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, 2010

¨	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, 2010
Common Stock, $0.01 par value		2,121,045

OTTAWA SAVINGS BANCORP, INC.

FORM 10-Q

For the quarterly period ended September 30, 2010

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		16
	Item 3	Quantitative and Qualitative Disclosures about Market Risk		25
	Item 4	Controls and Procedures		25

PART II – OTHER INFORMATION

	Item 1	Legal Proceedings		25
	Item 1A	Risk Factors		26
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		26
	Item 3	Defaults upon Senior Securities		26
	Item 4	[Removed and Reserved]		26
	Item 5	Other Information		26
	Item 6	Exhibits		26

SIGNATURES				27

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

OTTAWA SAVINGS BANCORP, INC.

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(Unaudited)


	September 30, 2010			December 31, 2009
Assets
Cash and due from banks	$	2,132,349		$	1,858,421
Interest bearing deposits		8,876,076			1,114,371

Total cash and cash equivalents		11,008,425			2,972,792
Federal funds sold		3,211,000			3,917,000
Securities held to maturity (fair value of $19 and $723,413 at September 30, 2010 and December 31, 2009, respectively)		19			721,101
Securities available for sale		29,296,192			27,118,824
Non-marketable equity securities		2,534,952			2,534,952
Loans, net of allowance for loan losses of $3,380,145 and $3,514,704 at September 30, 2010 and December 31, 2009, respectively		139,164,101			148,700,290
Loans held for sale		1,141,885			—
Premises and equipment, net		7,108,936			7,282,235
Accrued interest receivable		838,762			889,562
Foreclosed real estate		782,360			832,809
Deferred tax asset		2,013,090			1,901,837
Cash value of life insurance		1,513,447			1,489,657
Prepaid FDIC premiums		749,851			1,013,083
Other assets		1,461,080			1,322,757

Total assets	$	200,824,100		$	200,696,899


Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	3,297,216		$	3,141,577
Interest bearing		172,269,799			172,867,675

Total deposits		175,567,015			176,009,252
Accrued interest payable		97,266			144,246
Other liabilities		2,403,869			2,268,085

Total liabilities		178,068,150			178,421,583

Commitments and contingencies
Redeemable common stock held by ESOP plan		215,792			227,906

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		8,753,269			8,726,277
Retained earnings		15,278,518			15,045,706
Unallocated ESOP shares		(470,603	)		(508,760	)
Unearned management recognition plan shares		(214,270	)		(267,336	)
Accumulated other comprehensive income		583,774			454,167

		23,952,937			23,472,303

Less:
Treasury shares, at cost, 103,866 shares		(1,196,987	)		(1,196,987	)
Maximum cash obligation related to ESOP shares		(215,792	)		(227,906	)

Total stockholders’ equity		22,540,158			22,047,410

Total liabilities and stockholders’ equity	$	200,824,100		$	200,696,899

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009
Interest and dividend income:
Interest and fees on loans	$	2,091,201	$	2,357,802		$	6,467,363		$	7,140,827
Securities:
Mortgage-backed and related securities		244,171		242,600			723,876			777,250
U.S. agency securities		72,693		82,687			211,843			246,279
Interest-bearing deposits		1,691		865			6,241			2,082

Total interest and dividend income		2,409,756		2,683,954			7,409,323			8,166,438

Interest expense:
Deposits		845,888		1,148,239			2,658,957			3,711,404
Other borrowings		—		46			—			5,988

Total interest expense		845,888		1,148,285			2,658,957			3,717,392

Net interest income		1,563,868		1,535,669			4,750,366			4,449,046
Provision for loan losses		80,825		580,856			1,161,399			1,519,454

Net interest income after provision for loan losses		1,483,043		954,813			3,588,967			2,929,592

Other income:
Gain (loss) on sale of securities		—		113			(422	)		22,593
Gain on sale of loans		31,500		22,509			52,603			159,178
Origination of mortgage servicing rights, net of amortization		371		7,096			4,058			59,253
Customer service fees		68,768		74,884			200,573			210,096
Income on bank owned life insurance		9,851		6,163			23,790			16,627
Other		3,483		5,485			29,945			29,889

Total other income		113,973		116,250			310,547			497,636

Other expenses:
Salaries and employee benefits		352,505		455,403			1,489,766			1,396,419
Directors fees		21,009		21,033			63,027			63,098
Occupancy		120,614		122,268			371,713			369,964
Deposit insurance premium		99,185		79,964			282,779			380,007
Legal and professional services		48,605		50,813			192,066			146,422
Data processing		75,066		73,621			217,733			209,304
Foreclosed real estate		231,019		191,802			298,688			344,175
Loss on sale of foreclosed real estate		19,308		23,100			39,618			23,100
Loss on sale of repossessed assets		722		8,232			2,922			27,615
Other		122,565		112,930			386,648			406,743

Total other expenses		1,090,598		1,139,166			3,344,960			3,366,847

Income (loss) before income taxes		506,418		(68,103	)		554,554			60,381
Income tax expense (benefit)		183,856		(35,002	)		195,345			16,246

