UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to_______

Commission File Number 000-51367

OTTAWA SAVINGS BANCORP, INC.

(Exact name of registrant as specified in its charter)

United States	20-3074627
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification Number)
organization)

925 LaSalle Street	61350
Ottawa, Illinois	(Zip Code)
(Address of principal executive offices)

(815) 433-2525

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐	Accelerated Filer ☐

Non-Accelerated Filer ☐ (Do not check if a smaller reporting company)	Smaller Reporting Company ☒

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

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


Class	Outstanding as of May 10, 2016
Common Stock, $0.01 par value		2,894,123

OTTAWA SAVINGS BANCORP, INC.

FORM 10-Q

For the quarterly period ended March 31, 2016

INDEX

		Page Number
PART I – FINANCIAL INFORMATION

Item 1	Financial Statements	3
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4	Controls and Procedures	32

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3	Defaults upon Senior Securities	33
Item 4	Mine Safety Disclosures	33
Item 5	Other Information	33
Item 6	Exhibits	33

SIGNATURES		34

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA SAVINGS BANCORP, INC.

Consolidated Balance Sheets

March 31, 2016 and December 31, 2015

(Unaudited)

	March 31, 2016			December 31, 2015
Assets
Cash and due from banks	$	2,524,974		$	2,096,966
Interest bearing deposits		1,635,668			5,038,753
Total cash and cash equivalents		4,160,642			7,135,719
Time deposits		250,000			250,000
Federal funds sold		949,000			1,604,000
Securities available for sale		48,444,907			46,984,907
Non-marketable equity securities		1,358,121			1,358,121
Loans, net of allowance for loan losses of $2,191,844 and $2,224,006 at March 31, 2016 and December 31, 2015, respectively		144,743,430			140,110,201
Loans held for sale		100,000			-
Premises and equipment, net		7,005,512			7,058,047
Accrued interest receivable		801,846			775,641
Foreclosed real estate		318,670			313,368
Deferred tax assets		2,552,190			2,725,354
Cash value of life insurance		2,207,596			2,195,424
Goodwill		649,869			649,869
Core deposit intangible		428,000			451,000
Other assets		2,595,360			1,951,700
Total assets	$	216,565,143		$	213,563,351
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	11,084,694		$	10,325,832
Interest bearing		169,090,829			166,409,076
Total deposits		180,175,523			176,734,908
Accrued interest payable		1,902			394
FHLB advances		1,138,422			2,139,117
Other liabilities		3,786,854			3,600,655
Total liabilities		185,102,701			182,475,074
Commitments and contingencies
Redeemable common stock held by ESOP plan		422,255			376,543
Stockholders' Equity
Common stock, $.01 par value, 12,000,000 shares authorized; 3,001,055 shares issued		30,010			30,010
Additional paid-in-capital		15,847,200			15,845,341
Retained earnings		16,453,280			16,194,374
Unallocated ESOP shares		(190,785	)		(203,504	)
Unearned management recognition plan shares		(2,649	)		(3,751	)
Accumulated other comprehensive income		537,504			437,925
		32,674,560			32,300,395
Less:
Treasury stock, at cost; 106,932 shares		(1,212,118	)		(1,212,118	)
Maximum cash obligation related to ESOP shares		(422,255	)		(376,543	)
Total stockholders' equity		31,040,187			30,711,734
Total liabilities and stockholders' equity	$	216,565,143		$	213,563,351

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Operations

Three Months Ended March 31, 2016 and 2015

(Unaudited)

	Three Months Ended
	March 31,
	2016		2015
Interest and dividend income:
Interest and fees on loans	$	1,723,298	$	1,752,996
Securities:
Residential mortgage-backed and related securities		152,077		157,273
State and municipal securities		134,980		142,027
Dividends on non-marketable equity securities		2,190		1,376
Interest-bearing deposits		7,344		5,352
Total interest and dividend income		2,019,889		2,059,024
Interest expense:
Deposits		202,470		224,255
Borrowings		4,620		15,868
Total interest expense		207,090		240,123
Net interest income		1,812,799		1,818,901
Provision for loan losses		120,000		165,000
Net interest income after provision for loan losses		1,692,799		1,653,901
Other income:
Gain on sale of securities		96		21,630
Gain on sale of loans		38,930		38,608
Gain on sale of OREO		65,197		5,491
Gain on sale of repossessed assets		632		-
Loan origination and servicing income		58,622		46,856
Origination of mortgage servicing rights, net of amortization		2,130		(970	)
Customer service fees		98,271		94,797
Income on bank owned life insurance		12,172		12,184
Other		24,819		27,389
Total other income		300,869		245,985
Other expenses:
Salaries and employee benefits		827,685		711,343
Directors fees		40,800		37,800
Occupancy		152,078		153,765
Deposit insurance premium		44,223		44,907
Legal and professional services		87,128		103,660
Data processing		135,022		374,928
Loss on sale of securities		-		2,039
Loan expense		58,542		60,268
Valuation adjustments and expenses on foreclosed real estate		36,513		20,098
Loss on sale of repossessed assets		-		9,883
Other		237,756		221,187
Total other expenses		1,619,747		1,739,878
Income before income tax expense		373,921		160,008
Income tax expense		115,015		16,344
Net income	$	258,906	$	143,664
Basic earnings per share	$	0.09	$	0.05
Diluted earnings per share	$	0.09	$	0.05

