UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended June
30,
2009





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




For the
transition period from __________________ to __________________.




Commission
File Number:  0-27672





NORTH CENTRAL BANCSHARES, INC.








Iowa
              42-1449849(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)825 Central Avenue,  Fort Dodge,
      Iowa
              50501(Address
      of principal executive offices)
              (Zip
      Code)





515-576-7531







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  þ  No   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   ̈  No   ̈




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




Large
      accelerated filer  ̈
              Accelerated
      filer   ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
              Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes   ̈  No þ




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





Class
              Outstanding at July 31,
  2009Common
      Stock, $.01 par value
              1,346,448





NORTH
CENTRAL BANCSHARES, INC.





INDEX





PagePart
      I.  Financial InformationItem
      1.  Financial Statements (Unaudited)
                                            
                                            1Consolidated
      Condensed Statements of Financial Condition at June 30, 2009 and December
      31, 2008
                                            
                                            1Consolidated
      Condensed Statements of Income for the Three Months and Six Months Ended
      June 30, 2009 and 2008
                                            
                                            2Consolidated
      Condensed Statements of Stockholders’ Equity for the Six Months Ended June
      30, 2009 and 2008
                                            
                                            3Consolidated
      Condensed Statements of Cash Flows for the Six Months Ended June 30, 2009
      and 2008
                                            
                                            5Notes
      to Consolidated Condensed Financial Statements
                                            
                                            7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                            
                                            15Item
      3.  Quantitative and Qualitative Disclosure About Market
      Risk
                                            
                                            24Item
      4T.  Controls and Procedures
                                            
                                            24Part
      II. Other InformationItem
      1. Legal Proceedings
                                            
                                            25Item
      4.   Submission of Matters to a Vote of Security
      Holders
                                            
                                            25Item
      6. Exhibits
                                            
                                            25Signatures
                                            
                                            26





PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements (Unaudited)




NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





CONSOLIDATED
CONDENSED STATEMENTS OF FINANCIAL CONDITION


(Unaudited)


June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008ASSETSCash
      and due from banks:Interest-bearing
                  
                  $
                  2,117,566
                  
                  
                  $
                  6,563,494Noninterest-bearing
                  
                  
                  6,056,606
                  
                  
                  
                  9,718,150Total
      cash and cash equivalents
                  
                  
                  8,174,172
                  
                  
                  
                  16,281,644Securities
      available-for-sale
                  
                  
                  26,930,265
                  
                  
                  
                  22,837,968Federal
      Home Loan Bank stock, at cost
                  
                  
                  4,739,000
                  
                  
                  
                  4,692,400Loans
      receivable, net
                  
                  
                  392,138,282
                  
                  
                  
                  400,786,505Loans
      held for sale
                  
                  
                  1,269,427
                  
                  
                  
                  730,466Accrued
      interest receivable
                  
                  
                  1,915,037
                  
                  
                  
                  2,096,784Foreclosed
      real estate
                  
                  
                  1,285,283
                  
                  
                  
                  1,182,917Premises
      and equipment, net
                  
                  
                  12,068,055
                  
                  
                  
                  12,113,092Rental
      real estate
                  
                  
                  2,302,772
                  
                  
                  
                  2,358,688Title
      plant
                  
                  
                  671,704
                  
                  
                  
                  671,704Deferred
      taxes
                  
                  
                  2,202,560
                  
                  
                  
                  3,003,565Bank-owned
      life insurance
                  
                  
                  5,417,592
                  
                  
                  
                  5,293,871Prepaid
      expenses and other assets
                  
                  
                  1,738,067
                  
                  
                  
                  1,248,232Total
      assets
                  
                  $
                  460,852,216
                  
                  
                  $
                  473,297,836LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
                  
                  $
                  331,224,258
                  
                  
                  $
                  350,169,925Borrowed
      funds
                  
                  
                  76,833,539
                  
                  
                  
                  82,348,915Advances
      from borrowers for taxes and insurance
                  
                  
                  1,814,385
                  
                  
                  
                  1,923,758Dividends
      payable
                  
                  
                  13,464
                  
                  
                  
                  13,434Accrued
      expenses and other liabilities
                  
                  
                  3,939,845
                  
                  
                  
                  3,629,661Total
      liabilities
                  
                  
                  413,825,491
                  
                  
                  
                  438,085,693STOCKHOLDERS'
      EQUITYPreferred
      stock ($.01 par value, authorized 3,000,000 shares; at June 30, 2009
      10,200 shares issued and outstanding; at December 31, 2008 none issued
      and  outstanding)
                  
                  
                  10,109,541
                  
                  
                  
                  -Common
      stock ($.01 par value, authorized 15,500,000 shares; at June 30, 2009
      1,346,448 shares issued and outstanding; at December 31, 2008, 1,343,448
      shares issued and outstanding)
                  
                  
                  13,435
                  
                  
                  
                  13,421Additional
      paid-in capital
                  
                  
                  17,947,828
                  
                  
                  
                  17,819,096Retained
      earnings, substantially restricted
                  
                  
                  18,702,631
                  
                  
                  
                  17,240,779Accumulated
      other comprehensive income
                  
                  
                  253,290
                  
                  
                  
                  138,847Total
      stockholders' equity
                  
                  
                  47,026,725
                  
                  
                  
                  35,212,143Total
      liabilities and stockholders' equity
                  
                  $
                  460,852,216
                  
                  
                  $
                  473,297,836





See Notes
to Consolidated Condensed Financial Statements


1




NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





CONSOLIDATED
CONDENSED STATEMENTS OF INCOME


(Unaudited)


Three
      Months Ended
                          
                          
                          Six
      Months EndedJune
      30,
                          
                          
                          June
      30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Interest
      income:Loans
      receivable
                          
                          $
                          6,000,127
                          
                          
                          $
                          6,879,895
                          
                          
                          $
                          12,185,344
                          
                          
                          $
                          14,051,270Securities
      and cash deposits
                          
                          
                          286,599
                          
                          
                          
                          274,886
                          
                          
                          
                          567,177
                          
                          
                          
                          591,8976,286,726
                          
                          
                          
                          7,154,781
                          
                          
                          
                          12,752,521
                          
                          
                          
                          14,643,167Interest
      expense:Deposits
                          
                          
                          1,786,240
                          
                          
                          
                          2,743,649
                          
                          
                          
                          3,855,796
                          
                          
                          
                          5,835,300Borrowed
      funds
                          
                          
                          888,844
                          
                          
                          
                          1,150,932
                          
                          
                          
                          1,887,281
                          
                          
                          
                          2,352,9172,675,084
                          
                          
                          
                          3,894,581
                          
                          
                          
                          5,743,077
                          
                          
                          
                          8,188,217Net
      interest income
                          
                          
                          3,611,642
                          
                          
                          
                          3,260,200
                          
                          
                          
                          7,009,444
                          
                          
                          
                          6,454,950Provision
      for loan losses
                          
                          
                          610,000
                          
                          
                          
                          160,000
                          
                          
                          
                          770,000
                          
                          
                          
                          220,000Net
      interest income after provision for loan losses
                          
                          
                          3,001,642
                          
                          
                          
                          3,100,200
                          
                          
                          
                          6,239,444
                          
                          
                          
                          6,234,950Noninterest
      income:Fees
      and service charges
                          
                          
                          1,079,992
                          
                          
                          
                          1,113,156
                          
                          
                          
                          2,019,687
                          
                          
                          
                          2,123,659Abstract
      fees
                          
                          
                          282,739
                          
                          
                          
                          284,892
                          
                          
                          
                          499,491
                          
                          
                          
                          549,149Mortgage
      banking income
                          
                          
                          331,994
                          
                          
                          
                          150,150
                          
                          
                          
                          646,737
                          
                          
                          
                          311,049Loan
      prepayment fees
                          
                          
                          199,512
                          
                          
                          
                          -
                          
                          
                          
                          212,166
                          
                          
                          
                          4,631Other
      income
                          
                          
                          395,506
                          
                          
                          
                          355,755
                          
                          
                          
                          766,745
                          
                          
                          
                          619,403Total
      noninterest income
                          
                          
                          2,289,743
                          
                          
                          
                          1,903,953
                          
                          
                          
                          4,144,826
                          
                          
                          
                          3,607,891Investment
      securities (losses), net:Total
      other-than-temporary impairment losses
                          
                          
                          (23,343
                          )
                          
                          
                          (1,959,911
                          )
                          
                          
                          (23,343
                          )
                          
                          
                          (1,959,911
                          )Portion
      of loss recognized in other comprehensive income (loss) before
      taxes
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      impairment losses recognized in earnings
                          
                          
                          (23,343
                          )
                          
                          
                          (1,959,911
                          )
                          
                          
                          (23,343
                          )
                          
                          
                          (1,959,911
                          )Realized
      securities (losses), net
                          
                          
                          (9,602
                          )
                          
                          
                          -
                          
                          
                          
                          (19,944
                          )
                          
                          
                          -Total
      securities (losses), net
                          
                          
                          (32,945
                          )
                          
                          
                          (1,959,911
                          )
                          
                          
                          (43,287
                          )
                          
                          
                          (1,959,911
                          )Noninterest
      expense:Compensation
      and employee benefits
                          
                          
                          1,844,770
                          
                          
                          
                          1,860,797
                          
                          
                          
                          3,712,155
                          
                          
                          
                          3,834,921Premises
      and equipment
                          
                          
                          442,199
                          
                          
                          
                          414,567
                          
                          
                          
                          928,831
                          
                          
                          
                          856,181Data
      processing
                          
                          
                          199,739
                          
                          
                          
                          243,402
                          
                          
                          
                          408,412
                          
                          
                          
                          486,284FDIC
      insurance expense
                          
                          
                          373,185
                          
                          
                          
                          21,573
                          
                          
                          
                          472,404
                          
                          
                          
                          32,235Other
      expenses
                          
                          
                          1,048,035
                          
                          
                          
                          1,094,813
                          
                          
                          
                          2,332,721
                          
                          
                          
                          2,169,109Total
      noninterest expense
                          
                          
                          3,907,928
                          
                          
                          
                          3,635,152
                          
                          
                          
                          7,854,523
                          
                          
                          
                          7,378,730Income
      (loss) before income taxes
                          
                          
                          1,350,512
                          
                          
                          
                          (590,910
                          )
                          
                          
                          2,486,460
                          
                          
                          
                          504,200Provision
      for income taxes
                          
                          
                          456,100
                          
                          
                          
                          365,900
                          
                          
                          
                          810,400
                          
                          
                          
                          657,500Net
      income/(loss)
                          
                          $
                          894,412
                          
                          
                          $
                          (956,810
                          )
                          
                          $
                          1,676,060
                          
                          
                          $
                          (153,300
                          )Preferred
      stock dividends and accretion of discount
                          
                          $
                          131,933
                          
                          
                          $
                          -
                          
                          
                          $
                          250,884
                          
                          
                          $
                          -Net
      income/(loss) available to common shareholders
                          
                          $
                          762,479
                          
                          
                          $
                          (956,810
                          )
                          
                          $
                          1,425,176
                          
                          
                          $
                          (153,300
                          )Basic
      earnings (loss) per common share
                          
                          $
                          0.57
                          
                          
                          $
                          (0.71
                          )
                          
                          $
                          1.06
                          
                          
                          $
                          (0.11
                          )Diluted
      earnings (loss) per common share
                          
                          $
                          0.57
                          
                          
                          $
                          (0.71
                          )
                          
                          $
                          1.06
                          
                          
                          $
                          (0.11
                          )Dividends
      declared per common share
                          
                          $
                          0.01
                          
                          
                          $
                          0.35
                          
                          
                          $
                          0.02
                          
                          
                          $
                          0.70





See Notes
to Consolidated Condensed Financial Statements.


