UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

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. (Check one)

Large accelerated filer ☐	Accelerated filer ☐
Non-Accelerated filer ☐	Smaller Reporting Company  ☒
	Emerging Growth Company ☐

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

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

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

Class	Outstanding as of May 14, 2020
Common Stock, $0.01 par value	3,121,035

OTTAWA BANCORP, INC.

FORM 10-Q

For the quarterly period ended March 31, 2020

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	24
Item 3       Quantitative and Qualitative Disclosures about Market Risk	32
Item 4       Controls and Procedures	32
PART II – OTHER INFORMATION
Item 1       Legal Proceedings	32
Item 1A    Risk Factors	32
Item 2       Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3       Defaults upon Senior Securities	33
Item 4       Mine Safety Disclosures	33
Item 5       Other Information	33
Item 6       Exhibits	33
SIGNATURES	34

2

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA BANCORP, INC.

Consolidated Balance Sheets

March 31, 2020 and December 31, 2019

(Unaudited)

	March 31,			December 31,
	2020			2019
Assets
Cash and due from banks	$	10,671,653		$	5,272,925
Interest bearing deposits		4,309,495			765,486
Total cash and cash equivalents		14,981,148			6,038,411
Time deposits		745,500			1,483,500
Federal funds sold		2,027,000			4,185,000
Securities available for sale		22,898,813			24,515,759
Loans, net of allowance for loan losses of $3,357,596 and $2,937,632
at March 31, 2020 and December 31, 2019, respectively		250,324,233			247,775,814
Loans held for sale		-			1,225,526
Premises and equipment, net		6,449,871			6,517,922
Accrued interest receivable		816,995			875,104
Deferred tax assets		1,806,616			1,743,161
Cash surrender value of life insurance		2,402,228			2,389,530
Goodwill		649,869			649,869
Core deposit intangible		160,499			169,999
Other assets		3,812,100			2,962,101
Total assets	$	307,074,872		$	300,531,696
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	17,366,843		$	13,664,986
Interest bearing		225,061,788			222,648,518
Total deposits		242,428,631			236,313,504
Accrued interest payable		89,832			8,146
FHLB advances		13,569,123			9,068,030
Other liabilities		2,229,358			4,431,141
Total liabilities		258,316,944			249,820,821
Stockholders' Equity
Common stock, $0.01 par value, 12,000,000 shares authorized; 3,119,598 and 3,159,494 shares issued at March 31, 2020 and December 31, 2019, respectively		31,190			31,594
Additional paid-in-capital		32,263,029			32,845,639
Retained earnings		17,770,596			18,938,633
Unallocated ESOP shares		(1,366,815	)		(1,398,600	)
Unearned management recognition plan shares		(66,982	)		(30,944	)
Accumulated other comprehensive income		126,910			324,553
Total stockholders' equity		48,757,928			50,710,875
Total liabilities and stockholders' equity	$	307,074,872		$	300,531,696

See accompanying notes to these unaudited consolidated financial statements.

3

OTTAWA BANCORP, INC.

Consolidated Statements of Income

Three Months Ended March 31, 2020 and 2019

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
Interest and dividend income:
Interest and fees on loans	$	2,909,081		$	2,860,592
Securities:
Residential mortgage-backed and related securities		67,230			82,461
State and municipal securities		95,944			97,411
Dividends on non-marketable equity securities		6,590			6,434
Interest-bearing deposits		40,148			45,378
Total interest and dividend income		3,118,993			3,092,276
Interest expense:
Deposits		730,819			608,390
Borrowings		61,896			72,701
Total interest expense		792,715			681,091
Net interest income		2,326,278			2,411,185
Provision for loan losses		450,000			130,000
Net interest income after provision for loan losses		1,876,278			2,281,185
Other income:
Gain on sale of loans		107,067			84,957
Gain on sale of securities, net		857			-
Loan origination and servicing income		114,958			154,283
Origination of mortgage servicing rights, net of amortization		(10,443	)		(9,690	)
Customer service fees		106,840			115,866
Increase in cash surrender value of life insurance		12,699			11,934
Gain/(Loss) on sale of repossessed assets, net		16,031			(748	)
Other		37,673			21,762
Total other income		385,682			378,364
Other expenses:
Salaries and employee benefits		1,264,646			1,098,588
Directors fees		43,000			43,000
Occupancy		178,525			170,950
Deposit insurance premium		-			17,100
Legal and professional services		104,622			95,535
Data processing		223,273			186,588
Loan expense		134,350			164,412
Valuation adjustments and expenses on foreclosed real estate		559			5,584
Other		211,665			282,887
Total other expenses		2,160,640			2,064,614
Income before income tax expense		101,320			594,935
Income tax expense		15,364			194,865
Net income	$	85,956		$	400,070
Basic earnings per share	$	0.029		$	0.130
Diluted earnings per share	$	0.029		$	0.130
Dividends per share	$	0.418		$	0.060

See accompanying notes to these unaudited consolidated financial statements.

4

OTTAWA BANCORP, INC.

Consolidated Statements of Comprehensive Income  

Three Months Ended March 31, 2020 and 2019

(Unaudited)

	Three Months Ended
	March 31,
	2020			2019
Net income	$	85,956		$	400,070
Other comprehensive (loss) income, before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period		(276,443	)		167,621
Other comprehensive income (loss) , before tax		(276,443	)		167,621
Income tax benefit related to items of other comprehensive income (loss)		(78,800	)		(22,994	)
Other comprehensive (loss) income, net of tax		(197,643	)		190,615
Comprehensive (loss) income	$	(111,687	)	$	590,685

See accompanying notes to these unaudited consolidated financial statements.