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Comprehensive Income

Three Ended March 31, 2016 and 2015

(Unaudited)

	Three Months Ended
	March 31,
	2016			2015
Net income	$	258,906		$	143,664
Other comprehensive income, before tax:
Securities available for sale:
Unrealized holding gains arising during the period		163,649			408,355
Reclassification adjustment for (gains) included in net income		(96	)		(19,591	)
Other comprehensive income, before tax		163,553			388,764
Income tax expense related to items of other comprehensive income		63,974			150,911
Other comprehensive income, net of tax		99,579			237,853
Comprehensive income	$	358,485		$	381,517

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited)

	2016			2015
Cash Flows from Operating Activities
Net income	$	258,906		$	143,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		58,535			56,426
Provision for loan losses		120,000			165,000
Provision for deferred income taxes		109,190			31,172
Net amortization of premiums and discounts on securities		163,362			171,845
Gain on sale of securities, net		(96	)		(19,591	)
Origination of mortgage loans held for sale		(1,473,405	)		(1,197,400	)
Proceeds from sale of mortgage loans held for sale		1,412,335			921,548
Gain on sale of loans, net		(38,930	)		(38,608	)
Origination and purchase of mortgage servicing rights, net of amortization		(2,130	)		970
Gain on sale of foreclosed real estate, net		(65,197	)		(5,491	)
Write down of foreclosed real estate		14,550			-
(Gain) loss on sale of repossessed assets, net		(632	)		9,883
ESOP compensation expense		13,121			13,287
MRP compensation expense		1,102			2,138
Compensation expense on RRP options granted		1,457			2,576
Amortization of core deposit intangible		23,000			29,000
Amortization (accretion) of fair value adjustments on acquired:
Loans		30,796			6,847
Certificates of deposit		(19,000	)		(31,000	)
Federal Home Loan Bank Advances		(695	)		-
Increase in cash surrender value of life insurance		(12,172	)		(12,184	)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable		(26,205	)		63,803
(Increase) decrease in other assets		(654,907	)		21,925
Increase (decrease) in accrued interest payable and other liabilities		240,143			(7,161	)
Net cash provided by operating activities		153,128			328,649
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(3,613,482	)		(3,241,338	)
Sales, calls, maturities and paydowns		2,153,769			7,274,293
Net decrease in time deposits		-			100,000
Net increase in loans		(4,896,715	)		(467,343	)
Net decrease in federal funds sold		655,000			(1,373,000	)
Proceeds from sale of foreclosed real estate		102,099			153,091
Proceeds from sale of repossessed assets		17,509			51,434
Purchase of premises and equipment		(6,000	)		(62,186	)
Net cash (used in) provided by investing activities		(5,587,820	)		2,434,951
Cash Flows from Financing Activities
Net increase in deposits		3,459,615			1,120,848
Principal reduction of Federal Home Loan Bank advances		(1,000,000	)		(2,792,728	)
Net cash provided by (used in) financing activities		2,459,615			(1,671,880	)
Net (decrease) increase in cash and cash equivalents		(2,975,077	)		1,091,720
Cash and cash equivalents:
Beginning of period		7,135,719			5,193,235
End of period	$	4,160,642		$	6,284,955

(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited)

	2016		2015
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	200,962	$	222,831
Interest paid on borrowings		4,620		15,868
Income taxes paid, net of refunds received		-		(13,800	)
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		109,190		426,207
Other assets acquired in settlement of loans		3,500		34,600
Increase in ESOP put option liability		45,712		82,275

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

NOTE 1 – NATURE OF BUSINESS

Ottawa Savings Bancorp, Inc. (the “Company”) is a savings and loan holding company incorporated under the laws of the United States on July 11, 2005, for the purpose of serving as the holding company of Ottawa Savings Bank (the “Bank”), as part of the Bank’s conversion from a mutual to a stock form of organization. The Company is a publicly traded banking company with assets of $216.6 million at March 31, 2016 and is headquartered in Ottawa, Illinois. The Bank’s business is to attract deposits from the general public and use those funds to originate and purchase one-to-four family, multi-family and non-residential real estate, construction, commercial and consumer loans, which the Bank primarily holds for investment. The Bank has continually diversified its products to meet the needs of the communities it serves.

In 2005, the Board of Directors of the Bank unanimously adopted a plan of conversion providing for the conversion of the Bank from an Illinois chartered mutual savings bank to a federally chartered stock savings bank and the purchase of all of the common stock of the Bank by the Company.

The conversion was completed in 2005 when the Company issued 1,223,701 shares of common stock to Ottawa Savings Bancorp MHC (a mutual holding company) and 1,001,210 shares of common stock to the public.

On December 31, 2014, the Company acquired Twin Oaks Savings Bank (“Twin Oaks”) and merged Twin Oaks with and into the Bank, with the Bank being the surviving entity in the merger (the “Merger”). As a result of the Merger, the Company increased its market share in the La Salle County market and expanded into Grundy County.

In connection with the Merger, the Company issued 776,144 shares of common stock to Ottawa Savings Bancorp, MHC. As of March 31, 2016, Ottawa Savings Bancorp MHC holds 1,999,845 shares of common stock, representing 69.1% of the Company’s common shares outstanding.

