Balance, December 31, 2017		$	34,518			$	36,949,508			$	17,720,962			$	(1,754,632	)		$	-			$	152,579			$	53,102,935
Net income			-				-				479,582				-				-				-				479,582
Other comprehensive income			-				-				-				-				-				(174,427	)			(174,427	)
Allocation 4,695 of ESOP shares			-				21,269				-				44,504				-				-				65,773
RRP options exercised			140				64,995				-				-				-				-				65,135
Cash dividends paid, $0.115 per share			-				-				(372,379	)			-				-				-				(372,379	)
Repurchase 50,305 shares			(503	)			(706,555	)			-				-				-				-				(707,058	)
Balance, March 31, 2018		$	34,155			$	36,329,217			$	17,828,165			$	(1,710,128	)		$	-			$	(21,848	)		$	52,459,561
Balance, December 31, 2018		$	33,589			$	35,579,606			$	18,859,232			$	(1,576,616	)		$	(40,361	)		$	(31,084	)		$	52,824,366
Net income			-				-				400,070				-				-				-				400,070
Other comprehensive income			-				-				-				-				-				190,615				190,615
Allocation 4,694 of ESOP shares			-				19,595				-				44,504				-				-				64,099
Compensation expense on MRP awards amortized			-				-				-				-				3,363				-				3,363
RRP options exercised			25				8,900				-				-				-				-				8,925
Cash dividends paid, $0.06 per share			-				-				(201,110	)			-				-				-				(201,110	)
Repurchase 24,963 shares			(249	)			(347,331	)			-				-				-				-				(347,580	)
Balance, March 31, 2019		$	33,365			$	35,260,770			$	19,058,192			$	(1,532,112	)		$	(36,998	)		$	159,531			$	52,942,747

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		2019				2018
Cash Flows from Operating Activities
Net income		$	400,070			$	479,582
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			72,630				59,806
Provision for loan losses			130,000				125,500
Provision for deferred income taxes			73,647				(3,220	)
Net amortization of premiums and discounts on securities			37,107				62,550
Origination of mortgage loans held for sale			(2,596,655	)			(4,481,167	)
Proceeds from sale of mortgage loans held for sale			2,431,107				4,905,269
Gain on sale of loans, net			(84,957	)			(133,211	)
Origination of mortgage servicing rights, net of amortization			9,690				(12,854	)
Gain on sale of foreclosed real estate, net			-				(42,035	)
Loss (gain) on sale of repossessed assets, net			-				2,708
MRP compensation expense			3,363				-
ESOP compensation expense			64,099				65,773
Amortization of core deposit intangible			14,500				14,500
Amortization (accretion) of fair value adjustments on acquired:
Loans			4,538				9,487
Federal Home Loan Bank Advances			1,093				1,736
Increase in cash surrender value of life insurance			(11,934	)			(11,770	)
Change in assets and liabilities:
Increase in accrued interest receivable			(16,463	)			(18,479	)
Decrease (increase) in other assets			167,016				(111,124	)
Increase in accrued interest payable and other liabilities			256,109				117,687
Net cash provided by operating activities			954,960				1,030,738
Cash Flows from Investing Activities
Securities available for sale:
Purchases			-				(665,765	)
Sales, calls, maturities and paydowns			1,194,282				951,413
Sale of non-marketable equity securities			-				101,250
Net increase in loans			(251,876	)			(13,393,000	)
Net decrease (increase) in federal funds sold			1,254,000				(819,000	)
Proceeds from sale of foreclosed real estate			-				126,135
Proceeds from sale of repossessed assets			114,444				18,211
Purchase of premises and equipment			(147,502	)			(6,559	)
Net cash used in (provided by) investing activities			2,163,348				(13,687,315	)
Cash Flows from Financing Activities
Net (decrease) increase in deposits			(2,206,372	)			14,967,865
Proceeds from Federal Home Loan Bank advances			-				3,250,000
Principal reduction of Federal Home Loan Bank advances			(1,500,000	)			(5,500,000	)
Proceeds from stock options exercised			8,925				65,135
Shares repurchased and cancelled			(347,580	)			(707,058	)
Dividends paid			(201,110	)			-
Net cash (used in) provided by financing activities			(4,246,137	)			12,075,942
Net decrease in cash and cash equivalents			(1,127,829	)			(580,635	)
Cash and cash equivalents:
Beginning of period			8,430,458				3,755,817
End of period		$	7,302,629			$	3,175,182

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		2019				2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors		$	597,245			$	326,295
Interest paid on borrowings			73,348				48,144
Income taxes paid, net of refunds received			300				300
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure			196,000				24,000
Other assets acquired in settlement of loans			54,500				47,500

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NOTE 1 – NATURE OF BUSINESS

 

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

 

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

 

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

 

NOTE 2 – BASIS OF PRESENTATION

 

The consolidated financial statements presented in this quarterly report include the accounts of the Company and the Bank.  The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and predominant practices followed by the financial services industry and are unaudited.  In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, which the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows have been recorded.  The interim financial statements should be read in conjunction with the audited financial statements and accompanying notes of the Company for the year ended December 31, 2018, which are included in the Company’s Annual Report Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on March 28, 2019.  The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

 

NOTE 3 – USE OF ESTIMATES

 

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

 

At March 31, 2019, 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, 2019.

