<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the Fiscal Year Ended December 31, 1998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from
     to                                                   -------------
       -------------
                                     0-27672
                            (Commission File Number)

                         NORTH CENTRAL BANCSHARES, INC.
             (Exact Name of Registrant as Specified in its Charter)

                     Iowa                               421449849
        (State or Other Jurisdiction of              (I.R.S. Employer
         Incorporation or Organization)            Identification Number)


    c/o First Federal Savings Bank of Iowa
     825 Central Avenue, Fort Dodge, Iowa                 50501
    (Address of Principal Executive Offices)            (Zip Code)

                                 (515) 576-7531
               (Registrant's Telephone Number including area code)


           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of Class)

     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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES  X    NO
                                       ---      ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.   [X]

     As of March 19,1999, there were issued and outstanding 2,957,242 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 1, 1999 was $44,144,265.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
     Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of
     Part III hereof.
<PAGE>
 
                                     PART I

ITEM 1.           BUSINESS

General

         North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company was
organized on December 5, 1995 at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank in connection with the conversion and reorganization of the Bank and North
Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding
company structure (these transactions are collectively referred to as the
"Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding
Company issued an aggregate of 4,011,057 shares of its Common Stock, par value
$0.01 per share, of which 1,385,590 shares were issued in exchange for all of
the Bank's issued and outstanding shares, except for shares owned by the MHC
which were cancelled, and 2,625,467 shares of which were sold in Subscription
and Community Offerings at a price of $10.00 per share, with gross proceeds
amounting to $26,254,670. At this time, the Holding Company conducts business as
a unitary savings and loan holding company and the principal business of the
Holding Company consists of the operation of its wholly-owned subsidiary, the
Bank.

         The Holding Company's executive offices are located at the home office
of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's
telephone number is (515) 576-7531.

First Federal Savings Bank of Iowa

         The Bank is a federally chartered savings bank that conducts its
operations from its main office located in Fort Dodge, Iowa and six branch
offices located in Iowa. Three of the Bank's branches are located in north
central Iowa, in the cities of Fort Dodge, Nevada and Ames. On January 30, 1998,
the Bank completed the acquisition of Valley Financial Corp., an Iowa
corporation, and the holding company for Valley Savings Bank, FSB (the
"Acquisition"). See "Acquisition of Valley Financial Corp." As a result of the
Acquisition, the Bank also has three branches in southeastern Iowa, in the
cities of Burlington and Mount Pleasant. The Bank is the successor to First
Federal Savings and Loan Association of Fort Dodge, which was chartered
originally in 1954, and on May 7, 1987 became a federally chartered savings
bank. The Bank adopted its present name on February 27, 1998. The Bank is a
community-oriented savings institution that is primarily engaged in the business
of attracting deposits from the general public in the Bank's market areas, and
investing such deposits in one-to-four family residential real estate mortgages
and multifamily mortgages and, to a lesser extent, secured and unsecured
consumer loans, with emphasis on second mortgage loans. The Bank's deposits are
insured by the FDIC under the SAIF. The Bank has been a member of the Federal
Home Loan Bank ("FHLB") System since 1954. At December 31, 1998, the Bank had
total assets of $336.7 million, total deposits of $246.7 million, and total
shareholders' equity of $48.2 million.

         The Bank's principal executive office is located at 825 Central Avenue,
Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531.

Acquisition of Valley Financial Corp.

         As of the close of business on January 30, 1998, the Bank completed the
Acquisition of Valley Financial Corp., ("Valley Financial"), pursuant to an
Agreement and Plan of Merger, dated as of September 18, 1997, (the "Merger
Agreement"). The Acquisition resulted in the merger of Valley Financial's wholly
owned subsidiary, Valley Savings Bank, FSB ("Valley Savings") with and into the
Bank, with the Bank as the

                                        2
<PAGE>
 
resulting financial institution (the "Bank Merger"). Valley Savings, formerly
headquartered in Burlington, Iowa was a federally-chartered stock savings bank
with three branch offices located in southeastern Iowa. The former offices of
Valley Savings are being operated as a division of the Bank.

         In connection with the Acquisition, each share of Valley Financial's
common stock, par value $1.00 per share, issued and outstanding (other than
shares held as treasury stock of Valley Financial) was cancelled and converted
automatically into the right to receive $525.00 per share in cash pursuant to
the terms and conditions of the Merger Agreement. As a result of the
Acquisition, shareholders of Valley Financial were paid a total of $14,726,250
in cash. The source of funds for the Acquisition consisted of the Bank's
accumulation of its cash flow from the maturity of short-term liquid
investments, principal and interest on loans, sale of other investment
securities, other cash receipts, net of operating expenses and other projected
disbursements.

Market Area and Competition

         The Company is an independent savings and loan company serving its
primary market area of Webster and Story Counties, which are located in the
central and north central part of the State of Iowa. As a result of the
Acquisition, the Company also operates branch locations in Burlington and Mount
Pleasant, Iowa. The Company's market area is influenced by agriculture as well
as gypsum mining, retail sales, professional services and public education. The
Company is headquartered in Fort Dodge, the Webster County seat, where it
operates two Company locations. The Company's Nevada branch operates in the city
of Nevada, Iowa, the county seat for Story County. Nevada is located close to
Ames, the location of Iowa State University, and is also located 35 miles from
Des Moines, the state capital. The Company's Ames branch operates in the city of
Ames, Iowa and is also located 30 miles from Des Moines. Fort Dodge has become a
strong retail center for North Central Iowa and Nevada and Ames are
significantly influenced by the proximity of Iowa State University and certain
Iowa state government agencies. Burlington, the county seat of Des Moines
County, is a strong retail center for southeastern Iowa. Mount Pleasant is the
county seat of Henry County.

         The unemployment rate for Webster County as of December 1998 was 2.3%,
compared to the national rate of 4.3% and the State of Iowa rate of 2.7%. The
unemployment rate for Story County was 2.0%, for Des Moines County was 2.8% and
Henry County was 3.2%.

         The Nevada, Iowa and Ames, Iowa markets have been a source of loan and
depositor growth for the Company in recent periods, and the Company expects to
continue to pursue lending and deposit growth opportunities in these markets, as
well as the markets in Burlington and Mount Pleasant, Iowa. However, due to the
loan demand in the Company's overall market area, increased competition, and the
Company's decision to diversify its loan portfolio, the Company has originated
and purchased loans (primarily multifamily loans) from out of state. The Company
intends to continue such originations and purchases pursuant to its underwriting
standards for Company-originated loans.

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


                                       3
<PAGE>
 
Lending Activities

         Loan Portfolio Composition. The principal components of the Company's
loan portfolio are fixed- and adjustable-rate first mortgage loans secured by
one-to-four family owner-occupied residential real estate, fixed-and
adjustable-rate first mortgage loans secured by multifamily residential real
estate and, to a lesser extent, secured and unsecured consumer loans, with
emphasis on second mortgage loans. At December 31, 1998, the Company's loans
receivable totalled $259.4 million, of which $149.0 million, or 57.5%, were
one-to-four family residential real estate first mortgage loans, and $76.3
million, or 29.4%, were other first mortgage loans, primarily multifamily and
commercial real estate loans purchased by the Company. Consumer loans,
consisting primarily of automobile loans and second mortgage loans, totalled
$34.1 million, or 13.1%, of the Company's loan portfolio.

         Savings associations, such as the Bank, are generally subject to the
same limits on loans to one borrower as are imposed on national banks.
Generally, under these limits, a savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of the
association's unimpaired capital and surplus. Additional amounts may be lent, in
the aggregate not exceeding 10% of unimpaired capital and surplus, if any such
loan or extension of credit is fully secured by readily-marketable collateral.
Such collateral is defined to include certain debt and equity securities and
bullion, but generally does not include real estate. For the year ended December
31, 1998, it was the Company's policy to limit loans to one borrower to $2.5
million. At December 31, 1998, the Company's largest aggregate outstanding loan
to one borrower was $2.5 million and the second largest borrower had an
aggregate balance of $2.1 million, both of which were first mortgage multifamily
residential real estate loans and both were performing as of that date.

                                       4
<PAGE>
 
         Analysis of Loan Portfolio.  Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated:

<TABLE>
<CAPTION>
                                                                                          At December 31,
                                         1998              1997               1996               1995               1994
                                  -----------------  -----------------  -----------------  -----------------  -----------------
                                           Percent            Percent            Percent            Percent            Percent
                                   Amount  of Total   Amount  of Total   Amount  of Total   Amount  of Total   Amount  of Total
                                   ------  --------   ------  --------   ------  --------   ------  --------   ------  --------
<S>                               <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
                                                                      (Dollars in thousands)
First mortgage loans:
   One-to-four family
    residential(1).............   $148,992  57.46%   $115,763   59.48%  $107,168   63.44%  $ 94,876   62.70%  $ 84,203   65.48%
   Multifamily.................     64,895   25.02     51,345   26.38     34,488   20.42     31,622   20.90     21,474   16.70
   Commercial..................     11,396    4.39      3,800    1.95      5,225    3.09      5,825    3.85      6,163    4.79
                                  --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
     Total first mortgage loans    225,283   86.87    170,908   87.81    146,881   86.95    132,323   87.45%   111,840   86.97
                                  --------  ------   --------  ------   --------  ------   --------  ------   --------  ------

Consumer loans:
   Automobiles.................    $ 7,348    2.83%  $  4,696    2.41%  $  4,155    2.46%  $  2,967    1.96%  $  2,889    2.25%
   Second mortgage(2)..........     20,784    8.01     16,226    8.34     15,303    9.06     13,284    8.78     10,735    8.35
   Other(3)....................      5,946    2.29      2,796    1.44      2,582    1.53      2,736    1.81      3,127    2.43
                                  --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
     Total consumer loans......     34,078   13.13     23,718   12.19     22,040   13.05     18,987   12.55     16,751   13.03
                                  --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
     Total loans receivable....   $259,361  100.00   $194,626  100.00   $168,921  100.00%  $151,310  100.00%  $128,591  100.00%

Less:
   Undisbursed portion of
     construction loans........    $ 2,025    0.78$       453    0.23%  $    371    0.22%  $    782    0.52%  $  1,048    0.81%
   Unearned loan discount......        312    0.12        424    0.22        525    0.31        682    0.45      1,013    0.79
   Net deferred loan
    origination fee                    316    0.12        349    0.18        241    0.14        238    0.16        203    0.16
   Allowance for loan losses...      2,676    1.03      2,151    1.11      1,953    1.16      1,736    1.14      1,543    1.20
                                  --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
      Total loans receivable, net $254,032   97.95%  $191,249   98.26%  $165,831   98.17%  $147,872   97.73%  $124,784   97.04%
                                  ========  ======   ========  ======   ========   =====   ========  ======   ========  ======
</TABLE>
-----------------------
(1) Includes interest-only construction loans that convert to permanent loans.

(2) Second mortgage loans included $1.4 million, $1.1 million, $862,000,
    $724,000,and $403,000 (in actual dollars) of nonowner-occupied residential
    first mortgage loans at December 31, 1998, 1997, 1996, 1995 and 1994,
    respectively.

(3) Other consumer loans included $2.3 million, $269,000, $213,000, $299,000 and
    $499,000 (in actual dollars) of commercial mortgage loans at December 31,
    1998, 1997, 1996, 1995 and 1994, respectively.

                                       5
<PAGE>
 
         Loan Maturity Schedule. The following table sets forth the maturity or
period to repricing of the Company's loan portfolio at December 31, 1998.
Overdraft lines of credit are reported as due in one year or less.
Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in which they contractually mature, and
fixed rate loans are included in the period in which the final contractual
repayment is due.

<TABLE>
<CAPTION>
                                                                At December 31, 1998
                                 ---------------------------------------------------------------------------------
                                 Within        1-3          3-5          5-10       10-20     Beyond 20
                                 1 Year       Years        Years        Years       Years       Years        Total
                                 ------       -----        -----        -----       -----     ---------      -----
<S>                              <C>         <C>          <C>          <C>         <C>          <C>         <C>
                                                                   (In thousands)
First mortgage loans:
    One-to-four family
      residential(1)........     $29,084     $19,195      $36,173      $58,087     $ 5,867      $   585     $148,991
    Multifamily.............      22,127      22,680       11,305        6,165       2,618           --      64,895
    Commercial..............       1,849       5,804        1,841        1,902          --           --      11,396
Consumer loans (2)..........       5,562      10,200       17,117        1,179          20           --      34,078
                                 -------     -------      -------      -------     -------      -------     -------
      Total ................     $58,622     $57,879      $66,436      $67,333     $ 8,505      $   585     $259,360
                                 =======     =======      =======      =======     =======      =======     ========
</TABLE>
------------------------
(1)      One-to-four family loans include $102.9 million of 7 year fixed rate
         loans that convert to adjustable rates at the beginning of the eighth
         year and are annually adjustable thereafter. $63.4 million of these
         loans with repricing periods greater than 5 years have been classified
         as fixed rate loans. $39.5 million of these loans with repricing
         periods less than 5 years have been classified as adjustable rate
         loans.

(2)      Includes second mortgage loans of $20.8 million at December 31, 1998.


         The following table sets forth the dollar amounts of all fixed rate and
adjustable rate loans in each loan category at December 31, 1998 due after
December 31, 1999.

<TABLE>
<CAPTION>
                                                                          Due After December 31, 1999
                                                                 Fixed            Adjustable             Total
                                                                 -----            ----------             -----
                                                                                (In thousands)
<S>                                                            <C>                 <C>                  <C>
First mortgage loans:
     One-to-four family residential(1)...................      $ 81,150            $ 38,757             $119,907
     Multifamily.........................................         9,294              33,474               42,768
     Commercial..........................................         4,468               5,079                9,547
Consumer loans (2).......................................        28,004                 512               28,516
                                                               --------            --------             --------
       Total.............................................      $122,917            $ 77,821             $200,738
                                                               ========            ========             ========
</TABLE>
------------------------

(1)      One-to-four family loans include $98.9 million of 7 year fixed rate
         loans that convert to adjustable rates at the beginning of the eighth
         year and are annually adjustable thereafter. $63.4 million of these
         loans with repricing periods greater than 5 years have been classified
         as fixed rate loans. $35.5 million of these loans with repricing
         periods less than 5 years have been classified as adjustable rate
         loans.
(2)      Includes second mortgage loans of $19.0 million at December 31, 1998.

         One-to-Four Family Residential Real Estate Loans. Traditionally, the
Company's primary lending activity consists of the origination of fixed- and
adjustable-rate one-to-four family owner-occupied residential first mortgage
loans, substantially all of which are collateralized by properties located in
the Company's market area. The Company also originates one-to-four family,
interest only construction loans that convert to permanent loans after an
initial construction period that generally does not exceed nine months. At
December 1998, 54.9% of the Company's residential real estate loans had fixed
rates, and 45.1% had adjustable rates.

         The Company originates loans for portfolio and sells loans in the
secondary mortgage market. However, the Company's one-to-four family,
fixed-rate, residential real estate loans originated for portfolio are generally
originated and underwritten according to standards that qualify such loans to be
included in Federal

                                       6
<PAGE>
 
Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA") purchase and guarantee programs and that otherwise permit
resale in the secondary mortgage market. The Bank has sold fixed-rate loans with
maturities equal to or in excess of 15 years in the secondary mortgage market.
For the year ended December 31, 1998, the Bank sold $4.5 million of mortgage
loans consisting of seventy one-to-four family residential mortgage loans.
One-to-four family loans are underwritten and originated according to policies
approved by the Board of Directors. First Iowa Mortgage, Inc., the Bank's wholly
owned mortgage banking subsidiary, sold $23.5 million of mortgage loans
consisting of two hundred seventy nine one-to-four family residential mortgage
loans.

         Originations of one-to-four family fixed-rate first mortgage loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, the Company's interest rate gap position, and loan
products offered by the Company's competitors. The Company's one-to-four family
fixed-rate first mortgage loans amortize on a monthly basis with principal and
interest due each month. To make the Company's fixed-rate loan portfolio more
interest rate sensitive, the Company currently emphasizes the origination of
fixed-rate loans with terms of 15 years or less to be held in portfolio. The
Company also offers 7-year fixed-rate first mortgage loans that convert to
adjustable-rate loans that adjust on an annual basis after the initial fixed
rate term. The overall maturity of these loans may be up to 30 years. The
Company determines whether a customer qualifies for these loans based upon the
initial fixed interest rate.

         The Company's adjustable rate mortgage loans, or "ARM loans", are
generally originated for terms of up to 30 years, with interest rates that
adjust annually. The Company establishes various annual and life-of-the-loan
caps on ARM loan interest rate adjustments. Currently, the Company offers ARM
loans with annual rate caps of 1.5% and maximum life-of-loan caps of 11.95%.
Prior to 1995, the Company's ARM loans originated for retention in its portfolio
generally were based on the 11th District Cost of Funds Index, a lagging market
index. At present, the interest rate on its ARM loans is calculated by using the
weekly average yield on United States Treasury Securities adjusted to a constant
maturity of one year. The Company currently offers one-year ARM loans with
initially discounted rates, often known as "teaser rates." The Company
determines whether a borrower qualifies for an ARM loan based on the fully
indexed rate of the ARM loan at the time the loan is originated, rather than the
introductory or "teaser" rate or the maximum life-of-the rate to which the loan
could adjust. In addition, the Company establishes floors for each loan
originated below which the loan may not adjust. One-to- four family residential
ARM loans totalled $67.2 million, or 26.5%, of the Company's total net loan
portfolio at December 31, 1998.

         The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Company's credit risk associated with its ARM loans is reduced because
of the annual and lifetime interest rate adjustment limitations on such loans,
although such limitations do create an element of interest rate risk. See Item
7A. "Discussion of Market Risk-- Interest Rate Sensitivity Analysis".

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

         Regulations limit the amount that a savings institution may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. See Item 1.

                                       7
<PAGE>
 
"Regulation-Regulation of Federal Savings Associations-Real Estate Lending
Standards." The Company's lending policies limit the maximum loan-to-value ratio
on mortgage loans without private mortgage insurance to 80% of the lesser of the
appraised value or the purchase price of the property to serve as collateral for
the loan. The Company generally makes one-to-four family first real estate loans
with loan-to-value ratios of up to 90%; however, for one-to-four family real
estate loans with loan-to-value ratios greater than 80%, the Company requires
the loan amount to be covered by private mortgage insurance. The Company
requires fire and casualty insurance, flood insurance, where applicable, an
abstract of title, and a title opinion on all properties securing real estate
loans originated by the Company.

         Multifamily Residential and Commercial Real Estate Loans. The Company's
loan portfolio contains loans secured by multifamily residential and commercial
real estate. Such loans constituted approximately $76.3 million, or 30.0%, of
the Company's total net loan portfolio at December 31, 1998. Of such loans,
$70.0 million, or 91.7%, were purchased or originated by the Company and were
secured by properties outside the State of Iowa (the "out of state" properties).
There was one commercial real estate loan more than 90 days past due at December
31, 1998. This loan was repaid in full subsequent to year end. These loans are
primarily secured by multifamily residences such as apartment buildings and by
commercial facilities such as office buildings and retail buildings. Multifamily
residential real estate loans are offered with fixed and adjustable rates and
are structured in a number of different ways depending upon the circumstances of
the borrower and the type of multifamily project. Fixed rate loans generally
amortize over 15 to 30 years, and generally contain call provisions permitting
the Company to require that the entire principal balance be repaid at the end of
five to fifteen years. Such loans are priced as five to fifteen year loans with
maximum loan-to-value ratios of 80%. See " -- Purchased or Out of State
Originated Loans".

         All purchased or out of state originated loans in excess of $200,000
are approved by the Chief Executive Officer, Chief Operating Officer and the
Board of Directors and are subject to the same underwriting standards as for
loans originated by the Company. All purchased or out of state originated loans
less than $200,000 are approved by the Chief Executive Officer and Chief
Operating Officer and ratified by the Board of Directors and are subject to the
same underwriting standards as loans originated by the Company. Before a loan is
purchased, the Company obtains a copy of the original loan application,
certified rent rolls, the original title insurance policy and personal financial
statements of any guarantors of the loan. An executive officer or director of
the Company also makes a personal inspection of the property securing the loan.
Such purchases are made without recourse to the seller. Generally, the
originating financial institution or mortgage banker continues to service the
loans, remitting principal and interest to the Company. The Company generally
imposes a $2.5 million limit on the aggregate size of multifamily and commercial
loans to any one borrower. Any exceptions to the limit must be specifically
approved by the Board of Directors on a loan-by-loan basis within the Company's
legal lending limit. See "Regulation -- Regulation of Federal Savings
Associations -- Loans to One Borrower".

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

         Consumer Loans, Including Second Mortgage Loans. The Company also
originates consumer loans, which primarily include second mortgage loans. As of
December 31, 1998, second mortgage loans totalled $20.8 million, or 8.0%, of the
Company's net total loan portfolio. The Company's second mortgage loans have
fixed interest rates and are generally for terms of 3 to 5 years. The Company's
second mortgage loans are

                                       8
<PAGE>
 
secured by the borrower's principal residence generally with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of generally no more than 80%. The average principal
amount of the Company's second mortgage loans is approximately $12,000.

         To a lesser extent, the Company also originates loans secured by
automobiles, with fixed rates generally on a 80% loan-to-value basis for new
cars. All of the Company's automobile loans were originated by the Company and
generally, have terms of up to five years.

         In addition, the Company also makes other types of consumer loans,
primarily unsecured signature loans for various purposes. The minimum loan
amount for such loans is $1,000, the maximum loan amount for such loans is
$7,500, and the average balance of such loans is approximately $1,800.

         The Company originates a limited number of commercial business loans,
which the Company includes with its consumer loan portfolio for reporting
purposes. Such loans may be unsecured and are originated for any business
purpose, such as for the purchase of computers and business equipment. The
maximum loan amount for such unsecured loans is $7,500.

         The Company's business plan calls for an increase in consumer lending
for the foreseeable future, particularly second mortgage lending. The Company
generally expects consumer loan demand will come from its mortgage loan
customers. Consumer loans generally provide for shorter terms and higher yields
as compared to residential first mortgage loans, but generally carry higher
risks of default. At December 31, 1998, $189,000, or 0.55%, of the Company's
consumer loan portfolio was on non-accrual status.

         Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to collateralize the proposed loan. An underwriter in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. Pursuant to the Company's written loan
policies, all first mortgage loans originated prior to 1998 were approved by the
Chief Executive Officer. Beginning in 1998, senior management approve all first
mortgage loans greater than $150,000. All first mortgage loans less than
$150,000 are approved by two loan officers. The Loan Committee of the Board of
Directors meets monthly to review a sampling of all loans originated in the
month.

         After a loan is approved, a loan commitment letter is promptly issued
to the borrower. The commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 60-day periods in the case of
loans to refinance, loans to purchase existing real estate, and construction
loans. The borrower must provide proof of fire and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. An abstract of title along with an attorney's title
opinion is required on all first mortgage loans secured by real property in
Iowa. At December 31, 1998, the Company had outstanding commitments to originate
$855,000 of loans. This amount does not include commitments to purchase loans,
the undisbursed overdraft loan privileges or the unfunded portion of loans in
process.

         Purchased or Out of State Originated Loans. The Company's loan
portfolio contains $78.8 million of loans secured by out of state properties.
These loans represented 30.4% of the Company's total loan portfolio at December
31, 1998. Substantially all of the multifamily residential and commercial real
estate loans in the Company's loan portfolio are purchased or originated out of
state by the Company without recourse to the seller. At December 31, 1998,
approximately $11.2 million of these purchased loans represented loans secured

                                       9
<PAGE>
 
by real estate in the West Coast states of California, Oregon and Washington. At
that date, the Company's investment in properties located in California totalled
$5.6 million and was distributed among two dozen cities. Most of these loans
were originated from 1973 through 1987 and were purchased by the Company between
1982 and 1988 generally under a 75% loan-to-value guideline. The Company's loans
in California were purchased prior to December 31, 1988. Concentrations of
California real estate loans exist in three areas, Los Angeles, Lodi/Stockton
and San Diego. The downturn in California real estate markets has not adversely
impacted the Company. The Company's investment in properties located in
Wisconsin totalled $34.6 million and was primarily distributed between the
Milwaukee and Madison areas. These loans were originated between 1985 and 1998
and were purchased by the Company between 1991 and 1998. The Company's
investment in properties in Colorado totalled $19.3 million and was primarily
distributed between the Colorado Springs and Denver areas. The remainder of the
Company's purchased or out of state originated loans are distributed in various
states. At December 31, 1998, the Company's multifamily residential and
commercial real estate loans had an average balance of $380,000 and the largest
loan had a principal balance of $2.5 million. As of December 31, 1998 there was
one commercial real estate loan that was more than 90 days past due and was on a
nonaccrual status. This loan was repaid in full subsequent to year end.

         To supplement its origination of one-to-four family first mortgage
loans, the Company also purchases loans secured by one-to-four family residences
out of state. At December 31, 1998, $8.5 million, or 3.3%, of the Company's
total loan portfolio consisted of purchased one-to-four family loans, of which
$2.8 million were secured by properties located in Missouri and $2.2 million
were secured by properties in Wisconsin. As of December 31, 1998 there were no
purchased one-to-four family first mortgage loans that were on a nonaccrual
status.

         Loans purchased by the Company entail certain risks not necessarily
associated with loans the Company originates. The Company's purchased loans are
generally acquired without recourse with servicing retained by the seller or
originator of the loans. Although the Company reviews each purchased loan using
the Company's underwriting criteria for originations and a Company officer or
director performs an on-site inspection of each purchased loan, the Company is
dependent on the servicer of the loan for ongoing collection efforts and
collateral review. In addition, the Company purchases loans with a variety of
terms, including maturities, interest rate caps and indices for adjustment of
interest rates that may differ from those offered at the time by the Company in
connection with loans the Company originates. Finally, the market areas in which
the properties which secure the purchased loans are located are subject to
economic and real estate market conditions that may significantly differ from
those experienced in the Company's market areas. If economic conditions continue
to limit the Company's opportunities to originate loans in its market areas, the
Company may increase its investment in out of state mortgage loans. There can be
no assurance, however, that economic conditions in these out of state areas will
not deteriorate in the future resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.

         In an effort to reduce the risk of loss on out of state purchased
loans, the Company only purchases loans that meet the underwriting policies for
loans originated by the Company although specific rates and terms may differ
from the rates and terms offered by the Company. The Company also requires
appropriate documentation, and personal inspections of the underlying real
estate collateral by an executive officer or director prior to purchase. The
servicers of the loans generally conduct annual inspections of the underlying
real estate collateral and copies of the reports of such inspections are
generally provided to the Company.

                                       10
<PAGE>
 
         Set forth below is a table of the Company's purchased or out of state
originated loans by state of origin (including multifamily residential,
commercial real estate and one-to-four family first mortgage loans) as of
December 31, 1998.


                                          Balance as of
      State                             December 31, 1998
      -----                             -----------------
                                          (In thousands)
   Arizona                                       $1,052
   California                                     5,597
   Colorado                                      19,302
   Florida                                          301
   Georgia                                          138
   Indiana                                        1,590
   Kansas                                           843
   Minnesota                                        350
   Missouri                                       3,499
   Montana                                          169
   Nebraska                                         570
   Nevada                                           770
   New Mexico                                       111
   North Carolina                                   984
   North Dakota                                     117
   Ohio                                             668
   Oregon                                         3,493
   South Carolina                                   126
   Tennessee                                        249
   Texas                                            965
   Utah                                           1,124
   Washington                                     2,127
   Wisconsin                                     34,557
   Other                                            109
                                                -------
   Total                                        $78,811
                                                =======


                                       11
<PAGE>
 
         Origination, Purchase and Sale of Loans. The table below shows the
Company's originations, purchases and sales of loans for the periods indicated.

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                December 31,
                                                          --------------------------------------------------------
                                                             1998                   1997                  1996
                                                          -----------            -----------           -----------
                                                                               (In thousands)
<S>                                                       <C>                    <C>                   <C>
Total loans receivable at beginning of period.........    $   194,626            $   168,921           $   151,310
                                                          -----------            -----------           -----------
Originations:
First mortgage loans:
   One-to-four family residential.....................         36,226                 25,001                24,178
   Multifamily........................................             --                     --                 3,410
   Commercial.........................................          1,100                     50                   235
Consumer loans:
   Automobile.........................................          6,349                  3,698                 3,962
   Second mortgage ...................................         14,493                  9,642                10,060
   Other .............................................          2,595                  1,591                 2,247
                                                          -----------            -----------           -----------
     Total originations:..............................         60,763                 39,982                44,092
   Effect of Valley Financial Acquisition.............         58,911                     --                    --
Loan Purchases:
   First mortgage-- one-to-four family................          3,159                     51                 3,133
                                                                                                             
   First mortgage-- multifamily.......................         21,315                 22,313                 4,813
Loan Sales:
   First mortgage-- one-to-four family................          4,517                    815                    --
   First mortgage-- multifamily.......................             --                     --                   380
   Consumer loan......................................             --                     --                    67
Transfer of mortgage loans to
   foreclosed real estate.............................            373                    175                   148
Repayments............................................         75,523                 35,651                33,832
                                                          -----------            -----------           -----------
Net loan activity.....................................         63,734                 25,705                17,611
                                                          -----------            -----------           -----------
     Total loans receivable at end of period..........    $   258,361            $   194,626           $   168,921
                                                          ===========            ===========           ===========
</TABLE>
         Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Company generally receives fees in connection with loan
originations. Such loan origination fees, net of costs to originate, are
deferred and amortized using an interest method over the contractual life of the
loan. Fees deferred are recognized into income immediately upon prepayment of
the related loan. At December 31, 1998, the Company had $316,000 of deferred
loan origination fees, net. Such fees vary with the type of loans and
commitments made. The Company typically charges an origination fee on fixed- and
adjustable-rate first mortgage loans. In addition to loan origination fees, the
Company also receives other fees, service charges (such as overdraft fees), and
other income that consist primarily of deposit transaction account service
charges and late charges. The Company recognized fees and service charges of
$1.2 million, $657,000 and $580,000 for the fiscal years ended December 31,
1998, 1997 and 1996 respectively.

                                       12
<PAGE>
 
Investment Activities

         At December 31, 1998, the Company's investment portfolio is comprised
of United States Treasury securities, United States Government Agencies,
Municipal Obligations, mortgage-backed securities, equity securities consisting
of FHLMC preferred stocks, FNMA preferred stock, FHLB stock, other common and
preferred stocks and interest-earning deposits. At December 31, 1998, $5.0
million, or 12.6%, of the Company's investment portfolio, excluding equity
securities, was scheduled to mature in one year or less, and $16.8 million, or
41.8% was scheduled to mature within one to five years.

         The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities. In addition, the Company's liquidity levels are affected by
the level and source of its borrowed funds.

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

<TABLE>
<CAPTION>
                                                                                At December 31,
                                                     ----------------------------------------------------------------
                                                         1998                         1997                    1996
                                                     -----------                  -----------             -----------
                                                                                (In thousands)
<S>                                                  <C>                          <C>                     <C>
Investment securities:
    U.S. Treasury  Notes........................     $     9,410                  $    11,046             $    16,518
    U.S. Government agencies....................          18,884                           --                      --
    Mortgage-backed securities..................           7,508                           --                      --
    State and Local Obligations.................           4,378                           --                      --
    FHLB stock..................................           2,379                        1,550                   1,374
    Equity securities...........................           7,323                        7,220                   8,711
                                                     -----------                  -----------             -----------
      Total investment securities...............          49,882                       19,816                  26,603
    Interest-earning deposits...................          13,201                        2,463                   2,973
                                                     -----------                  -----------             -----------
      Total investments.........................     $    63,083                  $    22,279             $    29,576
                                                     ===========                  ===========             ===========
</TABLE>

                                       13
<PAGE>
 
         Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 1998.

<TABLE>
<CAPTION>
                                                         At December 31, 1998
                             -----------------------------------------------------------------------------
                                  One Year or Less          One to Five Years         Over Five Years
                             -------------------------- ------------------------  ------------------------
                                           Annualized                Annualized                 Annualized
                                            Weighted                  Weighted                   Weighted
                               Carrying      Average     Carrying      Average     Carrying       Average
                                 Value        Yield        Value        Yield        Value         Yield
                               --------    ----------    ---------   -----------   ---------   -----------
<S>                             <C>           <C>         <C>            <C>        <C>            <C>
                                                         (Dollars in thousands)
Investment securities:
   U.S. Treasury Notes.......   $ 5,045        5.92%       $ 3,843        5.34%     $   522         6.81%
   U.S. Government agencies(1)       --          --         10,488        5.95        8,396         6.30
   Mortgage-backed securities        --          --          1,673        5.93        5,834         6.10
   State and Local Obligations       --          --            802        4.01        3,576         4.49
   FHLB Stock................        --          --             --          --           --           --
   Common Stock. . . . . . .         --          --             --          --           --           --
   Preferred Stock-other . . .       --          --             --          --           --           --
   Preferred Stock-FNMA              --          --             --          --           --           --
   Preferred Stock-FHLMC.....        --          --             --          --           --           --
                                -------     -------        -------     -------      -------      -------
     Total...................   $ 5,045        5.92%       $16,806        5.73%     $18,328         5.90%
Interest-bearing deposits
   at the FHLB...............    13,201        4.42             --          --           --           --
                                -------     -------        -------     -------      -------      -------
     Total investments.......   $18,246        4.83%       $16,806         5.73%    $18,328         5.90%
                                =======     =======        =======     ========     =======      =======
</TABLE>
<TABLE>
<CAPTION>

                                            At December 31, 1998
                             -----------------------------------------------
                                                  Total
                             -----------------------------------------------
                                                                  Annualized
                                                        Average     Weighted
                              Carrying     Market       Life in      Average
                                Value       Value        Years        Yield
                             ----------   ---------     -------   ----------
<S>                             <C>         <C>            <C>         <C>

Investment securities:
   U.S. Treasury Notes.......   $ 9,410     $ 9,410           1         5.73%
   U.S. Government agencies(1    18,884      18,884           4         6.11
   Mortgage-backed securities     7,508       7,508          10         6.06
   State and Local Obligation     4,378       4,378           9         4.40
   FHLB Stock................     2,379       2,379                     6.50
   Common Stock. . . . . . .        652         652                     2.33
   Preferred Stock-other . .        273         273                     7.01
   Preferred Stock-FNMA           5,402       5,402                     6.49
   Preferred Stock-FHLMC.....       996         996                     6.72
                                -------     -------                  -------
     Total...................   $49,882     $49,882                     5.91%
Interest-bearing deposits
   at the FHLB...............    13,201      13,201                     4.42
                                -------     -------                  -------
     Total investments.......   $63,084     $63,084                     5.59%
                                =======     =======                  =======
</TABLE>

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

                                       14
<PAGE>
 
Sources of Funds

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

         Deposits. During 1998, consumer and commercial deposits were attracted
principally from within the Company's market area through the offering of a
broad selection of deposit instruments including NOW accounts, savings accounts,
money market savings, certificates of deposit and individual retirement
accounts. The Company also offers these products in its new market area which it
now serves as a result of the Acquisition. See "Acquisition of Valley Financial
Corp." Deposit account terms vary according to the minimum balance required, the
period of time during which the funds must remain on deposit, and the interest
rate, among other factors. The maximum rate of interest which the Company may
pay is not established by regulatory authority. The Company regularly evaluates
its internal cost of funds, surveys rates offered by competing institutions,
reviews the Company's cash flow requirements for lending and liquidity, and
executes rate changes when deemed appropriate. The Company has sought to
decrease the risk associated with changes in interest rates by offering
competitive rates on deposit accounts and by pricing certificates of deposit to
provide customers with incentives to choose certificates of deposit with longer
terms. The Company does not obtain funds through brokers through a solicitation
of funds outside its market area, nor by offering negotiated rates on
certificates of deposit in excess of $100,000.

         Deposit Portfolio.  Deposits with the Company as of December 31, 1998,
were represented by the various types of deposit programs described below.

<TABLE>
<CAPTION>
   Weighted
    Average                                                                                            Percentage
   Interest                                 Checking and               Minimum                          of Total
     Rate       Original Term              Savings Deposits            Balance         Balances         Deposits
   --------     -------------              ----------------            -------         --------        ----------
                                                                                     (Dollars in
                                                                                      thousands)
   <S>         <C>                    <C>                              <C>             <C>               <C>

   0.00%       None                   Noninterest-bearing demand       $     50        $  5,458            2.21%
   1.50        None                   NOW accounts                           50          30,909           12.53
   2.25        None                   Savings accounts                       25          26,099           10.58
   3.90        None                   Money Market savings                2,500          19,828            8.04

                                      Certificates of Deposit

   4.23        1-3 months             Fixed term, fixed rate           $  1,000        $    564            0.23
   4.55        4-6 months             Fixed term, fixed rate              1,000           4,727            1.92
   4.71        7-9 months             Fixed term, fixed rate              1,000           1,013            0.41
   5.38        10-12 months           Fixed term, fixed rate              1,000          18,092            7.33
   5.53        13-24 months           Fixed term, fixed rate              1,000          64,712           26.23
   5.64        25-36 months           Fixed term, fixed rate              1,000          23,623            9.58
   5.91        37-48 months           Fixed term, fixed rate              1,000           1,333            0.54
   6.24        49-60 months           Fixed term, fixed rate              1,000          49,365           20.01
   6.91        61 months or greater   Fixed term, fixed rate              1,000             745            0.30
   3.50        Various                Variable rate                         100             222            0.09
                                                                                       --------         -------
                                      Total certificates of deposit                    $246,690          100.00%
                                                                                       ========         =======
</TABLE>

                                       15
<PAGE>
 
         The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Company between the
dates indicated.

<TABLE>
<CAPTION>
                                                    Increase      Increase                    Increase      Increase
                                        Balance    (Decrease)    (Decrease)      Balance     (Decrease)    (Decrease)      Balance
                                       12/31/98         %             $         12/31/97         %             $          12/31/96
                                  -------------------------------------------------------------------------------------------------
                                                                          (Dollars in thousands)
<S>                                   <C>              <C>       <C>           <C>               <C>       <C>           <C>
Noninterest bearing demand........    $    5,458        73.55%   $    2,313    $    3,145         38.24%   $      870    $    2,275
NOW...............................        30,909       113.80        16,452        14,457         22.27         2,633        11,824
Savings account ..................        26,099        52.45         8,979        17,120         (3.58)         (636)       17,756
Money market savings..............        19,828       121.34        10,870         8,958         23.05         1,678         7,280
Certificates of deposit
  that mature:
    within 12 months..............        81,295        99.44        40,533        40,762         10.25         3,790        36,972
    within 12-36 months...........        64,962        53.20        22,558        42,404         33.24        10,578        31,826
    beyond 36 months..............        18,139        27.04         3,861        14,278        (34.47)       (7,511)       21,789
                                      ----------   ----------    ----------    ----------    ----------    ----------    ----------
       Total......................    $  246,690   $    74.80%   $  105,566    $  141,124          8.79%   $   11,402    $  129,722
                                      ==========   ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>
<TABLE>
<CAPTION>
                                                      Increase      Increase                    Increase      Increase
                                          Balance    (Decrease)    (Decrease)      Balance     (Decrease)    (Decrease)    Balance
                                         12/31/96         %             $         12/31/95          %             $       12/31/94
                                       ---------------------------------------------------------------------------------------------

                                                                           (Dollars in thousands)
<S>                                      <C>             <C>       <C>           <C>               <C>       <C>          <C>
Noninterest bearing demand.............  $    2,275        0.04%   $        8    $    2,267          1.93%   $       43   $    2,224

NOW....................................      11,824        3.39           388        11,436          6.20           668       10,768

Passbook savings.......................      17,756       (5.85)       (1,104)       18,860        (14.17)       (3,114)      21,974

Money market savings...................       7,280       29.38         1,653         5,627        169.62         3,540        2,087

Certificates of deposit that mature:
    within 12 months...................      36,972       22.37         6,759        30,213        (21.32)       (8,185)      38,398

    within 12-36 months................      31,826       (6.77)       (2,311)       34,137         19.54         5,580       28,557

    beyond 36 months...................      21,789       (9.71)       (2,343)       24,132         19.58         3,951       20,181

                                         ----------  -----------   -----------   ----------    ----------    ----------   ----------

       Total...........................  $  129,722        2.41%   $    3,050    $  126,672          2.00%   $    2,483   $  124,189

                                         ==========  ==========    ==========    ==========    ==========    ==========   ==========

</TABLE>

                                       16
<PAGE>
 
         The following table sets forth the certificates of deposit in the
Company classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
                                                                   At December 31,
                                         -------------------------------------------------------------------
                                            1998                         1997                       1996
                                         -----------                 -----------                 -----------
                                                                      (In thousands)
<S>                                      <C>                         <C>                         <C>
Rate
----
3.99% or less......................      $       232                 $        91                 $       140
4.00-5.99%.........................          110,152                      45,749                      45,481
6.00-7.99%.........................           53,829                      51,585                      44,913
8.00 or greater....................              183                          19                          53
                                         -----------                 -----------                 -----------
                                         $   164,396                 $    97,444                 $    90,587
                                         ===========                 ===========                 ===========
</TABLE>

         The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
                                                               Amount Due
                            ---------------------------------------------------------------------------------------
                             Less
                            Than 1       1-2         2-3          3-4           4-5         After 5
                             Year       Years       Years        Years         Years         Years          Total
                            ------      -----       -----        -----         -----        -------         -----
                                                             (In thousands)
<S>                         <C>       <C>         <C>           <C>          <C>           <C>            <C>
Rate

3.99% or less...........    $   232   $     --    $      --     $     --     $     --      $    --        $      232
4.00-5.99%..............     57,320     37,218        6,462          297        8,849            6           110,152
6.00-7.99%..............     23,572     15,332        5,947        7,044        1,737           197           53,829
8.00% or greater........        173         --            --          10           --            --              183
                            -------   --------    ----------    --------     --------      --------       ----------
                            $81,297   $ 52,550    $   12,409    $  7,351     $ 10,586      $    203       $  164,396
                            =======   ========    ==========    ========     ========      ========       ==========
</TABLE>

         The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity at December 31,
1998. This amount does not include savings accounts of greater than $100,000,
which totalled approximately $1.4 million at December 31, 1998.

<TABLE>
<CAPTION>
                                                            Certificates
                                                           of Deposit over
                 Remaining Maturity                            $100,000
                 ------------------                        ---------------
                                                            (In thousands)
<S>                                                           <C>
Three months or less.................................         $   1,126
Three through six months.............................             1,837
Six through twelve months............................             1,935
Over twelve months...................................             5,001
                                                              ---------
  Total..............................................         $   9,899
                                                              =========
</TABLE>

                                      -17-
<PAGE>
 
         The following table sets forth the savings activities of the Company
for the periods indicated:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                         -----------------------------------------------------
                                                           1998                    1997                 1996
                                                         ---------              ---------            ---------
                                                                              (In thousands)
<S>                                                      <C>                    <C>                  <C>
Net increase (decrease) before interest
    credited and deposits acquired..................     $  (2,943)             $   6,132            $  (1,751)
Effect of Valley Financial Acquisition..............        99,269                     --                   --
Interest credited...................................         9,240                  5,270                4,801
                                                         ---------              ---------            ---------
    Net increase in deposits........................     $ 105,566              $  11,402            $   3,050
                                                         =========              =========            =========
</TABLE>

Borrowings

         Deposits are the Company's primary source of funds. The Company may
also obtain funds from the FHLB. FHLB advances are collateralized by selected
assets of the Company. Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB. The maximum amount of FHLB advances to a member institution generally is
reduced by borrowings from any other source.

