UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2018~~2019

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

THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 1-37914

OTTAWA BANCORP, INC.

(Exact Name of Registrant as Specified in Charter)

Maryland

81-2959182

(State or other Jurisdiction

of Incorporation)

(I.R.S. Employer

Identification No.)


925 LaSalle Street, Ottawa, Illinois		61350
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (815) 433-2525

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

Common Stock, Par Value $0.01 per share

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

(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒.

Indicate by check mark whether the issuer (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 (Section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions 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 ☐☒ ~~Emerging~~Smaller ~~Growth~~Reporting Company ☒☐ ~~Smaller~~Emerging ~~Reporting~~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 Securities Act. ☐

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

As of June 30, ~~2018~~2019, the aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $4440,~~128~~782,~~281~~941 (based on the last sale price of the common stock on the NASDAQ Capital Market of $13.8883 per share on June 2930, ~~2018~~2019).

The number of shares of Common Stock of the registrant issued and outstanding as of March 28, ~~2019~~2020 was 3,~~336~~160,~~459~~154.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its ~~2019~~2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference into Part III.

OTTAWA BANCORP, INC.

Form 10-K for Fiscal Year Ended

December 31, ~~2018~~ 2019

TABLE OF CONTENTS

		Page	~~Page~~
PART I
Item 1.	~~Item 1.~~Business	~~Business~~1	1
Item 1A.	~~Item~~Risk ~~1A.~~Factors	~~Risk Factors~~24	23
Item 1B.	~~Item~~Unresolved ~~1B.~~Staff Comments	~~Unresolved Staff Comments~~30	30
Item 2.	~~Item 2.~~Properties	~~Properties~~30	30
Item 3.	~~Item~~Legal 3.Proceedings	~~Legal Proceedings~~31	30
Item 4.	~~Item~~Mine 4.Safety Disclosures	~~Mine Safety Disclosure~~31	30
PART II
Item 5.	~~Item~~Market 5.for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~31	30
Item 6.	~~Item~~Selected 6.Financial Data	~~Selected Financial Data~~32	32
Item 7.	~~Item~~Management’s 7.Discussion and Analysis of Financial Condition and Results of Operations	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~34	33
Item 7A.	~~Item~~Quantitative ~~7A.~~and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~44	43
Item 8.	~~Item~~Financial 8.Statements and Supplementary Data	~~Financial Statements and Supplementary Data~~44	43
Item 9.	~~Item~~Changes 9.in and Disagreements with Accountants on Accounting and Financial Disclosure	~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~44	43
Item 9A.	~~Item~~Controls ~~9A.~~and Procedures	~~Controls and Procedures~~44	44
Item 9B.	~~Item~~Other ~~9B.~~Information	~~Other Information~~44	44
PART III
Item 10.	~~Item~~Directors, ~~10.~~Executive Officers and Corporate Governance	~~Directors, Executive Officers and Corporate Governance~~45	44
Item 11.	~~Item~~Executive ~~11.~~Compensation	~~Executive Compensation~~45	44
Item 12.	~~Item~~Security ~~12.~~Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~45	44
Item 13.	~~Item~~Certain ~~13.~~Relationships and Related Transactions, and Director Independence	~~Certain Relationships and Related Transactions, and Director Independence~~45	44
Item 14.	~~Item~~Principal ~~14.~~Accounting Fees and Services	~~Principal Accountant Fees and Services~~45	45
PART IV
Item 15.	~~Item~~Exhibits ~~15.~~and Financial Statement Schedules	~~Exhibits and Financial Statement Schedules~~46	45
Item 16.	~~Item~~Form ~~16.~~10-K Summary	~~Form 10-K Summary~~47	45
INDEX TO FINANCIAL STATEMENTS		F-1	~~F-1~~
SIGNATURES		S-1	~~S-1~~

PART I

Forward-Looking Statements

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 December 31, ~~2018~~2019 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, the outbreak of the coronavirus or other highly infectious or contagious disease,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. See also “Item 1A. Risk Factors” and other risk factors discussed elsewhere in this Annual Report.

ITEM 1.

BUSINESS

General

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 and unitary savings and loan holding company for Ottawa Savings Bank, a federally chartered savings bank. The second-step conversion was completed on October 11, 2016, at which time the Company sold, for gross proceeds of $23.8 million, a total of 2,383,950 shares of common stock at $10.00 per share, including 190,716 shares purchased by the Bank’s employee stock ownership plan. Capital increased an additional $126,000 due to cash contributed by Ottawa Savings Bancorp MHC upon merging into Ottawa Savings Bancorp, Inc. Also as part of the second-step conversion, treasury shares held by Ottawa Savings Bancorp were retired and each of the existing outstanding shares of Ottawa Savings Bancorp common stock owned by persons other than Ottawa Savings Bancorp MHC was converted into 1.1921 of a share of Company common stock. The Company is a publicly traded banking company with assets of $~~292~~300.85 million at December 31, ~~2018~~2019 and is headquartered in Ottawa, Illinois.

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~~LaSalle and ~~Peru,~~Sandwich 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.

Business Strategy

The Company’s business strategy is to operate as a well-capitalized and profitable community savings bank dedicated to providing high quality customer service and innovative new products. Highlights of our business strategy are as follows:

●

Continue to emphasize the origination of one-to four-family mortgage loans, including investor-owned (e.g., non-owner occupied) one-to-four family mortgage loans;

●

Aggressively market core deposits;

●

Offer a broad range of financial products and services to both retail and commercial customers in our market area;

●

Pursue opportunities to increase non-residential real estate lending, which we consider to be comprised of commercial real estate, land and multi-family loans in our market area;

●

Continue to utilize conservative underwriting guidelines to limit credit risk in our loan portfolio to achieve a high level of asset quality; and

●

Consider judicious expansion into new market areas to grow our business through the addition of new branch locations and/or through possible acquisitions.

Market Area and Competition

The Company is headquartered in Ottawa, Illinois, which is located in north-central Illinois approximately 80 miles southwest of Chicago. Its market area, which benefits from its proximity to Chicago, includes LaSalle County, Grundy County and parts of contiguous counties.

The Bank faces significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits and loans has historically come from the several financial institutions operating in our market area, including a number of independent banks, and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions, mortgage companies and mortgage brokers. In addition, the Bank faces competition for investors’ funds from money market funds and other corporate and government securities. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage and consumer credit market, such as securities companies and specialty finance companies. The Bank believes that its long-standing presence in Ottawa, Illinois, its ~~recent~~ expansion into Grundy County as a result of the Twin Oaks acquisition, and its personal service philosophy enhance its ability to compete favorably in attracting and retaining individual and business customers. The Company actively solicits deposit-related customers and competes for deposits by offering customers personal attention, professional service and competitive interest rates.

Lending Activities

General. Our loan portfolio consists primarily of one-to-four family residential mortgage loans. To a lesser extent, our loan portfolio includes multi-family and non-residential real estate, commercial, construction and consumer loans. Excluding our purchased loan portfolio and except as noted below, the majority of our loans are made within our local market. However, on occasion we originate loans to borrowers outside our market area. At December 31, ~~2018~~2019, loans made to borrowers outside our market area totaled $6334.51 million, or 2613.98% of our total loan portfolio.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses.

	At December 31,
	2018						2017						2016						2015						2014
	2019						2018						2017						2016						2015
	(Dollars in Thousands)
				Percent						Percent						Percent						Percent						Percent
	Amount			Of Total			Amount			Of Total			Amount			Of Total			Amount			Of Total			Amount			Of Total
One-to-four family	$	~~141~~155,~~780~~143			5961.4388	%	$	~~124~~141,~~118~~780			59.2443	%	$	~~103~~124,~~872~~118			6359.8024	%	$	99103,~~255~~872			6963.7380	%	$	9899,~~144~~255			6769.7873	%
Multi-family		65,~~776~~861			2.8434	%		56,~~664~~776			2.7084	%		5,~~182~~664			32.1870	%		35,~~970~~182			23.7918	%		3,~~112~~970			2.1579	%
Non-residential		3530,~~286~~680			1412.7924	%		3235,~~133~~286			1514.3479	%		2232,~~560~~133			1315.8534	%		2022,~~177~~560			1413.1885	%		20,~~929~~177			14.4518	%
Commercial		1723,~~242~~915			79.2354	%		2017,~~759~~242			97.9123	%		1620,~~645~~759			109.2291	%		1216,~~069~~645			810.4822	%		12,~~242~~069			8.4548	%
Consumer direct		1520,~~390~~563			68.4520	%		615,~~282~~390			36.0045	%		26,~~860~~282			13.7600	%		12,~~651~~860			1.1676	%		1,~~724~~651			1.1916	%
Purchased auto		2214,~~080~~551			95.2680	%		2022,~~551~~080			9.8126	%		1120,~~714~~551			79.1981	%		511,~~212~~714			37.6619	%		85,~~665~~212			53.9866	%
Total loans, gross		~~238~~250,~~554~~713			100.00	%		~~209~~238,~~507~~554			100.00	%		~~162~~209,~~833~~507			100.00	%		~~142~~162,~~334~~833			100.00	%		~~144~~142,~~816~~334			100.00	%
Allowance for loan losses		(2,~~628~~937	)					(2,~~472~~628	)					(2,~~247~~472	)					(2,~~224~~247	)					(2,~~315~~224	)
Total loans, net	$	~~235~~247,~~926~~776					$	~~207~~235,~~035~~926					$	~~160~~207,~~586~~035					$	~~140~~160,~~110~~586					$	~~142~~140,~~501~~110

Listed below are the outstanding balances of purchased loans, which have been included in the table above.

	At December 31,
	2018		2017		2016		2015		2014
	2019		2018		2017		2016		2015
	(In Thousands)
One-to-four family	$	-	$	-	$	-	$	~~1,978~~-	$	~~212~~1,978
Multi-family		~~566~~549		~~582~~566		~~599~~582		-599		~~623~~-
Non-residential		3,983		3,~~060~~983		13,~~148~~060		~~711~~1,148		~~665~~711
Commercial		3,~~574~~387		63,~~750~~574		46,~~814~~750		24,~~922~~814		-2,922
Purchased auto loans		2214,~~080~~551		2022,~~551~~080		1120,~~714~~551		511,~~212~~714		85,~~665~~212
Total	$	3019,~~203~~470	$	30,~~943~~203	$	1830,~~275~~943	$	1018,~~823~~275	$	10,~~165~~823

Maturity of Loan Portfolio. The following tables show the remaining contractual maturity of our loans at December 31, ~~2018~~2019. The tables do not include the effect of possible prepayments or due on sale clause payments.

At December 31, 2018

At December 31, 2019

One-to-

Non-

four

residential

Consumer

Purchased

Family

Multi-family

real estate

Commercial

direct

auto

Total

(In Thousands)

Amounts due one year or less

1215,~~882~~234

43,~~841~~195

76,~~529~~656

~~173~~88

~~126~~131

25,~~551~~304

After one year

More than one year to three years

23,~~831~~194

~~602~~562

32,~~472~~504

110,~~724~~773

15,~~230~~304

19,~~610~~011

1131,~~469~~348

More than three years to five years

2,~~717~~435

-759

~~3,522~~944

51,~~970~~948

612,~~397~~873

135,~~116~~409

3124,~~722~~368

More than five years to ten years

107,~~312~~275

~~1,276~~288

56,~~820~~047

23,~~019~~305

72,~~397~~151

~~7,228~~-

3419,~~052~~066

More than ten years to twenty years

4648,~~028~~800

2,~~292~~019

14,~~645~~918

~~193~~147

6365,~~158~~884

More than twenty years

6778,~~010~~205

2,~~606~~233

23,~~986~~072

-1,233

7284,~~602~~743

Total due after December 31, 2019

128,897

6,776

30,445

9,713

15,217

21,954

213,003

Total due after December 31, 2020

139,909

5,861

27,485

17,259

20,475

14,420

225,409

Gross loans receivable

~~141~~155,~~780~~143

65,~~776~~861

3530,~~286~~680

1723,~~242~~915

1520,~~390~~563

2214,~~080~~551

~~238~~250,~~554~~713

Less:

Allowance for loan losses

(2,~~628~~937

)

Total loans, net

~~235~~247,~~926~~776

Due After December 31, 2019

Due After December 31, 2020

Fixed

Adjustable

Total

(In Thousands)

One-to-four family

5765,~~218~~118

7174,~~680~~791

~~128~~139,~~898~~909

Multi-family

1,~~753~~194

54,~~023~~667

65,~~776~~861

Non-residential

1411,~~508~~359

1516,~~937~~126

3027,~~445~~485

Commercial

812,~~959~~508

~~754~~4,751

917,~~713~~259

Consumer direct

1520,~~217~~475

Purchased auto

2114,~~954~~420

Total

~~119~~125,~~609~~074

93100,~~394~~335

~~213~~225,~~003~~409

Asset Quality. Within our investment portfolio we have no subprime or Alt-A backed instruments among our securities. Historically, our lending activity has promoted home ownership in the communities we serve. Our consumer and residential mortgage loans are originated consistent with the underwriting approach described herein. This includes an assessment of each borrower’s personal financial condition, including a review of credit reports and related FICO scores as well as verification of income and assets. The Company does not conduct lending programs that target the subprime market. During the ordinary course of business to achieve our goal of being a community bank, we originate and manage loans in our portfolio to some borrowers with a risk of default higher than customers considered prime. Thus, an extended economic downturn may affect us indirectly, albeit to a lesser extent than it would likely impact those banks and thrifts that produce and retain significant portfolios that target such loans and securities. While we believe that the nature of our one-to-four family lending niche and our underwriting standards would limit the impact of the downward turn in the credit cycle on the quality of our assets—particularly in comparison with those institutions that directly target subprime and Alt-A lending—another downturn in the credit cycle could result in our experiencing higher levels of charge-offs and/or provisions for loan losses, which might impact our results of operations.

One- to-Four Family Residential Loans. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings in our market area. We offer fixed-rate and adjustable-rate mortgage loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated or purchased at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk. The loan fees charged, interest rates, and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

We offer fixed rate loans with terms of either 15, 20 or up to 30 years. We traditionally sell 30-year fixed rate loans into the secondary market, resulting in a fixed rate loan portfolio primarily composed of loans with less than 15 to 20 year terms, however, 30 year loans may be retained. Our adjustable-rate mortgage loans are based on either a 15, 20 or up to 30-year amortization schedule and interest rates and payments on our adjustable-rate mortgage loans adjust every one, three, five or seven years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate that is based on the respective one, three, and five year monthly Constant Maturity Treasury indices. The maximum amount by which the interest rate may be increased or decreased is generally 1% to 2% per adjustment period, depending on the type of loan, and the lifetime interest rate ceiling is generally 5% over the initial interest rate of the loan. The initial and floor rates for owner occupied properties range from are 42.~~125~~675% to 4.625% for the one, three, five and seven-year adjustable rate loans for non-owner occupied one-to-four family properties, respectively, at this time.

Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest rate sensitivity is limited by the annual and lifetime interest rate adjustment limits.

While one-to-four family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

We also regularly make loans secured by non-owner occupied one-to-four family residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. In reaching a decision on whether to originate a non-owner occupied one-to-four family residential real estate loan, we consider the net operating income of the property, the borrower’s credit history and profitability, and the value of the underlying property. At December 31, ~~2018~~2019, loans secured by non-owner occupied one-to-four family properties totaled $29.72 million, or 2018.98% of our total one-to-four family residential loan portfolio.

We generally do not make conventional loans with loan-to-value ratios exceeding 80%. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance, government guarantee or additional collateral. We require all properties securing mortgage loans to be appraised by an independent appraiser approved by our Board of Directors and licensed by the State of Illinois. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, or flood insurance for loans on property located in a flood zone, before closing the loan.

Our largest one-to-four family residential loan at December 31, ~~2018~~2019 was a loan for $3.5 million that is secured by multiple one-to-four family and condominium units, of which $3.42 million is outstanding. This loan is performing in accordance with its terms.

We participate with the USDA Rural Development Company to offer loans to qualifying customers. Loans are granted up to 100% of appraised value and the USDA guarantees up to 90% of the loan. These loans require no down payment but are subject to maximum income limitations.

Residential and Commercial Construction Loans. On occasion we originate (i) residential construction loans to individuals and purchase loans that finance the construction of residential dwellings for personal use, which we classify within our one-to-four family loan portfolio, and (ii) commercial construction loans for the development of projects including condominiums, apartment buildings, single-family subdivisions, single-family investor loans, as well as owner-occupied properties used for business, which we classify within our loan portfolio based on the type of property under construction.

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is usually twelve months. At the end of the construction phase, substantially all of our loans automatically convert to permanent mortgage loans. Construction loans generally can be made with a maximum loan to value ratio of 80% or up to 95% with private mortgage insurance of the appraised value with maximum terms of 30 years. We also require periodic inspections of the property during the term of the construction. At December 31, ~~2018~~2019, our largest outstanding residential construction loan was for $1.52 million, of which $1.0.4 million was disbursed.

Our commercial construction loans provide for payment of interest only during the construction phase and may, in the case of an apartment or commercial building, convert to a permanent mortgage loan upon the completion of construction. In the case of a single-family subdivision or construction or builder loan, as individual lots are sold, the principal balance is reduced by a minimum of 80% of the net lot sales price. In the case of a commercial construction loan, the construction period may be from nine months to two years. Loans are generally made to a maximum of 70% of the appraised value as determined by an appraisal of the property made by an independent licensed appraiser. We also require periodic inspections of the property during the term of the construction loan. At December 31, ~~2018~~2019, our largest outstanding commercial construction loan was for $1.17 million, all of which ~~$0.6 million~~ was disbursed.

Lines of Credit. We offer lines of credit, principally home equity lines of credit, which have adjustable rates of interest that are indexed to the prime rate as published in The Wall Street Journal for terms of up to 20 years. These loans are originated with maximum loan-to-value ratios of 80% of the appraised value of the property, and we require that we have a second lien position on the property if we do not have a first lien. We also offer secured and unsecured lines of credit for well-qualified individuals and small businesses. Management includes these loans based on the collateral supporting the line of credit in either the non-residential, multi-family, commercial or one-to-four family categories for the purposes of monitoring and evaluating the portfolio.

Multi-Family and Non-Residential Real Estate Loans. We offer fixed rate and adjustable-rate mortgage loans secured by multi-family, non-residential real estate and agricultural real estate loans. Our loans in the category are generally secured by condominiums, apartment buildings, single-family subdivisions, owner-occupied properties used for businesses and agricultural land used for production.

We originate and purchase multi-family, non-residential real estate and agricultural loans with terms generally up to 30 years. Interest rates and payments on adjustable-rate loans adjust every one, three and five years. Interest rates and payments on our adjustable rate loans generally are adjusted to a rate typically equal to the interest rate used for one- to- four family loan products, plus 50 basis points to 100 basis points based on credit-worthiness and risk. Loan amounts generally do not exceed 80% of the appraised value for well-qualified borrowers.

We originate and purchase land loans to individuals on approved residential building lots for personal use for terms of up to 15 years and to a maximum loan to value ratio of 80% of the appraised value. Our land loans are adjustable rate loans with adjustments occurring every one, three and five years, based on the original contract. Interest rate adjustments are based on the CMT plus a spread. For adjustable rate loans in this class, the loans generally have an interest rate floor.

Our largest non-residential real estate loan at December 31, ~~2018~~2019 was for $21.23 million, all of which is outstanding. This loan is performing in accordance with its terms. For adjustable rate loans in this category, there generally is an interest rate floor ranging from 3.75% to 6.00%.

Loans secured by multi-family and non-residential real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential mortgage loans. Of primary concern in multi-family and non-residential real estate lending is the borrower’s credit-worthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income producing properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. In reaching a decision on whether to make a multi-family or non-residential real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property.

Commercial Business Loans. These loans consist of operating lines of credit secured by general business assets, equipment, inventory and crops. We loan primarily to businesses with less than $5,000,000 in annual revenues. The operating lines of credit are generally short term in nature with interest rates tied to short term rates and adjustments occurring daily, monthly, or quarterly based on the original contract. For adjustable loans, there is also an interest rate floor. The equipment loans are typically made with maturities of less than five years and are priced with a fixed interest rate. The Bank has originated commercial loans from Bankers Healthcare Group in prior years. Bankers Healthcare Group specializes in loans to healthcare professionals of all specialties throughout the United States. These loans are primarily comprised of working capital and equipment loans. We underwrite these loans based on our criteria and service the loans in-house.

Consumer Loans. We offer a variety of consumer loans, which include auto, share loans and personal unsecured loans to our customer base. Unsecured loans generally have a maximum borrowing limit of $25,000 and a maximum term of ~~four~~five years.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s credit-worthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws may limit the amount which can be recovered on such loans.

