UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended  September 30,
2009





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




For the
transition period from __________________ to __________________.




Commission
File Number:  0-27672





NORTH CENTRAL BANCSHARES, INC.


(Exact
name of registrant as specified in its charter)




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


(Registrant’s
telephone number, including area code)




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 November 11, 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 September 30, 2009 and
      December 31, 2008
                1Consolidated
      Condensed Statements of Income for the Three Months and Nine Months Ended
      September 30, 2009 and 2008
                2Consolidated
      Condensed Statements of Stockholders’ Equity for the Nine Months Ended
      September 30, 2009 and 2008
                3Consolidated
      Condensed Statements of Cash Flows for the Nine Months Ended September 30,
      2009 and 2008
                4Notes
      to Consolidated Condensed Financial Statements
                6Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                15Item
      3.  Quantitative and Qualitative Disclosure About Market
      Risk
                26Item
      4T.  Controls and Procedures
                26Part
      II. Other InformationItem
      1. Legal Proceedings
                26Item
      1A. Risk Factors
                27Item
      6. Exhibits
                28Signatures
                29





PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements (Unaudited)


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
 CONSOLIDATED
CONDENSED STATEMENTS OF FINANCIAL CONDITION
 (Unaudited)


September 30,
                                                                
                                                                
                                                                December 31,2009
                                                                
                                                                
                                                                2008ASSETSCash
      and due from banks:Interest-bearing
                                                                
                                                                $
                                                                2,548,210
                                                                
                                                                
                                                                $
                                                                6,563,494Noninterest-bearing
                                                                
                                                                
                                                                9,217,624
                                                                
                                                                
                                                                
                                                                9,718,150Total
      cash and cash equivalents
                                                                
                                                                
                                                                11,765,834
                                                                
                                                                
                                                                
                                                                16,281,644Securities
      available-for-sale
                                                                
                                                                
                                                                25,142,249
                                                                
                                                                
                                                                
                                                                22,837,968Federal
      Home Loan Bank stock, at cost
                                                                
                                                                
                                                                4,739,000
                                                                
                                                                
                                                                
                                                                4,692,400Loans
      receivable, (net of allowance for loan loss of $5,956,743 and $5,379,155
      respectively)
                                                                
                                                                
                                                                383,866,542
                                                                
                                                                
                                                                
                                                                400,786,505Loans
      held for sale
                                                                
                                                                
                                                                745,458
                                                                
                                                                
                                                                
                                                                730,466Accrued
      interest receivable
                                                                
                                                                
                                                                1,899,607
                                                                
                                                                
                                                                
                                                                2,096,784Foreclosed
      real estate
                                                                
                                                                
                                                                1,422,770
                                                                
                                                                
                                                                
                                                                1,182,917Premises
      and equipment, net
                                                                
                                                                
                                                                11,972,207
                                                                
                                                                
                                                                
                                                                12,113,092Rental
      real estate
                                                                
                                                                
                                                                2,273,997
                                                                
                                                                
                                                                
                                                                2,358,688Title
      plant
                                                                
                                                                
                                                                671,704
                                                                
                                                                
                                                                
                                                                671,704Deferred
      taxes
                                                                
                                                                
                                                                1,404,799
                                                                
                                                                
                                                                
                                                                3,003,565Bank-owned
      life insurance
                                                                
                                                                
                                                                5,481,738
                                                                
                                                                
                                                                
                                                                5,293,871Prepaid
      expenses and other assets
                                                                
                                                                
                                                                1,869,945
                                                                
                                                                
                                                                
                                                                1,248,232Total
      assets
                                                                
                                                                $
                                                                453,255,850
                                                                
                                                                
                                                                $
                                                                473,297,836LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
                                                                
                                                                $
                                                                328,751,602
                                                                
                                                                
                                                                $
                                                                350,169,925Borrowed
      funds
                                                                
                                                                
                                                                72,825,739
                                                                
                                                                
                                                                
                                                                82,348,915Advances
      from borrowers for taxes and insurance
                                                                
                                                                
                                                                861,619
                                                                
                                                                
                                                                
                                                                1,923,758Dividend
      payable
                                                                
                                                                
                                                                13,464
                                                                
                                                                
                                                                
                                                                13,434Accrued
      expenses and other liabilities
                                                                
                                                                
                                                                2,702,506
                                                                
                                                                
                                                                
                                                                3,629,661Total
      liabilities
                                                                
                                                                
                                                                405,154,930
                                                                
                                                                
                                                                
                                                                438,085,693STOCKHOLDERS'
      EQUITYPreferred
      stock ($.01 par value, authorized 3,000,000shares;
      at September 30, 2009 10,200 sharesissued
      and outstanding; at December 31, 2008none
      issued and outstanding)
                                                                
                                                                
                                                                10,114,032
                                                                
                                                                
                                                                
                                                                -Common
      stock ($.01 par value, authorized 15,500,000shares;
      at September 30, 2009 1,346,448 sharesissued
      and outstanding; at December 31, 2008,1,343,448
      shares issued and outstanding)
                                                                
                                                                
                                                                13,443
                                                                
                                                                
                                                                
                                                                13,421Additional
      paid-in capital
                                                                
                                                                
                                                                17,961,497
                                                                
                                                                
                                                                
                                                                17,819,096Retained
      earnings, substantially restricted
                                                                
                                                                
                                                                19,558,953
                                                                
                                                                
                                                                
                                                                17,240,779Accumulated
      other comprehensive gain
                                                                
                                                                
                                                                452,995
                                                                
                                                                
                                                                
                                                                138,847Total
      stockholders' equity
                                                                
                                                                
                                                                48,100,920
                                                                
                                                                
                                                                
                                                                35,212,143Total
      liabilities and stockholders' equity
                                                                
                                                                $
                                                                453,255,850
                                                                
                                                                
                                                                $
                                                                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
                                    
                                    
                                    Nine Months EndedSeptember 30,
                                    
                                    
                                    September 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Interest
      income:Loans
      receivable
                                    
                                    $
                                    5,878,253
                                    
                                    
                                    $
                                    6,698,254
                                    
                                    
                                    $
                                    18,063,597
                                    
                                    
                                    $
                                    20,749,524Securities
      and cash deposits
                                    
                                    
                                    279,356
                                    
                                    
                                    
                                    267,728
                                    
                                    
                                    
                                    846,533
                                    
                                    
                                    
                                    859,6256,157,609
                                    
                                    
                                    
                                    6,965,982
                                    
                                    
                                    
                                    18,910,130
                                    
                                    
                                    
                                    21,609,149Interest
      expense:Deposits
                                    
                                    
                                    1,547,248
                                    
                                    
                                    
                                    2,543,881
                                    
                                    
                                    
                                    5,403,044
                                    
                                    
                                    
                                    8,379,181Borrowed
      funds
                                    
                                    
                                    858,484
                                    
                                    
                                    
                                    1,131,914
                                    
                                    
                                    
                                    2,745,765
                                    
                                    
                                    
                                    3,484,8312,405,732
                                    
                                    
                                    
                                    3,675,795
                                    
                                    
                                    
                                    8,148,809
                                    
                                    
                                    
                                    11,864,012Net
      interest income
                                    
                                    
                                    3,751,877
                                    
                                    
                                    
                                    3,290,187
                                    
                                    
                                    
                                    10,761,321
                                    
                                    
                                    
                                    9,745,137Provision
      for loan losses
                                    
                                    
                                    450,000
                                    
                                    
                                    
                                    60,000
                                    
                                    
                                    
                                    1,220,000
                                    
                                    
                                    
                                    280,000Net
      interest income after provision for loan losses
                                    
                                    
                                    3,301,877
                                    
                                    
                                    
                                    3,230,187
                                    
                                    
                                    
                                    9,541,321
                                    
                                    
                                    
                                    9,465,137Noninterest
      income:Fees
      and service charges
                                    
                                    
                                    1,148,759
                                    
                                    
                                    
                                    1,234,639
                                    
                                    
                                    
                                    3,168,446
                                    
                                    
                                    
                                    3,358,298Abstract
      fees
                                    
                                    
                                    223,456
                                    
                                    
                                    
                                    238,737
                                    
                                    
                                    
                                    722,947
                                    
                                    
                                    
                                    787,886Mortgage
      banking income
                                    
                                    
                                    177,131
                                    
                                    
                                    
                                    111,167
                                    
                                    
                                    
                                    823,868
                                    
                                    
                                    
                                    422,216Loan
      prepayment fees
                                    
                                    
                                    30,715
                                    
                                    
                                    
                                    900
                                    
                                    
                                    
                                    242,881
                                    
                                    
                                    
                                    5,531Other
      income
                                    
                                    
                                    353,149
                                    
                                    
                                    
                                    336,294
                                    
                                    
                                    
                                    1,119,894
                                    
                                    
                                    
                                    955,697Total
      noninterest income
                                    
                                    
                                    1,933,210
                                    
                                    
                                    
                                    1,921,737
                                    
                                    
                                    
                                    6,078,036
                                    
                                    
                                    
                                    5,529,628Investment
      securities gains (losses), net:Total
      other-than-temporary impairment losses
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (3,850,900
                                    )
                                    
                                    
                                    (23,343
                                    )
                                    
                                    
                                    (5,810,811
                                    )Portion
      of loss recognized in other comprehensive income (loss) before
      taxes
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Net
      impairment losses recognized in earnings
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (3,850,900
                                    )
                                    
                                    
                                    (23,343
                                    )
                                    
                                    
                                    (5,810,811
                                    )Realized
      securities gains (losses), net
                                    
                                    
                                    5,540
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (14,404
                                    )
                                    
                                    
                                    -Total
      securities gains (losses), net
                                    
                                    
                                    5,540
                                    
                                    
                                    
                                    (3,850,900
                                    )
                                    
                                    
                                    (37,747
                                    )
                                    
                                    
                                    (5,810,811
                                    )Noninterest
      expense:Compensation
      and employee benefits
                                    
                                    
                                    1,856,575
                                    
                                    
                                    
                                    1,766,045
                                    
                                    
                                    
                                    5,568,730
                                    
                                    
                                    
                                    5,600,966Premises
      and equipment
                                    
                                    
                                    464,459
                                    
                                    
                                    
                                    423,783
                                    
                                    
                                    
                                    1,393,290
                                    
                                    
                                    
                                    1,279,964Data
      processing
                                    
                                    
                                    185,959
                                    
                                    
                                    
                                    229,002
                                    
                                    
                                    
                                    594,371
                                    
                                    
                                    
                                    715,286FDIC
      insurance expense
                                    
                                    
                                    143,544
                                    
                                    
                                    
                                    72,940
                                    
                                    
                                    
                                    615,948
                                    
                                    
                                    
                                    105,175Other
      expenses
                                    
                                    
                                    1,075,213
                                    
                                    
                                    
                                    1,064,178
                                    
                                    
                                    
                                    3,407,934
                                    
                                    
                                    
                                    3,233,287Total
      noninterest expense
                                    
                                    
                                    3,725,750
                                    
                                    
                                    
                                    3,555,948
                                    
                                    
                                    
                                    11,580,273
                                    
                                    
                                    
                                    10,934,678Income
      (loss) before income taxes
                                    
                                    
                                    1,514,877
                                    
                                    
                                    
                                    (2,254,924
                                    )
                                    
                                    
                                    4,001,337
                                    
                                    
                                    
                                    (1,750,724
                                    )Provision
      for income taxes
                                    
                                    
                                    513,100
                                    
                                    
                                    
                                    495,000
                                    
                                    
                                    
                                    1,323,500
                                    
                                    
                                    
                                    1,152,500Net
      income (loss)
                                    
                                    $
                                    1,001,777
                                    
                                    
                                    $
                                    (2,749,924
                                    )
                                    
                                    $
                                    2,677,837
                                    
                                    
                                    $
                                    (2,903,224
                                    )Preferred
      stock dividends and accretion of discount
                                    
                                    $
                                    131,991
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    382,875
                                    
                                    
                                    $
                                    -Net
      income (loss) available to common stockholders
                                    
                                    $
                                    869,786
                                    
                                    
                                    $
                                    (2,749,924
                                    )
                                    
                                    $
                                    2,294,962
                                    
                                    
                                    $
                                    (2,903,224
                                    )Basic
      earnings (loss) per share
                                    
                                    $
                                    0.65
                                    
                                    
                                    $
                                    (2.05
                                    )
                                    
                                    $
                                    1.71
                                    
                                    
                                    $
                                    (2.17
                                    )Dilluted
      earnings (loss) per share
                                    
                                    $
                                    0.65
                                    
                                    
                                    $
                                    (2.05
                                    )
                                    
                                    $
                                    1.71
                                    
                                    
                                    $
                                    (2.17
                                    )Dividends
      declared per common share
                                    
                                    $
                                    0.01
                                    
                                    
                                    $
                                    0.01
                                    
                                    
                                    $
                                    0.03
                                    
                                    
                                    $
                                    0.71




See Notes
to Consolidated Condensed Financial Statements.