         In conjunction with the Bank's conversion from mutual to stock form in
1994, the Bank established an Employee Stock Ownership Plan (the "ESOP") for
eligible employees. The ESOP borrowed $960,000 from an unrelated third party
lender to finance the purchase of 104,075 shares of the Bank's common stock.
Collateral for such loan consisted of the common stock held by the ESOP, as well
as $100,000 in cash pledged by North Central Bancshares, MHC. The term of the
loan was 10 years. The ESOP also borrowed funds in the amount of $840,000 from
the Holding Company to purchase 84,000 shares of the Holding Company's Common
Stock issued in the reorganization of the Bank and the MHC to the stock holding
company form in 1996. In September 1996, these two loans were consolidated into
a single loan from the Holding Company to the ESOP.
<TABLE>
<CAPTION>
                                                                       For the
                                                               Year Ended December 31,
                                                        -------------------------------------
                                                          1998           1997          1996
                                                        --------       -------       --------
                                                                (Dollars in thousands)
<S>                                                     <C>            <C>            <C>
Weighted average rate paid on: (1)
    FHLB advances.............................              5.81%         5.94%          5.76%
FHLB advances:
    Maximum balance...........................           $42,550       $29,800        $24,300
    Average balance...........................            33,980        23,672         11,503
Weighted average rate paid on:
    ESOP advances.............................               N/A           N/A           8.03%
ESOP advances:
    Maximum balance...........................               N/A           N/A            790
    Average balance...........................               N/A           N/A            513
Weighted average rate paid on:
    Other borrowings..........................              1.00%         9.00%          7.00%
Other borrowings:
    Maximum balance...........................               $42           $35           $130
    Average balance...........................                40             7             98
</TABLE>
------------------------
(1) Calculated using monthly weighted average interest rates.

                                      -18-
<PAGE>
 
Title Abstract Business

         A component of the Company's operating strategy is to increase
non-interest income, primarily through the expansion of the abstract company
business conducted through a wholly owned subsidiary, First Iowa Title Services
Inc. ("First Iowa"). On December 28, 1996, First Iowa purchased the assets of
two abstract companies located in Webster and Calhoun Counties in Iowa. The
abstract company in Calhoun County was subsequently sold on March 30, 1997.
First Iowa currently provides real estate title abstracting services in Webster,
Boone and Jasper counties. These services include researching recorded documents
at the county courthouse and providing a history of those documents as they
pertain to specific parcels of real estate. This information is used to
determine who owns specific parcels of real estate and what encumbrances are on
those specific parcels. The abstract business performed by First Iowa replaces a
significant portion of the function of a title insurance company. Iowa law
prohibits Iowa insurance companies or companies authorized to do business in
Iowa from issuing title insurance or insurance against loss or damage by reason
of defective title, encumbrance or otherwise. Institutions can purchase title
insurance, for their own protection or to sell loans on the secondary market,
but the cost of this insurance may not be passed on to the borrower. First Iowa
had 17 employees as of December 31, 1998.

Insurance and Annuity Business

         The Company has another wholly-owned subsidiary, First Financial
Service Corporation ("First Financial"), which the Company began in 1971. First
Financial's activities include the sale of life insurance on mortgage loans, and
credit life and accident and health insurance on consumer loans made by the
Company. In addition, First Financial sells life insurance annuity products. In
connection with the Acquisition, the Bank acquired Valley Services, Inc., which
was merged into First Financial. First Financial also originates leases for
equipment such as computers, office equipment, light industrial equipment and
commercial cleaning equipment. First Financial has no employees. The subsidiary
has executed a management agreement with the Company which provides its
management and staff.

Mortgage Company Business

         First Iowa Mortgage, Inc. (formerly known as Hearthstone Mortgage
Company, Inc.) was acquired as a part of the Acquisition of Valley Financial and
is a wholly-owned subsidiary of the Bank.  First Iowa Mortgage, Inc. originates
first mortgage loans and subsequently sells these loans and the mortgage
servicing rights to investors.  First Iowa Mortgage, Inc. currently operates in
Ames, Iowa  First Iowa Mortgage, Inc. has 3 employees at December 31, 1998.

Multifamily Apartment Building

         On July 13, 1995, the Company formed the Northridge Apartments Limited
Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa
corporation formed to acquire, develop and manage low-and moderate-income
housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort
Dodge Municipal Housing Agency, an agency chartered by the City of Fort Dodge.
The Northridge Partnership is a low-income housing tax credit project for
certain federal tax purposes. A 44-unit apartment complex was completed on
February 1, 1997. The tax credits for the year ended December 31, 1998 are
approximately $149,000. The tax credits will amount to approximately $153,000
for each year during the eight-year period commencing with the year ended
December 31, 1999.

Personnel

         At December 31, 1998, the Company had 108 full-time and 27 part-time
employees (including the 17 employees of First Iowa and the 3 employees at First
Iowa Mortgage, Inc.). None of the Company's employees is represented by a
collective bargaining group. The Company believes its relationship with its
employees to be good.

                                      -19-
<PAGE>
 
                           FEDERAL AND STATE TAXATION



Federal Taxation

         General. The following is a general discussion of material tax matters
and does not purport to be a comprehensive description of the tax rules
applicable to the Holding Company or the Bank. The Bank has not been audited in
the last five years. For federal income tax purposes, the Holding Company and
the Bank will be eligible to file consolidated income tax returns and report
their income on a calendar year basis using the accrual method of accounting and
will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's tax reserve
for bad debts, discussed below.

         Bad Debt Reserves. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general, are
loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are deductible
for purposes of computing the Bank's taxable income. Pursuant to the Small
Business Job Protection Act of 1996, the Bank is now recapturing (taking into
income) over a multi-year period a portion of the balance of its bad debt
reserve as of December 31, 1995.

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

         The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.

         Corporate Alternative Maximum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20%. Only 90% of AMTI can be offset by net operating losses. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Company's AMTI is increased by an amount equal to 75% of the
amount by which the Company's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1998 and before January 2010. The
Company does not expect to be subject to the AMT, but would be subject to the
environmental tax liability.

         Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Bank will not file a consolidated tax
return, except that if the Holding Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.


                                      -20-
<PAGE>
 
State and Local Taxation

         Iowa Taxation. The Holding Company and the Bank's subsidiaries will
file Iowa corporation tax returns and the Bank will file an Iowa franchise tax
return. The Bank currently files an Iowa franchise tax return, and the Holding
Company and the Bank's subsidiaries file an Iowa corporation tax return, on a
calendar year basis.

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

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


                                   REGULATION

General

         The Bank is a federal savings bank subject to the regulation,
examination and supervision by the OTS and is subject to the examination and
supervision of the Federal Deposit Insurance Corporation ("FDIC") as its deposit
insurer. The Bank is a member of the SAIF, and its deposit accounts are insured
up to applicable limits by the FDIC. All of the deposit premiums paid by the
Bank to the FDIC for deposit insurance are currently paid to the SAIF. The Bank
is also a member of the FHLB of Des Moines, which is one of the 12 regional
FHLBs. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Holding Company, as a savings and loan holding company, files certain reports
with, and otherwise complies with, the rules and regulations of the OTS and of
the Commission under the federal securities laws.

         The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.

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

Regulation of Savings and Loan Holding Companies

         The Holding Company is a savings and loan holding company and is
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Holding
Company and any of its non-savings association subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the financial safety, soundness or stability
of a subsidiary savings association.

         The Home Owner and Loan Act ("HOLA"), as amended, prohibits a savings
and loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings association or holding company
thereof, without prior written approval of the OTS; acquiring or retaining, with
certain exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a non-subsidiary company engaged

                                      -21-
<PAGE>
 
in activities other than those permitted by HOLA; or acquiring or retaining
control of a depository institution that is not insured by the FDIC. In
evaluating an application by a holding company to acquire a savings association,
the OTS must consider the financial and managerial resources and future
prospects of the company and savings association involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.

         As a unitary savings and loan holding company, the Holding Company
generally is not restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to satisfy
the QTL test. See "-- Regulation of Federal Savings Associations -- QTL Test"
for a discussion of the QTL requirements. Upon any nonsupervisory acquisition by
the Company of another savings association or savings bank that meets the QTL
test and is deemed to be a savings association by the OTS and that will be held
as a separate subsidiary, the Holding Company would become a multiple savings
and loan holding company and would be subject to limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings and loan holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act (the "BHC Act"), subject
to the prior approval of the OTS, and to other activities authorized by OTS
regulation.

         The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings associations
in more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquiror by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.

         Transactions between the Bank and the Holding Company and its other
subsidiaries are subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations -- Transactions with Related
Parties." The Bank must give 30-days written notice to the OTS prior to any
declaration of the payment of any dividends or other capital distributions to
the Holding Company. See "-- Regulation of Federal Savings Associations --
Limitation on Capital Distributions."

Regulation of Federal Savings Associations

         Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. These investment powers are subject to various limitations,
including: (i) a prohibition against the acquisition of any corporate debt
security that is not rated in one of the four highest rating categories; (ii) a
limit of 400% of an association's capital on the aggregate amount of loans
secured by nonresidential real estate property; (iii) a limit of 20% of an
association's assets on commercial loans with the amount of commercial loans in
excess of 10% of assets being limited to small business loans; (iv) a limit of
35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (v) a limit of 5.0% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(vi) a limit of the greater of 5.0% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.

                                      -22-
<PAGE>
 
         Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if
any such loan or extension of credit is fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. For the year
ended December 31, 1998, the Bank generally imposed a $2.5 million limit on the
aggregate size of loans to any one borrower. Any exception to the limit must be
specifically approved by the Board of Directors on a loan-by-loan basis within
the Bank's legal lending limit. At December 31, 1998, the Bank's largest
aggregate amount of loans to one borrower was $2.5 million, and the second
largest borrower had an aggregate balance of $2.1 million. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

         QTL Test. HOLA requires a savings association to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" in certain "qualified thrift investments" in at least 9
months of the most recent 12-month period. "Portfolio assets" means, in general,
an association's total assets less the sum of (i) specified liquid assets up to
20% of total assets, (ii) goodwill and other intangible assets, and (iii) the
value of property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of an association's
portfolio assets. Recent legislation broadened the scope of "qualified thrift
investments" to include 100% of an institution's credit card loans, education
loans, and small business loans. A savings association may also satisfy the QTL
test by qualifying as a "domestic building and loan association" as defined in
the Internal Revenue Code of 1986. At December 31, 1998, the Bank maintained
92.7% of its portfolio assets in qualified thrift investments, and it had more
than 65% of its portfolio assets in qualified thrift investments in the
requisite number of the prior 12 months.

         A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may requalify under the QTL test and be free of such limitations, but
it may do so only once.

         Capital Requirements. The OTS regulations require savings associations
to meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3.0% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8.0% of core and supplementary capital
to total risk-based assets. The 3.0% core capital requirement has been
effectively superseded by the OTS' prompt corrective action regulations, which
impose a 4.0% core capital leverage requirement for "adequately capitalized"
thrifts and a 5.0% core capital leverage requirement for "well capitalized"
thrifts. See "-- Prompt Corrective Regulatory Action." The OTS and the federal
banking regulators have proposed amendments to their minimum capital regulations
to provide that the minimum leverage capital ratio for a depository institution
that has been assigned the highest composite rating of 1 under the Uniform
Financial Institutions Ratings System will be 3% and that the minimum leverage
capital ratio for any other depository institution will be 4%, unless a higher
leverage capital ratio is warranted by the particular circumstances or risk
profile of the depository institution. In determining the amount of
risk-weighted assets for purposes of the risk-based capital requirement, a
savings association must compute its risk-based assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies

                                      -23-
<PAGE>
 
to 100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks found by the OTS to be inherent in the type of
asset.

         Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.

         The OTS and the other federal banking agencies are required to take
into account interest rate risk ("IRR") in their risk-based capital standards.
The OTS adopted regulations, effective January 1, 1994, that set forth the
methodology for calculating an IRR component to be incorporated into the OTS
risk-based capital regulations. The OTS has indefinitely deferred the
implementation of the IRR component in the computation of an institution's
risk-based capital requirement. The OTS continues to monitor the IRR of
individual institutions and retains the right to impose additional capital on
individual institutions. At December 31, 1998, the Bank was not required to
maintain any additional risk-based capital under this regulation.

         At December 31, 1998, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1998:

<TABLE>
<CAPTION>
                                                         Bank                 Capital           Excess Capital
                                                         ----               Requirements        --------------
                                                                            ------------
<S>                                                                           <C>                 <C>
                                                                           (In thousands)
Tangible capital.................................     $  38,245               $   4,917           $  33,328
Core capital.....................................        38,245                   9,834              28,411
Risk-based capital...............................        40,509                  13,614              26,895
</TABLE>

         A reconciliation between regulatory capital and GAAP capital at
December 31, 1998 in the accompanying financial statements is presented below:

<TABLE>
<CAPTION>
                                                     Tangible Capital        Core Capital      Risk-based Capital
                                                     ----------------        ------------      ------------------
                                                                             (In thousands)
<S>                                                     <C>                     <C>                 <C>
GAAP capital.....................................       $45,876                 $45,876             $45,876
Intangible assets................................        (7,313)                 (7,313)             (7,313)
Unrealized (gain) on certain available for sale
  assets.........................................          (318)                   (318)               (188)
Allowance for loan losses includable
  in supplementary capital.......................            --                      --               2,134
                                                        -------                 -------             -------
Regulatory capital...............................       $38,245                 $38,245             $40,509
                                                        =======                 =======             =======
</TABLE>

         Limitation on Capital Distributions. OTS regulations impose limitations
upon capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger, and other distributions charged
against capital. Effective April 1, 1999, the OTS amended its capital
distribution regulations to reduce regulatory burdens on savings associations.
The prior regulations, which were effective throughout 1998, required that at
least 30-days written notice must be given to the OTS of a proposed capital
distribution by a savings association, and capital distributions in excess of
specified earnings

                                      -24-
<PAGE>
 
or by certain institutions are subject to approval by the OTS. An association
that has capital in excess of all fully phased-in regulatory capital
requirements before and after a proposed capital distribution and that is not
otherwise restricted in making capital distributions, could, after prior notice
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above. See "-- Prompt Corrective Regulatory Action."
Under the amendments adopted by the OTS, certain savings associations will be
permitted to pay capital distributions during a calendar year that do not exceed
the association's net income for that year plus its retained net income for the
prior two years, or the approval of, the OTS. However, a savings association
subsidiary of a savings and loan holding company, such as the Bank, will
continue to have to file a notice unless the specific capital distribution
requires an application.

         Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4.0%. Monetary penalties may be imposed
for failure to meet these liquidity requirements. At December 31, 1998, the
Bank's liquidity position was $45.7 million or 17.58% of liquid assets, compared
to $14.0 million or 9.28% at December 31, 1997.

         Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The OTS adopted
amendments to its regulations, effective January 1, 1999, that are intended to
assess savings associations on a more equitable basis. The new regulations will
base the assessment for an individual savings association on three components:
the size of the association, on which the basic assessment would be based; the
association's supervisory condition, which would result in an additional
assessment based of a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the association's operations, which
would result in an additional assessment based of a percentage of the basic
assessment for any savings association that managed over $1 billion in trust
assets, serviced for others loans aggregating more than $1 billion, or had
certain off-balance sheet assets aggregating more than $1 billion. In order to
avoid a disproportionate impact on the smaller savings institutions, which are
those whose total assets never exceeded $100 million, the new regulations
provide that the portion of the assessment based on assets size will be lesser
of the assessment under the amended regulations or the regulations before the
amendment. Management believes that any change in its rate of OTS assessments
under the amended regulations will not be material.

         Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (i) in states that expressly authorize branches of savings
associations located in another state and (ii) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.

         Community Reinvestment.  Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation

                                      -25-
<PAGE>
 
to help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
association, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA
rating in its most recent examination.

         In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefitting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices. Small savings
associations are to be assessed pursuant to a streamlined approach focusing on a
lesser range of information and performance standards. The term "small savings
association" is defined as including associations with less than $250 million in
assets or an affiliate of a holding company with banking and thrift assets of
less than $1.0 billion, which would include the Bank. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.

         Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (i) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.

         The Bank's authority to extend credit to its directors, executive
officers and 10% stockholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board (the "FRB") thereunder.
Among other things, these provisions require that extensions of credit to
insiders (i) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features and (ii) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits are
based, in part, on the amount of the association's capital. In addition,
extensions of credit in excess of certain limits must be approved by the
association's board of directors.

         Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"),
the OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other

                                      -26-
<PAGE>
 
significant adverse effect on an insured savings association. Civil penalties
cover a wide range of violations and actions and range from $5,000 for each day
during which violations of law, regulations, orders and certain written
agreements and conditions continue, up to $1,000,000 per day for such violations
if the person obtained a substantial pecuniary gain as a result of such
violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $10 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.

         Standards for Safety and Soundness. Pursuant to the FDI Act, as amended
by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"), the OTS and the federal bank regulatory agencies
adopted, effective August 9, 1995, a set of guidelines prescribing safety and
soundness standards. The guidelines establish general standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. See "--
Prompt Corrective Regulatory Action." If an institution fails to comply with
such an order, the OTS may seek to enforce such order in judicial proceedings
and to impose civil money penalties.

         Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted to
make a limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.

         Prompt Corrective Regulatory Action. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the banking regulators are required to take
certain supervisory actions against undercapitalized institutions, based upon
the five categories of institutions established by FDICIA: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," which are categories defined by the
institution's regulatory capital ratios. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to any undercapitalized institution,
including restrictions on growth of assets and other forms of expansion. The OTS
could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors. Generally, subject to a narrow exception,
FDICIA requires the applicable banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. Under the
OTS regulations, generally, a federally

                                      -27-
<PAGE>
 
chartered savings association is treated as well capitalized if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio
is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject
to any order or directive by the OTS to meet a specific capital level. As of
December 31, 1998, the Association met the criteria for being considered "well
capitalized" by the OTS.

         Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of
FDICIA.

         Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established
a new risk-based assessment system for determining the deposit insurance
assessments to be paid by insured depositary institutions. Under the new
assessment system, which began in 1993, the FDIC assigns an institution to one
of three capital categories based on the institution's financial information as
of the reporting period ending seven months before the assessment period. The
three capital categories consist of (i) well capitalized, (ii) adequately
capitalized, or (iii) undercapitalized. The FDIC also assigns an institution to
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds
Act of 1996 (the "1996 Funds Act"), both the BIF and the SAIF currently satisfy
the reserve ratio requirement. If the FDIC determines that assessment rates
should be increased, institutions in all risk categories could be affected. The
FDIC has exercised this authority several times in the past and could raise
insurance assessment rates in the future. If such action is taken by the FDIC,
it could have an adverse effect on the earnings of the Bank.

         In addition, the 1996 Funds Act expanded the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the deposits of both BIF-
and SAIF-insured institutions were assessed for the payments on the FICO bonds.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the quarterly period
beginning on January 1, 1998 was set at 0.01256 % for BIF-assessable deposits
and 0.0628% for SAIF-assessable deposits. For the quarterly period beginning on
July 1, 1998 the rates of assessment for the FICO bonds was 0.0122% for
BIF-assessable deposits and 0.0610% for SAIF-assessable deposits.

         Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

         Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of Des Moines, is required to acquire and hold
shares of capital stock in the FHLB of Des Moines in an amount at least equal to
the greater of 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of Des Moines. The Bank was in
compliance with this requirement with an investment in FHLB of Des Moines stock
at December 31, 1998 of $2.4 million. Any advances from a FHLB must be secured
by specified types of collateral, and all long-term advances may be obtained
only for the purpose of providing funds for residential housing finance.


                                      -28-
<PAGE>
 
         The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.

         Federal Reserve System. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depositary institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3.0% of the aggregate of transaction accounts up to $46.5 million. The amount of
aggregate transaction accounts in excess of $46.5 million are currently subject
to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and
12%. The FRB regulations currently exempt $4.9 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve discount window, but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.



                                      -29-
<PAGE>
 
                   EXECUTIVE OFFICERS OF THE HOLDING COMPANY


         The name, age, position, term of office as officer and period during
which he or she has served as an officer is provided below for each executive
officer of the Holding Company. David M. Bradley, Jean L. Lake, C. Thomas
Chalstrom and John L. Pierschbacher are executive officers of the Holding
Company and the Bank. Kirk A. Yung is an executive officer of the Bank, and as
such, is deemed to be executive officer of the Holding Company pursuant to SEC
regulations.

         David M. Bradley, CPA has been President of the Bank since 1990, Chief
Executive Officer of the Bank since 1992 and was named Chairman of the Board in
January 1997. He has been affiliated with the Bank for 16 years. Mr. Bradley is
46 years of age.

         Jean L. Lake has been employed with the Bank since 1972 and was named
Secretary in 1987.  Ms. Lake serves as Board Secretary and is in charge of
marketing.  Ms. Lake is 56 years of age.

         John L. Pierschbacher, CPA has been employed with the Bank since 1992.
Mr. Pierschbacher was named Treasurer in January 1994.  He is the Bank's chief
financial officer and is in charge of the accounting functions of the Bank.  Mr.
Pierschbacher was employed in public accounting for nine years at the public
accounting firm of McGladrey & Pullen, LLP prior to joining the Bank.  Mr.
Pierschbacher is 39 years of age.

         C. Thomas Chalstrom has been employed with the Bank since 1985, was
named Executive Vice President of the Bank in January 1995, Executive Vice
President of the Holding Company in January, 1998 and Chief Operating Officer of
the Bank in January, 1999. Mr. Chalstrom is 34 years of age.

         Kirk A. Yung has been employed with the Bank since 1990, was named
Senior Vice President in January 1995, and is in charge of consumer lending. Mr.
Yung had five years of prior experience in various positions in financial
institutions before joining the Bank.  Mr. Yung is 36 years of age.


ITEM 2.           PROPERTIES

         The Company conducts its business through its main office located in
Fort Dodge, Iowa and six full-service offices located in Fort Dodge, Nevada,
Ames, Burlington and Mount Pleasant, Iowa. The following table sets forth
certain information concerning the main office and each branch office of the
Company and the offices of First Iowa Title Services and First Iowa Mortgage,
Inc. at December 31, 1998. All of the offices of the Company are owned. In
addition to the properties listed below, First Financial owns land in Fort
Dodge, Iowa with a net book value of $99,000 and Northridge Apartments Limited
Partnership owns a multifamily apartment building with a net book value of $1.9
million at December 31, 1998. The aggregate net book value of the Company's
premises and equipment, on a consolidated basis was $3.6 million at December 31,
1998.