Net income (loss)	$	322,562	$	(33,101	)	$	359,209		$	44,135

Basic earnings (loss) per share	$	0.16	$	(0.02	)	$	0.18		$	0.02

Diluted earnings (loss) per share	$	0.16	$	(0.02	)	$	0.17		$	0.02

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

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010		2009
Comprehensive income (loss):
Net income (loss)	$	322,562		$	(33,101	)	$	359,209	$	44,135
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities available for sale arising during period, net of income taxes		(94,305	)		152,106			129,338		177,578
Reclassification adjustment for (gains) losses included in net income (loss), net of tax expense		—			(14,911	)		279		(75	)

Comprehensive income	$	228,257		$	104,094		$	488,826	$	221,638

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2010 and 2009

(Unaudited)


	2010			2009
Cash Flows from Operating Activities
Net income	$	359,209		$	44,135
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		185,394			180,049
Provision for loan losses		1,161,399			1,519,454
Provision for deferred income taxes		(178,020	)		(402,195	)
Net amortization of premiums and discounts on securities		92,159			28,773
Loss (gain) on sale of available for sale securities		422			(22,593	)
Origination of mortgage loans held for sale		(4,924,775	)		(13,909,379	)
Proceeds from sale of mortgage loans held for sale		3,835,493			14,068,557
Gain on sale of loans, net		(52,603	)		(159,178	)
Origination of mortgage servicing rights, net of amortization		(4,058	)		(59,253	)
Amortization of prepaid FDIC insurance premiums		263,232			—
Loss on sale of foreclosed real estate		39,618			23,100
Write down of foreclosed real estate		174,760			136,145
Loss on sale of repossessed assets		2,922			27,615
ESOP compensation expense		31,949			36,313
MRP compensation expense		53,066			85,057
Compensation expense on RRP options granted		33,200			40,097
Increase in cash surrender value of life insurance		(23,790	)		(16,627	)
Change in assets and liabilities:
Decrease in accrued interest receivable		50,800			7,975
Increase in other assets		(122,765	)		(88,143	)
Increase in accrued interest payable and other liabilities		88,804			161,524

Net cash provided by operating activities		1,066,416			1,701,426

Cash Flows from Investing Activities
Securities available for sale:
Purchases		(16,754,148	)		(1,798,933	)
Sales, calls, maturities and paydowns		14,705,087			6,968,110
Securities held to maturity:
Sales and paydowns		696,568			90,740
Net decrease in loans		7,385,591			1,152,879
Net decrease (increase) in federal funds sold		706,000			(1,988,000	)
Proceeds from sale of foreclosed real estate		776,342			—
Proceeds from sale of repossessed assets		34,506			99,724
Purchase of premises and equipment		(12,095	)		(23,214	)

Net cash provided by investing activities		7,537,851			4,501,306

Cash Flows from Financing Activities
Net (decrease) increase in deposits		(442,237	)		1,651,670
Principal reduction of Federal Home Loan Bank advances		—			(6,300,000	)
Cash dividends paid		(126,397	)		(125,849	)

Net cash used in financing activities		(568,634	)		(4,774,179	)

Net increase in cash and cash equivalents		8,035,633			1,428,553
Cash and cash equivalents:
Beginning		2,972,792			3,096,742

Ending	$	11,008,425		$	4,525,295

(Continued)

See accompanying notes to these unaudited consolidated financial statements.

OTTAWA SAVINGS BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2010 and 2009

(Unaudited)

(Continued)


	2010			2009
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors	$	2,705,937		$	3,654,037
Interest paid on other borrowings		—			5,988
Income taxes		573,389			464,742
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		1,709,543			604,859
Other assets acquired in settlement of loans		48,928			92,500
Sale of foreclosed real estate through loan origination		769,272			204,900
(Decrease) increase in liability arising from ESOP put option		(12,114	)		51,479

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, 2009. Certain amounts in the accompanying financial statements and footnotes for 2009 have been reclassified with no effect on net income or stockholders’ equity to be consistent with the 2010 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, 2010, 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, 2010.

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.

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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 September 30,						Nine Months ended September 30,
	2010			2009			2010			2009
Net income (loss) available to common stockholders	$	322,562		$	(33,101	)	$	359,209		$	44,135

Basic potential common shares:
Weighted average shares outstanding		2,121,045			2,123,017			2,121,045			2,123,017
Weighted average unallocated ESOP shares		(47,908	)		(52,987	)		(49,164	)		(54,246	)
Weighted average unvested MRP shares		(20,939	)		(28,786	)		(20,939	)		(28,786	)

Basic weighted average shares outstanding		2,052,198			2,041,244			2,050,942			2,039,985
Dilutive potential common shares:
Weighted average unrecognized compensation on MRP shares		14,956			—			14,327			15,465
Weighted average RRP options outstanding **		—			—			—			—

Dilutive weighted average shares outstanding		2,067,154			2,041,244			2,064,084			2,055,450

Basic earnings (loss) per share	$	0.16		$	(0.02	)	$	0.18		$	0.02

Diluted earnings (loss) per share	$	0.16		$	(0.02	)	$	0.17		$	0.02

**	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.

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, 2010, 26,974 shares at a fair value of $8.00 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, 2010			December 31, 2009
Shares allocated		29,254			25,438
Shares withdrawn from the plan		(2,280	)		(1,321	)
Unallocated shares		47,060			50,876

