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 June 30, 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

(State or other jurisdiction of incorporation or organization)

20-3074627

(I.R.S. Employer Identification Number)

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

(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 August 12, 2016
Common Stock, $0.01 par value	2,894,123

OTTAWA SAVINGS BANCORP, INC.

FORM 10-Q

For the quarterly period ended June 30, 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	25
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4	Controls and Procedures	37


PART II – OTHER INFORMATION

	Item 1	Legal Proceedings	37
	Item 1A	Risk Factors	37
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 3	Defaults upon Senior Securities	38
	Item 4	Mine Safety Disclosures	38
	Item 5	Other Information	38
	Item 6	Exhibits	38

SIGNATURES			39

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA SAVINGS BANCORP, INC.

Consolidated Balance Sheets

June 30, 2016 and December 31, 2015

(Unaudited)

	June 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	2,072,912		$	2,096,966
Interest bearing deposits		493,320			5,038,753
Total cash and cash equivalents		2,566,232			7,135,719
Time deposits		250,000			250,000
Federal funds sold		-			1,604,000
Securities available for sale		45,821,865			46,984,907
Non-marketable equity securities		753,321			1,358,121

Loans, net of allowance for loan losses of $2,288,041 and $2,224,006 at June 30, 2016 and December 31, 2015, respectively		150,115,863			140,110,201
Loans held for sale		506,544			-
Premises and equipment, net		6,945,765			7,058,047
Accrued interest receivable		841,408			775,641
Foreclosed real estate		314,753			313,368
Deferred tax assets		2,273,942			2,725,354
Cash value of life insurance		2,220,150			2,195,424
Goodwill		649,869			649,869
Core deposit intangible		405,000			451,000
Other assets		3,058,668			1,951,700
Total assets	$	216,723,380		$	213,563,351
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest bearing	$	9,860,488		$	10,325,832
Interest bearing		166,243,344			166,409,076
Total deposits		176,103,832			176,734,908
FHLB advances		1,128,961			2,139,117
Federal funds purchased		3,705,000			-
Accrued interest payable		1,371			394
Other liabilities		3,758,570			3,600,655
Total liabilities		184,697,734			182,475,074
Commitments and contingencies
Redeemable common stock held by ESOP plan		477,731			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		15,850,603			15,845,341
Retained earnings		16,826,596			16,194,374
Unallocated ESOP shares		(178,066	)		(203,504	)
Unearned management recognition plan shares		(1,548	)		(3,751	)
Accumulated other comprehensive income		710,169			437,925
		33,237,764			32,300,395
Less:
Treasury stock, at cost; 106,932 shares		(1,212,118	)		(1,212,118	)
Maximum cash obligation related to ESOP shares		(477,731	)		(376,543	)
Total stockholders' equity		31,547,915			30,711,734
Total liabilities and stockholders' equity	$	216,723,380		$	213,563,351

