UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





(Mark
One)


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


SECURITIES
EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2008





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


SECURITIES
EXCHANGE ACT OF 1934:    For the transition period
from  to





Commission
File No.  0-27672





NORTH
CENTRAL BANCSHARES, INC.


(Exact
name of registrant as specified in its charter)





Iowa
              42-1449849(State
      of incorporation)
              (I.R.S.
      Employer Identification No.)





825
      Central AvenueFort
      Dodge, Iowa
              50501(Address
      of principal executive offices)
              (Zip
      Code)




Registrant’s
telephone number, including area code(515)
576-7531




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





Title of each class
                
                Name of each exchange on which
      registeredCommon
      Stock, par value $0.01 per share
                
                The
      NASDAQ Stock Market,
LLC





Securities
registered pursuant to Section 12(g) of the Act: N/A





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





Yes  ̈  No x





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




Yes  ̈   No x




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





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





Large
      Accelerated Filer  ̈
              
              Accelerated
      Filer  ̈Non-Accelerated
      Filer  ̈
              (Do
      not check if smaller reporting company)
              Smaller
      Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule 2b-2
of the Exchange Act).




Yes  ̈ 
No x




The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of the
common stock as of June 30, 2008 was $28,300,000.





As of
March 26, 2009, there were issued and outstanding 1,343,448 shares of the
registrant’s common stock.





DOCUMENTS
INCORPORATED BY REFERENCE





1.          Portions
of the Proxy Statement for the registrant’s 2009 Annual Meeting of Shareholders
are incorporated by reference to Items 10, 11, 12, 13 and Item 14 of Part III
hereof.


2.          Portions
of the 2008 Annual Report to Shareholders are incorporated by reference to Items
5, 6, 7, 7A and 8 of Part II hereof.














Table of
Contents




PART
      IItem
      1
                Business
                3Item
      1A
                Risk
      Factors
                31Item
      1B
                Unresolved
      Staff Comments
                37Item
      2
                Properties
                38Item
      3
                Legal
      Proceedings
                39Item
      4
                Submission
      of Matters to a Vote of Security Holders
                39PART
      IIItem
      5
                Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                39Item
      6
                Selected
      Financial Data
                39Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                39Item
      7A
                Quantitative
      and Qualitative Disclosures About Market Risk
                39Item
      8
                Financial
      Statements and Supplementary Data
                39Item
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                40Item
      9A(T)
                Controls
      and Procedures
                40Item
      9B
                Other
      Information
                40PART
      IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                41Item
      11
                Executive
      Compensation
                41Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                41Item
      13
                Certain
      Relationships and Related Transactions, and Director
      Independence
                42Item
      14
                Principal
      Accountant Fees and Services
                42PART
      IVItem
      15
                Exhibits,
      Financial Statement Schedules
                43











PART
I





North
Central Bancshares, Inc. and First Federal Savings Bank of Iowa (the “Bank”) may
from time to time make written or oral “forward-looking statements.” These
forward-looking statements may be contained in this annual filing on Form 10-K
with the Securities and Exchange Commission (the “SEC”), the Annual Report to
Shareholders, and in other communications by the Company and the Bank, which are
made in good faith pursuant to the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. The words “may,” “could,” “should,”
“would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and
similar expressions are intended to identify forward-looking
statements.  As used in this Form 10-K, the terms “we,” “us,” “our,”
“North Central” and “Company” mean North Central Bancshares, Inc. and its
subsidiary, the Bank, on a consolidated basis (unless the context indicates
another meaning).




Forward-looking
statements include statements with respect to the Company’s beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions that
are subject to significant risks and uncertainties. The following factors, many
of which are subject to change based on various other factors beyond the
Company’s control, and other factors discussed in this Form 10-K, as well as
other factors identified in the Company’s filings with the SEC and those
presented elsewhere by management from time to time, could cause its financial
performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking
statements:




·
            developments
      impacting the financial services industry and global credit markets, and
      the response of legislators and regulators
  thereto;




·
            new
      laws and regulations aimed at stimulating the economy and mitigating the
      effects of the current global economic
crisis;




·
            developments
      at other companies in our industry, including the potential failure of
      other financial institutions;




·
            the
      strength of the United States economy in general and the strength of the
      local economies in which we conduct
operations;




·
            changes
      in consumer spending and saving
habits;




·
            the
      strength of our loan portfolio, including potential defaults by borrowers
      and our realization of amounts below the amounts we are due on certain
      loans;




·
            impairments
      to the value of investment securities held by
  us;




·
            the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Federal Reserve
    Board;




·
            inflation,
      interest rate, market and monetary
fluctuations;




·
            our
      ability to attract and retain key personnel to implement our strategy and
      oversee our operations;




·
            the
      impact of changes in financial services’ laws and regulations (including
      laws concerning taxes, banking, securities and
  insurance);




·
            our
      success in gaining regulatory approval of products and services, when
      required;




·
            the
      timely development of and acceptance of new products and services and the
      perceived overall value of these products and services by users, including
      the features, pricing and quality compared to competitors’ products and
      services;




·
            the
      willingness of users to substitute competitors’ products and services for
      our products and services;




·
            our
      ability to attract funds and raise capital when needed to support growth
      or ongoing operations;




·
            our
      previous expansion into new market areas and the associated costs may
      reduce our profitability;




·
            the
      availability of desirable avenues to deploy our existing
      capital;




·
            our
      success at managing the risks involved in our business, including our
      ability to maintain an effective system of internal control over financial
      reporting;




·
            limitations
      imposed on us by our articles of incorporation and bylaws which could
      restrict our ability to pursue growth opportunities;
  and




- 1
-





·
            limitations
      imposed on us by virtue of the agreements we entered into with the United
      States Treasury in connection with our participation in the Troubled Asset
      Relief Program Capital Purchase Program (including any potential changes
      to these agreements required to comply with changes in applicable Federal
      laws).




This list
of important factors is not exclusive.  The Company or the Bank does
not undertake to update any forward-looking statement, whether written or oral,
that may be made from time to time by or on behalf of the Company or the
Bank.





- 2
-





ITEM
1.  BUSINESS





General





North Central Bancshares, Inc., an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa, a
federally chartered savings bank.  The Company owns 100% of the
outstanding stock of the Bank.  The Company’s stock is traded on the
Nasdaq Global Market under the symbol “FFFD.”





At this time, the Company conducts
business as a unitary savings and loan holding company and the principal
business of the Company consists of the operation of the Bank.  The
Company’s executive offices are located at the home office of the Company at 825
Central Avenue, Fort Dodge, Iowa.  The Company’s telephone number is
(515) 576-7531.





First
Federal Savings Bank of Iowa





The Bank
is a federally-chartered savings bank that conducts its operations from its main
office located in Fort Dodge, Iowa and ten other branch offices located in
Iowa.  Eight of the Bank’s offices are located in north central and
central Iowa, in the cities of Fort Dodge, Nevada, Ames, Perry, Ankeny, Clive
and West Des Moines.  Three of the Bank’s offices are located in
southeast Iowa, in the cities of Burlington and Mount Pleasant. The Bank is the
successor to First Federal Savings and Loan Association of Fort Dodge, which was
originally chartered in 1954, and on May 7, 1987 became a federally chartered
savings bank.  The Bank adopted its present name on February 27, 1998.
The Bank is a community-oriented savings institution that is primarily engaged
in the business of attracting deposits from the general public in the Bank’s
market areas, and investing such deposits in one- to four-family residential
real estate mortgages, multifamily and commercial mortgages and consumer loans,
with emphasis on second mortgage loans.  The Bank’s deposits are
insured by the Federal Deposit Insurance Corporation (the
“FDIC”).  The Bank has been a member of the Federal Home Loan Bank
(“FHLB”) system since 1954.  At December 31, 2008, the Bank had total
assets of $473.9 million, total deposits of $351.3 million, and total
shareholders’ equity of $35.1 million.





The
Bank’s principal executive office is located at 825 Central Avenue, Fort Dodge,
Iowa and its telephone number at that address is (515) 576-7531.  The
Bank’s website address is www.firstfederaliowa.com.  Information
on the website shall not be considered a part of this Form 10-K.





Market
Area and Competition





The Company is a savings and loan
holding company serving its primary market area of Webster, Story, Des Moines,
Dallas, Polk, and Henry Counties, which are located in the central, north
central and southeastern parts of the State of Iowa.  The Company’s
market area is influenced by agriculture, manufacturing, retail sales,
insurance, financial and other professional services and public
education.  The Company is headquartered in Fort Dodge, the Webster
County seat, where it also operates two branch offices.





The year
2008 was an extremely challenging one for the financial industry and the entire
world economy.  The financial crisis and recession also impacted the
local economies in the Company’s market area.  The unemployment rate
for the month of December 2008 for Webster County was 5.0%, for Story County
3.2%, for Dallas County 3.7%, for Polk County 4.5%, for Henry County 6.3% and
for Des Moines County 6.8%.  These compare to the national rate of
7.2% and the State of Iowa rate of 4.6%.





Due to
the type of loan demand in the Company’s overall market area, increased
competition, and the Company’s decision to diversify its loan portfolio, the
Company has originated and purchased loans (primarily one- to four-family,
multifamily and commercial real estate loans) from outside the State of Iowa.
The Company intends to continue such originations and purchases pursuant to its
underwriting standards for Company-originated loans.





- 3
-





The
Company encounters strong competition both in attracting deposits and in
originating real estate and other loans.  Its most direct competition
for deposits has historically come from commercial and savings banks and credit
unions in its market area. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Company expects
continued strong competition in the foreseeable future.  Many such
institutions have greater financial and marketing resources available to them
than does the Company.  The Company competes for savings deposits by
offering depositors a high level of personal service and a wide range of
competitively priced financial products.  In recent years, additional
strong competition has come from stock and bond dealers and brokers and, in
particular, mutual funds.  The Company competes for real estate loans
primarily through the interest rates and loan fees it charges and advertising,
as well as by offering high levels of personal service.





Lending
Activities





Loan Portfolio
Composition.  The principal components of the Company’s loan
portfolio are fixed-rate and adjustable-rate first mortgage loans secured
primarily by one- to four-family owner-occupied residential real estate, fixed-
and adjustable-rate first mortgage loans secured by multifamily residential and
commercial real estate and secured and unsecured consumer loans, with emphasis
on second mortgage real estate loans.  At December 31, 2008, the
Company’s total loans receivable was $406.8 million, of which $170.2 million, or
41.8 %, were one- to four-family residential real estate first mortgage loans,
$58.0 million, or 14.3%, were multifamily real estate first mortgage loans,
primarily purchased by the Company, $92.0 million, or 22.6%, were commercial
real estate first mortgage loans, primarily purchased by the Company, and $8.4
million, or 2.1% were construction real estate loans.  Consumer loans,
consisting primarily of second mortgage loans and automobile loans, totaled
$78.2 million, or 19.2%, of the Company’s loan portfolio.





Loans to One
Borrower.Savings associations, such as the Bank, are
generally subject to the same limits on loans to one borrower as are imposed on
national banks.  Generally, under these limits, a savings association
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of the association’s unimpaired capital and
surplus.  Additional amounts may be lent, in the aggregate not
exceeding 10% of unimpaired capital and surplus, if any such loan or extension
of credit is fully secured by readily-marketable collateral.  Such
collateral is defined to include certain debt and equity securities, but
generally does not include real estate.  At December 31, 2008, it was
the Company’s policy to limit loans to one borrower to $5.0 million (reduced
from $5.5 million in 2007 due to current economic conditions), with higher
limits subject to board approval.  At December 31, 2008, it was the
Company’s policy to limit loans to related entities, corporate groups, or common
guarantors to $10.0 million.  These limitations are less than
regulatory requirements.  At December 31, 2008, the Company’s largest
aggregate outstanding loans to a single borrower or group of related borrowers
totaled $5.6 million.  The Company had one other lending relationships
of over $4.0 million as of December 31, 2008.  At December 31, 2008,
each of these loans were performing, pursuant to their respective
terms.





- 4
-





Analysis of Loan
Portfolio.  Set forth below are selected data relating to the
composition of the Company’s loan portfolio by type of loan as of the dates
indicated:





At
      December 31,2008
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      2006
                                                                                                      
                                                                                                      
                                                                                                      2005
                                                                                                      
                                                                                                      
                                                                                                      2004Percent
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      Percent
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      PercentAmount
                                                                                                      
                                                                                                      
                                                                                                      of
      Total
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      of
      Total
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      of
      Total
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      of
      Total
                                                                                                      
                                                                                                      
                                                                                                      Amount
                                                                                                      
                                                                                                      
                                                                                                      of
      Total(Dollars
      in thousands)First
      mortgage loans:One-
      to four-family residential
                                                                                                      
                                                                                                      $
                                                                                                      170,184
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      41.83
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      195,586
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      43.23
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      214,499
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      47.31
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      201,242
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      45.88
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      179,311
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      42.81
                                                                                                      %Multifamily
                                                                                                      
                                                                                                      
                                                                                                      57,968
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14.25
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      56,587
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12.51
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      65,807
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14.52
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      73,946
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      16.86
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      78,428
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      18.73Commercial
                                                                                                      
                                                                                                      
                                                                                                      91,978
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      22.61
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      109,186
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      24.13
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      95,508
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21.07
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      81,255
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      18.52
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      90,907
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21.70Construction
                                                                                                      
                                                                                                      
                                                                                                      8,447
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.08
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      17,385
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.84
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12,091
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.67
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21,192
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4.83
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14,308
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.42Total
      first mortgage loans
                                                                                                      
                                                                                                      
                                                                                                      328,577
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      80.77
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      378,744
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      83.71
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      387,905
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      85.57
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      377,635
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      86.09
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      362,954
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      86.66Consumer
      loans:Automobiles
                                                                                                      
                                                                                                      
                                                                                                      14,106
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.47
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12,667
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.80
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10,459
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.31
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9,252
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.11
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      9,052
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.16
                                                                                                      %Second
      mortgage(1)
                                                                                                      
                                                                                                      
                                                                                                      58,001
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14.26
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      54,586
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12.06
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      49,070
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10.82
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      44,218
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10.08
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      39,701
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9.48Other(2)
                                                                                                      
                                                                                                      
                                                                                                      6,099
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.50
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      6,460
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.43
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      5,901
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.30
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      7,545
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.72
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      7,134
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.70Total
      consumer loans
                                                                                                      
                                                                                                      
                                                                                                      78,206
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      19.23
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      73,713
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      16.29
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      65,430
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14,43
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      61,015
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      13.91
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      55,887
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      13.34Total
      loans receivable
                                                                                                      
                                                                                                      $
                                                                                                      406,783
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      452,457
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      453,335
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      438,650
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      418,841
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %Less:Undisbursed
      portion ofconstruction
      loans
                                                                                                      
                                                                                                      $
                                                                                                      840
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.21
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      2,364
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.52
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      1,217
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.27
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      5,666
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.29
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      9,114
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.18
                                                                                                      %Unearned
      loan (premium) discount
                                                                                                      
                                                                                                      
                                                                                                      (347
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.09
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (370
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.08
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (583
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.13
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (769
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.18
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (984
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (0.24
                                                                                                      )Net
      deferred loan originationfees
      (costs)
                                                                                                      
                                                                                                      
                                                                                                      124
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      119
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      165
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      149
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.03
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      160
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.04Allowance
      for loan losses
                                                                                                      
                                                                                                      
                                                                                                      5,379
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.32
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,487
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.77
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,493
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.77
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,326
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.76
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,235
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.77Total
      loans receivable, net
                                                                                                      
                                                                                                      $
                                                                                                      400,787
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      98.53
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      446,857
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      98.76
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      449,043
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      99.05
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      430,278
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      98.10
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      407,316
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      97.25
                                                                                                      %







(1)
            Second
      mortgage loans included $6.1 million, $5.7 million, $5.4 million, $5.0
      million, $4.4 million of nonowner-occupied residential first mortgage
      loans at December 31, 2008, 2007, 2006, 2005,  and 2004,
      respectively.


(2)
            Other
      consumer loans included $3.4 million, $1.9 million, $2.0 million, $2.3
      million, and $2.8 million of commercial mortgage loans at December 31,
      2008, 2007, 2006, 2005, and 2004,
respectively.





- 5
-





Loan Maturity
Schedule.  The following table sets forth the contractual
maturity of the Company’s loan portfolio at December 31,
2008.  Overdraft lines of credit are reported as due within one
year.





At December 31, 2008Within
                            
                            
                            1-5
                            
                            
                            Beyond
      51 Year
                            
                            
                            Years
                            
                            
                            Years
                            
                            
                            Total(In
      thousands)First
      mortgage loans:One-
      to four-familyResidential
                            
                            $
                            7,970
                            
                            
                            $
                            39,061
                            
                            
                            $
                            $124,457
                            
                            
                            $
                            171,488Multifamily
                            
                            
                            2,335
                            
                            
                            
                            20,358
                            
                            
                            
                            35,275
                            
                            
                            
                            57,968Commercial
                            
                            
                            21,295
                            
                            
                            
                            47,341
                            
                            
                            
                            30,485
                            
                            
                            
                            99,121Consumer
      loans
                            
                            
                            12,879
                            
                            
                            
                            47,982
                            
                            
                            
                            17,345
                            
                            
                            
                            78,206Total
                            
                            $
                            44,479
                            
                            
                            $
                            $154,742
                            
                            
                            $
                            $207,562
                            
                            
                            $
                            406,783





The following table sets forth the
dollar amounts of all fixed rate and adjustable rate loans in each loan
category  at December 31, 2008 due after December 31,
2009.





Due After December 31, 2009Fixed
                      
                      
                      Adjustable
                      
                      
                      Total(In
      thousands)First
      mortgage loans:One-
      to four-family residential
                      
                      $
                      33,590
                      
                      
                      $
                      129,928
                      
                      
                      $
                      163,518Multifamily
                      
                      
                      2,205
                      
                      
                      
                      53,428
                      
                      
                      
                      55,633Commercial
                      
                      
                      22,856
                      
                      
                      
                      54,970
                      
                      
                      
                      77,826Consumer
      loans
                      
                      
                      56,431
                      
                      
                      
                      8,896
                      
                      
                      
                      65,327Total
                      
                      $
                      115,082
                      
                      
                      $
                      247,222
                      
                      
                      $
                      362,304




One- to four-family Residential Real
Estate Loans.  Traditionally, the Company’s primary lending
activity consists of the origination of fixed- and adjustable-rate one- to
four-family owner-occupied residential first mortgage loans, substantially all
of which are collateralized by properties located in the Company’s market
area.  The Company also originates one- to four-family, interest-only
construction loans that convert to permanent loans after an initial construction
period that typically runs up to twelve months.  At December 31, 2008,
22.3% of the Company’s residential real estate loans had fixed rates, and 77.7%
had adjustable rates.





