Edgar Filing: Ottawa Savings Bancorp, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨	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 organization)

(I.R.S. Employer

Identification Number)

925 LaSalle Street

Ottawa, Illinois 61350

(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 x 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 (Section 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):

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

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 November 12, 2009
Common Stock, $0.01 par value		2,123,017

OTTAWA SAVINGS BANCORP, INC.

FORM 10-Q

For the quarterly period ended September 30, 2009

INDEX


		Page Number

PART I – FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements (Unaudited)	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4T	Controls and Procedures	24

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults upon Senior Securities	24
Item 4	Submission of Matters to a Vote of Security Holders	24
Item 5	Other Information	24
Item 6	Exhibits	25

SIGNATURES		26

OTTAWA SAVINGS BANCORP, INC.

Consolidated Balance Sheets

September 30, 2009 and December 31, 2008

(Unaudited)


	September 30, 2009			December 31, 2008
Assets
Cash and due from banks	$	1,391,268		$	1,432,594
Interest bearing deposits		3,134,027			1,664,148

Total cash and cash equivalents		4,525,295			3,096,742
Federal funds sold		1,988,000			-
Securities held to maturity (fair value of $742,138 and $821,840 at September 30, 2009 and December 31, 2008, respectively)		746,861			839,236
Securities available for sale		25,677,262			30,582,039
Non-marketable equity securities		2,534,952			2,534,952
Loans, net of allowance for loan losses of $2,173,368 and $1,604,731 at September 30, 2009 and December 31, 2008, respectively		153,074,531			156,444,223
Premises and equipment, net		7,346,891			7,503,726
Accrued interest receivable		973,355			981,330
Mortgage servicing rights		166,527			107,274
Foreclosed real estate		540,614			95,000
Deferred tax asset		1,493,140			1,182,387
Cash value of life insurance		1,482,380			1,465,753
Other assets		1,135,129			1,081,825

Total assets	$	201,684,937		$	205,914,487

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	3,396,913		$	2,295,792
Interest bearing		173,484,858			172,934,309

Total deposits		176,881,771			175,230,101
Accrued interest payable		261,792			204,425
FHLB Advances		-			6,300,000
Other liabilities		2,284,440			2,180,283

Total liabilities		179,428,003			183,914,809

Commitments and contingencies
Redeemable common stock held by ESOP plan		222,749			171,270

Stockholders’ Equity
Common Stock, $.01 par value 12,000,000 shares authorized; 2,224,911 shares issued		22,249			22,249
Additional paid-in-capital		8,711,503			8,673,250
Retained earnings		14,894,881			14,976,595
Unallocated ESOP shares		(521,479	)		(559,636	)
Unearned MRP shares		(294,142	)		(379,199	)
Accumulated other comprehensive income		622,175			444,672

		23,435,187			23,177,931
Less:
Treasury Shares at cost; 101,894 shares		(1,178,253	)		(1,178,253	)
Maximum cash obligation related to ESOP shares		(222,749	)		(171,270	)

Total stockholders’ equity		22,034,185			21,828,408

Total liabilities and stockholders’ equity	$	201,684,937		$	205,914,487

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2009 and 2008

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009		2008
Interest and dividend income:
Interest and fees on loans	$	2,357,802		$	2,506,505		$	7,140,828	$	7,574,847
Securities:
Mortgage-backed and related securities		242,600			284,237			777,250		759,930
U.S. agency securities		82,687			101,686			246,279		253,757
Interest-bearing deposits		865			11,436			2,082		101,309

Total interest and dividend income		2,683,954			2,903,864			8,166,439		8,689,843

Interest expense:
Deposits		1,148,239			1,625,527			3,711,404		5,226,137
Other borrowings		46			433			5,989		433

Total interest expense		1,148,285			1,625,960			3,717,393		5,226,570

Net interest income		1,535,669			1,277,904			4,449,046		3,463,273
Provision for loan losses		580,856			-			1,519,454		33,435

Net interest income after provision for loan losses		954,813			1,277,904			2,929,592		3,429,838

Other income:
Gain on sale of securities available for sale		113			6,750			22,592		65,629
Gain on sale of loans		22,509			8,620			159,178		48,139
Origination of mortgage servicing rights, net of amortization		7,096			(1,265	)		59,253		4,446
Customer service fees		74,884			67,476			210,095		187,443
Income on bank owned life insurance		6,163			15,051			16,627		46,250
Other		5,485			8,579			29,890		35,458

Total other income		116,250			105,211			497,635		387,365

Other expenses:
Salaries and employee benefits		455,403			427,138			1,396,419		1,296,881
Directors fees		21,033			21,078			63,098		63,236
Occupancy		122,268			123,689			369,964		364,370
Deposit insurance premium		79,964			27,924			380,007		38,318
Legal and professional services		50,813			56,823			146,421		194,244
Data processing		73,621			58,459			209,304		216,626
Foreclosed real estate		191,802			4,625			344,175		12,302
Loss (gain) on sale of foreclosed real estate		23,100			(318	)		23,100		8,350
Loss on sale of reposessed assets		8,232			16,655			27,615		26,812
Other		112,930			112,030			406,743		398,893