 

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.

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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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 shares. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards. 

 

 

 

NOTE 6 – EMPLOYEE STOCK OWNERSHIP PLAN

 

On May 6, 2005, the Bank 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 common stock in the Company’s 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 common stock in connection with the Company’s second-step conversion offering at a price of $10.00 per share.

 

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

 

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

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

 

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

 

 

 

NOTE 7 – INVESTMENT SECURITIES

 

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

 

 

The amortized cost and fair value at March 31, 2019, 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.

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at March 31, 2019 and December 31, 2018:

 

 

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

 

At March 31, 2019, 29 securities had unrealized losses with an aggregate depreciation of 1.78% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at March 31, 2019 due to the following:

 

●

Decline in value is attributable to interest rates.

●

The value did not decline due to credit quality.

●

The Company does not intend to sell these securities.

●

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

 

There were no proceeds from the sales of securities for the three months ended March 31, 2019 and March 31, 2018.

 

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

 

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

 

 

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

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:

 

 

 

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of March 31, 2019 and December 31, 2018:

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

 

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2019 and December 31, 2018:

 

 

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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For the three months ended March 31, 2019, the Company recognized no cash basis interest income on impaired loans. For the three months ended March 31, 2018, the Company recognized no cash basis interest income on impaired loans.

 

At March 31, 2019 there were 19 impaired loans totaling approximately $1.1 million, compared to 21 impaired loans totaling approximately $1.5 million at December 31, 2018. The change in impaired loans was a result of writing down and moving one impaired loan totaling approximately $277,000 to foreclosed real estate/repossessed assets, payoffs on two loans of approximately $109,000 and payments of approximately $22,000, offset by the addition of one loan totaling approximately $18,500 to the impaired loan list.

 

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

 

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

 

Impaired loans at March 31, 2019 included approximately $68,000 of loans whose terms have been modified in troubled debt restructurings, compared to approximately $70,000 at December 31, 2018. The amount of TDR loans included in impaired loans decreased as a result of payments of approximately $2,000. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

 

There were no new loans classified as TDRs during the three months ended March 31, 2019 and 2018.

 

There were no TDR loans that were restructured during the twelve months prior to March 31, 2019 and 2018 that had payment defaults (i.e., 60 days or more past due following a modification) during the three months ended March 31, 2019 and 2018.

 

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

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as of March 31, 2019 and December 31, 2018:

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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The following table presents the aging of the recorded investment in loans, by class of loans, as of March 31, 2019 and December 31, 2018:

 

 

 

Credit Quality Indicators:

 

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

 

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

 

The Company uses the following definitions for risk ratings:

 

●

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

●

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

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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●

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

●

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

●

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

 

At March 31, 2019 and December 31, 2018, the risk category of loans by class is as follows:

 

 

 

At March 31, 2019, the Company held $196,000 in foreclosed residential real estate property, compared to $0 at December 31, 2018. In addition, the Company also held $92,925 and $276,815 in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at March 31, 2019 and December 31, 2018, respectively.

 

NOTE 9 – STOCK COMPENSATION

 

Total stock-based compensation expense was $3,363 and $0 for the three-month periods ended March 31, 2019 and 2018, respectively. In accordance with FASB ASC 718, Compensation-Stock Compensation, compensation expense is recognized on a straight-line basis over the grantees’ vesting period or to the grantees’ retirement eligibility date, if earlier. During the three months ended March 31, 2019 and 2018, the Company did not grant additional options or shares under the Management Recognition Plan (MRP).

 

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

 

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

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

 

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

 

●

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

 

●

Gains/losses on sale of foreclosed real estate and repossessed assets. The Company records a gain or loss from the sale of foreclosed real estate and repossessed assets when control of the property transfers to the buyer, which generally occurs at the time of the executed deed or title. When the Company finances the sale of foreclosed real estate or 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 or loss on sale if a significant component is present.

 

●

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

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance in this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee`s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company adopted this guidance on January 1, 2019 and the standard did not have a material impact on its financial statements.

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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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. The impact of adopting this ASU did not have an effect on our financial results as our current bond accounting is consistent with the requirements of this guidance.

 

NOTE 11 – BORROWINGS

 

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

 

 

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NOTE 12 – FAIR VALUE MEASUREMENT AND DISCLOSURE

 

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

 

Basis of Fair Value Measurement:

 

•

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

 

•

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

 

•

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

 

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

 

Securities Available for Sale

 

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

 

Foreclosed Assets

 

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

 

Impaired Loans

 

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

 

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2019 and the year ended December 31, 2018. 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.

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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The tables below present the recorded amounts of assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018.

 

 

 

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at March 31, 2019 and December 31, 2018.

 

 

 

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.

 

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of March 31, 2019 and December 31, 2018, are as follows:

 

 

 

 

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

 

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

 

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

 

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

 

Securities: The Company obtains fair value measurements of available for sale securities from an independent pricing service.

 

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates represent an exit price for 2019, but do not necessarily represent an exit price for years prior. Loan fair value estimates also include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using underlying collateral values, where applicable or discounted cash flows.

 

 

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

 

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

 

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

 

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

 

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

 

 Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. At March 31, 2019 and December 31, 2018, 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.