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2016 and 2015

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016		2015			2016		2015
Interest and dividend income:
Interest and fees on loans	$	1,851,755	$	1,715,125		$	3,575,053	$	3,468,121
Securities:
Residential mortgage-backed and related securities		148,467		156,707			300,544		313,980
State and municipal securities		135,724		140,876			270,704		282,903
Dividends on non-marketable equity securities		1,970		1,902			4,160		3,278
Interest-bearing deposits		3,054		2,518			10,398		7,870
Total interest and dividend income		2,140,970		2,017,128			4,160,859		4,076,152
Interest expense:
Deposits		203,220		218,911			405,690		443,166
Borrowings		7,120		15,664			11,740		31,532
Total interest expense		210,340		234,575			417,430		474,698
Net interest income		1,930,630		1,782,553			3,743,429		3,601,454
Provision for loan losses		157,500		55,000			277,500		220,000
Net interest income after provision for loan losses		1,773,130		1,727,553			3,465,929		3,381,454
Other income:
Gain on sale of securities		8,322		-			8,418		21,630
Gain on sale of loans		148,740		51,801			187,670		90,409
Gain on sale of OREO		46,251		41,442			111,448		46,933
Gain on sale of repossessed assets		1,048		2,335			1,680		2,335
Loan origination and servicing income		77,912		97,422			136,534		144,279
Origination of mortgage servicing rights, net of amortization		25,424		10,836			27,554		10,836
Customer service fees		101,656		110,761			199,927		205,558
Income on bank owned life insurance		12,554		12,072			24,726		24,256
Other		23,798		26,353			48,617		52,772
Total other income		445,705		353,022			746,574		599,008
Other expenses:
Salaries and employee benefits		837,233		700,212			1,664,918		1,411,555
Directors fees		40,800		37,800			81,600		75,600
Occupancy		154,112		176,846			306,190		330,611
Deposit insurance premium		45,769		44,198			89,992		89,105
Legal and professional services		87,817		81,743			174,945		185,403
Data processing		120,711		797,238			255,733		1,172,166
Loss on sale of securities		3,261		-			3,261		2,039
Loan expense		101,279		95,417			159,821		155,686
Valuation adjustments and expenses on foreclosed real estate		32,423		89,805			68,936		109,903
Loss on sale of repossessed assets		-		2,088			-		11,971
Other		240,317		254,118			478,073		475,305
Total other expenses		1,663,722		2,279,465			3,283,469		4,019,344
Income (loss) before income tax expense		555,113		(198,890	)		929,034		(38,882	)
Income tax expense (benefit)		181,797		(121,913	)		296,812		(105,569	)
Net income (loss)	$	373,316	$	(76,977	)	$	632,222	$	66,687
Basic earnings (loss) per share	$	0.13	$	(0.03	)	$	0.22	$	0.02
Diluted earnings (loss) per share	$	0.13	$	(0.03	)	$	0.22	$	0.02

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2016 and 2015

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Net income (loss)	$	373,316		$	(76,977	)	$	632,222		$	66,687
Other comprehensive income (loss), before tax:
Securities available for sale:
Unrealized holding gains (losses) arising during the period		288,653			(409,900	)		452,302			(1,545	)
Reclassification adjustment for (gains) included in net income		(5,061	)		-			(5,157	)		(19,591	)
Other comprehensive income (loss), before tax		283,592			(409,900	)		447,145			(21,136	)
Income tax expense (benefit) related to items of other comprehensive income (loss)		110,927			(159,115	)		174,901			(8,204	)
Other comprehensive income (loss), net of tax		172,665			(250,785	)		272,244			(12,932	)
Comprehensive income (loss)	$	545,981		$	(327,762	)	$	904,466		$	53,755

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015

(Unaudited)

	2016			2015
Cash Flows from Operating Activities
Net income	$	632,222		$	66,687
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		118,282			109,528
Provision for loan losses		277,500			220,000
Provision for deferred income taxes		276,511			(143,322	)
Net amortization of premiums and discounts on securities		326,814			352,766
Gain on sale of securities, net		(5,157	)		(19,591	)
Origination of mortgage loans held for sale		(7,405,366	)		(3,375,900	)
Proceeds from sale of mortgage loans held for sale		7,086,492			3,466,309
Gain on sale of loans, net		(187,670	)		(90,409	)
Origination and purchase of mortgage servicing rights, net of amortization		(27,554	)		(10,836	)
Gain on sale of foreclosed real estate, net		(111,448	)		(46,933	)
Write down of foreclosed real estate		28,551			65,490
(Gain) loss on sale of repossessed assets, net		(1,680	)		9,636
ESOP compensation expense		27,786			28,418
MRP compensation expense		2,203			4,276
Compensation expense on RRP options granted		2,914			5,151
Amortization of core deposit intangible		46,000			58,000
Amortization (accretion) of fair value adjustments on acquired:
Loans		61,595			37,148
Certificates of deposit		(37,000	)		(58,000	)
Federal Home Loan Bank Advances		1,041			-
Increase in cash surrender value of life insurance		(24,726	)		(24,256	)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable		(65,767	)		11,650
(Increase) decrease in other assets		(1,024,355	)		370,911
Increase (decrease) in accrued interest payable and other liabilities		158,892			(391,088	)
Net cash provided by operating activities		156,080			645,635
Cash Flows from Investing Activities
Securities available for sale:
Purchases		(3,613,482	)		(7,372,128	)
Sales, calls, maturities and paydowns		4,902,012			9,313,402
Sale of non-marketable equity securities		604,800			422,553
Net decrease in time deposits		-			205,861
Net (increase) decrease in loans		(10,602,947	)		3,836,474
Net decrease (increase) in federal funds sold		1,604,000			(3,076,000	)
Proceeds from sale of foreclosed real estate		264,266			427,858
Proceeds from sale of repossessed assets		22,057			66,364
Purchase of premises and equipment		(6,000	)		(63,713	)
Net cash (used in) provided by investing activities		(6,825,294	)		3,760,671
Cash Flows from Financing Activities
Net decrease in deposits		(594,076	)		(1,840,162	)
Principal reduction of Federal Home Loan Bank advances		(1,011,197	)		(2,811,033	)
Proceeds from federal funds purchased		3,705,000			-
Net cash provided by (used in) financing activities		2,099,727			(4,651,195	)
Net (decrease) in cash and cash equivalents		(4,569,487	)		(244,889	)
Cash and cash equivalents:
Beginning of period		7,135,719			5,193,235
End of period	$	2,566,232		$	4,948,346
(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015