Total other expenses		1,139,166			848,103			3,366,846		2,620,032

(Loss) income before income taxes		(68,103	)		535,012			60,381		1,197,171
Income tax (benefit) expense		(35,002	)		189,178			16,246		424,678

Net (loss) income	$	(33,101	)	$	345,834		$	44,135	$	772,493

Basic (loss) earnings per share	$	(0.02	)	$	0.17		$	0.02	$	0.38

Diluted (loss) earnings per share	$	(0.02	)	$	0.17		$	0.02	$	0.37

Dividends per share	$	0.05		$	0.05		$	0.15	$	0.15

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2009 and 2008

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Comprehensive (loss) income:
Net (loss) income	$	(33,101	)	$	345,834		$	44,135		$	772,493
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale arising during period, net of income taxes		152,106			76,152			177,578			(31,741	)
Reclassification adjustment for gains included in net (loss) income, net of tax expense		(14,911	)		(4,455	)		(75	)		(43,315	)

Comprehensive income	$	104,094		$	417,531		$	221,638		$	697,437

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2009 and 2008

(Unaudited)


	2009			2008
Cash Flows from Operating Activities
Net income	$	44,135		$	772,493
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		180,049			197,951
Provision for loan losses		1,519,454			33,435
Provision for deferred income taxes		(402,195	)		18,344
Net amortization of premiums and discounts on securities		28,772			13,070
Gain on sale of available for sale securities		(22,592	)		(65,629	)
Origination of mortgage loans held for sale		(13,909,379	)		(2,163,931	)
Proceeds from sale of mortgage loans held for sale		14,068,557			2,212,070
Gain on sale of loans, net		(159,178	)		(48,139	)
Origination of mortgage servicing rights, net of amortization		(59,253	)		(4,446	)
Loss on sale of foreclosed real estate		23,100			8,350
Write down of foreclosed real estate		136,145			-
Loss on sale of repossessed assets		27,615			26,812
ESOP compensation expense		36,313			43,245
MRP compensation expense		85,057			75,089
Compensation expense on RRP options granted		40,097			45,457
Increase in cash surrender value of life insurance		(16,627	)		(46,250	)
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable		7,975			(19,914	)
(Increase) decrease in other assets		(88,143	)		7,890
Increase in accrued interest payable and other liabilities		161,524			98,624

Net cash provided by operating activities		1,701,426			1,204,521

Cash Flows from Investing Activities
Securities available for sale:
Purchases		(1,798,933	)		(11,101,223	)
Sales, calls, maturities and paydowns		6,968,110			8,268,403
Securities held to maturity:
Maturities and paydowns		90,740			104,901
Net decrease in loans		1,152,879			274,819
Net increase in federal funds sold		(1,988,000	)		-
Proceeds from sale of foreclosed real estate		-			222,716
Proceeds from sale of repossessed assets		99,724			86,088
Purchase of premises and equipment		(23,214	)		(2,471	)

Net cash provided by (used in) investing activities		4,501,306			(2,146,767	)

Cash Flows from Financing Activities
Net increase (decrease) in deposits		1,651,670			(782,020	)
Proceeds from Federal Home Loan Bank advances		-			1,700,000
Principal reduction of Federal Home Loan Bank advances		(6,300,000	)		(1,700,000	)
Cash dividends paid		(125,849	)		(129,209	)
Purchase of treasury stock		-			(932,690	)

Net cash used in financing activities		(4,774,179	)		(1,843,919	)

Net increase (decrease) in cash and cash equivalents		1,428,553			(2,786,165	)
Cash and cash equivalents:

Beginning		3,096,742			7,585,237

Ending	$	4,525,295		$	4,799,072

(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2009 and 2008

(Unaudited)


(Continued)
	2009		2008
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	3,654,037	$	4,984,306
Interest paid on other borrowings		5,989		433
Income taxes		464,742		550,296
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		604,859		251,497
Other assets acquired in settlement of loans		92,500		85,100
Sale of foreclosed real estate through loan origination		204,900		128,590
Liability arising from ESOP put option		51,479		28,621

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – NATURE OF BUSINESS

Ottawa Savings Bancorp, Inc. (the “Company”) is the federally chartered savings and loan holding company of Ottawa Savings Bank (the “Bank”) and was formed upon completion of the Bank’s reorganization from a mutual to stock form of organization on July 11, 2005.

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, 2008. Certain amounts in the accompanying financial statements and footnotes for 2008 have been reclassified with no effect on net income or stockholders’ equity to be consistent with the 2009 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 September 30, 2009, there were no material changes in the Company’s significant accounting policies or critical accounting estimates from those disclosed in the Form 10-K filed with the Securities and Exchange Commission on March 30, 2009.