The
Company originates loans for portfolio and sells loans in the secondary mortgage
market. However, the Company’s one- to four-family, fixed-rate, residential real
estate loans originated for portfolio are generally originated and underwritten
according to standards that qualify such loans to be included in Freddie Mac and
Fannie Mae purchase and guarantee programs and that otherwise permit resale in
the secondary mortgage market.  The Company has sold fixed-rate loans
with maturities of 15 years or greater in the secondary mortgage
market.  For the year ended December 31, 2008, the Company sold $41.8
million of one- to four-family residential mortgage loans, generally to lower
the Company’s interest rate risk.  One- to four-family portfolio loans
are originated and underwritten according to policies approved by our board of
directors.





Originations
of one- to four-family fixed-rate first mortgage loans are monitored on an
ongoing basis and are affected significantly by the level of market interest
rates, the Company’s interest rate gap position and loan products offered by the
Company’s competitors.  The Company’s one- to four-family fixed-rate
first mortgage loans amortize on a monthly basis with principal and interest due
each month.  The Company also offers one- to four-family
adjustable-rate first mortgage loans that convert to adjustable-rate loans that
adjust on an annual basis after the initial fixed rate term.  The
initial fixed rate term of these loans are primarily 5 and 7 years and the
overall maturity of these loans may be up to 30 years.  The Company
determines whether a customer qualifies for these loans based upon the initial
fixed interest rate.





The
Company’s adjustable rate mortgage loans, or “ARM loans,” are generally
originated for terms of up to 30 years, with interest rates that adjust annually
after an initial fixed rate period. The Company establishes various annual and
life-of-the-loan caps on ARM loan interest rate adjustments.  At
December 31, 2008, the Company generally offered ARM loans with annual rate caps
of 2.00% and maximum life-of-loan caps of 6.00% above the initial interest
rate.   At present, the interest rate on the Company’s ARM loans
are calculated by using the weekly average yield on United States Treasury
Securities adjusted to a constant maturity of one year.  In addition,
the Company establishes floors for each loan originated below which the loan may
not adjust. One- to four-family residential ARM loans totaled $136.5 million, or
33.6%, of the Company’s total loan portfolio at December 31, 2008.





- 6
-





The
primary purpose of offering ARM loans is to make the Company’s loan portfolio
more interest rate sensitive.  ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase.  It is possible, therefore, that
during periods of rising interest rates, the risk of default on ARM loans may
increase due to the upward adjustment of interest costs to the
borrower.  Management believes that the Company’s credit risk
associated with its ARM loans is reduced because of the annual and lifetime
interest rate adjustment limitations on such loans, although such limitations do
create an element of interest rate risk.  See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Discussion of
Market Risk – Interest Rate Sensitivity Analysis” in the 2008 Annual Report to
Shareholders, which is included as Exhibit 13.1 to this Form 10-K and
incorporated herein by reference.





The
Company’s one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Company the right
to declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan.  Due-on-sale clauses are an
important means of adjusting the rates on the Company’s fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.





Regulations
limit the amount that a savings association may lend relative to the appraised
value of the real estate securing the loan, as determined by an appraisal at the
time of loan origination.  The Company originates one- to four-family
residential mortgage loans with terms up to a maximum of 30 years and with
loan-to-value ratios up to 100% of the lesser of the appraised value of the
security property or the contract price.  The Company generally
requires that private mortgage insurance be obtained in an amount sufficient to
reduce the Company’s exposure to be at or below the 80% loan-to-value
level.  The Company requires fire and casualty insurance, flood
insurance, where applicable, an abstract of title, and a title opinion or title
insurance on all properties securing real estate loans originated by the
Company.





Multifamily Residential and
Commercial Real Estate Loans.  The Company’s loan portfolio
contains loans secured by multifamily residential and commercial real estate.
Such loans constituted approximately $157.1 million, or 38.6%, of the Company’s
total loan portfolio at December 31, 2008.  Of such loans, $105.4
million, or 67.1%, were purchased or originated by the Company and were secured
by properties outside the State of Iowa.  The multifamily and
commercial real estate loans are primarily secured by multifamily residences
such as apartment buildings and by commercial facilities such as office
buildings and retail buildings.  Multifamily residential and
commercial real estate loans are offered with fixed and adjustable rates and are
structured in a number of different ways depending upon the circumstances of the
borrower and the type of project.  See “-Purchased or Out of State
Originated Loans.”





All
purchased or out of state originated multifamily or commercial real estate loans
in excess of $1.0 million are approved by the Company’s chief executive officer,
chief operating officer and the board of directors and are generally subject to
the same underwriting standards as for loans originated by the
Company.  All out of state originated loans less than $1.0 million are
approved by the Company’s chief executive officer and chief operating officer
and ratified by the board of directors and are subject to the same underwriting
standards as loans originated by the Company.  Before a loan is
purchased, the Company obtains copies of the original loan application, title
insurance policy, appraisal and personal financial statements of any guarantors
of the loan, and certified rent rolls. An executive officer of the Company also
makes a personal inspection of the property securing the loan. Such purchases
are made without recourse to the seller. At December 31, 2008, $20.6 million, or
19.5%, of out of state multifamily and commercial real estate loans were
serviced by the Bank.  At December 31, 2008, $84.8 million, or 80.5%,
of the out of state multifamily and commercial real estate loans were serviced
by the originating financial institution or mortgage company.  The
Company imposes a $3.0 million limit on the aggregate size of multifamily and
commercial loans to any one borrower for loans secured by real estate located
outside the State of Iowa and a $5.0 million limit on the aggregate size of
multifamily and commercial loans to one borrower applied to loans secured by
real estate located in Iowa.  The Company also imposes a $3.0 million
and $4.0 million loan limit per secured property located outside and inside the
State of Iowa, respectively.  Any exceptions to these limits must be
specifically approved by the board of directors on a loan-by-loan basis within
the Company’s legal lending limit.  See “Regulation – Regulation of
Federal Savings Associations – Loans to One Borrower.”





- 7
-





Loans
secured by multifamily and commercial real estate generally involve a greater
degree of credit risk than single-family residential mortgage loans and such
loans also typically have larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multifamily and commercial real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
such real estate projects is reduced, the borrower’s ability to repay the loan
may be impaired.  As a result, these types of loans present greater
potential loan delinquencies and loan losses than single-family residential
loans.





Construction
Lending.The Company makes construction loans to individuals
for the construction of their residences as well as to builders for the
construction of one- to four-family residences and commercial and
multifamily  real estate.  At December 31, 2008, the
Company’s construction loan portfolio totaled $8.4 million, or 2.1%, of the
Company’s total loan portfolio.  Construction loans to individuals for
their residences are structured to be converted to permanent loans at the end of
the construction phase, which typically runs up to twelve
months.  These construction loans have rates and terms which generally
match the one- to four-family ARM loan rates then offered by the Company, except
that during the construction phase the borrower pays interest
only.  Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised
value.  Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans.





Generally,
construction loans to builders of one- to four-family residences require the
payment of interest only  with terms of up to 12
months.  These loans may also provide for the payment of interest and
loan fees from loan proceeds and carry adjustable rates of
interest.  At December 31, 2008, the Company had $4.4 million of one-
to four-family construction loans.





Construction
loans on commercial and multifamily real estate projects may be secured by
apartments, small office buildings, strip retail centers, or other property, and
are generally structured to be converted to permanent loans at the end of the
construction phase, which generally runs up to 12 months.  During the
construction phase the borrower pays interest only.  These loans
generally provide for the payment of interest and loan fees from loan
proceeds.  At December 31, 2008, the Company had approximately $4.1
million of loans for the construction of commercial real estate of which $2.9
million is nonperforming.





Construction
loans are obtained principally through continued business from builders who have
previously borrowed from the Company and from new or existing customers who are
building new facilities.  The application process includes a
submission to the Company of accurate plans, specifications, and costs of the
project to be constructed and projected revenues from the
project.  These items are also used as a basis to determine the
appraised value of the subject property.  Loans are based on the
lesser of the current appraised value of the property or the cost of
construction (land plus building).





Because
of the uncertainties inherent in estimating construction costs and the market
for the project upon completion, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the
project.  Construction loans to borrowers other than owner-occupants
also involve many of the same risks discussed above regarding multifamily and
commercial real estate loans and tend to be more sensitive to general economic
conditions than many other types of loans.  Also, the funding of loan
fees and interest during the construction phase makes the monitoring of the
progress of the project particularly important, as customary early warning
signals of project difficulties may not be present.





Consumer Loans, Including Second
Mortgage Loans. The Company also originates consumer loans, which
consists primarily of one- to four-family second mortgage loans, including home
equity lines of credit. As of December 31, 2008, consumer loans totaled $78.2
million, of which second mortgage loans totaled $58.0 million, or 14.3%, of the
Company’s total loan portfolio. The Company’s second mortgage loans generally
have fixed interest rates for terms of three to five years. The Company’s home
equity lines of credit are adjustable rate loans with terms up to ten
years.  The Company’s second mortgage loans are generally secured by
the borrower’s principal residence with a maximum loan-to-value ratio, including
the principal balances of both the first and second mortgage loans, of generally
no more than 90%.  In recent years the Company has begun originating
one- to four-family second mortgage loans with a loan-to-value ratio of up to
100%; however during 2008 that limit was reduced to 95%.  These type
of loans are subject to stricter underwriting guidelines.  Generally,
loans in excess of 90% loan-to-value are insured through a pool insurance
product, unless the loan has secondary collateral.  Effective the
first quarter of 2008, the loan-to-value threshold for obtaining insurance was
changed to 80%.  As of December 31, 2008, the average principal amount
of the Company’s second mortgage loans was approximately
$24,000.





- 8
-





To a
lesser extent, the Company also originates loans secured by automobiles, with
fixed rates generally up to 100% loan-to-value basis for new cars. All of the
Company’s automobile loans were originated by the Company and generally have
terms of up to five years.  At December 31, 2008, automobile loans
totaled $14.1 million, or 3.5%, of the Company’s total loan
portfolio.





In
addition, the Company also makes other types of consumer loans, including
unsecured signature loans, for various purposes.   At December
31, 2008, other consumer loans totaled $6.1 million, or 1.5%, of the Company’s
total loan portfolio. Included in other consumer loans are unsecured consumer
loans which totaled $1.2 million, or 0.29 %, of the Company’s total loan
portfolio.  The minimum loan amount for unsecured signature loans is
$2,000, the maximum loan amount for such loans is generally $5,000, and the
average balance of such loans is approximately $2,700.





The
Company originates a limited number of commercial business loans, which the
Company includes with its consumer loan portfolio for reporting purposes. Such
loans are generally secured and are originated for any business purpose, such as
for the purchase of business equipment.





The
Company’s business plan calls for an increase in consumer lending for the
foreseeable future, particularly second mortgage lending. The Company expects
consumer loan demand will come from its existing customer base. Consumer loans
generally provide for shorter terms and higher yields as compared to residential
first mortgage loans, but generally carry higher risks of default. At December
31, 2008, $204,000, or 0.26%, of the Company’s consumer loan portfolio was on
non-accrual status.





Loan Originations, Solicitation,
Processing, and Commitments. Loan originations are derived from a number
of sources such as real estate agent referrals, existing customers, borrowers,
builders, and walk-in customers. Upon receiving a loan application, the Company
obtains a credit report and income information to verify specific information
relating to the applicant’s employment, income, and credit standing. In the case
of a real estate loan, an appraiser approved by the Company appraises the real
estate intended to collateralize the proposed loan. An underwriter in the
Company’s loan department reviews the loan application file for accuracy and
completeness, and verifies the information provided. Pursuant to the Company’s
written loan policies, at least one member of management approves all first
mortgage loans.  The loan committee of the board of directors meets
quarterly to review a sampling of all loans originated in the previous three
months.





After a
loan is approved, a loan commitment letter is promptly issued to the borrower.
The commitment letter specifies the terms and conditions of the proposed loan
including the amount of the loan, interest rate, and amortization term, a brief
description of the required collateral, and required insurance coverage.
Commitments are typically issued for 60-day periods in the case of loans to
refinance, loans to purchase existing real estate, and construction loans. The
borrower must provide proof of fire and casualty insurance on the property
serving as collateral, which insurance must be maintained during the full term
of the loan. At December 31, 2008, the Company had outstanding commitments to
originate $4.3 million of loans. This amount does not include commitments to
purchase loans, undisbursed overdraft loan privileges, undisbursed home equity
lines of credit or the unfunded portion of loans in process.





Purchased or Out of State Originated
Loans. At December 31, 2008, the Company’s loan portfolio contained
$115.6 million of loans secured by out of state
properties.  These loans represented 28.4% of the Company’s total loan
portfolio at December 31, 2008.  All of the one- to four-family,
multifamily residential and commercial real estate loans in the Company’s loan
portfolio which are purchased out of state by the Company, are generally without
recourse to the seller.  At December 31, 2008, the Company’s out of
state multifamily residential and commercial real estate loans had an average
balance of $743,000 and the largest loan had a principal balance of $3.3
million.  As of December 31, 2008, there were six out of
state commercial real estate loans totaling $4.0 million that were more than 90
days past due.





To
supplement its origination of one- to four-family first mortgage loans, the
Company also purchases first mortgage loans secured by out of state one- to
four-family residences.  Due to economic conditions during 2008,
including the uncertainty surrounding real estate values in other geographical
areas, the Bank did not purchase out of market residential real
estate.  At December 31, 2008, $10.2 million, or 2.5%, of the
Company’s total loan portfolio consisted of out of state one- to four-family
loans.  As of December 31, 2008, there were no out of state
one- to four-family first mortgage loans that were more than 90 days past
due.





- 9
-





There are
certain risks with loans purchased by the Company that are not associated with
loans the Company originates.  At December 31, 2008, $21.7 million, or
18.8%, of purchased loans were serviced by the Bank.  At December 31,
2008, $93.9 million, or 81.2%, of purchased loans were serviced by the
originating financial institution, mortgage company or alternate servicing
financial institution.  Although the Company reviews each purchased
loan using the Company’s underwriting criteria for originations and a Company
officer performs an on-site inspection of each purchased multifamily and
commercial real estate loan, the Company is dependent on the servicer of the
loan for ongoing collection efforts and collateral review.  In
addition, the Company purchases loans with a variety of terms, including
maturities, interest rate caps and indices for adjustment of interest rates that
may differ from those offered at the time by the Company in connection with
loans the Company originates.  Finally, the market areas in which the
properties which secure the purchased loans are located are subject to economic
and real estate market conditions that may significantly differ from those
experienced in the Company’s market areas.  If economic conditions
continue to limit the Company’s opportunities to originate loans in its market
areas, the Company may increase its investment in out of state mortgage
loans.  There can be no assurance, however, that economic conditions
in these out of state areas will not deteriorate in the future resulting in
increased loan delinquencies and loan losses among the loans secured by property
in these areas.





In an
effort to reduce the risk of loss on out of state purchased loans, the Company
generally purchases loans that meet the underwriting policies for loans
originated by the Company although specific rates and terms may differ from the
rates and terms offered by the Company.  The Company requires
appropriate documentation, and personal inspections of the underlying real
estate collateral by an executive officer prior to purchase.  The
Company limits its out of state loan portfolio concentration within a single
state to 100% of the Bank’s risk based capital.  The Company also
limits its loan portfolio concentration to a single servicer to 100% of the
Bank’s risk based capital.





Set forth
below is a table of the Company’s out of state purchased or originated loans by
state of origin (including multifamily residential, commercial real estate and
one- to four-family first mortgage loans) as of December 31, 2008.





Balance
      as of
                    
                    
                    Percentage
      as ofState
                    
                    December 31, 2008
                    
                    
                    December 31, 2008(In
      thousands)California
                    
                    $
                    23,844
                    
                    
                    
                    20.6
                    %Washington
                    
                    
                    13,853
                    
                    
                    
                    12.0Wisconsin
                    
                    
                    9,861
                    
                    
                    
                    8.5Utah
                    
                    
                    9,737
                    
                    
                    
                    8.4Colorado
                    
                    
                    8,135
                    
                    
                    
                    7.0Nebraska
                    
                    
                    6,419
                    
                    
                    
                    5.6South
      Carolina
                    
                    
                    5,482
                    
                    
                    
                    4.7Oregon
                    
                    
                    4,911
                    
                    
                    
                    4.3Missouri
                    
                    
                    4,765
                    
                    
                    
                    4.1Florida
                    
                    
                    4,276
                    
                    
                    
                    3.7Minnesota
                    
                    
                    3,966
                    
                    
                    
                    3.4Arizona
                    
                    
                    2,851
                    
                    
                    
                    2.5South
      Dakota
                    
                    
                    2,711
                    
                    
                    
                    2.4Michigan
                    
                    
                    2,167
                    
                    
                    
                    1.9Virginia
                    
                    
                    2,134
                    
                    
                    
                    1.9Indiana
                    
                    
                    1,799
                    
                    
                    
                    1.6Illinois
                    
                    
                    1,611
                    
                    
                    
                    1.4District
      of Columbia
                    
                    
                    1,500
                    
                    
                    
                    1.3Nevada
                    
                    
                    1,433
                    
                    
                    
                    1.2Ohio
                    
                    
                    1,421
                    
                    
                    
                    1.2Texas
                    
                    
                    1,354
                    
                    
                    
                    1.2Kansas
                    
                    
                    1,071
                    
                    
                    
                    0.9North
      Carolina
                    
                    
                    267
                    
                    
                    
                    0.2Total
                    
                    $
                    115,568
                    
                    
                    
                    100.0
                    %




- 10
-





Origination, Purchase and Sale of
Loans.  The table below shows the Company’s originations,
purchases and sales of loans for the periods indicated.