2


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





CONSOLIDATED
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY


Six
Months Ended June 30, 2008


(Unaudited)





Comprehensive
                        Income (Loss)
                      
                      
                      Common
                        Stock
                      
                      
                      Additional
                        Paid-in
                        Capital
                      
                      
                      Retained
                        Earnings
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        Income (Loss)
                      
                      
                      Total
                        Stockholders’
                        EquityBalance,
      January 1, 2008
                      
                      
                      
                      
                      $
                      13,392
                      
                      
                      $
                      17,686,444
                      
                      
                      $
                      24,483,022
                      
                      
                      $
                      (1,206,148
                      )
                      
                      $
                      40,976,710Comprehensive
      income:Net
      (loss)
                      
                      $
                      (153,300
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (153,300
                      )
                      
                      
                      -
                      
                      
                      
                      (153,300
                      )Other
      comprehensive income, net of reclassification adjustment and
      tax
                      
                      
                      1,079,867
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,079,867
                      
                      
                      
                      1,079,867Total
      comprehensive income
                      
                      $
                      926,567Dividends
      on common stock
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (939,363
                      )
                      
                      
                      -
                      
                      
                      
                      (939,363
                      )Employee
      stock-based compensation
                      
                      
                      
                      
                      
                      
                      12
                      
                      
                      
                      64,870
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      64,882Issuance
      of 200 shares of common stock
                      
                      
                      
                      
                      
                      
                      2
                      
                      
                      
                      4,538
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,540Balance,
      June 30, 2008
                      
                      
                      
                      
                      
                      $
                      13,406
                      
                      
                      $
                      17,755,852
                      
                      
                      $
                      23,390,359
                      
                      
                      $
                      (126,281
                      )
                      
                      $
                      41,033,336





See Notes
to Consolidated Financial Statements


3


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





CONSOLIDATED
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY


Six
Months Ended June 30, 2009


(Unaudited)





Comprehensive
                    Income
                  
                  
                  Preferred
                    Stock
                  
                  
                  Common
                    Stock
                  
                  
                  Additional
                    Paid-in
                    Capital
                  
                  
                  Retained
                    Earnings
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income
                  
                  
                  Total
                    Stockholders’
                    EquityBalance,
      January 1, 2009
                  
                  
                  
                  
                  $
                  -
                  
                  
                  $
                  13,421
                  
                  
                  $
                  17,819,096
                  
                  
                  $
                  17,240,779
                  
                  
                  $
                  138,847
                  
                  
                  $
                  35,212,143Comprehensive
      income:Net
      income
                  
                  $
                  1,676,060
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,676,060
                  
                  
                  
                  -
                  
                  
                  
                  1,676,060Other
      comprehensive income, net of reclassification adjustment and
      tax
                  
                  
                  114,443
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  114,443
                  
                  
                  
                  114,443Total
      comprehensive income
                  
                  $
                  1,790,503Dividends
      on preferred stock
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (178,500
                  )
                  
                  
                  -
                  
                  
                  
                  (178,500
                  )Dividends
      on common stock
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (26,899
                  )
                  
                  
                  -
                  
                  
                  
                  (26,899
                  )Employee
      stock-based compensation
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  14
                  
                  
                  
                  29,464
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29,478Issuance
      of preferred stock through the capital purchase program
                  
                  
                  
                  
                  
                  
                  10,200,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,200,000Discount
      on preferred stock
                  
                  
                  
                  
                  
                  
                  (99,268
                  )
                  
                  
                  -
                  
                  
                  
                  99,268
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Accretion
      of discount on preferred stock
                  
                  
                  
                  
                  
                  
                  8,809
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,809
                  )
                  
                  
                  -
                  
                  
                  
                  -Balance,
      June 30, 2009
                  
                  
                  
                  
                  
                  $
                  10,109,541
                  
                  
                  $
                  13,435
                  
                  
                  $
                  17,947,828
                  
                  
                  $
                  18,702,631
                  
                  
                  $
                  253,290
                  
                  
                  $
                  47,026,725





See Notes
to Consolidated Financial Statements


4


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


(Unaudited)


Six
      Months Ended
                  June
      30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                1,676,060
                
                
                $
                (153,300
                )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                770,000
                
                
                
                220,000Depreciation
                
                
                455,024
                
                
                
                435,874Amortization
      and accretion
                
                
                229,595
                
                
                
                36,582Deferred
      taxes
                
                
                732,924
                
                
                
                (5,219
                )Stock-based
      compensation
                
                
                29,478
                
                
                
                53,185Excess
      tax benefit (expense) related to stock-based compensation
                
                
                18,550
                
                
                
                (2,268
                )(Gain)
      on sale of foreclosed real estate and loans, net
                
                
                (643,600
                )
                
                
                (339,099
                )Provision
      for impairment on investments
                
                
                23,343
                
                
                
                1,959,911Loss
      on sale or disposal of equipment and other assets, net
                
                
                62
                
                
                
                -Write-down
      of other real estate owned
                
                
                84,463
                
                
                
                267,090Loss
      on sale of investments
                
                
                19,944
                
                
                
                -Proceeds
      from sales of loans held-for-sale
                
                
                50,556,224
                
                
                
                26,116,575Originations
      of loans held-for-sale
                
                
                (50,448,448
                )
                
                
                (25,249,812
                )Change
      in assets and liabilities:Accrued
      interest receivable
                
                
                181,747
                
                
                
                176,084Prepaid
      expenses and other assets
                
                
                (613,556
                )
                
                
                (49,111
                )Accrued
      expenses and other liabilities
                
                
                310,184
                
                
                
                394,831Net
      cash provided by operating activities
                
                
                3,381,994
                
                
                
                3,861,323CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      change in loans
                
                
                21,207,738
                
                
                
                36,902,186Purchase
      of loans
                
                
                (14,428,863
                )
                
                
                (18,303,699
                )Purchase
      of securities available-for-sale
                
                
                (8,032,172
                )
                
                
                (9,815,998
                )Proceeds
      from sale of securities available-for-sale
                
                
                582,000
                
                
                
                -Proceeds
      from maturities and calls of securities available-for-sale
                
                
                3,468,824
                
                
                
                962,419Proceeds
      from redemption of Federal Home Loan Bank stock
                
                
                -
                
                
                
                459,900Purchase
      of Federal Home Loan Bank stock
                
                
                (46,600
                )
                
                
                (157,000
                )Purchase
      of premises, equipment and rental real estate
                
                
                (354,133
                )
                
                
                (242,041
                )Proceeds
      from sale of premises and equipment
                
                
                -
                
                
                
                381Net
      proceeds from sale of foreclosed real estate
                
                
                708,075
                
                
                
                1,983,884Net
      cash provided by investing activities
                
                
                3,104,869
                
                
                
                11,790,032CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      (decrease) in deposits
                
                
                (18,945,667
                )
                
                
                (9,485,150
                )Net
      (decrease) in advances from borrowers for taxes and
    insurance
                
                
                (109,373
                )
                
                
                (107,635
                )Proceeds
      from other borrowed funds
                
                
                9,500,000
                
                
                
                8,500,000Payments
      of other borrowed funds
                
                
                (15,015,376
                )
                
                
                (14,514,799
                )Proceeds
      from issuance of common stock, preferred stock and common stock
      warrant
                
                
                10,200,000
                
                
                
                4,504Excess
      tax benefit (expense) related to stock-based compensation
                
                
                (18,550
                )
                
                
                2,268Common
      and preferred dividends paid
                
                
                (205,369
                )
                
                
                (938,312
                )Net
      cash (used in) financing activities
                
                
                (14,594,335
                )
                
                
                (16,539,124
                )Net
      (decrease) in cash
                
                
                (8,107,472
                )
                
                
                (887,769
                )CASH
      AND DUE FROM BANKSBeginning
                
                
                16,281,644
                
                
                
                12,526,707Ending
                
                $
                8,174,172
                
                
                $
                11,638,938


5


CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS-Continued


(Unaudited)





Six
      Months Ended
                  June
      30,2009
                
                
                2008SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      payments for:Interest
      paid to depositors
                
                $
                3,794,173
                
                
                $
                6,140,390Interest
      paid on borrowings
                
                
                1,887,281
                
                
                
                2,352,917Income
      taxes
                
                
                107,623
                
                
                
                234,411SUPPLEMENTAL
      DISCLOSURE OF NONCASH OPERATING, INVESTING AND FINANCING
      ACTIVITIESTransfers
      from loans to other real estate owned
                
                $
                898,041
                
                
                $
                2,427,100





See Notes
to Consolidated Condensed Financial Statements.


6


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)





1.           BASIS
OF PRESENTATION





The
consolidated condensed financial statements for the three and six month periods
ended June 30, 2009 and 2008 are unaudited.  In the opinion of the
management of North Central Bancshares, Inc. (the “Company”), these financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary to present fairly these consolidated financial
statements.  The results of operations for the interim periods are not
necessarily indicative of results that may be expected for an entire
year.  Certain information and footnote disclosures normally included
in complete financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with the requirements for
interim financial statements.  The financial statements and notes
thereto should be read in conjunction with the Company’s Annual Report on Form
10-K for the year ended December 31, 2008.





The
consolidated condensed financial statements include the accounts of the Company
and its wholly owned subsidiaries.  All significant intercompany
balances and transactions have been eliminated in consolidation.





2.           EARNINGS
(LOSS) PER COMMON SHARE





Basic
earnings (loss) per common share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period.  Income (loss) available to common
stockholders is net income (loss) less preferred stock dividends and accretion
of discount on preferred stock, treated as preferred stock
dividends.  Diluted earnings (loss) per common share reflects the
potential dilution that would occur if the Company’s outstanding stock options
and warrant were exercised and converted into common stock and restricted stock
was vested.  The dilutive effect is computed using the treasury stock
method, which assumes all outstanding warrants are exercised.  The
incremental shares issuable upon exercise of the warrant, to the extent they
would have been dilutive, are included in the denominator of the diluted
earnings (loss) per common share calculation.  The calculation of
earnings (loss) per common share and diluted earnings (loss) per common share
for the three and six months ended June 30, 2009 and 2008 is presented
below.


Three Months Ended June 30,
                              
                              
                              Six Months Ended June 30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Basic
      earnings (loss) per common share:Net
      Income (loss)
                              
                              $
                              894,412
                              
                              
                              $
                              (956,810
                              )
                              
                              $
                              1,676,060
                              
                              
                              $
                              (153,300
                              )Preferred
      stock dividends and accretion of discount1
                              
                              
                              131,933
                              
                              
                              
                              -
                              
                              
                              
                              250,884
                              
                              
                              
                              -Net
      income (loss) available to common stockholders
                              
                              $
                              762,479
                              
                              
                              $
                              (956,810
                              )
                              
                              $
                              1,425,176
                              
                              
                              $
                              (153,300
                              )Weighted
      average common shares outstanding – basic
                              
                              
                              1,342,210
                              
                              
                              
                              1,339,390
                              
                              
                              
                              1,341,184
                              
                              
                              
                              1,338,619Basic
      earnings (loss) per common share
                              
                              $
                              0.57
                              
                              
                              $
                              (0.71
                              )
                              
                              $
                              1.06
                              
                              
                              $
                              (0.11
                              )Diluted
      earnings (loss) per common share:Net
      income (loss) available to common stockholders
                              
                              $
                              762,479
                              
                              
                              $
                              (956,810
                              )
                              
                              $
                              1,425,176
                              
                              
                              $
                              (153,300
                              )Weighted
      average common shares outstanding - basic
                              
                              
                              1,342,210
                              
                              
                              
                              1,339,390
                              
                              
                              
                              1,341,184
                              
                              
                              
                              1,338,619Effect
      of dilutive securities:Stock
      Options
                              
                              
                              -
                              3
                              
                              
                              -
                              2
                              
                              
                              -
                              3
                              
                              
                              -
                              2Restricted
      Stock
                              
                              
                              3,118
                              
                              
                              
                              -
                              2
                              
                              
                              3,208
                              
                              
                              
                              -
                              2Common
      stock warrant4
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      diluted average common shares issued and outstanding
                              
                              
                              1,345,328
                              
                              
                              
                              1,339,390
                              
                              
                              
                              1,344,392
                              
                              
                              
                              1,338,619Diluted
      earnings (loss) per common share
                              
                              $
                              0.57
                              
                              
                              $
                              (0.71
                              )
                              
                              $
                              1.06
                              
                              
                              $
                              (0.11
                              )





1Preferred
stock and the common stock warrant were issued on January 9, 2009, and therefore
had no effect in 2008.