NOTE 4 – CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses. The allowance for loan losses is an amount necessary to absorb known or inherent losses that are both probable and reasonably estimable and is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect each borrower’s ability to repay, the 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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 5 – EARNINGS PER SHARE

Basic earnings (loss) per share is based on net income (loss) 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 (loss) per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.


	Three Months ended September 30,						Nine Months ended September 30,
	2009			2008			2009			2008
Net (loss) income available to common stockholders	$	(33,101	)	$	345,834		$	44,135		$	772,493

Basic potential common shares:
Weighted average shares outstanding		2,123,017			2,124,791			2,123,017			2,152,402
Weighted average unallocated ESOP shares		(52,987	)		(58,074	)		(54,246	)		(59,338	)
Weighted average unvested MRP shares		(28,786	)		(36,197	)		(28,786	)		(36,197	)

Basic weighted average shares outstanding		2,041,244			2,030,520			2,039,985			2,056,867
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		-			8,105			15,465			7,098
Weighted average RRP options outstanding **		-			-			-			-

Dilutive weighted average shares outstanding		2,041,244			2,038,625			2,055,450			2,063,965

Basic (loss) earnings per share	$	(0.02	)	$	0.17		$	0.02		$	0.38

Diluted (loss) earnings per share	$	(0.02	)	$	0.17		$	0.02		$	0.37

**	The effect of share options were 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.

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 September 30, 2009, 22,846 shares at a fair value of $9.75 have been classified as mezzanine capital.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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


	September 30, 2009			December 31, 2008
Shares allocated		24,167			20,351
Shares withdrawn from the plan		(1,321	)		(1,321	)
Unallocated shares		52,147			55,963

Total ESOP shares		74,993			74,993

Fair value of unallocated shares	$	508,433		$	503,667

NOTE 7 – INVESTMENT SECURITIES

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2009:
Held to Maturity
Mortgage-backed securities	$	746,861	$	5,618	$	10,341	$	742,138

Available for Sale
U.S. agency securities	$	5,359,132	$	120,122	$	-	$	5,479,254
Mortgage-backed securities		19,375,440		834,135		11,567		20,198,008

	$	24,734,572	$	954,257	$	11,567	$	25,677,262

December 31, 2008:
Held to Maturity
Mortgage-backed securities	$	839,236	$	887	$	18,283	$	821,840

Available for Sale
U.S. agency securities	$	7,354,779	$	240,124	$	-	$	7,594,903
Mortgage-backed securities		22,553,515		526,423		92,802		22,987,136

	$	29,908,294	$	766,547	$	92,802	$	30,582,039

The amortized cost and fair value at September 30, 2009, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalties. Therefore, stated maturities of mortgage-backed securities are not disclosed.


	Securities Held to Maturity				Securities Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due within one year	$	-	$	-	$	-	$	-
Due after one year through five years		-		-		1,304,650		1,334,944
Due after five years through ten years		-		-		4,054,482		4,144,310
Due after ten years		-		-		-		-
Mortgage-backed securities		746,861		742,138		19,375,440		20,198,008

	$	746,861	$	742,138	$	24,734,572	$	25,677,262

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table reflects securities with gross unrealized losses for less than 12 months and for 12 months or more at September 30, 2009:


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2009:
Securities Held to Maturity
Mortgage-backed securities	$	-	$	-	$	477,475	$	10,341	$	477,475	$	10,341


Securities Available for Sale
Mortgage-backed securities	$	-	$	-	$	1,233,363	$	11,567	$	1,233,363	$	11,567


December 31, 2008:
Securities Held to Maturity
Mortgage-backed securities	$	271,186	$	3,443	$	481,093	$	14,840	$	752,279	$	18,283


Securities Available for Sale
Mortgage-backed securities	$	774,031	$	18,049	$	1,755,852	$	74,753	$	2,529,883	$	92,802

The unrealized losses at September 30, 2009, relate principally to interest rates relative to the market. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at September 30, 2009. 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.

NOTE 8 – ASSET QUALITY

The following is a summary of information pertaining to impaired and non-accrual loans:


	September 30, 2008		December 31, 2008
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		3,706,267		1,413,888

Total impaired loans	$	3,706,267	$	1,413,888

Valuation allowance related to impaired loans	$	828,404	$	818,063

Total non-accrual loans	$	3,809,615	$	5,207,757

Total loans past due ninety days or more and still accruing interest	$	67,189	$	73,411

Total non-accrual loans decreased $1.4 million due to the transfer of impaired loans to foreclosed real estate. The Company also charged off approximately $951,000 through the allowance for loan losses to record these properties at fair value.

The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all non-performing assets are classified assets.

On the basis of management’s review of its assets at September 30, 2009 and December 31, 2008, we classified $2.3 million and $4.0 million, respectively, of our assets as special mention, $3.7 million and $2.8 million, respectively, of our assets as substandard, and $175,000 and $1,000, respectively, of our assets as doubtful.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Following is a summary of activity in the allowance for loan losses for the nine months ended September 30, 2009 and 2008.