Purchased Auto Loans. We purchase auto loans from regulated financial institutions. At December 31, ~~2018~~2019 and ~~2017~~2018, we had $2214.16 million and $2022.61 million of purchased auto loans outstanding, respectively. These types of loans are primarily low balance individual auto loans. We have the opportunity to review the loans at least three days prior to our purchase and we have a right to refuse any specific loan within thirty days of the purchase of any given loan pool. ~~For~~We did not purchase any auto loans during the ~~years~~year ended December 31, ~~2018~~2019 and ~~2017, we~~ purchased $10.0 ~~and $14.1~~ million of auto loans during the year ended December 31, ~~respectively~~2018.

Loan Origination, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and to a lesser extent, advertising and referrals from customers. We occasionally purchase loans or participation interests in loans. As of December 31, ~~2018~~2019, we had an aggregate of $3019.25 million in purchased loan participations outstanding, including the auto loan purchases discussed in the previous paragraph. The largest outstanding loan participation as of December 31, ~~2018~~2019 was a commercial loan for $3.31 million. This loan is performing in accordance with its terms.

We sell some of the longer-term fixed-rate one-to-four family mortgage loans that we originate in the secondary market based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management goals. Generally, loans are sold without recourse and with servicing retained. We sold $1918.89 million and $2119.8 million of loans in the years ended December 31, ~~2018~~2019 and ~~2017~~2018, respectively. We occasionally sell participation interests in loans and may sell loan participations in the future.

The following table shows our loan originations, purchases, sales and repayment activities for the periods indicated.

For The Years Ended

December 31,

2018

2017

2016

2015

2014

2019

2018

2017

2016

2015

(In Thousands)

Beginning balance, net

~~207~~235,~~035~~926

~~160~~207,~~586~~035

~~140~~160,~~110~~586

~~142~~140,~~501~~110

~~110~~142,~~673~~501

Loans originated

One-to-four family

5229,~~421~~944

4952,~~105~~421

3449,~~876~~105

1934,~~581~~876

1019,~~124~~581

Multi-family

~~3,160~~300

~~733~~3,160

~~901~~733

~~2,413~~901

-2,413

Non-residential

35,~~481~~941

133,~~756~~481

513,~~544~~756

15,~~898~~544

21,~~775~~898

Commercial

111,~~322~~461

111,~~080~~322

411,~~288~~080

64,~~352~~288

36,~~513~~352

Construction

9,~~681~~903

69,~~577~~681

56,~~199~~577

~~757~~5,199

~~412~~757

Consumer direct

910,~~421~~541

59,~~309~~421

25,~~460~~309

~~842~~2,460

~~505~~842

Total loans originated

7968,~~486~~090

8679,~~560~~486

5386,~~268~~560

3153,~~843~~268

1731,~~329~~843

Loans acquired in Twin Oaks merger

29,796

Loans purchased

One-to-four family

36,~~844~~604

-3,844

~~2,000~~-

-2,000

Multi-family

~~600~~-

-600

Non-residential

~~2,027~~-

12,~~100~~027

-1,100

Commercial

~~346~~-

~~3,478~~346

3,~~146~~478

-3,146

Consumer direct

31,~~349~~859

-3,349

Purchased auto

~~10,013~~-

1410,~~141~~013

1014,~~357~~141

-10,357

~~4,038~~-

Total loans purchased

178,~~642~~463

1917,~~646~~642

1519,~~203~~646

215,~~000~~203

42,~~038~~000

Loan sales (1)

(1917,~~801~~659

)

(2119,~~786~~801

)

(1821,~~287~~786

)

(718,~~630~~287

)

(37,~~057~~630

)

Principal payments

(4846,~~280~~735

)

(3748,~~746~~280

)

(2937,~~685~~746

)

(2829,~~695~~685

)

(1628,~~873~~695

)

Change in allowance for loan losses

(~~156~~309

)

(~~225~~156

)

(23225

)

91(23

)

~~595~~91

Ending balance, net

~~235~~247,~~926~~776

~~207~~235,~~035~~926

~~160~~207,~~586~~035

~~140~~160,~~110~~586

~~142~~140,~~501~~110

(1)	All loan sales were one-to-four family loans.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our Board of Directors and management.

For one-to-four family loans and owner occupied residential loans, our President may approve loans up to $500,000. Residential loans and all commercial loans above $500,000 and up to $2 million in the aggregate to any borrower(s) must be approved by a majority of our level one loan committee. This committee consists of our President, Executive Vice-President ~~and our~~ /Chief Lending Officer and Commercial Loan Officers. For loans to any borrower(s) in the aggregate of more than $2 million up to $4 million, approval is required by a majority of our level two loan committee, which consists of specific members of the level one committee, one designated outside director and our Chairman of the Board. For loan requests above $4 million in the aggregate to any borrower(s), approval is required by a majority of the Board of Directors, as a whole.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation to generally 15% of our stated capital and reserves. At December 31, ~~2018~~2019, our regulatory maximum was $67.93 million.

Loan Commitments. We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers and generally expire in 45 days.

Delinquencies. When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 10 days past due. If payment is not then received by the 30^th day of delinquency, additional letters are sent and phone calls are made to the customer. When the loan becomes 120 days past due, we generally commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. We may consider loan workout arrangements with certain borrowers under certain circumstances.

Management informs the Board of Directors on a monthly basis of the amount of loans delinquent more than 60 days, all loans in foreclosure and all foreclosed and repossessed property that we own.

Delinquent Loans

The following table presents information with respect to the delinquent loans at the dates indicated.

	December 31, 2019
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		6	$	607		7	$	986		13	$	1,593
Multi-family		-		-		-		-		-		-
Non-residential		1		64		-		-		1		64
Commercial		1		53		-		-		1		53
Purchased auto		1		22		1		19		2		41

Total		9	$	746		8	$	1,005		17	$	1,751

	December 31, 2018
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		8	$	549		9	$	788		17	$	1,337
Multi-family		-		-		-		-		-		-
Non-residential		1		129		1		127		2		256
Commercial		-		-		-		-		-		-
Purchased auto		1		16		-		-		1		16

Total		10	$	694		10	$	915		20	$	1,609

	December 31, 2017
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		10	$	986		3	$	100		13	$	1,086
Multi-family		-		-		-		-		-		-
Non-residential		2		395		-		-		2		395
Commercial		1		10		-		-		1		10
Purchased auto		-		-		1		1		1		1

Total		13	$	1,391		4	$	101		17	$	1,492

	December 31, 2016
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		1	$	23		9	$	1,089		10	$	1,112
Multi-family		-		-		-		-		-		-
Non-residential		-		-		2		681		2		681
Purchased auto		-		-		1		25		1		25

Total		1	$	23		12	$	1,795		13	$	1,818

	December 31, 2015
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		5	$	753		10	$	737		15	$	1,490
Multi-family		-		-		-		-		-		-
Non-residential		1		113		1		18		2		131
Purchased auto		-		-		1		3		1		3
Total		6	$	866		12	$	758		18	$	1,624

	December 31, 2014
	December 31, 2015
	60-89 Days				90 Days or More				Total
	(Dollars in Thousands)
	Number of		Principal		Number of		Principal		Number of		Principal
	Loans		Balance		Loans		Balance		Loans		Balance
One-to-four family		45	$	~~310~~753		3710	$	~~1,741~~737		4115	$	21,~~051~~490
Multi-family		-		-		2-		~~257~~-		2-		~~257~~-
Non-residential		1		~~420~~113		31		~~115~~18		42		~~535~~131
Purchased auto		-		-		1		113		1		113
Total		56	$	~~730~~866		4312	$	~~2,124~~758		4818	$	21,~~854~~624

Classified Assets. Federal Deposit Insurance Corporation regulations and our Asset Classification Policy provide that loans and other assets considered to be of lesser quality be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s escalated level of attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. Loans classified as impaired for financial reporting purposes are generally those loans classified as substandard or doubtful for regulatory reporting purposes.

An insured institution is required to establish allowances for loan losses in an amount deemed prudent by management for loans classified as substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required to charge off such amounts. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of the Comptroller of the Currency (“OCC”).

On the basis of management’s review of our assets, at December 31, ~~2018~~2019 and ~~2017~~2018, we classified $0.304 million and $0.834 million, respectively, of our assets as special mention and $12.53 million and $1.5 million, respectively, of our assets as substandard. We classified none of our assets as doubtful and there were no assets classified as loss for the years ended December 31, ~~2018~~2019 and ~~December 31, 2017~~2018. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.

The economy continued to stabilize in our market during ~~2018~~2019 which meant foreclosures and liquidations as a manner of reducing non-performing assets continued but at a much slower pace. This is not our primary means to resolve credit issues, however, there are certain circumstances when foreclosure and liquidations are the remedy pursued. From time to time, the Company as part of our loss mitigation strategy may renegotiate the loan terms (i.e. interest rate, structure, repayment term, A/B note format, etc.) based on the economic or legal reasons related to the borrower’s financial difficulties. There were no new troubled debt restructurings (“TDRs”) during ~~2018~~2019 and ~~2017~~2018. TDRs are considered to be non-performing, except for those that have established a sufficient performance history (generally a minimum of six consecutive months of performance) under the terms of the restructured loan.

At December 31, ~~2018~~2019, one loan (with ~~aggregate~~a ~~balances~~balance of $0.1 million) of our 2229 substandard loans (with aggregate balances of $12.53 million) was considered a TDR and was included in non-performing assets. At December 31, ~~2017~~2018, ~~four~~one ~~loans~~loan (with ~~aggregate~~a ~~balances~~balance of $0.51 million) of our 1922 substandard loans (with aggregate balances of $1.5 million) ~~were~~was considered ~~TDRs~~a TDR and ~~were~~was included in non-performing assets. The ~~decrease in~~ TDR ~~balances~~balance included in impaired loans was primarily a result of ~~upgrading~~no ~~three~~new ~~TDRs~~loans ~~totaling~~being ~~$0.4~~downgraded ~~million~~to ~~due~~TDRs toduring ~~improved~~the ~~performance~~year.

The following table shows the amounts and relevant ratios of nonperforming assets for the periods indicated:

	December 31,
	2018		2017		2016		2015		2014
	2019		2018		2017		2016		2015
			(In Thousands)
Non-accrual:			(In Thousands)
Non-accrual:
One-to-four family	$	2,089	$	1,049	$	1,214	$	2,693	$	2,982
One-to-four family	$	1,049	$	1,214	$	2,693	$	2,982	$	3,733
Multi-family		-		-		-		-		-
Multi-family		-		-		-		-		257
Non-residential real estate		144		455		355		2,265		2,070
Non-residential real estate		455		355		2,265		2,070		2,039
Commercial		-		-		10		-		-
Commercial		-		10		-		-		-
Purchased auto		19		-		1		24		3
Purchased auto		-		1		24		3		11
Total non-accrual loans		2,252		1,504		1,580		4,982		5,055
Total non-accrual loans		1,504		1,580		4,982		5,055		6,040
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Lines of credit		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Total nonperforming loans		12,~~504~~252		1,~~580~~504		41,~~982~~580		54,~~055~~982		65,~~040~~055
Foreclosed real estate		-		84-		3384		~~313~~33		~~233~~313
Other repossessed assets		7913		-79		2-		172		6317
Total nonperforming assets	$	12,~~583~~265	$	1,~~664~~583	$	51,~~017~~664	$	5,~~385~~017	$	65,~~336~~385

Ratios
	December 31,
	2018			2017			2016			2015			2014
Allowance for loan losses as a percent of gross loans receivable		1.10	%		1.18	%		1.38	%		1.56	%		1.60	%
Allowance for loan losses as a percent of total nonperforming loans		174.73	%		156.46	%		45.10	%		44.00	%		38.33	%
Nonperforming loans as a percent of gross loans receivable		0.63	%		0.75	%		3.06	%		3.55	%		4.17	%
Nonperforming loans as a percent of total assets		0.51	%		0.62	%		2.16	%		2.37	%		2.72	%
Nonperforming assets as a percent of total assets		0.54	%		0.65	%		2.18	%		2.52	%		2.86	%

Ratios

The total amount of non-accrual loans decreased to $1.5 million as of December 31, 2018, from $1.6 million at December 31, 2017. Total non-performing loans consist of 22 loans to 15 borrowers for the year ended December 31, 2018, as compared to 19 loans to 21 borrowers for the year ended December 31, 2017. For the years ended December 31, 2018 and 2017, gross interest income of $108,000 and $123,000, respectively, would have been recorded had the non-accrual loans at the end of the period been on accrual status throughout the period. We recognized $0 and $10,000 in cash basis interest income on impaired loans for the years ended December 31, 2018 and 2017, respectively.

	December 31,
	2019			2018			2017			2016			2015
Allowance for loan losses as a percent of gross loans receivable		1.17	%		1.10	%		1.18	%		1.38	%		1.56	%
Allowance for loan losses as a percent of total nonperforming loans		130.42	%		174.73	%		156.46	%		45.10	%		44.00	%
Nonperforming loans as a percent of gross loans receivable		0.90	%		0.63	%		0.75	%		3.06	%		3.55	%
Nonperforming loans as a percent of total assets		0.75	%		0.51	%		0.62	%		2.16	%		2.37	%
Nonperforming assets as a percent of total assets		0.75	%		0.54	%		0.65	%		2.18	%		2.52	%

The total amount of non-accrual loans increased to $2.3 million as of December 31, 2019, from $1.5 million at December 31, 2018. Total non-performing loans consist of 39 loans to 29 borrowers for the year ended December 31, 2019, as compared to 22 loans to 15 borrowers for the year ended December 31, 2018. For the years ended December 31, 2019 and 2018, gross interest income of $97,000 and $108,000, respectively, would have been recorded had the non-accrual loans at the end of the period been on accrual status throughout the period. We recognized no cash basis interest income on impaired loans for the years ended December 31, 2019 and 2018, respectively.

Allowance for Loan Losses

Our allowance for loan losses is maintained at a level necessary to absorb loan losses which are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. We utilize a two-tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of our loan portfolio. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.

The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company using the most recent twelve quarters with heavier weighting given to the most recent quarters.

Actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following:

●

Levels of and trends in delinquencies and impaired loans

●

Levels of and trends in charge-offs and recoveries

●

Trends in volume and terms of loans

●

Effects of any changes in risk selection and underwriting standards

●

Other changes in lending policies, procedures and practices

●

Experience, ability and depth of lending management and other relevant staff

●

National and local economic trends and conditions

●

Industry conditions

●

Effects of changes in credit concentrations

The allowance is increased through provisions charged against current earnings and offset by recoveries of previously charged-off loans. Loans which are determined to be uncollectible are charged against the allowance. Management uses available information to recognize probable and reasonably estimable loan losses, but future loss provisions may be necessary based on changing economic conditions. The allowance for loan losses as of December 31, ~~2018~~2019 is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses.

Allowance for Loan Losses. The following table analyzes changes in the allowance for the periods indicated.

	Year Ended December 31,
	2018			2017			2016			2015			2014
	2019			2018			2017			2016			2015
	(Dollars in Thousands)
Balance at beginning of year	$	2,~~472~~628		$	2,~~247~~472		$	2,~~224~~247		$	2,~~315~~224		$	2,~~910~~315
Charge-offs:
One-to-four family		~~312~~285			~~259~~312			~~233~~259			~~296~~233			~~976~~296
Multi-family		-			-			-			34-			~~183~~34
Non-residential		-			62-			~~171~~62			18171			~~336~~18
Commercial		-			-			-			-			-
Consumer		-48			9-			-9			64-			2664
Purchased auto		~~166~~161			85166			~~109~~85			74109			9074
		478			415			513			486			1,611
		494			478			415			513			486
Recoveries:
One-to-four family		50138			1150			6011			9560			8195
Multi-family		1632			16			16			16			2416
Non-residential real estate		-			8-			-8			-			-
Commercial		-			-			-			-			-
Consumer		164			816			8			78			37
Purchased auto		2434			2224			1022			710			7
		106			65			94			125			115
		208			106			65			94			125
Net charge-offs		~~372~~285			~~350~~372			~~419~~350			~~361~~419			~~1,496~~361
Additions charged to operations		~~528~~595			~~575~~528			~~442~~575			~~270~~442			~~901~~270
Balance at end of year	$	2,~~628~~937		$	2,~~472~~628		$	2,~~247~~472		$	2,~~224~~247		$	2,~~315~~224
Net charge-offs to average gross loans outstanding		0.1711	%		0.1817	%		0.2718	%		0.2527	%		10.3025	%

Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the allowance for loan losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

	2018
	2019
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	12,~~762~~121		6772.0522	%		5961.4388	%
Multi-family		2624		0.9982	%		2.8434	%
Non-residential		~~344~~207		137.0905	%		1412.7924	%
Commercial		~~135~~199		56.1478	%		79.2354	%
Consumer		83192		36.1654	%		68.4520	%
Purchased auto		~~278~~194		106.5761	%		95.2680	%
Total allowance for loan losses	$	2,~~628~~937		100.00	%		100.00	%

	2018
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,762		67.05	%		59.43	%
Multi-family		26		0.99	%		2.84	%
Non-residential		344		13.09	%		14.79	%
Commercial		135		5.14	%		7.23	%
Consumer		83		3.16	%		6.45	%
Purchased auto		278		10.58	%		9.26	%
Total allowance for loan losses	$	2,628		100.00	%		100.00	%

	2017
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,477		59.75	%		59.24	%
Multi-family		22		0.89	%		2.70	%
Non-residential		371		15.01	%		15.34	%
Commercial		154		6.23	%		9.91	%
Consumer		140		5.66	%		3.00	%
Purchased auto		308		12.46	%		9.81	%
Total allowance for loan losses	$	2,472		100.00	%		100.00	%

		2016
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,427		63.51	%		63.80	%
Multi-family		93		4.14	%		3.18	%
Non-residential		367		16.33	%		13.85	%
Commercial		97		4.32	%		10.22	%
Consumer		79		3.52	%		1.76	%
Purchased auto		184		8.18	%		7.19	%
Total allowance for loan losses	$	2,247		100.00	%		100.00	%

	2016
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,427		63.51	%		63.80	%
Multi-family		93		4.14	%		3.18	%
Non-residential		367		16.33	%		13.85	%
Commercial		97		4.32	%		10.22	%
Consumer		79		3.52	%		1.76	%
Purchased auto		184		8.18	%		7.19	%
Total allowance for loan losses	$	2,247		100.00	%		100.00	%

	2015
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,728		77.71	%		69.73	%
Multi-family		142		6.38	%		2.79	%
Non-residential		198		8.90	%		14.18	%
Commercial		51		2.29	%		8.48	%
Consumer		37		1.66	%		1.16	%
Purchased auto		68		3.06	%		3.66	%
Total allowance for loan losses	$	2,224		100.00	%		100.00	%

	2014
			Percent Of			Percent Of Gross Loans In
			Allowance To			Each Category To Total
	Amount		Total Allowance			Gross Loans
	(Dollars in Thousands)
One-to-four family	$	1,813		78.31	%		67.78	%
Multi-family		122		5.27	%		2.15	%
Non-residential		245		10.58	%		14.45	%
Commercial		36		1.56	%		8.45	%
Consumer		11		0.48	%		1.19	%
Purchased auto		88		3.80	%		5.98	%
Total allowance for loan losses	$	2,315		100.00	%		100.00	%

Each quarter, management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific, but are reflective of the inherent losses in the loan portfolio. This process includes, but is not limited to, a periodic review of loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, underlying value of collateral, if applicable, and economic conditions in our market areas. First, we group loans by delinquency status. All loans 90 days or more delinquent and all loans classified as substandard or doubtful are evaluated individually, based primarily on the value of the collateral securing the loan. Specific loss allowances are established as required by this analysis. All loans for which a specific loss allowance has not been assigned are segregated by type and delinquency status and a loss allowance is established by using loss experience data and management’s judgment concerning other matters it considers significant. The allowance is allocated to each category of loan based on the results of the above analysis.

Total allowance for loan losses increased to $2.69 million at December 31, ~~2018~~2019 as compared to $2.56 million at December 31, ~~2017~~2018. The increase reflected an increase of $0.3 million in the general portion of the reserve while specific reserves on impaired loans were consistent between the years. Impaired loans were $12.53 million with a valuation allowance of $~~217~~200,000 at December 31, ~~2018~~2019, as compared to $1.5 million with a valuation allowance of $~~230~~217,000 at December 31, ~~2017~~2018. Of the $12.53 million of impaired loans at December 31, ~~2018~~2019, $0.12 million were acquired in the merger with Twin Oaks and valued per FASB ASC 310-30 (see Note 4 to the Notes to the Consolidated Financial Statements). The increase in the general portion of the reserve was due primarily to balance increases in all categories of the loan portfolio. These increases to the allowance were partially off-set by improvements in historical loss levels resulting from stabilization in nonperforming asset levels and charge-off levels, off-set slightly by changes in the qualitative factors applied to reflect changes in risk.