2For the
2008 periods, options to purchase 75,000 shares of common stock and restricted
stock shares of 3,300 were not dilutive due to a net loss.


3For the
2009 periods, the stock options to purchase 67,400 shares of common stock were
not dilutive due to the exercise price of all options exceeding the average
closing price of the Company’s common stock.


4The
average closing price of the Company’s common stock for the three and six months
ended June 30, 2009, was $12.25 and $14.20, respectively.  This was
less than the $15.43 exercise price of the common stock warrant to purchase
99,157 shares of common stock, therefore, the warrant was not
dilutive.


7


3.           DIVIDENDS





On May
15, 2009, the Company paid an aggregate cash dividend of $127,500 on the Fixed
Rate Cumulative Perpetual Preferred Stock, Series A issued to the United States
Department of the Treasury.  On May 29, 2009, the Company declared a
cash dividend on its common stock, payable on July 3, 2009 to stockholders of
record as of June 12, 2009.





4.           CURRENT
ACCOUNTING DEVELOPMENTS





In April
2009, the Financial Accounting Standards Board (“FASB”) issued Financial
Statement of Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”).  FSP
FAS 115-2/124-2 requires entities to separate an other-than temporary impairment
(“OTTI”) of a debt security into two components when there are credit-related
losses associated with the impaired debt security for which management asserts
that it does not have the intent to sell the security, and it is more likely
than not that it will not be required to sell the security before recovery of
its cost basis.  The amount of the OTTI related to a credit loss is
recognized in earnings, and the amount of the OTTI related to other factors is
recorded in other comprehensive income (loss).  FSP FAS 115-2/124-2 is
effective for periods ending after June 15, 2009.  The Company adopted
FSP FAS 115-1/124-2 effective for the quarter ended June 30,
2009.  The adoption of this FSP did not have a material impact on the
Company’s financial position or results of operations.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are Not Orderly”(“FSP FAS 157-4”), if
an entity determines that there has been a significant decrease in the volume
and level of activity for the asset or the liability in relation to the normal
market activity for the asset or liability (or similar assets or liabilities),
then transactions or quoted prices may not accurately reflect fair
value.  In addition, if there is evidence that the transaction for the
asset or liability is not orderly; the entity shall place little, if any weight
on that transaction price as an indicator of fair value.  FSP FAS
157-4 is effective for periods ending after June 15, 2009.  The
Company adopted FSP FAS 157-4 effective for the quarter ended June 30,
2009.  The adoption of this FSP did not have a material impact on the
Company’s financial position or results of operations.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments”(“FSP FAS 107-1 and APB
28-1”).  FSP FAS 107-1 and APB 28-1 require disclosures about fair
value of financial instruments in interim and annual financial
statements.  FSP FAS 107-1 and APB 28-1 is effective for periods ended
June 15, 2009.  The Company adopted FSP FAS 107-1 and APB 28-1
effective for the quarter ending June 30, 2009.  The adoption of this
FSP did not have an impact on the Company’s financial position or results of
operations.





In May
2009, the FASB issued FASB Statement No. 165, “Subsequent Events”(“SFAS No.
165”).  SFAS No. 165 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued.  The Company adopted this statement
for the quarter ended June 30, 2009.  The Company evaluated events
occurring subsequent to June 30, 2009 through August 12, 2009, the date the
financial statements are being issued, and other than as set forth in note 10,
did not identify any subsequent events requiring disclosure pursuant to the
provisions of SFAS No. 165.





In June
2009, the FASB issued FASB Statement No. 166, “Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140,”to improve
the reporting for the transfer of financial assets resulting from (1) practices
that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,”that
are not consistent with the original intent and key requirements of that
Statement and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of
transferors.  This Statement must be applied as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter.  Earlier application
is prohibited.  The Company will review the requirements of FASB No.
166 and comply with its requirements.  The Company does not expect
that the adoption of this Statement will have a material impact on the Company’s
consolidated financial statements.


8


In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments of FASB Interpretation
No. 46(R)”to amend certain requirements of FASB Interpretation No. 46
(revised December 2003), “Consolidation of Variable Interest Entities” to
improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements.  The Statement is effective as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods
thereafter.  Earlier application is prohibited.  The Company
will review the requirements of FASB No. 167 and comply with its
requirements.  The Company does not expect that the adoption of this
Statement will have a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162.”Under the Statement,
The FASB Accounting
Standards Codification (the “Codification”) will become the source of
authoritative U.S. generally accepted accounting principles (“GAAP”) recognized
by the FASB to be applied by nongovernmental entities.  Rules and
interpretive release of the Securities and Exchange Commission (the “SEC”) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants.  On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative.  This
Statement is effective for financial statement issued for interim and annual
periods ending after September 15, 2009.  In the FASB’s view, the
issuance of this Statement and the Codification will not change GAAP, except for
those nonpublic nongovernmental entities that must now apply the American
Institute of Certified Public Accountants Technical Inquiry Service Section
5100, “Revenue Recognition”, paragraphs 38-76.  The Company does not
expect that the adoption of the Codification will have a material impact on the
Company’s consolidated financial statements.





5.           OPERATING
SEGMENTS





An
operating segment is generally defined as a component of a business for which
discrete financial information is available and whose results are reviewed by
the chief operating decision-maker.  The Company has determined that
it has two reportable segments:  a traditional banking segment and a
nonbank segment.  The traditional banking segment consists of the
Company’s banking subsidiary, First Federal Savings Bank of Iowa (the “Bank”),
and the holding company.  The Bank operates as a federal savings bank
providing deposit, loan and other related products to individuals and small
businesses, primarily in the communities where their offices are
located.  The nonbank segment, which is set forth under the caption
“All Others” below, consists of the operations of the subsidiaries under the
Bank, and includes real estate abstracting services, insurance and investment
services, and ownership of low-income housing tax credit apartment
complexes.





Transactions
between affiliates, the resulting revenues of which are shown in the
inter-segment revenue category, are conducted at market prices that would be
paid if the companies were not affiliates.





Three Months Ended June 30, 2009
                  
                  
                  Six Months Ended June 30, 2009Traditional
                  
                  
                  
                  
                  
                  
                  
                  
                  TraditionalBanking
                  
                  
                  All Others
                  
                  
                  Total
                  
                  
                  Banking
                  
                  
                  All Others
                  
                  
                  TotalInterest
      income
                  
                  $
                  6,286,726
                  
                  
                  $
                  -
                  
                  
                  $
                  6,286,726
                  
                  
                  $
                  12,752,521
                  
                  
                  $
                  -
                  
                  
                  $
                  12,752,521Interest
      expense
                  
                  
                  2,675,084
                  
                  
                  
                  -
                  
                  
                  
                  2,675,084
                  
                  
                  
                  5,743,077
                  
                  
                  
                  -
                  
                  
                  
                  5,743,077Net
      interest income
                  
                  
                  3,611,642
                  
                  
                  
                  -
                  
                  
                  
                  3,611,642
                  
                  
                  
                  7,009,444
                  
                  
                  
                  -
                  
                  
                  
                  7,009,444Provision
      for loan losses
                  
                  
                  610,000
                  
                  
                  
                  -
                  
                  
                  
                  610,000
                  
                  
                  
                  770,000
                  
                  
                  
                  -
                  
                  
                  
                  770,000Net
      interest income after provision for loan losses
                  
                  
                  3,001,642
                  
                  
                  
                  -
                  
                  
                  
                  3,001,642
                  
                  
                  
                  6,239,444
                  
                  
                  
                  -
                  
                  
                  
                  6,239,444Noninterest
      income
                  
                  
                  1,657,791
                  
                  
                  
                  599,007
                  
                  
                  
                  2,256,798
                  
                  
                  
                  2,982,768
                  
                  
                  
                  1,118,771
                  
                  
                  
                  4,101,539Noninterest
      expense
                  
                  
                  3,581,242
                  
                  
                  
                  326,686
                  
                  
                  
                  3,907,928
                  
                  
                  
                  7,192,235
                  
                  
                  
                  662,288
                  
                  
                  
                  7,854,523Income
      before income taxes
                  
                  
                  1,078,191
                  
                  
                  
                  272,321
                  
                  
                  
                  1,350,512
                  
                  
                  
                  2,029,977
                  
                  
                  
                  456,483
                  
                  
                  
                  2,486,460Provision
      for income taxes
                  
                  
                  412,500
                  
                  
                  
                  43,600
                  
                  
                  
                  456,100
                  
                  
                  
                  752,200
                  
                  
                  
                  58,200
                  
                  
                  
                  810,400Net
      income
                  
                  $
                  665,691
                  
                  
                  $
                  228,721
                  
                  
                  $
                  894,412
                  
                  
                  $
                  1,277,777
                  
                  
                  $
                  398,283
                  
                  
                  $
                  1,676,060Inter-segment
      revenue (expense)
                  
                  $
                  247,769
                  
                  
                  $
                  (247,769
                  )
                  
                  $
                  -
                  
                  
                  $
                  442,963
                  
                  
                  $
                  (442,963
                  )
                  
                  $
                  -Total
      assets
                  
                  $
                  457,621,881
                  
                  
                  $
                  3,230,335
                  
                  
                  $
                  460,852,216
                  
                  
                  $
                  457,621,881
                  
                  
                  $
                  3,230,335
                  
                  
                  $
                  460,852,216Total
      deposits
                  
                  $
                  331,224,258
                  
                  
                  $
                  -
                  
                  
                  $
                  331,224,258
                  
                  
                  $
                  331,224,258
                  
                  
                  $
                  -
                  
                  
                  $
                  331,224,258


9





Three Months Ended June 30, 2008
                  
                  
                  Six Months Ended June 30, 2008Traditional
                  
                  
                  
                  
                  
                  
                  
                  
                  TraditionalBanking
                  
                  
                  All Others
                  
                  
                  Total
                  
                  
                  Banking
                  
                  
                  All Others
                  
                  
                  TotalInterest
      income
                  
                  $
                  7,154,781
                  
                  
                  $
                  -
                  
                  
                  $
                  7,154,781
                  
                  
                  $
                  14,643,167
                  
                  
                  $
                  -
                  
                  
                  $
                  14,643,167Interest
      expense
                  
                  
                  3,894,581
                  
                  
                  
                  -
                  
                  
                  
                  3,894,581
                  
                  
                  
                  8,188,217
                  
                  
                  
                  -
                  
                  
                  
                  8,188,217Net
      interest income
                  
                  
                  3,260,200
                  
                  
                  
                  -
                  
                  
                  
                  3,260,200
                  
                  
                  
                  6,454,950
                  
                  
                  
                  -
                  
                  
                  
                  6,454,950Provision
      for loan losses
                  
                  
                  160,000
                  
                  
                  
                  -
                  
                  
                  
                  160,000
                  
                  
                  
                  220,000
                  
                  
                  
                  -
                  
                  
                  
                  220,000Net
      interest income after provision for loan losses
                  
                  
                  3,100,200
                  
                  
                  
                  -
                  
                  
                  
                  3,100,200
                  
                  
                  
                  6,234,950
                  
                  
                  
                  -
                  
                  
                  
                  6,234,950Noninterest
      income
                  
                  
                  (605,227
                  )
                  
                  
                  549,269
                  
                  
                  
                  (55,958
                  )
                  
                  
                  577,504
                  
                  
                  
                  1,070,476
                  
                  
                  