	2009			2008

Balance at beginning of year	$	1,604,731		$	605,450
Provision charged (credited) to income		1,519,454			33,435
Loans charged off		(998,263	)		(109,391	)
Recoveries of loans previously charged off		47,446			1,432

Balance at end of period	$	2,173,368		$	530,926

NOTE 9 – STOCK COMPENSATION

The total stock-based compensation expense was approximately $125,000 and $121,000, for the nine months ended September 30, 2009 and 2008, 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. For the nine months ended September 30, 2009 and 2008, the Company did not grant additional options or shares under the MRP.

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative GAAP. All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification became effective September 30, 2009 for the Company and disclosures within this Quarterly Report on Form 10-Q have been updated to reflect the change.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (codified in ASC Topic 860, Transfers and Servicing), related to transfers of assets. This guidance is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The Company is currently evaluating the impact of adopting the guidance.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 11 – FAIR VALUE DISCLOSURE

Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures. This guidance 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 are 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 Topic 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 utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements 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 the bonds’ terms and conditions, among other things.

Foreclosed Real Estate and Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. 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 fair value 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. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The table below presents the recorded amount of assets measured at fair value on a recurring basis at September 30, 2009.


	Level 1		Level 2		Level 3		Total Fair Value
U.S. agency securities available for sale	$	-	$	5,479,254	$	-	$	5,479,254
Mortgage-backed securities available for sale		-		20,198,008		-		20,198,008

	$	-	$	25,677,262	$	-	$	25,677,262

The table below presents the recorded amount of assets measured at fair value on a non-recurring basis at September 30, 2009.


	Level 1		Level 2		Level 3		Total Fair Value
Foreclosed assets	$	-	$	553,114	$	-	$	553,114
Impaired loans, net		-		2,877,863		-		2,877,863

NOTE 12 – FAIR VALUE MEASUREMENTS

The following information presents estimated fair value of the Company’s financial instruments as of September 30, 2009 and December 31, 2008.


	September 30, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial Assets:
Cash and cash equivalents	$	4,525,295	$	4,525,295	$	3,096,742	$	3,096,742
Federal funds sold		1,988,000		1,988,000		-		-
Securities		28,959,075		28,954,352		33,956,227		33,938,831
Accrued interest receivable		973,355		973,355		981,330		981,330
Loans		153,074,531		159,449,000		156,444,223		159,989,000
Mortgage servicing rights		166,527		166,527		107,274		107,274

Financial Liabilities:
Deposits		176,881,771		180,182,000		175,230,101		179,350,000
Borrowings		-		-		6,300,000		6,300,000
Accrued interest payable		261,792		261,792		204,425		204,425

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

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

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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Securities: The Company obtains fair value measurements of available for sale and held to maturity securities from an independent pricing service. The fair value measurements 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 the bonds’ terms and conditions, among other things. The carrying value of non-marketable equity securities approximates fair value.

Loans: For variable-rate loans that reprice 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.

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.

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.

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 September 30, 2009 and December 31, 2008, the fair value of the commitments are immaterial in nature.

Borrowings: Due to the short term nature of the advances, the carrying amounts of these advances approximate their fair values.

In addition, other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. 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 13 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events as to their potential impact to the Financial Statements through November 12, 2009, which is the date the financial statements are issued.

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.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 September 30, 2009, 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, delays in obtaining the necessary regulatory approvals, our ability to consummate proposed transactions in a timely manner, 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. These risks and uncertainties should be considered in evaluating forward-looking statements.

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 one-to-four family residential loans, consumer loans and other loans. 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. The Bank completed its reorganization on that same date, pursuant to which the Bank 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.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

The Company’s total assets decreased $4.2 million, or 2.05%, to $201.7 million at September 30, 2009, from $205.9 million at December 31, 2008. The decrease primarily reflects a decrease in loans of $3.4 million, and a decrease in securities available for sale of $4.9 million. The decreases were offset by an increase in cash and cash equivalents of $1.4 million, an increase in mortgage servicing rights of $59,000, an increase in foreclosed real estate of $446,000 and an increase in the deferred tax asset of $311,000.

Cash and cash equivalents increased $1.4 million, or 46.13%, to $4.5 million at September 30, 2009, from $3.1 million at December 31, 2008. The increase in cash and cash equivalents is primarily due to sales, calls and repayments on securities, additions to the deposit portfolio, and payments received on loans.

Securities available for sale decreased $4.9 million, or 16.04%, to $25.7 million at September 30, 2009, from $30.6 million at December 31, 2008. The decrease was primarily the result of $7.0 million in sales, calls, maturities, and principal pay-downs, offset by purchases of $1.8 million and a $269,000 increase in market values of the available for sale securities. Most of the proceeds from the decrease in securities available for sale were kept in cash and fed funds in order to meet the liquidity needs of the Company.