2


NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
 Nine
Months Ended September 30, 2008 and 2009
 (Unaudited)
  AccumulatedAdditional
                                    
                                    
                                    
                                    
                                    
                                    Other
                                    
                                    
                                    TotalComprehensive
                                    
                                    
                                    Preferred
                                    
                                    
                                    Common
                                    
                                    
                                    Paid-in
                                    
                                    
                                    Retained
                                    
                                    
                                    Comprehensive
                                    
                                    
                                    Stockholders'Income (Loss)
                                    
                                    
                                    Stock
                                    
                                    
                                    Stock
                                    
                                    
                                    Capital
                                    
                                    
                                    Earnings
                                    
                                    
                                    Income (Loss)
                                    
                                    
                                    EquityBalance,
      January 1, 2008
                                    
                                    
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    13,392
                                    
                                    
                                    $
                                    17,686,444
                                    
                                    
                                    $
                                    24,483,022
                                    
                                    
                                    $
                                    (1,206,148
                                    )
                                    
                                    $
                                    40,976,710Comprehensive
      income (loss):Net
      (loss)
                                    
                                    $
                                    (2,903,224
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,903,224
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,903,224
                                    )Other
      comprehensive income, net ofreclassification
      adjustment and tax (Note 7)
                                    
                                    
                                    1,072,420
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,072,420
                                    
                                    
                                    
                                    1,072,420Total
      comprehensive (loss)
                                    
                                    $
                                    (1,830,804
                                    )Dividends
      on common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (952,798
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (952,798
                                    )Employee
      stock-based compensation
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    20
                                    
                                    
                                    
                                    96,792
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    96,812Issuance
      of 200 shares of common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    4,538
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,540Balance,
      September 30, 2008
                                    
                                    
                                    
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    13,414
                                    
                                    
                                    $
                                    17,787,774
                                    
                                    
                                    $
                                    20,627,000
                                    
                                    
                                    $
                                    (133,728
                                    )
                                    
                                    $
                                    38,294,460Balance,
      January 1, 2009
                                    
                                    
                                    
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    13,421
                                    
                                    
                                    $
                                    17,819,096
                                    
                                    
                                    $
                                    17,240,779
                                    
                                    
                                    $
                                    138,847
                                    
                                    
                                    $
                                    35,212,143Comprehensive
      income:Net
      income
                                    
                                    $
                                    2,677,837
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,677,837
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,677,837Other
      comprehensive income, net ofreclassification
      adjustment and tax (Note 7)
                                    
                                    
                                    314,148
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    314,148
                                    
                                    
                                    
                                    314,148Total
      comprehensive income
                                    
                                    $
                                    2,991,985Dividends
      on preferred stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (306,000
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (306,000
                                    )Dividends
      on common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (40,363
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (40,363
                                    )Employee
      stock-based compensation
                                    
                                    
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    22
                                    
                                    
                                    
                                    43,133
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    43,155Issuance
      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
                                    
                                    
                                    
                                    
                                    
                                    
                                    13,300
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (13,300
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    -Balance,
      September 30, 2009
                                    
                                    
                                    
                                    
                                    
                                    $
                                    10,114,032
                                    
                                    
                                    $
                                    13,443
                                    
                                    
                                    $
                                    17,961,497
                                    
                                    
                                    $
                                    19,558,953
                                    
                                    
                                    $
                                    452,995
                                    
                                    
                                    $
                                    48,100,920
 3
 NORTH
CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)




Nine
      Months EndedSeptember
      30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  2,677,837
                  
                  
                  $
                  (2,903,224
                  )Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
                  
                  
                  1,220,000
                  
                  
                  
                  280,000Depreciation
                  
                  
                  675,338
                  
                  
                  
                  649,141Amortization
      and accretion
                  
                  
                  383,596
                  
                  
                  
                  52,966Deferred
      taxes
                  
                  
                  1,420,824
                  
                  
                  
                  48,551Stock-based
      compensation
                  
                  
                  43,155
                  
                  
                  
                  85,115Excess
      tax benefit (expense) related to stock-based compensation
                  
                  
                  18,550
                  
                  
                  
                  (2,268
                  )(Gain)
      on sale of foreclosed real estate and loans, net
                  
                  
                  (823,694
                  )
                  
                  
                  (528,586
                  )Provision
      for impairment of investments
                  
                  
                  23,343
                  
                  
                  
                  5,810,811Write-down
      of other real estate owned
                  
                  
                  118,963
                  
                  
                  
                  359,696Loss
      on sale or disposal of equipment and other assets, net
                  
                  
                  62
                  
                  
                  
                  6,299Loss
      on sale of investments
                  
                  
                  14,404
                  
                  
                  
                  -Proceeds
      from sales of loans held-for-sale
                  
                  
                  61,659,026
                  
                  
                  
                  34,533,178Originations
      of loans held-for-sale
                  
                  
                  (60,850,150
                  )
                  
                  
                  (33,105,072
                  )Change
      in assets and liabilities:Accrued
      interest receivable
                  
                  
                  197,177
                  
                  
                  
                  201,175Prepaid
      expenses and other assets
                  
                  
                  (706,638
                  )
                  
                  
                  (251,235
                  )Accrued
      expenses and other liabilities
                  
                  
                  (920,599
                  )
                  
                  
                  (134,659
                  )Net
      cash provided by operating activities
                  
                  
                  5,151,194
                  
                  
                  
                  5,101,888CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      change in loans
                  
                  
                  27,996,477
                  
                  
                  
                  50,178,568Purchase
      of loans
                  
                  
                  (14,428,954
                  )
                  
                  
                  (18,473,872
                  )Purchase
      of securities available-for-sale
                  
                  
                  (8,032,172
                  )
                  
                  
                  (10,800,499
                  )Proceeds
      from sale of securities available-for-sale
                  
                  
                  832,000
                  
                  
                  
                  9,850Proceeds
      from maturities and calls of securities available-for-sale
                  
                  
                  5,202,054
                  
                  
                  
                  1,468,059Proceeds
      from redemption of Federal Home Loan Bank stock
                  
                  
                  -
                  
                  
                  
                  542,900Purchase
      of Federal Home Loan Bank stock
                  
                  
                  (46,600
                  )
                  
                  
                  (215,800
                  )Purchase
      of premises, equipment and rental real estate
                  
                  
                  (449,824
                  )
                  
                  
                  (344,840
                  )Proceeds
      from sale of premises and equipment
                  
                  
                  -
                  
                  
                  
                  381Net
      proceeds from sale of foreclosed real estate
                  
                  
                  1,428,536
                  
                  
                  
                  3,707,708Net
      cash provided by investing activities
                  
                  
                  12,501,517
                  
                  
                  
                  26,072,455CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      (decrease) in deposits
                  
                  
                  (21,418,323
                  )
                  
                  
                  (20,747,190
                  )Net
      (decrease) in advances from borrowers for taxes and
    insurance
                  
                  
                  (1,062,139
                  )
                  
                  
                  (1,043,641
                  )Proceeds
      from other borrowed funds
                  
                  
                  8,500,000
                  
                  
                  
                  11,500,000Payments
      of other borrowed funds
                  
                  
                  (18,023,176
                  )
                  
                  
                  (21,522,306
                  )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
                  
                  
                  (346,333
                  )
                  
                  
                  (1,408,344
                  )Net
      cash (used in) financing activities
                  
                  
                  (22,168,521
                  )
                  
                  
                  (33,214,709
                  )Net
      (decrease) in cash
                  
                  
                  (4,515,810
                  )
                  
                  
                  (2,040,366
                  )CASH
      AND DUE FROM BANKSBeginning
                  
                  
                  16,281,644
                  
                  
                  
                  12,526,707Ending
                  
                  $
                  11,765,834
                  
                  
                  $
                  10,486,341


4




CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS -Continued
 (Unaudited)
  Nine Months Ended
                        September 30,2009
                      
                      
                      2008SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      payments for:Interest
      paid to depositors
                      
                      $
                      5,500,837
                      
                      
                      $
                      8,834,215Interest
      paid on borrowings
                      
                      
                      2,745,765
                      
                      
                      
                      3,484,831Income
      taxes
                      
                      
                      48,162
                      
                      
                      
                      719,509SUPPLEMENTAL
      DISCLOSURE OF NONCASH OPERATING,INVESTING
      AND FINANCING ACTIVITIESTransfers
      from loans to other real estate owned
                      
                      $
                      1,804,082
                      
                      
                      $
                      2,500,545
  See Notes
to Consolidated Condensed Financial Statements.
  5




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 nine month periods
ended September 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 nine months ended September 30, 2009 and 2008 is presented
below.




Three Months Ended September 30,
                      
                      
                      Nine Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Basic
      earnings (loss) per common share:Net
      Income (loss)
                      
                      $
                      1,001,777
                      
                      
                      $
                      (2,749,924
                      )
                      
                      $
                      2,677,837
                      
                      
                      $
                      (2,903,224
                      )Preferred stock
      dividends and accretion of discount1
                      
                      
                      131,991
                      
                      
                      
                      -
                      
                      
                      
                      382,875
                      
                      
                      
                      -Net
      income (loss) available to common stockholders
                      
                      $
                      869,786
                      
                      
                      $
                      (2,749,924
                      )
                      
                      $
                      2,294,962
                      
                      
                      $
                      (2,903,224
                      )Weighted
      average common shares outstanding - basic
                      
                      
                      1,342,948
                      
                      
                      
                      1,340,148
                      
                      
                      
                      1,341,779
                      
                      
                      
                      1,339,132Basic
      earnings (loss) per common share
                      
                      $
                      0.65
                      
                      
                      $
                      (2.05
                      )
                      
                      $
                      1.71
                      
                      
                      $
                      (2.17
                      )Diluted
      earnings (loss) per common share:Net
      income (loss) available to common stockholders
                      
                      
                      869,786
                      
                      
                      
                      (2,749,924
                      )
                      
                      
                      2,294,962
                      
                      
                      
                      (2,903,224
                      )Weighted
      average common shares outstanding – basic
                      
                      
                      1,342,948
                      
                      
                      
                      1,340,148
                      
                      
                      
                      1,341,779
                      
                      
                      
                      1,339,132Effect
      of dilutive securities:Stock
      Options
                      
                      
                      2233
                      
                      
                      
                      - 2
                      
                      
                      
                      74 3
                      
                      
                      
                      - 2Restricted
      Stock
                      
                      
                      3,500
                      
                      
                      
                      - 2
                      
                      
                      
                      3,307
                      
                      
                      
                      - 2Common stock
      warrant4
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      diluted average common shares issued and outstanding
                      
                      
                      1,346,671
                      
                      
                      
                      1,340,148
                      
                      
                      
                      1,345,160
                      
                      
                      
                      1,339,132Diluted
      earnings (loss) per common share
                      
                      $
                      0.65
                      
                      
                      $
                      (2.05
                      )
                      
                      $
                      1.71
                      
                      
                      $
                      (2.17
                      )


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 74,600 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 common stock totaled 67,400 shares.
Of the total shares, only 2,200 were included in the
calculation, representing average dilutive shares of 223 and 74 for the three
and nine months periods ended September 30, 2009 respectively. The
remaining shares were not dilutive due to the exercise price of the 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 nine
months ended September 30, 2009, was $15.09 and $13.37, respectively.
This was less than $15.43 exercise price of the common stock warrant to purchase
99,157 shares of common stock, therefore, the
warrant was not dilutive.


6


3.           DIVIDENDS





On August
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 August 28, 2009, the Company declared
a cash dividend on its common stock, payable on October 9, 2009 to stockholders
of record as of September 18, 2009.





4.           CURRENT
ACCOUNTING DEVELOPMENTS





In April
2009, the Financial Accounting Standards Board (FASB) issued guidanceon Other-Than-Temporary
Impairments (“OTTI”).  This standard requires entities to separate an
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).  The Company adopted this standard
effective for the quarter ended June 30, 2009.  The adoption of this
standard did not have a material impact on the Company’s financial position or
results of operations.





