Note 12 - Acquisition

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 1

2

–

ACQUISITION

On December 31, 2014, Ottawa Savings Bancorp completed its acquisition of Twin Oaks. Pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of June 30, 2014, Twin Oaks merged with and into the Bank, effective December 31, 2014. As part of the transaction, Ottawa Savings Bancorp issued 776,144 shares of its common stock to Ottawa Savings Bancorp MHC, based on a $9.18 per share stock valuation of Ottawa Savings Bancorp’s stock, as determined by an independent appraisal based primarily on the price to book value valuation method and to a lesser extent the price to earnings valuation method, and a market value determined by an independent appraiser of Twin Oaks of $7.125 million. As a result of the issuance of 776,144 shares in connection with the merger, Ottawa Savings Bancorp MHC’s ownership interest in Ottawa Savings Bancorp increased from 57.8% to 69.1%.

The Merger was accounted for using the acquisition

method

of

accounting, and

accordingly, the

assets acquired and

liabilities assumed

were

recognized

at fair value on the date

the transaction was completed. Under this method of accounting, the Bank and Twin Oaks are treated as one company from the acquisition date forward, and we have recorded the fair value of Twin Oaks’ assets (including intangible assets which arise from either contractual or other legal rights) and liabilities in our consolidated financial statements.

Total merger related costs included in other noninterest expenses in the consolidated statement of operations for the nine months ended September 30, 2015 were approximately $850,000. The merger related costs are primarily related to the merger of the core processing systems.

 

Based on the merger date fair values of the assets acquired and the fair values of the assumed liabilities, the Company recorded goodwill of $649,869, none of which is expected to be tax deductible. The goodwill resulting from the merger primarily consists of the economies of scale expected from combining operations.

Total loans acquired in the merger were recorded at a fair value of $29,795,910 and had a contractual amount due of $31,831,910 as of the acquisition date, which was December 31, 2014.

FASB ASC 310-20, Nonrefundable Fees and Other Costs,

specifies the approach that needs to be used when the Bank expects to receive all of the contractual principal and interest payments due under an individual loan. Loans not considered to have deteriorated credit quality at the merger date had a contractual balance due of approximately $28,638,000 and an estimated fair value of approximately $28,472,000. The loan discount recorded at the date of the merger consisted of an accretable yield component of approximately $407,000 and an accretable credit component of approximately $(573,000), for a net fair value adjustment of approximately $(166,000).

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

The following table reflects activity for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Balance, beginning of period	$	498,912		$	1,201,159		$	575,605		$	1,323,648
Payment activity		(42,422	)		(147,664	)		(134,325	)		(309,968	)
Charge-offs		-			-			-			(19,810	)
Recoveries		-			-			-			-
Transfer to OREO		-			(266,225	)		(44,417	)		(266,225	)
Accretion to income		23,345			28,883			82,972			88,508
	$	479,835		$	816,153		$	479,835		$	816,153

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $1,116,000 and $1,208,000 as of September 30, 2016 and December 31, 2015, respectively.

The following table reflects activity in the accretable yield for the loans acquired with deteriorated credit quality for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Balance, beginning of period	$	124,583		$	302,375		$	175,342		$	362,000
Net reclassification from non-accretable yield		-			4,186			8,868			4,186
Accretion into interest income		(23,345	)		(28,883	)		(82,972	)		(88,508	)
Disposals		-			(64,521	)		-			(64,521	)
	$	101,238		$	213,157		$	101,238		$	213,157