                  1,647,980Noninterest
      expense
                  
                  
                  3,322,988
                  
                  
                  
                  312,164
                  
                  
                  
                  3,635,152
                  
                  
                  
                  6,751,869
                  
                  
                  
                  626,861
                  
                  
                  
                  7,378,730Income/(loss)
      before incometaxes
                  
                  
                  (828,015
                  )
                  
                  
                  237,105
                  
                  
                  
                  (590,910
                  )
                  
                  
                  60,585
                  
                  
                  
                  443,615
                  
                  
                  
                  504,200Provision
      for income taxes
                  
                  
                  331,500
                  
                  
                  
                  34,400
                  
                  
                  
                  365,900
                  
                  
                  
                  595,500
                  
                  
                  
                  62,000
                  
                  
                  
                  657,500Net
      income/(loss)
                  
                  $
                  (1,159,515
                  )
                  
                  $
                  202,705
                  
                  
                  $
                  (956,810
                  )
                  
                  $
                  (534,915
                  )
                  
                  $
                  381,615
                  
                  
                  $
                  (153,300
                  )Inter-segment
      revenue (expense)
                  
                  $
                  200,129
                  
                  
                  $
                  (200,129
                  )
                  
                  $
                  -
                  
                  
                  $
                  394,014
                  
                  
                  $
                  (394,014
                  )
                  
                  $
                  -Total
      assets
                  
                  $
                  491,585,477
                  
                  
                  $
                  3,439,338
                  
                  
                  $
                  495,024,815
                  
                  
                  $
                  491,585,477
                  
                  
                  $
                  3,439,338
                  
                  
                  $
                  495,024,815Total
      deposits
                  
                  $
                  356,462,706
                  
                  
                  $
                  -
                  
                  
                  $
                  356,462,706
                  
                  
                  $
                  356,462,706
                  
                  
                  $
                  -
                  
                  
                  $
                  356,462,706





6.
            INVESTMENT
      INFORMATION





Securities
available-for-sale as of June 30, 2009 was as follows:





Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      (Losses)
                    
                    
                    Fair ValueEquity
      securities:Mutual
      fund
                    
                    $
                    686,652
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    686,652Debt
      securities:State
      and local obligations
                    
                    $
                    2,503,363
                    
                    
                    $
                    43,816
                    
                    
                    $
                    (39,883
                    )
                    
                    $
                    2,507,296Mortgage-backed
      securities
                    
                    
                    21,764,981
                    
                    
                    
                    436,757
                    
                    
                    
                    (20,656
                    )
                    
                    
                    22,181,082U.S.
      Government agencies
                    
                    
                    1,571,297
                    
                    
                    
                    -
                    
                    
                    
                    (16,062
                    )
                    
                    
                    1,555,235$
                    25,839,641
                    
                    
                    $
                    480,573
                    
                    
                    $
                    (76,601
                    )
                    
                    $
                    26,243,613$
                    26,526,293
                    
                    
                    $
                    480,573
                    
                    
                    $
                    (76,601
                    )
                    
                    $
                    26,930,265





Securities
available-for-sale as of December 31, 2008 was as follows:





Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  (Losses)
                
                
                Fair ValueEquity
      securities:Mutual
      fund
                
                $
                1,229,939
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,229,939FHLMC
      preferred stock
                
                
                82,000
                
                
                
                -
                
                
                
                -
                
                
                
                82,0001,311,939
                
                
                
                -
                
                
                
                -
                
                
                
                1,311,939Debt
      securities:State
      and local obligations
                
                
                1,743,349
                
                
                
                31,876
                
                
                
                (1,781
                )
                
                
                1,772,444Mortgage-backed
      securities
                
                
                19,562,233
                
                
                
                355,646
                
                
                
                (164,294
                )
                
                
                19,753,58521,304,582
                
                
                
                387,522
                
                
                
                (166,075
                )
                
                
                21,526,029$
                22,616,521
                
                
                $
                387,522
                
                
                $
                (166,075
                )
                
                $
                22,837,968


10


Gross
unrealized losses and estimated fair value, aggregated by investment category
and length of time that individual securities have been in a continuous
unrealized loss position, as of June 30, 2009 and December 31, 2008, are
summarized as follows:





June 30, 2009Less than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesDebt
      securities:State
      and local obligations
                  
                  $
                  1,564,487
                  
                  
                  $
                  (39,883
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,564,487
                  
                  
                  $
                  (39,883
                  )Mortgage-backed
      securities
                  
                  
                  3,655,310
                  
                  
                  
                  (8,336
                  )
                  
                  
                  1,369,182
                  
                  
                  
                  (12,320
                  )
                  
                  
                  5,024,492
                  
                  
                  
                  (20,656
                  )U.S.
      Government agencies
                  
                  
                  1,555,235
                  
                  
                  
                  (16,062
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,555,235
                  
                  
                  
                  (16,062
                  )$
                  6,775,032
                  
                  
                  $
                  (64,281
                  )
                  
                  $
                  1,369,182
                  
                  
                  $
                  (12,320
                  )
                  
                  $
                  8,144,214
                  
                  
                  $
                  (76,601
                  )





December 31, 2008Less than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesDebt
      securities:State
      and local obligations
                  
                  $
                  413,219
                  
                  
                  $
                  (1,781
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  413,219
                  
                  
                  $
                  (1,781
                  )Mortgage-backed
      securities
                  
                  
                  3,443,676
                  
                  
                  
                  (75,207
                  )
                  
                  
                  1,626,411
                  
                  
                  
                  (89,087
                  )
                  
                  
                  5,070,087
                  
                  
                  
                  (164,294
                  )$
                  3,856,895
                  
                  
                  $
                  (76,988
                  )
                  
                  $
                  1,626,411
                  
                  
                  $
                  (89,087
                  )
                  
                  $
                  5,483,306
                  
                  
                  $
                  (166,075
                  )





The
unrealized losses for the above investment securities are generally due to
changes in interest rates and, as such, are considered to be temporary by the
Company.  In addition, the Company has the ability to hold and intent
not to sell these investment securities for a period of time sufficient to allow
for an anticipated recovery.





The
amortized cost and fair value of debt securities as of June 30, 2009 and
December 31, 2008 by contractual maturity are shown below.  Certain
securities have call features, which allow the issuer to call the security prior
to maturity.  Maturities may differ from contractual maturities in
mortgage-backed securities because the mortgages underlying the securities may
be called or repaid without any penalties.  Therefore, these
securities are not included in the maturity categories in the following maturity
summary:





Debt Securities Available-for-SaleJune 30, 2009
                
                
                December 31, 2008Amortized
                  Cost
                
                
                Fair Value
                
                
                Amortized
                  Cost
                
                
                Fair ValueDue
      in one year or less
                
                $
                355,000
                
                
                $
                355,708
                
                
                $
                382,669
                
                
                $
                384,225Due
      from one to five years
                
                
                1,581,031
                
                
                
                1,548,309
                
                
                
                630,000
                
                
                
                637,636Due
      from five to ten years
                
                
                1,078,993
                
                
                
                1,110,074
                
                
                
                729,680
                
                
                
                750,583Due
      over 10 years
                
                
                1,059,636
                
                
                
                1,048,440
                
                
                
                -
                
                
                
                -Mortgage-backed
      securities
                
                
                21,764,981
                
                
                
                22,181,082
                
                
                
                19,562,233
                
                
                
                19,753,585$
                25,839,641
                
                
                $
                26,243,613
                
                
                $
                21,304,582
                
                
                $
                21,526,029


11


The
following is a summary of securities sold, excluding the sale of Federal Home
Loan Bank (“FHLB”) stock:





June 30, 2009
                
                
                December 31, 2008Net Proceeds
                  from Sale
                
                
                Gain/(Loss)
                
                
                Net Proceeds
                  from Sale
                
                
                Gain/(Loss)Equity
      securities:Mutual
      funds
                
                $
                500,000
                
                
                $
                (19,944
                )
                
                $
                250,000
                
                
                $
                (41,558
                )FHLMC
      preferred stock
                
                
                82,000
                
                
                
                -
                
                
                
                18,400
                
                
                
                (77,300
                )FNMA
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                19,400
                
                
                
                (51,800
                )Other
      equity securities
                
                
                -
                
                
                
                -
                
                
                
                9,850
                
                
                
                -$
                582,000
                
                
                $
                (19,944
                )
                
                $
                297,650
                
                
                $
                (170,658
                )





7.
            OTHER
      COMPREHENSIVE INCOME (LOSS)





Under FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,”credit-related losses on debt
securities with OTTI are recorded in current earnings, while the
noncredit-related portion of the reduction in fair value is recorded in other
comprehensive income (loss).  The Company’s other component of other
comprehensive income (loss) consists of the unrealized holding gains and losses
on available for sale investment securities which are considered temporary in
nature.





The
components of other comprehensive income (loss), presented net of taxes for the
six months ended June 30, 2009 and 2008, are as follows:





Six
      Months Ended June 30,2009
                
                
                2008Net
      income (loss)
                
                $
                1,676,060
                
                
                $
                (153,300
                )Other
      comprehensive income:Securities
      for which a portion of an other-than-temporary impairment has been
      recorded in earnings:Unrealized
      holding losses
                
                
                (43,287
                )
                
                
                (714,037
                )Loss
      recognized in earnings
                
                
                43,287
                
                
                
                1,959,911Net
      unrealized gain on securities with other-than-temporary impairment before
      tax expense
                
                
                -
                
                
                
                1,245,874Tax
      expense
                
                
                -
                
                
                
                (23,266
                )Net
      unrealized (losses) on securities with other-than-temporary impairment,
      net of tax in other comprehensive income (loss)
                
                
                -
                
                
                
                1,222,608Other
      securities:Unrealized
      holding gains (losses) arising during the period
                
                
                182,524
                
                
                
                (227,657
                )Realized
      net (gains) losses recognized into net income (loss)
                
                
                -
                
                
                
                -Net
      unrealized gains (losses) on other securities before tax (expense)
      benefit
                
                
                182,524
                
                
                
                (227,657
                )Tax
      (expense) benefit
                
                
                (68,081
                )
                
                
                84,916Net
      unrealized gains (losses) on other securities, net of tax in other
      comprehensive income (loss)
                
                
                114,443
                
                
                
                (142,741
                )Other
      comprehensive income
                
                $
                1,790,503
                
                
                $
                926,567





8.           FAIR
VALUE





The
Company adopted SFAS 157 Fair
Value Measurements on January 1, 2009 in its entirety. SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value. It also establishes a hierarchy for determining
fair value measurement. The hierarchy includes three levels and is based upon
the valuation techniques used to measure assets and liabilities. The three
levels are as follows:





1.
            Level
      1 – Inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in
markets;





2.
            Level
      2 – Inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial instrument;
    and





3.
            Level
      3 – Inputs to the valuation methodology are unobservable and significant
      to the fair value measurement.


12


Fair
value measurements for items measured at fair value at June 30, 2009
included:





Fair Value Measurements at Reporting Date Using($ in 000s)Quoted Prices in
                          Active Markets
                          for Identical
                          Assets (Level 1)
                        
                        
                        Significant
                          Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        Total
                          June 30, 2009DescriptionSecurities
      available-for-saleState
      and local obligations
                        
                        $
                        -
                        
                        
                        $
                        2,507
                        
                        
                        $
                        -
                        
                        
                        $
                        2,507Mortgage-backed
      securities
                        
                        
                        -
                        
                        
                        
                        22,181
                        
                        
                        
                        -
                        
                        
                        
                        22,181U.S.
      Government agencies
                        
                        
                        -
                        
                        
                        
                        1,555
                        
                        
                        
                        -
                        
                        
                        
                        1,555Mutual
      funds
                        
                        
                        687
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        687Total
      Securities available-for-sale
                        
                        $
                        687
                        
                        
                        $
                        26,243
                        
                        
                        $_ -
                        
                        
                        $
                        26,930





A portion
of the securities available-for-sale portfolio is an equity security consisting
of a mortgage bond mutual fund investment.  The fair values used by
the Company are obtained from an independent pricing service, which represent
quoted market prices for the identical securities (Level 1 inputs).