NOTE 2 – BASIS OF PRESENTATION

The consolidated financial statements presented in this quarterly report include the accounts of the Company and the Bank. The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and predominant practices followed by the financial services industry, and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, which the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows have been recorded. The interim financial statements should be read in conjunction with the audited financial statements and accompanying notes of the Company for the year ended December 31, 2015. Certain amounts in the accompanying financial statements and footnotes for 2015 have been reclassified with no effect on net income or stockholders’ equity to be consistent with the 2016 classifications. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

NOTE 3 – USE OF ESTIMATES

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

At March 31, 2016, there were no material changes in the Company’s significant accounting policies from those disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 30, 2016.

NOTE 4 – CRITICAL ACCOUNTING POLICIES

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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

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

A loan is considered impaired when, based on current information and events, it is probable that 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 for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

NOTE 5 – EARNINGS PER SHARE

Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period, including allocated and committed-to-be-released Employee Stock Ownership Plan (“ESOP”) shares and vested Management Recognition Plan (“MRP”) shares. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.

	Three Months Ended March 31,
	2016			2015
Net income available to common stockholders	$	258,906		$	143,664
Basic potential common shares:
Weighted average shares outstanding		2,894,123			2,894,123
Weighted average unallocated ESOP shares		(19,912	)		(25,000	)
Weighted average unvested MRP shares		(1,047	)		(2,795	)
Basic weighted average shares outstanding		2,873,164			2,866,328
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		919			2,338
Weighted average RRP options outstanding		7,752			7,660
Dilutive weighted average shares outstanding		2,881,835			2,876,326
Basic earnings per share	$	0.09		$	0.05
Diluted earnings per share	$	0.09		$	0.05

NOTE 6 – EMPLOYEE STOCK OWNERSHIP PLAN

On July 11, 2005, the Company adopted an ESOP for the benefit of substantially all employees. Upon adoption of the ESOP, the ESOP borrowed $763,140 from the Company and used those funds to acquire 76,314 shares of the Company's stock in the initial public offering at a price of $10.00 per share.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of approximately $77,000 are to be made by the ESOP.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

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

A terminated participant or the beneficiary of a deceased participant who received a distribution of employer stock from the ESOP has the right to require the Company to purchase such shares at their fair market value any time within 60 days of the distribution date. If this right is not exercised, an additional 60 day exercise period is available in the year following the year in which the distribution is made and begins after a new valuation of the stock has been determined and communicated to the participant or beneficiary. At March 31, 2016, 38,739 shares at a fair value of $10.90 have been classified as mezzanine capital.

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

	March 31,			December 31,
	2016			2015
Shares allocated		57,236			55,964
Shares withdrawn from the plan		(18,497	)		(18,497	)
Unallocated shares		19,078			20,350
Total ESOP shares		57,817			57,817
Fair value of unallocated shares	$	207,950		$	204,518

NOTE 7 – INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2016:
Available for Sale
State and municipal securities	$	18,582,161	$	574,479	$	1,487	$	19,155,153
Residential mortgage-backed securities		28,979,926		414,918		105,090		29,289,754
	$	47,562,087	$	989,397	$	106,577	$	48,444,907
December 31, 2015:
Available for Sale
State and municipal securities	$	18,733,573	$	525,089	$	21,454	$	19,237,208
Residential mortgage-backed securities		27,532,067		365,558		149,926		27,747,699
	$	46,265,640	$	890,647	$	171,380	$	46,984,907

The amortized cost and fair value at March 31, 2016, by contractual maturity, are shown below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without penalties. Therefore, stated maturities of residential mortgage-backed securities are not disclosed.

	Securities Available for Sale
	Amortized		Fair
	Cost		Value

Due in three months or less	$	-	$	-
Due after three months through one year		35,628		36,029
Due after one year through five years		2,086,238		2,148,217
Due after five years through ten years		7,200,706		7,425,262
Due after ten years		9,259,589		9,545,645
Residential mortgage-backed securities		28,979,926		29,289,754
	$	47,562,087	$	48,444,907

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at March 31, 2016 and December 31, 2015:

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
March 31, 2016
Securities Available for Sale
State and municipal securities	$	898,342	$	1,487	$	-	$	-	$	898,342	$	1,487
Residential mortgage-backed securities		6,637,334		64,876		3,288,403		40,214		9,925,737		105,090
	$	7,535,676	$	66,363	$	3,288,403	$	40,214	$	10,824,079	$	106,577

December 31, 2015
Securities Available for Sale
State and municipal securities	$	169,601	$	101	$	436,067	$	21,353	$	605,668	$	21,454
Residential mortgage-backed securities		10,468,746		120,218		1,247,527		29,708		11,716,273		149,926
	$	10,638,347	$	120,319	$	1,683,594	$	51,061	$	12,321,941	$	171,380

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

At March 31, 2016, 18 securities had unrealized losses with an aggregate depreciation of 0.98% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at March 31, 2016 due to the following:

●

Decline in value is attributable to interest rates.

●

The value did not decline due to credit quality.

●

The Company does not intend to sell these securities.