In April
2009, the FASB issued guidance on Determining Fair Value.  Under this
standard, if an entity determines 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.  The Company
adopted this standard effective for the quarter ended June 30,
2009.  The adoption of this standard did not have a material impact on
the Company’s financial position or results of operations.





In April
2009, the FASB issued guidance on Interim Disclosures about Fair Value of
Financial Instruments.  This standard requires disclosures about fair
value of financial instruments in interim and annual financial
statements.  The Company adopted this standard effective for the
quarter ended June 30, 2009.  The adoption of this standard did not
have an impact on the Company’s financial position or results of
operations.





In May
2009, the FASB issued guidance on Subsequent Events.  This standard
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 standard for the quarter ended June
30, 2009.





In June
2009, the FASB issued guidance on Accounting for Transfers of Financial
Asset,to improve the
reporting for the transfers of financial assets resulting from (1) practices
that have developed that are not consistent with the original intent and key
requirements of prior FASB guidance 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 standard 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 does not expect the adoption of this
standard will have a material impact on the Company’s consolidated financial
statements.





On June
29, 2009, FASB issued an accounting pronouncement establishing the FASB Accounting Standards
Codification(the “ASC”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity of US
GAAP.  This pronouncement was effective for financial statements
issued for interim and annual periods ending after September 15, 2009, for most
entities.  On the effective date, all non-SEC accounting and reporting
standards were superceded.  The Company adopted this pronouncement for
the quarterly period ended September 30, 2009, as required, and adoption did not
have a material impact on the Company’s financial statements taken as a
whole.


7


In August
2009, the FASB issued guidance on Fair Value Measurements whichprovides clarification
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value using one or more of the following techniques:





1.
            A
      valuation technique that uses (a) the quoted price of an identical
      liability when traded as an asset or (b) quoted prices for similar
      liabilities or similar liabilities when traded as
  assets.


2.
            Another
      valuation technique that is consistent with the principles of this
      standard.  Examples include an income approach, such as a
      present value technique, or a market approach, such as a technique that is
      based on the amount at the measurement date that the reporting entity
      would pay to transfer the  identical liability or would receive
      to enter into the identical
liability.





This
standard is effective for financial statements issued for interim and annual
periods ending after August 2009.  The Company adopted this standard
effective for the quarter ended September 30, 2009.  The adoption of
this standard did not have a material impact on the Company’s consolidated
financial statements or its financial position or results of
operations.





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.





8




Three Months Ended September 30, 2009
                    
                    
                    Nine Months Ended September 30, 2009Traditional
                    
                    
                    
                    
                    
                    
                    
                    
                    TraditionalBanking
                    
                    
                    All Others
                    
                    
                    Total
                    
                    
                    Banking
                    
                    
                    All Others
                    
                    
                    TotalInterest
      income
                    
                    $
                    6,157,609
                    
                    
                    $
                    -
                    
                    
                    $
                    6,157,609
                    
                    
                    $
                    18,910,130
                    
                    
                    $
                    -
                    
                    
                    $
                    18,910,130Interest
      expense
                    
                    
                    2,405,732
                    
                    
                    
                    -
                    
                    
                    
                    2,405,732
                    
                    
                    
                    8,148,809
                    
                    
                    
                    -
                    
                    
                    
                    8,148,809Net
      interest income
                    
                    
                    3,751,877
                    
                    
                    
                    -
                    
                    
                    
                    3,751,877
                    
                    
                    
                    10,761,321
                    
                    
                    
                    -
                    
                    
                    
                    10,761,321Provision
      for loan losses
                    
                    
                    450,000
                    
                    
                    
                    -
                    
                    
                    
                    450,000
                    
                    
                    
                    1,220,000
                    
                    
                    
                    -
                    
                    
                    
                    1,220,000Net
      interest income afterprovision
      for loan losses
                    
                    
                    3,301,877
                    
                    
                    
                    -
                    
                    
                    
                    3,301,877
                    
                    
                    
                    9,541,321
                    
                    
                    
                    -
                    
                    
                    
                    9,541,321Noninterest
      income
                    
                    
                    1,412,205
                    
                    
                    
                    521,005
                    
                    
                    
                    1,933,210
                    
                    
                    
                    4,438,260
                    
                    
                    
                    1,639,776
                    
                    
                    
                    6,078,036Securities
      gains (losses), net
                    
                    
                    5,540
                    
                    
                    
                    -
                    
                    
                    
                    5,540
                    
                    
                    
                    (37,747
                    )
                    
                    
                    -
                    
                    
                    
                    (37,747
                    )Noninterest
      expense
                    
                    
                    3,402,384
                    
                    
                    
                    323,366
                    
                    
                    
                    3,725,750
                    
                    
                    
                    10,594,619
                    
                    
                    
                    985,654
                    
                    
                    
                    11,580,273Income
      before income taxes
                    
                    
                    1,317,238
                    
                    
                    
                    197,639
                    
                    
                    
                    1,514,877
                    
                    
                    
                    3,347,215
                    
                    
                    
                    654,122
                    
                    
                    
                    4,001,337Provision
      for income taxes
                    
                    
                    493,200
                    
                    
                    
                    19,900
                    
                    
                    
                    513,100
                    
                    
                    
                    1,245,400
                    
                    
                    
                    78,100
                    
                    
                    
                    1,323,500Net
      income
                    
                    $
                    824,038
                    
                    
                    $
                    177,739
                    
                    
                    $
                    1,001,777
                    
                    
                    $
                    2,101,815
                    
                    
                    $
                    576,022
                    
                    
                    $
                    2,677,837Inter-segment
      revenue (expense)
                    
                    $
                    221,023
                    
                    
                    $
                    (221,023
                    )
                    
                    $
                    -
                    
                    
                    $
                    663,986
                    
                    
                    $
                    (663,986
                    )
                    
                    $
                    -Total
      assets
                    
                    $
                    450,048,888
                    
                    
                    $
                    3,206,962
                    
                    
                    $
                    453,255,850
                    
                    
                    $
                    450,048,888
                    
                    
                    $
                    3,206,962
                    
                    
                    $
                    453,255,850Total
      deposits
                    
                    $
                    328,751,602
                    
                    
                    $
                    -
                    
                    
                    $
                    328,751,602
                    
                    
                    $
                    328,751,602
                    
                    
                    $
                    -
                    
                    
                    $
                    328,751,602




Three Months Ended September 30, 2008
                      
                      
                      Nine Months Ended September 30, 2008Traditional
                      
                      
                      
                      
                      
                      
                      
                      
                      TraditionalBanking
                      
                      
                      All Others
                      
                      
                      Total
                      
                      
                      Banking
                      
                      
                      All Others
                      
                      
                      TotalInterest
      income
                      
                      $
                      6,965,982
                      
                      
                      $
                      -
                      
                      
                      $
                      6,965,982
                      
                      
                      $
                      21,609,149
                      
                      
                      $
                      -
                      
                      
                      $
                      21,609,149Interest
      expense
                      
                      
                      3,675,795
                      
                      
                      
                      -
                      
                      
                      
                      3,675,795
                      
                      
                      
                      11,864,012
                      
                      
                      
                      -
                      
                      
                      
                      11,864,012Net
      interest income
                      
                      
                      3,290,187
                      
                      
                      
                      -
                      
                      
                      
                      3,290,187
                      
                      
                      
                      9,745,137
                      
                      
                      
                      -
                      
                      
                      
                      9,745,137Provision
      for loan losses
                      
                      
                      60,000
                      
                      
                      
                      -
                      
                      
                      
                      60,000
                      
                      
                      
                      280,000
                      
                      
                      
                      -
                      
                      
                      
                      280,000Net
      interest income afterprovision
      for loan losses
                      
                      
                      3,230,187
                      
                      
                      
                      -
                      
                      
                      
                      3,230,187
                      
                      
                      
                      9,465,137
                      
                      
                      
                      -
                      
                      
                      
                      9,465,137Noninterest
      income
                      
                      
                      1,431,562
                      
                      
                      
                      490,175
                      
                      
                      
                      1,921,737
                      
                      
                      
                      3,968,977
                      
                      
                      
                      1,560,651
                      
                      
                      
                      5,529,628Securities
      gains (losses), net
                      
                      
                      (3,850,900
                      )
                      
                      
                      -
                      
                      
                      
                      (3,850,900
                      )
                      
                      
                      (5,810,811
                      )
                      
                      
                      -
                      
                      
                      
                      (5,810,811
                      )Noninterest
      expense
                      
                      
                      3,269,321
                      
                      
                      
                      286,627
                      
                      
                      
                      3,555,948
                      
                      
                      
                      10,021,190
                      
                      
                      
                      913,488
                      
                      
                      
                      10,934,678Income/(loss)
      before income taxes
                      
                      
                      (2,458,472
                      )
                      
                      
                      203,548
                      
                      
                      
                      (2,254,924
                      )
                      
                      
                      (2,397,887
                      )
                      
                      
                      647,163
                      
                      
                      
                      (1,750,724
                      )Provision
      for income taxes
                      
                      
                      472,000
                      
                      
                      
                      23,000
                      
                      
                      
                      495,000
                      
                      
                      
                      1,067,500
                      
                      
                      
                      85,000
                      
                      
                      
                      1,152,500Net
      income/(loss)
                      
                      $
                      (2,930,472
                      )
                      
                      $
                      180,548
                      
                      
                      $
                      (2,749,924
                      )
                      
                      $
                      (3,465,387
                      )
                      
                      $
                      562,163
                      
                      
                      $
                      (2,903,224
                      )Inter-segment
      revenue (expense)
                      
                      $
                      184,368
                      
                      
                      $
                      (184,368
                      )
                      
                      $
                      -
                      
                      
                      $
                      578,382
                      
                      
                      $
                      (578,382
                      )
                      
                      $
                      -Total
      assets
                      
                      $
                      471,700,426
                      
                      
                      $
                      3,393,873
                      
                      
                      $
                      475,094,299
                      
                      
                      $
                      471,700,426
                      
                      
                      $
                      3,393,873
                      
                      
                      $
                      475,094,299Total
      deposits
                      
                      $
                      345,200,666
                      
                      
                      $
                      -
                      
                      
                      $
                      345,200,666
                      
                      
                      $
                      345,200,666
                      
                      
                      $
                      -
                      
                      
                      $
                      345,200,666


9


6. INVESTMENT
INFORMATION


Securities
available-for-sale as of September 30, 2009 was as follows:
 Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  UnrealizedCost
                  
                  
                  Gains
                  
                  
                  (Losses)
                  
                  
                  Fair ValueEquity
      securities:Mutual
      fund
                  
                  $
                  442,193
                  
                  
                  $
                  15,032
                  
                  
                  $
                  -
                  
                  
                  $
                  457,225Debt
      securities:State
      and local obligations
                  
                  
                  2,503,360
                  
                  
                  
                  51,944
                  
                  
                  
                  (740
                  )
                  
                  
                  2,554,564Mortgage-backed
      securities
                  
                  
                  19,921,474
                  
                  
                  
                  662,596
                  
                  
                  
                  (23,819
                  )
                  
                  
                  20,560,251U.S.
      Government agencies
                  
                  
                  1,561,685
                  
                  
                  
                  9,266
                  
                  
                  
                  (742
                  )
                  
                  
                  1,570,20923,986,519
                  
                  
                  
                  723,806
                  
                  
                  
                  (25,301
                  )
                  
                  
                  24,685,024Total
                  
                  $
                  24,428,712
                  
                  
                  $
                  738,838
                  
                  
                  $
                  (25,301
                  )
                  
                  $
                  25,142,249
 
 Securities
available-for-sale as of December 31, 2008 was as follows:
 
 Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  UnrealizedCost
                  
                  
                  Gains
                  
                  
                  (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
                  
                  
                  1,742,349
                  
                  
                  
                  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
                  )
                  
                  
                  21,526,029Total
                  
                  $
                  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 September 30, 2009 and December 31, 2008, are
summarized as follows:


September 30, 2009Lessthan12Months
                  
                  
                  12MonthsorMore
                  
                  
                  TotalUnrealized
                  
                  
                  
                  
                  
                  Unrealized
                  
                  
                  
                  
                  
                  UnrealizedFair Value
                  
                  
                  Losses
                  
                  
                  Fair Value
                  
                  
                  Losses
                  
                  
                  Fair Value
                  
                  
                  LossesDebt
      securities:State
      and local obligations
                  
                  $
                  224,260
                  
                  
                  $
                  (740
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  224,260
                  
                  
                  $
                  (740
                  )Mortgage-backed
      securities
                  
                  
                  1,772,019
                  
                  
                  
                  (15,767
                  )
                  
                  
                  1,214,718
                  
                  
                  
                  (8,052
                  )
                  
                  
                  2,986,737
                  
                  
                  
                  (23,819
                  )U.S.
      Government agencies
                  
                  
                  507,397
                  
                  
                  
                  (742
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  507,397
                  
                  
                  
                  (742
                  )Total
                  
                  $
                  2,503,676
                  
                  
                  $
                  (17,249
                  )
                  
                  $
                  1,214,718
                  
                  
                  $
                  (8,052
                  )
                  
                  $
                  3,718,394
                  
                  
                  $
                  (25,301
                  )




December 31, 2008Lessthan12Months
                  
                  
                  12MonthsorMore
                  
                  
                  TotalUnrealized
                  
                  
                  
                  
                  
                  Unrealized
                  
                  
                  
                  
                  
                  UnrealizedFair Value
                  
                  
                  Losses
                  
                  
                  FairValue
                  
                  
                  Losses
                  
                  
                  FairValue
                  
                  
                  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
                  )Total
                  
                  $
                  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 intent not to sell these
investment securities and/or it is not likely that the Company will be required
to sell the securities before their anticipated recovery.





