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, 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	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)

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 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.

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, 2019
Common Stock, $0.01 par value	3,173,074

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended September 30, 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	26
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4	Controls and Procedures	37
PART II – OTHER INFORMATION
	Item 1	Legal Proceedings	37
	Item 1A	Risk Factors	37
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 3	Defaults upon Senior Securities	38
	Item 4	Mine Safety Disclosures	38
	Item 5	Other Information	38
	Item 6	Exhibits	38
SIGNATURES			39

2

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

September 30, 2019 and December 31, 2018

(Unaudited)

	September 30,			December 31,
	2019			2018
Assets
Cash and due from banks	$	4,053,800		$	2,416,568
Interest bearing deposits		6,627,649			6,013,890
Total cash and cash equivalents		10,681,449			8,430,458
Time deposits		3,736,000			250,000
Federal funds sold		3,947,000			5,663,000
Securities available for sale		24,089,350			25,533,767
Loans, net of allowance for loan losses of $2,774,443 and $2,627,738 at September 30, 2019 and December 31, 2018, respectively		243,244,687			235,926,419
Loans held for sale		1,571,495			-
Premises and equipment, net		6,564,106			6,621,080
Accrued interest receivable		800,805			824,542
Foreclosed real estate		196,000			-
Deferred tax assets		1,779,082			1,898,141
Cash value of life insurance		2,376,864			2,341,453
Goodwill		649,869			649,869
Core deposit intangible		184,500			228,000
Other assets		4,392,723			4,469,350
Total assets	$	304,213,930		$	292,836,079
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	13,798,606		$	14,057,719
Interest bearing		225,967,615			209,390,810
Total deposits		239,766,221			223,448,529
Accrued interest payable		10,068			5,648
FHLB advances		10,078,727			12,087,152
Other liabilities		4,022,383			4,470,384
Total liabilities		253,877,399			240,011,713
Stockholders' Equity
Common stock, $.01 par value, 12,000,000 shares authorized; 3,170,554 and 3,358,922 shares issued at September 30, 2019 and December 31, 2018, respectively		31,705			33,589
Additional paid-in-capital		32,976,828			35,579,606
Retained earnings		18,477,320			18,859,232
Unallocated ESOP shares		(1,443,104	)		(1,576,616	)
Unallocated management recognition (MRP) plan shares		(32,962	)		(40,361	)
Accumulated other comprehensive income (loss)		326,744			(31,084	)
Total stockholders' equity		50,336,531			52,824,366
Total liabilities and stockholders' equity	$	304,213,930		$	292,836,079

See accompanying notes to these unaudited consolidated financial statements.

3

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Interest and dividend income:
Interest and fees on loans	$	2,878,874	$	2,596,019	$	8,591,812	$	7,541,652
Securities:
Residential mortgage-backed and related securities		67,217		67,156		223,536		205,975
State and municipal securities		101,169		102,269		299,190		305,920
Dividends on non-marketable equity securities		6,387		5,079		19,098		14,473
Interest-bearing deposits		81,905		30,516		181,452		75,864
Total interest and dividend income		3,135,552		2,801,039		9,315,088		8,143,884
Interest expense:
Deposits		774,630		454,352		2,055,165		1,187,481
Borrowings		68,413		46,584		209,559		143,129
Total interest expense		843,043		500,936		2,264,724		1,330,610
Net interest income		2,292,509		2,300,103		7,050,364		6,813,274
Provision for loan losses		105,000		65,000		405,000		377,500
Net interest income after provision for loan losses		2,187,509		2,235,103		6,645,364		6,435,774
Other income:
Gain on sale of loans		370,387		155,656		628,678		464,527
Gain on sale of foreclosed real estate, net		-		59,511		-		99,108
Loan origination and servicing income		291,677		244,351		646,068		615,369
Origination of mortgage servicing rights, net of amortization		111,316		4,124		98,581		26,977
Customer service fees		129,831		135,710		370,776		384,717
Increase in cash surrender value of life insurance		11,565		11,986		35,411		35,621
Gain on sale of repossessed assets, net		4,182		5,166		11,978		4,928
Other		42,532		23,973		88,478		72,607
Total other income		961,490		640,477		1,879,970		1,703,854
Other expenses:
Salaries and employee benefits		1,393,099		1,139,592		3,679,948		3,255,532
Directors fees		43,000		43,000		129,000		137,750
Occupancy		171,352		159,892		499,362		494,353
Deposit insurance premium		2,000		17,107		33,565		49,933
Legal and professional services		105,469		89,623		303,402		279,273
Data processing		186,462		169,316		521,905		485,210
Loan expense		201,404		189,814		538,439		552,483
Valuation adjustments and expenses on foreclosed real estate		20,418		4,465		32,421		25,265
Other		302,536		280,830		901,287		957,569
Total other expenses		2,425,740		2,093,639		6,639,329		6,237,368
Income before income tax expense		723,259		781,941		1,886,005		1,902,260
Income tax expense		178,343		191,798		506,407		476,662
Net income	$	544,916	$	590,143	$	1,379,598	$	1,425,598
Basic earnings per share	$	0.18	$	0.18	$	0.44	$	0.44
Diluted earnings per share	$	0.18	$	0.18	$	0.44	$	0.44
Dividends per share	$	0.063	$	0.050	$	0.563	$	0.215

See accompanying notes to these unaudited consolidated financial statements.

4

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income  

Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2019		2018			2019		2018
Net income	$	544,916	$	590,143		$	1,379,598	$	1,425,598
Other comprehensive income (loss), before tax:
Securities available for sale:
Unrealized holding gains (losses) arising during the period		23,367		(98,287	)		500,494		(408,908	)
Other comprehensive income (loss), before tax		23,367		(98,287	)		500,494		(408,908	)
Income tax expense (benefit) related to items of other comprehensive income (loss)		6,661		(28,017	)		142,666		(116,559	)
Other comprehensive income (loss), net of tax		16,706		(70,270	)		357,828		(292,349	)
Comprehensive income	$	561,622	$	519,873		$	1,737,426	$	1,133,249

See accompanying notes to these unaudited consolidated financial statements.