This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at a level to absorb probable and estimable losses, additions may be necessary if economic or other conditions in the future differ from the current environment.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions.

At December 31, ~~2018~~2019, our investment portfolio consisted primarily of municipal securities with maturities of five to more than ten years and residential mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae with stated final maturities of 30 years or less.

Our investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our Board of Directors has the overall responsibility for our investment portfolio, including approval of our investment policy and appointment of our Investment Committee. The Investment Committee is responsible for approval of investment strategies and monitoring of investment performance. Our ~~Executive Vice-~~President and CFO are the designated investment officers and they are responsible for the daily investment activities and are authorized to make investment decisions consistent with our investment policy. The Investment Committee, consisting of seven ~~external~~non-employee members of the Board of ~~Director~~Directors ~~members~~, meets regularly with the ~~Executive Vice-~~President and CFO to review and determine investment strategies and transactions.

The following table sets forth the carrying value of our investment portfolio at the dates indicated.

December 31,

2018

2017

2016

2019

2018

2017

Carrying

Fair

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Amount

Value

(In Thousands)

Available-for-sale

State and municipal securities

13,~~187~~465

13,~~971~~187

1813,~~156~~971

Residential mortgage-backed securities

1211,~~347~~051

12,~~075~~347

2612,~~405~~075

Total available-for-sale

2524,~~534~~516

2625,~~046~~534

4426,~~561~~046

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, ~~2018~~2019 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Certain mortgage-backed securities have interest rates that are adjustable and will re-price annually within the various maturity ranges. These re-pricing schedules are not reflected in the table below.

	At December 31, 2018
	At December 31, 2019
											More than Five
						More than One Year					Years Through Ten					More than Ten
	One Year or Less					Through Five Years					Years					Years					Total Securities
			Weighted					Weighted					Weighted					Weighted					Weighted
	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Yield
	(Dollars in Thousands)
Available-for-sale securities:
State and municipal securities	$	1,~~119~~770		32.7797	%	$	4,~~958~~446		3.3058	%	$	3,~~862~~968		3.9286	%	$	3,~~248~~281		4.15	%	$	13,~~188~~465		3.7372	%
Residential mortgage-backed securities		~~537~~75		1.6519	%		1110,~~353~~748		2.63	%		~~457~~228		3.5660	%		-		0.00	%		1211,~~348~~051		2.6264	%
Total securities available-for-sale	$	1,~~656~~845		32.0890	%	$	1615,~~311~~194		2.8391	%	$	4,~~319~~196		3.8885	%	$	3,~~248~~281		4.15	%	$	2524,~~536~~516		3.1923	%

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions.

Deposit Accounts. The vast majority of our depositors are residents of LaSalle County, with some deposit relationships in Grundy County. Deposits are raised primarily from within our primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, regular savings accounts, club savings accounts, certificate accounts and various retirement accounts. The Bank also is a member of the Certificate of Deposit Registry Service (CDARS), which allows the Bank to retain high deposit relationships with its depository customer base, while still allowing the customer to enjoy FDIC deposit insurance on amounts in excess of the current limit of $250,000. During 2017, the Bank became a member of the QuickRate CD listing service, which allows the Bank to obtain institutional deposits when needed to help meet loan funding needs. During 2018, the Bank also began a relationship with Financial Northeastern Companies, a CD broker, to obtain institutional deposits when needed to help meet loan funding needs. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates, but not be the market leader in every type and maturity.

The following table sets forth the dollar amount of deposits by type as of the dates indicated.

	At December 31,	~~At December 31,~~
		2018							2017							2016
	2019							2018							2017
				Percent	~~Percent~~						Percent	~~Percent~~						Percent	~~Percent~~
	Amount	~~Amount~~		Of Total	~~Of Total~~			Amount	~~Amount~~		Of Total	~~Of Total~~			Amount	~~Amount~~		Of Total	~~Of Total~~
	(Dollars In Thousands)	~~(Dollars In Thousands)~~
Non-Interest Bearing Checking	$	$13,665	~~14,058~~		5.78	~~6.29~~%	%	$	$14,058	~~11,563~~		6.29	~~6.32~~%	%	$	$11,563	~~9,975~~		6.32	~~5.78~~%	%
Interest Bearing Checking		62,474	~~54,292~~		26.44	~~24.30~~%	%		54,292	~~29,081~~		24.30	~~15.91~~%	%		29,081	~~27,634~~		15.91	~~16.02~~%	%
Money Market accounts		22,452	~~25,033~~		9.50	~~11.20~~%	%		25,033	~~27,560~~		11.20	~~15.08~~%	%		27,560	~~29,719~~		15.08	~~17.22~~%	%
Savings accounts		25,008	~~25,720~~		10.58	~~11.51~~%	%		25,720	~~25,966~~		11.51	~~14.21~~%	%		25,966	~~23,988~~		14.21	~~13.90~~%	%
Certificates of Deposit accounts		112,715	~~104,346~~		47.70	~~46.70~~%	%		104,346	~~88,605~~		46.70	~~48.48~~%	%		88,605	~~81,231~~		48.48	~~47.08~~%	%
Total deposit accounts	$	$236,314	~~223,449~~		100.00	~~100.00~~%	%	$	$223,449	~~182,775~~		100.00	~~100.00~~%	%	$	$182,775	~~172,547~~		100.00	~~100.00~~%	%
Certificate Accounts, by rate
Less than 1.00%	$	$6,422	~~9,980~~		5.70	~~9.56~~%	%	$	$9,980	~~17,481~~		9.56	~~19.73~~%	%	$	$17,481	~~32,249~~		19.73	~~39.70~~%	%
1.00% to 1.99%		36,587	~~53,673~~		32.46	~~51.44~~%	%		53,673	~~66,410~~		51.44	~~74.95~~%	%		66,410	~~48,927~~		74.95	~~60.23~~%	%
2.00% to 2.99%		59,809	~~39,114~~		53.06	~~37.49~~%	%		39,114	~~4,714~~		37.49	~~5.32~~%	%		4,714	55		5.32	~~0.07~~%	%
3.00% to 3.99%		9,897	~~1,579~~		8.78	~~1.51~~%	%		1,579	-		1.51	~~0.00~~%	%		-	-		0.00	~~0.00~~%	%
4.00% to 4.99%			-			0.00	%			-			0.00	%			-			0.00	%
Total Certificate Accounts	$	112,715			100.00	%		$	104,346			100.00	%		$	88,605			100.00	%
5.00% to 5.99%			-			0.00	%			-			0.00	%			-			0.00	%
Total Certificate Accounts		$	104,346			100.00	%		$	88,605			100.00	%		$	81,231			100.00	%

The following table sets forth the distribution of average deposit accounts, by account type, at the dates indicated.

	Years Ended December 31,
	2018					2017					2016
	2019					2018					2017
	Weighted			Average		Weighted			Average		Weighted			Average
	Avg. Rate			Amount		Avg. Rate			Amount		Avg. Rate			Amount
	(Dollars In Thousands)
Non-Interest Bearing Checking		0.00	%	$	1210,~~210~~052		0.00	%	$	1012,~~784~~210		0.00	%	$	1110,~~125~~784
Interest Bearing Checking		0.9084	%		4243,~~340~~889		0.0790	%		2942,~~048~~340		0.0507	%		2729,~~463~~048
Money Market accounts		0.2726	%		2623,~~837~~416		0.2827	%		2926,~~961~~837		0.2128	%		3029,~~520~~961
Savings accounts		0.06	%		26,~~148~~713		0.06	%		26,~~230~~148		0.06	%		2826,~~353~~230
Certificate of Deposit accounts		12.7715	%		~~101~~111,~~025~~866		1.2077	%		83101,~~283~~025		01.9620	%		8483,~~589~~283
Total		1.1534	%	$	~~208~~215,~~560~~936		01.6915	%	$	~~179~~208,~~306~~560		0.5369	%	$	~~182~~179,~~050~~306

Deposit Activity. The following table sets forth the deposit activities for the periods indicated.

	Years Ended December 31,
	2018			2017			2016
	2019			2018			2017
	(In Thousands)
Beginning of period	$	~~182~~223,~~775~~449		$	~~172~~182,~~547~~775		$	~~176~~172,~~735~~547
Net deposits (withdrawals)		3910,~~448~~680			939,~~305~~448			(49,~~971~~305	)
Interest credited on deposit accounts		12,~~226~~185			~~923~~1,226			~~783~~923
End of period	$	~~223~~236,~~449~~314		$	~~182~~223,~~775~~449		$	~~172~~182,~~547~~775
Percent change		225.2576	%		522.9325	%		-25.3793	%

The following table indicates the dollar amount of certificates of deposit as of December 31, ~~2018~~2019, by time remaining until maturity.

Three

Over Three

Over Six

Over

Months

To Six

To Twelve

Twelve

Or Less

Months

Total

(In Thousands)

Less than $100,000

38,~~739~~307

810,~~542~~493

126,~~479~~419

23,~~245~~559

48,~~005~~777

$100,000 to $250,000

47,~~063~~459

610,~~627~~412

97,~~293~~140

1921,~~341~~817

3946,~~324~~827

Over $250,000

~~288~~3,327

1,~~478~~974

31,~~927~~238

1110,~~324~~571

17,~~017~~110

Total

819,~~090~~093

1622,~~647~~879

2514,~~699~~797

5355,~~910~~947

~~104~~112,~~346~~715

	Less than	~~Less than~~		1 to 2	~~1 to 2~~		2 to 3	~~2 to 3~~		3 to 4	~~3 to 4~~		4 to 5	~~4 to 5~~
	1 year	~~1 year~~		years	~~years~~		years	~~years~~		years	~~years~~		years	~~years~~		Total	~~Total~~
	(In Thousands)	~~(In Thousands)~~
Less than 1.00%	$	$6,264	~~8,437~~	$	$158	~~1,211~~	$	$-	~~332~~	$	$-	-	$	$-	-	$	$6,422	~~9,980~~
1.00% to 1.99%		12,016	~~22,691~~		14,658	~~19,755~~		3,176	~~3,940~~		1,990	~~4,383~~		4,747	~~2,904~~		36,587	~~53,673~~
2.00% to 2.99%		29,584	~~19,308~~		14,813	~~4,741~~		9,586	~~2,982~~		3,182	~~9,124~~		2,644	~~2,959~~		59,809	~~39,114~~
3.00% to 3.99%		8,905	-		249	~~240~~		494	~~1,339~~		-	-		249	-		9,897	~~1,579~~
4.00% to 4.99%			-			-			-			-			-			-
Total	$	56,769		$	29,878		$	13,256		$	5,172		$	7,640		$	112,715
5.00% to 5.99%			-			-			-			-			-			-
Total		$	50,436		$	25,947		$	8,593		$	13,507		$	5,863		$	104,346

Borrowings. If necessary, we borrow from the Federal Home Loan Bank of Chicago to supplement our supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Chicago and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities that are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s credit-worthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 35% of a member’s assets, and short-term borrowings of less than one year may not exceed 10% of the institution’s assets. The Federal Home Loan Bank determines specific lines of credit for each member institution. There were $129.1 million of Federal Home Loan Bank advances outstanding at December 31, ~~2018~~2019. At December 31, ~~2018~~2019, we had the ability to borrow an additional $7465.68 million from the Federal Home Loan Bank of Chicago. In addition, as of December 31, ~~2018~~2019, the Bank had $7.9 million of available credit from Bankers Bank of Wisconsin to purchase federal funds and $5.0 million of available credit from Midwest Independent Bank to purchase federal funds.

Personnel

At December 31, ~~2018~~2019, we had 5057 full-time employees and 813 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Subsidiaries

The Company’s only subsidiary is Ottawa Savings Bank.

REGULATION AND SUPERVISION

General

Ottawa Savings Bank as a federal savings bank is currently subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency (OCC), as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the insurer of its deposits. Ottawa Savings Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) managed by the Federal Deposit Insurance Corporation (“FDIC”). Ottawa Savings Bank must file reports with the OCC and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OCC and, under certain circumstances, the FDIC to evaluate Ottawa Savings Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the OCC, the FDIC or Congress, could have a material adverse impact on Ottawa Bancorp, Inc., and Ottawa Savings Bank and their operations.

The Dodd-Frank Act made extensive changes to the regulation of Ottawa Savings Bank. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated and responsibility for the supervision and regulation of federal savings associations such as Ottawa Savings Bank was transferred to the OCC on July 21, 2011. The OCC is the agency that is primarily responsible for the regulation and supervision of national banks. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as Ottawa Savings Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.

Certain of the regulatory requirements that are applicable to Ottawa Savings Bank and Ottawa Bancorp, Inc. are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Ottawa Savings Bank and Ottawa Bancorp, Inc.

Federal Banking Regulation

Business Activities. The activities of federal savings banks, such as Ottawa Savings Bank, are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements. In July 2013, the OCC and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to Ottawa Savings Bank. The final rule ~~implements~~implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule ~~includes~~included new minimum risk-based capital and leverage ratios, which became effective for Ottawa Savings Bank on January 1, 2015, and ~~refines~~refined the definition of what constitutes “capital” for purposes of calculating these ratios. The ~~new~~ minimum capital requirements under the final rule are: (i) a ~~new~~ common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged); and (iv) a Tier 1 leverage ratio of 4%. The final rule also ~~establishes~~established a “capital conservation” buffer of 2.5%, and ~~will~~resulted ~~result~~ in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and was increased each year until it was fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The OCC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits, which are $250,000 per depositor by the Deposit Insurance Fund (“DIF”) of the FDIC. Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by Federal Deposit Insurance Corporation regulations. Institutions deemed less risky pay lower assessments. The Federal Deposit Insurance Corporation may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

The Dodd-Frank Act required the Federal Deposit Insurance Corporation to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The Federal Deposit Insurance Corporation finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Ottawa Savings Bank. Management cannot predict what insurance assessment rates will be in the future.

Loans to One Borrower. Federal law provides that savings banks are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, savings banks may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Qualified Thrift Lender Test. Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings bank is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily multi-family residential mortgages and related investments, including certain mortgage-backed securities but also including education, credit card and small business loans) in at least 9 months out of each 12-month period.

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and the Dodd-Frank Act also specifies that failing the qualified thrift lender test is a violation of law that could result in an enforcement action and dividend limitations. As of December 31, ~~2018~~2019, Ottawa Savings Bank maintained 8688.50% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Limitation on Capital Distributions. Federal regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OCC is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OCC regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required, the institution must still provide 30-days prior written notice to and receive the non-objection of, the Federal Reserve Board of the capital distribution if, like Ottawa Savings Bank, it is a subsidiary of a holding company, as well as an informational notice filing to the OCC. If Ottawa Savings Bank’s capital were ever to fall below its regulatory requirements or the OCC notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OCC could prohibit a proposed capital distribution by any institution which would otherwise be permitted by the regulation, if the OCC determines that such distribution would constitute an unsafe or unsound practice.

Community Reinvestment Act. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. ~~Responsibility for administering the Community Reinvestment Act, unlike other fair lending laws, is not being transferred to the Consumer Financial Protection Bureau.~~ Ottawa Savings Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.

Transactions with Related Parties. Federal law limits Ottawa Savings Bank’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with Ottawa Savings Bank, including Ottawa Bancorp and their other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by Ottawa Bancorp to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Ottawa Savings Bank’s authority to extend credit to executive officers, directors and 10% stockholders (“insiders”), as well as entities such persons’ control, is limited. The laws limit both the individual and aggregate amount of loans that Ottawa Savings Bank may make to insiders based, in part, on Ottawa Savings Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

In accordance with banking regulations, the Board of Directors reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of Ottawa Bancorp’s capital and surplus (up to a maximum of $500,000) and such loans must be approved in advance by a majority of the disinterested members of the Board of Directors. Additionally, pursuant to the Company’s Code of Ethics and Business Conduct, all executive officers and directors of the Company must disclose any existing or emerging conflicts of interest to the President and Chief Executive Officer of the Company. Such potential conflicts of interest include, but are not limited to, the following: (i) the Company conducting business with or competing against an organization in which a family member of an executive officer or director has an ownership or employment interest; and (ii) the ownership of more than 1% of the outstanding securities (or that represents more than 5% of the total assets of the employee and/or family member) of any business entity that does business with or is in competition with the Company.

Enforcement. The OCC currently has primary enforcement responsibility over savings associations and has authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings association. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Federal Home Loan Bank System. Ottawa Savings Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Ottawa Savings Bank, as a member of the Federal Home Loan Bank of Chicago is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Ottawa Savings Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, ~~2018~~2019 of $0.56 million.

Federal Reserve System. The Federal Reserve Act authorizes the Federal Reserve Board ~~regulations~~to require savings associations to maintain noninterest-earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal “NOW” and regular checking accounts). The amounts are adjusted annually and, for ~~2018~~2019, the regulations provided that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $~~124~~127.25 million; and a 10% reserve ratio is applied above $~~124~~127.25 million. The first $16.39 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) ~~are~~were exempted from the reserve requirements. Ottawa Savings Bank ~~complies~~complied with the foregoing requirements during 2019. InOn ~~October~~March ~~2008~~15, 2020, the Federal Reserve Board ~~began~~reduced ~~paying~~reserve ~~interest~~requirement onto ~~certain~~0% effective as of March 26, 2020, which eliminated reserve ~~balances~~requirements for all depository institutions.

Other Regulations. Ottawa Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as, but not limited to, the:

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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

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Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

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Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Ottawa Savings Bank also are subject to the:

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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

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Check Clearing for the 21^stCentury Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

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Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), and the related regulations of the Federal Reserve Board, which require savings associations operating in the United States to develop new anti-money laundering compliance programs (including a customer identification program that must be incorporated into the AML compliance program), due diligence policies and controls to ensure the detection and reporting of money laundering; and

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The Bank Secrecy Act of 1970, which requires financial institutions in the United States to keep records of cash purchases of negotiable instruments, file reports of cash purchases of negotiable instruments exceeding a daily amount of $10,000 or more and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.

Holding Company Regulation

General. As a savings and loan holding company, Ottawa Bancorp, Inc. is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations regarding its activities. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Ottawa Savings Bank.

Pursuant to federal law and regulations and policy, a savings and loan holding company such as Ottawa Bancorp may generally engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities that have been authorized for savings and loan holding companies by regulation.

Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital Requirements. Savings and loan holding companies with less than $3 billion in assets are not subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.

Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all banks and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends and Stock Repurchases. The Federal Reserve Board has the power to prohibit dividends by savings and loan holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which also applies to savings and loan holding companies and which expresses the Federal Reserve Board’s view that a holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

Federal Reserve Board policy also provides that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of “control” may occur, and prior notice is required, upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control. Under the Change in Bank Control Act, the Federal Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Federal Securities Laws

Ottawa Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Ottawa Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

FEDERAL AND STATE TAXATION

Federal Income Taxation

General. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. We report our income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year ~~2013~~2016. For its ~~2018~~2019 fiscal year, Ottawa Savings Bank’s maximum federal income tax rate was 21%.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted, which amended the Internal Revenue Code of 1986, reducing tax rates and modifying certain policies, credits, and deductions for individuals and businesses. Included in this legislation was a reduction of the federal corporate income tax rate from 35% to 21%. As a result of this reduction, we were required to revalue our existing net deferred tax assets, which resulted in a charge to income tax expense during the fourth quarter of 2017. The Tax Cuts and Jobs Act also added limitations on the deductibility of business interest expense. While this limitation should not impact the deductibility of the Company’s interest expense, the limitation could impact our commercial borrowers. The Tax Cuts and Jobs Act also includes changes to personal income taxes that may impact the Bank’s borrowers, including: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgages; (ii) the elimination of interest deductions for home equity loans; and (iii) a limitation on the deductibility of property taxes and state and local income taxes.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts for institutions with assets in excess of $500 million and the percentage of taxable income method for all institutions for tax years beginning after 1995 and requires savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $2.3 million of our accumulated bad debt reserves would not be recaptured into taxable income unless Ottawa Savings Bank makes a “non-dividend distribution” to Ottawa Bancorp, Inc. as described below.

Distributions. If Ottawa Savings Bank makes “non-dividend distributions” to Ottawa Bancorp, Inc., the distributions will be considered to have been made from Ottawa Savings Bank’s un-recaptured tax bad debt reserves, to the extent of the “non-dividend distributions,” and then from Ottawa Savings Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Ottawa Savings Bank’s taxable income. Non-dividend distributions include distributions in excess of Ottawa Savings Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Ottawa Savings Bank’s current or accumulated earnings and profits will not be so included in Ottawa Savings Bank’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Ottawa Savings Bank makes a non-dividend distribution to Ottawa Bancorp, Inc., approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 21% federal corporate income tax rate. Ottawa Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

Tax Allocation Agreement. Ottawa Bancorp, Inc. and Ottawa Savings Bank have executed a Tax Allocation Agreement. The purpose of this agreement is to set forth the rights and obligations of Ottawa Bancorp and Ottawa Savings Bank for purposes of filing consolidated federal and state combined income tax returns.