The
amortized cost and fair value of debt securities as of September 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-SaleSeptember 30, 2009
                  
                  
                  December 31, 2008Amortized
                  
                  
                  
                  
                  
                  AmortizedCost
                  
                  
                  Fair Value
                  
                  
                  Cost
                  
                  
                  Fair ValueDue
      in one year or less
                  
                  $
                  355,000
                  
                  
                  $
                  354,504
                  
                  
                  $
                  382,669
                  
                  
                  $
                  384,225Due
      from one to five years
                  
                  
                  1,577,849
                  
                  
                  
                  1,587,082
                  
                  
                  
                  630,000
                  
                  
                  
                  637,636Due
      from five to ten years
                  
                  
                  1,078,651
                  
                  
                  
                  1,120,376
                  
                  
                  
                  729,680
                  
                  
                  
                  750,583Due
      over 10 years
                  
                  
                  1,053,545
                  
                  
                  
                  1,062,811
                  
                  
                  
                  -
                  
                  
                  
                  -Mortgage-backed
      securities
                  
                  
                  19,921,474
                  
                  
                  
                  20,560,251
                  
                  
                  
                  19,562,233
                  
                  
                  
                  19,753,585$
                  23,986,519
                  
                  
                  $
                  24,685,024
                  
                  
                  $
                  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:





September 30, 2009
                      
                      
                      December 31, 2008Net Proceeds
                      
                      
                      
                      
                      
                      Net Proceedsfrom Sale
                      
                      
                      Gain/(Loss)
                      
                      
                      from Sale
                      
                      
                      Gain/(Loss)Equity
      securities:Mutual
      funds
                      
                      $
                      750,000
                      
                      
                      $
                      (14,404
                      )
                      
                      $
                      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
                      
                      
                      
                      -$
                      832,000
                      
                      
                      $
                      (14,404
                      )
                      
                      $
                      297,650
                      
                      
                      $
                      (170,658
                      )





7. OTHER
COMPREHENSIVE INCOME (LOSS)





Under
FASB guidance on OTTI, 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
nine months ended September 30, 2009 and 2008, are as follows:





Nine Months Ended September 30,2009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        2,677,837
                        
                        
                        $
                        (2,903,224
                        )Other
      comprehensive income:Securities
      for which a portion of an other-than-temporary impairment has been
      recorded in earnings:Unrealized
      holding losses
                        
                        
                        (37,747
                        )
                        
                        
                        (4,721,880
                        )Loss
      recognized in earnings
                        
                        
                        37,747
                        
                        
                        
                        5,810,811Net
      unrealized gain on securities with other-than-temporary impairment before
      tax expense
                        
                        
                        -
                        
                        
                        
                        1,088,931Tax
      expense
                        
                        
                        -
                        
                        
                        
                        35,274Net
      unrealized (losses) on securities with other-than-temporary impairment,
      net of tax in other comprehensive income (loss)
                        
                        
                        -
                        
                        
                        
                        1,124,205Other
      securities:Unrealized
      holding gains (losses) arising during the period
                        
                        
                        492,090
                        
                        
                        
                        (82,591
                        )Realized
      net (gains) losses recognized into net income (loss)
                        
                        
                        -
                        
                        
                        
                        -Net
      unrealized gains (losses) on other securities before tax (expense)
      benefit
                        
                        
                        492,090
                        
                        
                        
                        (82,591
                        )Tax
      (expense) benefit
                        
                        
                        (177,942
                        )
                        
                        
                        30,806Net
      unrealized gains (losses) on other securities, net of tax in other
      comprehensive income (loss)
                        
                        
                        314,148
                        
                        
                        
                        (51,785
                        )Other
      comprehensive income (loss)
                        
                        $
                        2,991,985
                        
                        
                        $
                        (1,830,804
                        )





8.           FAIR
VALUE





The
Company measures the fair value of assets and liabilities using a hierarchy
system consisting of three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine
fair value.  These levels are:




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


12




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.





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





Fair Value Measurements at Reporting Date($ in 000s)Quoted Pricesin Active Markets
                                                                
                                                                
                                                                Significant Other
                                                                
                                                                Significantfor Identical Assets
                                                                
                                                                
                                                                Observable Inputs
                                                                
                                                                Unobservable InputsDescription
                                                                
                                                                (Level 1)
                                                                
                                                                
                                                                (Level 2)
                                                                
                                                                (Level 3)
                                                                
                                                                TotalSecurities available-for-saleState
      and local obligations
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                2,555
                                                                
                                                                $
                                                                
                                                                -
                                                                
                                                                $
                                                                
                                                                2,555Mortgage-backed
      securities
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                20,560
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                20,560U.S.
      Government agencies
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,570
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,570Mutual
      funds
                                                                
                                                                
                                                                457
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                457Total
      securities available-for-sale
                                                                
                                                                $
                                                                457
                                                                
                                                                
                                                                $
                                                                24,685
                                                                
                                                                $
                                                                
                                                                -
                                                                
                                                                $
                                                                
                                                                25,142





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).





The
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 provides the
level of valuation assumptions used to determine each adjustment and the
carrying value of the related individual assets at September 30,
2009:





Fair Value Measurements at Reporting Date($ in 000s)Quoted Pricesin Active Markets
                                                            
                                                            
                                                            Significant Other
                                                            
                                                            
                                                            Significantfor Identical Assets
                                                            
                                                            
                                                            Observable Inputs
                                                            
                                                            
                                                            Unobservable InputsDescription
                                                            
                                                            (Level 1)
                                                            
                                                            
                                                            (Level 2)
                                                            
                                                            
                                                            (Level 3)
                                                            
                                                            
                                                            TotalAssets:Loans
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            4,994
                                                            
                                                            
                                                            $
                                                            4,994Other
      real estate owned
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            1,423
                                                            
                                                            
                                                            $
                                                            1,423





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.


13


Generally
accepted accounting principles require 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.





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 borrowed funds is estimated based on
discounted cash flows using currently available borrowing 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 September 30, 2009 and December 31, 2008 the
carrying amount and fair value of the commitments were not
significant.




September 30, 2009
                  
                  
                  December 31, 2008Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  Value(nearest 000)
                  
                  
                  
                  
                  
                  (nearest 000)Financial
      assets:Cash
      and due from banks
                  
                  $
                  11,765,834
                  
                  
                  $
                  11,766,000
                  
                  
                  $
                  16,281,644
                  
                  
                  $
                  16,282,000Securities
                  
                  
                  25,142,249
                  
                  
                  
                  25,142,000
                  
                  
                  
                  22,837,968
                  
                  
                  
                  22,838,000FHLB
      stock
                  
                  
                  4,739,000
                  
                  
                  
                  4,739,000
                  
                  
                  
                  4,692,400
                  
                  
                  
                  4,692,000Loans,
      net
                  
                  
                  383,866,542
                  
                  
                  
                  387,300,000
                  
                  
                  
                  400,786,505
                  
                  
                  
                  401,837,000Loans
      held for sale
                  
                  
                  745,458
                  
                  
                  
                  745,000
                  
                  
                  
                  730,466
                  
                  
                  
                  730,000Accrued
      interest receivable
                  
                  
                  1,899,607
                  
                  
                  
                  1,900,000
                  
                  
                  
                  2,096,784
                  
                  
                  
                  2,097,000Financial
      liabilities:Deposits
                  
                  
                  328,751,602
                  
                  
                  
                  331,793,000
                  
                  
                  
                  350,169,925
                  
                  
                  
                  354,654,000Borrowed
      funds
                  
                  
                  72,825,739
                  
                  
                  
                  75,875,000
                  
                  
                  
                  82,348,915
                  
                  
                  
                  85,411,000Accrued
      interest payable
                  
                  
                  499,661
                  
                  
                  
                  500,000
                  
                  
                  
                  597,448
                  
                  
                  
                  597,000


14


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.





10.         SUBSEQUENT
EVENTS





The
Company evaluated events occurring subsequent to September 30, 2009 through
November 12, 2009, the date the financial statements are being filed and did not
identify any subsequent events requiring disclosure pursuant to the provisions
of this standard.





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 and
in Part II, Item 1A — Risk Factors of this Quarterly Report on Form
10-Q.  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 September 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 current economic
      environment continues to affect the Company, the Bank, and the financial
      industry generally, and it is not clear when or at what speed the economy
      will recover.•
            The
      Company has taken significant steps to reduce the risk of additional loan
      losses.  During the quarter ended September 30, 2009 the Company
      increased its provision for loan losses to $450,000 compared to the
      $60,000 during the quarter ended September 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.  The
      Board of Directors and all employees continue to work hard to make the
      best of these continuing challenging conditions.•
            Although
      the level of non-performing assets as a percentage of total assets
      increased to 3.01% as of September 30, 2009 from 1.95% as of December 31,
      2008 the Company remains focused on credit quality and continues to take a
      pro-active approach to addressing and minimizing the financial impact of
      these assets.•
            The
      Company continues its focus on earnings through management of net interest
      margin, successfully increasing the margin to 3.51% for the three months
      ended September 30, 2009 from 2.90% for the three months ended September
      30, 2008.


15


•
            Net
      income of $1.00 million for the third quarter 2009 represents the
      Company’s third consecutive period of profitable results and the first
      period with earnings in excess of $1 million since the third quarter of
      2007.




•
            Capital
      remains strong with stockholders equity as a percentage of total assets
      increasing to 10.61% at September 30, 2009 from 10.20% at June 30,
      2009.




•
            The
      volume of originations of residential mortgages during the third quarter
      of 2009 has slowed from the highs during the second quarter 2009; however
      residential loan activity remains a significant focus of the Company. At
      September 30, 2009, the Company serviced $266 million in residential
      loans, which is the largest amount of residential loans serviced by the
      Company to date.




•
            The
      bank has paid 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. Further, the FDIC has adopted
      a new rule that requires all institutions to prepay, on
      December 30, 2009, estimated assessments for the fourth quarter of
      2009 (typically paid one quarter in arrears), and for all of 2010, 2011,
      and 2012. For purposes of calculating the prepaid amount, the base
      assessment rate in effect at September 30, 2009 would be used for
      2010. That rate would be increased by 3 basis points for 2011 and 2012
      assessments. The prepayment calculation would also assume a 5 percent
      annual growth rate through the end of 2012.The expense of FDIC premiums
      continues to be a focus of the industry and the
  Company.




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 OTTI 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 intent of the
Company to not sell the security or whether it is more-likely-than-not that the
Company will be required to sell the security before its anticipated
recovery.


16





FINANCIAL
CONDITION





Total
assets decreased $20.0 million, or 4.2%, to $453.3 million at September 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 $4.5 million,
or 27.7%, to $11.8 million at September 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 nine
months ended September 30, 2009.  The increase in securities
available-for-sale was primarily due to the purchase of $8.0 million of
securities for the nine months ended September 30, 2009, offset in part by
payments, maturities and the sale of securities.