For
      the Years Ended
                    December
      31,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Total
      loans receivable at beginning of period
                  
                  $
                  452,457
                  
                  
                  $
                  453,335
                  
                  
                  $
                  438,650Originations:First
      mortgage loans:One-
      to four-family residential
                  
                  
                  52,200
                  
                  
                  
                  55,106
                  
                  
                  
                  46,247Multifamily
                  
                  
                  860
                  
                  
                  
                  2,104
                  
                  
                  
                  9,702Commercial
                  
                  
                  4,946
                  
                  
                  
                  21,291
                  
                  
                  
                  16,281Consumer
      loans:Automobile
                  
                  
                  9,849
                  
                  
                  
                  10,518
                  
                  
                  
                  8,406Second
      mortgage
                  
                  
                  29,540
                  
                  
                  
                  31,559
                  
                  
                  
                  28,830Other
                  
                  
                  5,312
                  
                  
                  
                  5,001
                  
                  
                  
                  3,435Total
      originations:
                  
                  
                  102,707
                  
                  
                  
                  125,579
                  
                  
                  
                  112,901Loan
      Purchases:First
      mortgage one- to four-family
                  
                  
                  0
                  
                  
                  
                  6,293
                  
                  
                  
                  11,269First
      mortgage multifamily
                  
                  
                  13,154
                  
                  
                  
                  1,707
                  
                  
                  
                  8,763First
      mortgage commercial
                  
                  
                  5,430
                  
                  
                  
                  32,591
                  
                  
                  
                  20,370Loan
      Sales:First
      mortgage one- to four-family
                  
                  
                  (41,823
                  )
                  
                  
                  (36,072
                  )
                  
                  
                  (19,188
                  )First
      mortgage commercial
                  
                  
                  0
                  
                  
                  
                  (2,000
                  )
                  
                  
                  -Transfer
      of mortgage loans toforeclosed
      real estate
                  
                  
                  (2,678
                  )
                  
                  
                  (2,360
                  )
                  
                  
                  (267
                  )Repayments
                  
                  
                  (122,464
                  )
                  
                  
                  (126,616
                  )
                  
                  
                  (119,163
                  )Net
      loan activity
                  
                  
                  (45,674
                  )
                  
                  
                  (878
                  )
                  
                  
                  14,685Total
      loans receivable at end of period
                  
                  $
                  406,783
                  
                  
                  $
                  452,457
                  
                  
                  $
                  453,335




Loan Origination Fees and Other
Income. In addition to interest earned on loans, the Company generally
receives fees in connection with loan originations. Such loan origination fees,
net of costs to originate, are deferred and amortized using an interest method
over the contractual life of the loan. Net deferred fees and costs are
recognized into income immediately upon prepayment of the related loan. At
December 31, 2008, the Company had $125,000 of deferred loan origination fees,
net. Such fees vary with the type of loans and commitments made. The Company
typically charges a document preparation fee on fixed- and adjustable-rate first
mortgage loans. In addition to loan origination fees, the Company also receives
other fees, service charges (such as overdraft fees), and other income that
consist primarily of deposit transaction account service charges, late charges
and loan prepayment fees. The Company recognized fees and service charges of
$4.6 million, $4.6 million and $4.4 million for the fiscal years ended December
31, 2008, 2007 and 2006, respectively.





Investment
Activities





At
December 31, 2008, the Company’s investment portfolio was comprised of state and
local obligations, mortgage-backed securities, interest-bearing deposits and
equity securities consisting of mutual funds, Freddie Mac preferred stocks, and
Federal Home Loan Bank stock.  At December 31, 2008, $384,000, or
21.7%, of the Company’s investment portfolio, excluding mortgage-backed
securities, mutual funds and equity securities, was scheduled to mature in one
year or less, $638,000, or 36.0%, was scheduled to mature within one to five
years, and $750,000, or 42.3%, was scheduled to mature in more than five
years.





Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management’s judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
the level of yield that will be available in the future, as well as management’s
projections as to the short term demand for funds to be used in the Company’s
loan origination and other activities.  In addition, the Company’s
liquidity levels are affected by the level and source of its borrowed
funds.




- 11
-




Investment
Portfolio.  The following table sets forth the carrying value
of the Company’s investment portfolio at the dates indicated.





At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Investment
      securities:Mortgage-backed
      securities
                  
                  $
                  19,754
                  
                  
                  $
                  2,191
                  
                  
                  $
                  2,881State
      and local obligations
                  
                  
                  1,772
                  
                  
                  
                  2,770
                  
                  
                  
                  3,674FHLB
      stock
                  
                  
                  4,692
                  
                  
                  
                  5,064
                  
                  
                  
                  5,476Mutual
      funds
                  
                  
                  1,230
                  
                  
                  
                  1,938
                  
                  
                  
                  1,946Equity
      securities
                  
                  
                  82
                  
                  
                  
                  4,636
                  
                  
                  
                  6,053Total
      investment securities
                  
                  
                  27,530
                  
                  
                  
                  16,599
                  
                  
                  
                  20,030Interest-earning
      deposits
                  
                  
                  6,564
                  
                  
                  
                  3,132
                  
                  
                  
                  12,431Total
      investments
                  
                  $
                  34,094
                  
                  
                  $
                  19,731
                  
                  
                  $
                  32,461









- 12
-


Investment Portfolio
Maturities.  The following table sets forth the scheduled
maturities, carrying values, market values and weighted average yields for the
Company’s investment portfolio at December 31, 2008.





At December 31, 2008One Year or Less
                
                
                One to Five Years
                
                
                Five to Ten Years
                
                
                Over Ten Years
                
                
                TotalCarrying
                  Value
                
                
                Annualized
                  Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Annualized
                  Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Annualized
                  Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Annualized
                  Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Fair
                  Value
                
                
                Average
                  Life in
                  Years
                
                
                Annualized
                  Weighted
                  Average
                  Yield(Dollars in thousands)Investment
      securities:Mortgage-backed
      securities
                
                $
                3
                
                
                
                4.17
                
                
                $
                85
                
                
                
                5.77
                %
                
                $
                8,279
                
                
                
                4.57
                %
                
                $
                11,387
                
                
                
                4.73
                %
                
                $
                19,754
                
                
                $
                19,754
                
                
                
                6
                
                
                
                4.66
                %State
      and local obligations(1)
                
                
                384
                
                
                
                4.32
                
                
                
                638
                
                
                
                4.61
                
                
                
                750
                
                
                
                6.00
                
                
                
                -
                
                
                
                -
                
                
                
                1,772
                
                
                
                1,772
                
                
                
                2
                
                
                
                5.14Mutual
      funds
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,230
                
                
                
                1,230
                
                
                
                
                
                
                
                6.32FHLB
      stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,692
                
                
                
                4,692
                
                
                
                
                
                
                
                3.00Preferred
      stock-Freddie Mac(2)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                82
                
                
                
                82
                
                
                
                
                
                
                
                -Total
      securities available-for-sale
                
                $
                387
                
                
                
                4.32
                %
                
                $
                723
                
                
                
                4.75
                %
                
                $
                9,029
                
                
                
                4.69
                %
                
                $
                11,387
                
                
                
                4.73
                %
                
                $
                27,530
                
                
                $
                27,530
                
                
                
                
                
                
                
                4.48
                %Interest-bearing
      deposits
                
                
                6,564
                
                
                
                0.33
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,564
                
                
                
                6,564
                
                
                
                
                
                
                
                0.33Total
      investments
                
                $
                6,951
                
                
                
                0.55
                %
                
                $
                723
                
                
                
                4.75
                %
                
                $
                9,029
                
                
                
                4.69
                %
                
                $
                11,387
                
                
                
                4.73
                %
                
                $
                34,094
                
                
                $
                34,094
                
                
                
                
                
                
                
                3.68
                %





(1) Certain
securities have call features which allow the issuer to call the security prior
to maturity date.


(2) Certain
securities have call features which allow the issuer to call the
security.


- 13
-


Sources
of Funds





General. Deposits are the
primary source of the Company’s funds for lending and other investment
purposes.  In addition to deposits, the Company derives funds from
FHLB advances, the amortization and prepayment of loans, the maturity and calls
of investment securities and operations.  Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions.  The Company uses short-term borrowings
to compensate for reductions in the availability of funds from other sources or
on a longer term basis for general business purposes.





Deposits.  During
2008, consumer and commercial deposits were attracted principally from within
the Company’s market area through the offering of a broad selection of deposit
instruments including noninterest-bearing demand accounts, NOW accounts, savings
accounts, money market savings, certificates of deposit and individual
retirement accounts.  Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors.  The maximum
rate of interest which the Company may pay is not established by regulatory
authority.  The Company regularly evaluates its internal cost of
funds, surveys rates offered by competing institutions, reviews the Company’s
cash flow requirements for lending and liquidity, and executes rate changes when
deemed appropriate.  Public fund deposits totaled $5.8 million at
December 31, 2008, a decrease of $900,000 from December 31,
2007.  Beginning fiscal year 2005, the Company began utilizing
brokered certificates of deposit as an alternative wholesale funding
source.  As of December 31, 2008, the Company had $15.6 million in
brokered certificates of deposit, a decrease of $8.0 million from December 31,
2007.





Deposit
Portfolio.  Deposits with the Company as of December 31, 2008,
were represented by the various types of deposit programs described
below.





Weighted
                              Average
                              Interest Rate
                            
                            Original Term
                            
                            Checking and
                              Savings Deposits
                            
                            Minimum
                              Balance
                            
                            
                            Balances
                            
                            
                            Percentage
                              of Total
                              Deposits(Dollars in
                              thousands)0.00%
                            
                            None
                            
                            Noninterest-bearing
      demand
                            
                            $
                            50
                            
                            
                            $
                            15,201
                            
                            
                            
                            4.3
                            %0.30
                            
                            None
                            
                            NOW
      accounts
                            
                            
                            50
                            
                            
                            
                            57,877
                            
                            
                            
                            16.50.25
                            
                            None
                            
                            Savings
      accounts
                            
                            
                            25
                            
                            
                            
                            26,128
                            
                            
                            
                            7.51.09
                            
                            None
                            
                            Money
      market savings
                            
                            
                            2,500
                            
                            
                            
                            34,228
                            
                            
                            
                            9.8Total
      non-maturing deposits
                            
                            
                            
                            
                            
                            
                            133,434
                            
                            
                            
                            38.1Certificates of Deposit2.49
                            
                            1-3
      months
                            
                            Fixed
      term, fixed rate
                            
                            $
                            1,000
                            
                            
                            $
                            391
                            
                            
                            
                            0.1
                            %4.60
                            
                            4-6
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            6,579
                            
                            
                            
                            1.94.62
                            
                            7-9
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            32,532
                            
                            
                            
                            9.34.92
                            
                            10-12
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            25,722
                            
                            
                            
                            7.45.01
                            
                            13-24
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            76,197
                            
                            
                            
                            21.85.02
                            
                            25-36
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            24,255
                            
                            
                            
                            6.94.52
                            
                            37-48
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            1,505
                            
                            
                            
                            0.44.44
                            
                            49-60
      months
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            49,467
                            
                            
                            
                            14.15.07
                            
                            61
      months or greater
                            
                            Fixed
      term, fixed rate
                            
                            
                            1,000
                            
                            
                            
                            88
                            
                            
                            
                            0.0Total
      certificate of deposits
                            
                            
                            
                            
                            
                            
                            216,736
                            
                            
                            
                            61.9Total
      deposits
                            
                            
                            
                            
                            
                            $
                            350,170
                            
                            
                            
                            100.0
                            %


- 14
-


The
following table sets forth the change in dollar amount of deposits in the
various types of deposit accounts offered by the Company between the dates
indicated.





Increase
                  
                  
                  Increase
                  
                  
                  
                  
                  
                  Increase
                  
                  
                  IncreaseBalance
                    12/31/08
                  
                  
                  (Decrease)
                    %
                  
                  
                  (Decrease)
                    $
                  
                  
                  Balance
                    12/31/07
                  
                  
                  (Decrease)
                    %
                  
                  
                  (Decrease)
                    $
                  
                  
                  Balance
                    12/31/06(Dollars in thousands)Noninterest
      bearing demand
                  
                  $
                  15,201
                  
                  
                  
                  11.18
                  %
                  
                  $
                  1,528
                  
                  
                  $
                  13,673
                  
                  
                  
                  6.92
                  %
                  
                  $
                  885
                  
                  
                  $
                  12,788NOW
                  
                  
                  57,877
                  
                  
                  
                  6.82
                  
                  
                  
                  3,697
                  
                  
                  
                  54,180
                  
                  
                  
                  9.15
                  
                  
                  
                  4,544
                  
                  
                  
                  49,636Savings
      account
                  
                  
                  26,128
                  
                  
                  
                  6.50
                  
                  
                  
                  1,595
                  
                  
                  
                  24,533
                  
                  
                  
                  (2.49
                  )
                  
                  
                  (627
                  )
                  
                  
                  25,160Money
      market savings
                  
                  
                  34,228
                  
                  
                  
                  3.56
                  
                  
                  
                  1,177
                  
                  
                  
                  33,051
                  
                  
                  
                  (4.72
                  )
                  
                  
                  (1,637
                  )
                  
                  
                  34,688Certificates
      of deposit that mature:within
      12 months
                  
                  
                  150,426
                  
                  
                  
                  4.48
                  
                  
                  
                  6,456
                  
                  
                  
                  143,970
                  
                  
                  
                  7.15
                  
                  
                  
                  9,601
                  
                  
                  
                  134,369within
      12-36 months
                  
                  
                  46,647
                  
                  
                  
                  (34.07
                  )
                  
                  
                  (24,102
                  )
                  
                  
                  70,749
                  
                  
                  
                  (14.54
                  )
                  
                  
                  (12,035
                  )
                  
                  
                  82,784beyond
      36 months
                  
                  
                  19,663
                  
                  
                  
                  (23.76
                  )
                  
                  
                  (6,129
                  )
                  
                  
                  25,792
                  
                  
                  
                  23.38
                  
                  
                  
                  4,887
                  
                  
                  
                  20,905Total
                  
                  $
                  350,170
                  
                  
                  
                  (4.31
                  )%
                  
                  $
                  (15,778
                  )
                  
                  $
                  365,948
                  
                  
                  
                  1.56
                  %
                  
                  $
                  5,618
                  
                  
                  $
                  360,330





Increase
                  
                  
                  Increase
                  
                  
                  
                  
                  
                  Increase
                  
                  
                  IncreaseBalance
                    12/31/06
                  
                  
                  (Decrease)
                    %
                  
                  
                  (Decrease)
                    $
                  
                  
                  Balance
                    12/31/05
                  
                  
                  (Decrease)
                    %
                  
                  
                  (Decrease)
                    $
                  
                  
                  Balance
                    12/31/04(Dollars in thousands)Noninterest
      bearing demand
                  
                  $
                  12,788
                  
                  
                  
                  4.94
                  %
                  
                  $
                  602
                  
                  
                  $
                  12,186
                  
                  
                  
                  11.35
                  %
                  
                  $
                  1,242
                  
                  
                  $
                  10,944NOW
                  
                  
                  49,636
                  
                  
                  
                  0.80
                  
                  
                  
                  394
                  
                  
                  
                  49,242
                  
                  
                  
                  4.15
                  
                  
                  
                  1,960
                  
                  
                  
                  47,282Savings
      account
                  
                  
                  25,160
                  
                  
                  
                  (6.98
                  )
                  
                  
                  (1,888
                  )
                  
                  
                  27,048
                  
                  
                  
                  (5.38
                  )
                  
                  
                  (1,538
                  )
                  
                  
                  28,586Money
      market savings
                  
                  
                  34,688
                  
                  
                  
                  (22.64
                  )
                  
                  
                  (10,153
                  )
                  
                  
                  44,841
                  
                  
                  
                  (2.51
                  )
                  
                  
                  (1,153
                  )
                  
                  
                  45,994Certificates
      of deposit that mature:within
      12 months
                  
                  
                  134,369
                  
                  
                  
                  25.91
                  
                  
                  
                  27,652
                  
                  
                  
                  106,717
                  
                  
                  
                  33.54
                  
                  
                  
                  26,805
                  
                  
                  
                  79,912Within
      12-36 months
                  
                  
                  82,784
                  
                  
                  
                  15.02
                  
                  
                  
                  10,811
                  
                  
                  
                  71,973
                  
                  
                  
                  (9.53
                  )
                  
                  
                  (7,582
                  )
                  
                  
                  79,555beyond
      36 months
                  
                  
                  20,905
                  
                  
                  
                  6.39
                  
                  
                  
                  (1,426
                  )
                  
                  
                  22,331
                  
                  
                  
                  (7.19
                  )
                  
                  
                  (1,730
                  )
                  
                  
                  24,061Total
                  
                  $
                  360,330
                  
                  
                  
                  7.77
                  %
                  
                  $
                  25,992
                  
                  
                  $
                  334,338
                  
                  
                  
                  5.69
                  %
                  
                  $
                  18,004
                  
                  
                  $
                  316,334


- 15
-


The
following table sets forth the certificates of deposit in the Company classified
by rates as of the dates indicated:




At
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      thousands)Rate1.99%
      or less
                    
                    $
                    1,266
                    
                    
                    $
                    33
                    
                    
                    $
                    3472.00-2.99%
                    
                    
                    45,490
                    
                    
                    
                    1,697
                    
                    
                    
                    11,2333.00-3.99%
                    
                    
                    78,812
                    
                    
                    
                    23,788
                    
                    
                    
                    38,3264.00-5.99%
                    
                    
                    91,168
                    
                    
                    
                    214,983
                    
                    
                    
                    188,0626.00-7.99%
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    908.00%
      or greater
                    
                    
                    -
                    
                    
                    
                    10
                    
                    
                    
                    -$
                    216,736
                    
                    
                    $
                    240,511
                    
                    
                    $
                    238,058




The
following table sets forth the amount and maturities of certificates of deposit
at December 31, 2008.