●

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

There were proceeds of $0.6 million from the sales of securities for the three months ended March 31, 2016 and proceeds of $5.6 million for the three months ended March 31, 2015. The sales during the three months ended March 31, 2016 resulted in gross realized gains of $96 and no realized losses. The sales during the three months ended March 31, 2015 resulted in gross realized gains of $21,630 and gross realized losses of $2,039, for net realized gains of $19,591. The tax provision applicable to the realized gains amounted to $38 and $7,605, respectively, for the three months ended March 31, 2016 and 2015.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	March 31,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	99,223,438		$	99,254,737
Multi-family residential loans		4,183,641			3,969,207
Total mortgage loans		103,407,079			103,223,944

Other loans:
Non-residential real estate loans		20,491,126			20,177,322
Commercial loans		11,573,233			12,069,815
Consumer direct		1,989,695			1,651,371
Purchased auto		9,474,141			5,211,755
Total other loans		43,528,195			39,110,263
Gross loans		146,935,274			142,334,207
Less: Allowance for loan losses		(2,191,844	)		(2,224,006	)
Loans, net	$	144,743,430		$	140,110,201

The following table reflects the carrying amount of loans acquired in the Twin Oaks merger, which are included in the loan categories above as of the dates indicated.

	March 31,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	20,308,604		$	20,752,355
Multi-family residential loans		277,231			294,020
Total mortgage loans		20,585,835			21,046,375

Other loans:
Non-residential real estate loans		2,652,108			2,685,987
Commercial loans		829,194			852,077
Consumer direct		415,551			541,174
Total other loans		3,896,853			4,079,238
Gross loans		24,482,688			25,125,613
Less: Allowance for loan losses		(100,000	)		(85,000	)
Loans, net	$	24,382,688		$	25,040,613

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

	Three Months Ended March 31,
	2016		2015
Purchased auto loans	$	5,007,392	$	-

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(Continuted)

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

	Three Months Ended March 31,
	2016			2015
One-to-four family	$	(151,015	)	$	48,566
Multi-family		3,972			(352	)
Non-residential		-			-
Commercial		-			-
Consumer direct		1,727			(23,488	)
Purchased auto		(6,846	)		(17,508	)
Net (charge-offs)/recoveries	$	(152,162	)	$	7,218

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015:

March 31, 2016	One-to-Four Family			Multi-family		Non-residential		Commercial			Consumer Direct		Purchased Auto			Total
Balance at beginning of period	$	1,727,582		$	142,237	$	198,340	$	51,306		$	37,187	$	67,354		$	2,224,006
Provision charged to income		26,052			15,940		7,910		(1,863	)		12,683		59,278			120,000
Loans charged off		(189,894	)		-		-		-			-		(8,680	)		(198,574	)
Recoveries of loans previously charged off		38,879			3,972		-		-			1,727		1,834			46,412
Balance at end of period	$	1,602,619		$	162,149	$	206,250	$	49,443		$	51,597	$	119,786		$	2,191,844

March 31, 2015	One-to-Four Family		Multi-family			Non-residential			Commercial		Consumer Direct			Purchased Auto			Total
Balance at beginning of period	$	1,812,448	$	121,918		$	245,098		$	35,947	$	10,804		$	88,392		$	2,314,607
Provision charged to income		95,169		9,714			(16,925	)		8,019		33,626			35,397			165,000
Loans charged off		-		(4,323	)		-			-		(25,025	)		(19,661	)		(49,009	)
Recoveries of loans previously charged off		48,566		3,971			-			-		1,537			2,153			56,227
Balance at end of period	$	1,956,183	$	131,280		$	228,173		$	43,966	$	20,942		$	106,281		$	2,486,825

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015:

March 31, 2016	One-to-four Family		Multi-family		Non-residential		Commercial		Consumer Direct		Purchased Auto		Total
Loans individually evaluated for impairment	$	2,367,914	$	-	$	2,027,946	$	-	$	-	$	-	$	4,395,860
Loans acquired with deteriorated credit quality		526,435		-		-		-		-		-		526,435
Loans collectively evaluated for impairment		96,329,089		4,183,641		18,463,180		11,573,233		1,989,695		9,474,141		142,012,979
Ending Balance	$	99,223,438	$	4,183,641	$	20,491,126	$	11,573,233	$	1,989,695	$	9,474,141	$	146,935,274

Period-end amount allocated to:
Loans individually evaluated for impairment	$	86,056	$	-	$	75,135	$	-	$	-	$	-	$	161,191
Loans acquired with deteriorated credit quality		32,685		-		-		-		-		-		32,685
Loans collectively evaluated for impairment		1,483,878		162,149		131,115		49,443		51,597		119,786		1,997,968
Balance at end of period	$	1,602,619	$	162,149	$	206,250	$	49,443	$	51,597	$	119,786	$	2,191,844

December 31, 2015	One-to-four Family		Multi-family		Non-residential		Commercial		Consumer Direct		Purchased Auto		Total
Loans individually evaluated for impairment	$	2,311,855	$	-	$	2,069,922	$	-	$	-	$	3,069	$	4,384,846
Loans acquired with deteriorated credit quality		575,605		-		-		-		-		-		575,605
Loans collectively evaluated for impairment		96,367,277		3,969,207		18,107,400		12,069,815		1,651,371		5,208,686		137,373,756
Ending Balance	$	99,254,737	$	3,969,207	$	20,177,322	$	12,069,815	$	1,651,371	$	5,211,755	$	142,334,207