Net loans
receivable decreased by $16.9 million, or 4.2%, to $383.9 million at September
30, 2009, from $400.8 million at December 31, 2008, primarily due to payments
and prepayments of $84.0 million and loan sales of $60.8 million during the nine
months ended September 30, 2009. These payments, prepayments, and loan sales
were offset in part by the origination of $86.9 million of first mortgage loans
primarily secured by one-to four-family residences and commercial real estate,
the origination of $30.1 million of consumer loans, and the purchase of $14.4
million of multifamily and commercial real estate loans during the nine months
ended September 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 $21.4 million, or 6.1%, to $328.8 million at September 30, 2009, from
$350.2 million at December 31, 2008, primarily reflecting decreases in
certificates of deposits and brokered deposits of $20.5 million and $15.6
million, respectively, offset in part by increases in NOW, money market, and
savings account balances of $1.4 million, $9.4 million and $3.0 million,
respectively.  The decrease in certificates of deposits and brokered
deposits were primarily due to relationship pricing considerations including a
strategic focus on other types of deposits and plans to reduce utilization of
brokered deposits.  Borrowings, primarily FHLB advances, decreased
$9.5 million, or 11.6%, to $72.8 million at September 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 $12.9 million, or 36.6%, to $48.1 million at
September 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 nine months ended
September 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
September 30, 2009, the Bank exceeded all of its regulatory capital
requirements.  The Bank’s required and actual capital levels as of
September 30, 2009 and December 31, 2008 were as follows:


17





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 September 30, 2009:Total
      Capital (to risk-weighted assets)
                                      
                                      $
                                      47,977
                                      
                                      
                                      
                                      14.6
                                      %
                                      
                                      $
                                      26,223
                                      
                                      
                                      
                                      8.0
                                      %
                                      
                                      $
                                      32,779
                                      
                                      
                                      
                                      10.0
                                      %Tier
      I Capital (to risk-weighted assets)
                                      
                                      
                                      43,909
                                      
                                      
                                      
                                      13.4
                                      
                                      
                                      
                                      13,112
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      19,667
                                      
                                      
                                      
                                      6.0Tier
      I (Core) Capital (to adjusted assets)
                                      
                                      
                                      43,909
                                      
                                      
                                      
                                      9.7
                                      
                                      
                                      
                                      13,572
                                      
                                      
                                      
                                      3.0
                                      
                                      
                                      
                                      22,620
                                      
                                      
                                      
                                      5.0Tangible
      Capital (to adjusted assets)
                                      
                                      
                                      43,909
                                      
                                      
                                      
                                      9.7
                                      
                                      
                                      
                                      6,786
                                      
                                      
                                      
                                      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
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -





RESULTS
OF OPERATIONS


The
following table shows selected financial results and measures for the three and
nine months ended September 30, 2009, compared with the same periods in
2008.


Three
      Months Ended September 30,
                          
                          
                          Nine
      Months Ended September 30,2009
                          
                          
                          2008
                          
                          
                          Change
                          
                          
                          Change
      %
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          Change
                          
                          
                          Change
      %Net
      income (loss)
                          
                          $
                          1,001,777
                          
                          
                          $
                          (2,749,924
                          )
                          
                          $
                          3,751,701
                          
                          
                          
                          136.4
                          %
                          
                          $
                          2,677,837
                          
                          
                          $
                          (2,903,224
                          )
                          
                          $
                          5,581,061
                          
                          
                          
                          192.2
                          %Average
      assets
                          
                          
                          454,626,835
                          
                          
                          
                          489,868,443
                          
                          
                          
                          (35,241,608
                          )
                          
                          
                          -7.19
                          %
                          
                          
                          466,262,878
                          
                          
                          
                          500,465,785
                          
                          
                          
                          (34,202,907
                          )
                          
                          
                          -6.83
                          %Average
      stockholders equity
                          
                          
                          47,616,182
                          
                          
                          
                          40,405,982
                          
                          
                          
                          7,210,200
                          
                          
                          
                          17.84
                          %
                          
                          
                          46,481,104
                          
                          
                          
                          41,068,757
                          
                          
                          
                          5,412,347
                          
                          
                          
                          13.18
                          %Return
      on assets
                          
                          
                          0.88
                          %
                          
                          
                          -2.25
                          %
                          
                          
                          3.13
                          %
                          
                          
                          
                          
                          
                          
                          0.77
                          %
                          
                          
                          -0.77
                          %
                          
                          
                          1.54
                          %Return
      on equity
                          
                          
                          8.42
                          %
                          
                          
                          -27.22
                          %
                          
                          
                          35.64
                          %
                          
                          
                          
                          
                          
                          
                          7.68
                          %
                          
                          
                          -9.43
                          %
                          
                          
                          17.11
                          %Efficiency
      ratio
                          
                          
                          65.54
                          %
                          
                          
                          68.23
                          %
                          
                          
                          -2.69
                          %
                          
                          
                          
                          
                          
                          
                          68.77
                          %
                          
                          
                          71.59
                          %
                          
                          
                          -2.82
                          %




Definitions
of ratios:




Return on
assets - annualized net income (loss) divided by average assets.
 Return on
equity - annualized net income (loss) divided by average stockholders
equity.
 Efficiency
ratio - noninterest expense divided by the sum of noninterest income plus net
interest income.
  Net Income
(Loss).  Net income
increased by $3.75 million to $1.00 million for the quarter ended September 30,
2009, compared to a net loss of $(2.75) million for the quarter ended September
30, 2008.  The increase in net income was primarily due to a decrease
in OTTI on the investment portfolio and an increase in net interest income,
offset in part by an increase in provision for loan losses.





Net
income increased by $5.58 million to $2.68 million for the nine months ended
September 30, 2009, compared to a net loss of $(2.90) million for the nine
months ended September 30, 2008.  The increase in net income was
primarily due to a decrease in OTTI 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.


18





The
following tables show average balances and related interest income or interest
expense, with the resulting average yield or rate by category of
interest-earning asset or interest-bearing liabilitities.
 
 Data for
the three months ended September 30:
 
 Average
      Balance
                  
                  
                  Interest
      Income/Expense
                  
                  
                  Yield/Rate2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  Change-%
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  Change-%
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  ChangeAssets:Interest-earning
      assets:Loans
                  
                  
                  393,574,174
                  
                  
                  
                  423,848,385
                  
                  
                  
                  (30,274,211
                  )
                  
                  
                  -7.14
                  %
                  
                  
                  5,878,253
                  
                  
                  
                  6,698,254
                  
                  
                  
                  (820,001
                  )
                  
                  
                  -12.24
                  %
                  
                  
                  5.94
                  %
                  
                  
                  6.29
                  %
                  
                  
                  -0.35
                  %Securities
      available-for-sale
                  
                  
                  30,350,837
                  
                  
                  
                  25,006,219
                  
                  
                  
                  5,344,618
                  
                  
                  
                  21.37
                  %
                  
                  
                  278,328
                  
                  
                  
                  245,205
                  
                  
                  
                  33,123
                  
                  
                  
                  13.51
                  %
                  
                  
                  3.67
                  %
                  
                  
                  3.92
                  %
                  
                  
                  -0.25
                  %Interest-bearing
      cash
                  
                  
                  2,256,241
                  
                  
                  
                  4,742,581
                  
                  
                  
                  (2,486,340
                  )
                  
                  
                  -52.43
                  %
                  
                  
                  1,028
                  
                  
                  
                  22,523
                  
                  
                  
                  (21,495
                  )
                  
                  
                  -95.44
                  %
                  
                  
                  0.18
                  %
                  
                  
                  1.88
                  %
                  
                  
                  -1.70
                  %Total
      interest-earning assets
                  
                  
                  426,181,252
                  
                  
                  
                  453,597,185
                  
                  
                  
                  (27,415,933
                  )
                  
                  
                  -6.04
                  %
                  
                  
                  6,157,609
                  
                  
                  
                  6,965,982
                  
                  
                  
                  (808,373
                  )
                  
                  
                  -11.60
                  %
                  
                  
                  5.75
                  %
                  
                  
                  6.12
                  %
                  
                  
                  -0.37
                  %Noninterest-earning
      assets
                  
                  
                  28,445,583
                  
                  
                  
                  36,271,258
                  
                  
                  
                  (7,825,675
                  )
                  
                  
                  -21.58
                  %Total
      assets
                  
                  
                  454,626,835
                  
                  
                  
                  489,868,443
                  
                  
                  
                  (35,241,608
                  )
                  
                  
                  -7.19
                  %Liabilities
      and Equity:Interest-bearing
      liabilities:NOW
      and money market savings
                  
                  
                  96,197,168
                  
                  
                  
                  93,732,533
                  
                  
                  
                  2,464,635
                  
                  
                  
                  2.63
                  %
                  
                  
                  102,516
                  
                  
                  
                  213,173
                  
                  
                  
                  (110,657
                  )
                  
                  
                  -51.91
                  %
                  
                  
                  0.42
                  %
                  
                  
                  0.90
                  %
                  
                  
                  -0.48
                  %Savings
                  
                  
                  29,270,643
                  
                  
                  
                  25,794,547
                  
                  
                  
                  3,476,096
                  
                  
                  
                  13.48
                  %
                  
                  
                  13,051
                  
                  
                  
                  17,380
                  
                  
                  
                  (4,329
                  )
                  
                  
                  -24.91
                  %
                  
                  
                  0.18
                  %
                  
                  
                  0.27
                  %
                  
                  
                  -0.09
                  %Certificates
      of Deposit
                  
                  
                  184,351,601
                  
                  
                  
                  217,427,520
                  
                  
                  
                  (33,075,919
                  )
                  
                  
                  -15.21
                  %
                  
                  
                  1,431,681
                  
                  
                  
                  2,313,328
                  
                  
                  
                  (881,647
                  )
                  
                  
                  -38.11
                  %
                  
                  
                  3.08
                  %
                  
                  
                  4.22
                  %
                  
                  
                  -1.14
                  %Borrowed
      funds
                  
                  
                  74,751,576
                  
                  
                  
                  89,655,328
                  
                  
                  
                  (14,903,752
                  )
                  
                  
                  -16.62
                  %
                  
                  
                  858,484
                  
                  
                  
                  1,131,914
                  
                  
                  
                  (273,430
                  )
                  
                  
                  -24.16
                  %
                  
                  
                  4.56
                  %
                  
                  
                  5.01
                  %
                  
                  
                  -0.45
                  %Total
      interest-bearing liabilities
                  
                  
                  384,570,988
                  
                  
                  
                  426,609,928
                  
                  
                  
                  (42,038,940
                  )
                  
                  
                  -9.85
                  %
                  
                  
                  2,405,732
                  
                  
                  
                  3,675,795
                  
                  
                  
                  (1,270,063
                  )
                  
                  
                  -34.55
                  %
                  
                  
                  2.48
                  %
                  
                  
                  3.42
                  %
                  
                  
                  -0.94
                  %Noninterest-bearing
      liabilities
                  
                  
                  22,439,665
                  
                  
                  
                  22,852,533
                  
                  
                  
                  (412,868
                  )
                  
                  
                  -1.81
                  %Total
      liabilities
                  
                  
                  407,010,653
                  
                  
                  
                  449,462,461
                  
                  
                  
                  (42,451,808
                  )
                  
                  
                  -9.45
                  %Equity
                  
                  
                  47,616,182
                  
                  
                  
                  40,405,982
                  
                  
                  
                  7,210,200
                  
                  
                  
                  17.84
                  %Total
      liabilities and equity
                  
                  
                  454,626,835
                  
                  
                  
                  489,868,443
                  
                  
                  
                  (35,241,608
                  )
                  
                  
                  -7.19
                  %Net
      interest income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,751,877
                  
                  
                  
                  3,290,187
                  
                  
                  
                  461,690
                  
                  
                  
                  14.03
                  %Net
      interest rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.27
                  %
                  
                  
                  2.70
                  %
                  
                  
                  0.57
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.51
                  %
                  
                  
                  2.90
                  %
                  
                  
                  0.61
                  %Ratio
      of average interest-earnings assets to average interest-bearing
      liabilities
                  
                  
                  110.82
                  %
                  
                  
                  106.33
                  %
 
 Data for
the nine months ended September 30:
 
 Average
      Balance
                  
                  
                  Interest
      Income/Expense
                  
                  
                  Yield/Rate2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  Change-%
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  Change-%
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  ChangeAssets:Interest-earning
      assets:Loans
                  
                  
                  397,062,355
                  
                  
                  
                  434,848,012
                  
                  
                  
                  (37,785,657
                  )
                  