                                      -30-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            Lease
       Location                                    Opening Date        Expiration Date         Net Book Value
       --------                                    ------------        ---------------         --------------
       <S>                                              <C>                  <C>                  <C>
       Main Office:
       825 Central Avenue                               1973                 N/A                  $ 952,986
       Fort Dodge, Iowa

       Branch Offices:
       201 South 25th Street                            1977                 N/A                  $ 219,422
       Fort Dodge, Iowa

       404 Lincolnway                                   1977                 N/A                  $ 548,019
       Nevada, Iowa

       107 Main Street                                  1977                 N/A                  $ 360,413
       Ames, Iowa

       321 North Third Street                           1953                 N/A                  $ 608,298
       Burlington, Iowa

       1010 North Roosevelt                             1975                 N/A                  $ 351,925
       Burlington, Iowa

       102 South Main                                   1991                 N/A                  $ 254,472
       Mount Pleasant, Iowa

       First Iowa Offices:
       805 Central Avenue                               1982                 2001 (1)             $  10,831
       Fort Dodge, Iowa

       814 8th Street                                   1996                 2003 (2)             $  11,646
       Boone, Iowa

       200 1st Street South                             1996                 2003 (2)             $  13,616
       Newton, Iowa

       First Iowa Mortgage Office:                      1998                 2003                 $   42,790
       415 South Duff
       Ames, Iowa

       Construction in Process:
       1st Avenue and Hwy 141                           N/A                  N/A                  $ 242,020
       Perry, Iowa
       -------------------------
</TABLE>
(1)  Does not include option to renew for an additional 3 years.
(2)  Does not include option to renew for an additional 5 years.

ITEM 3.           LEGAL PROCEEDINGS

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

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1998.

                                      -31-
<PAGE>
 
                                    PART II

ITEM 5.           MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
                  MATTERS

Price Range of the Company's Common Stock

            The Company's Common Stock trades on The Nasdaq National Market
System under the symbol "FFFD." The following table shows the high and low per
share sales prices of the Company's Common Stock as reported by Nasdaq and the
dividends declared per share during the periods indicated. Such quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                             Price Range
                                                             -----------
                                                                                     Dividends Declared
                 Quarter Ended                          High           Low                Per Share
                 -------------                          ----           ---           ------------------
<S>                                                    <C>            <C>                   <C>
1997
    First Quarter..............................        16.750         13.375                0.0625
    Second Quarter.............................        16.125         15.000                0.0625
    Third Quarter..............................        18.250         15.625                0.0625
    Fourth Quarter ............................        20.125         17.188                0.0625
1998
    First Quarter..............................        22.875         18.750                0.0800
    Second Quarter.............................        24.875         21.188                0.0800
    Third Quarter..............................        21.250         15.000                0.0800
    Fourth Quarter.............................        18.313         15.406                0.0800
</TABLE>

The Company's Common Stock was traded at $16.50 as of March 12, 1999.

Information Relating to the Company's Common Stock

         As of March 11, 1999, the Company had 2,120 shareholders of record,
which does reflect the number of persons or entities who hold their Common Stock
in nominee or "street" name through various brokerage firms. As of such date
2,957,242 shares of the Common Stock were outstanding.

         The Company's current quarterly dividend is $0.10 per share. The Board
of Directors of the Company plans to maintain a regular quarterly dividend in
the future and will continue to review the dividend payment amount in relation
to the Company's earnings, financial condition and other relevant factors (such
as regulatory requirements).

         The Bank will not be permitted to pay dividends to the Holding Company
on its capital stock if its shareholders' equity would be reduced below the
amount required for the liquidation account. For information concerning federal
regulations which apply to the Bank in determining the amount of proceeds which
may be retained by the Company and regarding a savings institution's ability to
make capital distributions including payment of dividends to its holding
company, see Note 12 to the Consolidated Financial Statements.

         Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Holding Company and earnings thereon and may be dependent, in part, upon
dividends from the Bank. The Holding Company is subject to the requirements of
Iowa law, which prohibit the Holding Company from paying a dividend if, after
giving it effect, either of the following would result: (a) the Holding Company
would not be able to pay its debts as they become due in the usual course of
business; or (b) the Holding Company's total assets would be less than the sum
of its total liabilities plus the amount that would be needed, if the Holding
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.

                                      -32-
<PAGE>
 
ITEM 6.           SELECTED FINANCIAL DATA

         The selected consolidated financial and other data of the Company set
forth below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
                                                                      At  December 31, (11)
                                           -------------------------------------------------------------------------
                                             1998            1997            1996            1995            1994
                                           ---------       ---------       ---------       ---------       ---------
                                                                         (In thousands)
<S>                                        <C>             <C>             <C>             <C>             <C>
Selected Consolidated Financial
  Condition Data:
Total assets............................   $ 336,690       $ 221,954       $ 203,093       $ 179,930       $ 157,153
Cash (noninterest bearing)..............       2,435             982             963             709             719
Loans receivable, net:(1)
  First mortgage loans secured
    by one-to-four family
    residences..........................     145,967         114,286         106,053          93,438          82,523
  First mortgage loans secured
    by multifamily properties...........      63,285          49,895          33,015          30,070          19,815
  First mortgage loans secured
    by commercial properties............      11,168           3,724           5,068           5,650           5,974
  Consumer loans........................      33,612          23,344          21,695          18,714          16,472
                                           ---------       ---------       ---------       ---------       ---------
    Total loans receivable, net.........     254,032         191,249         165,831         147,872         124,784
Investment securities(2)................      63,084          22,279          29,577          26,156          28,389
Deposits................................     246,690         141,124         129,722         126,672         124,189
Borrowed funds..........................      38,832          28,550          22,335          21,940           3,886
Total shareholders' equity..............      48,207          50,417          49,235          29,900          27,813
</TABLE>
<TABLE>
<CAPTION>
                                                                For the Year Ended December 31,
                                             1998            1997            1996           1995            1994
                                          ---------       ---------       ---------      ---------       ---------
                                                                        (In thousands)
<S>                                       <C>             <C>               <C>          <C>             <C>
Selected Operating Data:
Interest income.........................  $  23,602       $  16,205         $15,090      $  13,148       $  11,592
Interest expense........................     12,869           7,900           6,929          7,079           6,048
                                          ---------       ---------       ---------      ---------       ---------
   Net interest income before
     provision for loan losses..........     10,733           8,305           8,161          6,069           5,544
Provision for loan losses...............        210             240             240            250             242
                                          ---------       ---------       ---------      ---------       ---------
   Net interest income after
     provision for loan losses..........     10,523           8,065           7,921          5,819           5,302
                                          ---------       ---------       ---------      ---------       ---------
Noninterest income:
     Fees and service charges...........      1,243             657             580            445             430
     Abstract fees......................      1,584           1,222             931            794             332
     Other income.......................      1,088             658             382            463             286
                                          ---------       ---------       ---------      ---------       ---------
       Total noninterest income.........      3,915           2,537           1,893          1,702           1,048
                                          ---------       ---------       ---------      ---------       ---------
Noninterest expense:
     Salaries and employee benefits.....      3,482           2,209           2,004          1,681           1,282
     Premises and equipment.............        812             444             421            382             326
     Data processing....................        553             258             244            236             248
     One-time SAIF special assessment...         --              --             817             --              --
     SAIF deposit insurance
       premiums.........................        143              85             279            287             306
     Goodwill                                   436              28              29             30              --
     Other expenses.....................      2,146           1,553           1,144          1,042             761
                                          ---------       ---------       ---------      ---------       ---------
       Total noninterest expense........      7,572           4,577           4,938          3,658           2,923
                                          ---------       ---------       ---------      ---------       ---------
Income before income taxes..............      6,866           6,025           4,876          3,863           3,427
Income tax expense......................      2,481           2,108           1,744          1,403           1,247
                                          ---------       ---------       ---------      ---------       ---------
   Net income...........................  $   4,385       $   3,917       $   3,132      $   2,460       $   2,180
                                          =========       =========       =========      =========       =========
</TABLE>

                                      -33-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  At or for the Year Ended December 31,
                                                 --------------------------------------------------------------------
                                                     1998            1997           1996        1995         1994
                                                     ----            ----           ----        ----         ----
<S>                                                <C>             <C>            <C>         <C>          <C>

Key Financial Ratios and Other Data:
Performance Ratios: (%)
Net interest rate spread (difference between
  average yield on interest-earning
  assets and average cost of interest-
  bearing liabilities)......................         2.81%           2.87%          3.01%       2.75%        3.02%
Net interest margin (net interest income
  as a percentage of average interest-
  earning assets)...........................         3.50            4.06           4.33        3.66         3.70
Return on average assets (net income
  divided by average total assets)..........         1.35            1.86           1.62        1.45         1.43
Return on average equity (net income
  divided by average equity)................         8.73            7.94           6.30        8.54        11.19
Noninterest income to average assets........         1.21            1.20           0.98        1.00         0.69
Efficiency ratio(3).........................        51.69           42.21          49.11       47.07        44.35
Noninterest expense to average assets.......         2.34            2.17           2.56        2.16         1.92
Net interest income after provision for
  loan losses to noninterest expenses.......       138.97          176.22         160.40      159.07       181.41
Financial Condition Ratios: (%)
Equity to assets at period end..............        14.32           22.72          24.24       16.62        17.70
Tangible equity to tangible assets
  at period end (5) (6).....................        12.42           22.32          23.80       16.09        17.10
Average shareholders' equity divided by
  average total assets......................        15.52           23.38          25.73       16.99        12.82
Average tangible shareholders equity divided
  by average tangible total assets (5) (6)..        13.71           22.96          25.29       16.42        12.17
Average interest-earning assets to average
  interest-bearing liabilities..............       116.28          130.97         136.02      121.37       116.87
Asset Quality Ratios: (%)(4)
Nonaccrual loans to total net loans.........         0.38            0.08           0.11        0.12         0.26
Nonperforming assets to total assets(7).....         0.34            0.10           0.15        0.23         0.21
Allowance for loan losses as a percent of
  total loans receivable at end of period...         1.03            1.10           1.16        1.15         1.20
Allowance for loan losses to nonaccrual
  loans.....................................       279.72        1,468.33       1,059.35      960.20       476.23
Per Share Data:
Book value per share........................       $16.26          $15.43         $14.36       $8.72        $8.11
Tangible book value per share (5)...........        13.79           15.09          14.01        8.39         7.78
Basic earnings per share (8)................         1.44            1.23           0.82        0.63         0.21
Diluted earnings per share (9)..............         1.40            1.21           0.82        0.63         0.21
Dividends declared per share................         0.32            0.25           0.28        0.60         0.12
Dividend payout ratio.......................         0.22            0.20           0.34        0.95         0.57

Key Financial Ratios Excluding
SAIF Assessment: (%) (10)
Return on average assets (net income divided
  by average total assets)..................         1.35%           1.86%          1.89%       1.45%        1.43%
Return on average equity (net income
  divided by average equity)................         8.73            7.94           7.34        8.54        11.19
Efficiency ratio (3)........................        51.69           42.21          40.99       47.07        44.35
Noninterest expense to average assets ......         2.34            2.17           2.13        2.16         1.92
Net interest income after provision for
  loan losses to noninterest expenses.......       138.97          176.22         192.21      159.07       181.41

-----------------------
                                                                                          (Notes on following page)
</TABLE>
                                      -34-
<PAGE>
 
(1)      Loans receivable, net represents total loans less discounts, loans in
         process, net deferred loan fees and allowance for loan losses. The
         allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and
         1994 was $2.7 million, $2.2 million, $2.0 million, $1.7 million and
         $1.5 million, respectively.

(2)      Includes interest-bearing deposits with the Federal Home Loan Bank of
         Des Moines (the "FHLB").

(3)      Efficiency ratio represents noninterest expense divided by the sum of
         net interest income before provision for loan losses plus noninterest
         income.

(4)      Asset Quality Ratios are end of period ratios. With the exception of
         end of period ratios, all ratios are based on average monthly balances
         during the indicated periods and are annualized where appropriate.

(5)      Tangible equity consists of stockholders' equity less goodwill and
         title plant. Goodwill and title plant at December 31, 1998, 1997, 1996,
         1995 and 1994 was $7.3 million, $1.1 million, $1.2 million, $1.1
         million and $1.1 million, respectively.

(6)      Tangible assets consists of total assets less goodwill and title plant.
         Goodwill and title plant at December 31, 1998, 1997, 1996, 1995 and
         1994 was $7.3 million, $1.1 million, $1.2 million, $1.1 million and
         $1.1 million, respectively.

(7)      Nonperforming assets consists of nonaccrual loans, foreclosed real
         estate and other nonperforming assets.

(8)      Basic earnings per share information is calculated by dividing net
         income by the weighted average number of shares outstanding. Basic
         earnings per share information for the year ended December 31, 1994 is
         calculated by dividing net income subsequent to the conversion of the
         Bank from mutual to stock form in 1994 by the weighted average number
         of shares outstanding. The weighted average number of shares
         outstanding for basic earnings per share computation for 1998, 1997,
         1996, 1995 and 1994 were 3,048,148, 3,184,269, 3,818,273, 3,919,488 and
         3,906,980, respectively. Net income subsequent to such conversion was
         $810,000 for the period ended December 31, 1994.

(9)      Diluted earnings per share information is calculated by dividing net
         income by the weighted average number of shares outstanding, adjusted
         for the effect of dilutive potential common shares outstanding which
         consists of stock options granted. Diluted earnings per share
         information for the year ended December 31, 1994 is calculated by
         dividing net income subsequent to the conversion of the Bank from
         mutual to stock form in 1994 by the weighted average number of shares
         outstanding. The weighted average number of shares outstanding for
         diluted earnings per share computation for 1998, 1997, 1996, 1995 and
         1994 were 3,132,833, 3,241,069, 3,818,273, 3,919,488 and 3,906,980,
         respectively. Net income subsequent to such conversion was $810,000 for
         the period ended December 31, 1994.

(10)     For 1996, excludes the one-time $817,000 (pre-tax) special assessment
         for the recapitalization of the Savings Association Insurance Fund
         ("SAIF").

(11)     As of the close of business on January 30, 1998, the Company completed
         the Acquisition of Valley Financial Corp. Subsequent to January 30,
         1998, the information contained in the Financial Selected Data tables
         reflect the effect of the Acquisition. Financial data prior to January
         30, 1998, does not reflect the Acquisition and is based upon historical
         figures. See discussion regarding Pro Forma Financial information, page
         51 through 53.

                                      -35-
<PAGE>
 
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

General

         North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company was
organized on December 5, 1995 at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank in connection with the conversion and reorganization of the Bank and North
Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding
company structure (these transactions are collectively referred to as the
"Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding
Company issued an aggregate of 4,011,057 shares of its common stock, par value
$0.01 per share ("Common Stock"), of which 1,385,590 shares were issued in
exchange for all of the Bank's issued and outstanding shares, except for shares
owned by the MHC which were cancelled, and 2,625,467 shares of which were sold
in Subscription and Community Offerings at a price of $10.00 per share, with
gross proceeds amounting to $26,254,670. At this time, the Holding Company
conducts business as a unitary savings and loan holding company and the
principal business of the Holding Company consists of the operation of its
wholly-owned subsidiary, the Bank.

         The profitability of the Company depends primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans and investment
securities, and the interest paid on interest-bearing liabilities, which
primarily consist of deposits and advances from the FHLB. Net interest income is
a function of the Company's interest rate spread, which is the difference
between the average yield on interest-earning assets and the average rate paid
on interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The
Company's net income is affected by its level of noninterest income which
primarily consists of service fees and charges and abstract fees, and
noninterest expense, which primarily consists of compensation and employee
benefit expenses, premises and equipment and data processing. Net income also is
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Company.

Acquisition of Valley Financial Corp.

         As of the close of business on January 30, 1998 (the "Effective Time"),
the Company completed the acquisition of (the "Acquisition") Valley Financial
Corp., ("Valley Financial"), pursuant to an Agreement and Plan of Merger, dated
as of September 18, 1997, (the "Merger Agreement"). The Acquisition resulted in
the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank,
FSB ("Valley Savings") with and into the Bank, with the Bank as the resulting
financial institution. Valley Savings, headquartered in Burlington, Iowa, was a
federally-chartered stock savings bank with three branch offices located in
southeastern Iowa. The former offices of Valley Savings are being operated as a
division of the Bank.

         In connection with the Acquisition, each share of Valley Financial's
common stock, par value $1.00 per share, issued and outstanding (other than
shares held as treasury stock of Valley Financial) was cancelled and converted
automatically into the right to receive $525.00 per share in cash pursuant to
the terms and conditions of the Merger Agreement. As a result of the
Acquisition, shareholders of Valley Financial were paid $14,726,250 in cash.

SAIF Recapitalization

         In response to the disparity in deposit insurance assessment rates that
existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts
insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act")
was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit
Insurance Corporation ("FDIC") to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to

                                      -36-
<PAGE>
 
recapitalize the SAIF. The Company's special SAIF assessment of $817,000 before
taxes (and $512,000 net of taxes) was charged against income in the third
quarter of 1996 and paid in November 1996 (the "SAIF Assessment"). In view of
the recapitalization of the SAIF, the FDIC reduced the assessment rates for
SAIF-assessable deposits. For the fiscal years ended December 31, 1998 and 1997,
the Bank incurred $143,000 and $85,000, respectively, in deposit insurance
premiums and for the interest payments on the FICO bonds issued by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation.

Business Strategy

         The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy primarily by using deposits and advances from
the FHLB as its source of funds and maintaining a substantial part of its assets
in loans secured by one- to four-family residential real estate, multi-family
loans and commercial real estate located both inside and outside the Company's
market area, consumer and other loans and in other liquid investment securities.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
locally-headquartered institution can offer; (2) maintaining high asset quality
by emphasizing investment in residential mortgage loans (including the purchase
of qualifying multifamily loans) and securities issued or guaranteed by the
United States Government or agencies thereof and mortgage-backed securities; (3)
maintaining capital in excess of regulatory requirements and growing only to the
extent that adequate capital levels can be maintained; (4) controlling
noninterest expenses; (5) managing interest rate risk exposure while achieving
desirable levels of profitability; and (6) increasing noninterest income through
(i) the expansion of the abstract company business conducted through a wholly
owned subsidiary, (ii) the acquisition of First Iowa Mortgage, Inc., a mortgage
banking company and (iii) other increases in fees and service charges.

         Highlights of the Company's business strategy are as follows:

         Community-Oriented Institution. The Company is committed to meeting the
financial needs of the communities in which it operates. Based in part on its
participation in several different programs designed to facilitate residential
lending to low- and moderate-income households, the Bank has received an
"Outstanding" Community Reinvestment Act rating. The Company believes it is
large enough to provide a full range of personal and business financial services
and yet is small enough to be able to provide such services on a personalized
and efficient basis. Management believes that the Company can be more effective
in servicing its customers than many of its competitors which are not
headquartered locally. Such proximity allows senior management of the Bank to
quickly and personally respond to customer needs and inquiries.

         Strong Retail Deposit Base. In 1998, the Company had a relatively
strong and stable retail deposit base drawn from its offices located in Fort
Dodge, Ames, Nevada, Burlington and Mount Pleasant, Iowa. The stability of the
Company's deposit base has been enhanced by the Company's offering of 5-year
certificates of deposit (which comprises $50.1 million, or 20.3%, of total
deposits at December 31, 1998) at attractive interest rates, and programs tying
low-cost checking account services to the maintenance of specified certificate
of deposit balances or loan balances. At December 31, 1998, 33.4% of the deposit
base, or $82.3 million, consisted of core deposits, which included money market
accounts, savings accounts, NOW accounts, and noninterest-bearing demand
accounts. Core deposits are considered to be a more stable and lower cost source
of funds than certificates of deposit or outside borrowings. The Company will
continue to emphasize retail deposits by providing quality customer service,
offering competitive rates on deposit accounts, and providing depositors with a
full range of accounts.


                                      -37-
<PAGE>
 
         Asset Quality and Emphasis on Residential Mortgage Lending. The Company
has historically emphasized residential real estate financing, and has been
primarily a portfolio lender. The Company expects to continue its commitment to
financing the purchase or improvement of residential real estate in its market
area. At December 31, 1998, 43.4% of the Company's total assets consisted of
one-to-four family residential first mortgage loans. To supplement local
mortgage loan originations and to diversify its mortgage loan portfolio
geographically, the Company has purchased loans in the secondary mortgage
market, with an emphasis on multifamily loans secured by properties outside the
State of Iowa (the "out of state properties"). At December 31, 1998, the
Company's portfolio of loans which were either originated or purchased by the
Company and secured by out of state properties consisted of $8.8 million of
one-to-four family residential mortgage loans, or 3.4% of the Company's total
loan portfolio, and $70.0 million of multifamily and commercial loans, or 27.0%
of the Company's total loan portfolio. At December 31, 1998, the Company's ratio
of nonperforming assets to total assets was 0.34%. The Company also invests in
United States Treasury securities, United States Government agencies, State and
Local Obligations, mortgage-backed securities, interest-earning deposits, equity
securities and FHLB stock.

         Generally, the yield on mortgage loans originated and purchased by the
Company is greater than that of securities purchased by the Company. Future
economic conditions and continued strong banking competition could result in
diminished lending opportunities. If new loan originations are reduced in the
future, the Company may increase its investment in securities and in purchased
mortgage loans outside its market area.

         Capital Strength and Controlled Internal Growth. Total equity increased
from $27.8 million at December 31, 1994 to $48.2 million at December 31, 1998,
an increase of 73.3%. Total assets have increased by $179.5 million, or 114.2%,
since December 31, 1994. As a result, the ratio of total equity to total assets
has decreased from 17.7% at December 31, 1994 to 14.3% at December 31, 1998. The
Company's growth can be attributed to the Acquisition and emphasis on the
origination and purchase of residential mortgage loans and the purchase of
multifamily mortgage loans. The Company's growth has been funded through a
combination of the use of proceeds from the stock offerings held in 1994 and
1996, FHLB advances and deposit growth. The Company intends to maintain strong
levels of total equity and capital ratios by controlling growth to the extent
that adequate capital levels can be maintained.

         Acquisition Strategy. With the consummation of the Acquisition in 1998,
the Company has grown through the purchase of another financial institution. The
Acquisition resulted in an increase in total assets of approximately 42%, making
effective use of the Company's excess capital. The Company intends to continue
evaluating the possibility of acquiring branch offices and other financial
institutions, which involves executing confidentiality agreements and conducting
due diligence. Such evaluations by the Company provide no indication of the
likelihood that the Company will enter into any agreement to engage in an
acquisition transaction as, in many instances, such transactions are subject to
competitive bidding and, in every instance, are subject to extensive arm's
length negotiations once by the Company's evaluation is complete.