Total ESOP shares		74,034			74,993

Fair value of unallocated shares	$	376,480		$	480,778

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, 2010:
Held to Maturity
Mortgage-backed securities	$	19	$	—	$	—	$	19

Available for Sale
U.S. agency securities	$	6,862,436	$	92,818	$	—	$	6,955,254
Mortgage-backed securities		21,549,250		809,858		18,170		22,340,938

	$	28,411,686	$	902,676	$	18,170	$	29,296,192


December 31, 2009:
Held to Maturity
Mortgage-backed securities	$	721,101	$	7,132	$	4,820	$	723,413

Available for Sale
U.S. agency securities	$	4,506,404	$	65,854	$	—	$	4,572,258
Mortgage-backed securities		21,924,288		672,800		50,522		22,546,566

	$	26,430,692	$	738,654	$	50,522	$	27,118,824

The amortized cost and fair value at September 30, 2010, 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 prepaid 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		—		—		2,498,556		2,519,475
Due after five years through ten years		—		—		4,363,880		4,435,779
Due after ten years		—		—		—		—
Mortgage-backed securities		19		19		21,549,250		22,340,938

	$	19	$	19	$	28,411,686	$	29,296,192

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, 2010 and December 31, 2009:


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2010:
Securities Available for Sale
Mortgage-backed securities	$	1,544,708	$	18,170	$	—	$	—	$	1,544,708	$	18,170


December 31, 2009:
Securities Held to Maturity
Mortgage-backed securities	$	—	$	—	$	359,176	$	4,820	$	359,176	$	4,820


Securities Available for Sale
Mortgage-backed securities	$	3,554,876	$	50,111	$	18,210	$	411	$	3,573,086	$	50,522

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 September 30, 2010, one security had an unrealized loss with an aggregate depreciation of 1.16% from the Company’s amortized cost basis. 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 this security and it is not more likely than not the Company will be required to sell this security before recovery of the amortized cost basis, which may be maturity, the Company does not consider this investment to be other than temporarily impaired at September 30, 2010.

There were no proceeds from the sales of securities for both the three months ended September 30, 2010 and 2009, respectively. There were no gross realized gains for the three months ended September 30, 2010 and $113 in gross realized gains for the three months ended September 30, 2009. There were no gross realized losses for both of the three months ended September 30, 2010 and 2009, respectively. The tax provision applicable to these net realized gains amounted to $0 and $38, respectively.

Proceeds from the sales of securities were $1.6 million and $861,295 for the nine months ended September 30, 2010 and 2009, respectively. There were $24,367 and $23,042 in gross realized gains for the nine months ended September 30, 2010 and 2009, respectively. Gross realized losses amounted to $24,789 and $450 for the nine months ended September 30, 2010 and 2009, respectively. The tax provision (benefit) applicable to these net realized losses and gains amounted to $(143) and $7,681, respectively.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – ASSET QUALITY

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


	September 30, 2010		December 31, 2009
Impaired loans without a valuation allowance	$	—	$	602,629
Impaired loans with a valuation allowance		9,382,065		5,540,654

Total impaired loans	$	9,382,065	$	6,143,283

Valuation allowance related to impaired loans	$	1,987,714	$	2,005,863

Total non-accrual loans	$	6,357,870	$	5,901,237

Total loans past due ninety days or more and still accruing interest	$	—	$	248,279

Total impaired loans increased approximately $3.2 million primarily due to the addition to impaired status of two loans secured by non-residential real estate totaling approximately $3.4 million. The increase is also attributable to an increase in the total number of impaired loans, off-set by loans removed from impaired status by becoming current or by being transferred to OREO. Total non-accrual loans increased approximately $457,000 due primarily to increased delinquencies of loans secured by multi-family residential real estate offset by slight decreases in delinquencies of loans secured by one-to-four family real estate and non-residential real estate.

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, 2010 and December 31, 2009, we classified $7.1 million and $10.6 million, respectively, of our assets as special mention, $10.2 million and $6.8 million, respectively, of our assets as substandard, and $0 and $175,000, respectively, of our assets as doubtful.

Following is a summary of changes to the allowance for loan losses for the nine months ended September 30, 2010 and 2009.


	2010			2009
Balance at beginning of year	$	3,514,704		$	1,604,731
Provision charged to income		1,161,399			938,598
Loans charged off		(1,314,474	)		(925,054	)
Recoveries of loans previously charged off		18,516			9,512

Balance at end of period	$	3,380,145		$	1,627,787

NOTE 9 – STOCK COMPENSATION

Total stock-based compensation expense for the nine months ended September 30, 2010 and 2009, was approximately $86,000 and $125,000, 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. The decrease in stock-based compensation expense was due to the forfeiture of options and shares as a result of the release agreement between the Company and its former CEO effective May 31, 2010. For the nine months ended September 30, 2010 and 2009, the Company did not grant additional options or shares under the MRP.