                  
                  -8.69
                  %
                  
                  
                  18,063,597
                  
                  
                  
                  20,749,524
                  
                  
                  
                  (2,685,927
                  )
                  
                  
                  -12.94
                  %
                  
                  
                  6.07
                  %
                  
                  
                  6.35
                  %
                  
                  
                  -0.28
                  %Securities
      available-for-sale
                  
                  
                  29,491,626
                  
                  
                  
                  22,031,482
                  
                  
                  
                  7,460,144
                  
                  
                  
                  33.86
                  %
                  
                  
                  834,535
                  
                  
                  
                  727,931
                  
                  
                  
                  106,604
                  
                  
                  
                  14.64
                  %
                  
                  
                  3.77
                  %
                  
                  
                  4.41
                  %
                  
                  
                  -0.64
                  %Interest-bearing
      cash
                  
                  
                  9,143,607
                  
                  
                  
                  7,457,322
                  
                  
                  
                  1,686,285
                  
                  
                  
                  22.61
                  %
                  
                  
                  11,998
                  
                  
                  
                  131,694
                  
                  
                  
                  (119,696
                  )
                  
                  
                  -90.89
                  %
                  
                  
                  0.18
                  %
                  
                  
                  2.35
                  %
                  
                  
                  -2.17
                  %Total
      interest-earning assets
                  
                  
                  435,697,588
                  
                  
                  
                  464,336,816
                  
                  
                  
                  (28,639,228
                  )
                  
                  
                  -6.17
                  %
                  
                  
                  18,910,130
                  
                  
                  
                  21,609,149
                  
                  
                  
                  (2,699,019
                  )
                  
                  
                  -12.49
                  %
                  
                  
                  5.79
                  %
                  
                  
                  6.19
                  %
                  
                  
                  -0.40
                  %Noninterest-earning
      assets
                  
                  
                  30,565,290
                  
                  
                  
                  36,128,969
                  
                  
                  
                  (5,563,679
                  )
                  
                  
                  -15.40
                  %Total
      assets
                  
                  
                  466,262,878
                  
                  
                  
                  500,465,785
                  
                  
                  
                  (34,202,907
                  )
                  
                  
                  -6.83
                  %Liabilities
      and Equity:Interest-bearing
      liabilities:NOW
      and money market savings
                  
                  
                  96,193,724
                  
                  
                  
                  94,057,285
                  
                  
                  
                  2,136,439
                  
                  
                  
                  2.27
                  %
                  
                  
                  351,034
                  
                  
                  
                  710,050
                  
                  
                  
                  (359,016
                  )
                  
                  
                  -50.56
                  %
                  
                  
                  0.49
                  %
                  
                  
                  1.01
                  %
                  
                  
                  -0.52
                  %Savings
                  
                  
                  28,402,468
                  
                  
                  
                  25,624,128
                  
                  
                  
                  2,778,340
                  
                  
                  
                  10.84
                  %
                  
                  
                  41,472
                  
                  
                  
                  56,662
                  
                  
                  
                  (15,190
                  )
                  
                  
                  -26.81
                  %
                  
                  
                  0.20
                  %
                  
                  
                  0.29
                  %
                  
                  
                  -0.09
                  %Certificates
      of Deposit
                  
                  
                  197,044,223
                  
                  
                  
                  225,625,846
                  
                  
                  
                  (28,581,623
                  )
                  
                  
                  -12.67
                  %
                  
                  
                  5,010,538
                  
                  
                  
                  7,612,469
                  
                  
                  
                  (2,601,931
                  )
                  
                  
                  -34.18
                  %
                  
                  
                  3.40
                  %
                  
                  
                  4.49
                  %
                  
                  
                  -1.09
                  %Borrowed
      funds
                  
                  
                  75,948,164
                  
                  
                  
                  92,099,854
                  
                  
                  
                  (16,151,690
                  )
                  
                  
                  -17.54
                  %
                  
                  
                  2,745,765
                  
                  
                  
                  3,484,831
                  
                  
                  
                  (739,066
                  )
                  
                  
                  -21.21
                  %
                  
                  
                  4.83
                  %
                  
                  
                  5.04
                  %
                  
                  
                  -0.21
                  %Total
      interest-bearing liabilities
                  
                  
                  397,588,579
                  
                  
                  
                  437,407,113
                  
                  
                  
                  (39,818,534
                  )
                  
                  
                  -9.10
                  %
                  
                  
                  8,148,809
                  
                  
                  
                  11,864,012
                  
                  
                  
                  (3,715,203
                  )
                  
                  
                  -31.31
                  %
                  
                  
                  2.74
                  %
                  
                  
                  3.61
                  %
                  
                  
                  -0.87
                  %Noninterest-bearing
      liabilities
                  
                  
                  22,193,195
                  
                  
                  
                  21,989,915
                  
                  
                  
                  203,280
                  
                  
                  
                  0.92
                  %Total
      liabilities
                  
                  
                  419,781,774
                  
                  
                  
                  459,397,028
                  
                  
                  
                  (39,615,254
                  )
                  
                  
                  -8.62
                  %Equity
                  
                  
                  46,481,104
                  
                  
                  
                  41,068,757
                  
                  
                  
                  5,412,347
                  
                  
                  
                  13.18
                  %Total
      liabilities and equity
                  
                  
                  466,262,878
                  
                  
                  
                  500,465,785
                  
                  
                  
                  (34,202,907
                  )
                  
                  
                  -6.83
                  %Net
      interest income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,761,321
                  
                  
                  
                  9,745,137
                  
                  
                  
                  1,016,184
                  
                  
                  
                  10.43
                  %Net
      interest rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.05
                  %
                  
                  
                  2.58
                  %
                  
                  
                  0.47
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.29
                  %
                  
                  
                  2.79
                  %
                  
                  
                  0.50
                  %Ratio
      of average interest-earnings assets to average interest-bearing
      liabilities
                  
                  
                  109.59
                  %
                  
                  
                  106.16
                  %


19





Net Interest
Income.  Net interest income before provision for loan losses
increased by $462,000, or 14.0%, to $3.75 million for the quarter ended
September 30, 2009, from $3.29 million for the quarter ended September 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 3.27%
for the quarter ended September 30, 2009, from 2.70% for the quarter ended
September 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 $1.02 million, or
10.3%, to $10.76 million for the nine months ended September 30, 2009, from
$9.75 million for the nine months ended September 30, 2008.  The
increase was 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 3.05% for the nine months ended September 30,
2009, from 2.58% for the nine months ended September 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 $808,000, or 11.6%, to
$6.16 million for the quarter ended September 30, 2009, compared to $6.97
million for the quarter ended September 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 $27.4 million to $426.2
million for the quarter ended September 30, 2009, from $453.6 million for the
quarter ended September 30, 2008.  The average yield on
interest-earning assets decreased to 5.75% for the quarter ended September 30,
2009, from 6.12% for the quarter ended September 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, consumer
loans and interest-bearing cash, offset in part by an increase in the average
balance of multifamily residences and securities
available-for-sale.  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 September 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 $2.7 million, or 12.5%, to $18.91 million for the nine
months ended September 30, 2009, compared to $21.61 million for the nine months
ended September 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 $28.6 million to $435.7 million for the nine
months ended September 30, 2009, from $464.3 million for the nine months ended
September 30, 2008.  The average yield on interest-earning assets
decreased to 5.79% for the nine months ended September 30, 2009, from 6.19% for
the nine months ended September 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, consumer loans, securities
available-for sale and interest-bearing cash.  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 and multifamily residences, 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 nine months ended September 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.


20


Interest
Expense.  Interest expense decreased by $1.27 million, or
34.6%, to $2.41 million for the quarter ended September 30, 2009, compared to
$3.68 million for the quarter ended September 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 $42.0 million to $384.6 million for the quarter ended
September 30, 2009, from $426.6 million for the quarter ended September 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 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 2.48% for the quarter ended
September 30, 2009, compared to 3.42% for the quarter ended September 30,
2008.





Interest
expense decreased by $3.72 million, or 31.3%, to $8.15 million for the nine
months ended September 30, 2009, compared to $11.86 million for the nine months
ended September 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 $39.8 million to $397.6 million for the
nine months ended September 30, 2009, from $437.4 million for the nine months
ended September 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 2.74% for the nine months
ended September 30, 2009, compared to 3.61% for the nine months ended September
30, 2008.





Provision for
Loan Losses.The Company’s provision
for loan losses was $450,000 and $60,000 for the quarters ended September 30,
2009 and 2008, respectively, representing an increase of $390,000, or
650%.  The Company’s provision for loan losses was $1,220,000 and
$280,000 for the nine months ended September 30, 2009 and 2008,
respectively.  The increase in provision for loan losses for the 2009
periods compared to the same periods 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 $25.5 million, or 6.1% from September 30, 2008 to September 30,
2009.  This decrease primarily consisted of decreases in loans secured
by one-to four-family residential real estate of $20.5 million and commercial
real estate of $8.8 million.  Net charge-offs were $642,000 for the
nine months ended September 30, 2009, compared to $294,000 for the nine months
ended September 30, 2008.





The
following table provides information regarding nonaccrual loans and
nonperforming assets as of the dates indicated.




Nonaccrual
loans and nonperforming assets as of:


September
      30
                    
                    
                    December
      312009
                    
                    
                    2008(Dollars
      in thousands)First
      mortgage loans:One-
      to four-family residential
                    
                    $
                    1,062
                    
                    
                    $
                    915Multifamily
      and commercial properties
                    
                    
                    9,902
                    
                    
                    
                    2,885Consumer
      loans
                    
                    
                    508
                    
                    
                    
                    204Total
      nonaccrual loans
                    
                    
                    11,472
                    
                    
                    
                    4,00490
      days past due loans (still accruing interest)
                    
                    
                    -
                    
                    
                    
                    1,071Other
      nonperforming loans
                    
                    
                    664
                    
                    
                    
                    2,941Total
      foreclosed real estate
                    
                    
                    1,423
                    
                    
                    
                    1,183Other
      nonperforming assets
                    
                    
                    65
                    
                    
                    
                    12Total
      nonperforming assets
                    
                    $
                    13,624
                    
                    
                    $
                    9,211Total
      nonaccrual loans to net loans receivable
                    
                    
                    2.99
                    %
                    
                    
                    1.00
                    %Total
      nonaccrual loans to total assets
                    
                    
                    2.53
                    %
                    
                    
                    0.85
                    %Total
      nonperforming assets to total assets
                    
                    
                    3.01
                    %
                    
                    
                    1.95
                    %


21





The
allowance for loan loss was $6.0 million at September 30, 2009, compared to $5.4
million at December 31, 2008.  The allowance for loan losses at
September 30, 2009 was 1.52% of loans and 49.08% of nonperforming loans,
compared to 1.32% of loans and 67.10% of nonperforming loans at December 31,
2008, and 1.43% of loans and 52.84% of nonperforming loans at June 30, 2009.
Additions to the allowance for loan loss were due to a deterioration of economic
conditions, downgrades in internal risk ratings, primarily in certain land and
land development loans, reductions in appraised values, and higher levels of
charge-offs.  Nonperforming loans were $12.14 million, or 3.10% of
total loans, at September 30, 2009, compared to $8.02 million, or 1.97% of total
loans, at December 31, 2008, and $10.78 million or 2.70% of total loans at June
30, 2009. Foreclosed real estate increased to $1.42 million at September 30,
2009 from $1.11 million at September 30, 2008.