Period-end amount allocated to:
Loans individually evaluated for impairment	$	295,770	$	-	$	75,086	$	-	$	-	$	-	$	370,856
Loans acquired with deteriorated credit quality		15,828		-		-		-		-		-		15,828
Loans collectively evaluated for impairment		1,415,984		142,237		123,254		51,306		37,187		67,354		1,837,322
Balance at end of period	$	1,727,582	$	142,237	$	198,340	$	51,306	$	37,187	$	67,354	$	2,224,006

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

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2016 and December 31, 2015:

March 31, 2016	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	3,034,280	$	1,691,312	$	1,203,037	$	2,894,349	$	118,741	$	3,019,955
Multi-family		-		-		-		-		-		-
Non-residential		2,027,946		363,985		1,663,961		2,027,946		75,135		1,950,103
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		2,046
	$	5,062,226	$	2,055,297	$	2,866,998	$	4,922,295	$	193,876	$	4,972,104

December 31, 2015	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	3,014,703	$	1,902,819	$	984,641	$	2,887,460	$	311,598	$	3,596,800
Multi-family		-		-		-		-		-		-
Non-residential		2,069,922		389,961		1,679,961		2,069,922		75,086		2,114,684
Commercial		-		-		-		-		-		21,789
Consumer direct		-		-		-		-		-		3,464
Purchased auto		3,069		3,069		-		3,069		-		6,574
	$	5,087,694	$	2,295,849	$	2,664,602	$	4,960,451	$	386,684	$	5,743,311

For the three months ended March 31, 2016 and 2015, the Company recognized no accrued or cash basis interest income on impaired loans.

At March 31, 2016, there were 33 impaired loans totaling approximately $4.9 million, compared to 34 impaired loans totaling approximately $5.0 million at December 31, 2015. The change in impaired loans was a result of writing down and moving two impaired loans totaling approximately $0.1 million to OREO, the pay-off, charge-off, or restructure of four impaired loans totaling approximately $0.1 million, upgrading and returning one loan of approximately $0.1 million to accrual status, and payments of approximately $0.1 million, offset by the addition of four loans totaling approximately $0.4 million to the impaired loan list.

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

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

Impaired loans at March 31, 2016 included $2.5 million of loans whose terms have been modified in troubled debt restructurings, compared to $2.6 million at December 31, 2015. The amount of TDR loans included in impaired loans decreased slightly as a result principal payments and as a result of moving one TDR of approximately $0.1 million to OREO, off-set by an increase due to the restructure of two impaired loans totaling approximately $0.1 million. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

Loans classified as TDRs during the three months ended March 31, 2016 and 2015, segregated by class, are shown in the tables below.

	Three Months Ended						Three Months Ended
	March 31, 2016						March 31, 2015

	Number of Modifications		Recorded Investment		Increase in Allowance		Number of Modifications		Recorded Investment		Increase in Allowance
	(as of period end)						(as of period end)
One-to-four family		2	$	82,400	$	-		-	$	-	$	-
Multi-family		-		-		-		-		-		-
Non-residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		-
		2	$	82,400	$	-		-	$	-	$	-

There were no TDR loans that were restructured during the twelve months prior to March 31, 2016 and 2015 that had payment defaults (i.e., 60 days or more past due following a modification), during the three months ended March 31, 2016 and 2015.

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

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as March 31, 2016 and December 31, 2015:

March 31, 2016	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,987,761	$	-
Multi-family		-		-
Non-residential		2,027,946		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		-		-
	$	5,015,707	$	-

December 31, 2015	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,982,386	$	-
Multi-family		-		-
Non-residential		2,069,922		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		3,069		-
	$	5,055,377	$	-

The following table presents the aging of the recorded investment in loans, by class of loans, as of March 31, 2016 and December 31, 2015:

March 31, 2016	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	908,111	$	1,084,774	$	513,714	$	2,506,599	$	96,716,839	$	99,223,438
Multi-family		-		-		-		-		4,183,641		4,183,641
Non-residential		267,271		-		-		267,271		20,223,855		20,491,126
Commercial		-		-		-		-		11,573,233		11,573,233
Consumer direct		10,838		-		-		10,838		1,978,857		1,989,695
Purchased auto		-		-		-		-		9,474,141		9,474,141
	$	1,186,220	$	1,084,774	$	513,714	$	2,784,708	$	144,150,566	$	146,935,274

December 31, 2015	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	1,251,155	$	753,597	$	737,042	$	2,741,794	$	96,512,943	$	99,254,737
Multi-family		31,274		-		-		31,274		3,937,933		3,969,207
Non-residential		847,216		112,739		18,127		978,082		19,199,240		20,177,322
Commercial		9,086		-		-		9,086		12,060,729		12,069,815
Consumer direct		4,814		-		-		4,814		1,646,557		1,651,371
Purchased auto		2,391		-		3,069		5,460		5,206,295		5,211,755
	$	2,145,936	$	866,336	$	758,238	$	3,770,510	$	138,563,697	$	142,334,207

Credit Quality Indicators:

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

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

The Company uses the following definitions for risk ratings:

●

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

●

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

●

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

●

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

●

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

As of March 31, 2016 and December 31, 2015, the risk category of loans by class is as follows:

March 31, 2016	Pass		Special Mention		Substandard		Doubtful		Not Rated
One-to-four family	$	-	$	1,116,880	$	2,894,349	$	-	$	95,212,209
Multi-family		-		-		-		-		4,183,641
Non-residential		18,440,434		22,746		2,027,946		-		-
Commercial		11,573,233		-		-		-		-
Consumer direct		-		-		-		-		1,989,695
Purchased auto		-		-		-		-		9,474,141
Total	$	30,013,667	$	1,139,626	$	4,922,295	$	-	$	110,859,686