5

Ottawa Bancorp, Inc. & Subsidiary

Consolidated Statements of Stockholders' Equity

Three Months Ended September 30, 2019 and 2018
																Accumulated
				Additional						Unallocated			Unearned			Other
	Common			Paid-in			Retained			ESOP			MRP			Comprehensive
	Stock			Capital			Earnings			Shares			Shares			Income (Loss)			Total
Balance, June 30, 2018	$	34,002		$	36,138,342		$	18,022,135		$	(1,665,624	)	$	-		$	(69,500	)	$	52,459,355
Net income		-			-			590,143			-			-			-			590,143
Other comprehensive (loss)		-			-			-			-			-			(70,270	)		(70,270	)
Allocation of 4,694 ESOP shares		-			20,174			-			44,504			-			-			64,678
Recognition and Retention Plan options exercised		-			-			-			-			-			-			-
Cash dividends paid, $0.05 per share		-			-			(161,354	)		-			-			-			(161,354	)
Repurchase 17,000 shares		(170	)		(235,363	)		-			-			-			-			(235,533	)
Balance, September 30, 2018	$	33,832		$	35,923,153		$	18,450,924		$	(1,621,120	)	$	-		$	(139,770	)	$	52,647,019
Balance, June 30, 2019	$	32,233		$	33,614,487		$	18,125,450		$	(1,487,608	)	$	(34,980	)	$	310,038		$	50,559,620
Net income		-			-			544,916			-			-			-			544,916
Other comprehensive income		-			-			-			-			-			16,706			16,706
Allocation 4,695 of ESOP shares		-			16,042			-			44,504			-			-			60,546
Compensation expense on MRP awards granted		-			-			-			-			2,018			-			2,018
Recognition and Retention Plan options exercised		-			-			-			-			-			-			-
Cash dividends paid, $0.063 per share		-			-			(193,046	)		-			-			-			(193,046	)
Repurchase 52,764 shares		(528	)		(653,701	)		-			-			-			-			(654,229	)
Balance, September 30, 2019	$	31,705		$	32,976,828		$	18,477,320		$	(1,443,104	)	$	(32,962	)	$	326,744		$	50,336,531

Nine Months Ended September 30, 2019 and 2018
																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		-			-			1,425,598			-			-			-			1,425,598
Other comprehensive (loss)		-			-			-			-			-			(292,349	)		(292,349	)
Allocation of 14,085 ESOP shares		-			61,945			-			133,512			-			-			195,457
Recognition and Retention Plan options exercised		140			64,995			-			-			-			-			65,135
Cash dividends paid, $0.215 per share		-			-			(695,636	)		-			-			-			(695,636	)
Repurchase 82,635 shares		(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
Balance, December 31, 2018	$	33,589		$	35,579,606		$	18,859,232		$	(1,576,616	)	$	(40,361	)	$	(31,084	)	$	52,824,366
Net income		-			-			1,379,598			-			-			-			1,379,598
Other comprehensive income		-			-			-			-			-			357,828			357,828
Allocation of 14,085 ESOP shares		-			53,917			-			133,512			-			-			187,429
Compensation expense on MRP awards granted		-			-			-			-			7,399			-			7,399
Recognition and Retention Plan options exercised		25			8,900			-			-			-			-			8,925
Cash dividends paid, $0.563 per share		-			-			(1,761,510	)		-			-			-			(1,761,510	)
Repurchase 356,773 shares		(1,909	)		(2,665,595	)		-			-			-			-			(2,667,504	)
Balance, September 30, 2019	$	31,705		$	32,976,828		$	18,477,320		$	(1,443,104	)	$	(32,962	)	$	326,744		$	50,336,531

See accompanying notes to these unaudited consolidated financial statements.

6

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2019 and 2018

   (Unaudited)

	2019			2018
Cash Flows from Operating Activities
Net income	$	1,379,598		$	1,425,598
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		146,558			182,464
Provision for loan losses		405,000			377,500
Provision for deferred income taxes		(23,607	)		(105,497	)
Net amortization of premiums and discounts on securities		108,386			172,302
Origination of mortgage loans held for sale		(10,740,469	)		(15,368,636	)
Proceeds from sale of mortgage loans held for sale		9,797,652			15,789,538
Gain on sale of loans, net		(628,678	)		(464,527	)
Origination of mortgage servicing rights, net of amortization		(98,581	)		(26,977	)
Gain on sale of foreclosed real estate, net		-			(99,108	)
Loss on sale of repossessed assets, net		11,978			4,928
ESOP compensation expense		187,429			195,457
MRP compensation expense		7,399			-
Amortization of core deposit intangible		43,500			43,500
Amortization of fair value adjustments on acquired:
Loans		13,255			22,366
Federal Home Loan Bank Advances		3,278			3,922
Increase in cash surrender value of life insurance		(35,411	)		(35,621	)
Change in assets and liabilities:
Increase (decrease) in accrued interest receivable		23,737			(47,675	)
(Decrease) in other assets		133,236			(264,359	)
Increase in accrued interest payable and other liabilities		(655,536	)		(288,122	)
Net cash provided by operating activities		78,724			1,517,053
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(1,417,224	)		(2,259,494	)
Sales, calls, maturities and paydowns		3,253,749			3,132,398
Net increase in time deposits		(3,486,000	)		-
Net increase in loans		(7,932,408	)		(17,647,718	)
Net decrease in federal funds sold		1,716,000			741,000
Proceeds from sale of foreclosed real estate		-			247,408
Proceeds from sale of repossessed assets		241,834			120,935
Purchase of premises and equipment		(89,584	)		(144,525	)
Net cash used in investing activities		(7,713,633	)		(15,809,996	)
Cash Flows from Financing Activities
Net increase in deposits		16,317,692			26,088,080
Proceeds from Federal Home Loan Bank advances		10,500,000			9,750,000
Principal reduction of Federal Home Loan Bank advances		(12,511,703	)		(12,761,532	)
Proceeds from stock options exercised		8,925			65,135
Shares repurchased and cancelled		(2,667,504	)		(1,154,121	)
Dividends paid		(1,761,510	)		(695,636	)
Net cash provided by financing activities		9,885,900			21,291,926
Net increase in cash and cash equivalents		2,250,991			6,998,983
Cash and cash equivalents:
Beginning of period		8,430,458			3,755,817
End of period	$	10,681,449		$	10,754,800
(Continued)

See accompanying notes to these unaudited consolidated financial statements.

7

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2019 and 2018

(Unaudited) 

	2019		2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	2,050,119	$	1,179,449
Interest paid on borrowings		210,185		143,129
Income taxes paid, net of refunds received		378,000		359,077
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		196,000		64,200
Other assets acquired in settlement of loans		211,840		129,007
Sale of foreclosed real estate through loan origination		-		44,800

See accompanying notes to these unaudited consolidated financial statements

8

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 1 – NATURE OF BUSINESS

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

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

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

NOTE 2 – BASIS OF PRESENTATION

The consolidated financial statements presented in this quarterly report include the accounts of the Company and the Bank. The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and predominant practices followed by the financial services industry and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, which the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows have been recorded. The interim financial statements should be read in conjunction with the audited financial statements and accompanying notes of the Company for the year ended December 31, 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.

Some items in the prior year financial statements were reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

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 September 30, 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.

9

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income available to common stockholders	$	544,916		$	590,143		$	1,379,598		$	1,425,598
Basic potential common shares:
Weighted average shares outstanding		3,207,652			3,393,111			3,282,493			3,409,674
Weighted average unvested MRP shares		(3,060	)		-			(2,547	)		-
Weighted average unallocated ESOP shares		(147,702	)		(166,430	)		(152,368	)		(171,113	)
Basic weighted average shares outstanding		3,056,890			3,226,681			3,127,578			3,238,561
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		-			-			48			-
Weighted average RRP options outstanding		5,408			8,606			5,483			8,638
Dilutive weighted average shares outstanding		3,062,298			3,235,287			3,133,110			3,247,199
Basic earnings per share	$	0.18		$	0.18		$	0.44		$	0.44
Diluted earnings per share	$	0.18		$	0.18		$	0.44		$	0.44

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.