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





Three
      Months Ended September 30,
                      
                      
                      Nine
      Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      Change
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      ChangeBalance
      at beginning of period
                      
                      $
                      5,698
                      
                      
                      $
                      3,463
                      
                      
                      $
                      2,235
                      
                      
                      $
                      5,379
                      
                      
                      $
                      3,487
                      
                      
                      $
                      1,892Charge-offs
                      
                      
                      (199
                      )
                      
                      
                      (53
                      )
                      
                      $
                      (146
                      )
                      
                      
                      (658
                      )
                      
                      
                      (309
                      )
                      
                      $
                      (349
                      )Recoveries
                      
                      
                      8
                      
                      
                      
                      3
                      
                      
                      $
                      5
                      
                      
                      
                      16
                      
                      
                      
                      15
                      
                      
                      $
                      1Net
      charge-offs
                      
                      
                      (191
                      )
                      
                      
                      (50
                      )
                      
                      $
                      (141
                      )
                      
                      
                      (642
                      )
                      
                      
                      (294
                      )
                      
                      $
                      (348
                      )Provision
      charged to operations
                      
                      
                      450
                      
                      
                      
                      60
                      
                      
                      
                      390
                      
                      
                      
                      1,220
                      
                      
                      
                      280
                      
                      
                      
                      940Balance
      at end of period
                      
                      $
                      5,957
                      
                      
                      $
                      3,473
                      
                      
                      $
                      2,484
                      
                      
                      $
                      5,957
                      
                      
                      $
                      3,473
                      
                      
                      $
                      2,484Average
      loans outstanding
                      
                      $
                      393,574
                      
                      
                      $
                      423,848
                      
                      
                      
                      
                      
                      
                      $
                      397,062
                      
                      
                      $
                      434,848Ratio
      of net charge-offs during the period to average loans
      outstanding
                      
                      
                      0.05
                      %
                      
                      
                      0.01
                      %
                      
                      
                      
                      
                      
                      
                      0.16
                      %
                      
                      
                      0.07
                      %Ratio
      of allowance for loan losses to average loansoutstanding
                      
                      
                      1.51
                      %
                      
                      
                      0.82
                      %
                      
                      
                      
                      
                      
                      
                      1.50
                      %
                      
                      
                      0.80
                      %


Management
believes that the allowance for loan losses was adequate as of September 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.


22




The
following table shows the changes in the noninterest income categories shown in
the Consolidated Condensed Statements of Income for the periods
presented.


Three
      Months Ended September 30,
                    
                    
                    Nine
      Months Ended September 30,2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    Change %
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    Change %Noninterest
      income:Fees
      and service charges
                    
                    
                    1,148,759
                    
                    
                    
                    1,234,639
                    
                    
                    
                    (85,880
                    )
                    
                    
                    -7.0
                    %
                    
                    
                    3,168,446
                    
                    
                    
                    3,358,298
                    
                    
                    
                    (189,852
                    )
                    
                    
                    -5.7
                    %Abstract
      fees
                    
                    
                    223,456
                    
                    
                    
                    238,737
                    
                    
                    
                    (15,281
                    )
                    
                    
                    -6.4
                    %
                    
                    
                    722,947
                    
                    
                    
                    787,886
                    
                    
                    
                    (64,939
                    )
                    
                    
                    -8.2
                    %Mortgage
      banking income
                    
                    
                    177,131
                    
                    
                    
                    111,167
                    
                    
                    
                    65,964
                    
                    
                    
                    59.3
                    %
                    
                    
                    823,868
                    
                    
                    
                    422,216
                    
                    
                    
                    401,652
                    
                    
                    
                    95.1
                    %Loan
      prepayment fees
                    
                    
                    30,715
                    
                    
                    
                    900
                    
                    
                    
                    29,815
                    
                    
                    
                    3312.8
                    %
                    
                    
                    242,881
                    
                    
                    
                    5,531
                    
                    
                    
                    237,350
                    
                    
                    
                    4291.3
                    %Other
      income:Increase
      in CSV - BOLI
                    
                    
                    64,146
                    
                    
                    
                    64,514
                    
                    
                    
                    (368
                    )
                    
                    
                    -0.6
                    %
                    
                    
                    187,867
                    
                    
                    
                    188,497
                    
                    
                    
                    (630
                    )
                    
                    
                    -0.3
                    %Investment
      and Insurance sales
                    
                    
                    199,143
                    
                    
                    
                    153,339
                    
                    
                    
                    45,804
                    
                    
                    
                    29.9
                    %
                    
                    
                    626,683
                    
                    
                    
                    478,142
                    
                    
                    
                    148,541
                    
                    
                    
                    31.1
                    %Foreclosured
      real estate net earnings
                    
                    
                    (39,099
                    )
                    
                    
                    (10,323
                    )
                    
                    
                    (28,776
                    )
                    
                    
                    278.8
                    %
                    
                    
                    (64,385
                    )
                    
                    
                    (109,807
                    )
                    
                    
                    45,422
                    
                    
                    
                    -41.4
                    %Rental
      income
                    
                    
                    125,734
                    
                    
                    
                    121,814
                    
                    
                    
                    3,920
                    
                    
                    
                    3.2
                    %
                    
                    
                    360,194
                    
                    
                    
                    361,789
                    
                    
                    
                    (1,595
                    )
                    
                    
                    -0.4
                    %All
      other
                    
                    
                    3,225
                    
                    
                    
                    6,950
                    
                    
                    
                    (3,725
                    )
                    
                    
                    -53.6
                    %
                    
                    
                    9,535
                    
                    
                    
                    37,076
                    
                    
                    
                    (27,541
                    )
                    
                    
                    -74.3
                    %Total
      other income
                    
                    
                    353,149
                    
                    
                    
                    336,294
                    
                    
                    
                    16,855
                    
                    
                    
                    5.0
                    %
                    
                    
                    1,119,894
                    
                    
                    
                    955,697
                    
                    
                    
                    164,197
                    
                    
                    
                    17.2
                    %Total
      noninterest income
                    
                    
                    1,933,210
                    
                    
                    
                    1,921,737
                    
                    
                    
                    11,473
                    
                    
                    
                    0.6
                    %
                    
                    
                    6,078,036
                    
                    
                    
                    5,529,628
                    
                    
                    
                    548,408
                    
                    
                    
                    9.9
                    %





Noninterest
Income.  Total
noninterest income increased by $11,000, or 0.6%, to $1.93 million for the
quarter ended September 30, 2009, from $1.92 million for the quarter ended
September 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 $66,000 for the quarter ended
September 30, 2009 compared to the same period of 2008 due to an increase in
loans originated for the secondary market.  During the quarter ended
September 30, 2009 loan prepayment fees increased $30,000 compared to the
quarter ended September 30, 2008.  Other income, which primarily
includes investment and insurance sales and foreclosed real estate net earnings,
increased $17,000 for the quarter ended September 30, 2009 compared to the same
period of 2008 primarily due to an increase in income from the sale of annuities
and securities, offset in part by a decrease in foreclosed real estate net
earnings.  Fees and service charges decreased $86,000 for the quarter
ended September 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 $15,000 for the quarter ended September
30, 2009 compared to the same period of 2008.





Total
noninterest income increased by $548,000, or 9.9%, to $6.08 million for the nine
months ended September 30, 2009, compared to $5.53 million for the nine months
ended September 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 $402,000 for the
nine months ended September 30, 2009 compared to the same period of 2008 due to
an increase in loans originated for the secondary market.  During the
nine months ended September 30, 2009, the Company recorded $243,000 in loan
prepayment fees, compared to $6,000 for the nine months ended September 30,
2008.  Other income, which primarily includes investment and insurance
sales and foreclosed real estate net earnings, increased $164,000 for the nine
months ended September 30, 2009 compared to the same period of 2008 primarily
due to an increase in income from the sale of annuities and securities and an
increase in foreclosed real estate net earnings.  Fees and service
charges decreased $190,000 for the nine months ended September 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
$65,000 for the nine months ended September 30, 2009 compared to the same period
of 2008.





Securities
Losses.There
was no OTTI taken on investments for the quarter ended September 30, 2009,
compared to $3.85 million for the quarter ended September 30,
2008.  There was a gain recognized on sale of investments due to the
partial sale of a mortgage bond mutual fund investment of $6,000 for the quarter
ended September 30, 2009.  While no investments were sold in the
quarter end September 30, 2008.  OTTI on investments decreased to
$23,000 for the nine months ended September 30, 2009, compared to $5.81 million,
primarily due to OTTI taken on investments in Fannie Mae and Freddie Mac
preferred stock, for the nine months ended September 30, 2008 which the Company
no longer owns.  Net loss on sale of investments increased by $14,000
for the nine months ended September 30, 2009 compared to the same period of 2008
due to the partial sales of a mortgage bond mutual fund
investment.


23





The
following table shows the changes in the noninterest expense categories shown in
the Consolidated Condensed Statements of Income for the periods
presented.
 
 Three
      Months Ended September 30,
                                
                                
                                Nine
      Months Ended September 30,2009
                                
                                
                                2008
                                
                                
                                Change
                                
                                
                                Change
      %
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                Change
                                
                                
                                Change
      %Noninterest
      expense:Compensation
      and employee benefits
                                
                                
                                1,856,575
                                
                                
                                
                                1,766,045
                                
                                
                                
                                90,530
                                
                                
                                
                                5.1
                                %
                                
                                
                                5,568,730
                                
                                
                                
                                5,600,966
                                
                                
                                
                                (32,236
                                )
                                
                                
                                -0.6
                                %Premises
      and equipment
                                
                                
                                464,459
                                
                                
                                
                                423,783
                                
                                
                                
                                40,676
                                
                                
                                
                                9.6
                                %
                                
                                
                                1,393,290
                                
                                
                                
                                1,279,964
                                
                                
                                
                                113,326
                                
                                
                                
                                8.9
                                %Data
      processing
                                
                                
                                185,959
                                
                                
                                
                                229,002
                                
                                
                                
                                (43,043
                                )
                                
                                
                                -18.8
                                %
                                
                                
                                594,371
                                
                                
                                
                                715,286
                                
                                
                                
                                (120,915
                                )
                                
                                
                                -16.9
                                %FDIC
      insurance expense
                                
                                
                                143,544
                                
                                
                                
                                72,940
                                
                                
                                
                                70,604
                                
                                
                                
                                96.8
                                %
                                
                                
                                615,948
                                
                                
                                
                                105,175
                                
                                
                                
                                510,773
                                
                                
                                
                                485.6
                                %Other
      expense:Advertising
      and promotions
                                
                                
                                139,317
                                
                                
                                
                                152,826
                                
                                
                                
                                (13,509
                                )
                                
                                
                                -8.8
                                %
                                
                                
                                374,998
                                
                                
                                
                                395,595
                                
                                
                                
                                (20,597
                                )
                                
                                
                                -5.2
                                %Professional
      fees
                                
                                
                                209,049
                                
                                
                                
                                86,264
                                
                                
                                
                                122,785
                                
                                
                                
                                142.3
                                %
                                
                                
                                624,854
                                
                                
                                
                                228,412
                                
                                
                                
                                396,442
                                
                                
                                
                                173.6
                                %Printing,
      postage, and supplies
                                
                                
                                106,542
                                
                                
                                
                                112,700
                                
                                
                                
                                (6,158
                                )
                                
                                
                                -5.5
                                %
                                
                                
                                329,296
                                
                                
                                
                                323,917
                                
                                
                                
                                5,379
                                
                                
                                
                                1.7
                                %Checking
      account charges
                                
                                
                                96,362
                                
                                
                                
                                98,181
                                
                                
                                
                                (1,819
                                )
                                
                                
                                -1.9
                                %
                                
                                
                                283,284
                                
                                
                                
                                284,084
                                
                                
                                
                                (800
                                )
                                
                                
                                -0.3
                                %Insurance
                                
                                
                                40,741
                                
                                
                                
                                52,667
                                
                                
                                
                                (11,926
                                )
                                
                                
                                -22.6
                                %
                                
                                
                                123,949
                                
                                
                                
                                126,479
                                
                                
                                
                                (2,530
                                )
                                
                                
                                -2.0
                                %OTS
      general assessment
                                
                                
                                35,255
                                
                                
                                
                                35,584
                                
                                
                                
                                (329
                                )
                                
                                
                                -0.9
                                %
                                
                                
                                99,760
                                
                                
                                
                                103,541
                                
                                
                                
                                (3,781
                                )
                                
                                
                                -3.7
                                %Telephone
                                
                                
                                35,284
                                
                                
                                
                                35,710
                                
                                
                                
                                (426
                                )
                                
                                
                                -1.2
                                %
                                
                                
                                110,775
                                
                                
                                
                                109,720
                                
                                
                                
                                1,055
                                
                                
                                
                                1.0
                                %Apartment
      operating costs
                                
                                
                                87,680
                                
                                
                                
                                78,644
                                
                                
                                
                                9,036
                                
                                
                                
                                11.5
                                %
                                
                                
                                259,124
                                
                                
                                
                                259,183
                                
                                
                                
                                (59
                                )
                                
                                
                                0.0
                                %Employee
      costs
                                
                                
                                39,799
                                
                                
                                
                                37,209
                                
                                
                                
                                2,590
                                
                                
                                
                                7.0
                                %
                                
                                
                                132,362
                                
                                
                                
                                144,454
                                
                                
                                
                                (12,092
                                )
                                