5

 Ottawa Bancorp, Inc. & Subsidiary

Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2020 and 2019

(Unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Unallocated ESOP Shares			Unearned MRP Shares			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2018	$	33,589		$	35,579,606		$	18,859,232		$	(1,576,616	)	$	(40,361	)	$	(31,084	)	$	52,824,366
Net income		-			-			400,070			-			-			-			400,070
Other comprehensive income		-			-			-			-			-			190,615			190,615
Allocation 4,694 of ESOP shares		-			19,595			-			44,504			-			-			64,099
Compensation expense on MRP awards amortized		-			-			-			-			3,363			-			3,363
RRP options exercised		25			8,900			-			-			-			-			8,925
Cash dividends paid, $0.06 per share		-			-			(201,110	)		-			-			-			(201,110	)
Repurchase 24,963 shares		(249	)		(347,331	)		-			-			-			-			(347,580	)
Balance, March 31, 2019	$	33,365		$	35,260,770		$	19,058,192		$	(1,532,112	)	$	(36,998	)	$	159,531		$	52,942,747
Balance, December 31, 2019	$	31,594		$	32,845,639		$	18,938,633		$	(1,398,600	)	$	(30,944	)	$	324,553		$	50,710,875
Net income		-			-			85,956			-			-			-			85,956
Other comprehensive income		-			-			-			-			-			(197,643	)		(197,643	)
Allocation 3,179 of ESOP shares		-			8,528			-			31,785			-			-			40,313
MRP awards granted		30			38,671			-			-			(38,701	)		-			-
Compensation expense on MRP awards granted		-			-			-			-			2,663			-			2,663
RRP options exercised		38			13,351			-			-			-			-			13,389
Cash dividends paid, $0.418 per share		-			-			(1,253,993	)		-			-			-			(1,253,993	)
Repurchase 47,249 shares		(472	)		(643,160	)		-			-			-			-			(643,632	)
Balance, March 31, 2020	$	31,190		$	32,263,029		$	17,770,596		$	(1,366,815	)	$	(66,982	)	$	126,910		$	48,757,928

See accompanying notes to these unaudited consolidated financial statements.

6

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2020 and 2019

(Unaudited)

	2020			2019
Cash Flows from Operating Activities
Net income	$	85,956		$	400,070
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		70,704			72,630
Provision for loan losses		450,000			130,000
Provision for deferred income taxes		15,345			73,647
Net amortization of premiums and discounts on securities		29,843			37,107
Origination of mortgage loans held for sale		(4,102,640	)		(2,596,655	)
Proceeds from sale of mortgage loans held for sale		5,435,233			2,431,107
Gain on sale of loans, net		(107,067	)		(84,957	)
Origination of mortgage servicing rights, net of amortization		10,443			9,690
Gain on sale of securities, net		(857	)		-
Loss on sale of repossessed assets, net		16,031			-
MRP compensation expense		2,633			3,363
ESOP compensation expense		40,313			64,099
Amortization of core deposit intangible		9,500			14,500
Amortization of fair value adjustments on acquired:
Loans		4,325			4,538
Federal Home Loan Bank Advances		1,093			1,093
Increase in cash surrender value of life insurance		(12,698	)		(11,934	)
Change in assets and liabilities:
Increase in accrued interest receivable		58,109			(16,463	)
(Increase) decrease in other assets		(891,078	)		167,016
Increase in accrued interest payable and other liabilities		(2,120,096	)		256,109
Net cash (used in) provided by operating activities		(1,004,908	)		954,960
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(167,148	)		-
Sales, calls, maturities and paydowns		1,478,665			1,194,282
Net increase in loans		(3,030,244	)		(251,876	)
Net decrease in time deposits		738,000			-
Net decrease in federal funds sold		2,158,000			1,254,000
Proceeds from sale of repossessed assets		42,105			114,444
Purchase of premises and equipment		(2,653	)		(147,502	)
Net cash used in investing activities		1,216,725			2,163,348
Cash Flows from Financing Activities
Net increase (decrease) in deposits		6,115,127			(2,206,372	)
Proceeds from Federal Home Loan Bank advances		4,500,000			-
Principal reduction of Federal Home Loan Bank advances		-			(1,500,000	)
Proceeds from stock options exercised		13,388			8,925
Shares repurchased and cancelled		(643,602	)		(347,580	)
Dividends paid		(1,253,993	)		(201,110	)
Net cash provided by (used in) financing activities		8,730,920			(4,246,137	)
Net increase (decrease) in cash and cash equivalents		8,942,737			(1,127,829	)
Cash and cash equivalents:
Beginning of period		6,038,411			8,430,458
End of period	$	14,981,148		$	7,302,629
(Continued)

See accompanying notes to these unaudited consolidated financial statements.

7

OTTAWA BANCORP, INC.

Consolidated Statements of Cash Flows (Continued)

Three Months Ended March 31, 2020 and 2019

(Unaudited) 

	2020		2019
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	649,133	$	597,245
Interest paid on borrowings		61,896		73,348
Income taxes paid, net of refunds received		-		300
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		-		196,000
Other assets acquired in settlement of loans		27,500		54,500

See accompanying notes to these unaudited consolidated financial statements

8

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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.

The Company is positioned to execute its mission as an essential community resource during these challenging times. The coronavirus disease 2019 (“COVID-19”) is not only impacting health and safety around the world, it is causing significant economic disruption for both individuals and businesses, making the Company’s promise of support even more important to customers. In the face of the challenges and risks posed by COVID-19, the Company remains resolute in its focus on protecting the strength and flexibility of its balance sheet. The progression of the COVID-19 pandemic in the United States began to negatively impact the Company’s results of operations during the quarter ended March 31, 2020. Going forward, COVID-19 can be expected to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty as it relates to both timing and severity. Primary areas of impact in the future for the Company may include margin compression, increased provision expense, a deterioration in asset quality and decreased fees for customer services.

Subsequent Events 

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. Other than as discussed below, there were no significant subsequent events for the quarter ended March 31, 2020 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

The COVID-19 pandemic has disrupted and adversely affected the Bank’s business and results of operations, and the ultimate impacts of the pandemic on the Bank’s business, financial condition and results of operations will depend on future developments and other factors that are highly uncertain and will be impacted by the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

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, 2019, which are included in the Company’s Annual Report Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on March 30, 2020. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

NOTE 3 – USE OF ESTIMATES

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

9

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

At March 31, 2020, 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 30, 2020.