Loans decreased $3.4 million, or 2.15%, to $153.1 million at September 30, 2009, from $156.4 million at December 31, 2008. The decrease in loans was primarily due to pay-offs and principal reductions on one-to-four-family loans, lines of credit and purchased consumer loans in addition to a decrease in construction loans in progress. The decreases were offset by increases in commercial loans, non-residential real estate loans and multi-family real estate loans.

Foreclosed real estate increased $446,000, or 469.07%, to $541,000 at September 30, 2009, from $95,000 at December 31, 2008. The increase was due to the foreclosure on properties securing eight loans previously identified by management as impaired. The increase was offset by the sale of three properties and a reduction in value on one property.

Total deposits increased $1.7 million, or .94%, to $176.9 million at September 30, 2009, from $175.2 million at December 31, 2008. The increase reflects increases in money market accounts, checking accounts and savings accounts, offset by a decrease in certificate of deposit accounts. The increase in checking accounts is primarily due to an increase in the number of business checking accounts. The increases in money market and savings accounts and the decrease in certificate of deposit accounts can be attributed to the movement of funds to more liquid accounts, due to historically low interest rates on certificates of deposit.

FHLB advances decreased $6.3 million, or 100.00%, to $0 at September 30, 2009, from $6.3 million at December 31, 2008. The decrease is due to the repayment of the outstanding advances during the first quarter of 2009.

Accrued interest payable increased $57,000, or 28.06%, to $262,000 at September 30, 2009, from $204,000 at December 31, 2008. The increase is due to an increased number of certificates of deposit accounts with terms of one year or less maturing in the next three months, which pay interest at maturity.

Other liabilities increased $104,000, or 4.78%, to $2.3 million at September 30, 2009, from $2.2 million at December 31, 2008. The increase was primarily due to increases in SERP expenses of $99,000, increases in accrued retirement benefits payable of $52,000, increases in accrued exam and accounting fees of $18,000, an increase in the deferred director compensation investment accounts payable of $43,000, increases in FDIC premiums payable of $74,000, and increases in the Certificate of Deposit Account Registry service payable of $11,000. The increase in retirement benefits payable is due to continued accruals for the defined benefit plan, which was terminated effective April 1, 2007, in anticipation of overall costs associated with withdrawing from the defined benefit plan and the absence of quarterly payments to fund the defined benefit plan. The increase in FDIC insurance premiums payable is due to an increase in assessments imposed by the FDIC. The increases were offset by decreases in federal income taxes payable of $75,000 due to lower pre-tax income, decreases in accrued property taxes payable of $47,000, due to the timing of the accrual and decreases in escrow payable of $97,000.

Stockholders’ equity increased $206,000, or .94%, to $22.0 million at September 30, 2009, from $21.8 million at December 31, 2008. The increase in stockholders’ equity reflects net income for the nine months ended September 30, 2009 of approximately $44,000 and an increase in other comprehensive income of $178,000, net of taxes, due to increases in the market value of the available for sale securities portfolio, offset by dividends of $126,000 paid to stockholders. The remaining changes to stockholders’ equity include increases of approximately $161,000 from the allocation and amortization of ESOP shares, MRP shares, and RRP options, offset by a decrease to stockholders’ equity of $51,000 to increase the cash obligation related to redeemable common stock held by the ESOP.

COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Net Income. The Company had a net loss of $33,000 for the three months ended September 30, 2009, compared to net income of $346,000 for the three months ended September 30, 2008.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2009 and 2008.


	Three Months Ended September 30,
	2009		2008		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,358	$	2,507	$	(149	)	(5.94	)%
Securities:
Mortgage-backed and related securities		242		284		(42	)	(14.79	)
U.S. agency securities		83		102		(19	)	(18.63	)
Interest-bearing deposits		1		11		(10	)	(90.91	)

Total interest and dividend income		2,684		2,904		(220	)	(7.58	)

Interest expense:
Deposits		1,148		1,626		(478	)	(29.40	)

Total interest expense		1,148		1,626		(478	)	(29.40	)

Net interest income	$	1,536	$	1,278	$	258		20.19	%

The following table summarizes average balances and average yield or cost of funds for the three months ended September 30, 2009 and 2008.


	Three Months Ended September 30,
	2009						2008
	AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST		AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST
	(Dollars in thousands)
Interest-earning assets
Securities, net	$	27,531	$	325	4.73	%	$	30,841	$	386	5.01	%
Loans receivable, net (1)		153,142		2,358	6.16	%		156,415		2,507	6.41	%
Other investments		4,985		1	0.08	%		3,611		11	1.22	%

Total interest-earning assets		185,658		2,684	5.78	%		190,867		2,904	6.09	%
Interest-bearing liabilities
Money Market accounts	$	15,867	$	81	2.04	%	$	12,860	$	74	2.30	%
Passbook accounts		11,417		10	0.35	%		10,833		14	0.52	%
Certificates of Deposit accounts		137,733		1,048	3.04	%		148,363		1,525	4.11	%
Checking accounts		9,354		9	0.38	%		8,865		13	0.59	%

Total interest-bearing liabilities		174,371		1,148	2.63	%		180,921		1,626	3.59	%

NET INTEREST INCOME			$	1,536					$	1,278

NET INTEREST RATE SPREAD (2)					3.15	%					2.50	%

NET INTEREST MARGIN (3)					3.31	%					2.68	%

RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES					106.47	%					105.50	%

(1)	Net of loans in process, deferred loan costs (fees), and allowance for loan losses.