         Increasing Noninterest Income. The Company has attempted to increase
its level of noninterest income from both new and traditional lines of business
to supplement net interest income. The Company currently owns abstract companies
in Webster, Boone and Jasper counties in Iowa, First Iowa Title Services, Inc.
("First Iowa"), the Bank's wholly owned subsidiary. The abstract business
performed by First Iowa replaces the function of a title insurance company. The
Company believes that First Iowa can continue to be an excellent source of fee
income. Noninterest income from such business for the year ended December 31,
1998 was $1.6 million, offset by noninterest expense attributable to First Iowa.
The Company also owns a mortgage banking company in Ames, Iowa, First Iowa
Mortgage, Inc. ("First Iowa Mortgage"), the Bank's wholly owned subsidiary. On
January 30, 1998, the Company acquired First Iowa Mortgage as a part of the
Acquisition of Valley Financial. Non-interest income for such business for the
year ended December 31, 1998 was $339,000, offset by non-interest expense
attributable to First Iowa Mortgage.

                                      -38-
<PAGE>
 
         Liquidity and Interest Rate Risk Management. Management seeks to manage
the Company's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an acceptable interest
rate spread. At December 31, 1998, total interest-bearing liabilities maturing
or repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $ 41.4 million, representing a one-year gap to
total assets ratio of negative 12.3% as compared to a positive 0.28% at December
31, 1997. This change is due in part to the Acquisition of Valley Financial. To
reduce the potential volatility of the Company's earnings in a changing interest
rate environment, the Company has emphasized the origination of 7-year fixed
rate mortgage loans that convert to adjustable rates at the conclusion of their
initial terms and have overall maturities of up to 30 years, adjustable-rate
loans, investment in short to medium term United States Treasury notes, U. S.
Government agencies, mortgage-backed securities and has sought to lengthen the
terms of its deposits through its pricing strategies with respect to longer term
certificates of deposit. See "-- Discussion of Market Risk -- Interest Rate
Sensitivity Analysis".

Liquidity and Capital Resources

        OTS regulations require that thrift institutions such as the Bank
maintain an average daily balance of liquid assets (cash, certain time deposits,
banker's acceptances and specified United States Government, state or federal
agency obligations) equal to a monthly average of not less than 4% of its net
withdrawable deposits plus short-term borrowings. At December 31, 1998, the
amount of the Bank's liquid assets were $45.7 million, resulting in a liquidity
ratio of 17.6%.

        The Company's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of securities and other investments, and
earnings and funds provided from operations. While scheduled principal
repayments on loans are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests in
short-to-medium term interest-earning assets, which provide liquidity to meet
lending requirements. At December 31, 1998, $5.0 million, or 12.6%, of the
Company's investment portfolio, excluding equity securities, was scheduled to
mature in one year or less and $16.8 million, or 41.8%, was scheduled to mature
in one to five years and $18.3 million, or 45.6%, was scheduled to mature in
more than five years. Certificates of deposit scheduled to mature in less than
one year, at December 31, 1998, totalled $81.3 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Company. If the Company requires funds beyond its ability to
generate them internally, borrowing agreements exist with the FHLB which provide
an additional source of funds. The amount of eligible collateral for blanket
lien pledges from the FHLB is $139.3 million as of December 31, 1998. For
additional information about cash flows from the Company's operating, financing
and investing activities, see the Statements of Cash Flows included in the
Consolidated Financial Statements.

        At December 31, 1998, the Company had outstanding loan commitments of
$2.8 million. This amount does not include undisbursed overdraft loan privileges
and the unfunded portion of loans in process.

        The main sources of liquidity for the Holding Company are net proceeds
from the sale of stock and payments from the Bank in the form of dividends and
loan repayments. The main cash outflows are payments of dividends to
shareholders and funds used to repurchase the Common Stock. During 1998, the
Holding Company repurchased 311,324 shares of its Common Stock, pursuant to
repurchase programs which were approved by the OTS. The Holding Company's
ability to pay dividends to shareholders depends substantially on dividends and
loan payments received from the Bank. The Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
requirements or the amount required to be maintained for the liquidation
account. For a description of the liquidation account, see Notes 17 and 18 to
the Consolidated Financial Statements. Unlike the Bank, the Holding Company is
not subject to OTS regulatory restrictions on the payment of dividends to its
shareholders, however, it is subject to the requirements of Iowa law. Iowa law
generally prohibits the Holding Company from paying a dividend if, after giving
it effect, either of the following would result: (a) the Holding Company would
not be able to pay its debts as they become due in the usual course of business;
or (b) the Holding Company's total assets would be less than the sum of its
total liabilities, plus the amount that would

                                      -39-
<PAGE>
 
be needed, if the Holding Company were to be dissolved at the time of
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.

        The primary investing activities of the Company are the origination and
purchase of mortgage and other loans and the purchase of securities. During the
years ended December 31, 1998, 1997 and 1996, the Company's disbursements for
loan originations and purchases totaled $85.2 million, $62.3 million and $52.0
million, respectively. These activities were funded primarily by net deposit
inflows, principal repayments on loans, proceeds from the sale of securities and
FHLB advances. Net cash flows used in investing activities amounted to $2.2
million, $19.1 million and $21.3 million for the years ended December 31, 1998,
1997 and 1996, respectively. Net cash flows provided by financing activities
amounted to $9.4 million, $14.3 million and $19.8 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

        The OTS regulations require savings associations, such as the Bank, to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations; a leverage ratio
requirement of 3% of core capital to such adjusted total assets; and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. The Bank satisfied these minimum capital standards at
December 31, 1998 with tangible and leverage capital ratios of 11.7% and a total
risk-based capital ratio of 23.8%. In determining the amount of risk-weighted
assets for purposes of the risk-based capital requirement, a savings association
must compute its risk-based assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations. These
capital requirements, which are applicable to the Bank only, do not consider
additional capital held at the Holding Company level, and require certain
adjustments to shareholder's equity to arrive at the various regulatory capital
amounts.

        The table below presents the Bank's regulatory capital amounts as
compared to the OTS regulatory capital requirements at December 31, 1998:

<TABLE>
<CAPTION>
                                                                               Capital               Excess
                                                         Amount              Requirements            Capital
                                                         -------             ------------            -------
                                                                            (In thousands)
<S>                                                   <C>                     <C>                   <C>
Tangible capital..................................... $    38,245             $    4,917            $   33,328
Core capital.........................................      38,245                  9,834                28,411
Risk-based capital...................................      40,509                 13,614                26,895
</TABLE>

                                      -40-
<PAGE>
 
Discussion of Market Risk--Interest Rate Sensitivity Analysis

         As a financial institution, the Company's primary component of market
risk is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate loan
portfolio, within Iowa, is subject to risks associated with the local economy.
The Company has sought to diversify its loan portfolio by purchasing loans
secured by properties outside of Iowa. At December 31, 1998, 30.4% of the
Company's loan portfolio was secured by properties outside the State of Iowa,
located in twenty-six states. See "Asset Quality." The Bank does not own any
trading assets. At December 31, 1998, neither the Company nor the Bank had any
hedging transactions in place, such as interest rate swaps and caps.

         The Company seeks to manage its interest risk by monitoring and
controlling the variation in repricing intervals between its assets and
liabilities. To a lesser extent, the Company also monitors its interest rate
sensitivity by analyzing the estimated changes in market value of its assets and
liabilities assuming various interest rate scenarios. As discussed more fully
below, there are a variety of factors which influence the repricing
characteristics of any given asset or liability.

         The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The "interest rate
sensitivity gap" is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.

         The Company's policy in recent years has been to manage its exposure to
interest rate risk generally by focusing on the maturities of its interest rate
sensitive assets and by emphasizing adjustable-rate mortgage loans, and
maintaining a level of liquidity by investing in short to medium term United
States Treasury notes, U. S. Government agencies, mortgage-backed securities and
short-term interest-earning deposits. The Company generally offers competitive
rates on deposit accounts and prices certificates of deposit to provide
customers with incentives to choose certificates of deposit with longer terms.

         At December 31, 1998, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $41.4 million, representing a one-year gap ratio
of negative 12.3%, compared to a one-year gap ratio of positive 0.28% at
December 31, 1997. To manage the potential volatility of the Company's earnings
in a changing interest rate environment, the Company has emphasized the
origination of 7-year fixed rate mortgage loans that convert to adjustable rates
at the conclusion of their initial terms and have overall maturities of up to 30
years, adjustable-rate loans and has sought to lengthen the terms of its
deposits through its pricing strategies with respect to longer term certificates
of deposit. The Chief Executive Officer regularly meets with the Bank's senior
executive officers to review trends in deposits as well as mortgage and consumer
lending. The Chief Executive Officer also regularly meets with the investment
committee to review the investment portfolio. The Chief Executive Officer
reports quarterly to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements.

                                      -41-
<PAGE>
 
         Gap Table. The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 1998 which are expected to reprice or mature, based upon certain
assumptions, in each of the future time periods shown. Except as stated below,
the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of term of
repricing or the contractual terms of the asset or liability. Certain
assumptions used in preparing the table are set forth in the following table.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable.

<TABLE>
<CAPTION>
                                                                        At December 31, 1998 (1)
                                     ---------------------------------------------------------------------------------------------
                                         Within         1-3            3-5          5-10         10-20       Over 20
                                         1 Year        Years          Years         Years        Years        Years       Total
                                     -------------- ------------- ------------ -------------- -----------  ----------- -----------
                                                                         (Dollars in thousands)
<S>                                       <C>          <C>           <C>          <C>           <C>          <C>          <C>
Interest-earning assets:
    First mortgage loans
      Adjustable (4)................      $ 51,059      $74,259      $  9,113     $     --      $     --     $     --     $134,431
      Fixed (4).....................        26,966       33,893        19,535       19,045           591           10      100,040
   Consumer and other loans.........        11,811       19,146         3,015          106            --           --       34,078
   Investment securities(3).........        35,421       11,410         3,769        4,976            --           --       55,576
                                          --------     --------      --------     --------      --------     --------     --------
      Total interest-earning assets.      $125,257     $138,708      $ 35,432     $ 24,127      $    591     $     10     $324,125
                                          ========     ========      ========     ========      ========     ========     ========

Rate sensitive liabilities:
   Savings accounts.................      $ 26,099     $     --      $     --     $     --      $     --     $     --     $ 26,099
   NOW accounts.....................        30,909           --            --           --            --           --       30,909
   Money market accounts............        19,828           --            --           --            --           --       19,828
   Certificate accounts.............        81,283       64,973        18,140           --            --           --      164,396
   Non-interest-bearing deposits....         5,458           --            --           --            --           --        5,458
FHLB advances and other liabilities.         3,068       13,447        19,701          491         2,125           --       38,832
                                          --------     --------      --------     --------      --------     --------     --------
      Total interest-bearing liabilities  $166,645     $ 78,420      $ 37,841     $    491      $  2,125     $     --     $285,522
                                          ========     ========      ========     ========      ========     ========     ========

Interest sensitivity gap............      $(41,388)    $ 60,288      $ (2,409)    $ 23,636      $ (1,534)    $     10
Cumulative interest-sensitivity gap.      $(41,388)    $ 18,900      $ 16,491     $ 40,127      $ 38,593     $ 38,603

Interest sensitivity gap to total assets    -12.29%       17.91%        -0.72%        7.02%        -0.46%          --
Cumulative interest-sensitivity gap
   total assets.....................        -12.29%        5.61%         4.90%       11.92%        11.46%       11.47%
Ratio of interest-earning assets to
   interest-bearing liabilities.....         75.16%      176.88%        93.63%      100.00%       100.00%          --       113.52%
Cumulative ratio of interest-earning
   assets to interest-bearing liabilities    75.16%      107.71%       105.83%      114.16%       113.52%      113.52%      113.52%

Total assets........................      $336,690     $336,690      $336,690     $336,690      $336,690     $336,690     $336,690
Cumulative interest bearing assets..      $125,257     $263,965      $299,397     $323,524      $324,115     $324,125     $324,125
Cumulative interest sensitive liabilities $166,645     $245,065      $282,906     $283,397      $285,522     $285,522     $285,522
</TABLE>
---------------------------------
(1)        The Company prepared the above table using December 31, 1998
           composite interest rate sensitivity assumptions of the Eighth
           District of the FHLB where such assumptions were available. Where
           such information was not available, the assumptions were made based
           on December 1998 OTS assumptions or the Company's actual experience.
           These assumptions are as follows: (i) fixed-rate first mortgage loans
           on one-to-four family residential properties with interest rates less
           than 8%, 8% to 9%, 9% to 10%, 10% to 11%, and 11% and over, and the
           remaining terms to maturity of over 15 years will prepay annually at
           9%, 22%, 22%, 19% and 16%, respectively; (ii) adjustable-rate first
           mortgage loans on one-to-four family residential properties will
           prepay at 8% to 9% per year; (iii) fixed- and adjustable-rate
           mortgage loans on multifamily and commercial properties will repay at
           8% per year; (iv) second mortgage consumer loans will prepay at 9%
           per year; (v) fixed-rate deposits will not be withdrawn prior to
           maturity; and (vi) passbook savings accounts, NOW accounts, money
           market accounts and noninterest-bearing deposit accounts are assumed
           to reprice within one year due to the possibility that such deposits
           will reprice in the event of significant changes in the overall level
           of interest rates.  These assumptions are annual percentages based on
           remaining balances and should not be regarded as indicative of the
           actual prepayments and withdrawals that may be experienced by the
           Company.  Certain shortcomings are inherent in the analysis presented
           by the foregoing table.

(2)        Fixed rate first mortgage loans include $44.0 million of one-to-four
           family seven year fixed rate loans than convert to adjustable rates
           at the beginning of the eighth year and are adjustable thereafter.

(3)        Includes FHLMC preferred stock, FNMA preferred stock, other equity
           securities, interest-bearing deposits and FHLB stock, all of which
           are shown in the within-one-year category. Components include
           interest-bearing deposits of $13.2 million and securities available
           for sale of $42.4 million.

(4)        Includes $629,000 and $6.9 million in mortgage-backed securities in
           the adjustable and fixed first mortgage loans, respectively.

           Certain shortcomings are inherent in the method of analysis presented
in the Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different

                                      -42-
<PAGE>
 
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets and liabilities
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of changes in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.

         NPV Analysis. As part of its efforts to maximize net interest income
and manage the risks associated with changing interest rates, management uses
the "market value of portfolio equity" ("NPV") methodology which the OTS has
adopted as part of its capital regulations.

         Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in Net Interest Income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall along the
yield curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.

         Presented below, as of December 31, 1998, is an analysis of the
Company's interest rate risk ("IRR") as measured by changes in NPV and NII for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Company's current capital position.
<TABLE>
<CAPTION>
                           Interest Rate Sensitivity of Net Portfolio Value (NPV)(1)

                                    Net Portfolio Value                      NPV as % of PV of Assets
                      --------------------------------------------------- ------------------------------
    Change in Rates    $ Amount          $ Change            % Change        NPV Ratio         Change
--------------------  ----------  -----------------------  -------------- ---------------- -------------
                                                   (Dollars in thousands)
    <S>                 <C>               <C>                   <C>             <C>              <C>
    +400 bp             $39,231            -5,002                 -11%          12.28%           -88bp
    +300 bp              41,304            -2,929                  -7           12.73            -43bp
    +200 bp              42,957            -1,275                  -3           13.06            -10bp
    +100 bp              43,937              -295                  -1           13.20              4bp
       0 bp              44,232                --                  --           13.16               --
    -100 bp              44,149               -84                  --           13.02            -14bp
    -200 bp              44,237                 4                  --           12.92            -24bp
    -300 bp              45,007               775                   2           12.99            -17bp
    -400 bp              45,273             1,040                   2           12.93            -23bp
</TABLE>
---------------------------------

(1) Denotes rate shock used to compute interest rate risk capital component.

         As is the case with the Gap Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.

Asset Quality

         Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge for mortgage loans. If
delinquency continues, on the 20th day past due, a telephone call is made to the
borrower seeking payment. If the loan is 30 days past due, a delinquent notice
is mailed along with a letter advising that the mortgagors are in violation of
the terms of their mortgage contract. If a loan becomes 60 days past due, the
loan becomes subject to possible legal action.

                                      -43-
<PAGE>
 
After 90 days, if satisfactory payment terms are not reached with the borrower,
foreclosure proceedings are initiated. To the extent required by the Department
of Housing and Urban Development ("HUD") regulations, generally within 45 days
of delinquency, a Section 160 HUD notice is given to the borrower which provides
access to consumer counseling services.

         It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.

         Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans and consumer loans are placed
on nonaccrual status generally when either principal or interest is more than 90
days past due. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.

         Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is deemed foreclosed real estate until such time as
it is sold. In general, the Company considers collateral for a loan to be in
substance foreclosed if: (i) the borrower has little or no equity in the
collateral; (ii) proceeds for repayment of the loan can be expected to come only
from the operation or sale of the collateral; and (iii) the borrower has either
formally or effectively abandoned control of the collateral to the Company, or
retained control of the collateral but is unlikely to be able to rebuild equity
in the collateral or otherwise repay the loan in the foreseeable future.

         When foreclosed real estate is acquired or otherwise deemed foreclosed
real estate, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. At December 31, 1998, the Company's
foreclosed real estate consisted of four properties with an aggregate value of
$187,000.

         Delinquent Loans, Nonaccrual Loans and Nonperforming Assets. The
following table sets forth information regarding loans on nonaccrual status and
foreclosed real estate of the Company at the dates indicated. At the dates
indicated, the Company did not have any material restructured loans within the
meaning of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, and did not have any loans that were ninety days past due and
still accruing interest.

<TABLE>
<CAPTION>
                                                                             At December 31,
                                             ------------------------------------------------------------------------------
                                                  1998           1997            1996            1995             1994
                                             -------------- --------------- --------------- ---------------  --------------
                                                                         (Dollars in thousands)
<S>                                             <C>            <C>             <C>             <C>              <C>
Nonaccrual loans and nonperforming assets:
First mortgage loans:
   One-to-four family residential...........    $   403        $   122         $   149         $   137          $   299
   Multifamily and commercial
     properties (2).........................        423             --              --              --               --
Consumer loans:.............................        130             25              35              44               25
                                                -------        -------         -------         -------          -------
   Total nonaccrual loans...................        956            147             184             181              324
Total foreclosed real estate(1).............        187             67             128             128               --
Other nonperforming assets..................          1             --               2             109               --
                                                -------        -------         -------         -------          -------
   Total nonperforming assets...............    $ 1,144        $   214         $   314         $   418          $   324
                                                =======        =======         =======         =======          =======
Total nonaccrual loans to net loans
   receivable...............................       0.38%          0.08%           0.11%           0.12%            0.26%
Total nonaccrual loans to total assets......       0.28           0.07            0.09            0.10             0.21
Total nonperforming assets to total
   assets...................................       0.34           0.10            0.15            0.23             0.21

                                                                                             (Notes on following page)
</TABLE>
-----------------
(1)       Represents the net book value of property acquired by the Company
          through foreclosure or deed in lieu of foreclosure. Upon acquisition,
          this property is recorded at the lower of cost or fair value less
          estimated selling expenses.

                                      -44-
<PAGE>
 
(2)  Includes a purchased loan which was secured by a commercial property that
     was 90 days past due in the amount of $364,636 (in actual dollars). This
     loan was repaid in March, 1999.

     The following table sets forth information with respect to loans
delinquent 60-89 days in the Company's portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                             At December 31,
                                                 ----------------------------------------------------------------------
                                                      1998           1997          1996          1995         1994
                                                 -------------- -------------- ------------- ------------ -------------
                                                                             (In thousands)
<S>                                                 <C>            <C>            <C>           <C>          <C>
Loans past due 60-89 days:
First mortgage loans:
   One-to-four family residential................   $ 1,070        $   275        $   323       $   311      $   288
   Multifamily and commercial properties.........        22            --              --            --           --
Consumer loans...................................       270            135             51            28           62
                                                    -------        -------        -------       -------      -------
     Total past due 60-89 days...................   $ 1,362        $   410        $   374       $   339      $   350
                                                    =======        =======        =======       =======      =======
</TABLE>

         The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 1998.

<TABLE>
<CAPTION>
                                                                                    At December 31, 1998
                                                                        -------------------------------------------
                                                                          Balance                          Number
                                                                        -----------                      ----------
                                                                                  (Dollars in thousands)
<S>                                                                       <C>                                 <C>
One-to-four family first mortgage loans:
  Loans 60 to 89 days delinquent..................................        $ 1,070                             25
  Loans 90 days or more delinquent................................            403                             11
Multifamily and commercial first mortgage loans:
  Loans 60 to 89 days delinquent..................................             22                              1
  Loans 90 days or more delinquent (1)............................            423                              2
Consumer Loans:
  Loans 60 to 89 days delinquent..................................            270                             29
  Loans 90 days or more delinquent................................            130                             13
Foreclosed real estate............................................            187                              4
Other nonperforming assets........................................              1                              1
Loans to facilitate sale of foreclosed real estate................            206                              6
Special mention loans.............................................            654                             24
</TABLE>
(1)      Includes a purchase loan which was secured by a commercial property
         that was 90 days past due in the amount of $364,636 (in actual
         dollars).  This loan was repaid in March, 1999.

         Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 1998,
the Company

                                      -45-
<PAGE>
 
had $654,000 of special mention loans, consisting of eleven loans secured by
one-to-four family residences, one commercial property and twelve consumer
loans.

         The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
                                                                         At December 31,
                                           -------------------------------------------------------------------------
                                              1998            1997           1996            1995             1994
                                           ---------       ---------      ---------      ---------         ---------
                                                                         (In thousands)
<S>                                        <C>             <C>            <C>            <C>               <C>
Substandard assets......................   $     745(2)    $     208      $     311      $  1,134(1)       $     357
Doubtful assets.........................          --              --             --             --                --
Loss assets.............................          35              18              9             --                10
                                           ---------       ---------      ---------      ---------         ---------
  Total classified assets...............   $     780       $     226      $     320      $   1,134         $     367
                                           =========       =========      =========      =========         =========
------------
</TABLE>

(1)        Includes one purchased loan which was secured by a multifamily
           property that was 30 days past due in the amount of $791,000 (in
           actual dollars).  This loan was repaid in January 1996.

(2)        Includes one purchase loan which was secured by a commercial property
           that was 90 days past due in the amount of $364,636 (in actual
           dollars). This loan was repaid in March, 1999.