NOTE 4 – CRITICAL ACCOUNTING POLICIES

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

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

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

NOTE 5 – EARNINGS PER SHARE 

Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released employee stock ownership plan shares. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.

	Three Months Ended
	March 31,
	2020			2019
Net income available to common stockholders	$	85,956		$	400,070
Basic potential common shares:
Weighted average shares outstanding		3,141,912			3,346,185
Weighted average unvested MRP share		(2,445	)		(3,060	)
Weighted average unallocated ESOP shares		(138,801	)		(157,022	)
Basic weighted average shares outstanding		3,000,666			3,186,103
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		-			103
Weighted average RRP options outstanding		5,391			5,541
Dilutive weighted average shares outstanding		3,006,057			3,191,747
Basic earnings per share	$	0.029		$	0.130
Diluted earnings per share	$	0.029		$	0.130

10

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

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:

	March 31,			December 31,
	2020			2019
Shares allocated		145,009			141,831
Shares withdrawn from the plan		(28,365	)		(28,365	)
Unallocated shares		136,682			139,860
Total ESOP shares		253,326			253,326
Fair value of unallocated shares	$	1,498,029		$	1,934,264

NOTE 7 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2020:
Securities Available for Sale
State and municipal securities	$	12,623,899	$	68,477	$	49,417	$	12,642,959
Residential mortgage-backed securities		10,097,405		178,860		20,411	$	10,255,854
	$	22,721,304	$	247,337	$	69,828	$	22,898,813
December 31, 2019:
Securities Available for Sale
State and municipal securities	$	13,126,074	$	339,243	$	-	$	13,465,317
Residential mortgage-backed securities		10,935,731		144,845		30,136		11,050,442
	$	24,061,805	$	484,088	$	30,136	$	24,515,759

11

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The amortized cost and fair value at March 31, 2020, 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	$	-	$	-
Due after three months through one year		2,436,843		2,434,230
Due after one year through five years		3,455,503		3,477,066
Due after five years through ten years		3,845,134		3,842,314
Due after ten years		2,886,419		2,889,349
Residential mortgage-backed securities		10,097,405		10,255,854
	$	22,721,304	$	22,898,813

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at March 31, 2020 and December 31, 2019:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
March 31, 2020
Securities Available for Sale
State and municipal securities	$	4,593,310	$	49,417	$	-	$	-	$	4,593,310	$	49,417
Residential mortgage-backed securities		790,156		3,017		1,976,472		17,394		2,766,628		20,411
	$	5,383,466	$	52,434	$	1,976,472	$	17,394	$	7,359,938	$	69,828
December 31, 2019
Securities Available for Sale
Residential mortgage-backed securities		1,912,778		6,049		2,943,044		24,087		4,855,822		30,136
	$	1,912,778	$	6,049	$	2,943,044	$	24,087	$	4,855,822	$	30,136

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

At March 31, 2020, 31 securities had unrealized losses with an aggregate depreciation of 0.98% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at March 31, 2020 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 $0.3 million of proceeds from the sales of securities for the three months ended March 31, 2020 and no proceeds from sale of securities for the three months ended March 31, 2019. The sales during the three months ended March 31, 2020 resulted in gross realized gains of $873. The tax provision applicable to the realized gains amounted to $16 for the three months ended March 31, 2020.

12

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	March 31,			December 31,
	2020			2019
Mortgage loans:
One-to-four family residential loans	$	155,788,454		$	155,143,081
Multi-family residential loans		6,932,652			5,861,428
Total mortgage loans		162,721,106			161,004,509
Other loans:
Non-residential real estate loans		30,440,187			30,679,614
Commercial loans		28,950,668			23,915,335
Consumer direct		18,461,591			20,562,789
Purchased auto		13,108,277			14,551,199
Total other loans		90,960,723			89,708,937
Gross loans		253,681,829			250,713,446
Less: Allowance for loan losses		(3,357,596	)		(2,937,632	)
Loans, net	$	250,324,233		$	247,775,814

During the three month period ended March 31, 2020 and 2019, there were no purchases of loans receivable, segregated by class of loans.

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

	Three Months Ended March 31,
	2020			2019
One-to-four family	$	2,601		$	(109,876	)
Multi-family		3,972			3,971
Consumer direct		566			353
Purchased auto		(37,175	)		(23,821	)
Net (charge-offs)/recoveries	$	(30,036	)	$	(129,373	)

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 March 31, 2020 and 2019:

	One-to-
	four		Multi-		Non-				Consumer		Purchased
March 31, 2020	family		family		residential		Commercial		direct		auto			Total
Balance at beginning of period	$	2,121,082	$	24,333	$	207,410	$	198,565	$	191,821	$	194,421		$	2,937,632
Provision charged to income		228,857		14,698		42,108		85,768		19,679		58,890			450,000
Loans charged off		-		-		-		-		-		(40,694	)		(40,694	)
Recoveries of loans previously charged off		2,601		3,972		-		-		566		3,519			10,658
Balance at end of period	$	2,352,540	$	43,003	$	249,518	$	284,333	$	212,066	$	216,136		$	3,357,596

	One-to-
	four			Multi-			Non-					Consumer		Purchased
March 31, 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		71,605			(3,835	)		(25,809	)		10,492		41,985		35,562			130,000
Loans charged off		(236,220	)		-			-			-		-		(34,520	)		(270,740	)
Recoveries of loans previously charged off		126,344			3,971			-			-		353		10,699			141,367
Balance at end of period	$	1,723,465		$	26,698		$	317,854		$	145,657	$	125,285	$	289,406		$	2,628,365

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of March 31, 2020 and December 31, 2019:

	One-to-
	four		Multi-		Non-				Consumer		Purchased
March 31, 2020	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for Impairment	$	2,016,080	$	-	$	335,441	$	-	$	18,732	$	37,964	$	2,408,217
Loans acquired with deteriorated credit quality		159,989		-		-		-		-		-		159,989
Loans collectively evaluated for Impairment		153,612,385		6,932,652		30,104,746		28,950,668		18,442,859		13,070,313		251,113,623
Balance at end of period	$	155,788,454	$	6,932,652	$	30,440,187	$	28,950,668	$	18,461,591	$	13,108,277	$	253,681,829
Period-end amount allocated to:
Loans individually evaluated for Impairment	$	85,776	$	-	$	-	$	-	$	3,968	$	18,982	$	108,726
Loans acquired with deteriorated credit quality		68,744		-		-		-		-		-		68,744
Loans collectively evaluated for Impairment		2,198,020		43,003		249,518		284,333		208,098		197,154		3,180,126
Balance at end of period	$	2,352,540	$	43,003	$	249,518	$	284,333	$	212,066	$	216,136	$	3,357,596

14

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	One-to-
	four		Multi-		Non-				Consumer		Purchased
December 31, 2019	family		family		residential		Commercial		direct		auto		Total
Loans individually evaluated for Impairment	$	1,724,694	$	-	$	343,720	$	-	$	-	$	19,190	$	2,087,604
Loans acquired with deteriorated credit quality		164,758		-		-		-		-		-		164,758
Loans collectively evaluated for Impairment		153,253,629		5,861,428		30,335,894		23,915,335		20,562,789		14,532,009		248,461,084
Balance at end of period	$	155,143,081	$	5,861,428	$	30,679,614	$	23,915,335	$	20,562,789	$	14,551,199	$	250,713,446
Period-end amount allocated to:
Loans individually evaluated for Impairment	$	90,359	$	-	$	-	$	-	$	-	$	9,595	$	99,954
Loans acquired with deteriorated credit quality		100,172		-		-		-		-		-		100,172
Loans collectively evaluated for Impairment		1,930,551		24,333		207,410		198,565		191,821		184,826		2,737,506
Balance at end of period	$	2,121,082	$	24,333	$	207,410	$	198,565	$	191,821	$	194,421	$	2,937,632

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

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2020 and December 31, 2019:

March 31, 2020	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	2,176,069	$	1,700,599	$	475,470	$	2,176,069	$	154,520	$	2,153,496
Multi-family		-		-		-		-		-		-
Non-residential		335,441		335,441		-		335,441		-		338,039
Commercial		-		-		-		-		-		-
Consumer direct		18,732		-		18,732		18,732		3,968		6,244
Purchased auto		37,964		-		37,964		37,964		18,982		12,655
	$	2,568,206	$	2,036,040	$	532,166	$	2,568,206	$	177,470	$	2,510,434

December 31, 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	$	1,889,452	$	1,357,280	$	532,172	$	1,889,452	$	190,531	$	1,298,425
Multi-family		-		-		-		-		-		-
Non-residential		343,720		343,720		-		343,720		-		377,632
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		19,190		-		19,190		19,190		9,595		5,736
	$	2,252,362	$	1,701,000	$	551,362	$	2,252,362	$	200,126	$	1,681,793

15

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

For the three months ended March 31, 2020 and 2019, the Company recognized no cash basis interest income on impaired loans.

At March 31, 2020 there were 35 impaired loans totaling approximately $2.6 million, compared to 30 impaired loans totaling approximately $2.3 million at December 31, 2019. The change in impaired loans was a result of the addition of five loans totaling approximately $405,000 to the impaired loan list offset by the payoff of a loan of approximately $30,000 and payments of approximately $108,000.

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.

Section 4013 of the U.S. Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), “Temporary Relief from Troubled Debt Restructurings,” allows banks to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. A bank may elect to account for modifications on certain loans under Section 4013 of the CARES Act or, if a loan modification is not eligible under Section 4013, a bank may use the criteria in the COVID-19 guidance to determine when a loan modification is not a TDR in accordance with ASC 310-40. Guidance noted that modification or deferral programs mandated by the federal or a state government related to COVID-19 would not be in the scope of ASC 310-40, such as a state program that requires all institutions within that state to suspend mortgage payments for a specified period.

Impaired loans at March 31, 2020 included approximately $58,000 of loans whose terms have been modified in troubled debt restructurings, compared to approximately $60,000 at December 31, 2019. The amount of TDR loans included in impaired loans decreased as a result of payments of approximately $2,000. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

There were no new loans classified as TDRs during the three months ended March 31, 2020 and 2019.

There were no TDR loans that were restructured during the twelve months prior to March 31, 2020 and 2019 that had payment defaults (i.e., 60 days or more past due following a modification) during the three months ended March 31, 2020 and 2019.

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

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as of March 31, 2020 and December 31, 2019:

March 31, 2020	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,176,069	$	-
Multi-family		-		-
Non-residential		335,441		-
Commercial		-		-
Consumer direct		18,732		-
Purchased auto		37,964		-
	$	2,568,206	$	-

16

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

December 31, 2019	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	1,889,452	$	-
Multi-family		-		-
Non-residential		343,720		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		19,190		-
	$	2,252,362	$	-

The following table presents the aging of the recorded investment in loans, by class of loans, as of March 31, 2020 and December 31, 2019:

March 31, 2020	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	$	3,358,841	$	1,032,608	$	904,345	$	5,295,794	$	150,492,660	$	155,788,454
Multi-family		-		-		-		-		6,932,652		6,932,652
Non-residential		104,716		265,360		64,116		434,192		30,005,995		30,440,187
Commercial		53,429		-		-		53,429		28,897,239		28,950,668
Consumer direct		51,950		-		-		51,950		18,409,641		18,461,591
Purchased auto		-		-		37,964		37,964		13,070,313		13,108,277
	$	3,568,936	$	1,297,968	$	1,006,425	$	5,873,329	$	247,808,500	$	253,681,829

December 31, 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	$	2,635,464	$	607,023	$	986,029	$	4,228,516	$	150,914,565	$	155,143,081
Multi-family		104,716		-		-		104,716		5,756,712		5,861,428
Non-residential		272,138		64,116		-		336,254		30,343,360		30,679,614
Commercial		368,448		52,629		-		421,077		23,494,258		23,915,335
Consumer direct		29,243		-		-		29,243		20,533,546		20,562,789
Purchased auto		64,489		21,673		19,190		105,352		14,445,847		14,551,199
	$	3,474,498	$	745,441	$	1,005,219	$	5,225,158	$	245,488,288	$	250,713,446

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.