10

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

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

	September 30,			December 31,
	2019			2018
Shares allocated		137,136			123,051
Shares withdrawn from the plan		(28,365	)		(28,278	)
Unallocated shares		144,555			158,639
Total ESOP shares		253,326			253,412
Fair value of unallocated shares	$	1,819,947		$	2,114,657

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, 2019:
Securities Available for Sale
State and municipal securities	$	13,584,907	$	334,573	$	-	$	13,919,480
Residential mortgage-backed securities		10,047,426		155,020		32,576	$	10,169,870
	$	23,632,333	$	489,593	$	32,576	$	24,089,350
December 31, 2018:
Securities Available for Sale
State and municipal securities	$	13,092,077	$	116,127	$	21,416	$	13,186,788
Residential mortgage-backed securities		12,485,167		59,282		197,470		12,346,979
	$	25,577,244	$	175,409	$	218,886	$	25,533,767

The amortized cost and fair value at September 30, 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.

	Securities Available for Sale
	Amortized		Fair
	Cost		Value
Due in three months or less	$	455,548	$	456,714
Due after three months through one year		978,471		985,778
Due after one year through five years		4,616,801		4,708,352
Due after five years through ten years		3,989,847		4,110,708
Due after ten years		3,544,240		3,657,928
Residential mortgage-backed securities		10,047,426		10,169,870
	$	23,632,333	$	24,089,350

11

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at September 30, 2019 and December 31, 2018:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2019
Securities Available for Sale
Residential mortgage-backed securities	$	782,948	$	1,461	$	3,637,321	$	31,115	$	4,420,269	$	32,576
	$	782,948	$	1,461	$	3,637,321	$	31,115	$	4,420,269	$	32,576
December 31, 2018
Securities Available for Sale
State and municipal securities	$	1,831,305	$	9,610	$	1,345,990	$	11,806	$	3,177,295	$	21,416
Residential mortgage-backed securities		2,865,546		25,266		6,034,053		172,204		8,899,599		197,470
	$	4,696,851	$	34,876	$	7,380,043	$	184,010	$	12,076,894	$	218,886

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, 2019, 16 securities had unrealized losses with an aggregate depreciation of 0.73% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at September 30, 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 or nine months ended September 30, 2019 and 2018.

12

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	September 30,			December 31,
	2019			2018
Mortgage loans:
One-to-four family residential loans	$	150,016,778		$	141,779,340
Multi-family residential loans		5,878,371			6,776,424
Total mortgage loans		155,895,149			148,555,764
Other loans:
Non-residential real estate loans		30,229,325			35,286,236
Commercial loans		24,064,408			17,241,698
Consumer direct		19,545,704			15,390,263
Purchased auto		16,284,544			22,080,196
Total other loans		90,123,981			89,998,393
Gross loans		246,019,130			238,554,157
Less: Allowance for loan losses		(2,774,443	)		(2,627,738	)
Loans, net	$	243,244,687		$	235,926,419

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,
	2019		2018		2019		2018
Purchased auto loans	$	-	$	1,309,729	$	-	$	10,012,800

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,
	2019			2018			2019			2018
One-to-four family	$	3,372		$	6,461		$	(149,452	)	$	(202,491	)
Multi-family		21,329			3,972			29,272			11,915
Consumer direct		(5,948	)		2,948			(41,489	)		6,766
Purchased auto		2,885			(29,934	)		(96,626	)		(71,703	)
Net (charge-offs)/recoveries	$	21,638		$	(16,553	)	$	(258,295	)	$	(255,513	)

13

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, 2019 and 2018:

	One-to-
	four		Multi-			Non-				Consumer			Purchased
September 30, 2019	family		family			residential		Commercial		direct			auto			Total
Balance at beginning of period	$	1,755,047	$	25,080		$	268,587	$	189,213	$	139,659		$	270,219		$	2,647,805
Provision charged to income		100,882		(21,812	)		3,653		12,177		38,508			(28,408	)		105,000
Loans charged off		-		-			-		-		(6,648	)		(11,658	)		(18,306	)
Recoveries of loans previously charged off		3,372		21,329			-		-		700			14,543			39,944
Balance at end of period	$	1,859,301	$	24,597		$	272,240	$	201,390	$	172,219		$	244,696		$	2,774,443

	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

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019 and 2018:

	One-to-
	four			Multi-			Non-					Consumer			Purchased
September 30, 2019	family			family			residential			Commercial		direct			auto			Total
Balance at beginning of period	$	1,761,736		$	26,562		$	343,663		$	135,165	$	82,947		$	277,665		$	2,627,738
Provision charged to income		247,017			(31,237	)		(71,423	)		66,225		130,761			63,657			405,000
Loans charged off		(284,980	)		-			-			-		(43,070	)		(125,407	)		(453,457	)
Recoveries of loans previously charged off		135,528			29,272			-			-		1,581			28,781			195,162
Balance at end of period	$	1,859,301		$	24,597		$	272,240		$	201,390	$	172,219		$	244,696		$	2,774,443

	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

14

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of September 30, 2019 and December 31, 2018:

	One-to-
	four		Multi-		Non-				Consumer		Purchased
September 30, 2019	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for Impairment	$	1,461,663	$	-	$	401,045	$	-	$	-	$	33,738	$	1,896,446
Loans acquired with deteriorated credit quality		74,644		-		-		-		-		-		74,644
Loans collectively evaluated for Impairment		148,480,471		5,878,371		29,828,280		24,064,408		19,545,704		16,250,806		244,048,040
Balance at end of period	$	150,016,778	$	5,878,371	$	30,229,325	$	24,064,408	$	19,545,704	$	16,284,544	$	246,019,130
Period-end amount allocated to:
Loans individually evaluated for Impairment	$	29,420	$	-	$	1,049	$	-	$	-	$	16,869	$	47,338
Loans acquired with deteriorated credit quality		8,062		-		-		-		-		-		8,062
Loans collectively evaluated for Impairment		1,821,819		24,597		271,191		201,390		172,219		227,827		2,719,043
Balance at end of period	$	1,859,301	$	24,597	$	272,240	$	201,390	$	172,219	$	244,696	$	2,774,443

	One-to-
	four		Multi-		Non-				Consumer		Purchased
December 31, 2018	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for Impairment	$	955,317	$	-	$	455,196	$	-	$	-	$	-	$	1,410,513
Loans acquired with deteriorated credit quality		93,427		-		-		-		-		-		93,427
Loans collectively evaluated for Impairment		140,730,596		6,776,424		34,831,040		17,241,698		15,390,263		22,080,196		237,050,217
Balance at end of period	$	141,779,340	$	6,776,424	$	35,286,236	$	17,241,698	$	15,390,263	$	22,080,196	$	238,554,157
Period-end amount allocated to:
Loans individually evaluated for Impairment	$	160,822	$	-	$	38,674	$	-	$	-	$	-	$	199,496
Loans acquired with deteriorated credit quality		17,817		-		-		-		-		-		17,817
Loans collectively evaluated for impairment		1,583,097		26,562		304,989		135,165		82,947		277,665		2,410,425
Balance at end of period	$	1,761,736	$	26,562	$	343,663	$	135,165	$	82,947	$	277,665	$	2,627,738

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.