(Unaudited)

	2016		2015
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	404,713	$	441,791
Interest paid on borrowings		11,740		31,532
Income taxes paid, net of refunds received		-		(48,000	)
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		235,190		591,241
Other assets acquired in settlement of loans		23,000		42,300
Increase in ESOP put option liability		101,188		108,271

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 $216.7 million at June 30, 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 June 30, 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 June 30, 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

(continued)

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 June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net income (loss) available to common stockholders	$	373,316		$	(76,977	)	$	632,222		$	66,687
Basic potential common shares:
Weighted average shares outstanding		2,894,123			2,894,123			2,894,123			2,894,123
Weighted average unallocated ESOP shares		(18,645	)		(23,728	)		(19,276	)		(24,360	)
Weighted average unvested MRP shares		(1,047	)		(2,795	)		(1,047	)		(2,795	)
Basic weighted average shares outstanding		2,874,431			2,867,600			2,873,800			2,866,968
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		905			-			917			2,335
Weighted average RRP options outstanding *		14,616			-			11,346			11,920
Dilutive weighted average shares outstanding		2,889,952			2,867,600			2,886,063			2,881,223
Basic earnings (loss) per share	$	0.13		$	(0.03	)	$	0.22		$	0.02
Diluted earnings (loss) per share	$	0.13		$	(0.03	)	$	0.22		$	0.02

* For the three months ended June 30, 2015, the effect of share options was not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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.

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 June 30, 2016, 40,011 shares at a fair value of $11.94 have been classified as mezzanine capital.

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

	June 30,			December 31,
	2016			2015
Shares allocated		58,507			55,964
Shares withdrawn from the plan		(18,497	)		(18,497	)
Unallocated shares		17,807			20,350
Total ESOP shares		57,817			57,817
Fair value of unallocated shares	$	212,616		$	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
June 30, 2016:
Available for Sale
State and municipal securities	$	18,136,098	$	781,623	$	-	$	18,917,721
Residential mortgage-backed securities		26,519,355		464,830		80,041		26,904,144
	$	44,655,453	$	1,246,453	$	80,041	$	45,821,865
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 June 30, 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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	Securities Available for Sale
	Amortized		Fair
	Cost		Value

Due in three months or less	$	-	$	-
Due after three months through one year		337,452		341,058
Due after one year through five years		3,352,315		3,477,431
Due after five years through ten years		5,512,154		5,754,491
Due after ten years		8,934,177		9,344,741
Residential mortgage-backed securities		26,519,355		26,904,144
	$	44,655,453	$	45,821,865

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at June 30, 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
June 30, 2016
Securities Available for Sale
State and municipal securities	$	-	$	-	$	-	$	-	$	-	$	-
Residential mortgage-backed securities		3,095,643		28,485		5,341,779		51,556		8,437,422		80,041
	$	3,095,643	$	28,485	$	5,341,779	$	51,556	$	8,437,422	$	80,041