December 31, 2015	Pass		Special Mention		Substandard		Doubtful		Not Rated
One-to-four family	$	-	$	692,601	$	2,887,460	$	-	$	95,674,676
Multi-family		-		-		-		-		3,969,207
Non-residential		18,083,194		24,206		2,069,922		-		-
Commercial		12,069,815		-		-		-		-
Consumer direct		-		-		-		-		1,651,371
Purchased auto		-		-		3,069		-		5,208,686
Total	$	30,153,009	$	716,807	$	4,960,451	$	-	$	106,503,940

At March 31, 2016, the Company held approximately $319,000 of foreclosed residential real estate property, compared to approximately $313,000 at December 31, 2015. In addition, the Company also held approximately $290,000 and $234,000, in consumer mortgage loans collateralized by residential real estate properties that were in the process of foreclosure at March 31, 2016 and December 31, 2015, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was approximately $3,000 and $5,000 for the three month periods ended March 31, 2016 and 2015, respectively. In accordance with FASB ASC 718, Compensation-Stock Compensation, compensation expense is recognized on a straight-line basis over the grantees’ vesting period or to the grantees’ retirement eligibility date, if earlier. During the three months ended March 31, 2016 and 2015, the Company did not grant additional options or shares under the Management Recognition Plan (MRP).

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company on January 1, 2018. The Company does not believe the adoption of the new financial instruments standard will have a material impact on its consolidated financial statements.

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 is currently evaluating the effect that this standard will have on its consolidated financial statements.

NOTE 11 – FAIR VALUE MEASUREMENT AND DISCLOSURE

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

Basis of Fair Value Measurement:

•

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

•

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

•

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

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

Securities Available for Sale

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

Foreclosed Assets

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

Impaired Loans

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

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2016 and the year ended December 31, 2015. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfers between levels.

The tables below present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015.

							Total
March 31, 2016	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	19,155,153	$	-	$	19,155,153
Residential mortgage-backed securities available for sale		-		29,289,754		-		29,289,754
	$	-	$	48,444,907	$	-	$	48,444,907

December 31, 2015	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	19,237,208	$	-	$	19,237,208
Residential mortgage-backed securities available for sale		-		27,747,699		-		27,747,699
	$	-	$	46,984,907	$	-	$	46,984,907

The tables below present the recorded amount of assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015.

							Total
March 31, 2016	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	322,170	$	322,170
Impaired loans, net		-		-		2,673,122		2,673,122

							Total
December 31, 2015	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	330,245	$	330,245
Impaired loans, net		-		-		2,277,918		2,277,918

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of March 31, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at
	Carrying		March 31, 2016 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	4,160,642	$	4,160,642	$	-	$	-	$	4,160,642
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		949,000		949,000		-		-		949,000
Securities		49,803,028		-		48,444,907		1,358,121		49,803,028
Accrued interest receivable		801,846		801,846		-		-		801,846
Net loans		144,743,430		-		-		146,509,000		146,509,000
Loans held for sale		100,000		100,000		-		-		100,000
Mortgage servicing rights		288,057		-		-		288,057		288,057
Financial Liabilities:
Non-interest bearing deposits		11,084,694		11,084,694		-		-		11,084,694
Interest bearing deposits		169,090,829		-		-		164,206,306		164,206,306
Accrued interest payable		1,902		1,902		-		-		1,902
FHLB advances		1,138,422		-		1,138,422		-		1,138,422

		Carrying		December 31, 2015 using:
		Amount		Level 1		Level 2		Level 3		Total

Financial Assets:
Cash and cash equivalents	$	7,135,719	$	7,135,719	$	-	$	-	$	7,135,719
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		1,604,000		1,604,000		-		-		1,604,000
Securities		48,343,028		-		46,984,907		1,358,121		48,343,028
Accrued interest receivable		775,641		775,641		-		-		775,641
Net loans		140,110,201		-		-		141,665,000		141,665,000
Loans held for sale		-		-		-		-		-
Mortgage servicing rights		285,927		-		-		285,927		285,927
Financial Liabilities:
Non-interest bearing deposits		10,325,832		10,325,832		-		-		10,325,832
Interest bearing deposits		166,409,076		-		-		161,173,168		161,173,168
Accrued interest payable		394		394		-		-		394
FHLB advances		2,139,117		-		2,139,117		-		5,483,036

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

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

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

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

Securities: The Company obtains fair value measurements of available for sale securities from an independent pricing service. See Note 11 - Fair Value Measurement and Disclosure for further detail on how fair values of securities available for sale are determined. The carrying value of non-marketable equity securities approximates fair value.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using underlying collateral values, where applicable or discounted cash flows.

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

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

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

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

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

Loan commitments: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The Bank does not charge fees to enter into these agreements. As of March 31, 2016 and December 31, 2015, the fair values of the commitments are immaterial in nature.

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

NOTE 12 – ACQUISITION

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

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

Total merger related costs included in other noninterest expenses in the consolidated statement of operations for the three months ended March 31, 2015 were approximately $243,000. The merger related costs are primarily related to the merger of the core processing systems.