15

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, 2019 and December 31, 2018:

September 30, 2019	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	$	1,526,444	$	1,347,064	$	189,243	$	1,536,307	$	37,482	$	1,155,543
Multi-family		-		-		-		-		-		-
Non-residential		282,505		291,446		109,599		401,045		1,049		389,229
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		33,738		33,738		16,869		-
	$	1,808,949	$	1,638,510	$	332,580	$	1,971,090	$	55,400	$	1,544,772

December 31, 2018	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	1,048,744	$	427,825	$	620,919	$	1,048,744	$	178,639	$	1,074,284
Multi-family		-		-		-		-		-		-
Non-residential		455,196		141,804		313,392		455,196		38,674		366,226
Commercial		-		-		-		-		-		1,282
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		5,708
	$	1,503,940	$	569,629	$	934,311	$	1,503,940	$	217,313	$	1,447,500

16

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

For the three and nine months ended September 30, 2019, the Company recognized no cash basis interest income on impaired loans. For the three months and nine months ended September 30, 2018, the Company recognized no cash basis interest income on impaired loans.

At September 30, 2019 there were 27 impaired loans totaling $2.0 million, compared to 21 impaired loans totaling $1.5 million at December 31, 2018. The change in impaired loans was a result of charging off part of the balance and moving one impaired loan totaling $277,000 to foreclosed real estate, payoffs on three impaired loans of approximately $117,000, a charge off for one impaired loan of $40,000 and payments of approximately $84,000, offset by the addition of ten loans totaling approximately $1,025,000 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, 2019 included $63 thousand of loans whose terms have been modified in troubled debt restructurings, compared to $70 thousand at December 31, 2018. The amount of TDR loans included in impaired loans decreased as a result of payments of $7 thousand. 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, 2019 and 2018.

There were no TDR loans that were restructured during the twelve months prior to September 30, 2019 and 2018 that had payment defaults (i.e., 60 days or more past due following a modification) during the three or nine months ended September 30, 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 September 30, 2019 and December 31, 2018:

September 30, 2019	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,536,307	$	-
Multi-family		-		-
Non-residential		401,045		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		33,738		-
	$	1,971,090	$	-

17

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

December 31, 2018	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,048,744	$	-
Multi-family		-		-
Non-residential		455,196		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		-		-
	$	1,503,940	$	-

The following table presents the aging of the recorded investment in loans, by class of loans, as of September 30, 2019 and December 31, 2018:

September 30, 2019	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	1,923,712	$	707,550	$	954,766	$	3,586,028	$	146,430,750	$	150,016,778
Multi-family		193,132		-		-		193,132		5,685,239		5,878,371
Non-residential		282,505		-		-		282,505		29,946,820		30,229,325
Commercial		296,569		-		-		296,569		23,767,839		24,064,408
Consumer direct		18,442		11,181		-		29,623		19,516,081		19,545,704
Purchased auto		55,385		29,396		33,738		118,519		16,166,025		16,284,544
	$	2,769,745	$	748,127	$	988,504	$	4,506,376	$	241,512,754	$	246,019,130

December 31, 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	$	1,293,142	$	549,331	$	788,127	$	2,630,600	$	139,148,740	$	141,779,340
Multi-family		-		-		-		-		6,776,424		6,776,424
Non-residential		1,413,392		129,464		127,464		1,670,320		33,615,916		35,286,236
Commercial		3,989		-		-		3,989		17,237,709		17,241,698
Consumer direct		9,044		-		-		9,044		15,381,219		15,390,263
Purchased auto		31,671		16,069		-		47,740		22,032,456		22,080,196
	$	2,751,238	$	694,864	$	915,591	$	4,361,693	$	234,192,464	$	238,554,157

Credit Quality Indicators:

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

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

The Company uses the following definitions for risk ratings:

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

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

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

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

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

18

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

At September 30, 2019 and December 31, 2018, the risk category of loans by class is as follows:

September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	33,817,292	$	63,649	$	1,536,307	$	-	$	114,599,530	$	150,016,778
Multi-family		-		-		-		-		5,878,371		5,878,371
Non-residential		29,828,280		-		401,045		-		-		30,229,325
Commercial		24,064,408		-		-		-		-		24,064,408
Consumer direct		-		-		-		-		19,545,704		19,545,704
Purchased auto		-		-		33,738		-		16,250,806		16,284,544
Total	$	87,709,980	$	63,649	$	1,971,090	$	-	$	156,274,411	$	246,019,130

December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	29,653,633	$	335,758	$	1,048,744	$	-	$	110,741,205	$	141,779,340
Multi-family		-		-		-		-		6,776,424		6,776,424
Non-residential		34,831,040		-		455,196		-		-		35,286,236
Commercial		17,241,698		-		-		-		-		17,241,698
Consumer direct		-		-		-		-		15,390,263		15,390,263
Purchased auto		-		-		-		-		22,080,196		22,080,196
Total	$	81,726,371	$	335,758	$	1,503,940	$	-	$	154,988,088	$	238,554,157

At September 30, 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 $0.6 million and $0.3 million in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at September 30, 2019 and December 31, 2018, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was $7,399 and $0 for the nine-month periods ended September 30, 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 and nine months ended September 30, 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 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.

19

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The standard allowed the use of either the full retrospective or modified retrospective transition method. We elected to apply the modified retrospective transition method to incomplete contracts as of the initial date of application on January 1, 2018. The adoption of the new standard did not have a material impact on our financial condition or results of operations as the revenue recognition patterns under the new standard 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 was effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 consolidated financial statements.

20

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. On October 16, 2019, the FASB unanimously approved to delay the required implementation date for this guidance until fiscal years beginning after December 12, 2022 for certain entities. The delay would apply to small reporting companies (as defined by the SEC), such as the Company, non-SEC public companies and private companies. The Company is currently evaluating the provisions of ASU 2016-13, to determine the potential impact of the new accounting guidance 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 was 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.

21

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,
	2019		2018
Matured 03/15/2019 at 2.42%, fixed	$	-	$	1,500,000
Matured 04/01/2019 at 2.00%, fixed		-		499,272
Matured 08/30/2019 at 1.56%, fixed				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		1,000,000
Matures 09/21/2021 at 3.07%, fixed		1,000,000		1,000,000
Matures 03/21/2022 at 3.09%, fixed		1,000,000		1,000,000
Matures 09/21/2022 at 3.11%, fixed		1,000,000		1,000,000
Matures 10/03/2022 at 1.48%, fixed		78,727		87,880
Matures 03/21/2023 at 3.15%, fixed		500,000		500,000
Matures 09/21/2023 at 3.18%, fixed		500,000		500,000
Matures 08/28/2024 at 1.59%, fixed		1,500,000		-
Matures 08/28/2029 at 1.93%, fixed		1,500,000		-
	$	10,078,727	$	12,087,152

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.