Amount DueLess
                    Than 1
                    Year
                  
                  
                  1-2
                    Years
                  
                  
                  2-3
                    Years
                  
                  
                  3-4
                    Years
                  
                  
                  4-5
                    Years
                  
                  
                  After 5
                    Years
                  
                  
                  Total(In thousands)Rate1.99%
      or less
                  
                  $
                  1,265
                  
                  
                  $
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,2662.00-2.99%
                  
                  
                  40,375
                  
                  
                  
                  4,733
                  
                  
                  
                  242
                  
                  
                  
                  -
                  
                  
                  
                  140
                  
                  
                  
                  -
                  
                  
                  
                  45,4903.00-3.99%
                  
                  
                  56,379
                  
                  
                  
                  16,539
                  
                  
                  
                  1,015
                  
                  
                  
                  351
                  
                  
                  
                  4,528
                  
                  
                  
                  -
                  
                  
                  
                  78,8124.00-5.99%
                  
                  
                  52,407
                  
                  
                  
                  11,774
                  
                  
                  
                  12,343
                  
                  
                  
                  13,837
                  
                  
                  
                  807
                  
                  
                  
                  -
                  
                  
                  
                  91,1686.00-7.99%
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -8.00%
      or greater
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  150,426
                  
                  
                  $
                  33,047
                  
                  
                  $
                  13,600
                  
                  
                  $
                  14,188
                  
                  
                  $
                  5,475
                  
                  
                  $
                  -
                  
                  
                  $
                  216,736





The following table indicates the
amount of the Company’s certificates of deposit, including brokered certificates
of deposit, greater than $100,000 by time remaining until maturity at December
31, 2008.





Remaining Maturity
                    
                    Certificates
                      of
      Deposit over
                      $100,000(In
      thousands)Three
      months or less
                    
                    $
                    15,964Three
      through six months
                    
                    
                    5,341Six
      through twelve months
                    
                    
                    14,636Over
      twelve months
                    
                    
                    12,129Total
                    
                    $
                    48,070


- 16
-


The following table sets forth the
changes in deposits of the Company for the periods indicated:





Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(In thousands)Net
      increase (decrease) before interest credited
                  
                  $
                  (25,311
                  )
                  
                  $
                  (5,199
                  )
                  
                  $
                  17,816Interest
      credited
                  
                  
                  9,533
                  
                  
                  
                  10,817
                  
                  
                  
                  8,176Net
      increase in deposits
                  
                  $
                  (15,778
                  )
                  
                  $
                  5,618
                  
                  
                  $
                  25,992





Borrowings





Deposits are the Company’s primary
source of funds. The Company may also obtain funds from the
FHLB.   FHLB advances are collateralized by selected assets of
the Company. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank fluctuates from time to time in accordance with the policies of the Office
of Thrift Supervision (“OTS”) and the FHLB.





For the
                  Year Ended December 31,2008
                
                
                2007
                
                
                2006(Dollars in thousands)Weighted
      average rate paid on:FHLB
      advances
                
                
                5.03
                %
                
                
                4.94
                %
                
                
                4.75
                %FHLB
      advances:Maximum
      balance
                
                $
                97,379
                
                
                $
                114,398
                
                
                $
                115,424Average
      balance
                
                
                90,250
                
                
                
                106,527
                
                
                
                108,749Balance
      at year-end
                
                
                82,349
                
                
                
                97,379
                
                
                
                107,908Weighted
      average rate paid on:Other
      borrowings
                
                
                -
                
                
                
                7.08
                %
                
                
                1.00
                %Other
      borrowings:Maximum
      balance
                
                $
                -
                
                
                $
                700
                
                
                $
                8Average
      balance
                
                
                -
                
                
                
                64
                
                
                
                5





Title
Abstract Business





A component of the Company’s operating
strategy to increase non-interest income is through the abstract company
business conducted by a wholly owned subsidiary of the Bank, First Iowa Title
Services, Inc. (“First Iowa”).  First Iowa provides real estate title
abstracting services in Webster and Boone counties of Iowa.  These
services include researching recorded documents at the county courthouse and
providing a history of those documents as they pertain to specific parcels of
real estate.  This information is used to determine who owns specific
parcels of real estate and what encumbrances are on those specific
parcels.  The abstract business performed by First Iowa replaces a
significant portion of the function of a title insurance
company.  Iowa law prohibits Iowa insurance companies or companies
authorized to do business in Iowa from issuing title insurance or insurance
against loss or damage by reason of defective title, encumbrance or
otherwise.  Institutions can purchase title insurance, for their own
protection or to sell loans on the secondary market.  First Iowa had
11 employees as of December 31, 2008.





Insurance
and Annuity Business





Another
component of the Company’s operating strategy to increase non-interest income is
through First Federal Investment Services, Inc. (“First Federal Investments”), a
wholly owned subsidiary of the Bank.  First Federal Investments’
activities include the sale of life insurance on mortgage loans, credit life and
accident and health insurance on consumer loans made by the Company. In
addition, First Federal Investments sells life insurance, annuity products,
mutual funds and other noninsured products.  First Federal Investments
had four employees as of December 31, 2008.


- 17
-


Mortgage
Company Business





First Iowa Mortgage, Inc. is a
wholly-owned subsidiary of the Bank.  First Iowa Mortgage, Inc.
originated first mortgage loans and subsequently sold those loans and the
mortgage servicing rights to investors.  First Iowa Mortgage, Inc.
currently is inactive and these services are provided by the Bank.





Multifamily
Apartment Buildings





On July 13, 1995, the Company formed
the Northridge Apartments Limited Partnership (“Northridge Partnership”), a
subsidiary of the Bank, with the Fort Dodge Housing Corporation (“FDHC”), a
non-profit Iowa corporation formed to acquire, develop and manage low- and
moderate-income housing for residents of the Fort Dodge area.  The
FDHC is controlled by the Fort Dodge Municipal Housing Agency, an agency
chartered by the City of Fort Dodge.  Northridge Partnership is a
low-income housing tax credit project for certain federal tax
purposes.  A 44-unit apartment complex was completed on February 1,
1997.  The tax credits for the year ended December 31, 2008 were
approximately $12,000.  The final federal income tax credits of
approximately $37,000 associated with this project will be recognized over the
next three years.





On October 24, 1996, the Company formed
the Northridge Apartments Limited Partnership II (“Northridge Partnership II”),
a subsidiary of the Bank, to acquire, develop and manage low- and
moderate-income housing for residents of the Fort Dodge
area.  Northridge Partnership II was awarded low-income housing tax
credits in 2002 by the Iowa Finance Authority.  These credits were
awarded to construct a 23-unit apartment building in Fort Dodge, Iowa, which was
completed on March 31, 2003.  The tax credits for the year ended
December 31, 2008 were approximately $127,000.  The tax credits will
continue for an additional 4.3 year period.





Personnel





At December 31, 2008, the Company had
118 full-time and 28 part-time employees (including the 11 employees of First
Iowa and the four employees of First Federal Investments).  None of
the Company’s employees are represented by a collective bargaining group. The
Company believes that it has good relationships with its
employees.


- 18
-


FEDERAL
AND STATE TAXATION





Federal
Taxation





General. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company. For
federal income tax purposes, the Company, the Bank and the Bank’s subsidiaries
will be eligible to file consolidated income tax returns and report their income
on a calendar year basis using the accrual method of accounting and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank’s tax reserve for bad debts,
discussed below.  The Company and the Bank are not currently under
audit by the IRS.





Bad Debt
Reserves.The Bank, is a “large bank” as of December 31, 2008
(one with assets having an adjusted tax basis greater than $500 million) is no
longer permitted to maintain a reserve for bad debts with respect to
loans.  The Bank instead utilizes the tax charge-off method for tax
bad debt deductions.





Distributions. To the extent
that the Bank makes “nondividend distributions” to shareholders, such
distributions will be considered to result in distributions from the Bank’s
“base year reserve,” i.e. its reserve as of December 31, 1987, to the extent
thereof and then from its supplemental reserve for losses on loans, and an
amount based on the amount distributed will be included in the Bank’s taxable
income.  Nondividend distributions include distributions in excess of
the Bank’s current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of the Bank’s current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not constitute
nondividend distributions and, therefore, will not be included in the Bank’s
income.





The
amount of additional taxable income created from a nondividend distribution is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, in some situations, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 35% federal corporate income tax
rate.  We do not intend to pay distributions that would result in the
recapture of any portion of our bad debt reserves.





Corporate Alternative Minimum
Tax.  The Internal Revenue Code (the “Code”) imposes a tax on
alternative minimum taxable income (“AMTI”) at a rate of 20%. Only 90% of AMTI
can be offset by AMTI minimum tax net operating loss carryovers, of which there
is none. AMTI is also adjusted by determining the tax treatment of certain items
in a manner that negates the deferral of income resulting from the regular tax
treatment of those items.  The Company does not expect to be subject
to the alternative minimum tax.





Dividends-Received
Deduction.  The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations.





State
and Local Taxation





Iowa and Colorado
Taxation.  The Company and the Bank’s subsidiaries file Iowa
corporation tax returns and the Bank files an Iowa franchise and Colorado income
tax return.





The Iowa
corporate income tax rate ranges from 6% to 12% depending upon Iowa taxable
income.  Interest from federal securities is not taxable for purposes
of the Iowa corporate income tax.





Iowa
imposes a financial institution franchise tax, in lieu of the corporate income
tax, on the Iowa franchise taxable income of thrift institutions at the rate of
5%.  Iowa franchise taxable income is generally similar to federal
taxable income except that interest from state and municipal obligations is
taxable, and no deduction is allowed for state franchise taxes.  The
net operating loss carryback and carryforward rules are similar to the federal
rules.





Colorado’s corporate income tax is
imposed on domestic and foreign corporations at a flat rate of 4.63% on net
income derived from Colorado sources.


- 19
-


REGULATION


General




North Central Bancshares, Inc. is
regulated as a savings and loan holding company by the OTS.  The
Company is required to file reports with, and otherwise comply with, the rules
and regulations of the OTS and of the SEC under federal securities
laws.




First Federal Savings Bank of Iowa, a
wholly owned subsidiary of the Company, is a federally chartered savings
bank.  The Bank is subject to regulation, examination and supervision
by the OTS, as its primary regulator, and the Federal Deposit Insurance
Corporation (the “FDIC”), as its deposit insurer.  The Bank files
reports with the OTS concerning its activities and financial
condition.  The OTS and the FDIC have significant discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the Bank’s capital levels,
classification of assets and establishment of adequate loan loss reserves for
regulatory purposes.




The following discussion is intended to
provide a summary of the material statutes and regulations applicable to savings
and loan holding companies and federal savings associations, and does not
purport to be a comprehensive description of all such statutes and
regulations.




Regulation
of Savings and Loan Holding Companies




The Company is registered as a unitary
savings and loan holding company and is subject to OTS regulations,
examinations, supervision and reporting requirements.  In addition,
the OTS has enforcement authority over the Company and any of its non-savings
association subsidiaries.  Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness or stability of a subsidiary savings
association.  Unlike bank holding companies, savings and loan holding
companies are not subject to formal regulatory capital
requirements.




As a grandfathered unitary savings and
loan holding company, the Company generally is not restricted under existing
laws as to the types of business activities in which it may engage, provided
that the Bank continues to satisfy the QTL test.  See “-Regulation of
Federal Savings Associations - Qualified Thrift Lender Test” for a discussion of
the QTL requirements. In addition, the Gramm-Leach-Bliley Act prohibits the sale
of grandfathered savings and loan holding companies to nonfinancial
companies.  This prohibition is intended to restrict the transfer of
grandfathered rights to other entities, and thereby prevent evasion of the
limitation on the creation of new unitary savings and loan holding
companies.





The Home Owners’ Loan Act, as amended
(the “HOLA”) prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control (as
defined under OTS Regulations) of a savings association without obtaining prior
OTS approval.  In addition, a savings and loan holding company is
prohibited from directly or indirectly acquiring (i) through mergers,
consolidation or purchase of assets, another savings association or a holding
company thereof, or acquiring all or substantially all of the assets of such
association or company without prior OTS approval; and (ii) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding company’s savings association subsidiary that is approved by
the OTS).




A savings and loan holding company also
may not acquire as a separate subsidiary a savings association that has a
principal office outside of the state where the principal office of its
subsidiary savings association in located, except, (i) in the case of certain
emergency acquisitions approved by the FDIC; (ii) if such holding company
controls a savings association subsidiary that operated a home or branch office
in such additional state as of March 5, 1987; or (iii) if the laws of the state,
in which the savings institution to be acquired is located, specifically
authorize a state chartered savings institution to be acquired by a savings
institution chartered by the state where the acquiring savings association or
savings and loan holding company is located or by a holding company that
controls such a state chartered association.




OTS regulations prohibit service at a
savings and loan holding company by any person convicted of certain criminal
offenses or who agreed to enter into a pre-trial diversion (or similar program)
in connection with a prosecution for such criminal offenses.  The
regulation implements a provision of the Federal Deposit Insurance Act that
prevents persons who are currently prohibited from serving at an insured
institution from serving at a holding company that controls such
institution.  In general, persons convicted of criminal offenses
involving dishonesty, breach of trust or money laundering are prohibited from
serving at a bank or its holding company.  OTS has the authority to
review proposed appointments on a case-by-case basis, and by regulation has
exempted categories of employees of certain savings and loan holding companies
engaged in activities that the holding company is not permitted to engage
in.


- 20
-


Transactions between the Company or its
subsidiaries and the Bank are subject to various conditions and
limitations.  See “-Regulation of Federal Savings Associations -
Transactions with Affiliates” and “-Regulation of Federal Savings Associations -
Limitation on Capital Distributions.”




Change of
Control.  Federal law requires, with few exceptions, OTS
approval (or, in some cases, notice and effective clearance) prior to any
acquisition of control of the Company. Among other criteria, under the HOLA,
Change in Bank Control Act and OTS regulations, “control” is conclusively
presumed to exist if a person or company acquires, directly or indirectly, more
than 25% of any class of voting stock of the savings association or holding
company.  Under OTS regulations, control is also presumed to exist,
subject to rebuttal, if an acquiror acquires more than 10% of any class of
voting stock (or more than 25% of any class of stock) and is subject to any of
several “control factors,” including but not limited to,  the relative
ownership position of a person, the existence of control agreements and board
composition.





Regulation
of Federal Savings Associations




Business
Activities.  The Bank derives its lending and investment powers
from the HOLA and OTS regulations promulgated thereunder.  Under these
laws and regulations, the Bank may invest in mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of debt securities, and certain other assets.  The Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage.  The Bank’s authority to invest in
certain types of loans or other investments is limited by federal law and
regulation.




Capital
Requirements.  OTS regulations require the Bank to meet three
minimum capital standards:




(1)
            a
      tangible capital ratio requirement of 1.5% of total assets, as adjusted
      under the OTS regulations;




(2)
            a
      leverage ratio requirement of 3.0% of core capital to such adjusted total
      assets, if a savings association has been assigned the highest composite
      rating of 1 under the Uniform Financial Institutions Rating System;
      and




(3)
            a
      risk-based capital ratio requirement of 8.0% of core and supplementary
      capital to total risk-based assets, provided that the amount of
      supplementary capital used to satisfy this requirement shall not exceed
      the amount of core capital.




The minimum leverage capital ratio for
any other depository institution that does not have a composite rating of 1 will
be 4%, unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution.  In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by
risk-weights.  Risk-weights are assigned by the OTS under its capital
regulations, and are based on the risks found by the OTS to be inherent in the
type of asset.  Risk-weights range from 0% for cash and obligations
issued by the United States Government or its agencies and certain other assets
to 100%, for consumer, commercial, home equity and construction loans and
certain other assets.




Tangible capital is defined, generally,
as common stockholders’ equity (including retained earnings), certain
noncumulative perpetual preferred stock and related earnings, minority interests
in equity accounts of fully consolidated subsidiaries, less intangibles assets
(other than certain servicing rights and nonsecurity financial instruments) and
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank.  The definition of core capital (or Tier 1
capital) is similar to that of tangible capital, but core capital also includes
certain qualifying supervisory goodwill and certain purchased credit card
relationships.  Supplementary capital (or Tier 2 capital) includes
cumulative and other preferred stock, mandatory convertible debt securities,
subordinated debt and intermediate preferred stock and the allowance for loan
and lease losses.  In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in Tier 2 capital.  The allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets.




At December 31, 2008, the Bank met and
exceeded each of its capital requirements.  The table below presents
the Bank’s regulatory capital as compared to the OTS regulatory capital
requirements at December 31, 2008:


- 21
-





Bank
                
                
                Capital
                  Requirements
                
                
                Excess Capital(In thousands)Tangible
      capital
                
                $
                34,336
                
                
                $
                7,094
                
                
                $
                27,242Core
      capital
                
                
                34,336
                
                
                
                14,187
                
                
                
                20,149Risk-based
      capital
                
                
                37,768
                
                
                
                27,097
                
                
                
                10,671




Prompt Corrective Action
Regulations.  Under the OTS “prompt corrective action”
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings
associations.  For this purpose, a savings association is placed in
one of the following five categories based on the association’s
capital:




•
            well
      capitalized;




•
            adequately
      capitalized;




•
            undercapitalized;




•
            significantly
      undercapitalized; or




•
            critically
      undercapitalized.




At December 31, 2008, the Bank met the
criteria for being considered “well-capitalized.”  When appropriate,
the OTS can require corrective action by a savings association holding company
under the “prompt corrective action” provision of federal law.




Limitation on Capital
Distributions.The OTS imposes various restrictions or
requirements on the Bank’s ability to make capital distributions, including the
payment of cash dividends.  A savings association that is the
subsidiary of a savings and loan holding company must file a notice or
application with the OTS at least 30 days before making a capital
distribution.  An application is required if the total amount of an
institution’s capital distributions, including the proposed distribution, for
the applicable calendar year would exceed an amount equal to the Bank’s net
income for that year plus the Bank’s retained net income for the previous two
years.




The OTS may disapprove a notice of
application if the:




•
            Bank
      would be undercapitalized following the
  distribution;




•
            proposed
      capital distribution raises safety and soundness concerns;
    or




•
            capital
      distribution would violate a prohibition contained in any statute,
      regulation or agreement.




Liquidity.  The
Bank is required to maintain a sufficient amount of liquid assets to ensure its
safe and sound operation.




Insurance of Deposit
Accounts.  The Bank is a member of the Deposit Insurance Fund
(“DIF”) maintained by the FDIC, which insures customer deposit accounts as
described below.  The Bank pays deposit
insurance  assessments to the FDIC to support the FDIC’s maintenance
of the DIF.