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

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

The following table summarizes the changes in net interest income due to rate and volume for the three months ended September 30, 2009 and 2008. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.


	Three Months Ended September 30, 2009 Compared to 2008 Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Securities, net	$	(39	)	$	(22	)	$	(61	)
Loans receivable, net		(50	)		(99	)		(149	)
Other investments		-			(10	)		(10	)

Total interest-earning assets	$	(89	)	$	(131	)	$	(220	)

Interest expense on
Money Market accounts	$	15		$	(8	)	$	7
Passbook accounts		1			(5	)		(4	)
Certificates of Deposit accounts		(81	)		(396	)		(477	)
Checking		-			(4	)		(4	)

Total interest-bearing liabilities		(65	)		(413	)		(478	)

Change in net interest income	$	(24	)	$	282		$	258

Net interest income increased $258,000, or 20.19%, for the three months ended September 30, 2009, compared to the three months ended September 30, 2008. Interest and dividend income decreased $220,000, or 7.58%, to $2.7 million for the three months ended September 30, 2009, from $2.9 million for the three months ended September 30, 2008 due to a decrease in the average rate on interest-earning assets to 5.78% from 6.09%, due to a declining interest rate environment, and a decrease of $2.2 million in average interest-earning assets to $185.7 million from $190.9 million for the three months ended September 30, 2009 compared to the same period in 2008. Interest expense decreased $478,000, or 29.38%, due to a decrease in the average cost of interest-bearing liabilities to 2.63% from 3.59%, due to a declining interest rate environment, and a decrease of $6.5 million in average interest-bearing liabilities for the three months ended September 30, 2009 compared to the same period in 2008.

Provision for Loan Losses. Management recorded a loan loss provision of $581,000 for the three months ended September 30, 2009, compared to no loss provision for the three months ended September 30, 2008. The increased loss provision is due to an increase in impaired loans of $388,000 and increases in the loss provision attributable to all loans primarily due to the current decline in economic conditions. Based on a general review of the loans that were in the loan portfolio at September 30, 2009, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Other Income. The following table summarizes other income for the three months ended September 30, 2009 and 2008.


	Three months ended September 30,
	2009		2008			$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities available for sale	$	-	$	7		$	(7	)	(100.00	)%
Gain on sale of loans		23		9			14		155.56
Origination of mortgage servicing rights, net of amortization		7		(1	)		8		(800.00	)
Customer service fees		75		67			8		11.94
Income on bank owned life insurance		6		15			(9	)	(60.00	)
Other		5		8			(3	)	(37.50	)


Total other income	$	116	$	105		$	11		10.48	%

The increase in total other income was primarily due to increased gains on sale of loans and origination of mortgage servicing rights, net of amortization, due to the refinancing of mortgage loans resulting from a decline in market interest rates, and an increase in customer service fees, due to management’s decision, effective June 1, 2009, to increase fees the Company charges. The increase was offset by a decrease in gains on sale of securities available for sale, due to fewer sales and decreased income on bank-owned life insurance, due to the decline in interest rates.

Other Expenses. The following table summarizes other expenses for the three months ended September 30, 2009 and 2008.


	Three months ended September 30,
	2009		2008		$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	455	$	427	$	28		6.56	%
Directors fees		21		21		-		-
Occupancy		122		124		(2	)	(1.61	)
Deposit insurance premium		80		28		52		185.71
Legal and professional services		51		57		(6	)	(10.53	)
Data processing		74		58		16		27.59
Foreclosed real estate		192		5		187		3,740.00
Loss on sale of foreclosed real estate		23		-		23		100.00
Loss on sale of repossessed assets		8		17		(9	)	(52.94	)
Other		113		111		2		1.80


Total other expenses	$	1,139	$	848	$	291		34.32	%

The increase in other expenses was primarily due to an increase in expenses on foreclosed real estate of $187,000, due primarily to the additional write-down of $136,000 on one property and payment of real estate taxes and expenses to maintain and sell properties, an increase in deposit insurance premiums of $52,000 due to increased assessments imposed by the FDIC, an increase in salaries and employee benefits of $28,000, and an increase in the loss on sale of foreclosed real estate of $23,000 due to a net loss on the sale of three properties. The increases were offset by a decrease in losses on the sale of repossessed assets of $9,000 and a decrease in legal and professional services of $6,000 due to the completion of legal services in connection with the purchase of bank-owned life insurance in 2008 and a reduction in costs associated with the implementation of Sarbanes Oxley compliance.