Securities
available-for-sale (excluding equity securities) portfolio consists of
mortgage-backed securities, government bonds, and municipal bond investments
whereby the Company obtains fair values from an independent pricing
service.  The fair values are determined by pricing models that
consider observable market data, such as interest rate volatilities, LIBOR yield
curve, credit spreads and prices from market makers and live trading systems
(Level 2 inputs).





Certain
assets are measured at fair value on a nonrecurring basis; that is, they are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  The following table presents the
assets carried on the balance sheet by level with the SFAS No. 157 valuation
hierarchy as of June 30, 2009:





Fair Value Measurements at Reporting Date Using($ in 000s)Description
                    
                    Quoted Prices
                      in Active Markets
                      for Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable Inputs
                      (Level 3)
                    
                    
                    TotalAssets:Loans
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,584
                    
                    
                    $
                    4,584Other
      real estate owned
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,285
                    
                    
                    $
                    1,285





Impaired
loans are evaluated and valued at the time the loan is identified as impaired,
at the lower of cost or fair value.  Fair value is measured based on
the value of the collateral securing these loans and is classified at a Level 3
in the fair value hierarchy.  Collateral may be real estate and/or
business assets including equipment, inventory and/or accounts
receivable.  Such collateral’s fair value is determined based on
appraisals by qualified licensed appraisers hired by the Company, and/or
management’s expertise and knowledge of the client and client’s
business.





SFAS 107,
“Disclosure about Fair Value
of Financial Instruments,”requires disclosure of the fair value of
financial assets and financial liabilities, including those financial assets and
financial liabilities that are not measured and reported at fair value on a
recurring basis or non-recurring basis.  The methodologies for
estimating the fair value of financial assets and financial liabilities that are
measured at fair value on a recurring or non-recurring basis are discussed
above.  The methodologies for other financial assets and financial
liabilities are discussed below:





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





Cash and
due from banks:  The carrying amount of cash and due from banks
represents the fair value.


13


Federal
Home Loan Bank stock:  The fair value of this untraded stock is
estimated at its carrying value because the Company is able to redeem the stock
with the Federal Home Loan Bank at par value.





Loans
held for sale:  Fair values are based on quoted market prices of
similar loans sold on the secondary market.





Loans:  For
variable-rate loans that reprice frequently and have experienced no significant
change in credit risk, fair values are based on carrying values.  Fair
values for all other loans are estimated based on discounted cash flows, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality.





Deposits:  Fair
values disclosed for demand, NOW, savings and money market savings deposits
equal their carrying amounts, which represent the amount payable on
demand.  Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregate expected monthly maturities
on time deposits.





Borrowed
funds:  The fair value of borrowered funds is estimated based on
discounted cash flows using currently available borrowering rates.





Accrued
interest receivable and payable:  The fair values of both accrued
interest receivable and payable are their carrying amounts.





Commitments
to extend credit:  The fair values of commitments to extend credit are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and creditworthiness of the
counterparties.  At June 30, 2009 and December 31, 2008 the carrying
amount and fair value of the commitments were not significant.





June 30, 2009
                  
                  
                  December 31, 2008Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  Value(nearest 000)
                  
                  
                  
                  
                  
                  (nearest 000)Financial
      assets:Cash
      and due from banks
                  
                  $
                  8,174,172
                  
                  
                  $
                  8,174,000
                  
                  
                  $
                  16,281,644
                  
                  
                  $
                  16,282,000Securities
                  
                  
                  26,930,265
                  
                  
                  
                  26,930,000
                  
                  
                  
                  22,837,968
                  
                  
                  
                  22,838,000FHLB
      stock
                  
                  
                  4,739,000
                  
                  
                  
                  4,739,000
                  
                  
                  
                  4,692,400
                  
                  
                  
                  4,692,000Loans,
      net
                  
                  
                  392,138,282
                  
                  
                  
                  398,601,000
                  
                  
                  
                  400,786,505
                  
                  
                  
                  401,837,000Loans
      held for sale
                  
                  
                  1,269,427
                  
                  
                  
                  1,269,000
                  
                  
                  
                  730,466
                  
                  
                  
                  730,000Accrued
      interest receivable
                  
                  
                  1,915,037
                  
                  
                  
                  1,915,000
                  
                  
                  
                  2,096,784
                  
                  
                  
                  2,097,000Financial
      liabilities:Deposits
                  
                  
                  331,224,258
                  
                  
                  
                  334,792,000
                  
                  
                  
                  350,169,925
                  
                  
                  
                  354,654,000Borrowed
      funds
                  
                  
                  76,833,539
                  
                  
                  
                  79,500,000
                  
                  
                  
                  82,348,915
                  
                  
                  
                  85,411,000Accrued
      interest payable
                  
                  
                  659,075
                  
                  
                  
                  659,000
                  
                  
                  
                  597,448
                  
                  
                  
                  597,000





9.           RECLASSIFICATIONS





Certain
amounts in the prior period financial statements have been reclassified, with no
effect on net income or stockholders’ equity, to be consistent with the current
period classification.


14


10.         SUBSEQUENT
EVENTS





Subsequent
events have been evaluated through August 12, 2009, the date financial
statements are filed with the Securities and Exchange
Commission.  Through that date, there were no events requiring
disclosure, except with respect to the settlement of the legal proceeding
described further below.





On April
13, 2009, Haskell Homes, Inc., Guy M. Haskell and Klyn R. Haskell (collectively,
the “Plaintiffs”) filed a complaint in the Fifth Judicial District Court for
Washington County, State of Utah against the Bank, as successor in interest to
ANB Financial N.A. (“ANB”), in connection with certain loans originally
made by ANB to the Plaintiffs for the development of certain real estate located
in Washington County, Utah (the “Property”).  The loans are secured by
the Property.  Following ANB's failure in May 2008, the Bank became
the sole holder of one of the loans.  The complaint included claims
for damages in excess of $16 million and recoupment of certain amounts
due under the loans as well as a temporary restraining order and/or
preliminary injunction.  In connection with the filing of the
complaint, the court granted a temporary restraining order to the
Plaintiffs.  At a preliminary hearing, the Court dissolved
the temporary restraining order because the Plaintiffs had not met the
applicable standards.  On May 13, 2009, the Bank filed a notice of
removal pursuant to which the case was removed to the U.S. District Court for
the District of Utah.  On July 31, 2009, the Bank entered into a
settlement agreement with the Plaintiffs pursuant to which the Plaintiffs agreed
to dismiss the lawsuit with prejudice.  The settlement agreement
provides that the Bank will accept a deed to the Property in lieu of foreclosure
in satisfaction of the loans and related obligations.  The settlement
agreement also provides that if a portion of the Property is sold to a buyer
referred to the Bank by the Plaintiffs within a specified time frame, the Bank
will pay a 10% commission to one of the Plaintiffs.  As of August 12,
2009, all actions required to effectuate the settlement were taken by the
applicable parties and, following the acceptance of the dismissal documents with
the court, this matter will be closed.





Item
2.  Management’s Discussion and Analysis Of Financial Condition and
Results Of Operations





This
Quarterly Report on Form 10-Q contains forward-looking statements consisting of
estimates with respect to the consolidated financial condition, results of
operations and business of the Company and its subsidiaries, including the Bank,
that are subject to various factors which could cause actual results to differ
materially from these estimates, including those set forth in Part I,
Item 1A — Risk Factors of the Company’s 2008 Annual Report on Form
10-K.  These factors include changes in general, economic, market,
legislative and regulatory conditions, and the development of an interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company’s operations and investments.  The
Company’s actual results may differ from the results discussed in the
forward-looking statements.  The Company disclaims any obligation to
publicly announce future events or developments that may affect the
forward-looking financial statements contained herein.





Executive
Overview





The
purpose of this summary is to provide an overview of the items management
focuses on when evaluating the condition of the Company and its success in
implementing its business and shareholder value strategies. The Company’s
business strategy is to operate the Bank as a well-capitalized, profitable and
independent community oriented savings bank.  The Company’s
shareholder value strategy has three major themes: (1) enhancing shareholders’
value; (2) making its retail banking franchise more valuable; and (3)
efficiently utilizing its capital.





Management
believes the following were important factors in the Company’s performance
during the quarter ended June 30, 2009:




•
            The
      credit crisis affecting the financial markets and residential housing that
      began in 2007 turned out to be just the flashpoint for a severe and
      prolonged recession.  While recently published economic data
      indicates that the current downturn may be easing, the recession continues
      to affect the Company, the Bank, and the financial industry generally, and
      it is not clear when or at what speed the recession will
    end.





•
            The
      Company has taken significant steps to reduce the risk of additional loan
      losses.  During the quarter ended June 30, 2009 the Company
      increased its provision for loan losses to $610,000 compared to the
      $160,000 during the quarter ended June 30, 2008.  The Company
      continues to monitor its loan portfolio with the objective of avoiding
      defaults or write-downs.  Despite these actions, the possibility
      of additional losses can not be eliminated, but the Board of Directors and
      all employees continue to work hard to make the best of these continuing
      challenging conditions.


15


•
            The
      Company continues its focus on earnings through management of net interest
      margin, successfully increasing the margin to 3.31% as of June 30, 2009
      from 2.80% as of June 30, 2008.





•
            The
      Bank is required to pay significantly higher FDIC premiums during 2009 due
      to market developments that have depleted the Deposit Insurance Fund and
      reduced the ratio of reserves to insured deposits.  On May 22,
      2009, the FDIC adopted a final rule imposing a five basis point special
      assessment on each insured depository institution’s assets minus Tier 1
      capital as of June 30, 2009.  The FDIC may impose an additional
      special assessment of up to five basis points later in
      2009.  Management believes this additional special assessment is
      probable, but the amount is
uncertain.





•
            The
      volume of originations of residential mortgages in the second quarter of
      2009 doubled compared to the second quarter of 2008.  The
      successful growth of this line of business is due to the historically low
      interest rates which are allowing consumers to refinance existing
      mortgages in order to reduce their monthly
  costs.




CRITICAL
ACCOUNTING POLICIES




This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and the disclosures included elsewhere in this report, are based on
the Company’s consolidated financial statements.  These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America.  The financial information contained
in these statements is, for the most part, based on approximate measures of the
financial effects of transactions and events that have already
occurred.  However, the preparation of these statements requires
management to make certain estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.





The
Company’s accounting policies are described in the “Notes to Consolidated
Financial Statements” of the Company’s 2008 Annual Report on Form
10-K.  Based on its consideration of accounting policies that involve
the most complex and subjective estimates and judgments, management has
identified its most critical accounting policies to be those related to the
allowance for loan losses and asset impairment judgments.





The
allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged off against the allowance for
loan losses when management believes that collectibility of the principal is
unlikely.  The Company has policies and procedures for evaluating the
overall credit quality of its loan portfolio, including timely identification of
potential problem credits.  On a quarterly basis, management reviews
the appropriate level for the allowance for loan losses, incorporating a variety
of risk considerations, both quantitative and
qualitative.  Quantitative factors include the Company’s historical
loss experience, delinquency and charge-off trends, collateral values, known
information about individual loans and other factors.  Qualitative
factors include the general economic environment in the Company’s market area
and the expected trend of those economic conditions.  To the extent
that actual results differ from forecasts and management’s judgment, the
allowance for loan losses may be greater or less than future
charge-offs.





Asset
impairment judgments include evaluating the decline in fair value of
available-for-sale securities below their cost.  Declines in fair
value of available-for-sale securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses.  In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
Company’s ability to hold and its intent not to sell its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in
fair value.