The DIF was formed on March 31, 2006,
following the merger of the Bank Insurance Fund and the Savings Association
Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of
2005 (“DIF Act”).  In addition to merging the insurance funds, the DIF
Act established a statutory minimum and maximum designated reserve ratio for the
DIF and granted the FDIC greater flexibility in establishing the required
reserve ratio.  In its regulations implementing the DIF Act, the FDIC
has set the current annual designated reserve ratio for the DIF at
1.25%.




Historically, the FDIC insured customer
deposit accounts up to $100,000; however, pursuant to the Emergency Economic
Stabilization Act enacted in October 2008, the DIF currently insures customer
deposit accounts up to $250,000.  This expanded coverage extends to
December 31, 2009, and may or may not be extended beyond that
date.  In November 2008, in order to provide additional stability to
the financial system, the FDIC also expanded its deposit coverage to provide a
full guarantee to insured depository institutions that participate in the
Transaction Account Guarantee Program of its Temporary Liquidity Guarantee
Program (“TAGP”) for customers’ non-interest bearing transaction accounts for
all amounts in such accounts.  At the same time the FDIC also
established the TLGP Debt Guarantee Program (“DGP”), which guarantees certain
senior unsecured debt issued by a depository institution and/or its holding
companies.  The Bank participates in the both TAGP and DGP; however,
to date the Bank has not issued, nor does it have any plans to issue, guaranteed
debt under the DGP.


- 22
-


In order to maintain the DIF, member
institutions are assessed an insurance premium.  The amount of each
institution’s premium is currently based on the balance of insured deposits and
the degree of risk the institution poses to the DIF.  Under the
assessment system, the FDIC assigns an institution to one of four risk
categories using a two-step process based first on capital ratios (the capital
group assignment) and then on other relevant information (the supervisory
subgroup assignment).  Each risk category is assigned an assessment
rate.  Until recently, assessment rates ranged from 0.05% of deposits
for an institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to 0.43% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concerns).  As of December 31, 2008, the
Bank’s assessment rate was 0.07% of  assessable deposits.




The FDIC is authorized to raise the
assessment rates as necessary to maintain the DIF.  In October 2008,
the FDIC proposed raising assessment rates to implement a Restoration Plan for
the DIF, which had fallen significantly below the minimum target level of 1.15%
as a result of recent bank failures.  On February 27, 2009, the FDIC
voted to implement an amended Restoration Plan.




Under the
amended Restoration Plan, the FDIC is implementing an assessment rate schedule
to raise the DIF reserve ratio to 1.15% within seven years.  Pursuant
to the Plan, the FDIC is implementing a final rule that sets assessment rates
and makes adjustments based on risk.  Under the final rule, banks in
the lowest risk category will pay initial base rates ranging from 0.12% of
deposits to 0.16% of assessable deposits on an annual basis, beginning on April
1, 2009 (applicable to assessments for the second quarter of 2009 and
thereafter); but this may be further adjusted to between 0.07% and 0.24% of
assessable deposits for banks’ holding unsecured debt, certain secured
liabilities and brokered deposits beyond a certain amount.  Banks in
the highest risk category will pay an initial base rate of 0.45% of assessable
deposits, which may also be adjusted to between 0.40% of deposits and 0.775% of
assessable deposits for excess amounts of unsecured debt, certain secured
liabilities and brokered deposits.  The FDIC also has the ability to
adjust the assessment rate schedule from quarter to quarter.  A
material increase in insurance assessments could have an adverse effect on the
earnings of the Bank.




In
addition to the final assessment rule, the FDIC adopted an interim rule imposing
an emergency special assessment on insured depository institutions equal to
0.20% of assessable deposits, effective June 30, 2009.  The special
assessment is to be collected on September 30, 2009.  The interim rule
would also permit the Board to impose an emergency special assessment after June
30, 2009, of up to 0.10% of assessable deposits if necessary to maintain public
confidence in the federal deposit insurance system.




As a
participant in the TAGP, the Bank is also assessed a 0.10% annual surcharge on
its noninterest-bearing transaction deposit amounts over
$250,000.  However, it is not assessed on amounts that are otherwise
insured, for example, in a custodial account that has pass-through coverage for
each actual owner where each owner has an account balance of less than
$250,000.  This surcharge is collected through the normal assessment
cycle.




In addition, all FDIC-insured
institutions are required to pay a pro rata portion of the
interest due on obligations issued by the Financing Corporation to fund the
closing and disposal of failed thrift institutions by the Resolution Trust
Corporation.  At December 31, 2008, the FDIC assessed DIF-insured
deposits 1.14 basis points per $100 of deposits to cover those
obligations.  The Financing Corporation rate is adjusted quarterly to
reflect changes in assessment bases of the DIF.  This obligation will
continue until the Financing Corporation bonds mature in 2019.




Standards for Safety and
Soundness.  Pursuant to the Federal Deposit Insurance Act, the
OTS has adopted a set of guidelines prescribing safety and soundness
standards.  These guidelines establish general standards relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings standards, compensation, fees and
benefits.  In general, the guidelines require appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines.




In addition, the OTS adopted
regulations that authorize, but do not require, the OTS to order a savings
association that has been given notice that it is not satisfying these safety
and soundness standards to submit a compliance plan.  If, after being
notified, a savings association fails to submit an acceptable plan or fails in
any material respect to implement an accepted plan, the OTS must issue an order
directing action to correct the deficiency.  Further, the OTS may
issue an order directing other actions of the types to which an undercapitalized
association is subject under the “prompt corrective action” provisions of
federal law.  If a savings association fails to comply with such an
order, the OTS may seek to enforce the order in judicial proceedings and/or
impose civil money penalties.


- 23
-


Loans to One
Borrower.  The Bank is generally subject to the same limits on
loans to one borrower as a national bank.  With specified exceptions,
the Bank’s total loans or extensions of credit to a single borrower cannot
exceed 15% of the Bank’s unimpaired capital and surplus which does not include
accumulated other comprehensive income.  The Bank may lend additional
amounts up to 10% of its unimpaired capital and surplus which does not include
accumulated other comprehensive income, if the loans or extensions of credit are
fully-secured by readily-marketable collateral.  The Bank currently
complies with applicable loans-to-one borrower limitations.




Qualified Thrift Lender
Test.  Under federal law, the Bank must comply with the
qualified thrift lender or “QTL” test.  Under the QTL test, the Bank
is required to maintain at least 65% of its “portfolio assets” in certain
“qualified thrift investments” in at least nine months of the most recent
12-month period.  “Portfolio assets” means, in general, the Bank’s
total assets less the sum of:




•
            specified
      liquid assets up to 20% of total
assets;




•
            goodwill
      and other intangible assets; and




•
            the
      value of property used to conduct the Bank’s
  business.




The Bank may also satisfy the QTL test
by qualifying as a “domestic building and loan association” as defined in the
Internal Revenue Code of 1986.  The Bank met the QTL test at December
31, 2008, and in each of the prior 12 months, and therefore is a “qualified
thrift lender.”




If the Bank fails the QTL test it must
promptly come into compliance, operate under certain restrictions on its
activities or convert to a bank charter, which would cause the Company to be
regulated as a bank holding company, subject to the Bank Holding Company Act of
1956, as amended and the rules and regulations of the Board of Governors of the
Federal Reserve System.




Transactions with
Affiliates.The Bank’s authority to engage in transactions
with its affiliates is limited by Sections 23A and 23B of the Federal Reserve
Act and the Federal Reserve Board’s Regulation W, as made applicable to federal
savings associations by the HOLA and the OTS regulations.  In general,
these transactions must be on terms which are as favorable to the Bank as
comparable transactions with non-affiliates.  In addition, certain
types of these transactions, referred to as “covered transactions,” are subject
to quantitative limits based on a percentage of the Bank’s capital, thereby
restricting the total dollar amount of transactions the Bank may engage in with
each individual affiliate and with all affiliates in the
aggregate.  Affiliates must pledge qualifying collateral in amounts
between 100% and 130% of the covered transaction in order to receive loans from
the Bank.  In addition, applicable regulations prohibit a savings
association from lending to any of its affiliates that engage in activities that
are not permissible for bank holding companies and from purchasing low-quality
(i.e., non-performing) assets from an affiliate or purchasing the securities of
any affiliate, other than a subsidiary.




Loans to
Insiders.  The Bank’s authority to extend credit to its
directors, executive officers and principal shareholders, as well as to entities
controlled by such persons, is currently governed by the requirements of
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve Board, as made applicable to federal savings associations by the
HOLA and the OTS regulations.  Among other things, these provisions
require that extensions of credit to insiders:




•
            be
      made on terms that are substantially the same as, and follow credit
      underwriting procedures that are not less stringent than, those prevailing
      for comparable transactions with third parties and that do not involve
      more that the normal risk of repayment or present other features that are
      unfavorable to the Bank; and




•
            not
      exceed certain limitations on the amount of credit extended to such
      persons, individually and in the aggregate, which limits are based, in
      part, on the amount of the Bank’s
capital.




In addition, extensions for credit in
excess of certain limits must be approved by the Bank’s board of
directors.


- 24
-


Community Reinvestment
Act.  Under the Community Reinvestment Act (“CRA”), as
implemented by OTS regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending
requirements or programs for the Bank, nor does it limit the Bank’s discretion
to develop the types of products and services that it believes are best suited
to its particular community, consistent with the CRA.  Rather, the CRA
requires the OTS, in connection with its examination of the Bank, to assess the
association’s record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by the
Bank.  The CRA also requires all institutions to make public
disclosure of their CRA ratings.  The Bank received the highest rating
of “Outstanding” in its most recent examination.




CRA regulations rate an institution
based on its actual performance in meeting community needs.  In
particular, the assessment system focuses on three tests:




•
            a
      lending test, to evaluate the institution’s record of making loans in its
      assessment areas;




•
            an
      investment test, to evaluate the institution’s record of investing in
      community development projects, affordable housing, and programs
      benefiting low or moderate income individuals and businesses in its
      assessment area, or a broader area that includes its assessment areas;
      and




•
            a
      service test, to evaluate the institution’s delivery of services through
      its retail banking channels and the extent and innovativeness of its
      community development services.




Consumer Protection and Other Laws
and Regulations.  The Bank is subject to various laws and
regulations dealing generally with consumer protection matters. The Bank may be
subject to potential liability under these laws and regulations for material
violations. The Bank’s lending operations are also subject to federal laws
applicable to credit transactions, such as the:





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





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





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





•
            Fair
      Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
      Transactions Act, governing the use and provision of information to credit
      reporting agencies, certain identity theft protections and certain credit
      and other disclosures;





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





•
            Servicemembers’
      Civil Relief Act; and





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





The
Bank’s deposit operations are subject to federal laws applicable to deposit
transactions, such as the:





•
            Truth
      in Savings Act, which imposes disclosure obligations to enable consumers
      to make informed decisions about accounts at depository
      institutions;




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




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


- 25
-


Subprime Mortgage
Lending.To address current issues in the subprime mortgage
market, the Federal Reserve approved a final rule for home mortgage loans to
better protect consumers and facilitate responsible lending.  The
final rule amends the Federal Reserve’s regulations that implement the Truth in
Lending Act (“TILA”), and was adopted under the Home Ownership and Equity
Protection Act. The rule prohibits unfair, abusive or deceptive home
mortgage lending practices and restricts certain other mortgage
practices.  The final rule also establishes advertising standards and
requires certain mortgage disclosures to be given to consumers earlier in the
transaction.  The final rule adds four key protections for a newly
defined category of “higher-priced mortgage loans” secured by a consumer’s
principal dwelling.  For loans in this category, the protections are
aimed to (a) prohibit a lender from making a loan without regard to borrowers’
ability to repay the loan from income and assets other than the home’s value;
(b) require creditors to verify the income and assets they rely upon to
determine repayment ability; (c) ban any prepayment penalty if the payment can
change in the initial four years (for other higher-priced loans, a prepayment
penalty period cannot last for more than two years); and (d) require creditors
to establish escrow accounts for property taxes and homeowner’s insurance for
all first-lien mortgage loans.  In addition to the rules governing
higher-priced loans, the rule also affords protections for loans secured by a
consumer’s principal dwelling, regardless of whether the loan is
higher-priced.





Prohibitions against Tying
Arrangements.  As a federal savings association, the Bank is
subject to prohibitions on certain tying arrangements.  The Bank is
prohibited, subject to certain exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
product or service from the institution or its affiliates or not obtain services
of a competitor of the institution.




Privacy
Provisions.  The Bank is required to disclose its privacy
policy, including identifying parties with whom it shares a customer’s
“non-public personal information,” to customers at the time of establishing the
customer relationship and annually thereafter.  The Bank is required
to provide its customers with the ability to “opt-out” of having their personal
information shared with unaffiliated third parties except under limited
circumstances, such as the processing of transactions requested by the consumer
or when the financial institution is jointly sponsoring a product or service
with a nonaffiliated third party.  Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing to consumers.  The Bank currently has a privacy
protection policy in place and believes that such policy is in compliance with
regulations.





Affiliate
Marketing.The federal banking agencies, including the OTS,
have finalized a joint rule implementing Section  214 of the FACT Act,
which provides consumers with the ability to restrict companies from using
certain information obtained from affiliates to make marketing
solicitations.  In general, a person is prohibited from using
information received from an affiliate to make a solicitation for marketing
purposes to a consumer, unless the consumer is given notice and had a reasonable
opportunity to opt out of such solicitations.  The rule permits
opt-out notices to be given by any affiliate that has a preexisting business
relationship with the consumer and permits a joint notice from two or more
affiliates.  Moreover, such notice would not be applicable to the
company using the information if it has a pre-existing business relationship
with the consumer.  The notice that is required under the FACT Act may
be combined with other required disclosures to be provided under other
provisions of law, including notices required under the privacy provisions of
the Gramm-Leach-Bliley Act.





IdentityTheft.  The federal
banking agencies, including the OTS, finalized a joint rule implementing Section
315 of the FACT Act, requiring each financial institution or creditor to develop
and implement a written Identity Theft Prevention Program to detect, prevent,
and mitigate identity theft in connection with the opening of certain accounts
or certain existing accounts.  The rule became effective on January 1,
2008 and mandatory compliance commenced on November 1, 2008.





Among the requirements under the rule,
the Bank is required to adopt “reasonable policies and procedures”
to:





·
            identify
      relevant Red Flags for covered accounts and incorporate those Red Flags
      into the Program;





·
            detect
      Red Flags that have been incorporated into the
  Program;





·
            respond
      appropriately to any Red Flags that are detected to prevent and mitigate
      identity theft; and





·
            ensure
      the Program is updated periodically, to reflect changes in risks to
      customers or to the safety and soundness of the financial institution or
      creditor from identity theft.




- 26
-




The Bank has implemented a program to
meet the requirements of the regulation, and believes its is currently in
compliance with this regulation.


Anti-Money Laundering/Terrorist
Financing Requirements.  The Company and the Bank are subject
to the Bank Secrecy Act, as amended by the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
(“USA PATRIOT Act”), which gives the federal government powers to address money
laundering and terrorist threats through enhanced domestic security measures,
expanded surveillance powers, and mandatory transaction reporting
obligations.  By way of example, the Bank Secrecy Act imposes an
affirmative obligation on the Bank to report currency transactions that exceed
certain thresholds and to report other transactions determined to be
suspicious.




Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among financial institutions,
bank regulatory agencies and law enforcement bodies.  Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.  Among other requirements, the USA PATRIOT Act imposes
the following obligations on financial institutions:




•
            financial
      institutions must establish anti-money laundering programs that include,
      at minimum: (i) internal policies, procedures, and controls, (ii) specific
      designation of an anti-money laundering compliance officer, (iii) ongoing
      employee training programs, and (iv) an independent audit function to test
      the anti-money laundering program;




•
            financial
      institutions must establish and meet minimum standards for customer due
      diligence, identification and
verification;




•
            financial
      institutions that establish, maintain, administer, or manage private
      banking accounts or correspondent accounts in the United States for
      non-United States persons or their representatives (including foreign
      individuals visiting the United States) must establish appropriate,
      specific, and, where necessary, enhanced due diligence policies,
      procedures, and controls to detect and report  instances of
      money laundering through those
accounts;




•
            financial
      institutions are prohibited from establishing, maintaining, administering
      or managing correspondent accounts for foreign shell banks (foreign banks
      that do not have a physical presence in any country) and are subject to
      certain recordkeeping obligations with respect to correspondent accounts
      of foreign banks; and




•
            bank
      regulators are directed to consider a bank’s or holding company’s
      effectiveness in combating money laundering when ruling on Federal Reserve
      Act and Bank Merger Act
applications.




The Office of Foreign Assets Control
(“OFAC”), which is a division of the U.S. Department of the Treasury
(“Treasury”), is responsible for helping to insure that United States entities
do not engage in transactions with “enemies” of the United States, as defined by
various Executive Orders and Acts of Congress.  The Bank and the
Company, like all United States companies and individuals, are prohibited from
transacting business with the individuals and entities named on OFAC’s list of
Specially Designated Nationals and Blocked Persons.  If the Bank finds
a name on any transaction account or wire transfer that is on an OFAC list, the
Bank is required to investigate, and if the match is confirmed, the Bank must
take additional actions including freezing such account, filing a suspicious
activity report and notifying the FBI.  Failure to comply may result
in fines and other penalties.  The Office of Foreign Asset Control has
issued guidance directed at financial institutions in which it asserted that it
may, in its discretion, examine institutions determined to be high-risk or to be
lacking in their efforts to comply with these prohibitions.




Enforcement.  The
OTS has primary enforcement responsibility over savings associations, including
the Bank.  This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease and desist orders
and to remove directors and officers.  In general, these enforcement
actions may be initiated in response to violations of laws and regulations, or
unsafe or unsound practices.


- 27
-


Federal Home Loan Bank
System.  The Bank is a member of the Federal Home Loan Bank of
Des Moines, which is one of the regional FHLBs composing the FHLB
System.  Each FHLB serves as a central credit facility for its member
institutions by extending advances up to a maximum aggregate
amount.  The Bank, as a member of the FHLB of Des Moines, is required
to acquire and hold shares of capital stock in the FHLB of Des Moines in an
amount at least equal to the greater of $10,000 or 0.12% of the total assets of
the Bank.  The Bank is also required to own activity based stock,
which is based on 4.45% of the Bank’s outstanding advances.  These
percentages are subject to change by the FHLB.  The Bank was in
compliance with this requirement with an investment in FHLB of Des Moines stock
at December 31, 2008 of $4.7 million.  Any advances from a FHLB must
be secured by specified types of collateral, and all long-term advances may be
obtained only for the purpose of providing funds for residential housing
finance.