         Allowance for Loan Losses. It is management's policy to provide an
allowance for estimated losses on the Company's loan portfolio based on
management's evaluation of the prior loss experience, industry standards, past
due loans, economic conditions, the volume and type of loans in the Company's
portfolio, which includes a significant amount of multifamily loans,
substantially all of which are purchased and are collateralized by properties
located outside of the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The Company regularly reviews
its loan portfolio, including problem loans, to determine whether any loans
require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. During the years ended December 31, 1998, 1997 and 1996
the Company's provision for loan losses were $210,000, $240,000 and $240,000,
respectively. The Company's allowance for loan losses totalled $2.7 million,
$2.2 million and $2.0 million at December 31, 1998, 1997 and 1996, respectively.

         Management believes that the allowances for losses on loans and
foreclosed real estate are adequate. While management uses available information
to recognize losses on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for loan losses. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.


                                      -46-
<PAGE>
 
         Analysis of the Allowance for Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                 For the Year Ended December 31,
                                         ------------------------------------------------------------------------------
                                              1998            1997            1996            1995            1994
                                         --------------- --------------- --------------- --------------- --------------
                                                                     (Dollars in thousands)
<S>                                        <C>             <C>             <C>             <C>             <C>
Total loans outstanding.................   $ 259,360       $ 194,626       $ 168,921       $ 151,310       $ 128,951
Average net loans outstanding...........     246,510         175,284         156,708         137,068         118,997
Allowance balances (at beginning of
  period...............................        2,151           1,953           1,736           1,543           1,306
                                           ---------       ---------       ---------       ---------       ---------
Provisions for losses:
  First mortgage loans..................         135             190             150             200             165
  Consumer loans........................          75              50              90              50              77
  Effect of-
    Valley Financial Corporation........         343              --              --              --              --
Charge-Offs:
  First mortgage loans..................           6              21               5               2              --
  Consumer loans........................          23              31              19              56               7
Recoveries:
  First mortgage loans..................          --             --               --              --              --
  Consumer loans........................           1              10               1               1               2
                                           ---------       ---------       ---------       ---------       ---------
  Net charge-offs.......................          28              42              23              57               5
                                           ---------       ---------       ---------       ---------       ---------
Allowance balance (at end of period)....   $   2,676       $   2,151       $   1,953       $   1,736       $   1,543
                                           =========       =========       =========       =========       =========
Allowance for loan losses as a percent
  of total loans receivable at end of
  period................................        1.03%           1.10%           1.16%           1.15%           1.20%
Net loans charged off as a percent of
  average net loans outstanding.........        0.01            0.02            0.01            0.04              --
Ratio of allowance for loan losses to
  total nonaccrual loans at end of
  period................................      279.96        1,468.33        1,059.35          960.20          476.23
Ratio of allowance for loan losses to
  total nonaccrual loans and foreclosed
  real estate at end of period..........      233.95        1,006.96          621.31          562.15          476.23
</TABLE>

                                      -47-
<PAGE>
 
         Allocation of Allowance for Loan Losses. The following table sets forth
the allocation for loan losses by loan category for the periods indicated:
<TABLE>
<CAPTION>
                                                                     At December 31,
                                          ------------------------------------------------------------------
                                                  1998                   1997                   1996
                                          ---------------------  --------------------  ---------------------
                                                    % of Loans            % of Loans             % of Loans
                                                      In Each               In Each                In Each
                                                    Category to           Category to           Category to
                                           Amount   Total Loans  Amount   Total Loans  Amount    Total Loans
                                           ------   -----------  ------   -----------  ------   ------------
                                                    (Dollars in thousands)
<S>                                        <C>        <C>        <C>         <C>       <C>         <C>
Balance at end of period applicable to:
 One-to-four family residential
   mortgage loans........................  $   684     57.46%    $  675       59.48%   $   503      63.44%
 Multifamily residential mortgage loans..    1,298     25.02      1,026       26.38        948      20.42
 Commercial mortgage loans...............      228      4.39         76        1.95        157       3.09
 Consumer loans..........................      466     13.13        374       12.19        345      13.05
                                           -------   -------    -------      ------    -------     ------
   Total allowance for loan losses.......  $ 2,676    100.00%   $ 2,151      100.00%   $ 1,953     100.00%
                                           =======    ======    =======      ======    =======     ======
</TABLE>

<TABLE>
<CAPTION>
                                                         At December 31,
                                          ------------------------------------------
                                                 1995                  1994
                                          --------------------  --------------------
                                                   % of Loans            % of Loans
                                                     In Each               In Each
                                                   Category to           Category to
                                          Amount   Total Loans  Amount   Total Loans
                                          ------   -----------  ------   -----------
                                                    (Dollars in thousands)
<S>                                       <C>         <C>       <C>          <C>
Balance at end of period applicable to:
 One-to-four family residential
   mortgage loans........................ $   418      62.70%   $   429       65.48%
 Multifamily residential mortgage loans..     870      20.90        646       16.70
 Commercial mortgage loans...............     175       3.85        189        4.79
 Consumer loans..........................     273      12.55        279       13.03
                                          -------     ------    -------      ------
   Total allowance for loan losses....... $ 1,736     100.00%   $ 1,543      100.00%
                                          =======     ======    =======      ======
</TABLE>

Average Balance Sheet

           The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. For purposes of this tables, average balances were computed
on a monthly basis.

                                      -48-
<PAGE>
 
<TABLE>
<CAPTION>
                                                                          For the Year Ended December 31,
                                                          ---------------------------------------------------------------
                                   At December 31, 1998                1998                             1997
                                  ----------------------  -------------------------------  ------------------------------
                                                                                  Average                         Average
                                                 Yield/   Average                 Yield/   Average                Yield/
                                    Balance       Cost    Balance    Interest      Cost    Balance    Interest    Cost
                                    -------       ----    -------    --------     -------  -------    --------   --------
                                                                                             (Dollars in thousands)
<S>                                <C>           <C>      <C>         <C>           <C>    <C>         <C>          <C>
Assets:
 Interest-earning assets:
   First mortgage loans(1).....    $  222,621     7.88%   $216,914    $17,318(8)    7.98%  $154,227    $12,433(8)   8.06%
   Consumer loans(1)...........        34,076     9.18      32,173      3,014       9.37     23,138      2,201      9.51
   Investment securities.......        62,513(4)  5.59      57,826(5)   3,270       5.65     27,102(6)   1,571      5.79
                                   ----------     ----    --------    -------      -----   --------    -------      ----
     Total interest-earning assets    319,210     7.57%    306,913     23,602       7.69%  $204,467    $16,205      7.93
                                                                      =======                          =======
 Noninterest-earning assets....        17,480               16,847                            6,645
                                   ----------             --------                         --------
     Total assets..............    $  336,690             $323,760                         $211,112
                                   ==========             ========                         ========
Liabilities and Equity:
 Interest-bearing liabilities:
   NOW and money market
     savings...................    $   50,735     2.20%   $ 44,622    $ 1,351       3.03%  $ 21,777    $   632      2.90%
   Passbook savings............        26,098     2.24      25,591        594       2.32     17,425        392      2.25
   Certificates of Deposit.....       164,396     5.63     159,701      8,948       5.60     93,239      5,470      5.87
                                       38,832     5.61      34,020      1,976       5.81     23,679      1,406      5.94
   Borrowed funds..............    ----------     ----    --------    -------      -----   --------    -------
     Total interest-bearing
       liabilities.............    $  280,061     4.69%   $263,934    $12,869       4.88%  $156,120    $ 7,900      5.06%
                                                                                                       =======
 Noninterest-bearing liabilities        8,422                9,587                            5,634
                                   ----------             --------                         --------
     Total liabilities.........    $  288,483             $273,521                         $161,754
Equity.........................        48,207               50,239                           49,358
                                   ----------             --------                         --------
     Total liabilities and equity  $  336,690              323,760                         $211,112
                                   ==========             ========                         ========
 Net interest income...........                                       $10,733                          $ 8,305
                                                                      =======                          =======
 Net interest rate spread(2)...                   2.88%                             2.81%                           2.87%
 Net interest margin (3).......                   3.45                              3.50                            4.06
 Ratio of average interest-earning
   assets to average interest-
   bearing liabilities.........                 113.98                            116.28                          130.97
</TABLE>
<TABLE>
<CAPTION>
                                    For the Year Ended December 31,
                                    -------------------------------
                                                1996
                                    -------------------------------
                                                            Average
                                    Average                 Yield/
                                    Balance    Interest     Cost
                                    -------    --------    --------
<S>                                 <C>         <C>           <C>
Assets:
 Interest-earning assets:
   First mortgage loans(1).....     $137,668    $ 11,174(8)   8.12%
   Consumer loans(1)...........       20,900       2,007      9.60
   Investment securities.......       29,827(7)    1,909      6.40
                                    --------    --------      ----
     Total interest-earning assets  $188,395    $ 15,090      8.01
                                                ========
 Noninterest-earning assets....        4,721
                                    --------
     Total assets..............     $193,116
                                    ========
Liabilities and Equity:
 Interest-bearing liabilities:
   NOW and money market
     savings...................     $ 18,704    $    530      2.83%
   Passbook savings............       18,997         432      2.27
   Certificates of Deposit.....       88,688       5,256      5.93

   Borrowed funds..............       12,114         711      5.87
     Total interest-bearing         --------    --------
       liabilities.............     $138,503    $  6,929      5.00%
                                                ========
 Noninterest-bearing liabilities       4,920
                                    --------
     Total liabilities.........     $143,423
Equity.........................       49,693
                                    --------
     Total liabilities and equity   $193,116
                                    ========
 Net interest income...........                 $  8,161
                                                ========
 Net interest rate spread(2)...                                  3.01%
 Net interest margin (3).......                                  4.33
 Ratio of average interest-earning
   assets to average interest-
   bearing liabilities.........                                136.02
</TABLE>

--------------------
(1) Balance is net of deferred loan fees, loan discounts and loans in process.
    Nonaccrual loans are included in the balances.
(2) Net interest rate spread represents the difference between the yield on
    average interest-earning assets and the cost of average interest-bearing
    liabilities.
(3) Net interest margin represents net interest income divided by average total
    interest-earning assets.
(4) Includes interest-bearing deposits of $13,201,000 and securities available
    for sale of $49,312,000.
(5) Includes interest-bearing deposits of $8,235,000 and securities available
    for sale of $49,590,000.
(6) Includes interest-bearing deposits of $3,912,000, securities available for
    sale of $22,440,000 and securities held to maturity of $750,000.
(7) Includes interest-bearing deposits of $3,323,000, securities available for
    sale of $16,298,000 and securities held to maturity of $10,206,000.
(8) Includes loan fee amortization of $(29,000), $(35,000) and $(33,000) for the
    years ended December 31, 1998, 1997 and 1996.

                                      -49-
<PAGE>
 
Rate/Volume Analysis

         The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
                                                            Year Ended                              Year Ended
                                                         December 31, 1998                       December 31, 1997
                                                            Compared to                             Compared to
                                                            Year Ended                              Year Ended
                                                         December 31, 1997                       December 31, 1996
                                            ----------------------------------------- ---------------------------------------
                                                  Increase/(Decrease)                     Increase/(Decrease)
                                                        Due to                                  Due to
                                            -----------------------------    Total    --------------------------    Total
                                                                  Rate/     Increase                     Rate/     Increase
                                              Volume     Rate     Volume   (Decrease)  Volume    Rate    Volume   (Decrease)
                                            ---------  --------- --------  ---------- -------- -------- --------  ----------
                                                                                (In thousands)
<S>                                           <C>        <C>       <C>       <C>       <C>       <C>      <C>       <C>
Interest income:
    First mortgage loans....................  $ 5,054    $  (120)  $  (49)   $ 4,885   $ 1,344   $  (76)  $   (9)   $ 1,259
    Consumer loans..........................      859        (33)     (13)       813       215      (19)      (2)       194
    Investment securities...................    1,770        (83)      12      1,699      (216)    (109)     (13)      (338)
                                              -------    -------   ------    -------   -------   ------   ------    -------
       Total interest-earning assets........  $ 7,683    $  (236)  $  (50)   $ 7,397   $ 1,343   $ (204)  $  (24)   $ 1,115
                                              =======    =======   ======    =======   =======   ======   ======    =======
Interest expense:
    NOW and money market savings............  $   663    $    27   $   29    $   719   $    87   $   13   $    2    $   102
    Passbook savings........................      184         13        6        203       (36)      (4)      --        (40)
    Certificate of deposits.................    3,897       (246)    (175)     3,476       271      (53)      (3)       215
    Borrowed funds..........................      614        (30)     (13)       571       679        8        7        694
                                              -------    -------   ------    -------   -------   ------   ------    -------
       Total interest-bearing liabilities...  $ 5,358    $  (236)  $ (153)   $ 4,969   $ 1,001   $  (36)  $    6    $   971
                                              =======    =======   ======    =======   =======   ======   ======    =======
Net change in net interest income...........  $ 2,325    $    --   $  103    $ 2,428   $   342   $ (168)  $  (30)   $   144
                                              =======    =======   ======    =======   =======   ======   ======    =======
</TABLE>

                                      -50-
<PAGE>
 
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

The unaudited pro forma consolidated financial statements presented on the
following pages are based on the historical financial statements of the Company
and Valley Financial. The unaudited pro forma consolidated statements of income
for the year ended December 31, 1998 and 1997 were prepared as if the
Acquisition had occurred as of the beginning of the respective periods for
purposes of the combined consolidated statements of income and as if such an
acquisition had occurred at December 31, 1997 for purposes of the combined
consolidated statement of financial condition. The income statement for the year
ended December 31, 1998 would therefore include the month ended January 31, 1998
for Valley Financial.

These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the Acquisition taken place
at the beginning of the period, or to project the Company's results of
operations at any future date or for any future period.



                                      -51-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL
CONDITION
(Unaudited)
<TABLE>
<CAPTION>
                                                                                         Actual                Pro Forma
                                                                                       December 31,           December 31,
ASSETS                                                                                    1998                   1997
                                                                                       ------------           ------------
<S>                                                                                   <C>                    <C>
Cash:
  Interest-bearing                                                                    $   13,201,437         $    6,481,514
  Noninterest-bearing                                                                      2,435,439              2,035,108
Securities available for sale                                                             49,882,544             58,739,131
Loans receivable, net                                                                    254,032,497            250,722,118
Loans held for sale                                                                        1,681,017                331,746
Accrued interest receivable                                                                1,933,237              2,273,563
Foreclosed real estate                                                                       186,931                 74,240
Premises and equipment, net                                                                3,616,438              3,229,924
Rental real estate                                                                         1,945,851              2,059,148
Title plant                                                                                  925,256                925,256
Goodwill                                                                                   6,387,671              6,795,123
Deferred taxes                                                                                13,490                     --
Prepaid expenses and other assets                                                            448,331                857,816
                                                                                      --------------         --------------

     Total assets                                                                     $  336,690,139         $  334,524,687
                                                                                      ==============         ==============

LIABILITIES AND STOCKHOLDERS' EQUITY


LIABILITIES
     Deposits                                                                        $  246,690,313         $  240,689,830
     Other borrowed funds                                                                38,832,239             40,250,984
     Advances from borrowers for taxes and insurance                                      1,066,025              1,164,417
     Dividend payable                                                                       237,133                204,155
     Deferred income taxes                                                                       --                270,446
     Income taxes payable                                                                   199,224                 13,215
     Accrued expenses and other liabilities                                               1,458,391              1,514,564
                                                                                     --------------         --------------
       Total liabilities                                                                288,483,325            284,107,611
                                                                                     --------------         --------------


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock ($.01 par value, authorized 3,000,000 shares,
       issued and outstanding none)                                                              --                     --
     Common Stock ($.01 par value, authorized 15,500,000 shares;
       issued and outstanding 4,011,057)                                                     40,111                 40,111
     Additional paid-in capital                                                          38,135,817             37,949,598
     Retained earnings, substantially restricted                                         27,084,907             23,660,964
     Unrealized gain on securities available for sale, net of
       income taxes                                                                         358,666                354,781
     Treasury stock at cost (1,053,815 and 744,574 shares, respectively)                (16,399,403)           (10,377,937)
     Unearned shares, employee stock ownership plan                                      (1,013,284)            (1,210,441)
                                                                                     ---------------        ---------------
       Total stockholders' equity                                                        48,206,814             50,417,076
                                                                                     --------------         --------------

     Total liabilities and stockholders' equity                                      $  336,690,139         $  334,524,687
                                                                                     ==============         ==============
</TABLE>
                                      -52-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
                                                                                    Year Ended
                                                                                    December 31,
                                                                             1998                 1997
                                                                        -------------         -------------
<S>                                                                     <C>                   <C>
Interest income...............................                          $  24,223,861         $  23,955,770
Interest expense..............................                             13,319,040            13,401,812
                                                                        -------------         -------------

      Net interest income.....................                             10,904,821            10,553,958

Provision for loan losses.....................                                210,000               140,000
                                                                        -------------         -------------
      Net interest income after provision for
         loan losses..........................                             10,694,821            10,413,958
                                                                        -------------         -------------

Noninterest income:
      Fees and service charges................                              1,279,153             1,139,663
      Abstract fees...........................                              1,583,773             1,221,807
      Gain on sale of securities
         available for sale, net..............                                 51,362               263,870
      Other income............................                              1,054,151               769,602
                                                                        -------------         -------------
         Total noninterest income.............                              3,968,439             3,394,942
                                                                        -------------         -------------


Noninterest expense:
      Salaries and employee benefits..........                              3,650,905             3,463,118
      Premises and equipment..................                                846,223               739,524
      Data processing.........................                                583,111               429,843
      SAIF deposit insurance premiums.........                                148,226               135,206
      Goodwill amortization...................                                472,290               473,875
      Other expenses..........................                              2,277,600             2,201,702
                                                                        -------------         -------------
         Total noninterest expense............                              7,978,355             7,443,268
                                                                        -------------         -------------

Income before income taxes....................                              6,684,905             6,365,632

Provision for income taxes....................                              2,439,432             2,343,256
                                                                        -------------         -------------

Net Income....................................                          $   4,245,473         $   4,022,376
                                                                        =============         =============
</TABLE>

                                      -53-
<PAGE>
 
Comparison of Financial Condition as of December 31, 1998, December 31, 1997 and
December 31, 1996

        The pro forma statement of financial condition as of December 31, 1997
was compared with the December 31, 1998 statement of financial condition in
order to more clearly present the changes in financial condition.

        Total assets increased $2.2 million, or .6%, from $334.5 million at
December 31, 1997 to $336.7 million at December 31, 1998. Interest bearing cash
increased $6.7 million, or 103.7%, from $6.5 million at December 31, 1997 to
$13.2 million at December 31, 1998. Securities available for sale decreased $8.9
million, or 15.1%, primarily due to the sales, calls, payments and maturities on
U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities,
partially offset by the purchase of U.S. Government agencies and mortgage-backed
securities. Total loans receivable, net, increased by $3.3 million, or 1.3%,
from $250.7 million at December 31, 1997 to $254.0 million at December 31, 1998,
primarily due to the origination of $36.2 million of first mortgage loans
secured by one-to-four family residences, purchases and originations of first
mortgage loans primarily secured by multifamily residences located out of state
of $24.5 million, and originations of $14.5 million of second mortgage loans.
These originations and purchases were offset in part by payments, prepayments
and sales of loans during the year ended December 31, 1998. Deposits increased
$6.0 million, or 2.5%, from $240.7 million at December 31, 1997 to $246.7
million at December 31, 1998, primarily reflecting increases in NOW accounts and
money market accounts. Other borrowings, primarily FHLB advances, decreased $1.4
million, from $38.8 million at December 31, 1997 to $37.9 million at December
31, 1998. Total shareholders' equity decreased $2.2 million from $48.2 million
at December 31, 1997 to $50.4 million at December 31, 1998, primarily due to
dividends paid to shareholders and funds used for repurchases of Common Stock
less, net income and increased unrealized gains.

     Total assets increased $18.9 million, or 9.3%, from $203.1 million at
December 31, 1996 to $222.0 million at December 31, 1997. Securities available
for sale decreased $3.3 million, or 14.2%, primarily due to the maturities of
several U.S. Treasury notes and the call of certain equity securities, partially
offset by the purchase of several U.S. Treasury notes and the purchase of
certain equity securities. Securities held to maturity decreased $3.5 million,
or 100.0%, due to the maturities of several U.S. Treasury notes and the
Company's decision not to replace such securities at the present time, in order
to allow the Company greater flexibility in managing its portfolio of investment
securities. Total loans receivable, net, increased by $25.4 million, or 15.3%,
from $165.8 million at December 31, 1996 to $191.3 million at December 31, 1997,
primarily due to the origination of $25.0 million of first mortgage loans
secured by one-to-four family residences, purchases and originations of first
mortgage loans primarily secured by multifamily residences located out of state
of $22.3 million, and originations of $9.6 million of second mortgage loans.
These originations and purchases were offset in part by payments, prepayments
and sales of loans during the year ended December 31, 1997. Deposits increased
$11.4 million, or 8.8%, from $129.7 million at December 31, 1996 to $141.1
million at December 31, 1997, primarily reflecting increases in certificates of
deposit. Other borrowings, primarily FHLB advances, increased $6.2 million, to
$28.6 million at December 31, 1997 from $22.3 million at December 31, 1996.
Total shareholders' equity increased $1.2 million from $49.2 million at December
31, 1996 to $50.4 million at December 31, 1997, primarily due to net income and
increased unrealized gains, less dividends paid to shareholders and funds used
for repurchases of Common Stock.

Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997

        The pro forma statements of income for the years ended December 31, 1998
and 1997 were used for comparison purposes in order to more clearly present the
changes in the results of operations.