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 June 30, 2016, 14 securities had unrealized losses with an aggregate depreciation of 0.94% from the Company’s amortized cost basis. The Company does not consider these investments to be other than temporarily impaired at June 30, 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 $1.1 million from the sales of securities for the three months ended June 30, 2016 and no sales of securities for the three months ended June 30, 2015. The sales during the three months ended June 30, 2016 resulted in gross realized gains of $8,322 and gross realized losses of $3,261, for net realized gains of $5,061. The tax provision applicable to the realized gains amounted to $1,965 and none, respectively, for the three months ended June 30, 2016 and 2015.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

There were proceeds of $1.7 million from the sales of securities for the six months ended June 30, 2016 and proceeds of $5.6 million for the six months ended June 30, 2015. The sales during the six months ended June 30, 2016 resulted in gross realized gains of $8,418 and gross realized losses of $3,261, for net realized gains of $5,157. The sales during the six months ended June 30, 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 $2,002 and $7,605, respectively, for the six months ended June 30, 2016 and 2015.

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

	June 30,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	101,234,009		$	99,254,737
Multi-family residential loans		4,238,801			3,969,207
Total mortgage loans		105,472,810			103,223,944

Other loans:
Non-residential real estate loans		21,410,232			20,177,322
Commercial loans		11,296,176			12,069,815
Consumer direct		2,352,054			1,651,371
Purchased auto		11,872,632			5,211,755
Total other loans		46,931,094			39,110,263
Gross loans		152,403,904			142,334,207
Less: Allowance for loan losses		(2,288,041	)		(2,224,006	)
Loans, net	$	150,115,863		$	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.

	June 30,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	19,534,847		$	20,752,355
Multi-family residential loans		275,635			294,020
Total mortgage loans		19,810,482			21,046,375

Other loans:
Non-residential real estate loans		2,621,673			2,685,987
Commercial loans		819,509			852,077
Consumer direct		334,859			541,174
Total other loans		3,776,041			4,079,238
Gross loans		23,586,523			25,125,613
Less: Allowance for loan losses		(100,000	)		(85,000	)
Loans, net	$	23,486,523		$	25,040,613

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Purchased auto loans	$	3,333,888	$	-	$	8,341,280	$	-

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
One-to-four family	$	(40,012	)	$	35,393		$	(191,027	)	$	83,959
Multi-family		3,971			(25,597	)		7,943			(25,949	)
Non-residential		-			-			-			-
Commercial		-			-			-			-
Consumer direct		1,727			(20,183	)		3,454			(43,671	)
Purchased auto		(26,989	)		(3,222	)		(33,835	)		(20,730	)
Net (charge-offs)/recoveries	$	(61,303	)	$	(13,609	)	$	(213,465	)	$	(6,391	)

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 and 2015:

June 30, 2016	One-to-Four Family			Multi-family		Non-residential		Commercial		Consumer Direct		Purchased Auto			Total
Balance at beginning of period	$	1,602,619		$	162,149	$	206,250	$	49,443	$	51,597	$	119,786		$	2,191,844
Provision charged to income		11,991			1,365		69,097		3,813		7,167		64,067			157,500
Loans charged off		(40,672	)		-		-		-		-		(29,613	)		(70,285	)
Recoveries of loans previously charged off		660			3,971		-		-		1,727		2,624			8,982
Balance at end of period	$	1,574,598		$	167,485	$	275,347	$	53,256	$	60,491	$	156,864		$	2,288,041

June 30, 2015	One-to-Four Family			Multi-family			Non-residential		Commercial			Consumer Direct			Purchased Auto			Total
Balance at beginning of period	$	1,956,183		$	131,280		$	228,173	$	43,966		$	20,942		$	106,281		$	2,486,825
Provision charged to income		(5,301	)		38,287			14,837		(11,316	)		28,440			(9,947	)		55,000
Loans charged off		(10,057	)		(29,569	)		-		-			(21,383	)		(4,629	)		(65,638	)
Recoveries of loans previously charged off		45,450			3,972			-		-			1,200			1,407			52,029
Balance at end of period	$	1,986,275		$	143,970		$	243,010	$	32,650		$	29,199		$	93,112		$	2,528,216

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016 and 2015:

June 30, 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		38,043			17,305		77,007		1,950		19,850		123,345			277,500
Loans charged off		(230,566	)		-		-		-		-		(38,293	)		(268,859	)
Recoveries of loans previously charged off		39,539			7,943		-		-		3,454		4,458			55,394
Balance at end of period	$	1,574,598		$	167,485	$	275,347	$	53,256	$	60,491	$	156,864		$	2,288,041

June 30, 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		89,868			48,001			(2,088	)		(3,297	)		62,066			25,450			220,000
Loans charged off		(10,057	)		(33,892	)		-			-			(46,408	)		(24,290	)		(114,647	)
Recoveries of loans previously charged off		94,016			7,943			-			-			2,737			3,560			108,256
Balance at end of period	$	1,986,275		$	143,970		$	243,010		$	32,650		$	29,199		$	93,112		$	2,528,216

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of June 30, 2016 and December 31, 2015:

June 30, 2016	One-to-four Family		Multi-family		Non-residential		Commercial		Consumer Direct		Purchased Auto		Total
Loans individually evaluated for impairment	$	1,826,949	$	-	$	1,911,875	$	-	$	-	$	10,681	$	3,749,505
Loans acquired with deteriorated credit quality		498,912		-		-		-		-		-		498,912
Loans collectively evaluated for impairment		98,908,148		4,238,801		19,498,357		11,296,176		2,352,054		11,861,951		148,155,487
Ending Balance	$	101,234,009	$	4,238,801	$	21,410,232	$	11,296,176	$	2,352,054	$	11,872,632	$	152,403,904

Period-end amount allocated to:
Loans individually evaluated for impairment	$	61,655	$	-	$	133,061	$	-	$	-	$	5,341	$	200,057
Loans acquired with deteriorated credit quality		21,913		-		-		-		-		-		21,913
Loans collectively evaluated for impairment		1,491,030		167,485		142,286		53,256		60,491		151,523		2,066,071
Balance at end of period	$	1,574,598	$	167,485	$	275,347	$	53,256	$	60,491	$	156,864	$	2,288,041

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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents loans individually evaluated for impairment, by class of loans, as of June 30, 2016 and December 31, 2015:

June 30, 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	$	2,429,873	$	1,695,600	$	630,261	$	2,325,861	$	83,568	$	2,888,717
Multi-family		-		-		-		-		-		-
Non-residential		1,911,875		279,914		1,631,961		1,911,875		133,061		1,991,270
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		10,681		-		10,681		10,681		5,341		4,583
	$	4,352,429	$	1,975,514	$	2,272,903	$	4,248,417	$	221,970	$	4,884,570

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 and six months ended June 30, 2016 and 2015, the Company recognized no accrued or cash basis interest income on impaired loans.

At June 30, 2016, there were 33 impaired loans totaling approximately $4.2 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 or charge-off of five impaired loans totaling approximately $0.2 million, upgrading and returning seven loans totaling approximately $0.8 million to accrual status, and payments of approximately $0.2 million, offset by the addition of 11 loans totaling approximately $0.6 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 non-performing at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

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

Impaired loans at June 30, 2016 included $2.4 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 approximately $0.2 million as a result of principal payments and decreased approximately $0.1 million as a result of moving one TDR 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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

There were no new loans classified as troubled debt restructurings during the three months ended June 30, 2016 and 2015. Loans classified as TDRs during the six months ended June 30, 2016 and 2015, segregated by class, are shown in the tables below.

	Six Months Ended						Six Months Ended
	June 30, 2016						June 30, 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 June 30, 2016 and 2015 that had payment defaults (i.e., 60 days or more past due following a modification), during the three or six months ended June 30, 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 non-performing factors, including collateral securing TDRs.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as June 30, 2016 and December 31, 2015:

June 30, 2016	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,417,760	$	-
Multi-family		-		-
Non-residential		1,911,875		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		10,681		-
	$	4,340,316	$	-

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	$	-

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the aging of the recorded investment in loans, by class of loans, as of June 30, 2016 and December 31, 2015:

June 30, 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	$	1,590,480	$	534,471	$	598,860	$	2,723,811	$	98,510,198	$	101,234,009
Multi-family		-		-		-		-		4,238,801		4,238,801
Non-residential		-		111,146		279,914		391,060		21,019,172		21,410,232
Commercial		1,593		-		-		1,593		11,294,583		11,296,176
Consumer direct		1,007		-		-		1,007		2,351,047		2,352,054
Purchased auto		-		-		10,681		10,681		11,861,951		11,872,632
	$	1,593,080	$	645,617	$	889,455	$	3,128,152	$	149,275,752	$	152,403,904

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 Company will sustain some loss if the deficiencies are not corrected.