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

Total loans acquired in the merger were recorded at a fair value of $29,795,910 and had a contractual amount due of $31,831,910 as of the acquisition date, which was December 31, 2014. FASB ASC 310-20, Nonrefundable Fees and Other Costs, specifies the approach that needs to be used when the Bank expects to receive all of the contractual principal and interest payments due under an individual loan. Loans not considered to have deteriorated credit quality at the merger date had a contractual balance due of approximately $28,638,000 and an estimated fair value of approximately $28,472,000. The loan discount recorded at the date of the merger consisted of an accretable yield component of approximately $407,000 and an accretable credit component of approximately $(573,000), for a net fair value adjustment of approximately $(166,000).

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

The following table reflects activity for the loans acquired with deteriorated credit quality for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
	2016			2015
Balance, beginning of year	$	575,605		$	1,323,648
Payment activity		(31,852	)		(38,582	)
Charge-offs		-			(15,959	)
Recoveries		-			-
Transfer to OREO		(44,417	)		-
Accretion to income		27,099			4,344
	$	526,435		$	1,273,451

The contractual amount outstanding for the loans acquired with deteriorated credit quality totaled $1,167,000 and $1,208,000 as of March 31, 2016 and December 31, 2015, respectively.

The following table reflects activity in the accretable yield for the loans acquired with deteriorated credit quality for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
	2016			2015
Balance, beginning of year	$	175,342		$	362,000
Net reclassification from non-accretable yield		8,868			-
Accretion into interest income		(27,099	)		(4,344	)
Disposals		-			-
	$	157,111		$	357,656

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

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

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to March 31, 2016 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, our ability to realize estimated benefits (including, but not limited to, cost savings, synergies and growth) from acquired or merged entities, our ability to successfully integrate acquired or merged entities with us (including Twin Oaks), 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. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on form 10-K as filed with the Securities and Exchange Commission on March 30, 2016.

GENERAL

The Bank is a community and customer-oriented savings bank. The Bank's business has historically consisted of attracting deposits from the general public and using those funds to originate and purchase one-to-four family, multi-family and non-residential real estate, construction, commercial and consumer loans, which the Bank primarily holds for investment. The Bank has continually diversified its products to meet the needs of the community. The Bank completed its reorganization pursuant to its Plan of Conversion on July 11, 2005, upon which the Bank converted from an Illinois-chartered mutual savings bank to a federally-chartered mutual savings bank, and on that same date, converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, all of the outstanding stock of which was issued to the Company. As part of the reorganization, the Company issued 1,001,210 shares to the public and 1,223,701 shares to Ottawa Savings Bancorp MHC, a mutual holding company.

On December 31, 2014, the Company acquired Twin Oaks and merged Twin Oaks with and into the Bank, with the Bank being the surviving entity in the Merger. As a result of the Merger, the Company increased its market share in the La Salle County market and expanded into Grundy County. In connection with the Merger, the Company issued 776,144 shares of common stock to Ottawa Savings Bancorp, MHC. As of December 31, 2014, Ottawa Savings Bancorp MHC holds 1,999,845 shares of common stock, representing 69.1% of the Company’s common shares outstanding.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2016 AND DECEMBER 31, 2015

The Company's total assets increased $3.0 million, or 1.4%, to $216.6 million at March 31, 2016, from $213.6 million at December 31, 2015. The increase in assets was primarily due to an increase in loans of $4.6 million, an increase in securities available for sale of $1.5 million, and an increase in other assets of $0.6 million, partially offset by a decrease in cash and cash equivalents of $3.0 million, and a decrease in federal funds sold of $0.7 million.

Cash and cash equivalents decreased $3.0 million, or 41.7%, to $4.2 million at March 31, 2016 from $7.1 million at December 31, 2015, primarily as a result of cash used in investing activities of $5.6 million exceeding cash provided by operating activities of $0.2 million and cash provided by financing activities of $2.5 million. The cash used in investing activities includes the purchase of approximately $5.0 million in auto loans, and the net cash provided by financing activities included a principal reduction in Federal Home Loan Bank advances of $1.0 million, off-set by increases in deposit accounts of $3.5 million.

Federal funds sold decreased $0.7 million, or 40.8%, to $0.9 million at March 31, 2016 from $1.6 million at December 31, 2015, primarily as a result of cash used in investing activities.

Securities available for sale increased $1.5 million, or 3.1%, to $48.4 million at March 31, 2016 from $47.0 million at December 31, 2015. The increase was primarily due to $3.6 million in purchases, offset by sales and maturities of $0.6 million and pay-downs of $1.6 million.

Loans, net of the allowance for loan losses, increased $4.6 million, or 3.3%, to $144.7 million at March 31, 2016 from $140.1 million at December 31, 2015. The increase in loans, net of the allowance for loan losses, was primarily due to an increase in consumer direct and purchased auto loans of $4.6 million, an increase in non-residential real estate loans of $0.3 million, and an increase in multi-family loans of $0.2 million. The increases were partially offset by a decrease in commercial loans of $0.5 million. Additionally, there were normal pay-downs and principal reductions. The Company is focusing its lending efforts on customers based primarily in its local market.

Foreclosed real estate remained consistent at $0.3 million at March 31, 2016 and December 31, 2015. Changes during the three months ended March 31, 2016 included an increase as a result of two properties valued at approximately $0.1 million acquired through loan foreclosures, offset by a decrease due to the sale of three properties with proceeds of approximately $0.1 million.