Income Taxes. The income tax benefit was $35,000 for the three months ended September 30, 2009, compared to income tax expense of $189,000 for the same period in 2008. The difference in income taxes for the periods is primarily a result of the differences in pre-tax income (loss) for the applicable periods.

COMPARISON OF RESULTS OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

Net Income. The Company had net income of $44,000 for the nine months ended September 30, 2009, compared to net income of $772,000 for the nine months ended September 30, 2008.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2009 and 2008.


	Nine Months Ended September 30,
	2009		2008		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	7,141	$	7,575	$	(434	)	(5.73	)%
Securities:
Mortgage-backed and related securities		777		760		17		2.24
U.S. agency securities		246		254		(8	)	(3.15	)
Interest-bearing deposits		2		101		(99	)	(98.02	)

Total interest and dividend income		8,166		8,690		(524	)	(6.03	)

Interest expense:
Deposits		3,711		5,226		(1,515	)	(28.99	)
Other borrowings		6		-		6		-

Total interest expense		3,717		5,226		(1,509	)	(28.87	)

Net interest income	$	4,449	$	3,464	$	985		28.44	%

The following table summarizes average balances and average yield or cost of funds for the nine months ended September 30, 2009 and 2008.


	Nine Months Ended September 30,
	2009						2008
	AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST		AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST
	(Dollars in thousands)
Interest-earning assets
Securities, net	$	28,509	$	1,023	4.78	%	$	27,873	$	1,014	4.85	%
Loans receivable, net (1)		153,930		7,141	6.19	%		157,540		7,575	6.41	%
Other investments		4,924		2	0.05	%		6,812		101	1.98	%

Total interest-earning assets		187,363		8,166	5.81	%		192,225		8,690	6.03	%
Interest-bearing liabilities
Money Market accounts	$	13,765	$	212	2.05	%	$	11,204	$	185	2.20	%
Passbook accounts		11,662		31	0.35	%		11,195		42	0.50	%
Certificates of Deposit accounts		140,153		3,439	3.27	%		150,300		4,960	4.40	%
Checking accounts		9,451		29	0.41	%		9,100		39	0.58	%
Advances from Federal Home Loan Bank		1,140		6	0.70	%		37		-	-

Total interest-bearing liabilities		176,171		3,717	2.81	%		181,836		5,226	3.83	%

NET INTEREST INCOME			$	4,449					$	3,464

NET INTEREST RATE SPREAD (2)					3.00	%					2.20	%

NET INTEREST MARGIN (3)					3.17	%					2.40	%

RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES					106.35	%					105.71	%

(1)	Net of loans in process, deferred loan costs (fees), and allowance for loan losses.

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

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

The following table summarizes the changes in net interest income due to rate and volume for the nine months ended September 30, 2009 and 2008. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.


	Nine Months Ended September 30, 2009 Compared to 2008 Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Securities, net	$	23		$	(14	)	$	9
Loans receivable, net		(167	)		(267	)		(434	)
Other investments		(1	)		(98	)		(99	)

Total interest-earning assets	$	(145	)	$	(379	)	$	(524	)

Interest expense on
Money Market accounts	$	39		$	(12	)	$	27
Passbook accounts		1			(12	)		(11	)
Certificates of Deposit accounts		(249	)		(1,272	)		(1,521	)
Checking		1			(11	)		(10	)
Advances from Federal Home Loan Bank		6			-			6

Total interest-bearing liabilities		(202	)		(1,307	)		(1,509	)

Change in net interest income	$	57		$	928		$	985

Net interest income increased $985,000, or 28.44%, for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. Interest and dividend income decreased $524,000, or 6.03%, to $8.2 million for the nine months ended September 30, 2009, from $8.7 million for the nine months ended September 30, 2008 due to a decrease in the average rate on interest-earning assets to 5.81% from 6.03%, due to a declining interest rate environment, and a decrease of $4.9 million in average interest-earning assets to $187.4 million from $192.2 million for the nine months ended September 30, 2009, compared to the same period in 2008. Interest expense decreased $1.5 million, or 28.99%, due to a decrease in the average cost of interest-bearing liabilities to 2.81% from 3.83%, due to a declining interest rate environment, and a decrease of $5.7 million in average interest-bearing liabilities for the nine months ended September 30, 2009, compared to the same period in 2008.

Provision for Loan Losses. Management recorded a loan loss provision of $1.5 million for the nine months ended September 30, 2009, compared to $33,000 for the nine months ended September 30, 2008. The increased loss provision is due to an increase in impaired loans of $2.3 million and increases in the loss provision attributable to all loans primarily due to the current decline in economic conditions. Based on a general review of the loans that were in the loan portfolio at September 30, 2009, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

Other Income. The following table summarizes other income for the nine months ended September 30, 2009 and 2008.