Under the Tax Allocation Agreement, Ottawa Bancorp and Ottawa Savings Bank calculate their federal and state income tax liabilities as if they were filing a separate tax return. If there is tax liability calculated on this separate entity basis, Ottawa Savings Bank pays that tax liability to Ottawa Bancorp. Payments are made no earlier than five days prior to the time that Ottawa Bancorp is required to make either estimated or final tax payments for the consolidated or combined return. If Ottawa Savings Bank has a taxable loss for a year on a separate entity basis, and if that loss could have been carried back to obtain a refund, Ottawa Bancorp pays an amount equal to such refund to Ottawa Savings Bank, whether or not any such refund is actually received on a consolidated or combined basis. If that taxable loss would not have resulted in a refund on a separate entity basis because there was no carry-back available, but that loss is used on the consolidated or combined return to reduce tax liability on a consolidated or combined basis, Ottawa Bancorp pays Ottawa Savings Bank an amount equal to the tax savings from using that loss.

Ottawa Savings Bank is required to contribute to Ottawa Bancorp, Inc. its share of any required estimated tax payments. When the consolidated or combined return is actually filed, if the estimated payments by Ottawa Savings Bank to Ottawa Bancorp exceed the amount of Ottawa Savings Bank’s tax liability on a separate entity basis, Ottawa Bancorp will refund the excess to Ottawa Savings Bank. If Ottawa Savings Bank’s tax liability on a separate entity basis exceeds the estimated payments it has paid to Ottawa Bancorp, Ottawa Savings Bank will pay the deficiency to Ottawa Bancorp.

State Taxation

Ottawa Savings Bank is required to file Illinois income tax returns and pay tax at an effective tax rate of approximately 9.465% of Illinois taxable income. For these purposes, Illinois taxable income generally means federal taxable income subject to certain modifications, primarily the exclusion of interest income on United States obligations.

ITEM 1A. RISK FACTORS

Our origination or purchase of non-residential real estate, multi-family, commercial or construction loans may expose us to increased lending risks.

Our loan portfolio includes non-residential real estate, multi-family, commercial and construction loans. We intend to continue to underwrite loans of this nature when it is prudent to do so from a business standpoint as long as the loans fall within internal policy limits and enable us to remain in compliance with regulatory guidelines and limits. These types of loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Also, many of these types of borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to-four family residential mortgage loan.

Our origination of non-owner occupied one-to-four family residential mortgage loans may expose us to increased lending risks.

At December 31, ~~2018~~2019, loans secured by non-owner occupied one-to-four family residential properties totaled $29.72 million, or 2018.98% of our total residential loan portfolio. We intend to continue to make loans secured by non-owner occupied one-to-four family residential properties in the future. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

We established our allowance for loan losses and maintain it at a level considered adequate by management to absorb loan losses that are inherent in the portfolio. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, ~~2018~~2019, our allowance for loan losses as a percentage of total gross loans was 1.1017% and as a percentage of total non-performing loans was approximately ~~174~~130.7342%. Because of the concentration of one-to-four family, non-residential and commercial loans in our loan portfolio, the movement of a small number of loans to non-performing status can have a significant impact on this ratio. Although management believes that the allowance for loan losses as of December 31, ~~2018~~2019, was adequate to absorb losses on any existing loans that may become uncollectible, in light of the current economic environment, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future, particularly if economic conditions worsen beyond what management currently expects. Additional provisions to the allowance for loan losses and loan losses in excess of our allowance for loan losses may adversely affect our business, financial condition and results of operations. For additional details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation -- Comparison of Financial Condition at December 31, ~~2018~~2019 and December 31, ~~2017~~2018-- Provision for Loan Losses.”

We may not be able to realize our deferred tax asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, ~~2018~~2019, we had $1.97 million of net deferred tax assets. During the fourth quarter of 2017, the Company revalued its net deferred tax assets which resulted in a charge of approximately $0.8 million to income tax expense. This income tax adjustment resulted from the December 22, 2017 enactment of the Tax Cuts and Jobs Act, which lowered the corporate tax rate from 34% to 21%. Prior to the enactment of the Tax Cuts and Jobs Act, the Company’s net deferred tax assets were valued based upon the projection of a 34% future tax benefit. We have determined that no valuation allowance is required as of December 31, ~~2018~~2019, although there is no guarantee that those assets will be fully recognizable in future periods. Management regularly reviews the net deferred tax asset for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of the net deferred tax asset ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. At December 31, ~~2018~~2019, we had federal net operating loss carry forwards of $0.64 million. The federal net operating loss carry forwards will begin to expire in ~~2033~~2034. Future events such as the expiration of net operating loss carry forwards, capital raises or transactions that result in a change in control, could trigger the application of certain tax laws which materially limit the utilization of the net deferred tax assets. This is a complex analysis and requires us to make certain judgments in determining the annual limitation. It is possible that we could ultimately not be able to use or lose a significant portion of the net deferred tax assets. Realization of our net deferred tax assets would significantly improve our earnings and capital.

Fiscal challenges facing the U.S government could negatively impact financial markets which in turn could have an adverse effect on our financial position or results of operations.

Many of our investment securities are issued by the U.S. government and government agencies and sponsored entities. As a result of uncertain domestic political conditions, including the recent federal government shutdown and potential future federal government shutdowns, the possibility of the federal government defaulting on its obligations for a period of time due to debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose liquidity risks. In 2011, Standard & Poor’s lowered its long term sovereign credit rating on the U.S. from AAA to AA+. A further downgrade or a downgrade by other rating agencies, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide. Additionally, the U.S. government and the governments of other countries took steps to stabilize the financial system, including investing in financial institutions, and implementing programs to improve general economic conditions, but there can be no assurances that these efforts will restore long-term stability and that they will not result in adverse unintended consequences.

The outbreak of the recent coronavirus (“COVID-19”), or an outbreak of another highly infectious or contagious disease, could adversely affect our business, financial condition and results of operations.

Our business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well the business and operations of the Company and the Bank. Moreover, since the beginning of January 2020, the coronavirus outbreak has caused significant disruption in the financial markets both globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease, could also negatively impact the availability of our key personnel necessary to conduct the business of Company and the Bank. Such a spread or outbreak could also negatively impact the business and operations of third party service providers who perform critical services for our business. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.

Fiscal challenges facing the U.S government could negatively impact financial markets which in turn could have an adverse effect on our financial position or results of operations.

Many of our investment securities are issued by the U.S. government and government agencies and sponsored entities. Future uncertain domestic political conditions could result in the possibility of the federal government defaulting on its obligations for a period of time due to debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose liquidity risks. In 2011, Standard & Poor’s lowered its long term sovereign credit rating on the U.S. from AAA to AA+. A further downgrade or a downgrade by other rating agencies, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide. Additionally, the U.S. government and the governments of other countries took steps to stabilize the financial system, including investing in financial institutions, and implementing programs to improve general economic conditions, but there can be no assurances that these efforts will restore long-term stability and that they will not result in adverse unintended consequences.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

~~Short-term~~ Our ~~market~~net ~~interest~~income ~~rates~~depends ~~(which~~to wea ~~use~~great asextent aupon ~~guide~~the tolevel ~~price~~of our ~~deposits)~~net ~~had~~interest ~~been~~income. ~~near~~Changes ~~historically~~in ~~low levels, and longer-term market~~ interest rates ~~(which~~can weincrease ~~use~~or asdecrease anet ~~guide~~interest toincome ~~price~~and ~~our~~net ~~longer-term~~income. ~~loans)~~Net ~~have~~interest ~~been~~income ~~volatile~~is ~~since~~the ~~rising~~difference ~~during~~between the ~~latter~~interest ~~part~~income ofearned ~~2013~~on ~~from~~loans, ~~historically~~investments, ~~low~~and ~~levels.~~other Ininterest-earning ~~recent~~assets, ~~quarters~~and the ~~Federal~~interest ~~Reserve~~paid ~~Board’s~~on ~~policy~~interest-bearing ~~has~~liabilities, ~~been~~such toas ~~begin~~deposits ~~raising~~and borrowings. Net interest ~~rates~~income ~~from~~is ~~their~~affected ~~historically~~by ~~low~~changes ~~levels.~~in ~~Market~~market interest rates, onbecause ~~the~~different ~~loans~~types weof ~~have~~assets ~~originated~~ and ~~the~~liabilities ~~yields~~may onreact ~~securities~~differently, weand ~~have purchased had been~~ at ~~historically~~different ~~low levels for the past several years. For the year ended December 31~~times, ~~2018,~~to ~~our~~market interest rate ~~spread was 3~~changes.~~39%~~ ~~compared~~When tointerest-bearing ~~3.70%~~liabilities ~~for~~mature ~~the~~or ~~year~~re-price ~~ended~~more ~~December~~quickly ~~31,~~than ~~2017. The average yield on our~~ interest-earning assets ~~has~~in ~~decreased.~~a Ifperiod, ~~interest~~an ~~rates~~increase ~~continue to rise as projected~~ in ~~2019,~~market ~~the~~rates ~~rising~~of interest ~~rate~~could ~~environment~~reduce ~~will likely continue to adversely affect our~~ net interest income~~, which would likely have an adverse effect on our profitability~~. AsSimilarly, ~~short-term~~when interest-earning ~~rates~~assets ~~rise,~~mature ~~and~~or ~~rates on our deposits~~ re-price ~~upwards~~more ~~faster~~quickly than ~~the rates on our long~~interest-~~term~~bearing ~~loans and investments~~liabilities, wefalling ~~could experience compression of our~~ interest ~~rate~~rates ~~spread~~could ~~and~~reduce net interest ~~margin, which would have a negative effect on our profitability~~income. ~~Increases in interest rates can result in decreased prepayments of loans and mortgage-related securities, as borrowers maintain existing borrowings.~~

Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in world financial markets. The Company attempts to manage its risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. Changes in the market interest rates for types of products and services in various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors.

Strong competition within our market area could hurt our profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. According to data obtained from the FDIC, as of June 30, ~~2018~~2019, we held approximately 67.92% of all bank and thrift deposits in LaSalle County, which was the 5th largest market share of deposits out of 22 financial institutions (excluding credit unions) in LaSalle County. For Grundy County, we held approximately 23.60% of all bank and thrift deposits which was the ~~13th~~8th largest market share of deposits out of 13 financial institutions (excluding credit unions). We face substantial competition from the other financial institutions that operate in our market area, most of which have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

Our small size makes it more difficult for us to compete.

Our small asset size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our ability to originate larger loans is limited by our lower loans to one borrower limit, which reduces our ability to compete for certain types of loans and can reduce our interest income. Our lower earnings also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base makes it difficult to generate meaningful non-interest income. Finally, as a smaller institution, we are disproportionately affected by the ongoing increased costs of compliance with banking and other regulations.

Future expansion strategy may negatively impact our earnings.

We consider our primary market area to consist of LaSalle County, Grundy County and parts of contiguous counties in Illinois. We currently operate three full-service branches with our headquarters located in Ottawa, Illinois and two additional branch locations in Marseilles and Morris, Illinois, and loan production offices in Shorewood, LaSalle, and Sandwich, Illinois. Although we do not currently have any specific plans for expansion, in the future we may consider expanding our presence throughout our market area and may also decide to pursue further expansion through the establishment of one or more branches or additional loan production offices. The profitability of any expansion policy will depend on whether the income that we generate from the additional branches we may establish will offset the increased expenses resulting from operating new branches. It may take a period of time before any new branches would become profitable, especially in areas in which we do not have an established presence. During this period, operating any new branches would likely have a negative impact on our net income.

The loss of any one of our senior executive officers could hurt our operations.

We rely heavily on our senior executive officers. The loss of any one of these officers could have an adverse effect on us because, as a small community bank, each of these officers has more responsibilities than would be typical at a larger financial institution with more employees. In addition, as a small community bank, we have fewer management level personnel who are in a position to assume the responsibilities of such officers’ positions with us should we need to find replacements for any of these senior members of management.

Our geographic concentration means that our performance may be affected by economic, regulatory and demographic conditions in our market area.

As of December 31, ~~2018~~2019, most of our total loans were to individuals and/or secured by properties located in our market area. As a result, our revenues and profitability are subject to prevailing economic, regulatory, demographic and other conditions in these counties. Because our business is concentrated in this area, adverse economic, regulatory, demographic or other developments that are limited to this area may have a disproportionately greater effect on us than they would have if we did business in markets outside that particular geographic area. A continued decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans, and a further decline in property values would further diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, decreases in asset quality have required and may require further additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. Also, a continued decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters.

The value of our goodwill and other intangible assets may decline in the future.

As of December 31, ~~2018~~2019, we had $650,000 of goodwill and $~~675~~781,000 of other intangible assets, which include core deposit intangible and mortgage servicing rights. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock, any or all of which could be materially impacted by many of the risk factors discussed herein, may necessitate our taking charges in the future related to the impairment of our goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the fair value of our net assets improves at a faster rate than the market value of our reporting units, or if we were to experience increases in book values of a reporting unit in excess of the increase in fair value of equity, we may also have to take charges related to the impairment of our goodwill. If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations.

Identifiable intangible assets other than goodwill consist of core deposit intangibles and mortgage servicing rights. Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, increased competition or adverse changes in the economy. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded, which could have a material adverse effect on our results of operations.

Ineffective liquidity management could adversely affect our financial results and condition.

Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets were loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.

We are a community bank and our ability to maintain our reputation is critical to the success of our business. The failure to do so may adversely affect our performance.

We are a community bank and our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers or otherwise, our business and operating results may be materially adversely affected.

We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in technological improvements.

The financial services industry continues to undergo rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to serving customers better, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success may depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

An interruption in or breach in security of our information systems may result in a loss of customer business.

We rely heavily on communications and information systems to conduct our business, and while we have established policies and procedures to prevent or limit the impact of system failures, interruptions, or security breaches, there can be no guarantees that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to third-party providers. If our third-party providers encounter difficulties, or if we are unable to communicate with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. The occurrence of any failures, interruptions, or security breaches to our systems or those of our third-party providers could result in a loss of customer business, additional regulatory scrutiny, and exposure to legal liability, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.

We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.

Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.

If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

The trading history of our common stock is characterized by low trading volume. The value of your common stock may be subject to sudden decreases due to the volatility of the price of our common stock.

Although our common stock trades on the Nasdaq Capital Market (“Nasdaq”), we cannot predict the extent to which investor interest in us will lead to a more active trading market in our common stock or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

● actual or anticipated fluctuations in our operating results; ● changes in interest rates; ● changes in the legal or regulatory environment in which we operate; ● press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry; ● changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors; ● future sales of our common stock; ● changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and ● other developments affecting our competitors or us.

●

changes in interest rates;

●

changes in the legal or regulatory environment in which we operate;

●

press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;

●

changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

●

future sales of our common stock;

●

changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and

●

other developments affecting our competitors or us.

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the price at which you purchased shares. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of our common stock, regardless of our trading performance.

We operate in a highly-regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the OCC, our chartering authority and the FDIC, as insurer of our deposits. Ottawa Bancorp, Inc. and Ottawa Savings Bank are both subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.

At this time, it is difficult to predict the legislative and regulatory changes that will result ~~from~~due to the ~~combination~~upcoming ofelection. If a new President of the United States is elected and ~~the~~a ~~first~~change ~~year~~in ~~since~~the ~~2010~~make-up inof ~~which~~either ~~both~~the Houses of Congress, ~~and~~ the White House ~~have~~and/or the House of Representatives and one or all having a majority ~~memberships~~membership from the same political party. ~~Recently,~~or ~~however,~~divided ~~both~~between the ~~new~~political ~~President~~parties. ~~and~~The ~~senior~~tone ~~members~~ of ~~the~~these ~~House~~chambers ofbeing ~~Representatives~~willing ~~have~~to ~~advocated~~advocate for ~~significant~~a reduction of financial services regulation, to include amendments to the Dodd-Frank Act and structural changes to the CFPB or possibly an increase in the regulations facing financial services industry. ~~The~~A new Administration, Congress and/or ~~Congress~~House ~~also~~of Representatives may also cause broader economic changes due to changes in governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

We may be adversely affected by recent changes in U.S. tax laws and regulations.

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, ~~include~~included a number of provisions that will ~~have~~continue anto impact on the banking industry, borrowers and the market for residential real estate. Included in this legislation was a reduction of the corporate income tax rate from 35% to 21%. In addition, other changes included: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.

~~The~~These ~~recent~~ changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on our earnings.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. The resultant changes in interest rates can also materially decrease the value of certain financial assets we hold, such as debt securities. Its policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve Board policies are beyond our control and difficult to predict; consequently, the impact these changes on our activities and results of operations is difficult to predict.

Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.29

InGlobal ~~recent~~economic ~~months, the U. S. government implemented tariffs on certain products,~~ and ~~certain~~political ~~countries or entities~~conditions, ~~such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory~~ tariffs ~~against products from the United States, including agricultural products. Additional tariffs~~ and ~~retaliatory tariffs may be imposed in the future by the United States and these and~~ other ~~countries. Tariffs,~~factors ~~retaliatory~~beyond ~~tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause~~ the ~~prices of our customers~~Company’ ~~products to increase which could reduce demand for such products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer’~~s ~~margins,~~control ~~and~~may adversely impact ~~their~~our ~~revenues~~business, financial ~~results and ability to service debt, which, in turn, could adversely affect our financial~~ condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.

~~Economic~~Negative ~~risks~~economic ~~are~~events ~~not~~in ~~limited~~other parts of the world may have a negative impact on the U.S. economy, and a severe market reaction to global economic or political conditions could have a material impact on our liquidity, financial condition, results of operations, and ability to meet regulatory requirements. Similarly, tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the ~~United~~prices ~~States~~of our customers’ products to increase which could reduce demand for such products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer’s margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations.

Negative economic events in other parts of the world may have a negative impact on the U.S. economy. Economic conditions in several European Union (EU) countries remain tenuous, with the possibility of default on their debt remaining an issue with resultant negative impact on fellow EU members. Similarly, a slowdown in growth in strategic Asian countries could have negative implications for the both the global and U.S. economy. Trade imbalances brought about by either ongoing tariff disputes or Great Britain’s pending departure from the EU could further disrupt global economics. A severe market reaction to any of the foregoing could have a material adverse effect on our liquidity, financial condition, results of operations, and ability to meet regulatory requirements.

We may be subject to more stringent capital requirements.

In July 2013, the OCC and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to Ottawa Savings Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule ~~includes~~included new minimum risk-based capital and leverage ratios, which became effective for Ottawa Savings Bank on January 1, 2015, and ~~refines~~refined the definition of what constitutes “capital” for purposes of calculating these ratios. ~~The~~Under ~~new~~the final rule, minimum capital requirements are: (i) a ~~new~~ common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged); and (iv) a Tier 1 leverage ratio of 4%. The final rule also ~~establishes~~established a “capital conservation” buffer of 2.5% and ~~will~~resulted ~~result~~ in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement iswas ~~being~~ phased in beginning in January 2016 at 0.625% of risk-weighted assets and ~~will~~increased ~~increase~~ each year until it was fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

The application of more stringent capital requirements for Ottawa Savings Bank could among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were unable to comply with such requirements.

The implementation of a new accounting standard could require the Company to increase its allowance for loan losses and may have a material adverse effect on its financial condition and results of operations.

FASB has adopted a new accounting standard that will be effective for the Company’s first fiscal year after December 15, ~~2019~~2022. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which the Company expects could require it to increase its allowance for loan losses, and will likely greatly increase the data the Company would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in the allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on the Company’s financial condition and results of operations.

Changes to LIBOR may adversely impact the interest rate paid on some of our loans and other financial instruments.

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates London Interbank Offered Rates (“LIBOR”), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain securities, loans, and liabilities, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the value of securities whose interest rates are tied to LIBOR.

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on, our securities, loans, and liabilities, including the interest we pay on those securities.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We are located and conduct our business at our main office at 925 LaSalle Street, Ottawa, Illinois, as well as at our two branch offices in Marseilles and Morris, Illinois and our loan production offices in Shorewood, Sandwich and LaSalle, Illinois. The Company believes that the current facilities are adequate to meet its present and immediately foreseeable needs.

~~The following table sets forth certain information relating to these facilities at December 31, 2018.~~30

		Net Book
	Year	Value at
	Opened/	December 31,		Square		Owned/
Location	Acquired	2018		Footage		Leased
925 LaSalle Street, Ottawa, IL 61350	1958	$	5,776,196		21,000	Owned
125 West Bluff Street, Marseilles, IL 61341	2014		277,430		3,286	Owned
1508 Creek Drive, Morris, IL 60450	2014		370,352		2,729	Owned
119 Joliet Street, LaSalle, IL 61301 (1)	2018		-		350	Leased (2)
566 Brook Forest Avenue, Shorewood, IL 60404 (1)	2017		-		1,239	Leased (3)
100 South Latham Street, Sandwich, IL 60548 (1)	2018		-		850	Leased (4)

The following table sets forth certain information relating to these facilities at December 31, 2019.