17

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The Company uses the following definitions for risk ratings:

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

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

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

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

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

At March 31, 2020 and December 31, 2019, the risk category of loans by class is as follows:

March 31, 2020	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	24,285,097	$	40,026	$	2,016,080	$	-	$	129,447,251	$	155,788,454
Multi-family		-		-		-		-		6,932,652		6,932,652
Non-residential		30,047,568		57,178		335,441		-		-		30,440,187
Commercial		28,950,688		-		-		-		-		28,950,688
Consumer direct		-		-		18,732		-		18,442,859		18,461,591
Purchased auto		-		-		37,964		-		13,070,313		13,108,277
Total	$	83,283,333	$	97,204	$	2,408,217	$	-	$	167,893,075	$	253,681,829

December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Not rated		Total Loans
One-to-four family	$	29,089,454	$	40,429	$	1,889,452	$	-	$	124,123,746	$	155,143,081
Multi-family		-		-		-		-		5,861,428		5,861,428
Non-residential		30,335,894		-		343,720		-		-		30,679,614
Commercial		23,915,335		-		-		-		-		23,915,335
Consumer direct		-		-		-		-		20,562,789		20,562,789
Purchased auto		-		-		19,190		-		14,532,009		14,551,199
Total	$	83,340,683	$	40,429	$	2,252,362	$	-	$	165,079,972	$	250,713,446

At March 31, 2020 and December 31, 2019, the Company held $0 in foreclosed residential real estate property. In addition, the Company also held $819,871 and $607,268 in consumer mortgage loans that are collateralized by residential real estate properties that were in the process of foreclosure at March 31, 2020 and December 31, 2019, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was $2,663 and $3,363 for the three-month periods ended March 31, 2020 and 2019, respectively. In accordance with FASB ASC 718, Compensation-Stock Compensation, compensation expense is recognized on a straight-line basis over the grantees’ vesting period or to the grantees’ retirement eligibility date, if earlier. During the three months ended March 31, 2020 and 2019, the Company did not grant additional options or shares under the Management Recognition Plan (MRP).

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

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 the guidance on January 1, 2019 and the standard did not have a material impact on its consolidated financial statements.

18

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effect of) reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In accordance with the amendments in this Update, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

19

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:

	March 31,		December 31,
	2020		2019
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		69,123		68,030
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		1,500,000
Matures 03/31/2025 at 1.19%, fixed		2,000,000		-
Matures 08/28/2029 at 1.93%, fixed		1,500,000		1,500,000
Matures 10/23/2029 at 1.96%, fixed		1,000,000		1,000,000
Matures 01/28/2030 at 2.06%, fixed		1,500,000		-
Matures 02/25/2029 at 1.81%, fixed		1,000,000		-
	$	13,569,123	$	9,068,030

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.

20

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 three months ended March 31, 2020 and the year ended December 31, 2019. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfers between levels.

The tables below present the recorded amounts of assets measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019.

							Total
March 31, 2020	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	12,642,959	$	-	$	12,642,959
Residential mortgage-backed securities available for sale		-		10,255,854		-		10,255,854
	$	-	$	22,898,813	$	-	$	22,898,813

December 31, 2019	Level 1		Level 2		Level 3		Total Fair Value
State and municipal securities available for sale	$	-	$	13,465,317	$	-	$	13,465,317
Residential mortgage-backed securities available for sale		-		11,050,442		-		11,050,442
	$	-	$	24,515,759	$	-	$	24,515,759

The tables below present the recorded amounts of assets measured at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.

							Total
March 31, 2020	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	15,963	$	15,963
Impaired loans, net		-		-		354,696		354,696

							Total
December 31, 2019	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	12,926	$	12,926
Impaired loans, net		-		-		351,236		351,236

21

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
March 31, 2020
Foreclosed assets	$	15,963	Appraisal of collateral	Appraisal adjustments	(35)%	to	(68)%
Impaired loans, net	$	264,080	Appraisal of collateral	Appraisal adjustments	(16)%	to	(100.0)%
Impaired loans, net	$	90,616	Discounted Future Cash Flows	Payment Stream		N/A
				Discount Rate		10%
December 31, 2019
Foreclosed assets	$	12,926	Appraisal of collateral	Appraisal adjustments	(50)%	to	(76)%
Impaired loans, net	$	287,815	Appraisal of collateral	Appraisal adjustments		(46.67)%
Impaired loans, net	$	63,421	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 March 31, 2020 and December 31, 2019, are as follows:

			Fair Value Measurements at
	Carrying		March 31, 2020 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	14,981,148	$	14,981,148	$	-	$	-	$	14,981,148
Time deposits		745,500		745,500		-		-		745,500
Federal funds sold		2,027,000		2,027,000		-		-		2,027,000
Securities		22,898,813		-		22,898,813		-		22,898,813
Net loans		250,324,233		-		-		250,467,566		250,467,566
Accrued interest receivable		816,995		816,995		-		-		816,995
Mortgage servicing rights		524,203		-		-		524,203		524,203
Financial Liabilities:
Non-interest bearing deposits		17,366,843		17,366,843		-		-		17,366,843
Interest bearing deposits		225,061,788		-		-		229,410,384		229,410,384
Accrued interest payable		89,832		89,832		-		-		89,832
FHLB advances		13,569,123		-		14,096,051		-		14,096,051

22

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	Carrying		December 31, 2019 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	6,038,411	$	6,038,411	$	-	$	-	$	6,038,411
Time deposits		1,483,500		1,483,500		-		-		1,483,500
Federal funds sold		4,185,000		4,185,000		-		-		4,185,000
Securities		24,515,759		-		24,515,759		-		24,515,759
Net loans		247,775,814		-		-		248,373,122		248,373,122
Loans held for sale		1,225,526		-		1,225,526		-		1,225,526
Accrued interest receivable		875,104		875,104		-		-		875,104
Mortgage servicing rights		534,646		-		-		534,646		534,646
Financial Liabilities:
Non-interest bearing deposits		13,664,986		13,664,986		-		-		13,664,986
Interest bearing deposits		222,648,518		-		-		226,125,337		226,125,337
Accrued interest payable		8,146		8,146		-		-		8,146
FHLB advances		9,068,030		-		9,158,597		-		9,158,597

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.