FINANCIAL
CONDITION





Total
assets decreased $12.4 million, or 2.6%, to $460.9 million at June 30, 2009,
from $473.3 million at December 31, 2008.  The decrease in assets was
primarily due to a decrease in cash and cash equivalents and net loans
receivable, offset in part by an increase in securities
available-for-sale.  Cash and cash equivalents decreased $8.1 million,
or 49.8%, to $8.2 million at June 30, 2009, compared to $16.3 million at
December 31, 2008.  The decrease in cash and cash equivalents was
primarily due to a decrease in deposits and borrowed funds during the six months
ended June 30, 2009.  The increase in securities available-for-sale
was primarily due to the purchase of $8.0 million of securities for the six
months ended June 30, 2009, offset in part by payments, maturities and sale of
securities.


16





Net loans
receivable decreased by $8.7 million, or 2.2%, to $392.1 million at June 31,
2009, from $400.8 million at December 31, 2008, primarily due to payments and
prepayments of $61.0 million and loan sales of $49.9 million during the six
months ended June 30, 2009. These payments, prepayments, and loan sales were
offset in part by the origination of $68.4 million of first mortgage loans
primarily secured by one-to four-family residences and commercial real estate,
the origination of $21.3 million of consumer loans, and the purchase of $14.4
million of multifamily and commercial real estate loans during the six months
ended June 30, 2009. The Company sells most fixed-rate residential loans
originated with maturities of 15 years or more in the secondary mortgage market
in order to reduce interest rate risk.





Deposits
decreased $19.0 million, or 5.4%, to $331.2 million at June 30, 2009, from
$350.2 million at December 31, 2008, primarily reflecting decreases in
certificates of deposits and brokered deposits of $16.0 million and $11.6
million, respectively, offset in part by increases in NOW, money market and
savings account balances of $4.5 million, $1.1 million and $3.0 million,
respectively.  Borrowings, primarily FHLB advances, decreased $5.5
million, or 6.7%, to $76.8 million at June 30, 2009, from $82.3 million at
December 31, 2008. This decrease is due to the normal repayment of borrowings
due to calls or maturities.





Total
stockholders’ equity increased $11.8 million, or 33.5%, to $47.0 million at June
30, 2009, from $35.2 million at December 31, 2008, primarily due to the sale of
the Series A Preferred Stock and the Warrant to the Treasury through the Capital
Purchase Program in January and earnings for the six months ended June 30,
2009.





The
Office of Thrift Supervision (the “OTS”) requires the Bank to meet minimum
tangible, leverage (core) and risk-based capital requirements.  As of
June 30, 2009, the Bank exceeded all of its regulatory capital
requirements.  The Bank’s required and actual capital levels as of
June 30, 2009 and December 31, 2008 were as follows:





To Be Well-CapitalizedFor Capital
                
                
                Under Prompt
                  CorrectiveActual
                
                
                Adequacy Purposes
                
                
                Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio(000’s
                )
                
                
                
                
                
                (000’s
                )
                
                
                
                
                
                (000’s
                )As
      of June 30, 2009:Total
      Capital (to risk- weighted assets)
                
                $
                46,668
                
                
                
                14.0
                %
                
                $
                26,592
                
                
                
                8.0
                %
                
                $
                33,241
                
                
                
                10.0
                %Tier
      I Capital (to risk- weighted assets)
                
                
                42,885
                
                
                
                12.9
                
                
                
                13,296
                
                
                
                4.0
                
                
                
                19,944
                
                
                
                6.0Tier
      I (Core) Capital (to adjusted assets)
                
                
                42,885
                
                
                
                9.3
                
                
                
                13,804
                
                
                
                3.0
                
                
                
                23,010
                
                
                
                5.0Tangible
      Capital (to adjusted assets)
                
                
                42,885
                
                
                
                9.3
                
                
                
                6,903
                
                
                
                1.5
                
                
                
                -
                
                
                
                -As
      of December 31, 2008:Total
      Capital (to risk- weighted assets)
                
                $
                37,768
                
                
                
                11.2
                %
                
                $
                27,097
                
                
                
                8.0
                %
                
                $
                33,872
                
                
                
                10.0
                %Tier
      I Capital (to risk- weighted assets)
                
                
                34,336
                
                
                
                10.1
                
                
                
                13,549
                
                
                
                4.0
                
                
                
                20,323
                
                
                
                6.0Tier
      I (Core) Capital (to adjusted assets)
                
                
                34,336
                
                
                
                7.3
                
                
                
                14,187
                
                
                
                3.0
                
                
                
                23,646
                
                
                
                5.0Tangible
      Capital (to adjusted assets)
                
                
                34,336
                
                
                
                7.3
                
                
                
                7,094
                
                
                
                1.5
                
                
                
                -
                
                
                
                -


17





RESULTS
OF OPERATIONS





Net Income
(Loss).  Net income
increased by $1.85 million to $894,000 for the quarter ended June 30, 2009,
compared to a net loss of $(957,000) for the quarter ended June 30,
2008.  The increase in net income was primarily due to a decrease in
other-than-temporary impairment on the investment portfolio and an increase in
net interest income, offset in part by increases in provision for loan losses
and FDIC insurance expense.





Net
income increased by $1.83 million to $1.68 million for the six months ended June
30, 2009, compared to a net loss of $(153,000) for the six months ended June 30,
2008.  The increase in net income was primarily due to a decrease in
other-than-temporary impairment on the investment portfolio and an increase in
net interest income, offset in part by increases in provision for loan losses
and FDIC insurance expense.





Net Interest
Income.  Net interest income before provision for loan losses
increased by $351,000, or 11%, to $3.61 million for the quarter ended June 30,
2009, from $3.26 million for the quarter ended June 30, 2008.  The
increase was due to an increase in net interest rate spread (i.e., the
difference in the average yield on assets and average cost of liabilities) and a
decrease in the average balance of interest-bearing liabilities, offset in part
by a decrease in the average balance of interest-earning assets.  The
interest rate spread increased to 3.07% for the quarter ended June 30, 2009,
from 2.59% for the quarter ended June 30, 2008.  The increase in
interest rate spread reflects a decrease in cost of funds, offset in part by a
decrease in the yield on interest-earning assets.





Net
interest income before provision for loan losses increased by $554,000 to $7.01
million for the six months ended June 30, 2009, from $6.45 million for the six
months ended June 30, 2008.  The increase is due to an increase in net
interest rate spread and a decrease in the average balance of interest-bearing
liabilities, offset in part by a decrease in the average balance of
interest-earning assets.  The interest rate spread increased to 2.94%
for the six months ended June 30, 2009, from 2.53% for the six months ended June
30, 2008. The increase in interest rate spread reflects a decrease in cost of
funds, offset in part by a decrease in the yield on interest-earning
assets.





Interest
Income.  Interest income decreased by $868,000, or 12%, to
$6.29 million for the quarter ended June 30, 2009, compared to $7.15 million for
the quarter ended June 30, 2008.  The decrease in interest income was
due to a decrease in the average balance of interest-earning assets and a
decrease in the yield on interest-earning assets.  The average balance
of interest-earning assets decreased $29.0 million to $435.3 million for the
quarter ended June 30, 2009, from $464.4 million for the quarter ended June 30,
2008.  The average yield on interest-earning assets decreased to 5.78%
for the quarter ended June 30, 2009, from 6.16% for the quarter ended June 30,
2008, primarily due to a decrease in market rates on first mortgage loans
secured by one-to four-family real estate, commercial real estate, and
multifamily residences and consumer loans.  The decrease in the
average balance of interest-earning assets primarily reflects decreases in the
average balances of first mortgage loans secured by one-to four-family real
estate and commercial real estate, offset in part by an increase in the average
balance of consumer loans, securities available-for-sale, and interest-bearing
cash.  The decrease in the average balance of first mortgage loans was
derived from payments, prepayments, and sales of loans offset in part by the
origination and purchases of first mortgage loans secured by one-to four-family
real estate and commercial real estate during the three months ended June 30,
2009.  The increase in the average balance of securities
available-for-sale was primarily due to the purchases of securities
available-for sale, offset in part by payments, maturities, and sale of
securities.





Interest
income decreased by $1.89 million, or 13%, to $12.75 million for the six months
ended June 30, 2009, compared to $14.64 million for the six months ended June
30, 2008.  The decrease in interest income was due to a decrease in
the average balance of interest-earning assets and a decrease in the yield on
interest-earning assets.  The average balance of interest-earning
assets decreased $29.2 million to $440.5 million for the six months ended June
30, 2009, from $469.7 million for the six months ended June 30,
2008.  The average yield on interest-earning assets decreased to 5.80%
for the six months ended June 30, 2009, from 6.24% for the six months ended June
30, 2008, primarily due to a decrease in market rates on first mortgage loans
secured by one-to four-family real estate, commercial real estate, and
multifamily residences and consumer loans.  The decrease in the
average balance of interest-earning assets primarily reflects decreases in the
average balances of first mortgage loans secured by one-to four-family real
estate and commercial real estate, offset in part by an increase in the average
balance of consumer loans, securities available-for-sale, and interest-bearing
cash.  The decrease in the average balance of first mortgage loans was
derived from payments, prepayments, and sales of loans, offset in part by the
origination and purchases of first mortgage loans secured by one-to four-family
real estate and commercial real estate during the six months ended June 30,
2009.  The increase in the average balance of securities
available-for-sale was primarily due to the purchases of securities
available-for sale, offset in part by payments, maturities, and sale of
securities.


18





Interest
Expense.  Interest expense decreased by $1.22 million, or 31%,
to $2.68 million for the quarter ended June 30, 2009, compared to $3.89 million
for the quarter ended June 30, 2008.  The decrease in interest expense
was due to a decrease in the average balance of interest-bearing liabilities and
a decrease in the cost of funds on interest-bearing liabilities. The average
balance of interest-bearing liabilities decreased $41.0 million to $396.7
million for the quarter ended June 30, 2009, from $437.7 million for the quarter
ended June 30, 2008.  The decrease in the average balance of
interest-bearing liabilities primarily reflects a decrease in borrowed funds and
certificates of deposit, offset in part by an increase in money market and
savings account balances.  The decrease in the average balance of
borrowed funds was primarily due to normal repayments of borrowings due to
maturities.  The average cost of funds was 2.70% for the quarter ended
June 30, 2009, compared to 3.57% for the quarter ended June 30,
2008.





Interest
expense decreased by $2.45 million, or 30%, to $5.74 million for the six months
ended June 30, 2009, compared to $8.19 million for the six months ended June 30,
2008.  The decrease in interest expense was due to a decrease in the
average balance of interest-bearing liabilities and a decrease in the cost of
funds on interest-bearing liabilities. The average balance of interest-bearing
liabilities decreased $38.7 million to $404.1 million for the six months ended
June 30, 2009, from $442.8 million for the six months ended June 30,
2008.  The decrease in the average balance of interest-bearing
liabilities primarily reflects a decrease in borrowed funds and certificates of
deposit, offset in part by an increase in NOW, money market and savings account
balances.  The decrease in the average balance of borrowed funds was
primarily due to normal repayments of borrowings due to
maturities.  The average cost of funds was 2.87% for the six months
ended June 30, 2009, compared to 3.71% for the six months ended June 30,
2008.





The
following table sets forth certain information relating to the Company’s average
balance sheets and reflects the average yield on assets and average cost of
liabilities for the three and six months ended June 30, 2009 and 2008,
respectively.