The FHLBs are required to provide funds
for the resolution of insolvent thrifts and to contribute funds for affordable
housing programs.  These requirements could reduce the amount of
earnings that the FHLBs can pay as dividends to their members and could also
result in the FHLBs imposing a higher rate of interest on advances to their
members.  If dividends were reduced, or if interest on future FHLB
advances were increased, the Bank’s net interest income would be
affected.




Federal Reserve
System.  Under the Federal Reserve Act and the Federal Reserve
Board’s regulations,  the Bank is required to maintain reserves
against its transaction accounts (primarily NOW and regular checking
accounts).  The regulations exempt $9.3 million of otherwise
reservable balances from the reserve requirements.  A 3% reserve is
required for transaction account balances over $9.3 million and up to $34.6
million.  Transaction account balances over $34.6 million are subject
to a reserve requirement of $1.04 million plus 10% of any amount over $34.6
million.  The Bank is in compliance with the foregoing reserve
requirements.  Because required reserves must be maintained in the
form of vault cash, a noninterest-bearing account at a Federal Reserve Bank, or
a pass-through account as defined by the Federal Reserve , the effect of this
reserve requirement is to reduce the Bank’s interest-earning
assets.  The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS.





Effect of Governmental Monetary
Polices.Our earnings will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.  The Federal Reserve has, and is likely to continue
to have, an important impact on the operating results of financial institutions
through its power to implement national monetary policy, among other things, in
order to curb inflation or combat a recession.  The Federal Reserve
affects the levels of bank loans, investments and deposits through its control
over the issuance of United States government securities, its regulation of the
discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject.  We cannot predict the
nature or impact of future changes in monetary and fiscal policies.





Federal Securities
Laws.  The Company’s common stock is registered with the SEC
under Section 12(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  The Company is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.




Listing on
Nasdaq.  The Company’s common stock is listed on the Nasdaq
Global Market.  In order to maintain such listing, the Company is
subject to certain corporate governance requirements, including:




•
            a
      majority of its board must be composed of independent
      directors;




•
            it
      is required to have an audit committee composed of at least three
      directors, each of whom is an independent director, as such term is
      defined by both the rules of the Financial Industry Regulatory Authority
      and by Securities Exchange Act
regulations;




•
            its
      nominating committee and compensation committee must also be composed
      entirely of independent directors;
and




•
            each
      of its audit committee and nominating committee must have a publicly
      available written charter.




Sarbanes-Oxley
Act.  As a public company, the Company is subject to the
Sarbanes-Oxley Act, which implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from corporate
wrongdoing including:




•
            auditor
      independence provisions which restrict non-audit services that accountants
      may provide to their audit
clients;


- 28
-


•
            additional
      corporate governance and responsibility measures, including the
      requirement that the chief executive officer and chief financial officer
      certify financial statements;




•
            a
      requirement that companies establish and maintain a system of internal
      control over financial reporting and that a company’s management provide
      an annual report regarding its assessment of the effectiveness of such
      internal control over financial reporting to the company’s regulator and
      the FDIC.  The Company’s assessment of internal control over
      financial reports is included in Part III, Item 9A(T) of this
      10-K.




•
            The
      Company’s independent accountants are also required to provide an
      attestation report with respect to management’s assessment of the
      effectiveness of the company’s internal control over financial reporting.
      The Company, as a smaller reporting company, is not subject to attestation
      provision until the year ending December 31,
  2009;




•
            an
      increase in the oversight of, and enhancement of certain requirements
      relating to audit committees of public companies, including how they
      interact with the company’s independent auditors;
  and




•
            a
      range of enhanced disclosure requirements as well as penalties for fraud
      and other violations.




Section 402 of the Sarbanes-Oxley Act
of 2002 prohibits the extension of personal loans to directors and executive
officers of issuers.  The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as the Bank, that
are subject to the insider lending restrictions of Section 22(h) of the Federal
Reserve Act.




Developments
in Regulation of the Financial Sector





Actions taken by
Congress and bank regulatory agencies in response to recent market
instability.In response to the widely-publicized
deteriorating conditions in the U.S. banking and financial system, Treasury and
federal banking agencies have taken various actions as part of a comprehensive
strategy to stabilize the financial system and housing markets, and to
strengthen U.S. financial institutions.





Emergency Economic Stabilization Act
of 2008.  The Emergency Economic Stabilization Act of 2008
(“EESA”), enacted on October 3, 2008, provided the Secretary of Treasury with
authority to, among other things, establish the Troubled Asset Relief Program
(“TARP”) to purchase from financial institutions up to $700 billion of troubled
assets, which include residential or commercial mortgages and any securities,
obligations, or other instruments that are based on or related to such
mortgages, that in each case was originated or issued on or before March 14,
2008.  The term “troubled assets” also included any other financial
instrument that the Secretary, after consultation with the Chairman of the
Federal Reserve Board determines the purchase of which is necessary to promote
financial market stability, upon transmittal of such determination in writing,
to the appropriate committees of the U.S. Congress.  EESA also
provided for the temporary increase of federal deposit insurance coverage levels
under the DIF from $100,000 to $250,000 per deposit category, per depositor, per
institution, through December 31, 2009.





On October 14, 2008, the Treasury
announced the Capital Purchase Program (“CPP”) under EESA, pursuant to which
Treasury would purchase up to $250 billion of senior preferred shares from
qualifying financial institutions on standardized terms.  The Company
is a participant of the program and as such, is required to comply with a number
of restrictions and provisions, including limits on executive compensation,
stock redemptions and declaration of dividends.





On February 25, 2009, the Treasury
announced the Capital Assistance Program (“CAP”), which is a new capital program
under the Treasury Department’s Financial Stability Plan.  The purpose
of the CAP is to restore confidence throughout the financial system by ensuring
that the nation's largest banking institutions have a sufficient capital cushion
against larger than expected future losses, should they occur due to a more
severe economic environment, and to support lending to creditworthy
borrowers.  The CAP does not replace the CPP and is open to qualifying
institutions regardless of whether they participated in the CPP.  The
deadline to apply for the CAP is May 25, 2009.





American Recovery and Reinvestment
Act of 2009.  On February 17, 2009, the President signed the
American Recovery and Reinvestment Act of 2009 into law as a $787 billion dollar
economic stimulus.  The stimulus includes discretionary spending for
among other things, infrastructure projects, increased unemployment benefits and
food stamps, as well as tax relief for individuals and
businesses.


- 29
-


Temporary Liquidity Guarantee
Program.  The FDIC established the Temporary Liquidity
Guarantee Program (“TLGP”) on October 14, 2008 (i) guaranteeing certain debt
issued by FDIC-insured institutions and certain holding companies on or after
October 14, 2008 through June 30, 2009; and (ii) providing unlimited insurance
coverage for non-interest bearing transaction accounts.  On March 17,
2009, the Board of Directors of the FDIC voted to extend the debt guarantee
portion of the TLGP from June 30, 2009 through October 31, 2009, and to impose a
surcharge on debt issued with a maturity of one-year or more beginning in the
second quarter to gradually phase-out the program.





The Debt Guarantee Program (“DGP”)
component of the TLGP provides liquidity to the inter-bank lending market and
promotes stability in the unsecured funding market.  Under the DGP,
the FDIC temporarily guarantees all newly-issued senior unsecured debt up to
prescribed limits.  In general, the maximum amount of outstanding debt
that is guaranteed under the DGP for each participating entity at any time is
limited to 125 percent of the par value of the participating entity’s senior
unsecured debt.  The DGP ensures that such debt would be fully
protected in the event the issuing institution subsequently fails or its holding
company files for bankruptcy.  Entities that did not wish to
participate in the DGP had to opt out by December 5, 2008.  As a
participant of the DGP, the Company is bound by the program’s requirements,
which include the payment of assessments that are determined by multiplying the
amount of FDIC-guaranteed debt times the term of the debt (expressed in years)
times an annualized assessment rate.  To date, neither the Company nor
the Bank has issued, nor do either have any plans to issue, guaranteed debt
under the DGP.




Under the Transaction Account Guarantee
Program (“TAGP”) component of the TLGP, non-interest bearing transaction
accounts are fully insured through December 31, 2009.  Non-interest
bearing transaction accounts are any deposit accounts with respect to which
interest is neither accrued nor paid and on which the insured depository
institution does not reserve the right to require advance notice of an intended
withdrawal, including traditional demand deposit checking accounts that allow
for an unlimited number of deposits and withdrawals at any
time.  Generally, transactions accounts do not include
interest-bearing money market deposit accounts or sweep arrangements that result
in funds being placed in an interest-bearing account as the result of the
sweep.  The unlimited guarantee under the TAGP is in addition to, and
separate from, the general deposit insurance coverage provided for under the
DIF, currently at $250,000 per depositor, per institution until December 31,
2009.  As a participant of the TAGP, the Bank is bound by the
requirements of the program, including the quarterly payment of an annualized 10
basis point assessment on any deposit amounts exceeding the existing deposit
insurance limit of $250,000.  (See the above discussion at “Insurance of Deposit
Accounts.”)




Term Asset-Backed Securities Loan
Facility. Under the Term Asset-Backed Securities Loan Facility (“TALF”),
the Federal Reserve Bank of New York will lend up to $200 billion to eligible
owners of certain AAA-rated ABS backed by newly and recently originated auto
loans, credit card loans, student loans, and SBA-guaranteed small business
loans.  The TALF has the potential to generate up to $1 trillion of
lending for businesses and households.  Any U.S. company that owns
eligible collateral may borrow from the TALF, provided the company maintains an
account relationship with a primary dealer.  The facility is expected
to cease making new loans on December 31, 2009, unless the Federal Reserve Board
extends the facility.




Unfair and Deceptive
Practices.  On January 29, 2009, the OTS, along with other
federal banking agencies (“the Agencies”) issued a joint, final rule under
Section 5 of the Federal Trade Commission Act (“FTC Act”) that provides
clarification to the body of law surrounding unfair or deceptive acts or
practices.  In adopting the rule, the Agencies drew on the statutory
definition of what constitutes an “unfair” act or practice under the FTC Act,
and also drew on the definition of what constitutes a “deceptive” act or
practice under applicable FTC guidance.  The Agencies identified five
credit card practices that they conclusively determined to be unfair, and
therefore unlawful under the FTC Act.  Furthermore, the Agencies
reserved the right to regulate all other unfair or deceptive acts or practices
of banks on a case-by-case basis.  The effective date of the final
rule is July 1, 2010.




Truth in Lending Act regulatory
amendments.  In conjunction with issuing the joint, final rule
regarding unfair or deceptive acts or practices, the Federal Reserve also
adopted a final rule amending regulations that implement the Truth in Lending
Act to revise the disclosures that consumers receive in connection with credit
card accounts and other revolving credit plans.  The final rule
imposes new format, timing, and content requirements for credit card
applications and solicitations, as well as for the disclosures that consumers
receive with regard to open-end accounts. The effective date of the final rule
is July 1, 2010.


- 30
-


Truth in Savings Act regulatory
amendments. In conjunction with issuing the joint, final rule regarding
unfair or deceptive acts or practices, the Federal Reserve also adopted a final
rule amending its regulations that implement the Truth in Savings
Act.  The final rule addresses depository institutions’ disclosure
practices related to overdrafts.  The final rule extends to all
institutions the requirement to disclose on periodic statements the total
amounts charged for overdraft fees and returned items fees, for both the
statement period as well as the year-to-date.  The final rule also
requires institutions that provide account balance information through an
automated system to provide a balance that excludes additional funds that may be
made available to cover overdrafts.  The effective date of the final
rule is January 1, 2010.




Electronic Fund Transfer Act
regulatory amendments.  The Federal Reserve has proposed a rule
addressing certain consumer protection proposals relating to the assessment of
overdraft fees by banks.   One proposal involved a choice between
allowing consumers to either opt out or opt in to an institution’s overdraft
service for the payment of ATM and one-time debit card overdrafts before the
institution may charge a fee for the service.  Another proposal
prohibited institutions from assessing a fee or charge for paying an overdraft
if the overdraft would not have occurred but for a debit hold placed on the
consumer’s account, provided that the amount of the hold exceeds the actual
transaction amount. The scope of this proposal was limited to debit card
transactions in which the actual transaction amount could generally be
determined by the merchant or other payee within a short period of time after an
institution authorizes the transaction.  Until the rule is adopted in
a final form, we cannot assess whether it will materially affect our
operations.




Federal Securities
Laws.  The Company’s common stock is registered with the SEC
under Section 12(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  The Company is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.




Legislative and Regulatory
Activities.New statutes, regulations and guidance are
regularly proposed and promulgated that potentially contain wide-ranging changes
to the statutes, regulations and guidance impacting the competitive
relationships of financial institutions operating and doing business in the
United States.  We cannot predict whether or in what form any proposed
statute, regulation or other guidance will be adopted or promulgated, or the
extent to which the business of either the Company or the Bank may be
affected.  These include potential changes to the bankruptcy laws that
could force modifications of mortgage loans currently held by the Bank, issues
involving the existing regulatory structure in place to oversee the operations
of the Bank and the Company, potential mortgage reforms that could adversely
affect the operations and current business model of the Bank and/or the Company,
as well as additional programs or changes to existing government programs that
the Bank and Company participate in and/or really on for their current
operations.





ITEM
      1A.
            RISK
      FACTORS





RISK
FACTORS




Recent negative
developments in the financial services industry and U.S. and global credit
markets may adversely impact our operations and results.Negative
developments in the capital markets in the latter half of 2007 and in 2008, and
the expectation of the general economic downturn continuing in 2009 and
potentially into 2010 have resulted in uncertainty in the financial markets in
general. Factors such as consumer spending, business investment, government
spending and inflation all affect the business and economic environment and,
ultimately, the amount and profitability of our business.  Loan
portfolio performances have deteriorated at many institutions resulting from,
among other factors, a weak economy and a decline in the value of the collateral
supporting their loans. The competition for deposits has increased significantly
due to liquidity concerns at many of these same institutions. In an economic
downturn characterized by higher unemployment, lower family income, lower
corporate earnings, lower business investment and lower consumer spending, stock
prices of bank holding companies, like ours, have been negatively affected by
the current condition of the financial markets, as has our ability, if needed,
to raise capital or borrow in the debt markets.




Dramatic
declines in the housing market over the past two years, with falling home prices
and increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of real estate related loans and resulted in
significant write-downs of asset values by financial
institutions.  These write-downs have caused many financial
institutions to seek additional capital, to reduce or eliminate dividends, to
merge with larger and stronger institutions and, in some cases, to
fail.  This market turmoil and tightening of credit have led to an
increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business
activity generally.  The resulting economic pressure on consumers and
lack of confidence in the financial markets may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact
our charge-offs and provision for loan losses.


- 31
-


As a
result, there is a potential for new federal or state laws and regulations
regarding lending and funding practices and liquidity standards, and financial
institution regulatory agencies are expected to be very aggressive in responding
to concerns and trends identified in examinations. Negative developments in the
financial services industry and the impact of new legislation in response to
those developments could adversely impact our operations, including our ability
to originate or sell loans, and adversely impact our financial
performance




There can be no
assurance that recently enacted legislation will help stabilize the U.S.
financial system.Since October 2008,
numerous legislative actions have been taken in response to the financial crisis
affecting the banking system and financial markets, including the
following:




·
            EESA
      was signed into law on October 3, 2008 in response to the financial crises
      affecting the banking system and financial markets and going concern
      threats to investment banks and other financial institutions. Pursuant to
      EESA, the Treasury has the authority to, among other things, purchase up
      to $700 billion of mortgages, mortgage-backed securities and certain other
      financial instruments from financial institutions for the purpose of
      stabilizing and providing liquidity to the U.S. financial
      markets.




·
            On
      October 14, 2008, the Treasury announced the CPP under EESA, pursuant to
      which it would purchase senior preferred stock and warrants to purchase
      common stock from participating financial institutions.  On
      January 9, 2009, we entered into the Agreement with the Treasury providing
      for our issuance of our Series A Preferred Stock and a Warrant to purchase
      shares of our common stock to the Treasury in connection with the TARP
      CPP.




·
            On
      October 3, 2008, the FDIC increased deposit insurance to $250,000 through
      December 31, 2009.  In addition, during October 2008, the FDIC
      announced the TLGP, under which it would temporarily guarantee certain new
      debt issued by insured banks and qualifying bank holding companies and
      expand its insurance to cover all non-interest bearing transaction
      accounts through December 31, 2009.  The Company did not opt out
      of the TLGP so its non-interest bearing transaction accounts are covered
      and does not expect to issue unsecured debt before the termination of that
      component of the TLGP.  Our participation in the TLGP will
      require the payment of additional insurance premiums to the
      FDIC.  Additionally, we may be required to pay significantly
      higher FDIC premiums in the future because market developments have
      significantly depleted the Deposit Insurance Fund and reduced the ratio of
      reserves to insured deposits. On February 27, 2009, the FDIC adopted
      an interim rule to impose a 20 basis point emergency special assessment on
      insured institutions.  The assessment will be based on deposits
      as of June 30, 2009 and collected on September 30, 2009.  After
      June 30, 2009, the FDIC may impose an additional assessment of up to 10
      basis points if the condition of the banking industry continues to
      decline.




·
            On
      February 10, 2009, the Treasury announced the Financial Stability Plan
      under the EESA, which is intended to further stabilize financial
      institutions and stimulate lending across a broad range of economic
      sectors.




·
            On
      February 17, 2009, President Obama signed the American Recovery and
      Reinvestment Act of 2009, or ARRA, a broad economic stimulus package that
      included additional restrictions on, and potential additional regulation
      of, financial institutions.




Each of
these programs was implemented to help stabilize and provide liquidity to the
financial system.  There can be no assurance, however, as to the
actual impact that the EESA and its implementing regulations, the CPP, the
Financial Stability Plan, the ARRA, the FDIC programs, or any other governmental
program will have on the financial markets.  The failure of the EESA,
ARRA, the FDIC or the U.S. government to stabilize the financial markets, and
the continuation or worsening of the current financial market conditions, could
have a material adverse affect on our business, our financial condition, the
results of our operations, our access to credit or the trading price of our
common stock as well as the financial condition of our customers.  It
could also result in declines in our investment portfolio which could be
“other-than-temporary impairments.”