_________

		Net Book
	Year	Value at
	Opened/	December	Square	Owned/
Location	Acquired	31, 2019	Footage	Leased
925 LaSalle Street, Ottawa, IL 61350	1958	$5,836,478	21,000	Owned
125 West Bluff Street, Marseilles, IL 61341	2014	$286,302	3,286	Owned
1508 Creek Drive, Morris, IL 60450	2014	$395,142	2,729	Owned
119 Joliet Street, LaSalle, IL 61301 (1)	2018	-	350	Leased (2)
566 Brook Forest Avenue, Shorewood, IL 60404 (1)	2017	-	1,239	Leased (3)
100 South Latham Street, Sandwich, IL 60548 (1)	2018	-	850	Leased (4)

_________ (1) Denotes loan production office (2) Lease expires in August ~~2019~~2020 (3) Lease expires in ~~June~~March ~~2019~~2020 (4) Lease expires in June ~~2019~~2020

ITEM 3. LEGAL PROCEEDINGS

The Company and the Bank are not involved in any pending proceedings other than legal proceedings occurring in the ordinary course of business. Such legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s business, financial condition, results of operations and cash flows.

ITEM 4. MINE SAFETY ~~PROCEEDINGS~~DISCLOSURES

Not applicable.

PART II

The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “OTTW”. ~~Prior~~ ~~to October 12, 2016, the Company’s common stock was traded on the Over-the-Counter (“OTC”) Bulletin Board under the symbol “OTTW”.~~ At December 31, ~~2018~~2019, the Company had 304 record holders of its common stock.

Dividend Policy

The Company paid aggregate cash dividends of $0.~~265~~629 per share during ~~2018~~2019, including a special dividend of $0.35 per share paid on April 12, 2019. We intend to pay cash dividends on a quarterly basis however, the amount of dividends to be paid will be subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

Ottawa Bancorp is subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

Dividends from the Company may depend upon receipt of dividends from the Bank. Federal and state law imposes certain limitations on dividends by savings associations. The Company files a consolidated federal tax return with the Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes. See “Item 1. Business.” and “Item 1A. Risk Factors”.

Issuer Purchases

On November 7, 2018, the Company issued a press release announcing that it has approved a stock repurchase program authorizing the purchase of 337,440 shares, representing 10% of the Company’s outstanding shares of common stock. The stock repurchase program was approved in connection with the expiration of the Company’s previously approved stock repurchase program, which occurred on November 15, 2018. Repurchases will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time depending on market conditions and other factors.

The following table sets forth information regarding the Company’s repurchases of its common stock during the year ended December 31, 2018:

					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
October 1-31, 2018		7,706	$	13.67		7,706		237,139
November 1-30, 2018		11,680		13.52		11,680		329,250
December 1-31, 2018		16,600		13.38		16,600		312,650
Total		35,986	$	13.49		35,986		312,650

Issuer Purchases

On November 7, 2018, the Company issued a press release announcing that it had approved a stock repurchase program authorizing the purchase of 337,440 shares, representing 10% of the Company’s outstanding shares of common stock. The stock repurchase program was approved in connection with the expiration of the Company’s previously approved stock repurchase program, which occurred on November 15, 2018. Repurchases will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to Securities and Exchange Commission Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time depending on market conditions and other factors.

The following table sets forth information regarding the Company’s repurchases of its common stock during the year ended December 31, 2019:

					Number of Shares		Maximum Number
					Purchased as Part		of Shares that
	Number		Average		of Publicly		may yet be
	of Shares		Price Paid		Announced		Purchased Under
	Purchased		per Share		Programs		the Program
October 1-31, 2019		3,290	$	13.09		3,290		132,547
November 1-30, 2019		3,330		13.80		3,330		129,217
December 1-31, 2019		6,960		13.92		6,960		122,257
Total		13,580	$	13.69		13,580		122,257

Equity Compensation Plans

The following table sets forth information as of December 31, 2019 about Company common stock that may be issued under the Company’s equity compensation plans. All plans were approved by the Company’s stockholders.

Number of Securities

Remaining Available for

Number of Securities to

Weighted Average

Future Issuance Under

be issued upon Exercise

Exercise Price

Equity Compensation

of Outstanding Options,

Plans (Excluding securities

Warrants and Rights

reflected in column a)

(a)

(b)

(c)

Equity Compensation Plans Approved by Stockholders

7,500

3.57

328,503

Equity Compensation Plans not Approved by Stockholders

Total

7,500

5.82

328,503

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected financial and other data of the Company for the periods and at the dates indicated. The information should be read in conjunction with the Consolidated Financial Statements and Notes beginning on page F-1.

	At December 31,
	2018		2017		2016
	2019		2018		2017
	(In Thousands, except per share data)
Financial Condition Data:
Total Assets	$	~~292~~300,~~836~~532	$	~~255~~292,~~400~~836	$	~~230~~255,~~161~~400
Loans, net (1)		~~235~~247,~~926~~776		~~207~~235,~~035~~926		~~160~~207,~~586~~035
Securities available for sale		2524,~~534~~516		2625,~~046~~534		4426,~~561~~046
Deposits		~~223~~236,~~449~~314		~~182~~223,~~775~~449		~~172~~182,~~547~~775
Stockholders' Equity		5250,~~824~~711		5352,~~102~~824		5153,~~936~~102
Book Value per common share	$	1516.7305	$	15.3873	$	1415.9838
Tangible Book Value per common share (2)	$	15.4779	$	15.1147	$	1415.6911

(1)	Net of undisbursed portion of construction loans, deferred loan (costs) fees, and allowance for loan losses.
(2)	Non-GAAP measure. Excludes goodwill and core deposit intangible.

(1)	Net of undisbursed portion of construction loans, deferred loan (costs) fees, and allowance for loan losses.

	Years Ended December 31,
	2018		2017		2016
	(In Thousands, except per share data)
Operations Data:
Total interest and dividend income	$	11,099	$	9,634	$	8,423
Total interest expense		1,981		1,045		856
Net interest income		9,118		8,589		7,567
Provision for loan losses		528		575		442
Other income		2,283		2,209		1,748
Other expense		8,200		7,905		7,012
Income tax expense		679		1,504		600
Net income	$	1,994	$	814	$	1,261
Basic earnings per share	$	0.62	$	0.25	$	0.43
Diluted earnings per share	$	0.62	$	0.25	$	0.42
Dividends per share	$	0.265	$	0.16	$	-

(2)	Non-GAAP measure. Excludes goodwill and core deposit intangible.

	At or for the Years Ended
	December 31,
	2018			2017			2016
Performance Ratios:
Return on average assets		0.73	%		0.34	%		0.56	%
Return on average stockholders' equity		3.77			1.55			3.43
Average stockholders' equity to average assets		19.29			21.66			16.38
Stockholders' equity to total assets at end of period		18.04			20.79			22.57
Net interest rate spread (1)		3.39			3.70			3.57
Net interest margin (2)		3.57			3.84			3.65
Average interest-earning assets to average interest-bearing liabilities		123.14			128.39			119.12
Other expense to average assets		2.99			3.26			3.12
Efficiency ratio (3)		71.92			72.96			75.27
Dividend payout ratio		42.74			64.00			-
Regulatory Capital Ratios:
Total risk-based capital (to risk-weighted assets)		21.08			22.52			26.76
Tier 1 core capital (to risk-weighted assets)		19.88			21.27			25.51
Common equity Tier 1 (to risk-weighted assets)		19.88			21.27			25.51
Tier 1 leverage (to adjusted total assets)		15.16			16.21			16.84
Asset Quality Ratios:
Net charge-offs (recoveries) to average gross loans outstanding		0.16			0.18			0.27
Allowance for loan losses to gross loans outstanding		1.10			1.18			1.35
Non-performing loans to gross loans (4)		0.63			0.75			3.00
Non-performing assets to total assets (4)		0.54			0.65			2.18
Other Data:
Number of full-service offices		3			3			3

(1) The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2) The net interest margin represents net interest income as a percent of average interest-earning assets.

(3) The efficiency ratio represents other expense as a percent of net interest income before the provision for loan losses and other income.

(4) Non-performing assets consist of non-performing loans, foreclosed real estate, and other foreclosed assets. Non-performing loans consist of all loans 90 days or more past due and all loans no longer accruing interest.

	Years Ended December 31,
	2019		2018		2017
	(In Thousands, except per share data)
Operations Data:
Total interest and dividend income	$	12,517	$	11,099	$	9,634
Total interest expense		3,100		1,981		1,045
Net interest income		9,417		9,118		8,589
Provision for loan losses		595		528		575
Other income		2,471		2,283		2,209
Other expense		8,630		8,200		7,905
Income tax expense		726		679		1,504
Net income	$	1,937	$	1,994	$	814
Basic earnings per share	$	0.62	$	0.62	$	0.25
Diluted earnings per share	$	0.61	$	0.62	$	0.25
Dividends per share	$	0.629	$	0.265	$	0.16

	At or for the Years Ended
	December 31,
	2019			2018			2017
Performance Ratios:
Return on average assets		0.65	%		0.73	%		0.34	%
Return on average stockholders' equity		3.29			3.77			1.55
Average stockholders' equity to average assets		19.86			19.29			21.66
Stockholders' equity to total assets at end of period		16.87			18.04			20.79
Net interest rate spread (1)		3.17			3.39			3.70
Net interest margin (2)		3.41			3.57			3.84
Average interest-earning assets to average interest-bearing liabilities		121.54			123.14			128.39
Other expense to average assets		2.91			2.99			3.26
Efficiency ratio (3)		72.59			71.92			72.96
Dividend payout ratio		101.45			42.74			64.00
Regulatory Capital Ratios:
Total risk-based capital (to risk-weighted assets)		22.21			21.08			22.52
Tier 1 core capital (to risk-weighted assets)		20.96			19.88			21.27
Common equity Tier 1 (to risk-weighted assets)		20.96			19.88			21.27
Tier 1 leverage (to adjusted total assets)		15.00			15.16			16.21
Asset Quality Ratios:
Net charge-offs (recoveries) to average gross loans outstanding		0.11			0.16			0.18
Allowance for loan losses to gross loans outstanding		1.17			1.10			1.18
Non-performing loans to gross loans (4)		0.90			0.63			0.75
Non-performing assets to total assets (4)		0.75			0.54			0.65
Other Data:
Number of full-service offices		3			3			3

(1)	The net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2)	The net interest margin represents net interest income as a percent of average interest-earning assets.
(3)	The efficiency ratio represents other expense as a percent of net interest income before the provision for loan losses and other income.
(4)	Non-performing assets consist of non-performing loans, foreclosed real estate, and other foreclosed assets. Non-performing loans consist of all loans 90 days or more past due and all loans no longer accruing interest.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

General

This discussion and analysis reflects the Company’s consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from and should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements, which appear beginning on page F-1.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of money market accounts, statement savings accounts, individual retirement accounts, certificates of deposit and borrowings. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of fees, service charges, and gains on the sale of loans. Non-interest expense currently consists primarily of salaries and employee benefits, deposit insurance premiums, directors’ fees, occupancy, data processing and professional fees. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

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 uncollectibility 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 collectibility 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 we 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 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.

33Comparison of Financial Condition at December 31, 2019 and December 31, 2018

~~Comparison~~The ofCompany's ~~Financial~~total ~~Condition~~assets increased $7.7 million, or 2.63%, to $300.5 million at December 31, ~~2018~~2019, ~~and~~from $292.8 million at December 31, ~~2017~~2018. The increase was primarily due to an increase of $11.9 million in the net loan portfolio, an increase in time deposits of $3.0 million and an increase in loans held for sale of $1.2 million. These increases were partially offset by a decrease in cash and cash equivalents of $4.1 million, a decrease in federal funds sold of $1.5 million, a decrease in securities available for sale of $1.0 million and an overall $1.8 million decrease in the remaining other asset categories.

~~The~~Cash ~~Company's~~and ~~total~~cash ~~assets~~equivalents ~~increased~~decreased $372.4 million, or 1448.68%, to $~~292~~4.83 million at December 31, ~~2018,~~2019 from $~~255~~8.4 million at December 31, ~~2017~~2018, primarily as a result of cash used in investing activities of $10.8 ~~The~~million ~~increase~~exceeding ~~was~~cash ~~primarily~~provided ~~due~~by tofinancing anactivities ~~increase~~of $5.1 million and cash provided by operating activities of $283.93 million. The cash used in investing activities includes the ~~net~~purchases ~~loan~~of ~~portfolio~~available for sale securities of $3.1 million, anincreases in time deposits of $1.2 million, increase in ~~cash~~loans of $12.9 million, purchase of property and ~~cash~~equipment ~~equivalents~~of $0.1 million, partially offset by sales, calls, maturities and paydowns of available for sale securities of $4.65 million, anproceeds ~~increase~~on sale of OREO of $0.2 million, decrease in federal funds sold of $41.75 million and anproceeds ~~increase~~on insale ~~other~~of repossessed assets of $0.43 million. The net cash provided by financing activities includes proceeds from Federal Home Loan Bank advances of $11.5 million and increases in deposits of $12.9 million, partially ~~off-set~~offset by ~~decreases~~a principal reduction in ~~securities~~Federal ~~available~~Home ~~for~~Loan ~~sale~~Bank advances of $014.5 million, ~~non-marketable~~shares ~~equity~~repurchased ~~securities~~and cancelled of $02.19 million and ~~loans~~dividends ~~held~~paid ~~for sale~~ of $01.59 million.

Cash and cash equivalents increased approximately $4.7 million, or 124.5%, to $8.4 million at December 31, 2018 from $3.8 million at December 31, 2017, primarily as a result of cash provided by financing activities of $35.3 million and cash provided by operating activities of $3.5 million exceeding cash used in investing activities of $34.1 million. The cash used in investing activities includes the purchase of approximately $9.4 million in auto loans and other net loan increases of $20.4 million, purchases of available for sale securities of $4.2 million, and sales of non-marketable equity securities of $0.1 million, partially offset by sales, calls, maturities and paydowns of available for sale securities of $4.2 million and an increase in federal funds sold of $4.7 million. The net cash provided by financing activities includes proceeds from Federal Home Loan Bank advances of $9.8 million and increases in deposits of $40.7 million, partially offset by a principal reduction in Federal Home Loan Bank advances of $12.8 million, shares repurchased and cancelled of $1.6 million and dividends paid of $0.9 million.

Federal funds sold increased approximately $4.7 million, or 503.1%, to $5.7 million at December 31, 2018 from $0.9 million at December 31, 2017.

Securities available for sale decreased $0.5 million, or 2.0%, to $25.5 million at December 31, 2018 from $26.0 million at December 31, 2017. The decrease was primarily due to sales, calls and maturities of $1.3 million and pay-downs of $2.9 million, offset by $4.2 million in purchases. The remaining decreases were attributable to net amortization/accretion of premiums and discounts, and changes in unrealized gains/losses.

Loans, net of the allowance for loan losses, increased $28.9 million, or 14.0%, to $235.9 million at December 31, 2018 from $207.0 million at December 31, 2017. The increase in loans, net of the allowance for loan losses, was primarily due to an increase in gross consumer direct loans of $9.1 million, an increase in gross residential mortgage loans of $17.7 million, an increase in gross non-residential real estate loans of $3.2 million, a $1.5 million increase in purchased auto loans, and an increase in multi-family residential loans of $1.1 million, offset by a decrease of $3.5 million in commercial loans and the allowance for loan losses of $0.2 million. The changes above are net of normal pay-downs and principal reductions.

Total deposits increased $40.6 million, or 22.2%, to $223.4 million at December 31, 2018 from $182.8 million at December 31, 2017. The increase is primarily due to an increase in certificates of deposit of $15.7 million, or 17.8%, and an increase in checking balances of $27.6 million, or 68.2%, partially offset by a decrease in money market balances of $2.5 million, or 9.2% and savings accounts decreased by $0.2 million or 0.9% from December 31, 2017 to December 31, 2018. The increase in certificates of deposit is primarily due to increases in listing service deposits of $12.3 million and brokered CD’s of $8.7 million, while the remaining increase in certificates of deposit and the increase in savings and checking balances is due to management’s continued efforts to strategically price interest rates to position the Bank for rising interest rates and customers seeking non-term products as they wait for a better rate environment.

FHLB advances decreased $3.0 million, to $12.1 million at December 31, 2018 compared to $15.1 million at December 31, 2017.

Stockholders’ equity decreased approximately $279,000 to $52.8 million at December 31, 2018 from $53.1 million at December 31, 2017. The decrease reflects $1.6 million to repurchase and cancel 118,621 outstanding shares of Company common stock, $0.9 million in dividends and a decrease in other comprehensive income of $0.2 million related to a decrease in the fair value of securities available for sale. These decreases were partially off-set by net income of $2.0 million for the year ended December 31, 2018, and proceeds from stock options exercised, equity incentive plan shares issued and the allocation of ESOP shares totaling approximately $0.4 million.

Comparison of Results of Operations for the Years Ended December 31, 2018 and December 31, 2017

General. Net income for the year ended December 31, 2018 increased approximately $1.2 million, or 150.0%, to $2.0 million compared to net income of $0.8 million for the year ended December 31, 2017. The increase was primarily attributed to a decrease in income tax expense of $0.8 million and increases of $0.5 million in net interest income and $0.2 million in other income. These increases in were partially offset by an increase in total other expenses of $0.4 million.

~~Net~~Federal ~~Interest~~funds ~~Income.~~sold ~~The~~decreased ~~following~~approximately ~~table~~$1.5 ~~summarizes~~million, ~~interest~~or ~~and~~26.3%, ~~dividend~~to ~~income~~$4.2 ~~and~~million ~~interest~~at ~~expense~~December ~~for~~31, ~~the~~2019 ~~years~~from ~~ended~~$5.7 million at December 31, 2018 ~~and 2017~~.

	Years Ended December 31,
	2018		2017		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	10,229	$	8,678	$	1,551			17.87	%
Securities:
Mortgage-backed and related securities		281		436		(155	)		(35.55	)
State and municipal securities		409		478		(69	)		(14.44	)
Non-marketable equity securities		25		12		13			108.33
Interest-bearing deposits		155		30		125			416.67
Total interest and dividend income		11,099		9,634		1,465			15.21
Interest expense:
Deposits		1,762		963		799			82.97
Borrowings		219		82		137			167.07
Total interest expense		1,981		1,045		936			89.57
Net interest income	$	9,118	$	8,589	$	529			6.16	%

Securities available for sale decreased $1.0 million, or 3.9%, to $24.5 million at December 31, 2019 from $25.5 million at December 31, 2018. The decrease was primarily due to sales, calls and maturities of $1.4 million and pay-downs of $3.1 million, offset by $3.1 million in purchases. The remaining decreases were attributable to net amortization/accretion of premiums and discounts, and changes in unrealized gains/losses.

~~Net~~Loans, ~~interest~~net ~~income~~of ~~increased~~the byallowance for loan losses, increased $011.59 million, or 65.20%, to $9247.18 million ~~for~~at ~~the year ended~~ December 31, ~~2018,~~2019 from $8235.69 million ~~for~~at ~~the year ended~~ December 31, ~~2017~~2018. ~~Interest~~The ~~and~~increase ~~dividend~~in ~~income~~loans, ~~increased~~net ~~$1.5~~of ~~million,~~the orallowance ~~15.2%~~for loan losses, was primarily due to ana $13.4 million increase in ~~the average balances of interest~~one-~~earning~~to-four ~~assets~~family ofloans, a $316.36 million. ~~The~~ increase in ~~net~~commercial ~~interest~~loans ~~income~~and ~~was~~a ~~partially~~$5.1 ~~offset~~million ~~by an~~ increase in ~~interest~~consumer ~~expense~~direct asloans. ~~the~~The ~~average~~increases ~~cost~~were ofoffset ~~funds~~by ~~increased~~decreases 36of ~~basis points to 0~~$1.~~96%~~0 ~~for~~million ~~the~~in ~~year~~multi-family ~~ended December 31~~loans, ~~2018~~$4.7 ~~The~~million ~~net~~in ~~interest~~non-residential ~~margin~~real ~~decreased~~estate byloans 27and ~~basis~~$7.5 ~~points,~~million orin ~~7.0%~~purchased toauto 3loans.~~57%~~ ~~during~~The ~~the~~changes ~~year~~above ~~ended~~are ~~December~~net ~~31,~~of ~~2018~~normal pay-downs and principal reductions.