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 10 – RECENT ACCOUNTING DEVELOPMENTS

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchase, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this accounting guidance related to Level 1 and 2 measurements did not have a material impact on the Company’s consolidated financial statements. The adoption of this guidance related to Level 3 measurements is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 will require an entity to provide enhanced and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of this guidance is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not expect the adoption of this accounting guidance to have a material impact on the Company’s consolidated financial statements.

NOTE 11 – FAIR VALUE MEASUREMENT AND DISCLOSURE

The Company has adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, which 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 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).

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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 obligations of U.S. government corporations and agencies, and 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 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. During this quarter management reassessed the valuation methods for impaired loans, and due to the volatility in the market and the subjectivity that goes into the valuation process, specifically the discounts on appraisals, management determined it was appropriate to reclassify impaired loans from Level 2 into Level 3. The calculated valuation amount does not necessarily represent the value of the loan if sold to a willing buyer. Management believes it is more likely than not that a workout solution or liquidation of the collateral is the best use of the asset and therefore has measured fair value based on the underlying collateral of the loans. If management were to sell the impaired loan portfolio to a third party instead of liquidating the collateral, the measurement of fair value could be significantly different.

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the second or third quarter of 2010.

The tables below present the recorded amount of assets measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009.


September 30, 2010	Level 1		Level 2		Level 3		Total Fair Value
U.S. agency securities available for sale	$	—	$	6,955,254	$	—	$	6,955,254
Mortgage-backed securities available for sale		—		22,340,938		—		22,340,938

	$	—	$	29,296,192	$	—	$	29,296,192


December 31, 2009	Level 1		Level 2		Level 3		Total Fair Value
U.S. agency securities available for sale	$	—	$	4,572,258	$	—	$	4,572,258
Mortgage-backed securities available for sale		—		22,546,566		—		22,546,566

	$	—	$	27,118,824	$	—	$	27,118,824

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The tables below present the recorded amount of assets measured at fair value on a non-recurring basis at September 30, 2010 and December 31, 2009.


September 30, 2010	Level 1		Level 2		Level 3		Total Fair Value
Foreclosed assets	$	—	$	547,790	$	267,569	$	815,359
Impaired loans, net		—		—		7,394,351		7,394,351

December 31, 2009	Level 1		Level 2		Level 3		Total Fair Value
Foreclosed assets	$	—	$	854,309	$	—	$	854,309
Impaired loans, net		—		4,137,420		—		4,137,420

The following information presents estimated fair value of the Company’s financial instruments as of September 30, 2010 and December 31, 2009.


	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial Assets:
Cash and cash equivalents	$	11,008,425	$	11,008,425	$	2,972,792	$	2,972,792
Federal funds sold		3,211,000		3,211,000		3,917,000		3,917,000
Securities		31,831,163		31,831,163		30,374,877		30,377,189
Accrued interest receivable		838,762		838,762		889,562		889,562
Loans		139,164,101		145,774,000		148,700,290		154,333,000
Loans held for sale		1,141,885		1,141,885		—		—
Mortgage servicing rights		168,707		168,707		164,649		164,649

Financial Liabilities:
Deposits		175,567,015		180,673,000		176,009,252		178,964,000
Accrued interest payable		97,266		97,266		144,246		144,246

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

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

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

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

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

OTTAWA SAVINGS BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

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

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, 2010 and December 31, 2009, the fair value of the commitments is immaterial in nature.

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

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

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

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to September 30, 2010, 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, and on that same date, converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, all of the outstanding stock of which was issued to the Company. As part of the reorganization, the Company issued 1,001,210 shares to the public and 1,223,701 shares to Ottawa Savings Bancorp MHC.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

The Company’s total assets increased $127,000, or .06%, to $200.8 million at September 30, 2010, from $200.7 million at December 31, 2009. The increase is primarily the result of an increase in cash and cash equivalents of $8.0 million, an increase in securities available for sale of $2.2 million, an increase in other assets of $138,000, an increase in deferred tax assets of $111,000, and an increase in the value of bank owned life insurance of $24,000. The increases were offset by a decrease in loans of $9.5 million, a decrease in securities held to maturity of $721,000, a decrease in federal funds sold of $706,000, a decrease in prepaid FDIC insurance premiums of $263,000, a decrease in premises and equipment of $173,000 due primarily to depreciation, a decrease in accrued interest receivable of $51,000, and a decrease in foreclosed real estate of $50,000.

Cash and cash equivalents increased $8.0 million, or 270.31%, to $11.0 million at September 30, 2010 from $3.0 million at December 31, 2009 as a result of cash provided by operating and investing activities exceeding the cash used.

Federal funds sold decreased $706,000, or 18.02%, to $3.2 million at September 30, 2010 from $3.9 million at December 31, 2009 primarily as a result of the increase in cash and cash equivalents.

Securities held to maturity decreased $721,000, or 99.99%, to $19 at September 30, 2010 from $721,000 at December 31, 2009. The decrease was primarily the result of the sale of 30 held to maturity securities and principal pay-downs. The purpose of the sale was to eliminate the safekeeping fees and administrative costs associated with the remnants of the original issues.