For the Three Months Ended June 30,2009
                  
                  
                  2008Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/Cost(Dollars
      in thousands)Assets:Interest-earning
      assets:Loans
                  
                  $
                  393,640
                  
                  
                  $
                  6,000
                  
                  
                  
                  6.10
                  %
                  
                  $
                  437,069
                  
                  
                  $
                  6,880
                  
                  
                  
                  6.30
                  %Securities
      available-for-sale
                  
                  
                  30,497
                  
                  
                  
                  282
                  
                  
                  
                  3.70
                  
                  
                  
                  22,998
                  
                  
                  
                  255
                  
                  
                  
                  4.44Interest-bearing
      cash
                  
                  
                  11,210
                  
                  
                  
                  5
                  
                  
                  
                  0.16
                  
                  
                  
                  4,301
                  
                  
                  
                  20
                  
                  
                  
                  1.84Total
      interest-earning assets
                  
                  
                  435,347
                  
                  
                  $
                  6,287
                  
                  
                  
                  5.78
                  %
                  
                  
                  464,368
                  
                  
                  $
                  7,155
                  
                  
                  
                  6.16
                  %Noninterest-earning
      assets
                  
                  
                  30,126
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  36,186Total
      assets
                  
                  $
                  465,473
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  500,554Liabilities
      and Equity:Interest-bearing
      liabilities:NOW
      and money market savings
                  
                  $
                  98,828
                  
                  
                  $
                  112
                  
                  
                  
                  0.45
                  %
                  
                  $
                  96,940
                  
                  
                  $
                  223
                  
                  
                  
                  0.92
                  %Savings
                  
                  
                  28,891
                  
                  
                  
                  12
                  
                  
                  
                  0.17
                  
                  
                  
                  26,173
                  
                  
                  
                  17
                  
                  
                  
                  0.27Certificates
      of deposit
                  
                  
                  196,968
                  
                  
                  
                  1,662
                  
                  
                  
                  3.38
                  
                  
                  
                  223,321
                  
                  
                  
                  2,504
                  
                  
                  
                  4.50Borrowed
      funds
                  
                  
                  72,041
                  
                  
                  
                  889
                  
                  
                  
                  4.95
                  
                  
                  
                  91,312
                  
                  
                  
                  1,151
                  
                  
                  
                  5.06Total
      interest-bearing liabilities
                  
                  
                  396,728
                  
                  
                  $
                  2,675
                  
                  
                  
                  2.70
                  %
                  
                  
                  437,746
                  
                  
                  $
                  3,895
                  
                  
                  
                  3.57
                  %Noninterest-bearing
      liabilities
                  
                  
                  21,924
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,291Total
      liabilities
                  
                  
                  418,652
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  459,037Equity
                  
                  
                  46,821
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  41,517Total
      liabilities and equity
                  
                  $
                  465,473
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  500,554Net
      interest income
                  
                  
                  
                  
                  
                  $
                  3,612
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,260Net
      interest rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.07
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.59
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.31
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.80
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  109.73
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  106.08
                  %


19





For the Six Months Ended June 30,2009
                  
                  
                  2008Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/Cost(Dollars
      in thousands)Assets:Interest-earning
      assets:Loans
                  
                  $
                  398,807
                  
                  
                  $
                  12,185
                  
                  
                  
                  6.13
                  %
                  
                  $
                  440,348
                  
                  
                  $
                  14,051
                  
                  
                  
                  6.38
                  %Securities
      available-for-sale
                  
                  
                  29,062
                  
                  
                  
                  556
                  
                  
                  
                  3.83
                  
                  
                  
                  20,544
                  
                  
                  
                  483
                  
                  
                  
                  4.70Interest-bearing
      cash
                  
                  
                  12,587
                  
                  
                  
                  11
                  
                  
                  
                  0.18
                  
                  
                  
                  8,815
                  
                  
                  
                  109
                  
                  
                  
                  2.48Total
      interest-earning assets
                  
                  
                  440,456
                  
                  
                  $
                  12,752
                  
                  
                  
                  5.80
                  %
                  
                  
                  469,707
                  
                  
                  $
                  14,643
                  
                  
                  
                  6.24
                  %Noninterest-earning
      assets
                  
                  
                  31,625
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  36,057Total
      assets
                  
                  $
                  472,081
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  505,764Liabilities
      and Equity:Interest-bearing
      liabilities:NOW
      and money market savings
                  
                  $
                  96,192
                  
                  
                  $
                  249
                  
                  
                  
                  0.52
                  %
                  
                  $
                  94,220
                  
                  
                  $
                  497
                  
                  
                  
                  1.06
                  %Passbook
      savings
                  
                  
                  27,968
                  
                  
                  
                  28
                  
                  
                  
                  0.20
                  
                  
                  
                  25,539
                  
                  
                  
                  39
                  
                  
                  
                  0.31Certificates
      of deposit
                  
                  
                  203,391
                  
                  
                  
                  3,579
                  
                  
                  
                  3.55
                  
                  
                  
                  229,725
                  
                  
                  
                  5,299
                  
                  
                  
                  4.63Borrowed
      funds
                  
                  
                  76,546
                  
                  
                  
                  1,887
                  
                  
                  
                  4.97
                  
                  
                  
                  93,322
                  
                  
                  
                  2,353
                  
                  
                  
                  5.06Total
      interest-bearing liabilities
                  
                  
                  404,097
                  
                  
                  $
                  5,743
                  
                  
                  
                  2.87
                  %
                  
                  
                  442,806
                  
                  
                  $
                  8,188
                  
                  
                  
                  3.71
                  %Noninterest-bearing
      liabilities
                  
                  
                  22,070
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,558Total
      liabilities
                  
                  
                  426,167
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  464,364Equity
                  
                  
                  45,914
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  41,400Total
      liabilities and equity
                  
                  $
                  472,081
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  505,764Net
      interest income
                  
                  
                  
                  
                  
                  $
                  7,009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  6,455Net
      interest rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.94
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.53
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.18
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.74
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  109.00
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  106.08
                  %





Provision for
Loan Losses.The Company’s provision
for loan losses was $610,000 and $160,000 for the quarters ended June 30, 2009
and 2008, respectively, representing a 281% increase.  The increase in
provision for loan losses for the quarter ended June 30, 2009 compared to the
same period in 2008 was higher as a result of continuing recessionary conditions
negatively impacting the construction and real estate development, commercial
real estate, and consumer sectors. The Company establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, industry standards, past due loans,
economic conditions, the volume and type of loans in the Company’s portfolio,
and other factors related to the collectibility of the Company’s loan
portfolio.  The Company’s total loan portfolio decreased $31.0
million, or 7.2% from June 30, 2008 to June 30, 2009.  This decrease
primarily consisted of decreases in loans secured by one-to four-family
residential real estate of $21.3 and commercial real estate of
$10.6.  Net charge-offs were $451,000 for the six months ended June
30, 2009, compared to $244,000 for the six months ended June 30, 2008.





The
allowance for loan loss was $5.7 million at June 30, 2009, compared to $5.4
million at December 31, 2008.  The allowance for loan losses at June
30, 2009 was 1.43% of loans and 52.84% of nonperforming loans, compared to 1.32%
of loans and 134.34% of nonperforming loans at December 31, 2008, and 1.38% of
loans and 56.58% of nonperforming loans at March 31, 2009. Additions to the
allowance for loan loss were due to a deterioration of economic conditions,
downgrades in internal risk ratings, reductions in appraised values, and higher
levels of charge-offs. Nonperforming loans were $10.78 million or 2.65% of total
loans at June 30, 2009, compared to $8.02 million or 2.00% of total loans at
December 31, 2008, and $9.59 million or 2.43% of total loans at March 31, 2009.
Foreclosed real estate decreased to $1.29 million at June 30, 2009 from $2.77
million at June 30, 2008.


20





The
following table summarizes the activity in the allowance for loan losses for the
three and six months ended June 30, 2009 and 2008, as well as common ratios
related to the allowance for loan losses.





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2009
                
                
                2008
                
                
                Change
                
                
                2009
                
                
                2008
                
                
                ChangeBalance
      at beginning of period
                
                $
                5,425
                
                
                $
                3,512
                
                
                $
                1,913
                
                
                $
                5,379
                
                
                $
                3,487
                
                
                $
                1,892Charge-offs
                
                
                (342
                )
                
                
                (222
                )
                
                
                (120
                )
                
                
                (459
                )
                
                
                (257
                )
                
                
                (202
                )Recoveries
                
                
                5
                
                
                
                13
                
                
                
                (8
                )
                
                
                8
                
                
                
                13
                
                
                
                (5
                )Net
      charge-offs
                
                
                (337
                )
                
                
                (209
                )
                
                
                (128
                )
                
                
                (451
                )
                
                
                (244
                )
                
                
                (207
                )Provision
      charged to operations
                
                
                610
                
                
                
                160
                
                
                
                450
                
                
                
                770
                
                
                
                220
                
                
                
                550Balance
      at end of period
                
                $
                5,698
                
                
                $
                3,463
                
                
                $
                2,235
                
                
                $
                5,698
                
                
                $
                3,463
                
                
                $
                2,235Average
      loans outstanding
                
                $
                393,640
                
                
                $
                437,069
                
                
                
                
                
                
                $
                398,807
                
                
                $
                440,348Ratio
      of net charge-offs during the period to average loans
      outstanding
                
                
                0.09
                %
                
                
                0.05
                %
                
                
                
                
                
                
                0.11
                %
                
                
                0.06
                %Ratio
      of allowance for loan losses to average loans outstanding
                
                
                1.45
                %
                
                
                0.79
                %
                
                
                
                
                
                
                1.43
                %
                
                
                0.79
                %





Management
believes that the allowance for loan losses was adequate as of June 30,
2009.  While management estimates loan losses using the best available
information, such as independent appraisals for significant collateral
properties, no assurance can be made that future adjustments to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans, and other factors, both within and outside of
management’s control.





Noninterest
Income.  Total
noninterest income increased by $400,000, or 21%, to $2.3 million for the
quarter ended June 30, 2009, from $1.9 million for the quarter ended June 30,
2008.  The increase in noninterest income was primarily due to
increases in mortgage banking income, loan prepayment fees and other income,
offset in part by decreases in fees and service charges.  Mortgage
banking income increased $182,000 for the quarter ended June 30, 2009 compared
to the same period of 2008 due to an increase in loans originated for the
secondary market.  During the quarter ended June 30, 2009, the Company
recorded $200,000 in loan prepayments, compared to none for the quarter ended
June 30, 2008.  Other income, which primarily includes annuity,
securities, insurance sales, and other real estate owned net earnings, increased
$40,000 for the quarter ended June 30, 2009 compared to the same period of 2008
primarily due to an increase in income from the sale of annuities and securities
and a decrease in other real estate owned expenses.  Fees and service
charges decreased $33,000 for the quarter ended June 30, 2009 compared to the
same period of 2008 primarily due to a decrease in fees associated with checking
accounts, including overdraft fees.





Total
noninterest income increased by $500,000, or 14%, to $4.1 million for the six
months ended June 30, 2009, compared to $3.6 million for the six months ended
June 30, 2008.  The increase in noninterest income was primarily due
to increases in mortgage banking income, loan prepayment fees and other income,
offset in part by decreases in fees and service charges, and abstract
fees.  Mortgage banking income increased $336,000 for the six months
ended June 30, 2009 compared to the same period of 2008 due to an increase in
loans originated for the secondary market.  During the six months
ended June 30, 2009, the Company recorded $212,000 in loan prepayments, compared
to $5,000 for the six months ended June 30, 2008.  Other income, which
primarily includes annuity, securities, insurance sales, and other real estate
owned net earnings, increased $147,000 for the six months ended June 30, 2009
compared to the same period of 2008 primarily due to an increase in income from
the sale of annuities and a decrease in other real estate owned
expenses.  Fees and service charges decreased $104,000 for the six
months ended June 30, 2009 compared to the same period of 2008 primarily due to
a decrease in fees associated with checking accounts, including overdraft
fees.  Abstract fees decreased $50,000 for the six months ended June
30, 2009 compared to the same period of 2008.





Securities
Losses.Other-than-temporary impairment on investments decreased to $23,000 for the
quarter ended June 30, 2009, compared to $1.96 million for the quarter ended
June 30, 2008.  Loss on sale of investments increased by $10,000 for
the quarter ended June 30, 2009 compared to the same period of 2008 due to the
partial sale of a mortgage bond mutual fund investment.  Other-than-temporary impairment on
investments decreased to $23,000 for the six months ended June 30, 2009,
compared to $1.96 million for the six months ended June 30,
2008.  Loss on sale of investments increased by $20,000 for the six
months ended June 30, 2009 compared to the same period of 2008 due to the
partial sales of a mortgage bond mutual fund investment.