Total deposits increased $3.4 million, or 2.0%, to $180.2 million at March 31, 2016, from $176.7 million at December 31, 2015. The increase is primarily due to an increase in checking balances of $1.8 million, or 5.6%, an increase in savings account balances of $1.8 million, or 7.8%, and an increase in money market balances of $1.3 million, or 4.5%, partially offset by a decrease in certificates of deposit of $1.5 million, or 1.5% from December 31, 2015 to March 31, 2016.

FHLB advances decreased $1.0 million, or 46.8%, to $1.1 million at March 31, 2016, from $2.1 million at December 31, 2015. The Company made principal payments of $1.0 million and took no new advances during the three months ended March 31, 2016.

Stockholders’ equity increased $0.3 million, or 1.1% to $31.0 million at March 31, 2016, from $30.7 million at December 31, 2015. The increase in equity is primarily a result of net income for the three months ended March 31, 2016 of approximately $0.25 million and an increase other comprehensive income and other changes totaling approximately $0.05 million.

Economic uncertainty continues to affect our asset quality. The market values of homes in our market area generally continue to improve from recessionary valuation levels. While local economic conditions are improving, they continue to lag national indicators. Higher unemployment locally continues to affect some of our borrowers’ ability to timely repay their obligations to the Company. These conditions have collectively resulted in nonperforming loans totaling 3.41% of total gross loans receivable as of March 31, 2016, down from 3.55% at December 31, 2015.

The Company’s nonperforming assets consist of non-accrual loans, foreclosed real estate and other repossessed assets. Loans are generally placed on non-accrual status when it is apparent all of the contractual payments (i.e. principal and interest) will not be received; however, they may be placed on non-accrual status sooner if management has significant doubt as to the collection of all amounts due. Interest previously accrued but uncollected is reversed and charged against interest income. During the first three months of 2016, non-performing assets decreased 0.8% to $5.3 million from $5.4 million as of December 31, 2015. The decrease in non-performing assets was primarily due to the decrease in non-accrual loans as a result of writing down and moving two impaired loans totaling approximately $0.1 million to OREO, the pay-off, charge-off, or restructure of four impaired loans totaling approximately $0.1 million, upgrading and returning one loan of approximately $0.1 million to accrual status, and payments of approximately $0.1 million, offset by the addition of four loans totaling approximately $0.4 million to the impaired loan list.

The following table summarizes nonperforming assets for the prior five quarters.

	March 31,		December,		September 30,		June 30,		March 31,
	2016		2015		2015		2015		2015
	(In Thousands)
Non-accrual:
One-to-four family	$	2,988	$	2,982	$	3,113	$	4,082	$	3,880
Multi-family		-		-		-		-		136
Non-residential real estate		2,028		2,070		2,112		2,106		1,907
Commercial		-		-		-		90		-
Consumer direct		-		-		10		10		-
Purchased auto		-		3		-		-		-
Total non-accrual loans		5,016		5,055		5,235		6,288		5,923
Past due greater than 90 days and still accruing:
One-to-four family		-		-		-		-		-
Non-residential real estate		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer direct		-		-		-		-		-
Total nonperforming loans		5,016		5,055		5,235		6,288		5,923
Foreclosed real estate		319		313		146		377		511
Other repossessed assets		3		17		29		27		36
Total nonperforming assets	$	5,338	$	5,385	$	5,410	$	6,692	$	6,470

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

	March 31,			December,			September 30,			June 30,			March 31,
	2016			2015			2015			2015			2015
Allowance for loan losses as a percent of gross loans receivable		1.49	%		1.56	%		1.64	%		1.79	%		1.71	%
Allowance for loan losses as a percent of total nonperforming loans		43.70	%		44.00	%		44.41	%		40.21	%		41.99	%
Nonperforming loans as a percent of gross loans receivable		3.41	%		3.55	%		3.68	%		4.45	%		4.08	%
Nonperforming loans as a percent of total assets		2.32	%		2.37	%		2.40	%		2.90	%		2.69	%
Nonperforming assets as a percent of total assets		2.46	%		2.52	%		2.48	%		3.09	%		2.94	%

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

General. Net income for the three months ended March 31, 2016 was $0.3 million compared to net income of $0.1 million for the three months ended March 31, 2015. Net income during the first quarter of 2016 was higher than the first quarter of 2015, primarily due to a decrease in provision expense, a decrease in other expenses, and increases in other income. The increases were partially offset by a decrease in net interest income and an increase in income tax expense.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2016 and 2015.

	Three Months Ended
	March 31,
	2016		2015		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	1,723	$	1,753	$	(30	)		(1.71	)%
Securities:
Residential mortgage-backed securities		152		157		(5	)		(3.18	)
State and municipal securities		135		142		(7	)		(4.93	)
Dividends on non-marketable equity securities		2		1		1			100.00
Interest-bearing deposits		7		5		2			40.00
Total interest and dividend income		2,019		2,058		(39	)		(1.90	)
Interest expense:
Deposits		202		224		(22	)		(9.82	)
Borrowings		5		16		(11	)		(68.75	)
Total interest expense		207		240		(33	)		(13.75	)
Net interest income	$	1,812	$	1,818	$	(6	)		(0.33	)%

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

Three Months Ended March 31,

2016

2015

Ottawa Savings Bancorp, Inc. 10-Q