●

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

●

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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

As of June 30, 2016 and December 31, 2015, the risk category of loans by class is as follows:

June 30, 2016	Pass		Special Mention		Substandard		Doubtful		Not Rated
One-to-four family	$	-	$	1,363,073	$	2,325,861	$	-	$	97,545,075
Multi-family		-		131,281		-		-		4,107,520
Non-residential		19,300,779		197,578		1,911,875		-		-
Commercial		11,296,176		-		-		-		-
Consumer direct		-		-		-		-		2,352,054
Purchased auto		-		-		10,681		-		11,861,951
Total	$	30,596,955	$	1,691,932	$	4,248,417	$	-	$	115,866,600

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 June 30, 2016, the Company held approximately $315,000 of foreclosed residential real estate property, compared to approximately $313,000 at December 31, 2015. In addition, the Company also held approximately $80,000 and $234,000, in consumer mortgage loans collateralized by residential real estate properties that were in the process of foreclosure at June 30, 2016 and December 31, 2015, respectively.

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense was approximately $5,000 and $9,000 for the six month periods ended June 30, 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 six months ended June 30, 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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact of ASU 2016-13 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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 six months ended June 30, 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 June 30, 2016 and December 31, 2015.

							Total
June 30, 2016	Level 1		Level 2		Level 3		Fair Value
State and municipal securities available for sale	$	-	$	18,917,721	$	-	$	18,917,721
Residential mortgage-backed securities available for sale		-		26,904,144		-		26,904,144
	$	-	$	45,821,865	$	-	$	45,821,865

							Total
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 June 30, 2016 and December 31, 2015.

							Total
June 30, 2016	Level 1		Level 2		Level 3		Fair Value
Foreclosed assets	$	-	$	-	$	334,253	$	334,253
Impaired loans, net		-		-		2,050,933		2,050,933

							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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value.

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

June 30, 2016

Foreclosed assets

334,253

Appraisal of collateral

Appraisal adjustments

-6.7%

-89.1%

Impaired loans, net

1,761,986

Appraisal of collateral

Appraisal adjustments

-24.8

-53.6%

Impaired loans, net

288,947

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

December 31, 2015

Foreclosed assets

330,245

Appraisal of collateral

Appraisal adjustments

-6.7%

-63.6%

Impaired loans, net

2,170,027

Appraisal of collateral

Appraisal adjustments

-10%

-70%

Impaired loans, net

107,891

Discounted Future Cash Flows

Payment Stream

N/A

Discount Rate

10%

In accordance with accounting pronouncements, the carrying value and estimated fair value of the Company’s financial instruments as of June 30, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at
	Carrying		June 30, 2016 using:
	Amount		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	2,566,232	$	2,566,232	$	-	$	-	$	2,566,232
Time deposits		250,000		250,000		-		-		250,000
Federal funds sold		-		-		-		-		-
Securities		46,575,186		-		45,821,865		753,321		46,575,186
Accrued interest receivable		841,408		841,408		-		-		841,408
Net loans		150,115,863		-		-		151,767,000		151,767,000
Loans held for sale		506,544		506,544		-		-		506,544
Mortgage servicing rights		313,482		-		-		313,482		313,482
Financial Liabilities:
Non-interest bearing deposits		9,860,488		9,860,488		-		-		9,860,488
Interest bearing deposits		166,243,344		-		-		162,302,512		162,302,512
Accrued interest payable		1,371		1,371		-		-		1,371
FHLB advances		1,128,961		-		1,128,961		-		1,128,961
Federal funds purchased		3,705,000		3,705,000		-		-		3,705,000

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

	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

Ottawa Savings Bancorp, Inc. 10-Q