21





Noninterest
Expense.  Total
noninterest expense increased by $273,000, or 7.5%, to $3.91 million for the
quarter ended June 30, 2009, from $3.64 million for the quarter ended June 30,
2008.  The increase in noninterest expense was primarily due to
increases in FDIC insurance expense and premises and equipment, offset in part
by decreases in salaries and employee benefits, data processing and other
expenses. FDIC insurance expense increased $352,000 for the quarter ended June
30, 2009 compared to the same period of 2008 due to a $210,000 special
assessment assessed by the FDIC on June 30, 2009.  The increase in
premises and equipment of $28,000 was primarily due to increases in information
technology enhancements and property taxes. Salaries and employee benefits
expenses decreased as a result of a decrease in the number of full time
equivalent employees, and data processing expenses decreased as a result of
renewing a core processing contract at reduced rates.  Other expenses
decreased $47,000 for the quarter ended June 30, 2009 compared to the same
period of 2008 primarily due to a decrease in impairment on other real estate
owned.  The Company’s efficiency ratio for the quarter ended June 30,
2009 and 2008 was 66.22% and 70.39%, respectively.  The Company’s
ratio of noninterest expense to average assets for the quarters ended June 30,
2009 and 2008 was 3.36% and 2.90%, respectively.





Total
noninterest expense increased by $476,000, or 6.5%, to $7.85 million for the six
months ended June 30, 2009, from $7.38 million for the six months ended June 30,
2008.  The increase in noninterest expense was primarily due to
increases in FDIC insurance expense, premises and equipment and other expenses,
offset in part by decreases in salaries and employee benefits and data
processing. FDIC insurance expense increased $440,000 for the six months ended
June 30, 2009 compared to the same period of 2008 due to a special assessment
assessed by the FDIC.  The increase in premises and equipment of
$73,000 was primarily due to increases in information technology enhancements
and property taxes. Other expenses increased $164,000 for the six months ended
June 30, 2009 compared to the same period of 2008 primarily due to an increase
in legal fees, audit and tax fees and other professional fees, offset in part by
a decrease in impairment on other real estate owned.  Salaries and
employee benefits expenses decreased as a result of a decrease in the number of
full time equivalent employees, and data processing expenses decreased as a
result of renewing a core processing contract at reduced rates.  The
Company’s efficiency ratio for the six months ended June 30, 2009 and 2008 was
70.42% and 73.33%, respectively.  The Company’s ratio of noninterest
expense to average assets for the six months ended June 30, 2009 and 2008 was
3.33% and 2.92%, respectively.





Income
Taxes.Provision for
income taxes increased by $90,000, or 25% to $456,000 for the quarter ended June
30, 2009, compared to $366,000 for the quarter ended June 30,
2008.  The increase in income taxes was primarily due to the increase
in the income before income taxes and an increase in the Company’s effective tax
rate due to a decrease in tax exempt earnings primarily caused by the
elimination of dividends on Fannie Mae and Freddie Mac preferred
stock.  During the second quarter 2008, the Company recorded
other-than-temporary impairments with minimal tax benefit.





Provision
for income taxes increased by $153,000, or 23%, to $810,000 for the six months
ended June 30, 2009, compared to $658,000 for the six months ended June 30,
2008.  The increase in income taxes was primarily due to the increase
in the income before income taxes and an increase in the Company’s effective tax
rate due to a decrease in tax exempt earnings primarily caused by the
elimination of dividends on Fannie Mae and Freddie Mac preferred
stock.


22




LIQUIDITY
AND CAPITAL RESOURCES





The
Company’s primary sources of funds are deposits, amortization and prepayment of
loans, borrowings such as FHLB advances, brokered certificates of deposit,
maturities of securities and other investments, and earnings and funds provided
from operations.  During the first six months of 2009 and 2008,
principal payments, prepayments, and proceeds from the sale of loans totaled
$117.8 million and $97.6 million, respectively.  The net decrease in
deposits during the first six months of 2009 and 2008 totaled $18.9 million and
$9.5 million, respectively.  The proceeds from borrowed funds during
the six months ended June 30, 2009 and 2008 totaled $9.5 million and $8.5
million.  During the first six months of 2009 and 2008, the proceeds
from the maturities, calls and sales of securities totaled $4.1 million and $1.4
million, respectively.  Cash provided from operating activities during
the first six months of 2009 and 2008 totaled $3.4 million and $3.9 million,
respectively.  The Company’s primary use of funds is to originate and
purchase loans, purchase securities available-for-sale, repay borrowed funds and
other financing activities.  During the first six months of 2009 and
2008, the Company’s gross purchases and origination of loans totaled $104.1
million and $77.6 million, respectively.  The purchase of securities
available-for-sale for the six months ended June 30, 2009 totaled $8.1 million
compared to $10.0 million for the six months ended June 30, 2008. The repayment
of borrowed funds during the first six months of 2009 and 2008 totaled $15.0
million and $14.5 million, respectively.  OTS regulations require the
Company to maintain sufficient liquidity to ensure its safe and sound
operation.  For additional information about cash flows from the
Company’s operating, financing and investing activities, see the Consolidated
Condensed Statements of Cash Flows in the Company’s financial statements
included in Part I, Item 1 of this report.





On
January 9, 2009, the Company completed the issuance of $10.2 million of our
Series A Preferred Stock and the Warrant under the TARP-CPP. Although the Bank
would have remained “well capitalized” without these funds, this new equity
investment further increases the capacity to support economic activity and
growth in each of the communities served by the Bank through responsible
lending.





On
January 5, 2009, the Company paid a quarterly cash dividend of $0.01 per share
of common stock to its shareholders as of the close of business on December 15,
2008.  This dividend payment totaled $13,000.  On February
15, 2009, the Company paid an aggregate cash dividend of $51,000 on the Series A
Preferred Stock.  On February 27, 2009, the Company declared a
quarterly cash dividend of $0.01 per share, payable on April 3, 2009 to
shareholders of record as of the close of business on March 13,
2009.  This dividend payment totaled $13,000.  On May 15,
2009, the Company paid an aggregate cash dividend of $127,500 on the Series A
Preferred Stock.  On May 29, 2009, the Company declared a quarterly
cash dividend of $0.01 per share, payable on July 3, 2009 to shareholders of
record as of the close of business on June 12, 2009.  This dividend
payment totaled $13,000.





During
the second quarter of 2009, macro-economic conditions and the ongoing recession
continued to impact liquidity and credit quality across the financial
markets.  While the recession has impacted the local economies in
which the Company operates and purchases out-of-state real estate loans, our
liquidity position and capital resources remain strong and the Company
anticipates that it will have sufficient funds to meet its current funding
commitments.




MODIFICATION
TO THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008




On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
went into effect and amended certain provisions of EESA, including replacing
Section 111 of EESA in its entirety.  The new Section 111 allows a
participant in the TARP-CPP, such as the Company, to repay any assistance
previously received pursuant to the TARP-CPP without regard to the source of
replacement funds or any waiting period subject to consultation with the
appropriate Federal banking agency.  In addition, the new Section 111
set forth in ARRA includes standards and requirements regarding executive
compensation and corporate governance.  On June 10, 2009, Treasury
issued an interim final rule implementing and providing guidance on the
executive compensation and corporate governance provisions of EESA, as amended
by ARRA. The regulations were published in the Federal Register on June 15,
2009.  In addition, on July 1, 2009, the SEC published a proposed
amendment to the proxy rules which would implement the ARRA’s requirement that
TARP-CPP participants provide a separate shareholder vote to approve the
compensation of the company’s executives.  Together, the Treasury’s
interim final rule and the SEC’s proposed rule do (or would, in the case of the
SEC’s proposed rule) impose:




·
            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;


·
            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;


23





·
            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;


·
            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;


·
            A
      prohibition on any compensation plan that would encourage manipulation of
      the Company’s reported earnings for the purposes of enhancing employee
      compensation;


·
            A
      requirement for the Company’s Chief Executive Officer and Chief Financial
      Officer to provide certain certifications regarding the
      foregoing;


·
            Certain
      requirements with respect to the Company’s Personnel and Compensation
      Committee;


·
            A
      requirement to adopt a company-wide policy regarding excessive or luxury
      expenditures;


·
            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


·
            Authorizing
      the Secretary of the 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.




In light
of the Treasury’s interim final rule and the SEC’s proposed rule, the
Company intends to evaluate and amend any employment agreements, benefit
plans and other arrangements, and take any other action necessary to ensure
compliance with the applicable requirements.





OFF-BALANCE
SHEET ARRANGEMENTS





The
Company is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers.  These financial instruments consist primarily of
commitments to extend credit.  Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial condition.  The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in a particular class of financial instruments.





The
Company uses the same credit policies in making commitments and conditional
obligations as it does for instruments reflected in its statement of financial
condition. The Company requires collateral or other security, to support
financial instruments with credit risks.





No
material changes in the Company’s off-statement of financial condition
arrangements occurred during the six months ended June 30, 2009.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





In
management’s opinion, there has not been a material change in the Company’s
market risk profile during the six months ended June 30, 2009.  Please
see the Company’s 2008 Annual Report on Form 10-K for a more detailed discussion
of the Company’s interest rate sensitivity analysis.





Item
4T.  Controls and Procedures





Management,
including the Company’s President and Chief Executive Officer and the
Company’s Chief Financial Officer and Treasurer, has evaluated 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 the end of the period covered by this
report.  Based upon that evaluation, the Company’s President and
Chief Executive Officer and the Chief Financial Officer and Treasurer concluded
that the disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is (i) recorded, processed, summarized and
reported as and when required and (ii) accumulated and communicated to the
Company’s management, including the Company’s President and Chief Executive
Officer and Chief Financial Officer and Treasurer, as appropriate to allow
timely decisions regarding required disclosure.


24





There
have been no changes 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 have materially affected, or that are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.





PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





Except
for the proceedings described in Note 10 to the Notes to Consolidated Condensed
Financial Statements which is incorporated herein by reference, the Company is
not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business.  While no
assurance can be given regarding the outcome of these matters, based on
information currently available, we believe that the resolution of these matters
will not have a material adverse effect on our financial position or results of
our future operations. However, because of the nature and inherent uncertainties
of litigation, should the outcome of these actions be unfavorable, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.




Item
4.  Submission of Matters to a Vote of Security Holders





The
Company held its 2009 Annual Meeting on May 5, 2009.  All proposals
submitted to the stockholders at the meeting were approved.  The
details and results of the voting on such proposals was included in the
Company’s Form 10-Q for the period ended March 31, 2009 which was filed with the
SEC on May 15, 2009.





Item
6.  Exhibits





Exhibit No.
            
            Description
            
            Reference No.3.1
            
            Articles
      of Incorporation of North Central Bancshares, Inc.
            
            *3.2
            
            Bylaws
      of North Central Bancshares, Inc., as amended
            
            (1)3.3
            
            Articles
      of Amendment to the Articles of Incorporation establishing Series A
      Preferred Stock
            
            (2)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 Certificate of Chief Financial Officer
            
            *





*
            Filed
      herewith





(1)
            Incorporated
      herein by reference to the Annual Report on Form 10-K filed with the SEC
      on March 29, 2004.





(2)
            Incorporated
      herein by reference to the Current Report on Form 8-K filed with the SEC
      on January 7, 2009.


25


SIGNATURES





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





NORTH
      CENTRAL BANCSHARES, INC.Date:
      August 12, 2009
                BY:
                /s/ David M. BradleyDavid
      M. Bradley, Chairman, President & CEODate:
      August 12, 2009
                BY:
                /s/ Kyle C. CookKyle
      C. Cook, Chief Financial Officer and
Treasurer


26