The soundness of
other financial institutions could adversely affect us.Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions.  Financial services institutions are interrelated as a
result of trading, clearing, counterparty or other relationships.  As
a result, defaults by, or even rumors or questions about, one or more financial
services institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by
other institutions.  Many of these transactions expose us to credit
risk in the event of default of our counterparty or client.  In
addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized upon or is liquidated at prices not sufficient to recover the
full amount of the financial instrument exposure.  There is no
assurance that any such losses would not materially and adversely affect our
results of operations.


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Our local economy
may affect our future growth possibilities.We are in
uncertain economic times, including uncertainty with respect to financial
markets that have been volatile as a result of sub-prime mortgage related and
other matters.  Unlike many larger institutions, we are not able to
spread the risks of unfavorable local economic conditions across a large number
of diversified economies and geographic locations.  Our success
significantly depends upon the growth in population, income levels, deposits and
housing starts in our current market area, which is primarily located in
Webster, Story, Des Moines, Dallas, Polk, and Henry Counties,
Iowa.  The financial crisis has negatively impacted our local economy
and any further downtown in our local economy may further limit funds available
for deposit and may negatively affect our borrowers’ ability to repay their
loans on a timely basis.  If the communities in which we operate do
not grow, or if prevailing economic conditions locally or nationally are
unfavorable, our business may not be successful. A prolonged economic downturn
would likely lead to a deterioration of the credit quality of our loan portfolio
and reduce our level of customer deposits, which in turn would hurt our
business. If the current downturn in the economy as a whole, or in our
geographic market areas, continues for a prolonged period, borrowers may be less
likely to repay their loans as scheduled or at all.  Moreover, the
value of real estate or other collateral that may secure our loans could be
adversely affected.




Our loan
portfolio includes loans with a higher risk of loss.We originate
commercial mortgage loans, including multifamily residential loans, commercial
business loans, consumer loans, and residential mortgage loans primarily within
our market area. We also purchase commercial mortgage loans, including
multifamily residential loans, and residential mortgage loans, primarily secured
by out of state properties, which entail certain risks not necessarily
associated with loans the Company originates. Commercial mortgage, commercial
business, and consumer loans may expose a lender to greater credit risk than
loans secured by residential real estate because the collateral securing these
loans may not be sold as easily as residential real estate. In addition,
commercial real estate and commercial business loans may also involve relatively
large loan balances to individual borrowers or groups of borrowers. These loans
also have greater credit risk than residential real estate for the following
reasons:





·
            Commercial Mortgage
      Loans. Repayment is dependent upon income being generated in
      amounts sufficient to cover operating expenses and debt
      service.




·
            Commercial Loans.Repayment is
      generally dependent upon the successful operation of the borrower’s
      business.




·
            Consumer
      Loans.Consumer
      loans (such as personal lines of credit) may or may not be collateralized
      with assets that provide an adequate source of payment of the loan due to
      depreciation, damage, or
loss.




Any
further downturn in the real estate market or local economy could adversely
affect the value of the properties securing the loans or revenues from the
borrower’s business thereby increasing the risk of non-performing
loans.




If our allowance
for loan losses is not sufficient to cover actual loan losses, our earnings
could decrease.  Given the high percentage of our assets
represented, directly or indirectly, by loans and the importance of lending to
our overall business, continued recessionary conditions are likely to have a
negative impact on our business, our ability to serve our customers and our
results of operations.  If the current recessionary environment
continues or worsens, our loan customers may not repay their loans according to
their terms and the collateral securing the payment of these loans may be
insufficient to pay any remaining loan balance. We therefore may experience
significant loan losses, which could have a material adverse effect on our
operating results.  Any further downturn in the real estate market or
local economy could exacerbate this risk.




Material
additions to our allowance for loan losses to reflect the risk of additional
unpaid loans also would materially decrease our net income, and the charge-off
of loans may cause us to increase the allowance. We make various assumptions and
judgments about the collectibility of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of our loans. We rely on
our loan quality reviews, our experience and our evaluation of economic
conditions, among other factors, in determining the amount of the allowance for
loan losses. If our assumptions prove to be incorrect, our allowance for loan
losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to our allowance.




The results of
our operations may be adversely affected if asset valuations cause
other-than-temporary impairment charges.  We may be required to
record future impairment charges on our investment securities if they suffer
declines in value that are considered other-than-temporary. Numerous factors,
including lack of liquidity for re-sales of certain investment securities,
absence of reliable pricing information for investment securities, adverse
changes in business climate, adverse actions by regulators, or unanticipated
changes in the competitive environment could have a negative effect on the
Company’s investment portfolio in future periods. If an impairment charge is
significant enough it could affect the ability of the Bank to upstream dividends
to the Company, which could have a material adverse effect on the Company’s
liquidity and its ability to pay dividends to shareholders and could also
negatively impact its regulatory capital ratios and result in the Bank not being
classified as “well-capitalized” for regulatory purposes.


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Changes in
interest rates could adversely affect our results of operations and financial
condition. Our profitability, like that of most financial institutions,
depends substantially on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Increases in interest
rates may decrease loan demand and make it more difficult for borrowers to repay
adjustable rate loans. In addition, as market interest rates rise, we will have
competitive pressures to increase the rates we pay on deposits, which could
result in a decrease of our net interest income.




We also
are subject to reinvestment risk associated with changes in interest rates.
Changes in interest rates may affect the average life of loans and
mortgage-related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are unable to reinvest the cash received
from such prepayments at rates that are comparable to the rates on existing
loans and securities.




Our
earnings may be adversely impacted by an increase in interest rates because a
significant portion of our interest-earning assets are long-term, fixed rate
mortgage-related assets that will not reprice as long-term interest rates
increase while a majority of our interest-bearing liabilities are expected to
reprice as interest rates increase. Therefore, in an increasing interest rate
environment, our cost of funds could increase more rapidly than the yields
earned on our loan portfolio and securities portfolio. An increasing rate
environment could cause a narrowing of our net interest rate spread and a
decrease in our net interest income.




We depend on our
executive officers and key personnel to continue the implementation of our
long-term business strategy and could be harmed by the loss of their
services. We believe that our continued growth and future success will
depend in large part upon the skills of our management team. The competition for
qualified personnel in the financial services industry is intense, and the loss
of our key personnel or an inability to continue to attract, retain and motivate
key personnel could adversely affect our business. We cannot assure you that we
will be able to retain our existing key personnel or attract additional
qualified personnel. Although we have employment agreements with our president
and chief executive officer, chief financial officer, and our executive vice
president that each contain a non-compete provision, the loss of the services of
one or more of our executive officers and key personnel could impair our ability
to continue to develop our business strategy.




In
addition, because of our participation in the CPP, we are subject to standards
on compensation paid to our executives imposed by the Treasury.  The
standards include (1) limits on compensation that exclude incentives for
the Company’s Senior Executive Officers to take unnecessary and excessive risks
that threaten the value of the Company; (2) a provision for the recovery of any
bonus, retention award, or incentive compensation paid to the Company’s Senior
Executive Officers or to any of the Company’s next twenty most highly
compensated employees based on certain financial statements or other criteria
that are later found to be materially inaccurate; (3) a prohibition on the
Company from making any payments to the Senior Executive Officers or to any of
the next five most highly compensated employees for departure from the Company
for any reason, except for payments for services performed or benefits accrued;
(4) a prohibition on the Company’s ability to pay bonuses and certain other
compensation to the Company’s Chief Executive Officer, except with respect to
certain restricted stock awards or to the extent that a bonus is required by a
valid employment contract; (5) a prohibition on any compensation plan that would
encourage manipulation of the Company’s reported earnings for the purposes of
enhancing employee compensation; (6) a requirement for the Company’s Chief
Executive Officer and Chief Financial Officer to provide certain certifications
regarding the foregoing; (7) certain requirements with respect to the Company’s
Personnel and Compensation Committee; (8) a requirement to adopt a company-wide
policy regarding excessive or luxury expenditures; (9) a requirement to permit a
nonbinding “say on pay” shareholder vote to be included in the Company’s proxy
statement with respect to an annual meeting of stockholders; and (10)
authorizing the Secretary of the U.S. Treasury to review certain compensation
paid to the Company’s Senior Executive Officers and the next 20 most
highly-compensated employees to determine whether any such payments were
inconsistent with the purposes of the foregoing.   Since these restrictions
apply until the Treasury no longer holds any of the Series A Preferred Stock, we
could potentially be subject to these restrictions
indefinitely.  These restrictions could limit our ability to attract
and retain key managerial talent.




We operate in a
highly regulated environment, and changes in laws and regulations to which we
are subject may adversely affect our results of operations.We are
subject to extensive regulation, supervision and examination by the OTS, as the
Bank’s chartering authority, and by the FDIC as the insurer of our deposits up
to certain limits. In addition, the OTS regulates and oversees the Company as a
savings and loan holding company. We also belong to the
Federal Home Loan Bank System and, as a member of such system; we are subject to
certain limited regulations promulgated by the FHLB of Des Moines. This
regulation and supervision limits the activities in which we may engage. The
purpose of regulation and supervision is primarily to protect our depositors and
borrowers and, in the case of FDIC regulation, the FDIC’s insurance fund.
Regulatory authorities have extensive discretion in the exercise of their
supervisory and enforcement powers. They may, among other things, impose
restrictions on the operation of a banking institution, the classification of
assets by such institution and such institution’s allowance for loan losses.
Regulatory and law enforcement authorities also have wide discretion and
extensive enforcement powers under various consumer protection and civil rights
laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the
Fair Housing Act, and the Real Estate Settlement Procedures Act. It is possible
that the new administration could make significant changes to the regulatory
framework applicable to banks and bank holding companies.  Any change
in the laws or regulations applicable to us, or in banking regulators’
supervisory policies or examination procedures, whether by the OTS, the FDIC,
other state or federal regulators, the United States Congress or the Iowa
legislature could have a material adverse effect on our business, financial
condition, results of operations and cash flows.


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Competition in
our primary market area may reduce our ability to attract and retain deposits
and originate loans. We operate in a competitive market for both
attracting deposits, which is our primary source of funds, and originating
loans. Historically, our most direct competition for savings deposits has come
from credit unions, community banks, large commercial banks and thrift
institutions in our primary market area. Particularly in times of extremely low
or extremely high interest rates, we have faced additional significant
competition for investors’ funds from brokerage firms and other firms’
short-term money market securities and corporate and government securities. Our
competition for loans comes principally from mortgage brokers, commercial banks,
other thrift institutions, and insurance companies. Such competition for the
origination of loans may limit our future growth and earnings prospects.
Competition for loan originations and deposits may limit our future growth and
earnings prospects.




If external funds
were not available, this could adversely impact our growth and
prospects.We rely on retail deposits, brokered deposits, the
amortization and prepayment of loans, the maturity and calls of investment
securities, our operations and advances from the FHLB of Des Moines to fund our
operations. Although we have historically been able to replace maturing deposits
and advances as necessary, we might not be able to replace such funds in the
future if, among other things, our results of operations or financial condition
or the results of operations or financial condition of the FHLB of Des Moines or
market conditions were to change. In addition, if we fall below the FDIC’s
thresholds to be considered “well capitalized” we will be unable to continue
with uninterrupted access to the brokered funds markets. In addition, certain
Federal Home Loan Banks have experienced lower earnings from time to time and
paid out lower dividends to its members. Future problems at the Federal Home
Loan Banks may impact the collateral necessary to secure borrowings and limit
the borrowings extended to its member banks, require additional capital
contributions by its member banks, and reduce or eliminate the dividend paid by
the FHLB of Des Moines. Should this occur, we could have difficulty meeting our
short term liquidity needs and the Bank’s net interest income could be
affected.  In addition, future problems at the Federal Home Loan Banks
could also cause the value of the equity investment we have in the stock of FHLB
of Des Moines to decline or become impaired.  As of December 31, 2008,
we held approximately $4.7 million in FHLB of Des Moines stock, representing
approximately 0.99 percent of our total assets.




We may not be
able to raise capital in the future on acceptable terms or at
all.We are required by federal and state regulatory
authorities to maintain adequate levels of capital to support our operations. We
anticipate our capital resources, in part as a result of the recent sale of the
Series A Preferred Stock to the Treasury, will satisfy our capital requirements
for the foreseeable future. We may at some point, however, need to raise
additional capital to support our continued growth.




Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets at that time, which are outside our control, and on our
financial performance. Accordingly, we cannot assure you of our ability to raise
additional capital if needed on terms acceptable to us. If we cannot raise
additional capital when needed, our ability to satisfy regulatory capital
requirements or expand our operations through internal growth and acquisitions
could be materially impaired.




Our prior branch
expansion may reduce our short-term profitability due to one-time fixed expenses
coupled with low levels of income earned by the branch until its customer base
is built.We opened a new branch in West Des Moines, Iowa in
2006.  The expense associated with building and staffing the new
branch will significantly increase our noninterest expense, with compensation
and occupancy costs constituting the largest amount of increased costs. Losses
are expected from the new branch for some time as the expenses associated with
it are largely fixed and is typically greater than the income earned as a branch
builds up its customer base. There can be no assurance that our branch expansion
strategy will result in increased earnings, or that it will result in increased
earnings within a reasonable period of time. We expect that the success of our
branching strategy will depend largely on the ability of our staff to market the
deposit and loan products offered by us.




Our profitability
could be adversely affected if we are unable to promptly deploy the capital
raised in our recent offering.We may not be able to
immediately deploy all of the capital raised in the recent sale of the Series A
Preferred Stock and the Warrant to the Treasury. Investing the offering proceeds
in securities until we are able to deploy the proceeds will provide lower
margins than we generally earn on loans, potentially adversely affecting
shareholder returns, including earnings per share, return on assets and return
on equity.


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If we fail to
maintain an effective system of internal control over financial reporting, we
may not be able to accurately report our financial results or prevent fraud,
and, as a result, investors and depositors could lose confidence in our
financial reporting, which could adversely affect our business, the trading
price of our stock and our ability to attract additional
deposits.  Beginning with our annual report on Form 10-K for
the fiscal year ended December 31, 2007, we had to include a report of our
management regarding internal control over financial reporting.  If we
fail to identify and correct any significant deficiencies in the design or
operating effectiveness of our internal control over financial reporting or fail
to prevent fraud, current and potential stockholders and depositors could lose
confidence in our financial reporting, which could adversely affect our
business, financial condition and results of operations, the trading price of
our stock and our ability to attract additional deposits.




Our Articles of
Incorporation and bylaws may prevent a transaction you may favor or limit our
growth opportunities, which could cause the market price of our common stock to
decline.Certain provisions of our articles of incorporation, including
the certificate of designations with respect to the Series A Preferred Stock,
(the “Articles of Incorporation”) and bylaws and applicable provisions of Iowa
and federal law and regulations may delay, inhibit or prevent an organization or
person from gaining control of the Company through a tender offer, business
combination, proxy contest or some other method, even though you might be in
favor of the transaction.




We may not be
able to pay dividends in the future in accordance with past practice and our
ability to increase future dividends is subject to the Treasury’s
consent.Our ability to pay dividends to our stockholders is
primarily dependent on the Bank’s earnings.  The payment of dividends
also is subject to legal and regulatory restrictions. Any payment of dividends
in the future will depend, in large part, on the Bank’s earnings, capital
requirements, financial condition and other factors considered relevant by North
Central’s board of directors.  In addition, the agreements governing
the issuance of the Series A Preferred Stock and the Warrant in connection with
the TARP CPP restrict our ability to pay dividends in certain circumstances and
to increase our dividend without the Treasury’s consent. As long as there is
Series A Preferred Stock outstanding, no dividends may be paid on our common
stock unless all dividends on the Series A Preferred Stock have been paid in
full.




The Series A
Preferred Stock and Warrant issued to the Treasury in connection with the TARP
CPP will impact net income available to our common stockholders and our earnings
per share.The dividends declared on our Series A Preferred
Stock will reduce the net income available to common stockholders and our
earnings per common share.  Additionally, the Warrant to purchase our
common stock issued to the Treasury in conjunction with the Series A Preferred
Stock may be dilutive to our earnings per share.  The Series A
Preferred Stock will also receive preferential treatment in the event of
liquidation, dissolution or winding up of our business.




The Series A
Preferred Stock is equity and is subordinate to all of our existing and future
indebtedness. Regulatory and contractual restrictions may limit or prevent us
from paying dividends on the Series A Preferred Stock and our common stock, and
the Series A Preferred Stock places no limitations on the amount of indebtedness
we and our subsidiaries may incur in the future.Shares of the
Series A Preferred Stock are equity interests in North Central and do not
constitute indebtedness. As such, the Series A Preferred Stock, like our common
stock, ranks junior to all indebtedness and other non-equity claims on North
Central with respect to assets available to satisfy claims on North Central,
including in a liquidation of North Central. Additionally, unlike indebtedness,
where principal and interest would customarily be payable on specified due
dates, in the case of preferred stock like the Series A Preferred Stock, as with
our common stock, (1) dividends are payable only when, as and if authorized
and declared by, our Board and depend on, among other things, our results of
operations, financial condition, debt service requirements, other cash needs and
any other factors our Board deems relevant, and (2) as an Iowa corporation,
under Iowa law we are subject to restrictions on payments of dividends out of
lawfully available funds.




In
addition, the Series A Preferred Stock does not limit the amount of debt or
other obligations we or our subsidiaries may incur in the future. Accordingly,
we and our subsidiaries may incur substantial amounts of additional debt and
other obligations that will rank senior to the Series A Preferred Stock or to
which the Series A Preferred Stock will be structurally
subordinated.




There may be
future sales of additional common stock or preferred stock or other dilution of
our equity, which may adversely affect the market price of our common stock or
the Series A Preferred Stock.We are not restricted from
issuing additional common stock or preferred stock, including any securities
that are convertible into or exchangeable for, or that represent the right to
receive, common stock or preferred stock or any substantially similar
securities. The per share value of our common stock or the Series A Preferred
Stock could decline as a result of sales by us of a large number of shares of
common stock or preferred stock or similar securities in the market or the
perception that such sales could occur.