Securities available for sale increased $2.2 million, or 8.03%, to $29.3 million at September 30, 2010 from $27.1 million at December 31, 2009. The increase was primarily the result of $16.8 million in purchases and a $196,000 increase in market values of the available for sale securities, offset by sales, calls and maturities of $10.1 million and principal pay-downs of $4.6 million.

Loans, net of allowances for loan losses, decreased $9.5 million, or 6.41%, to $139.2 million at September 30, 2010 from $148.7 million at December 31, 2009. The decrease in loans, net of allowances for loan losses, was primarily due to pay-offs and principal reductions of one-to-four family mortgages, construction loans, and personal loans, offset by a slight increase in commercial loans and line of credit advances in addition to a slight decrease in the allowance for loan losses.

Accrued interest receivable decreased $51,000, or 5.71%, to $839,000 at September 30, 2010 from $890,000 at December 31, 2009. The decrease was due to a decrease in accrued interest on securities of $26,000 and an increase in the reserve for uncollected interest on non-accrual loans of $130,000, offset by an increase in accrued interest on loans of $105,000.

Other assets comprised primarily of prepaid expenses, deferred director compensation accounts, and auto loan repossessions increased $138,000, or 10.46%, to $1.5 million at September 30, 2010 from $1.3 million at December 31, 2009. The increase is primarily due to an increase in other charges due on loans of $103,000, an increase in the deferred director compensation investment accounts of $17,000 due to investment gains and contributions, an increase in auto loan repossessions, net of proceeds from sales, totaling $11,000, an increase of $8,000 in funds due from the ESOP trustee, an increase in mortgage servicing rights of $4,000, an increase in prepaid dealer reserve on purchased auto loans of $3,000, and an increase in accounts receivable of $2,000. The increases were offset by a decrease in prepaid expenses of $11,000.

Prepaid FDIC premiums decreased $263,000, or 25.98%, to $750,000 at September 30, 2010 from $1.0 million at December 31, 2009 as a result of recording the current year-to-date FDIC premium expenses.

Total deposits decreased $442,000, or .25%, to $175.6 million at September 30, 2010, from $176.0 million at December 31, 2009. The decrease is primarily due to a decrease in money market accounts of $2.2 million, offset by an increase in certificates of deposit of $873,000, primarily in terms of three to five years, an increase in interest bearing checking accounts of $586,000, an increase in passbook savings accounts of $182,000 and an increase in non-interest bearing checking accounts of $156,000. The shift in fund allocation can be attributed to managements’ decision to reduce interest rates in general during the third quarter, and particularly on one of our money market products to a level no longer competitive with the short term certificates offered.

Accrued interest payable decreased $47,000, or 32.57%, to $97,000 at September 30, 2010, from $144,000 at December 31, 2009. The decrease is primarily a result of declining interest rates on money market and certificates of deposit accounts.

Other liabilities increased $136,000, or 5.99%, to $2.4 million at September 30, 2010 from $2.3 million at December 31, 2009. The increase is primarily due to an outstanding payable to another local financial institution as part of a loan participation agreement in the amount of $281,000, an increase in accounts payable of $142,000 primarily as a result of the release agreement entered into between the Company and its former CEO, and an increase in the accrued SERP payable of $74,000, as accruals continue with no distributions. The increases were offset by a decrease in income taxes payable of $199,000, a decrease in escrow payable of $92,000, a decrease in property taxes payable of $45,000, due to the timing of the accrual, and a decrease of $26,000 in the CDARs payable.

Equity increased $493,000, or 2.23%, to $22.5 million at September 30, 2010 from $22.0 million at December 31, 2009. The increase in equity reflects net income for the nine months ended September 30, 2010 of approximately $359,000, an increase in other comprehensive income, net of taxes of $130,000, 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 equity include increases of $118,000 from the allocation and amortization of ESOP shares, MRP shares, and RRP options, and an increase to stockholders’ equity of $12,000 due to decrease the cash obligation related to redeemable common stock held by the ESOP.

The continuing state of economic uncertainty continues to affect our asset quality. We have witnessed a decrease in the market values of homes in our market area in general and also on specific properties held as collateral. In addition, high unemployment locally continues to affect some of our borrowers’ ability to timely repay their obligations to the Company.

The Company’s nonperforming assets consist of non-accrual loans, foreclosed real estate and other repossessed assets. Loans are generally placed in non-accrual status when they are contractually past due 90 days or more; they may be placed in non-accrual status sooner if management has significant doubt as to the collection of all amounts due. Interest previously accrued but uncollected is reversed and charged against interest income.

The following table summarizes nonperforming assets at September 30, 2010 and December 31, 2009.


	September 30, 2010		December 31, 2009
	(In Thousands)
Non-accrual:
One-to-four family	$	3,784	$	3,856
Multi-family		530		—
Non-residential real estate		2,039		2,020
Construction		—		—
Consumer		5		25

Total non-accrual loans		6,358		5,901
Past due greater than 90 days and still accruing:
Lines of credit		—		248

Total nonperforming loans		6,358		6,149
Foreclosed real estate		782		833
Other repossessed assets		33		21

Total nonperforming assets	$	7,173	$	7,003

The table below presents selected asset quality ratios at September 30, 2010 and December 31, 2009.