22

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, 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.

The tables below present the recorded amounts of assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018.

							Total
September 30, 2019	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	13,919,480	$	-	$	13,919,480
Residential mortgage-backed securities available for sale		-		10,169,870		-		10,169,870
	$	-	$	24,089,350	$	-	$	24,089,350

							Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	13,186,788	$	-	$	13,186,788
Residential mortgage-backed securities available for sale		-		12,346,979		-		12,346,979
	$	-	$	25,533,767	$	-	$	25,533,767

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at September 30, 2019 and December 31, 2018.

							Total
September 30, 2019	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	261,802	$	261,802
Impaired loans, net		-		-		277,180		277,180

							Total
December 31, 2018	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	78,926	$	78,926
Impaired loans, net		-		-		716,998		716,998

23

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, 2019
Foreclosed assets	$	261,802	Appraisal of collateral	Appraisal adjustments	-50%	to	-67.0%
Impaired loans, net	$	217,267	Appraisal of collateral	Appraisal adjustments	-44.33%	to	-50.82%
Impaired loans, net	$	59,913	Discounted Future Cash Flows	Payment Stream		N/A
				Discount Rate		10%
December 31, 2018
Foreclosed assets	$	78,926	Appraisal of collateral	Appraisal adjustments	-36%	to	49%
Impaired loans, net	$	662,799	Appraisal of collateral	Appraisal adjustments	-44%	to	69%
Impaired loans, net	$	54,199	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, 2019 and December 31, 2018, are as follows:

			Fair Value Measurements at
	Carrying		September 30, 2019 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	10,681,449	$	10,681,449	$	-	$	-	$	10,681,449
Time deposits		3,736,000		3,736,000		-		-		3,736,000
Federal funds sold		3,947,000		3,947,000		-		-		3,947,000
Securities		24,089,350		-		24,089,350		-		24,089,350
Net loans		243,244,687		-		-		244,703,780		243,887,260
Loans held for sale		1,571,495		-		1,571,495		-		1,571,495
Accrued interest receivable		800,805		800,805		-		-		800,805
Mortgage servicing rights		435,942		-		-		435,942		435,942
Financial Liabilities:
Non-interest bearing deposits		13,798,606		13,798,606		-		-		13,798,606
Interest bearing deposits		225,967,615		-		-		227,037,230		211,681,793
Accrued interest payable		10,068		10,068		-		-		10,068
FHLB advances		10,078,727		-		10,245,752		-		10,183,435

24

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	Carrying		December 31, 2018 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	8,430,458	$	8,430,458	$	-	$	-	$	8,430,458
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		5,663,000		5,663,000		-		-		5,663,000
Securities		25,533,767		-		25,533,767		-		25,533,767
Net loans		235,926,419		-		-		232,996,807		232,996,807
Accrued interest receivable		824,542		824,542		-		-		824,542
Mortgage servicing rights		446,375		-		-		446,375		446,375
Financial Liabilities:
Non-interest bearing deposits		14,057,719		14,057,719		-		-		14,057,719
Interest bearing deposits		209,390,810		-		-		209,576,569		209,576,569
Accrued interest payable		5,648		5,648		-		-		5,648
FHLB advances		12,087,152		-		12,136,836		-		12,136,386

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.

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 September 30, 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.

25

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

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

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to September 30, 2019 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, our ability to realize estimated benefits (including, but not limited to, cost savings, synergies and growth) from acquired or merged entities, our ability to successfully integrate acquired or merged entities with us, legislative or regulatory changes that adversely affect our business, adverse developments or changes in the composition of our loan or investment portfolios, significant increases in competition, changes in real estate values, difficulties in identifying attractive acquisition opportunities or strategic partners to complement our Company’s approach and the products and services the Company offers, the possible dilutive effect of potential acquisitions or expansion, and our ability to raise new capital as needed and the timing, amount and type of such capital raises. The consequence of these factors, many of which could hurt our business, could include, among other things, increased loan delinquencies, an escalation in problem assets and foreclosures, a decline in demand for our products and services, a reduction in the value of certain assets held by us, an inability to meet our liquidity needs and an inability to engage in certain lines of business. These risks and uncertainties should be considered in evaluating forward-looking statements. Except to the extent required by applicable law or regulation the Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on March 28, 2019.

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, Sandwich and LaSalle, 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.

26

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

The Company's total assets increased $11.4 million, or 3.9%, to $304.2 million at September 30, 2019, from $292.8 million at December 31, 2018.  The increase was primarily due to an increase of $7.3 million in the net loan portfolio, an increase in time deposits of $3.5 million, increases in cash and cash equivalents of $2.3 million, an increase in loans held for sale of $1.6 million, and an increase in foreclosed real estate of $0.2 million.  These increases were partially offset by a decrease in federal funds sold of $1.8 million, a decrease in securities available for sale of $1.4 million and an overall $0.3 million decrease in the remaining other asset categories.

Cash and cash equivalents increased $2.3 million, or 27.4%, to $10.7 million at September 30, 2019 from $8.4 million at December 31, 2018. The increase in cash and cash equivalents was primarily a result of cash provided by financing activities of $9.9 million and cash provided by operating activities of $0.1 million exceeding cash used in investing activities of $7.7 million.

Federal funds sold decreased $1.8 million, or 31.6%, to $3.9 million at September 30, 2019, from $5.7 million at December 31, 2018 to fund loan growth.

Securities available for sale decreased $1.4 million, or 5.5%, to $24.1 million at September 30, 2019 from $25.5 million at December 31, 2018, as paydowns, calls, and maturities exceeded new securities purchases.

Net loans increased by $7.3 million, or 3.1% to $243.2 million at September 30, 2019 compared to $235.9 million at December 31, 2018 primarily as a result of an $8.2 million increase in one-to-four family loans, a $6.8 million increase in commercial loans and a $4.1 million increase in consumer direct loans.  The increases were offset by decreases of $5.1 million in non-residential real estate loans, $0.9 million in multi-family loans and $5.8 million in purchased auto loans.

Total deposits increased $16.4 million, or 7.3%, to $239.8 million at September 30, 2019 from $223.4 million at December 31, 2018. At September 30, 2019, checking accounts increased by $5.5 million and certificates of deposit increased by $14.5 million as compared to December 31, 2018. The increases were offset by a decrease in non-interest bearing checking accounts of $0.3 million, a decrease in savings accounts of $0.1 million and a decrease in money market accounts of $3.2 million as compared to December 31, 2018.

FHLB advances decreased $2.0 million, or 16.5% to $10.1 million at September 30, 2019, compared to $12.1 million at December 31, 2018. The decrease was related to the maturing of several advances with short term maturities that had been used to fund loan growth during the second quarter of 2019.