        Interest Income. Interest income increased by $268,000 to $24.2 million
for the year ended December 31, 1998 compared to $24.0 million for the year
ended December 31, 1997. The increase in interest income was primarily due to a
$5.4 million increase in average interest earning assets to $315.1 million for
the year ended December 31, 1998, from $309.7 million for 1997. The increase in
the average balances of interest earning assets primarily reflects increases in
the average balances of first and second mortgage loans, partially offset by
decreases in securities available for sale. These increases were primarily
derived from originations of $36.2

                                      -54-
<PAGE>
 
million of first mortgage loans secured by one-to-four family residences,
purchases and originations of first mortgage loans secured by multifamily
residences located outside of the State of Iowa of $24.5 million and
originations of $14.5 million of second mortgage loans, which originations and
purchases were offset in part by payments, prepayments and sales of loans during
the year ended December 31, 1998. The increase in average interest-earning
assets reflects the Company's continued emphasis on residential lending. See
"-Business Strategy." The decreases in available for sale securities were
primarily due to the sales, calls, payments and maturities on U.S. Treasury
Notes, U.S. Government agencies and mortgage-backed securities, partially offset
by the purchase of U.S. Government agencies and mortgage-backed securities. The
average yield on interest earning assets decreased to 7.69% for the year ended
December 31, 1998 from 7.74% for the year ended December 31, 1997, primarily due
to a general decrease in market interest rates.

        Interest Expense. Interest expense decreased by $83,000 to $13.3 million
for the year ended December 31, 1998 compared to $13.4 million for the year
ended December 31, 1997. The decrease in interest expense was primarily due to a
decrease in the average cost of NOW and money market accounts, savings accounts
and borrowed funds and a decrease in the average balance of borrowed funds. The
decrease in the average cost of funds is due to the general decrease in market
interest rates. The decrease in the average balance of borrowed funds was
partially due to the utilization of excess cash funds to repay certain
borrowings. This decrease was partially offset by an increase in the average
balances of interest bearing-liabilities of $3.1 million, from $270.2 million
for the year ended December 31, 1997, compared to $273.3 million for the year
ended December 31, 1998. The increase in the average balances of interest
bearing liabilities reflects an increase in the average balances of NOW accounts
and money market accounts and certificates of deposit, consistent with the
Company's strategy of controlled internal growth. The average cost of interest
bearing liabilities decreased from 4.96% for the year ended December 31, 1997 to
4.87% for the year ended December 31, 1998, reflecting changes in the
distribution of NOW and money market savings accounts and borrowing of funds
with longer maturities and, to a lesser extent, decreases in the average cost of
NOW and money market savings accounts and borrowed funds.

        Net Interest Income. Net interest income before provision for loan
losses increased by $351,000 to $10.9 million for the year ended December 31,
1998 from $10.6 million for the year ended December 31, 1997. The increase is
primarily due to the increases in the average interest earning assets and
decreases in the cost of interest bearing liabilities, offset in part by
decreases in the average interest bearing liabilities and decreases in the
average yield on interest bearing assets. The interest rate spread (i.e., the
difference in the average yield on assets and average cost of liabilities)
increased from 2.78% for the year ended December 31, 1997 to 2.82% for the year
ended December 31, 1998. The increase in the spread reflects the general decline
in the overall costs on interest bearing liabilities in excess of the decline in
yields on the interest-earning assets combined with the increase in the average
interest bearing assets in excess of the increase in the interest bearing
liabilities.


                                      -55-
<PAGE>
 
        The following table sets forth certain information relating to the
Company's pro forma average balance sheets and reflects the pro forma average
yield on assets and pro forma average cost of liabilities for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
                                                                         For Years Ended December 31,
                                                -------------------------------------------------------------------------
                                                              1998                                   1997
                                                -----------------------------------   -----------------------------------
                                                  Average                 Average      Average                  Average
                                                  Balance    Interest    Yield/Cost    Balance     Interest    Yield/Cost
                                                  -------    --------    ----------    -------     --------    ----------
                                                                         (Dollars in thousands)
<S>                                              <C>         <C>             <C>      <C>          <C>               <C>
Assets:
 Interest-earning assets:
   Loans.....................................    $ 253,863   $  20,737        8.17%   $ 238,973    $  19,768         8.27%
   Securities available for sale.............       53,138       3,106        5.85       65,556        3,914         5.97
   Interest bearing cash.....................        8,103         381        4.70        5,167          274         5.31
                                                 ---------   ---------   ---------    ---------    ---------    ---------
     Total interest-earning assets...........      315,104   $  24,224        7.69%     309,696    $  23,956         7.74%
                                                             ---------   ---------                 ---------    ---------
 Noninterest-earning assets..................       18,299                               18,215
                                                 ---------                            ---------
     Total assets............................    $ 333,403                            $ 327,911
                                                 =========                            =========

Liabilities and Equity:
 Interest-bearing liabilities:
   NOW and money market savings..............    $  46,457   $   1,416        3.05%   $  42,295    $   1,325         3.13%
   Savings...................................       26,329         616        2.34       26,465          650         2.46
   Certificates of deposit...................      165,207       9,236        5.59      161,888        9,070         5.60
   Borrowed funds............................       35,275       2,051        5.81       39,512        2,357         5.96
                                                 ---------   ---------   ---------    ---------    ---------    ---------
 Total interest-bearing liabilities..........      273,268   $  13,319        4.87%     270,160    $  13,402         4.96%
                                                             ---------   ---------                 ---------    ---------
 Noninterest-bearing liabilities.............        9,896                                8,394
                                                 ---------                            ---------
     Total liabilities.......................      283,164                              278,554
 Equity......................................       50,239                               49,357
                                                 ---------                            ---------
     Total liabilities and equity ...........    $ 333,403                            $ 327,911
                                                 =========                            =========

Net interest income..........................                $  10,905                             $  10,554
                                                             =========                             =========
Net interest rate spread.....................                                 2.82%                                  2.78%
                                                                         =========                              =========
Net interest margin..........................                                 3.46%                                  3.41%
                                                                         =========                              =========
Ratio of average interest-earning assets to
 average interest-bearing liabilities........                               115.31%                                114.63%
                                                                         =========                              =========
</TABLE>

          Provision for Loan Losses. The Company's provision for loan losses was
$210,000 and $140,000 for years ended December 31, 1998 and December 31, 1997,
respectively. 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, which includes a significant
amount of multifamily loans, substantially all of which are purchased and are
secured by properties located out of state, and other factors related to the
collectibility of the Company's loan portfolio. The net charge offs were $28,000
for the year ended December 31, 1998 as compared to $124,000 for the year ended
December 31, 1997. The resulting allowance for loan loss was $2.7 million at
December 31, 1998 as compared to $2.5 million at December 31, 1997.

          The increase in the allowance is primarily due to the increase in
total loans from $253.8 million at December 31, 1997 to $259.4 million at
December 31, 1998. The allowance for loan losses as a percentage of total loans
receivable increased to 1.03% at December 31, 1998 from 0.99% at December 31,
1997. The level of nonperforming loans has increased to $956,000 at December 31,
1998 from $317,000 at December 31, 1997. See "Asset Quality".

          Management believes that the allowance for loan losses is adequate.
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 no problem loans, identification of
additional problem loans, and other factors, both within and outside of
management's control.

                                      -56-
<PAGE>
 
          Noninterest income. Total noninterest income increased by $573,000, or
16.9%, to $4.0 million for the year ended December 31, 1998 from $3.4 million
for the year ended December 31, 1997. The increase is due to increases in fees
and service charges, abstract fees and other income, partially offset by a
decrease in the gain on the sale of investments. Fees and service charges
increased $139,000 due to increases in overdraft fees on NOW accounts, service
charges on NOW and savings accounts and loan prepayment fees. Abstract fees
increased $362,000 due to increased sales volume. Sales volume increased in part
due to a general decline in market interest rates. Other income increased by
$285,000, primarily due to an increase in loan origination and commitment fees
from First Iowa Mortgage, an increase in insurance sales, the rental income from
the Bank's investment in the Northridge Apartment Limited Partnership, offset in
part by a decrease in annuity sales. Non interest income for the year ended
December 31, 1998 also reflects gains on the sales of securities available for
sale of $51,000, as compared to gains on the sale of such securities of $264,000
for the 1997 comparable period due to a substantial portion of the Holding
Company's available for sale securities being sold in 1997. See "-Business
Strategy-Increased Noninterest Income".

          Noninterest Expense. Total non-interest expense increased by $535,000
to $8.0 million for the year ended December 31, 1998 from $7.4 million for the
year ended December 31, 1997. The increase is primarily due to an increase in
the employee salaries and benefits, premises and equipment, data processing and
SAIF deposit insurance premiums. The increase in salaries and benefits was
primarily a result of the expenses associated with the ESOP, normal salary
increases, an increase in the number of employees and one time costs associated
with the acquisition of Valley Financial. The increase in premises and equipment
was primarily a result of purchases of computer equipment for the Bank and one
time costs associated with the acquisition of Valley Financial. The increase in
data processing is due to normal annual increases and one time costs associated
with the acquisition of Valley Financial. The increase in SAIF deposit insurance
premiums were due to a corresponding increase in the deposits at the Bank. The
Company's efficiency ratio for the year ended December 31, 1998 and 1997 were
53.64% and 53.36%, respectively. The Company's ratio of noninterest expense to
average assets for the year ended December 31, 1998 and 1997 were 2.39% and
2.27%, respectively.

          Income Taxes. Income taxes increased by $96,000 to $2.4 million for
the year ended December 31, 1998 as compared to $2.3 million for the year ended
December 31, 1997. The increase was principally due to an increase in pre-tax
earnings during the 1998 period as compared to the 1997 period, offset in part
by an increase in the tax credits recognized from the Bank's investment in the
Northridge Apartments Limited Partnership in 1998 as compared to 1997.

          Net Income. Net income totalled $4.2 million for the year ended
December 31, 1998 compared to $4.0 million for the same period in 1997.

Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996

          The actual statements of income for the years ended December 31, 1997
and 1996 were used for comparison purposes.

          Interest Income. Interest income increased by $1.1 million to $16.2
million for the year ended December 31, 1997 compared to $15.1 million for the
year ended December 31, 1996. The increase in interest income was primarily due
to a $16.1 million increase in average interest earning assets to $204.5 million
for the year ended December 31, 1997, from $188.4 million for 1996. The increase
in the average balances of interest earning assets primarily reflects increases
in the average balances of first and second mortgage loans. These increases were
primarily derived from originations of $25.0 million of first mortgage loans
secured by one-to-four family residences, purchases and originations of first
mortgage loans secured by multifamily residences located outside of the State of
Iowa of $22.3 million and originations of $9.6 million of second mortgage loans,
which originations and purchases were offset in part by payments, prepayments
and sales of loans during the year ended December 31, 1997. The increase in
average interest-earning assets reflects the Company's continued emphasis on
residential lending. See "-Business Strategy." The average balance of securities
held to maturity decreased $9.5 million, or 92.7%, and such securities were in
part, replaced by lower yielding securities available for sale. The average
yield on interest earning assets decreased to 7.93% for the year ended December

                                      -57-
<PAGE>
 
31, 1997 from 8.01% for the year ended December 31, 1996, primarily due to a
general decrease in market interest rates.

          Interest Expense. Interest expense increased by $971,000 to $7.9
million for the year ended December 31, 1997 compared to $6.9 million for the
year ended December 31, 1996. The increase in interest expense was primarily due
to a $17.6 million increase in the average balances of interest bearing
liabilities to $156.1 million for the year ended December 31, 1997 compared to
$138.5 million for comparable 1996 period. The increase in the average balances
of interest bearing liabilities reflects an increase in the average balances of
certificates of deposit and borrowed funds, consistent with the Company's
strategy of controlled internal growth. The increase of $11.6 million, or 95.5%,
of the average balance of borrowed funds from 1996 reflects the repayment of
borrowed funds with the proceeds of the Conversion in 1996 and the increase of
borrowed funds subsequent to the Conversion to fund asset growth. The average
cost of interest bearing liabilities increased to 5.06% for the year ended
December 31, 1997 from 5.00% for the year ended December 31, 1996, reflecting
changes in the distribution of NOW and money market savings accounts and
borrowing of funds with longer maturities and to a lesser extent increases in
the average cost of NOW and money market savings accounts and borrowed funds.
This was offset in part by a decline in the average cost of certificates of
deposit, primarily reflecting maturities of certificates of deposit at a rate of
higher than the current market rate.

          Net Interest Income. Net interest income before provision for loan
losses increased by $144,000 to $8.3 million for the year ended December 31,
1997 from $8.2 million for the year ended December 31, 1996. The increase is
primarily due to the increases in the average interest earning assets, and
increases in the average interest bearing liabilities. This increase was offset
in part by the decrease in the interest rate spread (i.e., the difference in the
average yield on assets and average cost of liabilities) from 3.01% for the year
ended December 31, 1996 to 2.87% for the year ended December 31, 1997. The
decline in the spread reflects the general decline in the overall yields on
interest-earning assets combined with the increase in the average balance of
borrowed funds and certificates of deposit which have higher costs than other
interest-bearing liabilities.

          Provision for Loan Losses. The Company's provision for loan losses was
$240,000 for years ended December 31, 1997 and December 31, 1996. 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, which includes a significant amount of multifamily
loans, substantially all of which are purchased and are secured by properties
located out of state, and other factors related to the collectibility of the
Company's loan portfolio. The net charge offs were $42,000 for the year ended
December 31, 1997 as compared to $23,000 for the year ended December 31, 1996.
The resulting allowance for loan loss was $2.2 million at December 31, 1997 as
compared to $2.0 million at December 31, 1996.

          The increase in the allowance is primarily due to the increase in
total loans from $168.9 million at December 31, 1996 to $194.6 million at
December 31, 1997 as well as the increase in multifamily loans both on an
aggregate basis and a percentage of the total loan portfolio. The allowance for
loan losses as a percentage of total loans receivable decreased to 1.10% at
December 31, 1997 from 1.16% at December 31, 1996. The level of nonperforming
loans has decreased to $147,000 at December 31, 1997 from $184,000 at December
31, 1996. See "Asset Quality".

          Management believes that the allowance for loan losses is adequate.
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 no problem loans, identification of
additional problem loans, and other factors, both within and outside of
management's control.

          Noninterest income. Total noninterest income increased by $644,000, or
34.0%, to $2.5 million for the year ended December 31, 1997 from $1.9 million
for the year ended December 31, 1996. The increase is

                                      -58-
<PAGE>
 
due to increases in abstract fees, other income and gain on the sale of
investments. Abstract fees increased $291,000 due to increased sales volume,
which is in part attributable to the purchase of the assets of an abstract
company in December, 1996. Other income increased by $41,000, primarily due to
the rental income from the Bank's investment in the Northridge Apartment Limited
Partnership, offset in part by decreases in annuity sales. Non interest income
for the year ended December 31, 1997 also reflects gains on the sales of
securities available for sale of $249,000, as compared to gains on the sale of
such securities of $14,000 for the 1996 comparable period due to a substantial
portion of the Holding Company's available for sale securities being sold in
1997. See "-Business Strategy-Increasing Noninterest Income".

          Noninterest Expense. Total non-interest expense decreased by $362,000
million to $4.6 million for the year ended December 31, 1997 from $4.9 million
for the year ended December 31, 1996. The decrease is primarily due to the
$817,000 one-time assessment to recapitalize the SAIF in 1996. Absent the
one-time SAIF special assessment, the noninterest expense for the year ended
December 31, 1997 increased $455,000 over the corresponding period in 1996. The
increase in 1997 is primarily due to increases in salaries and employee benefits
and other expenses, offset in part by decreases in SAIF deposit insurance
premiums. The increase in salaries and benefits was primarily a result of the
expenses associated with the ESOP, normal salary increases and increase in the
number of employees at the Ames office and at First Iowa, offset in part by the
costs incurred in 1996 related to the adoption of a retirement plan for the
benefit of the former Chairman of the Board. The increase in other expenses is
primarily due to higher expenditures for advertising, employee expenses,
professional fees and expenses associated with the Bank's investment in the
Northridge Apartments Limited Partnership. The decrease in SAIF deposit
insurance, excluding the one-time assessment, was primarily due to the enactment
of legislation which decrease assessment rates for institutions such as the
Bank. See "SAIF Recapitalization." The Company's efficiency ratio, excluding the
one-time SAIF assessment, for the year ended December 31, 1997 and 1996 were
42.21% and 40.99%, respectively. The Company's ratio of noninterest expense to
average assets, excluding the one-time SAIF assessment, for the year ended
December 31, 1997 and 1997 were 2.17% and 2.13%, respectively.

          Income Taxes. Income taxes increased by $365,000 to $2.1 million for
the year ended December 31, 1997 as compared to $1.7 million for the year ended
December 31, 1996. The increase was principally due to an increase in pre-tax
earnings during the 1997 period as compared to the 1996 period, offset in part
by the tax credits recognized from the Bank's investment in the Northridge
Apartments Limited Partnership in 1997.

          Net Income. Net income totalled $3.9 million for the year ended
December 31, 1997 compared to $3.1 million for the same period in 1996.

Impact of Inflation and Changing Prices

          The consolidated financial statements of the Company and notes
thereto, presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities are monetary. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.

Impact of New Accounting Standards

          In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" (SFAS No. 133).  SFAS No. 133 establishes
accounting and reporting standards for derivatives instruments, including
certain derivative instruments embedded in other contracts, and for hedging
contracts.  It requires that an entity recognize all derivatives as either
assets or liabilities, and measures those instruments at fair value.  It also
sets forth the

                                      -59-
<PAGE>
 
proper accounting for hedging activities, which is determined by the intended
use of the derivative and how that use is designated by the entity. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. Earlier application
is permitted and should not be applied retroactively to financial statements of
prior periods. Since the Company is not currently holding any derivative
instruments (as defined) and is not engaged in hedging activities, the adoption
of SFAS No. 133 is expected to have no effect on the Company's financial
condition or results of operations.

          In October 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." (SFAS No. 134). SFAS No. 134
amends FASB Statement No. 65 and conforms the subsequent accounting for
securities retained after the securitization of mortgage loans held for sale by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. Therefore, after the securitization of a mortgage loan held
for sale, any retained mortgage-backed securities shall by classified in
accordance with the provisions of FASB Statement No. 115. The adoption of SFAS
No. 134 is expected to have no effect on a company's financial condition or
results of operations.

Year 2000 Compliance

            The Year 2000 ("Y2K") issue is a serious operational problem that is
widespread and complex, affecting all industries. The problem consists
essentially of the risk that programming code in existing computer systems will
fail to properly recognize the new millennium when it occurs in the Year 2000.
Many computer programs and related hard-printed memory circuits were developed
with six-digit date fields. These programs and memory circuits were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. Because banks rely heavily on their computer
systems, the Federal Financial Institutions Examination council ("FFIEC") has
placed significant emphasis on the problems surrounding the Year 2000 issues and
has required financial institutions to document the assessment, testing and
corrections made to ready their computer systems and programs for the Year 2000
date change. The FFIEC and the OTS have strict regulations, guidelines and
milestones in place that each FDIC insured financial institution must follow in
order to remain operational. The Company's board of directors has remained
informed of the Company's position and progress in its Year 2000 project.

          In addition, noninformation technology systems, such as telephones,
copiers and elevators, may also contain embedded technology which controls its
operation and which may be effected by the Y2K problem. When the Year 2000
arrives, systems, including some of those with embedded chips, may not work
properly because of the way they store date information. They may not be able to
deal with the date 01/01/00, and may not be able to deal with operational
'cycles' such as 'do X every 100 days'. Thus, even noninformation technology
systems may affect the normal operations of the Company upon arrival of the Year
2000.

          In order to address the Y2K issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Y2K Problem, assess its potential impact on the operations of
the Company, monitor the progress of FIserv, Inc. of Milwaukee ("FIserv") and
other third party software vendors in addressing the matter, test changes
provided by these vendors, and develop contingency plans for all critical
systems. An internal committee of the Company has been formed to address the
potential risks that Y2K poses for the Company. The Company's Y2K committee has
completed the awareness, inventory and assessment phases of Y2K. The testing of
the Company's internal computer system and software should be completed by the
first part of the second quarter of 1999. The Company's most critical exposure
to Y2K system problems is with its data processing provider, FIserv. FIserv's
Vision system has been reported as being Y2K ready as of February, 1999. During
the first and early second quarter of 1999, the Company intends to complete the
testing phase of Y2K. Management anticipates that the enhancements necessary to
prepare its mission critical systems for Y2K will be completed during the second
quarter of 1999. Although the effort to prepare for Y2K is intended to address
all Y2K issues, the Company has developed a contingency plan to address
potential Y2K issues that

                                      -60-
<PAGE>
 
arise from noncompliance. Contingency plans have been developed on a
department-by-department basis in anticipation of the possibility of unplanned
system difficulties or failure of third parties to successfully prepare for Y2K.
It is expected that most of these plans will provide for some types of manual
record keeping and reporting procedures. The testing phase on the Company's
contingency plan will begin in the second quarter of 1999.

          The Company anticipates that it has and will incur internal staff
costs, consulting costs, data processing costs, additional purchase of equipment
and other expenses related to the enhancements necessary to prepare its systems
for Y2K. The Company has replaced some equipment, software and incurred
consulting fees at a cost of approximately $40,000. Management anticipates the
additional costs associated with Year 2000 compliance will not exceed $100,000.
Any personnel and consulting costs have been and will continue to be expensed as
incurred.



                                      -61-
<PAGE>
 
ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES

                  See Item 7.  Management Discussion and Analysis.  "Discussion
                  of Market Risk - Interest Rate Sensitivity Analysis."



ITEM 8.           FINANCIAL STATEMENTS



                         NORTH CENTRAL BANCSHARES, INC.
                                AND SUBSIDIARIES


                         INDEX TO FINANCIAL STATEMENTS



        ---------------------------------------------------------
        INDEPENDENT AUDITOR'S REPORT.......................................63
        ---------------------------------------------------------



        FINANCIAL STATEMENTS
         Consolidated statements of financial condition....................64
         Consolidated statements of income.................................65
         Consolidated statements of shareholders' equity...................66
         Consolidated statements of cash flows.............................67
         Notes to consolidated financial statements........................69


        ---------------------------------------------------------







                                      -62-
<PAGE>
 
                    [LETTERHEAD OF MC GLADREY & PULLEN, LLP]




                          Independent Auditor's Report


To the Board of Directors
North Central Bancshares, Inc.
Fort Dodge, Iowa

We have audited the accompanying consolidated statements of financial condition
of North Central Bancshares, Inc., and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the three years ended December 31, 1998, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Central
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the three years ended
December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.