	September 30,			December 31,
	2010			2009
Allowance for loan losses as a percent of gross loans receivable		2.34	%		2.31	%
Allowance for loan losses as a percent of total nonperforming loans		53.16	%		57.16	%
Nonperforming loans as a percent of gross loans receivable		4.41	%		4.03	%
Nonperforming assets as a percent of total assets		3.57	%		3.49	%

COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

Net Income. The Company had net income of $323,000 for the three months ended September 30, 2010, compared to a net loss of $33,000 for the three months ended September 30, 2009.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2010 and 2009.


	Three Months Ended
	September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,091	$	2,358	$	(267	)		(11.32	)%
Securities:
Mortgage-backed and related securities		244		242		2			0.83
U.S. agency securities		73		83		(10	)		(12.05	)
Interest-bearing deposits		2		1		1			100.00

Total interest and dividend income		2,410		2,684		(274	)		(10.21	)

Interest expense:
Deposits		846		1,148		(302	)		(26.31	)

Total interest expense		846		1,148		(302	)		(26.31	)

Net interest income	$	1,564	$	1,536	$	28			1.82	%

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


	Three Months Ended September 30,
	2010							2009
	AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST			AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST
	(Dollars in thousands)
Interest-earning assets
Loans receivable, net (1)	$	140,165	$	2,091		5.97	%	$	153,142	$	2,358		6.16	%
Securities, net (2)		32,588		317		3.89	%		27,531		325		4.73	%
Interest-bearing deposits		9,364		2		0.07	%		4,985		1		0.08	%

Total interest-earning assets		182,117		2,410		5.29	%		185,658		2,684		5.78	%
Interest-bearing liabilities
Money Market accounts	$	23,783	$	67		1.13	%	$	15,867	$	81		2.04	%
Passbook accounts		11,724		7		0.24	%		11,417		10		0.35	%
Certificates of Deposit accounts		127,734		764		2.39	%		137,733		1,048		3.04	%
Checking accounts		10,225		8		0.31	%		9,354		9		0.38	%

Total interest-bearing liabilities		173,466		846		1.95	%		174,371		1,148		2.63	%

NET INTEREST INCOME			$	1,564						$	1,536

NET INTEREST RATE SPREAD (3)						3.34	%						3.15	%

NET INTEREST MARGIN (4)						3.43	%						3.31	%

RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES						104.99	%						106.47	%

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

(2)	Includes unamortized discounts and premiums.

(3)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities.

(4)	Net interest margin represents net interest income divided by average interest-earning assets.

The following table summarizes the changes in net interest income due to rate and volume for the three months ended September 30, 2010 and 2009. 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, 2010 Compared to 2009 Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	(194	)	$	(73	)	$	(267	)
Securities, net		49			(57	)		(8	)
Interest-bearing deposits		1			—			1

Total interest-earning assets	$	(144	)	$	(130	)	$	(274	)

Interest expense on
Money Market accounts	$	22		$	(36	)	$	(14	)
Passbook accounts		—			(3	)		(3	)
Certificates of Deposit accounts		(60	)		(224	)		(284	)
Checking		1			(2	)		(1	)

Total interest-bearing liabilities		(37	)		(265	)		(302	)

Change in net interest income	$	(107	)	$	135		$	28

Net interest income increased $28,000, or 1.84%, to $1.6 million for the three months ended September 30, 2010 compared to $1.5 million for the three months ended September 30, 2009. Interest and dividend income decreased $274,000, or 10.22%, to $2.4 million for the three months ended September 30, 2010 from $2.7 million for the three months ended September 30, 2009 due to a decrease in the average rate on interest-earning assets to 5.29% from 5.78%, due to a declining interest rate environment and a decrease of $3.5 million in average interest-earning assets to $182.1 million from $185.6 million for the three months ended September 30, 2010 compared to the same period in 2009. Interest expense decreased $302,000, or 26.33%, due to a decrease in the average cost of interest-bearing liabilities to 1.95% from 2.63%, due to a declining interest rate environment and a decrease of $905,000 in average interest-bearing liabilities for the three months ended September 30, 2010 compared to the same period in 2009.

Provision for Loan Losses. Management recorded a loan loss provision of $81,000 for the three months ended September 30, 2010, compared to $581,000 for the three months ended September 30, 2009. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect each borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Based on its review at September 30, 2010, 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, 2010 and 2009.


	Three months ended September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	—	$	—	$	—			—	%
Gain on sale of loans		32		23		9			39.13
Origination of mortgage servicing rights, net of amortization		—		7		(7	)		(100.00	)
Customer service fees		69		75		(6	)		(8.00	)
Income on bank owned life insurance		10		6		4			66.67
Other		3		5		(2	)		(40.00	)

Total other income	$	114	$	116	$	(2	)		(1.72	)%

The decrease in total other income was due to decreased origination of mortgage servicing rights, net of amortization. The decrease was due to a decline in the origination of mortgage loans for sale, which resulted from a continued decrease in demand for new mortgage loans and a decline in the refinancing of existing loans to be sold to Freddie Mac, combined with a slight decrease in customer service fees. The decrease was offset by a slight increase in the gains on sale of loans and an increase in the income on bank owned life insurance.