Stockholders’ equity decreased $2.5 million, or 4.7% to $50.3 million at September 30, 2019 from $52.8 million at December 31, 2018. The decrease reflects $2.7 million used to repurchase and cancel 190,868 outstanding shares of Company common stock and $1.8 million in cash dividends. The decreases were partially offset by an increase of $0.4 million in other comprehensive income due to an increase in the fair value of securities available for sale, net income of $1.4 million for the nine months ended September 30, 2019 and proceeds from stock options exercised.

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 0.73% at September 30, 2019 which is up from 0.54% at December 31, 2018. During the first nine months of 2019, non-performing assets increased 37.5% to $2.2 million from $1.6 million as of December 31, 2018. The increase in non-performing assets was primarily due to the increase in non-accrual loans as a result of writing down and moving one impaired loan totaling $277,000 to foreclosed real estate/repossessed assets, payoffs on three loans of $117,000, a charge off for one loan of $40,000 and payments of $84,000, offset by the addition of ten loans totaling $1.0 million to the impaired loan list. Additionally, foreclosed real estate increased to $196,000, while other repossessed assets decreased $13,000.

27

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

	September 30,		June 30,		March 31,		December 31,		September 30,
	2019		2019		2019		2018		2018
Non-accrual:	(In Thousands)
One-to-four family	$	1,536	$	1,427	$	662	$	1,049	$	1,117
Multi-family		-		-		-		-		-
Non-residential real estate		401		427		444		455		324
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Purchased auto		34		-		-		-		14
Total non-accrual loans		1,971		1,854		1,106		1,504		1,455
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		1,971		1,854		1,106		1,504		1,455
Foreclosed real estate		196		196		196		-		-
Other repossessed assets		65		75		18		79		13
Total nonperforming assets	$	2,232	$	2,125	$	1,320	$	1,583	$	1,468

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

	September 30,			June 30,			March 31,			December 31,			September 30,
	2019			2019			2019			2018			2018
Allowance for loan losses as a percent of gross loans receivable		1.13	%		1.07	%		1.10	%		1.10	%		1.14	%
Allowance for loan losses as a percent of total nonperforming loans		140.74	%		142.83	%		237.18	%		174.73	%		182.16	%
Nonperforming loans as a percent of gross loans receivable		0.80	%		0.75	%		0.46	%		0.63	%		0.63	%
Nonperforming loans as a percent of total assets		0.65	%		0.61	%		0.38	%		0.51	%		0.51	%
Nonperforming assets as a percent of total assets		0.73	%		0.70	%		0.46	%		0.54	%		0.52	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

General. Net income for the three months ended September 30, 2019 was $544,916 compared to net income of $590,143 for the three months ended September 30, 2018. The decrease in net income of $45,227 or 7.7%, was primarily attributed to a $47,594 decrease in net interest income after provision for loan losses and an increase in total other expenses of $332,101, which were partially offset by an increase in total other income of $321,013 and a decrease in tax expense of $13,455.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2019 and 2018:

	Three Months Ended
	September 30,
	2019		2018		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,879	$	2,596	$	283			10.90	%
Securities:
Residential mortgage-backed securities		67		67		-			-
State and municipal securities		101		102		(1	)		(0.98	)
Dividends on non-marketable equity securities		7		5		2			40.00
Interest-bearing deposits		82		31		51			164.52
Total interest and dividend income		3,136		2,801		335			11.96
Interest expense:
Deposits		775		454		321			70.70
Borrowings		68		47		21			44.68
Total interest expense		843		501		342			68.26
Net interest income	$	2,293	$	2,300	$	(7	)		(0.30	)%

28

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,
	2019							2018
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	243,126	$	2,879		4.74	%	$	222,436	$	2,596		4.67	%
Securities, net (2)		24,415		168		2.75	%		24,989		169		2.71	%
Non-marketable equity securities		825		7		3.39	%		791		5		2.53	%
Interest-bearing deposits		13,744		82		2.39	%		6,333		31		1.96	%
Total interest-earning assets		282,110		3,136		4.45	%		254,549		2,801		4.40	%
Non-interest-earning assets		19,376							19,875
Total assets		301,486							274,424

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	22,638	$	14	0.25	%	$	26,407	$	19	0.29	%
Savings accounts		26,322		5	0.08	%		25,902		4	0.06	%
Certificates of Deposit accounts		118,838		627	2.11	%		101,496		381	1.50	%
Checking accounts		55,600		129	0.93	%		42,311		50	0.47	%
Advances and borrowed funds		10,578		68	2.57	%		10,097		47	1.86	%
Total interest-bearing liabilities		233,976		843	1.44	%		206,213		500	0.97	%
Non-interest-bearing liabilities		8,534						15,520
Total liabilities		242,510						221,733
Equity		58,976						52,691
Total liabilities and equity		301,486						274,424
Net interest income			$	2,293					$	2,300
Net interest rate spread (3)					3.01	%					3.43	%
Net interest margin (4)					3.25	%					3.61	%
Ratio of average interest-earning assets to average interest-bearing liabilities					120.57	%					123.44	%

^{(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.}

29

The following table summarizes the changes in net interest income due to rate and volume for the three months ended September 30, 2019 and 2018. 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,
	2019 Compared to 2018
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net		244			39			283
Securities, net		(4	)		3			(1	)
Non-marketable equity securities		1			1			2
Interest-bearing deposits		44			7			51
Total interest-earning assets	$	285		$	50		$	335
Interest expense on
Money Market accounts	$	(2	)	$	(3	)	$	(5	)
Passbook accounts		0			1			1
Certificates of Deposit accounts		91			152			243
Checking		32			50			82
Advances and borrowed funds		3			18			21
Total interest-bearing liabilities		124			218			342
Change in net interest income	$	161		$	(168	)	$	(7	)

Net interest income decreased by $0.01 million, or 0.4%, to $2.29 million for the three months ended September 30, 2019, from $2.30 million for the three months ended September 30, 2018. Interest and dividend income increased $0.3 million, or 11.9%, primarily due to an increase in the average balances of interest-earning assets of $27.6 million. The increase in net interest income was partially offset by an increase in interest expense as the average cost of funds increased 47 basis points to 1.44% for the three months ended September 30, 2019. The net interest margin decreased 36 basis points during the three months ended September 30, 2019 to 3.25% from 3.61%.

Provision for Loan Losses. Management recorded a loan loss provision of $0.1 million for both of the three-month periods ended September 30, 2019 and 2018. The allowance for loan losses was $2.8 million, or 1.13% of total gross loans at September 30, 2019, compared to $2.6 million, or 1.14% of gross loans at September 30, 2018. Net recoveries during the third quarter of 2019 were ($22,000) compared to net charge-offs of $17,000 during the third quarter of 2018. General reserves were higher at September 30, 2019, when compared to September 30, 2018, primarily due to the balances in most loan categories increasing during the twelve months ended September 30, 2019. This increase in the allowance due to loan growth was partially offset by improvements in historical loss levels. Although non-performing loans increased, the necessary reserves on non-performing loans as of September 30, 2019 were approximately $140,000 lower than they were as of September 30, 2018 due to the transfer of one non-performing loan to Foreclosed Real Estate, the charge-off of the specific reserve for another non-performing loan and an improvement in the payment status of several other non-performing loans. Collateral values of real estate have stabilized and are increasing from recessionary valuation levels, but economic conditions in the local markets continue to lag national indicators, including higher levels of unemployment locally of 4.9% in LaSalle County, 4.8% in Grundy County, and 4.0% for the State of Illinois, versus the national level of 3.7%. Based on a review of the loans that were in the loan portfolio at September 30, 2019, 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.