	Nine months ended September 30,
	2009		2008		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities available for sale	$	23	$	66	$	(43	)	(65.15	)%
Gain on sale of loans		159		48		111		231.25
Origination of mortgage servicing rights, net of amortization		59		4		55		1,375.00
Customer service fees		210		187		23		12.30
Income on bank owned life insurance		17		46		(29	)	(63.04	)
Other		30		36		(6	)	(16.67	)


Total other income	$	498	$	387	$	111		28.68	%

Other Expenses. The following table summarizes other expenses for the nine months ended September 30, 2009 and 2008.


	Nine months ended September 30,
	2009		2008		$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,396	$	1,297	$	99		7.63	%
Directors fees		63		63		-		-
Occupancy		370		364		6		1.65
Deposit insurance premium		380		38		342		900.00
Legal and professional services		147		195		(48	)	(24.62	)
Data processing		209		217		(8	)	(3.69	)
Foreclosed real estate		344		12		332		2,766.67
Loss on sale of foreclosed real estate		23		8		15		187.50
Loss on sale of repossessed assets		28		27		1		3.70
Other		407		399		8		2.01


Total other expenses	$	3,367	$	2,620	$	747		28.51	%

The increase in other expenses was primarily due to an increase in deposit insurance premiums of $342,000, due to increased regular assessments and the special assessment of $92,000 imposed by the FDIC, an increase in salaries and employee benefits of $99,000, and an increase in expenses on foreclosed real estate of $332,000, due primarily to payment of expenses of $137,000 and the additional write-down of $136,000 on one property and payment of real estate taxes and expenses to maintain and sell properties. The increases were offset by a decrease in legal and professional services of $48,000, due to the completion of legal services in connection with the purchase of bank-owned life insurance in 2008 and a reduction in costs associated with the implementation of Sarbanes Oxley compliance.

Income Taxes. Income tax expense was $16,000 for the nine months ended September 30, 2009, compared to $425,000 for the same period in 2008. The effective tax rates for the nine months ended September 30, 2009 and 2008 were 26.91% and 35.47%, respectively. The decrease in the effective tax rate was due to the disproportionate share of tax exempt interest to net income before tax during the respective periods.

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 2009, the Bank had outstanding commitments to originate $1.1 million in loans, unfunded lines of credit of $10.8 million, unfunded commitments on construction loans of $282,000, and unfunded standby letters of credit of $502,000. In addition, as of September 30, 2009, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $92.7 million. The Bank believes that it has adequate resources to fund all of its commitments and that it can adjust the rate on certificates of deposit to retain deposits in changing interest rate environments. If the Bank requires funds beyond its internal funding capabilities, advances from the Federal Home Loan Bank of Chicago are available as an additional source of funds. As of September 30, 2009, the Bank had $46.9 million of available credit from the Federal Home Loan Bank of Chicago, based on 20 times the amount of our capital stock in the Federal Home Loan Bank of Chicago. There were no Federal Home Loan Bank advances outstanding at September 30, 2009. In addition, as of September 30, 2009, the Bank had $5.0 million of available credit from Bankers Bank of Wisconsin to purchase Federal Funds.

Ottawa Savings Bancorp is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Ottawa Savings Bancorp is responsible for paying any dividends declared to its shareholders and for any repurchased shares of its common stock. Ottawa Savings Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Ottawa Savings Bancorp in any calendar year, without the receipt of prior approval from the OTS but with prior notice to the OTS, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At September 30, 2009, Ottawa Savings Bancorp had cash and cash equivalents of $4.5 million.

Capital. The Bank is required to maintain regulatory capital sufficient to meet Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of at least 4.0%, 4.0% and 8.0%, respectively. The Bank exceeded each of its capital requirements with ratios at September 30, 2009 of 9.67%, 15.56% and 16.82%, respectively, compared to ratios at December 31, 2008 of 9.81%, 16.39% and 17.64%, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the nine months ended September 30, 2009, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This Item is not applicable as the Company is a smaller reporting company.

ITEM 4T. CONTROLS AND PROCEDURES

Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information to be included in the Company’s periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

In addition, there have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

ITEM 1 - LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business that, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

ITEM 1A - RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. As of September 30, 2009, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2 - UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5 - OTHER INFORMATION

Not applicable.

ITEM 6 - EXHIBITS


Exhibit No.		Description

3.1		Certificate of Incorporation of Ottawa Savings Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to Company’s Registration Statement on Form SB-2, No. 333-123455, filed on May 3, 2005, as amended)

3.2		Bylaws of Ottawa Savings Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to Company’s Registration Statement on Form SB-2, No. 333-123455, filed on May 3, 2005, as amended)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


						OTTAWA SAVINGS BANCORP, INC. Registrant

Date: November 12, 2009						/S/ GARY L. OCEPEK
						Gary L. Ocepek
						President and Chief Executive Officer
						(Principal Executive Officer)

Date: November 12, 2009						/S/ JON L. KRANOV
						Jon L. Kranov
						Senior Vice President and Chief Financial Officer
						(Principal Accounting and Financial Officer)

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