Other Expenses. The following table summarizes other expenses for the three months ended September 30, 2010 and 2009.


	Three months ended September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	353	$	455	$	(102	)		(22.42	)%
Directors fees		21		21		—			—
Occupancy		121		122		(1	)		(0.82	)
Deposit insurance premium		99		80		19			23.75
Legal and professional services		49		51		(2	)		(3.92	)
Data processing		75		74		1			1.35
Foreclosed real estate		231		192		39			20.31
Loss on sale of foreclosed real estate		19		23		(4	)		100.00
Loss on sale of repossessed assets		1		8		(7	)		(87.50	)
Other		123		113		10			8.85

Total other expenses	$	1,092	$	1,139	$	(47	)		(4.13	)%

The decrease in other expenses was primarily due to a decrease in salaries and employee benefits of $102,000 as a result of a decrease in compensation expenses relating to the departure of the Company’s former CEO and a decrease of $22,000 due to the termination of the defined benefit plan in December 2009. Expenses on foreclosed real estate increased $39,000, primarily due to an additional write-down on one property of $174,000 during in the third quarter of 2010, compared to a write-down on one property of $136,000 during the third quarter of 2009. Deposit insurance premiums increased $19,000 due to increased assessments imposed by the FDIC.

Income Taxes. The income tax expense was $184,000 for the three months ended September 30, 2010, compared to an income tax benefit of $35,000 for the same period in 2009. 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, 2010 AND 2009

Net Income. The Company had net income of $359,000 for the nine months ended September 30, 2010, compared to net income of $44,000 for the nine months ended September 30, 2009.

Net Interest Income. The following table summarizes interest and dividend income and interest expense for the nine months ended September 30, 2010 and 2009.


	Nine Months Ended
	September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	6,467	$	7,141	$	(674	)		(9.44	)%
Securities:
Mortgage-backed and related securities		724		777		(53	)		(6.82	)
U.S. agency securities		212		246		(34	)		(13.82	)
Interest-bearing deposits		6		2		4			200.00

Total interest and dividend income		7,409		8,166		(757	)		(9.27	)

Interest expense:
Deposits		2,659		3,711		(1,052	)		(28.35	)
Borrowings		—		6		(6	)		(100.00	)

Total interest expense		2,659		3,717		(1,058	)		(28.46	)

Net interest income	$	4,750	$	4,449	$	301			6.77	%


	Nine Months Ended September 30,
	2010							2009
	AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST			AVERAGE BALANCE		INTEREST		AVERAGE YIELD/ COST
	(Dollars in thousands)
Interest-earning assets
Loans receivable, net (1)	$	143,373	$	6,467		6.01	%	$	153,768	$	7,141		6.19	%
Securities, net (2)		32,937		936		3.79	%		28,509		1,023		4.78	%
Interest-bearing deposits		8,579		6		0.09	%		4,924		2		0.05	%

Total interest-earning assets		184,889		7,409		5.34	%		187,201		8,166		5.82	%
Interest-bearing liabilities
Money Market accounts	$	24,343	$	245		1.34	%	$	13,765	$	212		2.05	%
Passbook accounts		11,826		27		0.30	%		11,662		31		0.35	%
Certificates of Deposit accounts		129,402		2,363		2.43	%		140,153		3,439		3.27	%
Checking accounts		10,174		24		0.32	%		9,451		29		0.41	%
Advances and borrowed funds		—		—		0.00	%		1,140		6		0.70	%

Total interest-bearing liabilities		175,745		2,659		2.02	%		176,171		3,717		2.81	%

NET INTEREST INCOME			$	4,750						$	4,449

NET INTEREST RATE SPREAD (3)						3.32	%						3.01	%

NET INTEREST MARGIN (4)						3.43	%						3.17	%

RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES						105.20	%						106.26	%

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

(2)	Includes unamortized discounts and premiums.

(3)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities.

(4)	Net interest margin represents net interest income divided by average interest-earning assets.

The following table summarizes the changes in net interest income due to rate and volume for the nine months ended September 30, 2010 and 2009. 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, 2010 Compared to 2009 Increase (Decrease) Due to
	VOLUME			RATE			NET
	(Dollars in Thousands)
Interest and dividends earned on
Loans receivable, net	$	126		$	(213	)	$	(87	)
Securities, net		(469	)		(205	)		(674	)
Interest-bearing deposits		3			1			4

Total interest-earning assets	$	(340	)	$	(417	)	$	(757	)

Interest expense on
Money Market accounts	$	106		$	(73	)	$	33
Passbook accounts		—			(4	)		(4	)
Certificates of Deposit accounts		(196	)		(880	)		(1,076	)
Checking		1			(6	)		(5	)
Advances and borrowed funds		—			(6	)		(6	)

Total interest-bearing liabilities		(89	)		(969	)		(1,058	)