30

Other Income. The following table summarizes other income for the three months ended September 30, 2019 and 2018.

	Three months ended
	September 30,
	2019		2018		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans	$	370	$	156	$	214			137.18
Gain on sale of foreclosed real estate		-		59		(59	)		(100.00	)
Loan origination and servicing income		292		244		48			19.67
Origination of mortgage servicing rights, net of amortization		111		4		107			2,675.00
Customer service fees		130		136		(6	)		(4.41	)
Increase in cash surrender value of life insurance		12		12		-			-
Gain/(Loss) on sale of repossessed assets		4		5		(1	)		(20.00	)
Other		42		24		18			75.00
Total other income	$	961	$	640	$	321			50.16	%

Total other income increased $0.04 million, to $1.0 million for the three months ended September 30, 2019, as compared to $0.6 million for the three months ended September 30, 2018. The increase was primarily due to an increase in gains on the sale of loans, an increase in origination of mortgage servicing rights, an increase in loan origination and servicing income and an increase in other income.  The increases in these categories was due to an increase in loan volume as well as a change in the mix in the volume of loans sold verses those being added to the portfolio.  These increases were partially offset by a decrease in gain on sale of foreclosed real estate. 

Other Expense. The following table summarizes other expense for the three months ended September 30, 2019 and 2018.

	Three months ended
	September 30,
	2019			2018			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,393		$	1,139		$	254			22.30	%
Directors fees		43			43			-			-
Occupancy		171			160			11			6.88
Deposit insurance premium		2			17			(15	)		(88.24	)
Legal and professional services		106			90			16			17.78
Data processing		186			169			17			10.06
Loan expense		201			190			11			5.79
Valuation adjustments and expenses on foreclosed real estate		20			4			16			400.00
Other		303			281			22			7.83
Total other expenses	$	2,425		$	2,093		$	332			15.86	%
Efficiency ratio (1)		74.52	%		71.19	%

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

Total other expense increased $0.3 million, or 15.9%, to $2.4 million for the three months ended September 30, 2019, as compared to $2.1 million for the three months ended September 30, 2018.  The increase was primarily due to increases in the salaries and employee benefits category due to the addition of a commercial lender and a senior credit analyst.

Income Taxes. The Company recorded income tax expense of $0.2 million for both the three-month periods ended September 30, 2019 and 2018, respectively due to similar levels of taxable and tax-exempt income in both periods.

31

The Company’s income tax differed from the maximum statutory federal rate of 21% for the three months ended September 30, 2019 and 2018, respectively as follows:

	Three Months Ended
	September 30,
	2019			2018
Expected income taxes	$	151,884		$	164,208
Income tax effect of:
State taxes, net of federal tax benefit		34,796			47,441
Tax exempt interest		(20,370	)		(19,218	)
Other		12,033			(633	)
	$	178,343		$	191,798

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

General. Net income was $1.38 million for the nine-month period ended September 30, 2019 which is a $0.05 million decrease from $1.43 million for the nine-month period ended September 30, 2018. The decrease in net income was primarily the result of total other expense and tax expense increasing more than the increase in total other income and net interest income after provision for loan losses.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2019 and 2018.

	Nine Months Ended
	September 30,
	2019		2018		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	8,592	$	7,542	$	1,050			13.92	%
Securities:
Residential mortgage-backed securities		224		206		18			8.74
State and municipal securities		299		306		(7	)		(2.29	)
Dividends on non-marketable equity securities		19		14		5			35.71
Interest-bearing deposits		181		76		105			138.16
Total interest and dividend income		9,315		8,144		1,171			14.38
Interest expense:
Deposits		2,055		1,188		867			72.98
Borrowings		210		143		67			46.85
Total interest expense		2,265		1,331		934			70.17
Net interest income	$	7,050	$	6,813	$	237			3.48	%

32

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.

	Nine Months Ended September 30,
	2019							2018
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	239,398	$	8,592		4.78	%	$	218,837	$	7,542		4.60	%
Securities, net (2)		24,726		523		2.82	%		25,287		512		2.70	%
Non-marketable equity securities		861		19		2.94	%		778		14		2.40	%
Interest-bearing deposits		9,049		181		2.67	%		5,127		76		1.98	%
Total interest-earning assets		274,034		9,315		4.53	%		250,029		8,144		4.34	%
Non-interest-earning assets		20,072							19,501
Total assets		294,106							269,530

Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	23,888	$	46	0.26	%	$	27,290	$	58	0.28	%
Savings accounts		26,886		14	0.07	%		26,298		14	0.07	%
Certificates of Deposit accounts		111,277		1,654	1.98	%		99,419		1,032	1.38	%
Checking accounts		50,863		341	0.89	%		38,746		84	0.29	%
Advances and borrowed funds		11,860		210	2.36	%		10,444		143	1.83	%
Total interest-bearing liabilities		224,774		2,265	1.34	%		202,197		1,331	0.88	%
Non-interest-bearing liabilities		10,587						14,636
Total liabilities		235,361						216,833
Equity		58,745						52,697
Total liabilities and equity		294,106						269,530
Net interest income			$	7,050					$	6,813
Net interest rate spread (3)					3.19	%					3.47	%
Net interest margin (4)					3.43	%					3.63	%
Ratio of average interest-earning assets to average interest-bearing liabilities					121.92	%					123.66	%

^{(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.}

33

The following table summarizes the changes in net interest income due to rate and volume for the nine months ended September 30, 2019 and 2018. 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,
	2019 Compared to 2018
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net		738			312			1,050
Securities, net		(12	)		23			11
Non-marketable equity securities		2			3			5
Interest-bearing deposits		78			27			105
Total interest-earning assets	$	806		$	365		$	1,171
Interest expense on
Money Market accounts	$	(7	)	$	(5	)	$	(12	)
Passbook accounts		0			(0	)		-
Certificates of Deposit accounts		176			439			615
Checking		83			181			264
Advances and borrowed funds		25			42			67
Total interest-bearing liabilities		277			657			934
Change in net interest income	$	529		$	(292	)	$	237

Net interest income increased by $0.24 million, or 3.5%, to $7.05 million for the nine months ended September 30, 2019, from $6.81 million for the nine months ended September 30, 2018. Interest and dividend income increased $1.2 million, or 14.4%, primarily due to an increase in the average balances of interest-earning assets of $24.0 million. The increase in interest and dividend income was partially offset by an increase in interest expense as the average cost of funds increased 46 basis points to 1.34% for the nine months ended September 30, 2019. The net interest margin decreased 20 basis points, or 5.51% during the nine months ended September 30, 2019 to 3.43% from 3.63% for the nine months ended September 30, 2018.   