23

OTTAWA BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

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

Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. At March 31, 2020 and December 31, 2019, the fair values of the commitments are immaterial in nature.

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

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

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

FORWARD-LOOKING INFORMATION

               Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to March 31, 2020 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, the potential effects of the COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic),  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, 2019 as filed with the Securities and Exchange Commission on March 28, 2020.

24

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.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND DECEMBER 31, 2019    

The Company's total assets increased $6.5 million, or 2.2%, to $307.1 million at March 31, 2020, from $300.5 million at December 31, 2019. The increase was primarily due to an increase of $9.0 million in cash and cash equivalents, a $2.5 million in the net loan portfolio and a $0.8 million increase in other assets. These increases were partially offset by a decrease in federal funds sold of $2.2 million, a decrease in securities available for sale of $1.6 million, a decrease of $0.8 million in time deposits and a decrease in loans held for sale of $1.2 million.

Cash and cash equivalents increased $9.0 million, or 150.0%, to $15.0 million at March 31, 2020 from $6.0 million at December 31, 2019. The increase in cash and cash equivalents was primarily a result of cash provided from financing activities of $8.7 million and cash provided by investing activities of $1.3 million exceeding and cash used in operating activities of $1.0 million.

Federal funds sold decreased $2.2 million, or 51.6%, to $2.0 million at March 31, 2020, from $4.2 million at December 31, 2019 to fund bank activities.

Securities available for sale decreased $1.6 million, or 6.6%, to $22.9 million at March 31, 2020 from $24.5 million at December 31, 2019, as paydowns, calls, and maturities exceeded new securities purchases.

Net loans increased by $2.5 million, or 1.0% to $250.3 million at March 31, 2020 compared to $247.8 million at December 31, 2019 primarily as a result of a $0.6 million increase in one-to-four family loans, a $1.0 million increase in multi-family loans and a $5.0 million increase in commercial loans. The increases were offset by decreases of $0.2 million in non-residential real estate loans, of $1.4 million in purchased auto loans and a $2.1 million decrease in consumer direct loans.

Total deposits increased $6.1 million, or 2.6%, to $242.4 million at March 31, 2020 from $236.3 million at December 31, 2019. At March 31, 2020 savings accounts increased by $2.1 million, non-interest bearing checking accounts increased by $3.7 million and certificates of deposit increased by $4.4 million as compared to December 31, 2019. The increases were offset by decreases in interest bearing checking accounts which decreased by $3.7 million and money market accounts which decreased by $0.4 million as compared to December 31, 2019.

FHLB advances increased $4.5 million, or 49.5% to $13.6 million at March 31, 2020, compared to $9.1 million at December 31, 2019.   The increase was related to the low rate environment and management extending out maturities to fund future loan growth.

Stockholders’ equity decreased $1.9 million, or 4.0% to $48.8 million at March 31, 2020 from $50.7 million at December 31, 2019. The decrease reflects $0.6 million used to repurchase and cancel 47,249 outstanding shares of Company common stock, a decrease of $0.2 million in other comprehensive income due to a decrease in fair value of securities available for sale and $1.3 million in cash dividends. The decreases were partially offset by net income of $0.1 million for the three months ended March 31, 2020 and proceeds from stock options exercised, equity incentive plan shares and the allocation of ESOP shares totaling $0.1 million.

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

25

The non-performing assets to total assets ratio was 0.84% at March 31, 2020 which is up from 0.75% at December 31, 2019. During the first three months of 2020, non-performing assets increased 14.0% to $2.6 million from $2.3 million as of December 31, 2019. The increase in non-performing assets was primarily due to the increase in non-accrual loans as a result of the addition of five loans totaling approximately. Additionally, foreclosed real estate stayed at $0, while other repossessed assets increased approximately $3,000.

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

	March 31,		December 31,		September 30,		June 30,		March 31,
	2020		2019		2019		2019		2019
	(In Thousands)
Non-accrual:
One-to-four family	$	2,176	$	1,889	$	1,536	$	1,427	$	662
Multi-family		-		-		-		-		-
Non-residential real estate		335		344		401		427		444
Commercial		-		-		-		-		-
Consumer direct		19		-		-		-		-
Purchased auto		38		19		34		-		-
Total non-accrual loans		2,568		2,252		1,971		1,854		1,106
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		2,568		2,252		1,971		1,854		1,106
Foreclosed real estate		-		-		196		196		196
Other repossessed assets		16		13		65		75		18
Total nonperforming assets	$	2,584	$	2,265	$	2,232	$	2,125	$	1,320

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

	March 31,			December 31,			September 30,			June 30,			March 31,
	2020			2019			2019			2019			2019
Allowance for loan losses as a percent of gross loans receivable		1.32	%		1.17	%		1.13	%		1.07	%		1.10	%
Allowance for loan losses as a percent of total nonperforming loans		130.71	%		130.42	%		140.74	%		142.83	%		237.18	%
Nonperforming loans as a percent of gross loans receivable		1.01	%		0.90	%		0.80	%		0.75	%		0.46	%
Nonperforming loans as a percent of total assets		0.84	%		0.75	%		0.65	%		0.61	%		0.38	%
Nonperforming assets as a percent of total assets		0.84	%		0.75	%		0.73	%		0.70	%		0.46	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

General. Net income for the three months ended March 31, 2020 was $0.1 million compared to net income of $0.4 million for the three months ended March 31, 2019. Total interest and dividend income was comparable at $3.1 million for the three months ended March 31, 2019 and March 31, 2020. Interest expense was $0.1 million higher during the three months ended March 31, 2020. In addition, a provision of $450,000 was taken during the three months ended March 31,2020. Due to the anticipated impact of the COVID-19 pandemic on the local and national economies, qualitative factors were adjusted negatively which led to an increase in the provision level. Thus, net interest income after provision for loan losses decreased by $0.4 million. Total other income was comparable, however, total other expenses rose slightly by $0.1 million this quarter as compared to the first quarter of 2019. Net income was $0.3 million lower for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