                                
                                -8.4
                                %ATM
      expense
                                
                                
                                15,357
                                
                                
                                
                                36,605
                                
                                
                                
                                (21,248
                                )
                                
                                
                                -58.0
                                %
                                
                                
                                67,868
                                
                                
                                
                                117,489
                                
                                
                                
                                (49,621
                                )
                                
                                
                                -42.2
                                %Foreclosed
      real estate impairment
                                
                                
                                34,500
                                
                                
                                
                                92,606
                                
                                
                                
                                (58,106
                                )
                                
                                
                                -62.7
                                %
                                
                                
                                118,963
                                
                                
                                
                                359,696
                                
                                
                                
                                (240,733
                                )
                                
                                
                                -66.9
                                %All
      other
                                
                                
                                235,327
                                
                                
                                
                                245,182
                                
                                
                                
                                (9,855
                                )
                                
                                
                                -4.0
                                %
                                
                                
                                882,701
                                
                                
                                
                                780,717
                                
                                
                                
                                101,984
                                
                                
                                
                                13.1
                                %Total
      other expense
                                
                                
                                1,075,213
                                
                                
                                
                                1,064,178
                                
                                
                                
                                11,035
                                
                                
                                
                                1.0
                                %
                                
                                
                                3,407,934
                                
                                
                                
                                3,233,287
                                
                                
                                
                                174,647
                                
                                
                                
                                5.4
                                %Total
      noninterest expense
                                
                                
                                3,725,750
                                
                                
                                
                                3,555,948
                                
                                
                                
                                169,802
                                
                                
                                
                                4.8
                                %
                                
                                
                                11,580,273
                                
                                
                                
                                10,934,678
                                
                                
                                
                                645,595
                                
                                
                                
                                5.9
                                %





Noninterest
Expense.  Total
noninterest expense increased by $170,000, or 4.8%, to $3.73 million for the
quarter ended September 30, 2009, from $3.56 million for the quarter ended
September 30, 2008.  The increase in noninterest expense was primarily
due to increases in compensation and employee benefits, FDIC insurance expense,
premises and equipment and other expenses, offset in part by decreases in data
processing expenses. Compensation and employee benefits increased $91,000 for
the quarter ended September 30, 2009 compared to the same period of 2008 due to
an increase in the number of full time equivalent employees, normal salary
increases and increased pension plan expenses.  FDIC insurance expense
increased $71,000 for the quarter ended September 30, 2009 compared to the same
period of 2008 due to an increase in assessment fees. The increase in premises
and equipment of $41,000 was primarily due to increases in information
technology enhancements and property taxes.  Other expenses increased
$11,000 for the quarter ended September 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 by a decrease in impairment on other real estate
owned. Data processing expenses decreased $43,000 primarily as a result of
renewing a core processing contract at reduced rates.  The Company’s
efficiency ratio for the quarter ended September 30, 2009 and 2008 was 65.54%
and 68.23%, respectively.  The Company’s ratio of noninterest expense
to average assets for the quarters ended September 30, 2009 and 2008 was 3.28%
and 2.90%, respectively.





Total
noninterest expense increased by $646,000, or 5.9%, to $11.58 million for the
nine months ended September 30, 2009, from $10.93 million for the nine months
ended September 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 $511,000 for the nine
months ended September 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 $113,000 was primarily due to increases in information technology
enhancements and property taxes. Other expenses increased $175,000 for the nine
months ended September 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 pension plan expenses, and data processing expenses decreased
as a result of renewing a core processing contract at reduced
rates.  The Company’s efficiency ratio for the nine months ended
September 30, 2009 and 2008 was 68.77% and 71.59%, respectively.  The
Company’s ratio of noninterest expense to average assets for the nine months
ended September 30, 2009 and 2008 was 3.31% and 2.91%,
respectively.


24





Income
Taxes.Provision for
income taxes increased by $18,000, or 3.66%, to $513,000 for the quarter ended
September 30, 2009, compared to $495,000 for the quarter ended September 30,
2008.  The increase in income taxes was primarily due to the increase
in 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 third quarter of 2008, the Company
recorded  an OTTI with minimal tax benefit.





Provision
for income taxes increased by $171,000, or 14.8%, to $1.32 million for the nine
months ended September 30, 2009, compared to $1.15 million for the nine months
ended September 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.  For the nine months ended September 30, 2008, the Company
recorded an OTTI with minimal tax benefit.




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 nine months of 2009 and 2008,
principal payments, prepayments, and proceeds from the sale of loans totaled
$144.9 million and $135.6 million, respectively.  The net decrease in
deposits during the first nine months of 2009 and 2008 totaled $21.4 million and
$20.7 million, respectively.  The proceeds from borrowed funds during
the nine months ended September 30, 2009 and 2008 totaled $8.5 million and $11.5
million.  During the first nine months of 2009 and 2008, the proceeds
from the maturities, calls and sales of securities totaled $6.0 million and $1.5
million, respectively.  Cash provided from operating activities during
the first nine months of 2009 and 2008 totaled $5.2 million and $5.1 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 nine months of 2009 and
2008, the Company’s gross purchases and origination of loans totaled $131.5
million and $102.8 million, respectively.  The purchase of securities
available-for-sale for the nine months ended September 30, 2009 totaled $8.0
million compared to $11.0 million for the nine months ended September 30, 2008.
The repayment of borrowed funds during the first six months of 2009 and 2008
totaled $18.0 million and $21.5 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 August
17, 2009, the Company paid an aggregate cash dividend of $127,500 on Series A
Preferred Stock. On August 28, 2009, the Company declared a quarterly cash
dividend to $0.01 per share payable on October 9, 2009 to shareholders of record
as of the close of business on September 18, 2009. This dividend payment totaled
$13,000.





On
November 12, 2009, the FDIC Board of Directors approved a final rule that
requires insured depository institutions to prepay their quarterly risk-based
assessments for the fourth quarter of 2009 and full years 2010 through 2012 on
December 30, 2009.  This action was taken to meet immediate liquidity
needs of the FDIC and restore the Deposit Insurance Fund to its federally
mandated level without imposing additional special assessments.  Under
this new rule, the prepaid assessment amount will be calculated using the
institution’s third quarter 2009 base assessment rate and corresponding
assessment base (deposit data) for each quarter, with the assessment rate
increasing 3 basis points for the purpose of calculating the 2011 and 2012
amounts and the assessment base increasing at a 5% annual growth rate for each
quarter of the prepayment period.  Based on this calculation,
management believes the amount of the Company’s required payment will not have a
material adverse effect on our liquidity or future results of operations and
financial condition.


25





During
the third 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.





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 nine months ended September 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 nine months ended September 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.





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





The
Company and its subsidiaries are not parties to any pending legal proceedings
(other than ordinary litigation incidental to the entities’ businesses) and no
property of these entities is the subject of any such proceeding.  The
Company does not know of any proceeding contemplated by a governmental authority
against the Company, its subsidiaries, or any related property.


26





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”).   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.  On August 11, 2009, the court approved the settlement
agreement and dismissal of the case, and this matter is now closed.





Item
1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form
10-K for the year ended December 31, 2008, as supplemented and updated by
the discussion below. These factors could materially adversely affect our
business, financial condition, liquidity, results of operations and capital
position, and could cause our actual results to differ materially from our
historical results or the results contemplated by the forward-looking statements
contained in this report.




Higher FDIC
deposit insurance premiums and assessments could adversely affect our financial
condition.  Beginning in late 2008, the economic environment
caused higher levels of bank failures, which dramatically increased FDIC
resolution costs and led to a significant reduction in the Deposit Insurance
Fund (“DIF”).  FDIC insurance premiums have increased substantially in
2009 and we expect to pay significantly higher FDIC premiums in the future.
Effective April 1, 2009, the FDIC adopted a final rule revising its risk-based
assessment system.  The changes to the assessment system involve
adjustments to the risk-based calculation of an institution’s unsecured debt,
secured liabilities and brokered deposits.  The revisions effectively
result in a range of possible assessments under the risk-based system of 7 to
77.5 basis points. In addition, on May 22, 2009, the FDIC implemented a five
basis point special assessment on all insured institutions.  This
emergency assessment was calculated based on the institution’s assets as of
June 30, 2009, totaled $209,000 for the Company, and was collected on
September 30, 2009. Additional special assessments may be imposed by the
FDIC for future periods.  There can be no assurance that there will
not be additional significant deposit insurance premium increases, special
assessments or prepayments in order to restore the insurance fund’s reserve
ratio.  Increases in FDIC insurance premiums will add to our cost of
operations and could have a significant impact on the profitability of our
business.




On
November 12, 2009, the FDIC Board of Directors approved a final rule that
requires insured depository institutions to prepay their quarterly
risk-based assessments for the fourth quarter of 2009, and for all of 2010,
2011, and 2012, on December 30, 2009, unless an exemption is
obtained.  Under this new rule, an institution will account
for the prepayment by recording the entire amount of its prepaid assessment as a
prepaid expense (an asset) as of December 30, 2009, the date the payment will be
made.  Subsequently, each institution will record an expense (charge
to earnings) for its regular quarterly assessment and an offsetting credit to
the prepaid assessment until the asset is exhausted.  Once the asset
is exhausted, the institution would resume paying and accounting for quarterly
deposit insurance assessments as they currently do.  Although the
FDIC has the authority to exempt institutions from the prepayment
requirement when prepayment would impact the institution’s safety and soundness,
the FDIC has stated it expects few exemptions to be granted, and the Company
currently does not expect to apply for an exemption.




We also
participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for
noninterest-bearing transaction deposit accounts. Banks that participate in the
TLGP’s noninterest-bearing transaction account guarantee will pay the FDIC an
annual assessment of 10 basis points on the amounts in such accounts above the
amounts covered by FDIC deposit insurance. The general termination date for the
transaction account guarantee portion of the TLGP is December 31,
2009.  To promote an orderly phase-out of the program, on August 26,
2009, the FDIC adopted a final rule extending the program for six months,
through June 30, 2010.  For institutions that choose to remain in the
program, the fee will be raised and adjusted to reflect the institution’s risk
profile. Any institution currently participating in the program that wishes to
opt out of the transaction account guarantee program extension must submit its
opt-out election to the FDIC on or before November 2, 2009.  We have
decided to remain in the program, and therefore will be subject to additional
fees for the extended portion of the program.


27




There can be no
assurance regarding the impact of pending legislation or regulatory changes on
the U.S. financial services industry and the U.S. financial system or that the
phase-out of existing recovery programs will not adversely impact the
system.  The U.S. Congress, the Obama Administration and
various industry and public interest groups are currently debating many aspects
of the existing structure of the U.S. financial system,
including regulatory restructuring; federal and national charter changes;
issues involving systemic risk; appropriate capitalization levels; establishment
of a new and independent Consumer Financial Protection Agency; permitting state
regulators to supervise, oversee and/or enforce state laws on federal and
nationally chartered depository institutions; the ability of federal and
nationally chartered depository institutions to operate nationwide under a
uniform set of federal laws; restrictions on mortgage lending, credit card
lending and other areas affecting bank lending operations; laws impacting loan
securitization and secondary mortgage lending activities; additional laws that
could impose new regulatory burdens on insured depository institutions;
increased assessments on depository institutions to pay for industry supervision
and oversight; and changes in holding company oversight and
supervision.  All of these changes could all have a material adverse
impact on our business, financial condition, results of operations, access to
credit and the value of our securities.  Similarly, the premature
termination, manner or timing of the phase-out of existing programs implemented
to assist the U.S. financial system in recovering from the recent financial
crisis could have a material adverse impact on our business, financial
condition, results of operations, access to credit or the value of our
securities.




Item
6.  Exhibits





Exhibit No.
                
                Description
                
                Reference No.3.1
                
                Articles
      of Incorporation of North Central Bancshares, Inc.
                
                (1)3.2
                
                Bylaws
      of North Central Bancshares, Inc., as amended
                
                (2)3.3
                
                Articles
      of Amendment to the Articles of Incorporation establishing Series A
      Preferred Stock
                
                (3)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
                
                *





(1)
            Incorporated
      herein by reference to the Quarterly Report on Form 10-Q filed with the
      SEC on August 12, 2009.





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





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


28


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:
      November 12, 2009
                BY:
                /s/ David M. BradleyDavid
      M. Bradley, Chairman, President & CEODate:
      November 12, 2009
                BY:
                /s/ Kyle C. CookKyle
      C. Cook, Chief Financial Officer and
Treasurer


29