Provision for Loan Losses. Management recorded a loan loss provision of $0.4 million for both of the nine-month periods ended September 30, 2019 and 2018. The allowance for loan losses was $2.8 million, or 1.13% of total gross loans at September 30, 2019 compared to $2.5 million, or 1.14% of gross loans at September 30, 2018. Net charge-offs during the first nine months of both 2019 and 2018 were $0.3 million. General reserves were higher at September 30, 2019, when compared to September 30, 2018, primarily due to the balances in all loan categories increasing during the twelve months ended September 30, 2019. This increase in the allowance due to loan growth was partially offset by improvements in historical loss levels. Although non-performing loans increased, the necessary reserves on non-performing loans as of September 30, 2019 were approximately $140,000 lower than they were as of September 30, 2018 due to the transfer of one non-performing loan to Foreclosed Real Estate, the charge-off of the specific reserve for another non-performing loan and an improvement in the payment status of several other non-performing loans. Collateral values of real estate have stabilized and are increasing from recessionary valuation levels, but economic conditions in the local markets continue to lag national indicators, including higher levels of unemployment locally of 4.9% in LaSalle County, 4.8% in Grundy County, and 4.0% for the State of Illinois, versus the national level of 3.7%. Based on a review of the loans that were in the loan portfolio at September 30, 2019, 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.

34

Other Income. The following table summarizes other income for the nine months ended September 30, 2019 and 2018.

	Nine months ended
	September 30,
	2019		2018		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans	$	629	$	464	$	165			35.56	%
Gain on sale of foreclosed real estate		-		99		(99	)		(100.00	)
Loan origination and servicing income		646		615		31			5.04
Origination of mortgage servicing rights, net of amortization		99		27		72			266.67
Customer service fees		371		385		(14	)		(3.64	)
Increase in cash surrender value of life insurance		35		36		(1	)		(2.78	)
Gain/(Loss) on sale of repossessed assets		12		5		7			140.00
Other		88		73		15			20.55
Total other income	$	1,880	$	1,704	$	176			10.33	%

Total other income increased slightly to $1.9 million for the nine months ended September 30, 2019, as compared to $1.7 million for the nine months ended September 30, 2018. The increase was primarily due to an increase in gains on sale of loans, an increase in the origination of mortgage servicing rights, an increase in loan origination and servicing income and an increase in other income. These increases were partially offset by a decrease in customer service fees and a decrease in gain on sale of foreclosed real estate.  Loan volume increased for the nine months ended September 30, 2019 as compared to the same period in 2018.   Additionally, the volume of loans sold increased during 2019 as less loans were kept in the portfolio.   

Other Expense. The following table summarizes other expense for the nine months ended September 30, 2019 and 2018.

	Nine months ended
	September 30,
	2019			2018			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	3,680		$	3,256		$	424			13.02	%
Directors fees		129			138			(9	)		(6.52	)
Occupancy		499			494			5			1.01
Deposit insurance premium		34			50			(16	)		(32.00	)
Legal and professional services		303			279			24			8.60
Data processing		522			485			37			7.63
Loan expense		538			553			(15	)		(2.71	)
Valuation adjustments and expenses on foreclosed real estate		32			25			7			28.00
Other		902			958			(56	)		(5.85	)%
Total other expenses	$	6,639		$	6,238		$	401			6.43
Efficiency ratio (1)		74.34	%		73.24	%

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

Total other expense increased $0.4 million, or 6.5%, to $6.6 million for the nine months ended September 30, 2019, as compared to $6.2 million for the nine months ended September 30, 2018.  The increase was primarily due to higher salaries and employee benefits, legal and professional fees and data processing costs. Salaries and employee benefits increased due to the addition of several individuals in the commercial loan area. These increases were offset in reductions in loan expense and other expense. The efficiency ratio increased due to increased total other expenses for the for the nine-month period ended September 30, 2019.

Income Taxes. The Company recorded income tax expense of $0.5 million for both nine-month periods ended September 30, 2019 and 2018, respectively due to similar levels of taxable and tax-exempt income in both periods.

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The Company’s income tax differed from the maximum statutory federal rate of 21% for the nine months ended September 30, 2019 and 2018, respectively as follows:

	Nine Months Ended
	September 30,
	2019			2018
Expected income taxes	$	396,061		$	399,475
Income tax effect of:
State taxes, net of federal tax benefit		122,609			115,708
Tax exempt interest		(59,513	)		(58,296	)
Other		47,250			19,775
	$	506,407		$	476,662

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, 2019, the Bank had outstanding commitments to originate $4.0 million in loans, unfunded lines of credit of $14.8 million, and $6.4 million in commitments to fund construction loans. In addition, as of September 30, 2019, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $66.3 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, 2019, the Bank had $78.4 million of available credit from the FHLBC and there were $10.1 million in FHLBC advances outstanding. In addition, as of September 30, 2019 the Bank had $7.9 million of available credit from Bankers Bank of Wisconsin as well as a $5.0 million line of credit available with 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, 2019, 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, 2019 of 21.59%, 20.34%, 20.34%, and 15.14%, respectively, compared to ratios at December 31, 2018 of 21.08%, 19.88%, 19.88%, and 15.16%, respectively. As of January 1, 2019, the Bank must hold 2.5% of risk-weighted assets as a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments. As a savings and loan holding company with less than $1.0 billion in assets, the Company is not subject to separate capital requirements.

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OFF-BALANCE SHEET ARRANGEMENTS

For the nine months ended September 30, 2019, 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, 2018, which could materially affect our business, financial condition or future results. As of September 30, 2019, 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 7, 2018, the Company announced that it has approved a stock repurchase program authorizing the purchase of 337,440 share, representing 10% of the Company’s outstanding shares of common stock. The stock repurchase program was approved in connection with the expiration of the Company’s previously approved stock repurchase program, which occurred 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.

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The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2019:

			Number of Shares	Maximum Number
			Purchased as Part	of Shares that
	Number	Average	of Publicly	may yet be
	of Shares	Price Paid	Announced	Purchased Under
	Purchased	per Share	Programs	the Program
July 1-31, 2019	6,000	10.47	6,000	182,601
August 1 - 31, 2019	19,175	12.61	19,175	163,426
September 1-30, 2019	27,589	12.65	27,589	135,837
Total	52,764	12.70	52,764	135,837

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 nine months ended September 30, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Statements of Comprehensive Income; (iv) The Condensed Consolidated Statements of Cash Flows and (v) related notes.

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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, 2019	/s/ Craig M. Hepner
	Craig M. Hepner President and Chief Executive Officer (Principal Executive Officer)
Date: November 14, 2019	/s/ Marc N. Kingry
	Marc N. Kingry Chief Financial Officer (Principal Financial Officer)

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