26

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2020 and 2019:

	Three Months Ended
	March 31,
	2020		2019		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,909	$	2,861	$	48			1.70	%
Securities:
Residential mortgage-backed securities		67		82		(15	)		(18.47	)
State and municipal securities		96		98		(2	)		(1.51	)
Dividends on non-marketable equity securities		7		6		1			2.43
Interest-bearing deposits		40		45		(5	)		(11.53	)
Total interest and dividend income		3,119		3,092		27			0.86
Interest expense:
Deposits		731		608		123			20.12
Borrowings		62		73		(11	)		(14.86	)
Total interest expense		793		681		112			16.39
Net interest income	$	2,326	$	2,411	$	(85	)		(3.52	)%

27

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

	Three Months Ended March 31,
	2020							2019
					AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
	(Dollars in thousands)
Assets
Interest-earning assets
Loans receivable, net (1)	$	249,830	$	2,909		4.66	%	$	235,271	$	2,861		4.86	%
Securities, net (2)		23,564		163		2.77	%		24,817		180		2.90	%
Non-marketable equity securities		832		7		3.37	%		769		6		3.12	%
Interest-bearing deposits		11,301		40		1.42	%		6,873		45		2.62	%
Total interest-earning assets		285,527		3,119		4.37	%		267,730		3,092		4.62	%
Non-interest-earning assets		18,773							20,276
Total assets		304,300							288,006
Liabilities and Equity
Interest-bearing liabilities
Money Market accounts	$	21,581	$	12		0.22	%	$	24,809	$	15		0.24	%
Savings accounts		26,681		4		0.06	%		26,663		5		0.08	%
Certificates of Deposit accounts		114,879		610		2.12	%		105,304		478		1.82	%
Checking accounts		61,178		105		0.69	%		48,510		110		0.91	%
Advances and borrowed funds		11,903		62		2.08	%		12,426		73		2.32	%
Total interest-bearing liabilities		236,222		793		1.34	%		217,712		681		1.25	%
Non-interest-bearing liabilities		11,260							11,979
Total liabilities		247,482							229,691
Equity		56,818							58,315
Total liabilities and equity		304,300							288,006
Net interest income			$	2,326						$	2,411
Net interest rate spread (3)						3.03	%						3.37	%
Net interest margin (4)						3.26	%						3.60	%
Ratio of average interest-earning assets to average interest-bearing liabilities						120.87	%						122.97	%

(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.

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The following table summarizes the changes in net interest income due to rate and volume for the three months ended March 31, 2020 and 2019. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

	Three Months Ended March 31,
	2020 Compared to 2019
	Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	167		$	(119	)	$	48
Securities, net		(9	)		(8	)		(17	)
Non-marketable equity securities		1			-			1
Interest-bearing deposits		16			(21	)		(5	)
Total interest-earning assets	$	175		$	(148	)	$	27
Interest expense on
Money Market accounts	$	(2	)	$	(1	)		(3	)
Passbook accounts		-			(1	)		(1	)
Certificates of Deposit accounts		52			80			132
Checking		22			(27	)		(5	)
Advances and borrowed funds		(4	)		(7	)		(11	)
Total interest-bearing liabilities		68			44			112
Change in net interest income	$	107		$	(192	)	$	(85	)

Net interest income decreased by $0.1 million, or 3.5%, to $2.3 million for the three months ended March 31, 2020, from $2.4 million for the three months ended March 31, 2019. Interest and dividend income were comparable between the periods. There was an increase in the average balances of interest-earning assets of $17.8 million. The increase in interest and dividend income was slightly offset by a decrease in yield on earning assets from 4.62% for the three months ended March 31, 2019 to 4.97% for the three months ended March 31, 2020. Additionally, there was an increase in interest expense as the average cost of funds increased 9 basis points to 1.34% for the three months ended March 31, 2020. The net interest margin decreased 47 basis points during the three months ended March 31, 2020 to 3.26% from 3.60% during the three months ended March 31, 2019.

Provision for Loan Losses. Management recorded a loan loss provision of approximately $0.4 million for the three-month period ended March 31, 2020 as compared to $0.1 million for the three months ended March 31, 2019. The allowance for loan losses was $3.4 million, or 1.32% of total gross loans at March 31, 2020, compared to $2.6 million, or 1.10% of gross loans at March 31, 2019. Net charge-offs during the first quarter of 2020 were approximately $30,000 compared to $0.1 million during the first quarter of 2019. General reserves were higher at March 31, 2020, when compared to March 31, 2019, as the balances in most loan categories increased during the twelve months ended March 31, 2020. Additionally, due to the anticipated impact of the COVID-19 pandemic on the local and national economies, qualitative factors were adjusted negatively which led to an increase in the provision level. Although non-performing loans increased, the necessary reserves on non-performing loans as of March 31, 2020 were approximately $15,000 lower than they were on December, 2019 due to improvements in the payment status of several other non-performing loans and the new non-performing loans added requiring smaller specific reserves than those removed. Based on a review of the loans that were in the loan portfolio at March 31, 2020, 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.

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Other Income. The following table summarizes other income for the three months ended March 31, 2020 and 2019.

	Three months ended
	March 31,
	2020			2019			$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans	$	107		$	85		$	22			26.02
Gain on sale of repossessed assets		16			-			16			100.00
Loan origination and servicing income		114			154			(40	)		(25.49	)
Origination of mortgage servicing rights, net of amortization		(10	)		(10	)		-			-
Customer service fees		107			116			(9	)		(7.79	)
Increase in cash surrender value of life insurance		13			12			1			6.41
Gain on sale of securities		1			-			1			100.00
Other		38			22			16			73.12
Total other income	$	386		$	379		$	7			1.93	%

Total other income was $0.4 million for the three months ended March 31, 2020, and March 31, 2019. There were fluctuations that led to an increase in gain on sale of loans, an increase in gain on sale of repossessed assets and an increase in other income. These increases were mostly offset by a decrease in customer service fees and loan origination and servicing income

Other Expense. The following table summarizes other expense for the three months ended March 31, 2020 and 2019.