~~Provision~~Total ~~for~~deposits ~~Loan~~increased ~~Losses~~$12.9 ~~Management~~million, ~~recorded~~or a5.8%, ~~provision~~to ~~for~~$236.3 ~~loan~~million ~~losses~~at ofDecember ~~$0.5~~31, ~~million~~2019 ~~and~~from $0223.64 million ~~for~~at ~~the years ended~~ December 31, 2018 ~~and 2017, respectively~~. The ~~decrease~~increase inis ~~provision expense was~~ primarily due to ~~improvements~~an increase in ~~specific~~certificates ~~reserves~~of ondeposit ~~impaired~~of ~~loans. Net charge-offs were approximately~~ $08.4 million, ~~and~~or $08.~~3 million for the years ended December 31~~0%, ~~2018~~ and ~~2017,~~an ~~respectively. The~~increase ~~allowance~~in ~~for~~checking ~~loan~~balances ~~losses~~of ~~was~~ $27.68 million, or 111.104%, ofpartially ~~total~~offset ~~gross~~by ~~loans~~a atdecrease ~~December~~in ~~31,~~money ~~2018,~~market ~~compared~~balances toof $2.56 million, or 110.183% ofand ~~gross~~savings ~~loans~~accounts atof$0.7 ~~December~~million ~~31,~~or ~~2017~~2. ~~General~~8% ~~reserves~~from ~~were higher at~~ December 31, 2018, ~~when compared~~ to December 31, ~~2017, as the balances in most loan categories increased during the year ended December 31, 2018~~2019. ~~These~~The ~~increases~~increase ~~to the allowance were slightly off-set by improvements~~ in ~~historical~~certificates ~~loss levels and changes in qualitative factors during year ended December 31, 2018, as compared to the same year ended December 31, 2017. Additionally, specific reserves as~~ of ~~December~~deposit ~~31,~~is ~~2018~~primarily ~~were lower than they were as of December 31, 2017,~~ due to ~~several credits being resolved during 2018 for which the Bank maintained reserves as of December 31, 2017. Management~~management’s ~~assessment~~continued ofefforts ~~risk~~to instrategically ~~the~~price ~~portfolio~~interest isrates ~~reflected~~to inposition the ~~qualitative~~Bank ~~factors,~~for aschanges ~~discussed on pages 11 and 12. Based on a review of the loans that were~~ in ~~the~~interest ~~loan~~rate ~~portfolio at December 31~~environment, ~~2018,~~and ~~management~~customers ~~believes~~seeking ~~that~~short-term ~~the~~products ~~allowance~~as isthey ~~maintained~~determine atwhere ato ~~level~~invest ~~that~~during ~~represents its best estimate of inherent losses in~~ the ~~loan~~current ~~portfolio~~rate ~~that were both probable and reasonably estimable~~environment.

~~Management~~FHLB ~~uses~~advances ~~available~~decreased ~~information to establish the appropriate level of the allowance for loan losses~~$3.0 ~~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~~million, ~~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~~$9.1 Inmillion ~~addition,~~at ~~various~~December ~~regulatory agencies~~31, as2019 ancompared ~~integral~~to ~~part of their examination process, periodically review the Company’s allowance for loan losses~~$12.1 ~~Such~~million ~~agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them~~ at ~~the~~December ~~time~~31, ~~of their examination~~2018.

Stockholders’ equity decreased $2.1 million to $50.7 million at December 31, 2019 from $52.8 million at December 31, 2018. The decrease reflects $2.8 million used to repurchase and cancel 204,448 outstanding shares of Company common stock and the payment of $1.9 million in cash dividends. The decreases were partially offset by an increase of $0.4 million in other comprehensive income due to an increase in the fair value of securities available for sale, net income of $1.9 million for the year ended December 31, 2019 and proceeds from stock options exercised, equity incentive plan shares issued and the allocation of ESOP shares totaling $0.3 million.

Comparison of Results of Operations for the Years Ended December 31, 2019 and December 31, 2018

General. Net income for the year ended December 31, 2019 decreased approximately $0.1 million, or 2.9%, to $1.9 million compared to net income of $2.0 million for the year ended December 31, 2018. The decrease in net income was primarily the result of total other expense and tax expense increasing more than the increase in total other income and net interest income after provision for loan losses.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the years ended December 31, 2019 and 2018.

	Years Ended December 31,
	2019		2018		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	11,541	$	10,229	$	1,312			12.83	%
Securities:
Mortgage-backed and related securities		295		281	$	14			4.98
State and municipal securities		400		409	$	(9	)		(2.20	)
Non-marketable equity securities		26		25	$	1			4.00
Interest-bearing deposits		255		155	$	100			64.52
Total interest and dividend income		12,517		11,099		1,418			12.78

Interest expense:
Deposits		2,823		1,762	$	1,061			60.22
Borrowings		277		218	$	58			26.48
Total interest expense		3,100		1,981		1,119			56.49
Net interest income	$	9,417	$	9,118	$	299			3.28	%

~~Other~~Net ~~Income~~interest income increased by $0.3 ~~The~~million, ~~following~~or ~~table~~3.3%, ~~summarizes~~to ~~other~~$9.4 ~~income~~million for the ~~years~~year ended December 31, 2019, from $9.1 million for the year ended December 31, 2018. Interest and ~~2017~~dividend income increased $1.4 million, or 12.8%, primarily due to an increase in the average balances of interest-earning assets of $21.3 million. The increase in net interest income was partially offset by an increase in interest expense as the average cost of funds increased 40 basis points to 1.36% for the year ended December 31, 2019. The net interest margin decreased by 16 basis points, or 4.48% to 3.41% during the year ended December 31, 2019.

	Years Ended December 31,
	2018		2017		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of loans, net	$	585	$	697	$	(112	)		(16.07	)%
Gain on sale of foreclosed real estate		116		45		71			157.78
Gain on sale of repossessed assets		5		15		(10	)		(66.67	)
Loan origination and servicing income		858		634		224			35.33
Origination of mortgage servicing rights, net of amortization		23		72		(49	)		(68.06	)
Customer service fees		528		482		46			9.54
Increase in cash surrender value of life insurance		48		48		-			-
Other		120		116		4			3.45
Total other income	$	2,283	$	2,109	$	174			8.25	%

Provision for Loan Losses. Management recorded a provision for loan losses of $0.6 million and $0.5 million for the years ended December 31, 2019 and 2018, respectively. The allowance for loan losses was $2.9 million, or 1.17% of total gross loans at December 31, 2019 compared to $2.6 million, or 1.10% of gross loans at December 31, 2018. Net charge-offs were $0.3 million for the year ended December 31, 2019 compared $0.4 million for the year ended December 31, 2018. General reserves were higher at December 31, 2019, when compared to December 31, 2018, primarily due to the balances in all loan categories increasing during the year ended December 31, 2019. This increase in the allowance due to loan growth was partially offset by improvements in historical loss levels. Although non-performing loans increased, the necessary reserves on non-performing loans as of December 31, 2019 were approximately $17,000 lower than they were as of December, 2018 due to the transfer of one non-performing loan to foreclosed real estate, the charge-off of the specific reserve for a non-performing loan, improvements in the payment status of several other non-performing loans and the new loans added not requiring as large of specific reserves as those removed. Management’s assessment of risk in the portfolio is reflected in the qualitative factors, as discussed on pages 11 and 12. Based on a review of the loans that were in the loan portfolio at December 31, 2019, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

~~The~~Management ~~increase~~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 ~~total~~economic conditions and other ~~income~~factors. ~~was~~As ~~primarily~~a ~~due~~result, our allowance for loan losses may not be sufficient to ~~higher~~cover ~~revenues~~actual loan losses, and future provisions for loan ~~origination~~losses ~~and~~could ~~servicing~~materially ~~income~~adversely affect the Company’s operating results. In addition, ~~customer~~various ~~service~~regulatory ~~fees~~agencies, ~~and~~as ~~gains~~an onintegral ~~sales~~part of ~~foreclosed~~their ~~real~~examination ~~estate~~process, ~~offset~~periodically ~~slightly~~review bythe aCompany’s ~~decrease~~allowance infor ~~gain~~loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on ~~sale~~their judgments about information available to them at the time of ~~loans~~their examination.

Other ~~Expenses~~Income. The following table summarizes other ~~expenses~~income for the years ended December 31, ~~2018~~2019 and ~~2017~~2018.

	Years Ended December 31,
	2018			2017			$ change			% change
	2019			2018			$ change			% change
	(Dollars in thousands)
Other expenses:
Other income:
Salaries and employee benefits	$	4,295		$	4,304		$	(9	)		(0.21	)%
Gain on sale of loans, net	$	759		$	585		$	174			29.74	%
Directors fees		181			163			18			11.04
Gain on sale of foreclosed real estate		16			116			(100	)		(86.21	)
Occupancy		638			644			(6	)		(0.93	)
Gain on sale of repossessed assets		19			5			14			280.00
Deposit insurance premium		66			57			9			15.79
Loan origination and servicing income		949			858			91			10.61
Legal and professional services		388			361			27			7.48
Origination of mortgage servicing rights, net of amortization		88			23			65			282.61
Data processing		665			594			71			11.95
Customer service fees		473			528			(55	)		(10.42	)
Loss on sale of securities, net		-			29			(29	)		(100.00	)
Increase in cash surrender value of life insurance		48			48			-			-
Loan expense		725			593			132			22.26
Other		119			120			(1	)		(0.83	)
Valuation adjustments and expenses on foreclosed real estate		26			12			14			116.67
Total other income	$	2,471		$	2,283		$	188			8.23	%
Other		1,216			1,048			168			16.03
Total other expenses	$	8,200		$	7,805		$	395			5.06	%
Efficiency ratio (1)		71.92	%		72.96	%

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

Total other expense increased $0.4 million, or 5.1%, to $8.2 million for the year December 31, 2018, as compared to $7.8 million for the year ended December 31, 2017. The increase was primarily due to higher other expenses, increased loan expenses, and higher data processing expenses.

Income Taxes. The Company recorded an income tax expense of $0.7 million for the year ended December 31, 2018, compared to $1.5 million for the year ended December 31, 2017. The 2017 results were negatively impacted by a reduction in value of the Company’s net deferred tax assets which resulted in a charge of approximately $0.8 million, or $0.25 per basic and diluted common share, to income tax expense. This income tax adjustment resulted from the December 22, 2017 enactment of the Tax Cuts and Jobs Act, which lowered the corporate tax rate from 34% to 21%. Prior to the enactment of the Tax Cuts and Jobs Acts, the Company’s net deferred tax assets were valued based upon the projection of a 34% future tax benefit.

The increase in total other income was primarily due to an increase in gains on sale of loans, an increase in the origination of mortgage servicing rights, and an increase in loan origination and servicing income all of which were primarily the result of increased loan volume in 2019. These increases were partially offset by a decrease in customer service fees and a decrease in gain on sale of foreclosed real estate.

Other Expenses. The following table summarizes other expenses for the years ended December 31, 2019 and 2018.

	Years Ended December 31,
	2019		2018		$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	4,730	$	4,295	$	435			10.13	%
Directors fees		172		181	$	(9	)		(4.97	)
Occupancy		683		638	$	45			7.05
Deposit insurance premium		34		66	$	(32	)		(48.48	)
Legal and professional services		326		388	$	(62	)		(15.98	)
Data processing		682		665	$	17			2.56
Loan expense		718		725	$	(7	)		(0.97	)
Valuation adjustments and expenses on foreclosed real estate		35		26	$	9			34.62
Other		1,250		1,216	$	34			2.80
Total other expenses	$	8,630	$	8,200	$	430			5.24	%

Efficiency ratio (1)		72.59		71.92

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

Total other expense increased $0.4 million, or 5.2%, to $8.6 million for the year December 31, 2019, as compared to $8.2 million for the year ended December 31, 2018. The increase was primarily due to higher salaries and employee benefits, occupancy, data processing and other costs. These increases were offset slightly by reductions in loan expense, deposit insurance premiums, and legal and professional fees.

Income Taxes. The Company recorded income tax expense of approximately $0.7 million for both of the years ended December 31, 2019 and 2018.

Average Balance Sheet

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.

	Year Ended December 31,
	2018							2017							2016
	2019							2018							2017
	(Dollars in Thousands)
					AVERAGE							AVERAGE							AVERAGE
	AVERAGE				YIELD/			AVERAGE				YIELD/			AVERAGE				YIELD/
	BALANCE		INTEREST		COST			BALANCE		INTEREST		COST			BALANCE		INTEREST		COST
ASSETS
Interest-earning assets
Securities, net (1)	$	2524,~~277~~749	$	~~690~~695		2.7381	%	$	3725,~~149~~277	$	~~914~~690		2.4673	%	$	4537,~~934~~149	$	~~1,084~~914		2.3646	%
Loans receivable, net (2)		~~221~~240,~~885~~855		1011,~~229~~541		4.6179	%		~~183~~221,~~508~~885		810,~~678~~229		4.7361	%		~~150~~183,~~525~~508		78,~~292~~678		4.8473	%
Non-marketable equity securities		~~776~~852		2526		3.2205	%		~~766~~776		1225		13.5722	%		~~905~~766		1112		1.2257	%
Other investments		79,~~222~~970		~~155~~255		2.1556	%		27,~~476~~222		30155		12.2115	%		102,~~091~~476		3630		01.3621	%
Total interest-earning assets		~~255~~276,~~160~~426	$	1112,~~099~~517		4.3553	%		~~223~~255,~~899~~160	$	911,~~634~~099		4.3035	%		~~207~~223,~~455~~899	$	89,~~423~~634		4.0630	%
Non-interest-earning assets		19,~~336~~926							1819,~~778~~336							1718,~~198~~778
TOTAL ASSETS	$	~~274~~296,~~496~~352						$	~~242~~274,~~677~~496						$	~~224~~242,~~653~~677
LIABILITIES AND EQUITY
Interest-bearing liabilities
Money Market accounts	$	2623,~~837~~416	$	7561		0.2826	%	$	2926,~~961~~837	$	7475		0.2528	%	$	3029,~~520~~961	$	6474		0.2125	%
Savings accounts		26,~~148~~713		19		0.07	%		26,~~229~~148		19		0.07	%		2826,~~353~~229		2019		0.07	%
Certificates of Deposit accounts		~~101~~111,~~025~~866		12,~~484~~252		12.4701	%		83101,~~283~~025		~~854~~1,484		1.0347	%		8483,~~589~~283		~~724~~854		01.8603	%
Checking accounts		4253,~~340~~941		~~185~~491		0.4491	%		2942,~~047~~340		16185		0.0644	%		2729,~~463~~047		1216		0.0406	%
Advances and borrowed funds		1011,~~856~~496		~~218~~277		2.0141	%		510,~~866~~856		82218		12.4001	%		35,~~225~~866		3682		1.1240	%
Total interest-bearing liabilities		~~207~~227,~~206~~432		13,~~981~~100		01.9636	%		~~174~~207,~~386~~206		1,~~045~~981		0.6096	%		174,~~150~~386		~~856~~1,045		0.4960	%
Non-interest-bearing liabilities		1410,~~239~~052							1514,~~736~~239							1315,~~695~~736
TOTAL LIABILITIES		~~221~~237,~~445~~484							~~190~~221,~~122~~445							~~187~~190,~~845~~122
EQUITY		5258,~~961~~868							52,~~555~~961							3652,~~808~~555
TOTAL LIABILITIES AND EQUITY	$	~~274~~296,~~496~~352						$	~~242~~274,~~677~~406						$	~~224~~242,~~653~~677
NET INTEREST INCOME			$	9,~~118~~417						$	89,~~589~~118						$	78,~~567~~589
NET INTEREST RATE SPREAD (3)						3.3917	%						3.7039	%						3.5770	%
NET INTEREST MARGIN (4)						3.5741	%						3.8457	%						3.6584	%
RATIO OF AVERAGE INTEREST- EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES						123.14	%						128.39	%						119.12	%
RATIO OF AVERAGE INTEREST- EARNING ASSETS TO AVERAGE
INTEREST-BEARING LIABILITIES						121.54	%						123.14	%						128.39	%

(1) Includes unamortized discounts and premiums

(2) Amount is net of deferred loan origination (costs) fees, undisbursed loan funds, unamortized discounts and allowance for loan losses and includes non-performing loans.

(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.

3738

Rate/Volume Analysis

The following table shows the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to changes in outstanding balances and those due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	Year Ended December 31,
	2018 COMPARED TO 2017									2017 COMPARED TO 2016
	2019 COMPARED TO 2018									2018 COMPARED TO 2017
	INCREASE (DECREASE) DUE TO									INCREASE (DECREASE) DUE TO
	VOLUME			RATE			NET			VOLUME			RATE			NET
	(Dollars in Thousands)
Interest earned on
Securities, net	$	(~~324~~15	)	$	~~100~~20		$	~~(224~~5	)	$	(~~216~~324	)	$	46100		$	(~~170~~224	)
Loans receivable, net		~~1,771~~909			~~(220~~403	)		1,~~551~~312			1,~~560~~771			(~~174~~220	)		1,~~386~~551
Non-marketable equity securities		-2			13(1	)		131			(2-	)		313			113
Other investments		~~102~~70			2330			~~125~~100			~~(92~~102	)		8623			(6125	)
Total interest-earning assets	$	~~1,544~~967		$	~~(84~~451	)	$	1,~~465~~418		$	1,~~250~~544		$	(3984	)	$	1,~~211~~465
Interest expense on
Money Market accounts	$	(9	)	$	9(5	)	$	-(14	)	$	(19	)	$	119		$	10-
Passbook savings accounts		-			-			-			(2	)		1			(1	)
Certificates of Deposit accounts		218			550			768			265			365			630
Certificates of Deposit accounts		265			365			630			(13	)		143			130
Checking accounts		106			200			306			60			109			169
Checking accounts		60			109			169			1			3			4
Borrowed funds		15			44			59			101			36			137
Borrowed funds		101			36			137			37			9			46
Total interest-bearing liabilities		331			788			1,119			417			519			936
Total interest-bearing liabilities		417			519			736			22			167			189
Change in net interest income	$	636		$	(337	)	$	299		$	1,132		$	(603	)	$	529
Change in net interest income	$	1,132		$	(603	)	$	529		$	1,228		$	(206	)	$	1,022

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of residential mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset/Liability Management Committee, which consists of senior management operating under a policy adopted by the Board of Directors, meets as needed to review our asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk in order to limit the exposure of our earnings and capital to changes in interest rates. In an attempt to accomplish this, we offer a variety of loan products, some of which are based on the prime rate and some loan products that adjust on one- to-five year intervals, based on various indices including the prime rate and U.S. Treasury securities. To shorten asset duration, we purchase investments, which are usually three to five years in length, as well as balance our investment purchases to ensure extension risk is minimized. In addition, we have attempted to lengthen the maturities of our deposit accounts by offering proportionately higher interest rates for longer terms, 3-5 year certificate accounts and by increasing our core deposits, in which the overall balances are generally less volatile to interest rate fluctuations than certificate accounts.

For additional information on our risk management strategy, see the sections entitled, “Item 1. Business – Delinquent Loans,” “Item 1. Business – Nonperforming Assets,” “Item 1. Business Ratios,” and “Item 1. Business - Allowance for Loan Losses.”

Net Portfolio Value. The net present value of an institution’s cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. The Company has engaged a third-party provider to value its portfolios. The model utilized by the Company’s third-party provider utilizes a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases by 100 to 300 basis points, or decreases by 100 basis points instantaneously. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The tables below set forth, as of the periods indicated, net portfolio value and the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve.

	Year Ended December 31, 2018
									Net Portfolio Value As A
	Net Portfolio Value								Percentage Of Present Value Assets
Change In
Interest Rates	Estimated		Amount			Percent Of			NPV			Change In
(Basis Points)	NPV		Of Change			Change			Ratio			Basis Points
	(Dollars In Thousands)
+400	$	54,362	$	(10,286	)		-15.91	%		20.30	%		(150	)
+300	$	57,194		(7,454	)		-11.53	%		20.80	%		(120	)
+200		60,293		(4,355	)		-6.74	%		21.40	%		(60	)
+100		62,977		(1,671	)		-2.58	%		21.80	%		(20	)
0		64,648		-			-			22.00	%		-
-100		65,327		679			1.05	%		21.80	%		(20	)
-200		65,301		(26	)		-0.04	%		21.40	%		(40	)

	Year Ended December 31, 2017
									Net Portfolio Value As A
	Net Portfolio Value								Percentage Of Present Value Assets
Change In
Interest Rates	Estimated		Amount			Percent Of			NPV			Change In
(Basis Points)	NPV		Of Change			Change			Ratio			Basis Points
	(Dollars In Thousands)
+300	$	54,397	$	(8,504	)		-13.52	%		22.63	%		(163	)
+200		58,103		(4,798	)		-7.63	%		23.48	%		(78	)
+100		61,086		(1,815	)		-2.89	%		24.07	%		(19	)
0		62,901		-			-			24.26	%		-
-100		63,917		1,016			1.62	%		24.18	%		(8	)

The table above indicates that at December 31, 2018, in the event of a 100-basis point increase in interest rates, we would experience a decrease of approximately 2.6% in net portfolio value. In the event of a 200-basis point increase in interest rates, we would experience a decrease of approximately 6.7% in net portfolio value. For a 300-basis point increase in interest rates, we would experience a decreased value of approximately 11.5% in net portfolio value. In the event of a 400-basis point increase in interest rates, we would experience a decrease of approximately 13.7% in net portfolio value. In the event of a 100-basis point decrease in interest rates, we would experience an increase of approximately 1.1% in net portfolio value. In the event of a 200-basis point decrease in interest rates, we would experience a decrease of approximately 0.1% in net portfolio value.