Change in net interest income	$	(251	)	$	552		$	301

Net interest income increased $301,000, or 6.77%, to $4.7 million for the nine months ended September 30, 2010 compared to $4.4 million for the nine months ended September 30, 2009. Interest and dividend income decreased $757,000, or 9.27%, to $7.4 million for the nine months ended September 30, 2010 from $8.2 million for the nine months ended September 30, 2009. The increase in net interest income was due to a decrease in the average rate paid on interest-earning assets to 5.34% from 5.82% resulting from a declining interest rate environment and a decrease of $2.3 million in average interest-earning assets to $184.9 million from $187.2 million for the nine months ended September 30, 2010 compared to the same period in 2009. Interest expense decreased $1.0 million, or 28.47%, to $2.7 million for the nine months ended September 30, 2010, from $3.7 million for the nine months ended September 30, 2009 due to a decrease in the average cost of interest-bearing liabilities to 2.02% from 2.81%. The decrease in interest expense is due to a declining interest rate environment and a decrease of $426,000 in average interest-bearing liabilities.

Provision for Loan Losses. Management recorded a loan loss provision of $1.2 million for the nine months ended September 30, 2010, compared to $1.5 million for the nine months ended September 30, 2009. 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. Based on its review at September 30, 2010, 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 at September 30, 2010.

Other Income. The following table summarizes other income for the nine months ended September 30, 2010 and 2009.


	Nine months ended September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Other income:
Gain on sale of securities	$	—	$	23	$	(23	)		100.00	%
Gain on sale of loans		53		159		(106	)		(66.67	)
Origination of mortgage servicing rights, net of amortization		4		59		(55	)		(93.22	)
Customer service fees		201		210		(9	)		(4.29	)
Income on bank owned life insurance		24		17		7			41.18
Other		30		30		—			—

Total other income	$	312	$	498	$	(186	)		(37.35	)%

The decrease in total other income was primarily due to decreased gains on sale of loans and origination of mortgage servicing rights, net of amortization, due to a decline in the origination of mortgage loans for sale. The decrease in the origination of mortgage loans for sale is the result of a continued decrease in demand for new mortgage loans and a decline in refinancing existing loans to be sold to Freddie Mac.

Other Expenses. The following table summarizes other expenses for the nine months ended September 30, 2010 and 2009.


	Nine months ended September 30,
	2010		2009		$ change			% change
	(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	1,490	$	1,396	$	94			6.73	%
Directors fees		63		63		—			—
Occupancy		372		370		2			0.54
Deposit insurance premium		283		380		(97	)		(25.53	)
Legal and professional services		192		147		45			30.61
Data processing		218		209		9			4.31
Foreclosed real estate		299		344		(45	)		(13.08	)
Loss on sale of foreclosed real estate		40		23		17			73.91
Loss on sale of repossessed assets		3		28		(25	)		(89.29	)
Other		387		407		(20	)		(4.91	)

Total other expenses	$	3,347	$	3,367	$	(20	)		(0.59	)%

Deposit insurance premiums decreased $97,000 due to the special assessment accrual in 2009 that was not required in 2010, offset by increased assessments imposed by the FDIC. Expenses on foreclosed real estate decreased $45,000. Losses on the sale of repossessed assets decreased $25,000, as a result of fewer assets sold in 2010 compared to 2009. The increase in salaries and employee benefits of $94,000 is primarily a result of a September 2010 payment, and a January 2011 payable, of approximately $158,000 each, partially offset by a decrease of approximately $25,000 in SERP expenses and a decrease of $39,000 in expenses related to the forfeiture of shares and options, relating to the release agreement entered into between the Company and its former CEO. The increase in salaries and employee benefits is also offset by a decrease of $83,000 due to the termination of the defined benefit plan in December 2009. The increase in legal and professional expenses was primarily a result of fees associated with the preparation of the release agreement.

Income Taxes. The income tax expense was $195,000 for the nine months ended September 30, 2010, compared to income tax expense of $16,000 for the same period in 2009. The difference in income taxes for the periods is primarily a result of the differences in pre-tax income for the applicable periods and the disproportionate impact of tax exempt transactions on the net income in each period.

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 2010, the Bank had outstanding commitments to originate $5.6 million in loans, unfunded lines of credit of $10.6 million, unfunded commitments on construction loans of $463,000, a commitment to purchase $5.0 million in auto loans, and unfunded standby letters of credit of $423,000. In addition, as of September 30, 2010, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $63.3 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, 2010, 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, 2010. In addition, as of September 30, 2010, the Bank had $5.0 million of available credit from Bankers Bank of Wisconsin to purchase Federal Funds.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for any repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the 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, 2010, the Company had cash and cash equivalents of $317,000.

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, 2010 of 9.99%, 16.95% and 18.22%, respectively, compared to ratios at December 31, 2009 of 9.70%, 15.82% and 17.09%, 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, 2010, 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 4. CONTROLS AND PROCEDURES

Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures 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 material to the financial condition and results of operations of the Company.

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 and in our quarterly report on Form 10-Q for the period ended June 30, 2010, which could materially affect our business, financial condition or future results. As of September 30, 2010, 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 – [REMOVED AND RESERVED]

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

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

SIGNATURE

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


		OTTAWA SAVINGS BANCORP, INC.
		Registrant

Date: November 12, 2010		/s/ Jon L. Kranov
		Jon L. Kranov
		President, Chief Executive Officer and Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company