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Holders of the
Series A Preferred Stock have limited voting rights.Until and
unless we are in arrears on our dividend payments on the Series A Preferred
Stock for six dividend periods, whether or not consecutive, the holders of the
Series A Preferred Stock will have no voting rights except with respect to
certain fundamental changes in the terms of the Series A Preferred Stock and
certain other matters and except as may be required by Iowa law. If dividends on
the Series A Preferred Stock are not paid in full for six dividend periods,
whether or not consecutive, the total number of positions on the North Central
Board will automatically increase by two and the holders of the Series A
Preferred Stock, acting as a class with any other parity securities having
similar voting rights, will have the right to elect two individuals to serve in
the new director positions. This right and the terms of such directors will end
when we have paid in full all accrued and unpaid dividends for all past dividend
periods.




If we are unable
to redeem the Series A Preferred Stock after five years, we will be required to
make higher dividend payments on this stock, thereby substantially increasing
our cost of capital.If we are unable to redeem the Series A
Preferred Stock prior to February 15, 2014, the dividend rate will increase
substantially on that date, from 5.0% per annum to 9.0% per annum. Depending on
our financial condition at the time, this increase in the annual dividend rate
on the Series A Preferred Stock could have a material negative effect on our
liquidity, our net income available to common shareholders, and our earnings per
share.




ITEM1B.
            UNRESOLVED
      STAFF COMMENTS




Not
applicable.


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ITEM
      2.
            PROPERTIES





The
Company conducts its business through its main office located in Fort Dodge,
Iowa and ten full-service offices located in Fort Dodge, Nevada, Ames, Perry,
Ankeny, Clive, West Des Moines, Burlington and Mount Pleasant, Iowa. The
following table sets forth certain information concerning the main office and
each branch office of the Company and the offices of First Iowa Title Services
at December 31, 2008.  In addition to the properties listed below,
First Federal Investments owned land and an office building in Fort Dodge, Iowa,
Northridge Partnership owned a multifamily apartment building in Fort Dodge,
Iowa and Northridge Partnership II owned a multifamily apartment building in
Fort Dodge, Iowa at December 31, 2008.





Location
              Opening
      Date
              Own/Lease
      Expiration DateMain
      Office:825
      Central Avenue
              1973
              OwnFort
      Dodge, IowaBranch
      Offices:201
      South 25th Street
              1977
              OwnFort
      Dodge, Iowa404
      Lincolnway
              1977
              OwnNevada,
      Iowa316
      South Duff
              1995
              OwnAmes,
      Iowa1111-141st
      Street
              1999
              OwnPerry,
      Iowa321
      North Third Street
              1953
              OwnBurlington,
      Iowa1010
      North Roosevelt
              1975
              OwnBurlington,
      Iowa102
      South Main
              1991
              OwnMount
      Pleasant, Iowa2110
      SE Delaware
              2003
              OwnAnkeny,
      Iowa13150
      Hickman Road
              2004
              OwnClive,
      Iowa120
      South 68th
      Street
              2006
              OwnWest
      Des Moines, IowaFirst
      Iowa Title Offices:628
      Central Avenue
              1982
              OwnFort
      Dodge, Iowa814
      8th Street
              1994
              2009Boone,
      Iowa


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ITEM
      3.
            LEGAL
      PROCEEDINGS





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





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





There
were no matters submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2008.





PART
II





ITEM
      5.
              MARKET
      FOR THE REGISTRANT’S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES





Information
required by this Item is incorporated herein by reference to pages 15 through 17
of the Company’s 2008 Annual Report to Shareholders under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources” and page 28 “Shareholder
Information,” incorporated by reference to Exhibit 13.1 to this Annual Report on
Form 10-K.  See Part II, Item 12, for the equity compensation plan
information required by this Item.





There
were no purchases made by or on behalf of the Company or any “affiliated
purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of
1934), of the Company’s common stock during the three months ended December 31,
2008.  As of December 31, 2008, there were 64,250 shares of common
stock that may yet be purchased as part of the Company’s previously publicly
announced repurchase plan.  However, as a result of participating in
the TARP CPP, the Company is currently restricted from repurchasing its common
stock without prior consent of the Treasury.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





The
information required by this Item is incorporated herein by reference to page 4
of the Company’s 2008 Annual Report to Shareholders under the heading “Selected
Financial Data,” incorporated by reference to Exhibit 13.1 to this Annual Report
on Form 10-K.





ITEM
      7.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
information required by this Item is incorporated herein by reference to pages 7
through 17 of the Company’s 2008 Annual Report to Shareholders under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” incorporated by reference to Exhibit 13.1 to this Annual Report on
Form 10-K.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
information required by this Item is incorporated herein by reference to pages
18 through 26 of the Company’s 2008 Annual Report to Shareholders under the
heading “Quantitative and Qualitative Disclosures about Market Risk,”
incorporated by reference to Exhibit 13.1 to this Annual Report on Form
10-K.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this Item is incorporated herein by reference to pages
31 through 74 of the Company’s 2008 Annual Report to Shareholders under the
headings “Independent Auditor’s Report,” “Consolidated Financial Statements” and
“Notes to Consolidated Financial Statements,” incorporated by reference to
Exhibit 13.1 to this Annual Report on Form 10-K.


- 39
-


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





None.





ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES




Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.  Internal control over the
Company’s financial reporting is a process designed under the supervision of the
Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company’s financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





Management
has made a comprehensive review, evaluation, and assessment of the Company’s
internal control over financial reporting as of December 31, 2008.  In
making its assessment of internal control over financial reporting, management
used the criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.  Based
on that assessment, management concluded that, as of December 31, 2008, the
internal control over financial reporting was effective.





This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit the Company to provide
only management’s report in this Annual Report on Form 10-K.





Evaluation
of Disclosure Controls and Procedures





Management
conducted an evaluation, with the participation of the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of December 31, 2008.  The disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported on a timely
basis.





Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded, as of December 31, 2008, that the Company’s disclosure controls and
procedures were effective in recording, processing, summarizing, and reporting
information required to be disclosed by the Company, within the time periods
specified in the SEC’s rules and forms, and such information is accumulated and
communicated to management to allow timely decisions regarding required
disclosures.





Changes
in Internal Control Over Financial Reporting





There has
been no change in the Company’s internal control over financial reporting
identified in connection with the evaluation that occurred during the Company’s
last fiscal quarter that has materially affected, or that is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.





ITEM
      9B.
            OTHER
      INFORMATION





None.


- 40
-




PART
III





ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Information
regarding directors and executive officers of the Registrant is included under
the headings “Information with Respect to Nominees and Continuing Directors,”
“Nominees for Election as Directors,” “Continuing Directors,” “Executive
Officers Who Are Not Directors or Nominees,” “Board and Committee Meetings,” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy
Statement for its Annual Meeting of Shareholders to be held on May 5, 2009,
which has been filed with the SEC and is incorporated herein by
reference.





The
Company and the Bank have adopted a Code of Conduct and Ethics which applies to
all employees, officers and directors of the Company.  The Company has
also adopted a Code of Ethics for Senior Financial Officers of North Central
Bancshares, Inc., which applies to the Company’s principal executive officer,
principal financial officer, principal accounting officer or controller or
person performing similar functions for the Company.  The Code of
Ethics for Senior Financial Officers of the Company meets the requirements of a
“code of ethics” as defined by Item 406 of Regulation S-K.





ITEM
      11.
              EXECUTIVE
      COMPENSATION





Information
relating to executive compensation is included under the heading “Executive
Compensation” in the Company’s Proxy Statement for its Annual Meeting of
Shareholders to be held on April 24, 2009, which has been filed with the SEC and
is incorporated herein by reference.





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





Information
relating to security ownership of certain beneficial owners and management is
included under the headings “Principal Shareholders of the Company” and
“Security Ownership of Management” in the Company’s Proxy Statement for its
Annual Meeting of Shareholders to be held on May 5, 2009, which has been filed
with the SEC and is incorporated herein by reference.





The
following table sets forth the aggregate information of our equity compensation
plans in effect as of December 31, 2008.





Plan
      category
                            
                            Number
      of securities
                              to
      be issued upon
                              exercise
      of outstanding
                              options
                              (a)
                            
                            
                            Weighted-average
                              exercise
      price of
                              outstanding
      options
                              (b)
                            
                            
                            Number
      of securities
                              remaining
      available for future
                              issuance
      under equity
                              compensation
      plans
                              (excluding
      securities reflected
                              in
      column (a))
                              (c)Equity
      compensation  plans approved by security holders
                            
                            
                            51,000
                            
                            
                            $
                            28.35
                            
                            
                            
                            113,605
                            (2)Equity
      compensation plans not approved by security holders (1)
                            
                            
                            23,000
                            
                            
                            $
                            38.46
                            
                            
                            
                            -Total
                            
                            
                            74,000
                            
                            
                            $
                            31.49
                            
                            
                            
                            113,605





(1)
              The
      equity compensation plan not approved by shareholders is that portion of
      the 1996 Stock Option Plan which granted nonqualified options to directors
      and officers out of a pool of 40,000 shares reserved to the plan without
      shareholder approval.


(2)
              Shares
      remaining from North Central Bancshares, Inc. 2006 Stock Incentive Plan
      approved by shareholders on April 28, 2006.  See Note 11
      included with the financial statements of the annual report to the
      shareholders.




- 41
-


ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Information
regarding certain relationships and related transactions is included under the
heading “Transactions with Certain Related Persons” and “Board of Directors and
Management” in the Company’s Proxy Statement for its Annual Meeting of
Shareholders to be held on May 5, 2009, which has been filed with the SEC and is
incorporated herein by reference.





ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Information
regarding the aggregate fees billed for each of the last two fiscal years by the
Company’s principal accountant is included under the heading “Principal
Accountant Fees and Services” and “Audit Committee Preapproval Policy” in the
Company’s Proxy Statement for its Annual Meeting of Shareholders to be held on
May 5, 2009, which has been filed with the SEC and is incorporated herein by
reference.


- 42
-


PART
IV





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(a)           Financial
Statements, Schedules and Exhibits





1.
              The
      consolidated statements of financial condition of North Central
      Bancshares, Inc. and subsidiaries as of December 31, 2008 and 2007, and
      the related consolidated statements of income, stockholders’ equity and
      cash flows for the years ended December 31, 2008, 2007 and 2006, together
      with the related notes and the report of the independent registered public
      accounting firm of McGladrey & Pullen, LLP are incorporated by
      reference to Exhibit 13.1 to this Annual Report on Form
    10-K.





2.
            Financial
      Statement Schedules have been omitted because they are not applicable or
      the required information is shown in the Consolidated Financial Statements
      or Notes thereto.





3.
            See
      Exhibit Index on following page.




- 43
-


(b)           Exhibits





Exhibit No.
                    
                    Description
                    
                    Reference No.3.1
                    
                    Articles
      of Incorporation of North Central Bancshares, Inc.
                    
                    (1)3.3
                    
                    Bylaws
      of North Central Bancshares, Inc., as amended
                    
                    (2)3.4
                    
                    Articles
      of Amendment to the Articles of Incorporation establishing Series A
      Preferred Stock
                    
                    (3)4.1
                    
                    Federal
      Stock Charter of First Federal Savings Bank of Iowa (formerly known as
      First Federal Savings Bank of Fort Dodge)
                    
                    (1)4.3
                    
                    Specimen
      Stock Certificate of North Central Bancshares, Inc.
                    
                    (1)4.4
                    
                    Bylaws
      of First Federal Savings Bank of Iowa, as amended
                    
                    (2)4.5
                    
                    Specimen
      of stock certificate representing Series A Preferred
Stock.
                    
                    (4)4.6
                    
                    Warrant
      to Purchase up to 99,157 shares of Common Stock.
                    
                    (4)10.1
                    
                    Tax
      Allocation Agreement between North Central Bancshares, Inc. and
      Subsidiaries
                    
                    (2)10.2
                    
                    North
      Central Bancshares, Inc. 1996 Stock Option Plan
                    
                    (5)10.3
                    
                    Amendment
      No. 1 to the North Central Bancshares, Inc. 1996 Stock Option
      Plan
                    
                    (6)10.4
                    
                    Form
      of Stock Option Agreement
                    
                    (7)10.5
                    
                    Employee
      Stock Ownership Plan of First Federal Savings Bank of Iowa (formerly known
      as First Federal Savings Bank of Fort Dodge) and ESOP Trust
      Agreement
                    
                    (1)10.5A
                    
                    Amendment
      #1 to Employee Stock Ownership Plan of First Federal Savings Bank of Iowa
      (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP
      Trust Agreement
                    
                    (8)10.5B
                    
                    Amendment
      #2 to Employee Stock Ownership Plan of First Federal Savings Bank of Iowa
      (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP
      Trust Agreement
                    
                    (8)10.6
                    
                    ESOP
      Loan Documents, dated September 3, 1996
                    
                    (9)10.7
                    
                    Employment
      Agreement between First Federal Savings Bank of Iowa (formerly known as
      First Federal Savings Bank of Fort Dodge) and David M. Bradley, amended
      and restated as of December 14, 2007
                    
                    (10)10.8
                    
                    Form
      of Employment Agreement between North Central Bancshares, Inc. and David
      M. Bradley, amended and restated as of December 14, 2007
                    
                    (10)10.9
                    
                    Employment
      Agreement between First Federal Savings Bank of Iowa and C. Thomas
      Chalstrom, amended and restated as of December 14, 2007
                    
                    (10)10.10
                    
                    Employment
      Agreement North Central Bancshares, Inc.  and C. Thomas
      Chalstrom, amended and restated as of December 14, 2007
                    
                    (10)10.11
                    
                    Employment
      Agreement between First Federal Savings Bank of Iowa and Kyle C.
      Cook
                    
                    (10)10.12
                    
                    Employment
      Agreement between North Central Bancshares, Inc. and Kyle C.
      Cook
                    
                    (10)10.13
                    
                    Amended
      and Restated Retention Agreement between First Federal Savings Bank of
      Iowa and Kirk A. Yung
                    
                    (10)10.14
                    
                    North
      Central Bancshares, Inc. 2006 Stock Incentive Plan
                    
                    (11)10.15
                    
                    North
      Central Bancshares, Inc. 2006 Incentive Award Plan
                    
                    (12)10.16
                    
                    Form
      of Restricted Stock Award Notice
                    
                    (13)10.17
                    
                    Novation
      of Employment Agreements
                    
                    (14)
 - 44
-


Exhibit No.
              
              Description
              
              Reference No.10.18
              
              Letter
      Agreement, dated January 9, 2009, including the Securities Purchase
      Agreement – Standard Terms incorporated by reference therein, between the
      Company and the United States Department of the Treasury.
              
              (4)10.19
              
              Form
      of Waiver, executed by each of David M. Bradley, Kyle C. Cook, C. Thomas
      Chalstrom, and Kirk A. Yung.
              
              (4)10.20
              
              Form
      of Omnibus Amendment Agreement, executed by each of David M. Bradley, Kyle
      C. Cook, C. Thomas Chalstrom, and Kirk A. Yung.
              
              (4)10.21
              
              First
      Federal Savings Bank of Iowa Supplemental Retirement and Deferred
      Compensation Plan, as amended and restated effective January 1,
      2005.
              
              (15)13.1
              
              North
      Central Bancshares, Inc. 2008 Annual Report to
Shareholders
              
              (16)14.1
              
              Code
      of Ethics for Senior Financial Officers of North Central Bancshares,
      Inc.
              
              (2)21.1
              
              Subsidiaries
      of the Registrant
              
              *23.1
              
              Consent
      of McGladrey & Pullen, LLP
              
              *31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
              
              *31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
              
              *32.1
              
              Section
      1350 Certification of Chief Executive Officer
              
              *32.2
              
              Section
      1350 Certification of Chief Financial Officer
              
              *








(*)
            Filed
      herewith.




(1)
            Incorporated
      herein by reference to Registration Statement No. 33-80493 on Form S-1
      filed with the SEC on December 18, 1995, as
  amended.




(2)
            Incorporated
      herein by reference to the Annual Report on Form 10-K filed with the SEC
      on March 29, 2004.




(3)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on January 7, 2009.




(4)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on January 15, 2009.




(5)
            Incorporated
      herein by reference to Registration Statement No. 333-33089 on form S-8
      filed with the SEC on August 7,
1997.




(6)
            Incorporated
      herein by reference to the Annual Report on Form 10-K filed with the SEC
      on March 31, 1998.




(7)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on July 3, 2007.




(8)
            Incorporated
      herein by reference to the Annual Report on Form 10-K filed with the SEC
      on March 29, 2002.




(9)
            Incorporated
      herein by reference to the Annual Report on Form 10-K filed with the SEC
      on March 31, 1997.




(10)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on December 20, 2007.




(11)
            Incorporated
      herein by reference to Registration Statement No. 333-133810 on form S-8
      filed with the SEC on May 4, 2006.




(12)
            Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed with the
      SEC on August 11, 2006.




(13)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on May 3, 2007.




- 45
-


(14)
            Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed with the
      SEC on November 13, 2007.




(15)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on February 27, 2009.




(16)
            Incorporated
      herein by reference to the Annual Report on Form ARS filed with the SEC on
      March 27, 2009.




- 46
-




SIGNATURES





Pursuant
to the requirements of the Section 13 or 15(d) 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.





North
      Central Bancshares, Inc.Date:  March
      27, 2009
              /s/ David M.
  BradleyBy:
      David M. BradleyChairman,
      President and Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Name
              
              Title
              
              Date/s/ David M.
      Bradley
              
              President,
      Chief Executive Officer, Director,
              
              03/27/09David
      M. Bradley
              
              and
      Chairman of the Board(Principal
      Executive Officer)/s/ Kyle C.
      Cook
              
              Chief
      Financial Officer, Treasurer
              
              03/27/09Kyle
      C. Cook
              
              (Principal
      Accounting andFinancial
      Officer)/s/ Robert H. Singer,
      Jr.
              
              Director
              
              03/27/09Robert
      H. Singer, Jr./s/ Melvin R.
      Schroeder
              
              Director
              
              03/27/09Melvin
      R. Schroeder/s/ Mark M.
      Thompson
              
              Director
              
              03/27/09Mark
      M. Thompson/s/ Randall L.
      Minear
              
              Director
              
              03/27/09Randall
      L. Minear/s/ Paul F.
      Bognanno
              
              Director
              
              03/27/09Paul
      F. Bognanno/s/ C. Thomas
      ChalstromC.
      Thomas Chalstrom
              
              Director
              
              03/27/09


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