	Year Ended December 31, 2019
									Net Portfolio Value As A
	Net Portfolio Value								Percentage Of Present Value Assets
Change In
Interest Rates	Estimated		Amount			Percent Of			NPV			Change In
(Basis Points)	NPV		Of Change			Change			Ratio			Basis Points
	(Dollars In Thousands)
+400	$	50,495	$	(9,984	)		-16.51	%		18.10	%		(150	)
+300		53,847		(6,632	)		-10.97	%		18.80	%		(90	)
+200		56,692		(3,787	)		-6.26	%		19.30	%		(40	)
+100		58,984		(1,495	)		-2.47	%		19.60	%		(10	)
0		60,479		-			-			19.70	%		-
-100		60,976		497			0.82	%		19.40	%		(30	)
-200		61,980		1,501			2.48	%		19.40	%		-

	Year Ended December 31, 2018
									Net Portfolio Value As A
	Net Portfolio Value								Percentage Of Present Value Assets
Change In
Interest Rates	Estimated		Amount			Percent Of			NPV			Change In
(Basis Points)	NPV		Of Change			Change			Ratio			Basis Points
	(Dollars In Thousands)
+400	$	54,362	$	(10,286	)		-15.91	%		20.30	%		(150	)
+300		57,194		(7,454	)		-11.53	%		20.80	%		(120	)
+200		60,293		(4,355	)		-6.74	%		21.40	%		(60	)
+100		62,977		(1,671	)		-2.58	%		21.80	%		(20	)
0		64,648		-			-			22.00	%		-
-100		65,327		679			1.05	%		21.80	%		(20	)
-200		65,301		(26	)		-0.04	%		21.40	%		(40	)

The table above indicates that at December 31, 2019, in the event of a 100-basis point increase in interest rates, we would experience a decrease of approximately 2.5% in net portfolio value. In the event of a 200-basis point increase in interest rates, we would experience a decrease of approximately 6.3% in net portfolio value. For a 300-basis point increase in interest rates, we would experience a decreased value of approximately 10.9% in net portfolio value. In the event of a 400-basis point increase in interest rates, we would experience a decrease of approximately 16.5% in net portfolio value. In the event of a 100-basis point decrease in interest rates, we would experience an increase of approximately 0.8% in net portfolio value. In the event of a 200-basis point decrease in interest rates, we would experience an increase of approximately 2.5% in net portfolio value.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or re-pricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity and Capital Resources

We maintain liquid assets at levels we believe are adequate to meet our liquidity needs. Our liquidity ratio averaged 56.0013% for the year ended December 31, ~~2018~~2019 compared to 35.1100% for the year ended December 31, ~~2017~~2018. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings, and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our liquidity ratio cannot be calculated using amounts disclosed in our consolidated financial statements, as many of the calculations involve monthly, quarterly, or annual averages. To calculate our liquidity ratio, the average liquidity base from the prior month is used as the denominator to calculate a daily liquidity ratio. The liquidity base consists of savings account balances, certificate of deposit balances, checking and money market balances, deposit loans and borrowings. The daily balances of these components are averaged to arrive at the liquidity base for the month, and the daily cash balances in selected general ledger accounts are used to derive our liquidity position. A daily liquidity ratio is calculated using the liquidity for the day divided by the prior month’s average liquidity base. At the end of each month, a monthly liquidity position is calculated using the average liquidity position for the month divided by the prior month’s average liquidity base. To calculate quarterly and annual liquidity ratios, we take the average liquidity for the three- or twelve-month period, respectively, and average it.

We maintain a liquidity ratio policy that establishes a target range of 1% to 5% for the liquidity ratio to assist in the management of this metric. However, during the existing low interest rate environment, we have strategically allowed this metric to at times be above 5% to provide for the effective management of extension risk and other interest rate risks.

Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities, other short-term investments, earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with the Consolidated Financial Statements which begin on page F-1 of this Form 10-K.

Our primary investing activities are the origination and purchase of one-to-four family, non-residential and multi-family real estate and other loans, including loans originated for sale, and the purchase of investment securities. For the years ended December 31, ~~2018~~2019 and ~~2017~~2018, our loan originations totaled $7968.51 million and $8679.65 million, respectively. For the ~~years~~year ended December 31, ~~2018~~2019, we purchased loans totaling $178.65 million, compared to the purchase of loans totaling $1917.6 million for the year ended December 31, ~~2017~~2018. For the years ended December 31, ~~2018~~2019 and ~~2017~~2018, we received $2018.4 million and $2220.54 million, respectively, from the sale of loans, resulting in gains of $0.68 million and $0.76 million, respectively. Cash received from the sales, calls, maturities and pay-downs on securities totaled $4.35 million and $~~19.~~4.3 million for the years ended December 31, ~~2018~~2019 and ~~2017~~2018 respectively. We purchased $43.21 million and $14.32 million in securities for the years ended December 31, ~~2018~~2019 and ~~2017~~2018, respectively. For a more detailed breakdown of our loan activity, see the section entitled “Item 1. Business-Lending Activities.”

Deposit flows are generally affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. Deposits increased $4012.69 million for the year ended December 31, ~~2018~~2019 and increased $1040.26 million for the year ended December 31, ~~2017~~2018. For a more detailed breakdown of our deposit activity, see the section entitled “Item 1. Business-Deposit Activities and Other Sources of Funds.”

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago (“FHLBC”) to provide advances and with Bankers Bank of Wisconsin to purchase Federal Funds. As a member of the FHLBC, we are required to own capital stock in the Federal Home Loan Bank of Chicago and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to credit-worthiness have been met. We had an available borrowing limit of $7465.68 million and $6074.46 million from the FHLBC as of December 31, ~~2018~~2019 and ~~2017~~2018, respectively. In addition, as of December 31, ~~2018~~2019 and ~~2017~~2018, the Bank had $7.9 million of available credit from Bankers Bank of Wisconsin to purchase Federal Funds. Additionally, at December 31, 2019 and 2018, we had a $5.0 million line of credit available with Midwest Independent Bank to purchase federal funds. There were $129.1 million and $1512.1 million, respectively of Federal Home Loan Bank advances at December 31, ~~2018~~2019 and ~~2017~~2018 and no Federal Funds purchased outstanding at December 31, ~~2018~~2019 and ~~2017~~2018.

4041

At December 31, ~~2018~~2019, we had outstanding commitments to originate loans of $56.89 million, unfunded commitments under lines of credit of $1514.51 million, unfunded commitments on construction loans of $75.20 million, and no$10.0 thousand unfunded standby letters of credit. At December 31, ~~2018~~2019, certificates of deposit scheduled to mature in less than one year totaled $5056.48 million. Based on prior experience, management believes that a significant portion 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 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. In addition, the cost of such deposits may be significantly higher if market interest rates are higher at the time of renewal.

The Company is a separate legal entity from Ottawa Savings 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 interest and principal on outstanding debt, if any. The Company’s primary source of income is dividends received from Ottawa Savings Bank. The amount of dividends that Ottawa Savings Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Federal Reserve Board, but with prior notice to the Federal Reserve Board, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At December 31, ~~2018~~2019, the Company had liquid assets of $72.02 million.

Off-Balance Sheet Arrangements and Contractual Obligations

For the year ended December 31, ~~2018~~2019, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material adverse effect on its financial condition, results of operations or cash-flows.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract and will also require additional disclosures. The new authoritative guidance was originally effective for reporting periods after December 15, 2016. In August 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606) was issued to delay the effective date of ASU 2014-09 by one year. The FASB issued four subsequent ASUs in 2016 which are intended to improve and clarify the implementation guidance related to ASU 2014-09. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has completed its overall assessment of non-interest income and review of related contracts potentially affected by the guidance. The Company adopted the guidance on January 1, 2018 and a cumulative effect adjustment to retained earnings was not necessary.

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

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

● Service charges on deposit accounts. The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Similarly, overdraft fees are recognized at the point in time that the overdraft occurs as this corresponds with the Company's performance obligation. Service charges on deposit accounts are withdrawn from the customer's account balance. ● Gains/losses on sale of foreclosed real estate and repossessed assets. The Company records a gain or loss from the sale of foreclosed real estate and repossessed assets when control of the property transfers to the buyer, which generally occurs at the time of the executed deed. When the Company finances the sale of foreclosed real estate and repossessed assets to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed real estate and repossessed asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant component is present. ● Other. Other noninterest income consists of other recurring revenue streams such as transaction fees, safe deposit rental income, and insurance commissions. Transaction fees primarily include check printing sales commissions, collection fees, and wire transfer fees which arise from in-branch transactions. Insurance commissions are agent commissions earned by the Company and earned upon the effective date of the bound coverage. Merchant referral income is associated with a program whereby the Company receives a share of processing revenue that is generated from clients that were referred by the Company to the service provider. Revenue is recognized at the point in time when the transaction occurs.

In● ~~January~~Gains/losses ~~2016,~~on ~~the~~sale ~~FASB~~of ~~issued~~foreclosed ~~ASU~~real ~~2016-01,~~estate ~~Financial~~and ~~Instruments—Overall~~repossessed ~~(Subtopic~~assets. ~~825-10):~~The ~~Recognition~~Company ~~and~~records ~~Measurement~~a gain or loss from the sale of ~~Financial~~foreclosed ~~Assets~~real estate and ~~Financial~~repossessed ~~Liabilities~~assets when control of the property transfers to the buyer, which ~~updates~~generally ~~certain~~occurs ~~aspects~~at the time of ~~recognition,~~the ~~measurement~~executed deed. When the Company finances the sale of foreclosed real estate and repossessed assets to the buyer, ~~presentation~~the Company assesses whether the buyer is committed to perform their obligations under the contract and ~~disclosure~~whether collectability of ~~financial~~the ~~instruments~~transaction price is probable. ~~ASU~~Once ~~2016-01~~these ~~was~~criteria ~~effective~~are ~~for~~met, the ~~Company~~foreclosed real estate and repossessed asset is derecognized and the gain or loss on ~~January~~sale 1,is ~~2018. The~~recorded ~~adoption~~upon the transfer of control of the ~~new~~property ~~financial~~to ~~instruments~~the ~~standard~~buyer. ~~did~~In ~~not~~determining ~~have~~the again ~~material~~or ~~impact~~loss on the ~~consolidated~~sale, ~~financial~~the ~~statements. There~~Company ~~was~~adjusts nothe ~~cumulative~~transaction ~~effect~~price ~~adjustment~~and ~~recorded~~related ~~with~~gain ~~the~~(loss) ~~adoption~~on ofsale ~~this~~if ~~guidance~~a significant component is present.

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

In● ~~June~~Other. ~~2016,~~Other ~~the~~noninterest ~~FASB~~income ~~issued~~consists ~~ASU~~of ~~2016-13,~~other ~~Financial~~recurring ~~Instruments~~revenue -streams ~~Credit~~such ~~Losses~~as ~~(Topic~~transaction ~~326):~~fees, ~~Measurement~~safe ofdeposit ~~Credit~~rental ~~Losses~~income, onand ~~Financial~~insurance ~~Instruments~~commissions. ~~ASU~~Transaction ~~2016-13~~fees ~~requires~~primarily ~~the~~include ~~measurement~~check ofprinting ~~all~~sales ~~expected credit losses for financial assets held at the reporting date based on historical experience~~commissions, ~~current~~collection ~~conditions~~fees, and ~~reasonable~~wire ~~and~~transfer ~~supportable~~fees ~~forecasts~~which ~~and~~arise ~~requires~~from ~~enhanced~~in-branch ~~disclosures~~transactions. ~~related~~Insurance tocommissions ~~the~~are ~~significant~~agent ~~estimates~~commissions ~~and~~earned ~~judgments~~by ~~used~~the inCompany ~~estimating~~and ~~credit~~earned ~~losses,~~upon ~~as well as~~ the ~~credit~~effective ~~quality~~date ~~and underwriting standards~~ of anthe ~~organization’s~~bound ~~portfolio~~coverage. InMerchant ~~addition,~~referral ~~ASU~~income ~~2016-13~~is ~~amends~~associated ~~the accounting for credit losses on available-for-sale debt securities and purchased financial assets~~ with ~~credit~~a ~~deterioration.~~program ~~ASU~~whereby ~~2016-13~~the isCompany ~~effective~~receives ~~for~~a ~~public~~share ~~business~~of ~~entities~~processing ~~for~~revenue ~~fiscal~~that ~~years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption~~ is ~~permitted~~generated ~~for~~from ~~fiscal~~clients ~~years~~that ~~beginning~~were ~~after~~referred ~~December~~by ~~31,~~the ~~2018,~~Company ~~including~~to ~~interim~~the ~~periods~~service ~~within those fiscal years~~provider. ~~The~~Revenue ~~Company~~ is ~~currently~~recognized ~~evaluating~~at the ~~potential~~point ~~impact~~in oftime ~~ASU~~when ~~2016-13~~the ontransaction ~~its consolidated financial statements~~occurs.

In January ~~2017~~2016, the FASB issued ASU ~~No. 2017~~2016-0401, ~~Intangibles~~Financial –Instruments—Overall ~~Goodwill and Other~~ (~~Topic~~Subtopic ~~350~~825-10): ~~Simplifying~~Recognition ~~the~~and ~~Test~~Measurement ~~for Goodwill Impairment. This ASU simplifies measurement~~ of ~~goodwill~~Financial Assets and ~~eliminates~~Financial ~~Step~~Liabilities, 2which ~~from~~updates ~~the~~certain ~~goodwill~~aspects ~~impairment~~of ~~test.~~recognition, ~~The~~measurement, ~~Company~~presentation ~~should~~and ~~perform~~disclosure ~~its goodwill impairment test by comparing the fair value~~ of afinancial ~~reporting unit with its carrying amount~~instruments. AnASU ~~impairment~~2016-01 ~~charge~~was ~~should~~effective ~~be recognized~~ for the ~~amount~~Company byon ~~which~~January ~~the~~1, ~~carrying amount exceeds the reporting unit’s fair value~~2018. The ~~impairment~~adoption ~~charge~~of ~~is limited to~~ the ~~amount~~new offinancial ~~goodwill~~instruments ~~allocated~~standard todid ~~that~~not ~~reporting~~have ~~unit.~~a ~~The~~material ~~amendments~~impact inon ~~this~~the ~~update~~consolidated ~~are~~financial ~~effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years~~statements. ~~Early~~There ~~adoption~~was isno ~~permitted~~cumulative ~~for~~effect ~~goodwill~~adjustment ~~impairment~~recorded ~~tests~~with ~~performed on testing dates after January 1, 2017. The Company does not believe~~ the adoption of this ~~standard will have a material impact on its consolidated financial statements~~guidance.

In ~~March~~February ~~2017~~2016, the FASB issued ASU ~~2017~~2016-0802, ~~Receivables~~ –Leases ~~Nonrefundable~~(Topic ~~Fees~~842). ~~and~~Under ~~Other~~the ~~Costs~~new ~~(Subtopic~~guidance ~~310-20),~~in ~~Premium~~this ~~Amortization~~ASU, onlessees ~~Purchased~~will ~~Callable~~be ~~Debt~~required ~~Securities,~~to ~~which~~recognize ~~shortens~~ the ~~period~~following offor ~~amortization~~all ofleases (with the ~~premium~~exception onof ~~certain~~short-term ~~callable~~leases) ~~debt~~at ~~securities~~the tocommencement ~~the~~date: ~~earliest~~(1) ~~call~~a ~~date.~~lease ~~Currently~~liability, ~~generally~~which ~~accepted~~is ~~accounting~~a ~~principles~~lessee`s ~~(“GAAP”)~~obligation ~~excludes~~to ~~certain~~make ~~callable~~lease ~~debt~~payments ~~securities~~arising from ~~consideration~~a oflease, ~~early~~measured ~~repayment~~on ofa ~~principal~~discounted ~~even~~basis; ifand ~~the~~(2) ~~holder~~a isright-of-use ~~certain~~asset, ~~that~~which ~~the~~is ~~call~~an ~~will~~asset bethat ~~exercised.~~represents Asthe alessee's ~~result~~right to use, ~~upon~~or control the ~~exercise~~use of, a ~~call~~specified onasset afor ~~callable~~the ~~debt~~lease ~~security~~term. ~~held~~Under atthe anew ~~premium~~guidance, ~~the~~lessor ~~unamortized~~accounting ~~premium~~ is ~~recorded~~largely asunchanged. aCertain ~~loss~~targeted inimprovements ~~earnings.~~were ~~ASU~~made ~~2017-08~~to ~~requires~~align, ~~that~~where ~~premiums~~necessary, onlessor ~~certain~~accounting ~~callable~~with ~~debt~~the ~~securities~~lessee beaccounting ~~amortized~~model toand ~~the~~Topic ~~shortest~~606, ~~call~~Revenue ~~date~~from Contracts with Customers. ~~Securities~~The ~~within~~new lease guidance also simplified the ~~scope~~accounting offor ~~this~~sale ~~ASU~~and ~~are~~leaseback ~~those~~transactions ~~that~~primarily ~~have~~because ~~explicit,~~lessees ~~noncontingent~~must ~~call~~recognize ~~features~~lease ~~that~~assets ~~are~~and ~~callable~~lease atliabilities. ~~fixed~~Lessees ~~prices~~will ~~and~~no onlonger ~~preset~~be ~~dates.~~provided ~~This~~with a source of off-balance sheet financing. ASU is2016-02 was effective for ~~annual~~public ~~periods~~business entities for fiscal years beginning after December 15, 2018, including interim periods within those ~~annual~~fiscal ~~periods~~years. ~~Early~~Lessees ~~adoption~~(for iscapital ~~permitted~~and operating leases) and lessors (for sales-type, ~~including~~direct ~~adoption~~financing, inand anoperating ~~interim~~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 ~~impact~~modified ofretrospective ~~adopting~~approach ~~this~~would ~~ASU~~not ~~will~~require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not ~~have~~apply ana ~~effect~~full asretrospective ~~our~~transition ~~current~~approach. ~~bond~~The ~~accounting~~Company isadopted ~~consistent~~the ~~with~~guidance on January 1, 2019 and the ~~requirements~~standard ofdid ~~this~~not ~~guidance~~have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. 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 Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Currently, generally accepted accounting principles (“GAAP”) excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. ASU 2017-08 requires that premiums on certain callable debt securities be amortized to the shortest call date. Securities within the scope of this ASU are those that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. This ASU was effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The impact of adopting this ASU did not have an effect as our current bond accounting is consistent with the requirements of this guidance.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item 8 is contained on pages F-1 through F-4850 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a)

Disclosure 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 our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” as contemplated by Exchange Act Rule 13a-15(d). Based upon their evaluation, and as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiary) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.

(b)

Internal Controls Over Financial Reporting

Management’s annual report on internal control over financial reporting is incorporated herein by reference to page 4546 of this Annual Report on Form 10-K.

(c)

Changes to Internal Controls Over Financial Reporting

There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the fourth quarter of ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required in response to this item regarding the Company’s directors, executive officers, the audit committee, the audit committee financial expert, the code of ethics and business conduct and compliance with Section 16(a) of the Exchange Act will be contained in the Company’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 16, ~~2019~~2020 (the “Proxy Statement”) under the captions “Proposal 1—Election of Directors,” “Corporate Governance—Meetings and Committees of the Board of Directors,” “Corporate Governance—Code of Ethics and Business Conduct,” and “Section 16(a) Beneficial Ownership Reporting Compliance” and the information included therein is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required in response to this item will be contained in the Proxy Statement under the caption “Executive Compensation” and the information included therein is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

(a) Securities Authorized for Issuance under Equity Compensation Plans. The information required in response to this item is included in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and is incorporated herein by reference.

The following table sets forth information as of December 31, 2018 about Company common stock that may be issued under the Company’s equity compensation plans. All plans were approved by the Company’s stockholders.

Number of Securities

Remaining Available for

Number of Securities to

Weighted Average

Future Issuance Under

be issued upon Exercise

Exercise Price

Equity Compensation

of Outstanding Options,

Plans (Excluding securities

Warrants and Rights

reflected in column a)

(a)

(b)

(c)

Equity Compensation Plans Approved by Stockholders

13,060

5.82

328,503

Equity Compensation Plans not Approved by Stockholders

Total

13,060

5.82

328,503

(b)

Stock Ownership. The information required in response to this item will be contained in the Proxy Statement under the caption “Stock Ownership” and the information included therein is incorporated herein by reference.