	Three months ended
	March 31,
	2020			2019			$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,264		$	1,098		$	166			15.12	%
Directors fees		43			43			-			-
Occupancy		178			171			7			4.43
Deposit insurance premium		-			17			(17	)		(100.00	)
Legal and professional services		105			96			9			9.51
Data processing		223			187			36			19.66
Loan expense		134			164			(30	)		(18.28	)
Valuation adjustments and expenses on foreclosed real estate		1			6			(5	)		(89.99	)
Other		212			283			(71	)		(25.18	)
Total other expenses	$	2,160		$	2,065		$	95			4.65	%
Efficiency ratio (1)		79.65	%		74.01	%

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

Total other expense increased $0.1 million, or 4.7%, to $2.2 million for the three months ended March 31, 2020, as compared to $2.1 million for the three months ended March 31, 2019.  The increase was primarily due to increased salary expense, higher data processing expense, and higher legal expenses. Data processing increased due to the enhancement of our infrastructure to support the implementation of our new core processing system. These increases were offset by decreases in deposit insurance premiums, loan expenses and other expenses. The efficiency ratio increased for the period ending March 31, 2020 as a result of these increases.

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Income Taxes. The Company recorded income tax expense of approximately $15,000 for the three-month period ended March 31, 2020 as compared to 0.2 million for the three-months ended March 31, 2019 due to lower pre-tax earnings in 2020 and a reduced impact of other items.

The Company’s income tax differed from the maximum statutory federal rate of 21% for the three months ended March 31, 2020 and 2019 respectively as follows:

	Three Months Ended
	March 31,
	2020			2019
Expected income taxes	$	21,277		$	124,936
Income tax effect of:
State taxes, net of federal tax benefit		8,863			31,788
Tax exempt interest		(19,273	)		(18,890	)
Other		4,497			57,031
	$	15,364		$	194,865

Response to COVID-19 Pandemic

As of April 30, 2020, the Company had received approximately $4.6 million of commercial loan modification requests and approximately $1.9 million of consumer related loan modification requests including one-to-four real estate loans and home equity loans and advances from our customers affected by the COVID-19 pandemic. These short-term loan modifications will be treated in accordance with Section 4013 of the CARES Act and will not be treated as troubled debt restructurings during the short-term modification period if the loan was not in arrears at December 31, 2019. Furthermore, these loans will continue to accrue interest and will not be tested for impairment during the short-term modification period. Commercial loan modification requests include various industries and property types.

Between April 1, 2020 and April 30, 2020, the Company originated approximately 100 loans for $5.0 million under the Small Business Association's (“SBA”) Paycheck Protection Program and expects to recognize approximately $0.25 million in fees which will be net against costs, deferred and amortized over the life of the loan. If any of these loans are sold to the SBA, the US Treasury or in a secondary market, any unamortized net fees will be included in the gain or loss on the sale of these loans. The Company plans on originating additional SBA Paycheck Protection Program loans under the recently signed stimulus bill.

LIQUIDITY AND CAPITAL RESOURCES

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

At March 31, 2020, the Bank had outstanding commitments to originate $8.0 million in loans, unfunded lines of credit of $17.2 million, and $8.6 million in commitments to fund construction loans. In addition, as of March 31, 2020, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $62.2 million. Based on prior experience, management believes that a majority of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as Federal Home Loan Bank of Chicago (“FHLBC”) advances, in order to maintain our level of assets. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents. As of March 31, 2020, the Bank had $56.2 million of available credit from the FHLBC and there were $13.6 million in FHLBC advances outstanding. In addition, as of March 31, 2020 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 March 31, 2020, the Company had cash and cash equivalents of $15.0 million.

Capital. The Bank is required to maintain regulatory capital sufficient to meet Total capital, Tier 1 capital, Common equity Tier 1 capital, and Tier 1 Leverage ratios of at least 8.0%, 6.0%, 4.5% and 4.0%, respectively. The Bank exceeded each of its minimum capital requirements for capital adequacy purposes and was considered “well capitalized” within the meaning of federal regulatory requirements with ratios at March 31, 2020 of 21.06%, 19.81%, 19.81%, and 14.19%, respectively, compared to ratios at December 31, 2019 of 22.21%, 20.96%, 20.96% and 15.00%, 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.

OFF-BALANCE SHEET ARRANGEMENTS

For the three months ended March 31, 2020, 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.

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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, 2019, which could materially affect our business, financial condition or future results.  Except as set forth below, as of March 31, 2020, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K and other periodic reports filed with the SEC.  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. 

The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the coronavirus pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.

Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans as well as declines noninterest income. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.

The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.

The outbreak of COVID-19 and the US federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the coronavirus pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business, financial condition and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations.

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

On November 21, 2019, the Company announced that it had approved a stock repurchase program authorizing the purchase of 317,307 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 29, 2019.  Repurchases will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1, or through privately negotiated transactions.  Repurchases will be made from time to time depending on market conditions and other factors. 

The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended March 31, 2020:

					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
January 1-31, 2020		13,036		14.07		13,036		119,511
February 1-29, 2020		2,779		14.28		2,779		116,732
March 1-31, 2020		31,434		13.38		31,434		85,298
Total		47,249		13.62		47,249		85,298

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 - OTHER INFORMATION

Not applicable.

ITEM 6 - EXHIBITS

Exhibit No.	Description
3.1	Articles of Incorporation of Ottawa Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed with the Securities and Exchange Commission on June 6, 2016)
3.2	Bylaws of Ottawa Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed on June 6, 2016)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certifications
101.0	The following materials from the Ottawa Bancorp, Inc. Quarterly Report on Form 10-Q for the three months ended March 31, 2020 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: May 15, 2020	/s/ Craig M. Hepner Craig M. Hepner President and Chief Executive Officer (Principal Executive Officer)
Date: May 15, 2020	/s/ Marc N. Kingry Marc N. Kingry Chief Financial Officer (Principal Financial Officer)

34