The information required in response to this item will be contained in the Proxy Statement under the caption “Proposal 1— Election of Directors” and “Transactions with Related Persons” and the information included therein is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this item will be contained in the Proxy Statement under the caption “Proposal 2—Ratification of Independent Registered Public Accounting Firm” and the information included therein is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS

Exhibit No.		Description of Exhibits
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)
4.0		Form of Stock Certificate of Ottawa Bancorp, Inc. (incorporated by reference to Exhibit 4.0 to Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed on June 6, 2016)
4.1		Description of Common Stock
10.1		Ottawa Savings Bank Voluntary Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 the Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed with the Securities and Exchange Commission on June 6, 2016) *
10.2		Amendment to Ottawa Savings Bank Voluntary Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.4 the Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed with the Securities and Exchange Commission on June 6, 2016) *
10.3		~~Salary Continuation Agreement between~~ Ottawa ~~Savings~~Bancorp, ~~Bank~~Inc. ~~and~~2006 ~~Jon~~Equity L.Incentive ~~Kranov~~Plan (incorporated by reference to Exhibit 10.57 the Company’s Registration Statement on Form S-1 (File No. 333-211860) initially filed with the Securities and Exchange Commission on June 6, 2016) *
10.4		Ottawa ~~Savings~~Bancorp, ~~Bank~~Inc. ~~Nonqualified~~2018 ~~Deferred~~Equity ~~Compensation~~Incentive Plan (incorporated by reference to ~~Exhibit~~Appendix ~~10.6~~A to the Company’s ~~Registration~~Definitive Proxy Statement on ~~Form~~Schedule ~~S-1~~14A (File No. ~~333~~001-~~211860~~37914) ~~initially~~ filed with the Securities and Exchange Commission on ~~June~~April 611, ~~2016~~2018) *
10.5		Change in Control Agreement by and between Ottawa Savings Bank, Ottawa Bancorp, Inc. ~~2006~~and ~~Equity~~Craig ~~Incentive~~M. ~~Plan~~Hepner (incorporated by reference to Exhibit 10.71 to the Company’s ~~Registration~~Current ~~Statement~~Report on Form S8-1K (File No. ~~333~~001-~~211860~~37914) ~~initially~~ filed with the Securities and Exchange Commission on ~~June~~October 64, ~~2016~~2019) *
10.6		Change in Control Agreement by and between Ottawa Savings Bank, Ottawa Bancorp, Inc. ~~2018~~and ~~Equity~~Marc ~~Incentive~~N. ~~Plan~~Kingry (incorporated by reference to ~~Appendix~~Exhibit A10.2 to the Company’s ~~Definitive~~Current ~~Proxy~~Report ~~Statement~~ on ~~Schedule~~Form ~~14A~~8-K (File No. 001-37914) filed with the Securities and Exchange Commission on ~~April~~October 114, ~~2018~~2019) *
10.7		Change in Control Agreement by and between Ottawa Savings Bank, Ottawa Bancorp, Inc. and Mark M. Stoudt (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-37914) filed with the Securities and Exchange Commission on October 4, 2019) *
21.0		Subsidiaries
23.1		Consent of RSM US, LLP
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 Savings Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Statements of Comprehensive Income; (iv) the Condensed Statements of Stockholders' Equity; (V) The Condensed Consolidated Statements of Cash Flows and (vi) related notes.
	* Indicates management contract or compensation plan or arrangement.

ITEM 16. FORM 10-K SUMMARY

None.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, utilizing the framework established in Internal Control – Integrated Framework of 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2018, is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Ottawa Bancorp, Inc. & Subsidiary

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 Savings Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Statements of Comprehensive Income; (iv) the Condensed Statements of Stockholders' Equity; (V) The Condensed Consolidated Statements of Cash Flows and (vi) related notes.

	* Indicates management contract or compensation plan or arrangement.

~~Contents~~ITEM 16. FORM 10-K SUMMARY

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Financial Statements
Consolidated balance sheets	F-3
Consolidated statements of operations	F-4
Consolidated statements of comprehensive income	F-5
Consolidated statements of stockholders’ equity	F-6
Consolidated statements of cash flows	F-7
Notes to consolidated financial statements	F-9

None.

~~F-1~~MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

~~Report~~The management of ~~Independent~~the ~~Registered~~Company ~~Public~~is ~~Accounting~~responsible ~~Firm~~for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

ToManagement conducted an assessment of the ~~Stockholders~~effectiveness ~~and~~of the ~~Board~~Company’s internal control over financial reporting as of ~~Directors~~December 31, 2019, utilizing the framework established in Internal Control – Integrated Framework of 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2019, is effective.

~~Ottawa~~Our ~~Bancorp~~internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, ~~Inc.~~in reasonable detail, transactions and ~~Subsidiary~~dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

~~Opinion~~All oninternal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the ~~Financial~~risk ~~Statements~~that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

WeThis ~~have~~annual ~~audited~~report ~~the~~does ~~accompanying~~not ~~consolidated~~include ~~balance~~an ~~sheets~~attestation ofreport ~~Ottawa Bancorp, Inc. and Subsidiary (the Company) as~~ of ~~December 31, 2018 and 2017,~~ the ~~related consolidated statements of operations, comprehensive income, stockholders~~Company’s ~~equity~~registered ~~and~~public ~~cash~~accounting ~~flows~~firm ~~for~~regarding ~~the~~internal ~~years~~control ~~then~~over ~~ended, and the related notes to the consolidated~~ financial ~~statements (collectively, the financial statements)~~reporting. InManagement’s ~~our~~report ~~opinion,~~was ~~the~~not ~~financial~~subject ~~statements~~to ~~present~~attestation ~~fairly,~~by ~~in all material respects,~~ the ~~financial position of the~~ Company’s asregistered ofpublic ~~December~~accounting ~~31,~~firm ~~2018~~pursuant ~~and~~to ~~2017, and~~ the ~~results~~rules of ~~its~~the ~~operations~~Securities and ~~its~~Exchange ~~cash~~Commission ~~flows~~that ~~for~~permit the ~~years~~Company ~~then~~to ~~ended,~~provide inonly ~~conformity~~management’s ~~with~~report ~~accounting principles generally accepted~~ in ~~the~~this ~~United~~annual ~~States of America~~report.

~~Basis for Opinion~~47

~~These~~Ottawa ~~financial~~Bancorp, ~~statements are the responsibility of the Company’s management~~Inc. ~~Our~~& responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Subsidiary

WeConsolidated ~~conducted~~Financial our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.Statements

~~Our~~December ~~audits included performing procedures to assess the risks of material misstatement of the financial statements~~31, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.2019

~~/s/~~ Ottawa ~~RSM~~Bancorp, USInc. ~~LLP~~& Subsidiary

~~We have served as the Company's auditor since 2005.~~Contents

Chicago, Illinois


Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements

Consolidated balance sheets	F-3
Consolidated statements of operations	F-4
Consolidated statements of comprehensive income	F-5
Consolidated statements of stockholders’ equity	F-6
Consolidated statements of cash flows	F-7
Notes to consolidated financial statements	F-9

~~March 28, 2019~~F-1

~~F-2~~Report of Independent Registered Public Accounting Firm

~~Ottawa~~To ~~Bancorp,~~the ~~Inc.~~Stockholders &and ~~Subsidiary~~the ~~Consolidated~~Board ~~Balance~~of ~~Sheets December 31, 2018 and 2017~~Directors

	2018			2017
Assets
Cash and due from banks	$	2,416,568		$	2,426,924
Interest bearing deposits		6,013,890			1,328,893
Total cash and cash equivalents		8,430,458			3,755,817
Time deposits		250,000			250,000
Federal funds sold		5,663,000			939,000
Securities available for sale		25,533,767			26,045,675
Non-marketable equity securities		769,121			918,387
Loans, net of allowance for loan losses of $2,627,738 and $2,472,446 at December 31, 2018 and 2017, respectively		235,926,419			207,035,091
Loans held for sale		-			499,375
Premises and equipment, net		6,621,080			6,670,088
Accrued interest receivable		824,542			794,449
Foreclosed real estate		-			84,100
Deferred tax assets		1,898,141			1,870,490
Cash surrender value of life insurance		2,341,453			2,293,800
Goodwill		649,869			649,869
Core deposit intangible		228,000			286,000
Other assets		3,700,229			3,307,734
Total assets	$	292,836,079		$	255,399,875
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	14,057,719		$	11,562,801
Interest bearing		209,390,810			171,211,823
Total deposits		223,448,529			182,774,624
Accrued interest payable		5,648			661
FHLB advances		12,087,152			15,105,287
Other liabilities		4,470,384			4,416,368
Total liabilities		240,011,713			202,296,940
Commitments and contingencies (Note 14)
Stockholders' equity
Common stock, $0.01 par value, 12,000,000 shares authorized; 3,358,922 and 3,451,802 shares issued at December 31, 2018 and 2017, respectively		33,589			34,518
Additional paid-in-capital		35,579,606			36,949,508
Retained earnings		18,859,232			17,720,962
Unallocated ESOP shares		(1,576,616	)		(1,754,632	)
Unearned management recognition plan shares		(40,361	)		-
Accumulated other comprehensive (loss) income		(31,084	)		152,579
Total stockholders' equity		52,824,366			53,102,935
Total liabilities and stockholders' equity	$	292,836,079		$	255,399,875

Ottawa Bancorp, Inc. and Subsidiary

~~F-3~~Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Ottawa Bancorp, Inc. &and Subsidiary ~~Consolidated~~(the ~~Statements~~Company) as of ~~Operations~~December ~~Years~~31, ~~Ended~~2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and ~~2017~~the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

	2018		2017
Interest and dividend income:
Interest and fees on loans	$	10,229,270	$	8,677,914
Securities:
Residential mortgage-backed and related securities		281,418		435,673
State and municipal securities		408,467		477,921
Dividends on non-marketable equity securities		24,535		12,084
Interest-bearing deposits		155,322		30,322
Total interest and dividend income		11,099,012		9,633,914
Interest expense:
Deposits		1,762,113		963,242
Borrowings		218,512		81,625
Total interest expense		1,980,625		1,044,867
Net interest income		9,118,387		8,589,047
Provision for loan losses		527,500		575,000
Net interest income after provision for loan losses		8,590,887		8,014,047
Other income:
Gain on sale of loans, net		584,929		696,754
Gain on sale of foreclosed real estate		116,295		44,773
Gain on sale of repossessed assets		4,917		14,686
Loan origination and servicing income		858,087		633,984
Origination of mortgage servicing rights, net of amortization		23,230		71,978
Customer service fees		527,739		482,525
Increase in cash surrender value of life insurance		47,653		48,222
Other		119,977		115,755
Total other income		2,282,827		2,108,677
Other expenses:
Salaries and employee benefits		4,295,121		4,303,658
Directors fees		180,750		163,200
Occupancy		637,872		644,103
Deposit insurance premium		66,010		57,189
Legal and professional services		388,199		360,721
Data processing		664,601		593,871
Loss on sale of securities		-		29,113
Loan expense		725,125		592,531
Valuation adjustments and expenses on foreclosed real estate		26,102		11,937
Other		1,216,412		1,048,628
Total other expenses		8,200,192		7,804,951
Income before income tax expense		2,673,522		2,317,773
Income tax expense		679,216		1,503,749
Net income	$	1,994,306	$	814,024
Basic earnings per share	$	0.62	$	0.25
Diluted earnings per share	$	0.62	$	0.25
Dividends per share	$	0.265	$	0.16

Basis for Opinion

~~See~~These ~~Accompanying~~financial ~~Notes~~statements are the responsibility of the Company’s management. Our responsibility is to ~~Consolidated~~express ~~Financial~~an ~~Statements~~opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

~~F-4~~We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

~~Ottawa~~Our ~~Bancorp,~~audits ~~Inc.~~included &performing ~~Subsidiary~~procedures ~~Consolidated~~to ~~Statements~~assess the risks of ~~Comprehensive~~material ~~Income~~misstatement ~~Years~~of ~~Ended~~the ~~December~~financial 31statements, ~~2018~~whether due to error or fraud, and ~~2017~~performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

	2018			2017
Net income	$	1,994,306		$	814,024
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding (losses) gains arising during the period		(256,890	)		70,603
Reclassification adjustment for losses included in net income		-			29,113
Other comprehensive (loss) income, before tax		(256,890	)		99,716
Income tax (benefit) expense related to items of other comprehensive (loss) income		(73,227	)		41,469
Other comprehensive (loss) income, net of tax		(183,663	)		58,247
Comprehensive income	$	1,810,643		$	872,271

/s/ RSM US LLP

~~See~~We ~~Accompanying~~have ~~Notes~~served toas ~~Consolidated~~the ~~Financial~~Company's ~~Statements~~auditor since 2005.

~~F-5~~Chicago, Illinois

~~Ottawa~~March ~~Bancorp~~30, ~~Inc. & Subsidiary Consolidated Statements of Stockholders' Equity Years Ended December 31, 2018 and 2017~~2020

																Accumulated
				Additional						Unallocated			Unearned			Other
	Common			Paid-in			Retained			ESOP			MRP			Comprehensive
	Stock			Capital			Earnings			Shares			Shares			Income (Loss)			Total
Balance, December 31, 2016	$	34,674		$	37,117,311		$	17,455,472		$	(1,932,648	)	$	-		$	69,224		$	52,744,033
Net income		-			-			814,024			-			-			-			814,024
Other comprehensive income		-			-			-			-			-			58,247			58,247
TCJA, reclassification between accumulated other comprehensive income and retained earnings		-			-			(25,108	)		-			-			25,108			-
Allocation 18,779 of ESOP shares		-			78,833			-			178,016			-			-			256,849
RRP options exercised		20			7,120			-			-			-			-			7,140
Cash dividends paid, $0.16 per share		-			-			(523,426	)		-			-			-			(523,426	)
Repurchase 17,600 shares		(176	)		(253,756	)		-			-			-			-			(253,932	)
Balance, December 31, 2017	$	34,518		$	36,949,508		$	17,720,962		$	(1,754,632	)	$	-		$	152,579		$	53,102,935
Net income		-			-			1,994,306			-			-			-			1,994,306
Other comprehensive (loss)		-			-			-			-			-			(183,663	)		(183,663	)
Allocation 18,779 of ESOP shares		-			80,341			-			178,016			-			-			258,357
Compensation expense on MRP awards granted		-			-			-			-			28,888			-			28,888
Grant of 5,250 MRP shares		53			69,196			-			-			(69,249	)		-			-
RRP options exercised		204			118,862			-			-			-			-			119,066
Cash dividends paid, $0.265 per share		-			-			(856,036	)		-			-			-			(856,036	)
Repurchase 118,621 shares		(1,186	)		(1,638,301	)		-			-			-			-			(1,639,487	)
Balance, December 31, 2018	$	33,589		$	35,579,606		$	18,859,232		$	(1,576,616	)	$	(40,361	)	$	(31,084	)	$	52,824,366

F-2

~~See~~Ottawa ~~Accompanying~~Bancorp, ~~Notes~~Inc. to& Subsidiary Consolidated ~~Financial~~Balance ~~Statements.~~Sheets December 31, 2019 and 2018

F-6

	2019			2018
Assets
Cash and due from banks	$	5,272,925		$	2,416,568
Interest bearing deposits		765,486			6,013,890
Total cash and cash equivalents		6,038,411			8,430,458
Time deposits		1,483,500			250,000
Federal funds sold		4,185,000			5,663,000
Securities available for sale		24,515,759			25,533,767
Loans, net of allowance for loan losses of $2,937,632 and $2,627,738 at December 31, 2019 and 2018, respectively		247,775,814			235,926,419
Loans held for sale		1,225,526			-
Premises and equipment, net		6,517,922			6,621,080
Accrued interest receivable		875,104			824,542
Deferred tax assets		1,743,161			1,898,141
Cash surrender value of life insurance		2,389,530			2,341,453
Goodwill		649,869			649,869
Core deposit intangible		169,999			228,000
Other assets		2,962,101			4,469,350
Total assets	$	300,531,696		$	292,836,079
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	13,664,986		$	14,057,719
Interest bearing		222,648,518			209,390,810
Total deposits		236,313,504			223,448,529
Accrued interest payable		8,146			5,648
FHLB advances		9,068,030			12,087,152
Other liabilities		4,431,141			4,470,384
Total liabilities		249,820,821			240,011,713
Commitments and contingencies (Note 14)

Stockholders' equity
Common stock, $0.01 par value, 12,000,000 shares authorized; 3,159,494 and 3,358,922 shares issued at December 31, 2019 and 2018, respectively	$	31,594		$	33,589
Additional paid-in-capital		32,845,639			35,579,606
Retained earnings		18,938,633			18,859,232
Unallocated ESOP shares		(1,398,600	)		(1,576,616	)
Unearned management recognition plan shares		(30,944	)		(40,361	)
Accumulated other comprehensive income (loss)		324,553			(31,084	)

Total stockholders' equity		50,710,875			52,824,366
Total liabilities and stockholders' equity	$	300,531,696		$	292,836,079

~~Ottawa~~See ~~Bancorp,~~Accompanying ~~Inc.~~Notes &to ~~Subsidiary~~ Consolidated ~~Statements~~Financial ~~of Cash Flows Years Ended December 31, 2018 and 2017~~Statements.

	2018			2017
Cash Flows from Operating Activities
Net income	$	1,994,306		$	814,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		245,762			246,658
Provision for loan losses		527,500			575,000
Provision for deferred income taxes		45,576			681,827
Net amortization of premiums and discounts on securities		217,838			470,371
Loss (gain) on sale of securities, net		-			29,113
Origination of mortgage loans held for sale		(19,301,192	)		(21,980,249	)
Proceeds from sale of mortgage loans held for sale		20,385,496			22,482,700
Gain on sale of loans		(584,929	)		(696,754	)
Origination and purchase of mortgage servicing rights, net of amortization		(22,128	)		(71,978	)
Gain on sale of foreclosed real estate		(116,295	)		(44,773	)
Gain on sale of repossessed assets, net		(4,917	)		(14,686	)
Release of ESOP Shares		258,357			256,849
Compensation expense on MRP options granted		28,888			-
Amortization of core deposit intangible		58,000			73,000
Amortization (accretion) of fair value adjustments on acquired:
Loans		26,904			193,787
Certificates of deposit		-			(14,000	)
Federal Home Loan Bank Advances		5,014			6,945
Increase in cash surrender value of life insurance		(47,653	)		(48,222	)
Change in assets and liabilities:
Increase in accrued interest receivable		(30,093	)		(8,965	)
Increase in other assets		(262,729	)		(679,346	)
Increase in accrued interest payable and other liabilities		59,003			667,852
Net cash provided by operating activities		3,482,708			2,939,153
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(4,223,564	)		(1,308,450	)
Sales, calls, maturities and paydowns		4,260,744			19,423,687
(Purchase) sale of non-marketable equity securities		149,266			(165,066	)
Net increase in loans		(29,717,439	)		(47,572,782	)
Net (increase) decrease in federal funds sold		(4,724,000	)		751,000
Proceeds from sale of foreclosed real estate		247,408			292,106
Proceeds from sale of repossessed assets		121,973			73,786
Purchase of property and equipment		(196,754	)		(72,840	)
Net cash used in investing activities		(34,082,366	)		(28,578,559	)
Cash Flows from Financing Activities
Net increase in deposits		40,673,905			10,241,603
Proceeds from Federal Home Loan Bank advances		9,750,000			16,000,000
Principal reduction of Federal Home Loan Bank advances		(12,773,149	)		(2,022,811	)
Proceeds from stock options exercised		119,066			7,140
Shares repurchased and cancelled		(1,639,487	)		(253,932	)
Dividends paid		(856,036	)		(523,426	)
Net cash provided by financing activities		35,274,299			23,448,574
Net increase (decrease) in cash and cash equivalents		4,674,641			(2,190,832	)
Cash and cash equivalents:
Beginning of period		3,755,817			5,946,649
End of period	$	8,430,458		$	3,755,817

F-3

~~F-7~~Ottawa Bancorp, Inc. & Subsidiary Consolidated Statements of Operations Years Ended December 31, 2019 and 2018

Ottawa Bancorp, Inc. & Subsidiary Consolidated Statements of Cash Flows (continued) Years Ended December 31, 2018 and 2017

	2019		2018
Interest and dividend income:
Interest and fees on loans	$	11,540,665	$	10,229,270
Securities:
Residential mortgage-backed and related securities		295,450		281,418
State and municipal securities		399,547		408,467
Dividends on non-marketable equity securities		25,786		24,535
Interest-bearing deposits		255,664		155,322
Total interest and dividend income		12,517,112		11,099,012
Interest expense:

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