                                             /s/ MC GLADREY & PULLEN, LLP


Des Moines, Iowa
February 10, 1999
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS                                                                                1998              1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
CASH:
   Interest-bearing                                                          $       13,201,437 $        2,462,809
   Noninterest-bearing                                                                2,435,439            982,354
Securities available-for-sale (Notes 3 and 9)                                        49,882,544         19,815,913
Loans receivable, net (Notes 4, 5, 9 and 15)                                        254,032,497        191,248,830
Loans held for sale                                                                   1,681,017
Accrued interest receivable (Note 6)                                                  1,933,237          1,300,495
Foreclosed real estate                                                                  186,931             67,107
Premises and equipment, net (Note 7)                                                  3,616,438          2,143,016
Rental real estate                                                                    1,945,851          2,059,148
Title plant                                                                             925,256            925,256
Goodwill                                                                              6,387,671            195,628
Deferred taxes (Note 10)                                                                 13,490            105,139
Prepaid expenses and other assets                                                       448,331            647,913
                                                                             --------------------------------------

              Total assets                                                   $      336,690,139 $      221,953,608
                                                                             ======================================

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
   Deposits (Note 8)                                                         $      246,690,313 $      141,123,707
   Borrowed funds (Note 9)                                                           38,832,239         28,550,000
   Advances from borrowers for taxes and insurance (Note 5)                           1,066,025            918,369
   Dividend payable                                                                     237,133            204,155
   Income taxes payable                                                                 199,224            194,325
   Accrued expenses and other liabilities                                             1,458,391            545,976
                                                                             --------------------------------------
              Total liabilities                                                     288,483,325        171,536,532
                                                                             --------------------------------------

COMMITMENTS AND CONTINGENCIES (Notes 14 and 17)

STOCKHOLDERS' EQUITY  (Notes 12 and 18)
   Common stock, $.01 par value, authorized 15,500,000 shares;
      issued and outstanding 1998 and 1997 4,011,057 shares                              40,111             40,111
   Preferred stock, $.01 par value, authorized 3,000,000 shares;
      issued and outstanding 1998 and 1997 none
   Additional paid-in capital                                                        38,135,817         37,949,598
   Retained earnings, substantially restricted (Note 10)                             27,084,907         23,660,964
   Unearned shares, employee stock ownership plan (Note 11)                         (1,013,284)        (1,210,441)
   Accumulated other comprehensive income                                               358,666            354,781
   Less cost of treasury stock, 1998 1,046,608 shares;
      1997 744,574 shares                                                          (16,399,403)       (10,377,937)
                                                                             --------------------------------------
              Total stockholders' equity                                             48,206,814         50,417,076
                                                                             --------------------------------------

              Total liabilities and stockholders' equity                     $      336,690,139 $      221,953,608
                                                                             ======================================
</TABLE>
See Notes to Consolidated financial Statements.
                                      -64-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                      1998             1997             1996
------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
Interest income:
   Loans receivable:
      First mortgage loans                                      $    17,317,988 $     12,432,797 $     11,173,567
      Consumer loans                                                  3,013,947        2,200,965        2,007,185
   Securities and cash deposits                                       3,269,617        1,570,932        1,909,267
                                                                --------------------------------------------------
                                                                     23,601,552       16,204,694       15,090,019
                                                                --------------------------------------------------
Interest expense:
   Deposits (Note 8)                                                 10,893,081        6,493,931        6,217,234
   Other borrowed funds                                               1,975,879        1,405,679          711,418
                                                                --------------------------------------------------
                                                                     12,868,960        7,899,610        6,928,652
                                                                --------------------------------------------------

              Net interest income                                    10,732,592        8,305,084        8,161,367

Provision for loan losses (Note 4)                                      210,000          240,000          240,000
                                                                --------------------------------------------------
              Net interest income after provision
                 for loan losses                                     10,522,592        8,065,084        7,921,367
                                                                --------------------------------------------------

Noninterest income:
   Fees and service charges                                           1,243,248          656,695          579,999
   Abstract fees                                                      1,583,773        1,221,807          931,031
   Mortgage banking fees                                                339,397
   Gain on sale of securities available-for-sale, net                    51,362          248,526           13,774
   Other income                                                         696,919          409,968          368,691
                                                                --------------------------------------------------
              Total noninterest income                                3,914,699        2,536,996        1,893,495
                                                                --------------------------------------------------

Noninterest expense:
   Salaries and employee benefits (Note 11)                           3,482,210        2,208,807        2,003,701
   Premises and equipment                                               811,725          444,231          420,633
   Data processing                                                      553,288          258,250          243,762
   SAIF special assessment                                                                                817,275
   SAIF deposit insurance premiums                                      142,932           84,742          278,563
   Goodwill amortization                                                435,817           27,947           28,973
   Other expenses (Note 13)                                           2,145,854        1,552,675        1,145,477
                                                                --------------------------------------------------
              Total noninterest expense                               7,571,826        4,576,652        4,938,384
                                                                --------------------------------------------------

              Income before income taxes                              6,865,465        6,025,428        4,876,478

Provision for income taxes (Note 10)                                  2,480,620        2,108,304        1,743,557
                                                                --------------------------------------------------

              Net income                                        $     4,384,845 $      3,917,124 $      3,132,921
                                                                ==================================================

Basic earnings per common share (Note 19)                       $          1.44 $           1.23 $           0.82

Earnings per common share - assuming dilution (Note 19)                    1.40             1.21             0.82

Dividends declared per common share (Note 12)                              0.32             0.25             0.28
</TABLE>
See Notes to Consolidated Financial Statements.

                                      -65-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
                                                                                                    Employee
                                                                        Additional                   Stock
                                               Comprehensive   Common    Paid-In      Retained     Ownership
                                                   Income      Stock     Capital      Earnings        Plan
---------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>      <C>          <C>          <C>
Balance, December 31, 1995
 Comprehensive income:
  Net income                                     $3,132,921    $37,000  $12,350,840  $18,220,626  $  (768,790)
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                  12,445          -           -     3,132,921            -
                                                 ----------
      Total comprehensive income                 $3,145,366          -           -             -            -
                                                 ==========
 Reorganization and conversion to stock form
  and proceeds from issuance of common stock                     3,111   26,249,048            -            -
   in connection therewith
 Purchase of treasury stock                                          -            -            -            -
 Dividends on common stock                                           -            -     (821,943)           -
 Expenses incurred relating to conversion to
  stock form                                                         -     (844,469)           -            -
 Unearned ESOP shares                                                -            -            -     (840,000)
 Effect of contribution to employees stock
  ownership plan                                                     -       41,192            -      191,835
                                                               ------------------------------------------------
  Balance, December 31, 1997                                    40,111   37,796,611   20,531,604   (1,416,955)
 Comprehensive income:
  Net income                                     $3,917,124          -            -    3,917,124            -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                 281,684          -            -            -            -
                                                 ----------
      Total comprehensive income                 $4,198,808
                                                 ==========
 Purchase of treasury stock                                          -            -            -            -
 Dividends on common stock                                           -            -     (787,764)           -
 Effect of contribution to employees stock
  ownership plan                                                     -      147,968            -     (206,514)
 Effect of stock options exercised                                   -        5,019            -            -
                                                               ------------------------------------------------
Balance, December 31, 1996                                      40,111   37,949,598   23,660,964   (1,210,441)
 Comprehensive income:
  Net income                                     $4,384,845          -            -    4,384,845            -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                   3,885          -            -            -            -
                                                 ----------
      Total comprehensive income                 $4,388,730
                                                 ==========
 Purchase of treasury stock                                          -            -            -            -
 Dividends on common stock                                           -            -     (960,902)           -
 Effect of contribution to employees stock
  ownership plan                                                     -      206,636            -      191,157
 Effect of stock options exercise                                    -      (20,417)           -            -
                                                               ------------------------------------------------
Balance, December 31, 1998                                     $40,111  $38,135,817  $27,084,907  $(1,013,284)
                                                               ================================================
</TABLE>
<TABLE>
<CAPTION>
                                                Accumulated
                                                   Other                      Total
                                               Comprehensive   Treasury   Stockholders'
                                                   Income        Stock       Equity
---------------------------------------------------------------------------------------
<S>                                               <C>        <C>           <C>
Balance, December 31, 1995
 Comprehensive income:
  Net income                                      $ 60,652   $          -  $29,900,328
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                      -              -    3,132,921

      Total comprehensive income                    12,445              -       12,445

 Reorganization and conversion to stock form
  and proceeds from issuance of common stock             -              -   26,252,159
   in connection therewith
 Purchase of treasury stock                              -     (7,789,661)  (7,789,661)
 Dividends on common stock                               -              -     (821,943)
 Expenses incurred relating to conversion to
  stock form                                             -              -     (844,469)
 Unearned ESOP shares                                    -              -     (840,000)
 Effect of contribution to employees stock
  ownership plan                                         -              -      233,027
                                               ---------------------------------------
  Balance, December 31, 1996                        73,097     (7,789,661)  49,234,807
 Comprehensive income:
  Net income                                             -              -    3,917,124
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                281,684              -      281,684

      Total comprehensive income

 Purchase of treasury stock                              -     (2,706,750)  (2,706,750)
 Dividends on common stock                               -              -     (787,764)
 Effect of contribution to employees stock
  ownership plan                                         -              -      354,482
 Effect of stock options exercise                        -        118,474      123,493
                                               ---------------------------------------
Balance, December 31, 1997                         354,781    (10,377,937)  50,417,076
 Comprehensive income:
  Net income                                             -              -    4,384,845
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                  3,885              -        3,885

      Total comprehensive income

 Purchase of treasury stock                              -     (6,164,419)  (6,164,419)
 Dividends on common stock                               -              -     (960,902)
 Effect of contribution to employees stock
  ownership plan                                         -              -      403,793
 Effect of stock options exercised                       -        142,953      122,536
                                               ---------------------------------------
Balance, December 31, 1998                        $358,666   $(16,399,403) $48,206,814
                                               =======================================
</TABLE>

See Notes to Consolidated Financial Statements.
                                      -66-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                    1998              1997               1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                     $  4,384,845     $   3,917,124      $   3,132,921
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Provision for loan losses                                        210,000           240,000            240,000
      Depreciation                                                     488,989           298,927            202,911
      Amortization and accretion                                       539,878            74,219          (163,796)
      Deferred taxes                                                 (164,846)          (80,591)          (143,069)
      Effect of contribution to employee stock
        ownership plan                                                 403,793           354,482            185,027
      (Gain) on sale of foreclosed real estate and
        loans, net                                                     (4,726)           (7,499)           (16,924)
      (Gain) on sale of securities available-for-sale                 (51,362)         (248,526)           (13,774)
      Loss on disposal of equipment                                      9,191             3,321             19,781
      Net (increase) in loans held for sale (1,681,017) Change in
      assets and liabilities:
        Decrease in accrued interest receivable                        386,631            27,238             87,378
        Decrease in income taxes receivable                                                                  31,766
        (Increase) decrease in prepaid expenses and
           other assets                                                453,985         (301,190)        (1,449,942)
        Increase in income taxes payable                                25,036            29,211            182,826
        Increase (decrease) in accrued expenses and
           other liabilities                                          (41,121)             3,950             34,345
                                                            --------------------------------------------------------
              Net cash provided by operating
                  activities                                         4,959,276         4,310,666          2,329,450
                                                            --------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in loans                                 20,168,334       (3,298,056)       (10,546,067)
   Purchase of loans                                              (24,644,011)      (22,363,597)        (7,499,489)
   Proceeds from sale of securities available-for-sale               4,445,868         3,204,196             53,891
   Purchase of securities available-for-sale                      (18,371,558)       (2,777,723)       (15,314,175)
   Proceeds from maturities of securities
      available-for-sale                                            25,460,742         3,500,000
   Proceeds from maturities of securities
      held-to-maturity                                                                 3,500,000         12,500,000
   Purchase of premises, equipment and rental real
      estate                                                         (776,473)         (981,010)          (381,450)
   Proceeds from sale of equipment                                          58            31,325                100
   Purchase of title plant                                                                                (110,947)
   Proceeds from sale of title plant                                                      45,000
   Cash paid in connection with acquisition of Valley
      Financial Corporation net of cash received                   (8,568,743)
   Other                                                                69,974            62,925             16,442
                                                            --------------------------------------------------------
              Net cash (used in) investing activities              (2,215,809)      (19,076,940)       (21,281,695)
                                                            --------------------------------------------------------
                                  (Continued)
</TABLE>
                                      -67-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                    1998               1997              1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in deposits                                       $  6,297,514      $  11,401,663     $   3,049,731
   Net increase (decrease) in advances from
      borrowers for taxes and insurance                              (154,127)             72,881            63,943
   Net change in short-term borrowings                                                (3,000,000)       (7,965,000)
   Proceeds from other borrowed funds                               16,542,000         21,250,000         9,300,000
   Payments of other borrowed funds                                (6,259,761)       (12,035,000)         (892,000)
   Proceeds from conversion to stock form                                                                25,412,159
   Payments for expenses incurred relating to
      conversion to stock form                                                                            (642,326)
   Purchase of treasury stock                                      (6,164,419)        (2,706,750)       (7,789,661)
   Proceeds from issuance of treasury stock                            114,963            105,781
   Dividends paid                                                    (927,924)          (813,953)         (719,428)
                                                            --------------------------------------------------------
              Net cash provided by financing
                  activities                                         9,448,246         14,274,622        19,817,418
                                                            --------------------------------------------------------

              Net increase (decrease) in cash                       12,191,713       (14,766,274)      (18,952,245)

CASH
   Beginning                                                         3,445,163          3,936,815         3,071,642
                                                            --------------------------------------------------------
   Ending                                                   $       15,636,876 $     (10,829,459) $    (15,880,603)
                                                            ========================================================

SUPPLEMENTAL SCHEDULE OF CASH FLOW
   INFORMATION
   Cash payments for:
      Interest paid to depositors                           $       10,989,646 $        6,479,044 $       6,236,351
      Interest paid on borrowings                                    1,975,691          1,477,850           684,894
      Income taxes                                                   2,628,003          2,180,268         1,656,411
</TABLE>

See Notes to Consolidated Financial Statements.

                                      -68-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 1.  Significant Accounting Policies
Organization, nature of business and basis of presentation: North Central
Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and
loan holding company that owns 100% of the outstanding stock of First Federal
Savings Bank of Iowa (the Bank), which is a federally chartered stock savings
bank that conducts its operations from its main office located in Fort Dodge,
Iowa, and six branch offices located in Fort Dodge, Nevada, Ames, Burlington and
Mt. Pleasant, Iowa.

The Company was created as part of a reorganization and conversion effected by
the Bank and North Central Bancshares, M.H.C. (the MHC) which became effective
on March 20, 1996. See Note 17 for a more complete description of the
reorganization and conversion.

Prior to March 20, 1996, the MHC owned approximately 65% of the Bank with the
remaining 35% owned by members of the general public (including directors and
officers of the Bank). The MHC became effective on August 31, 1994, when First
Federal Savings Bank of Iowa (the mutual savings bank) converted to a federal
mutual holding company and concurrently formed a new federally chartered stock
savings bank subsidiary (the Bank). See Note 16 for a more complete description.

The financial statements presented for the Company include, since March 20,
1996, the consolidated statements of the Company and the Bank and, for periods
prior to the March 20, 1996 conversion, the consolidated statements of the MHC
and the Bank as if the MHC owned 100% of the Bank. These financial statements
were prepared as if the pooling-of-interests method of accounting were applied
to the conversions.

Effective  January 1, 1998, the Bank adopted FASB  Statement No. 130, which was
issued in June 1997.  Statement No. 130 establishes  new rules for the reporting
and display of  comprehensive  income and its  components,  but has no effect on
the Bank's net income or total  stockholders'  equity.  Statement No. 130
requires  unrealized  gains and losses  on the  Bank's  available-for-sale
securities,  which  prior  to  adoption  were  reported  separately  in
stockholders'  equity,  to be  included  in  comprehensive  income.  Prior  year
financial  statements  have  been reclassified to conform to the requirements of
Statement No. 130.

Principles of consolidation: The consolidated financial statements, as described
above, include the accounts of the Company and its wholly-owned subsidiary, the
Bank and the Bank's wholly-owned subsidiaries, First Financial Service
Corporation (which sells insurance and annuity products and originates equipment
leases), First Iowa Title Services, Inc. (which provides real estate abstracting
services), Northridge Apartments Limited Partnership (which owns a multifamily
apartment building) and First Iowa Mortgage, Inc. (which originates and sells
mortgage loans in the secondary market). All significant intercompany balances
and transactions have been eliminated in consolidation.

Accounting estimates and assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.

                                      -69-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Securities available-for-sale: Securities classified as available-for-sale are
those debt and equity securities the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors.

Securities available-for-sale are reported at fair value with unrealized gains
or losses reported as a separate component of other comprehensive income, net of
the related deferred tax effect. The amortization of premiums and accretion of
discounts is computed by the interest method over their contractual lives.

Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.

Loans held for sale: Loans held for sale are those loans held with the intent to
sell in the foreseeable future. They are carried at the lower of aggregate cost
or market value. Sales are made without recourse and any gain or loss is
recognized at the settlement date.

Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, net deferred loan origination fees and unearned
discounts.

Discounts on first mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.

The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.

Uncollectible interest on loans that are contractually past due is charged-off
or an allowance is established based on management's periodic evaluation,
generally when loans become 90 days past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is no longer in doubt, in which case the loan is
returned to accrual status.

Loan origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience.

                                      -70-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less selling costs at
the date of foreclosure. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.

Valuations are periodically performed by management, and an allowance for losses
is established by a charge to income if the carrying value of a property exceeds
its market value less estimated selling costs.

Premises and equipment: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by straight-line
and double-declining balance methods over the estimated useful lives of the
assets.

Rental real estate: Rental real estate is comprised of a low-income housing,
multifamily apartment building and equipment which is stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by the
straight-line and double-declining balance methods over the estimated useful
lives of the assets.

Title plant: Title plant is carried at cost and, in accordance with FASB
Statement No. 61, is not depreciated. Costs incurred to maintain and update the
title plant are expensed as incurred.

Goodwill:  Goodwill is stated at cost, net of accumulated  amortization  and is
being  amortized over 10 - 15 years using the straight-line method.

Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the difference
between the reported amounts of assets and liabilities and their income tax
bases. Income taxes are allocated to the Company and its subsidiaries based on
each entity's income tax liability as if it filed a separate return.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of the deferred
tax assets, will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

Earnings per share: Basic earnings per share and earnings per common share -
assuming dilution were computed using the methodology prescribed by FASB
Statement No. 128 Earnings per Share. The basic earnings per common share
amounts were computed using the weighted average number of shares outstanding
during the periods presented. The earnings per common share amounts - assuming
dilution were computed using the weighted average number of shares outstanding
during the periods presented, adjusted for the effect of dilutive potential
common shares outstanding which consists of stock options granted. In accordance
with Statement of Position 93-6, shares owned by the ESOP that have not been
committed to be released are not considered to be outstanding for the purpose of
computing earnings per share.


                                      -71-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Stock-option plan: SFAS No. 123, Accounting for Stock-Based Compensation,
establishes a fair value based method for financial accounting and reporting for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
However, the standard allows compensation to continue to be measured by using
the intrinsic value based method of accounting prescribed by APB No. 25,
Accounting for Stock Issued to Employees, but requires expanded disclosures. The
Company has elected to apply the intrinsic value based method of accounting for
stock options issued to employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.

Fair value of financial instruments: FASB Statement No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheets, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.

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

   Cash: The carrying amount of cash represents the fair value.

   Securities: Fair values for all securities are based on quoted market prices,
   where available. If quoted market prices are not available, fair values are
   based on quoted market prices of comparable instruments.

   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.


                                      -72-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

   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 December 31, 1998 and 1997, the carrying amount and
   fair value of the commitments were not significant.

Note 1.  Business Combination
As the close of business on January 30, 1998, the Bank completed the acquisition
of Valley Financial Corp. ("Valley Financial") pursuant to an Agreement and Plan
of Merger, dated as of September 19, 1997. The acquisition resulted in the
merger of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB
("Valley Savings") with and into the Bank, with the Bank as the resulting
financial institution. Valley Savings, headquartered in Burlington, Iowa, was a
federally-charted stock savings bank with three branch offices located in
southeastern Iowa. The former offices of Valley Savings are being operated as
branches of the Bank.

In connection with the acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was canceled and converted automatically
into the right to receive $525 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the acquisition, shareholders
of Valley Financial were paid a total of $14,726,250 in cash. The excess of the
total acquisition cost over the fair value of the net assets acquired of
$6,627,859 is being amortized over 15 years by the straight-line method. The
acquisition was accounted for as a purchase transaction and therefore, the
operating results of the former offices of Valley Savings Bank are included in
the 1998 operating results of the Company only from the date of acquisition
through December 31, 1998.


                                      -73-
<PAGE>
 
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corporation:

   Cash                                                        $   6,157,507
   Securities                                                     41,818,057
   Loans                                                          58,567,364
   Accrued interest receivable                                     1,019,373
   Premises and equipment                                          1,081,890
   Goodwill                                                        6,627,859
   Prepaid expenses and other assets                                 228,785
   Deposits                                                      (99,269,092)
   Advances from borrowers for taxes and insurance                  (301,783)
   Deferred income taxes                                            (262,738)
   Accrued taxes payable                                              12,565
   Accrued expenses and other liabilities                           (953,537)
                                                               -------------
              Cash paid                                           14,726,250

   Less: cash received                                            (6,157,507)
                                                               -------------
              Cash paid, net of cash received                  $   8,568,743
                                                               =============

Unaudited pro forma consolidated results of operations for the years ended
December 31, 1998 and 1997, as though Valley Savings Bank had been acquired as
of January 1, 1997, follow:

                                                      1998         1997
                                                  -------------------------

Net interest income                               $ 10,904,821 $ 10,553,958
Net income                                           4,245,473    4,022,376
Basic earnings per common share                           1.39         1.26
Earnings per common share - assuming dilution             1.36         1.24

                                      -74-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 3. Securities
Securities available-for-sale as of December 31, 1998, were as follows:
<TABLE>
<CAPTION>
                                                          Gross        Gross
                                        Amortized Cost  Unrealized   Unrealized
                                                          Gains       (Losses)     Fair Value
                                        --------------------------------------------------------
   <S>                                  <C>            <C>          <C>            <C>
   Equity securities:
      Federal Home Loan Bank
        stock                           $  2,379,400   $            $              $  2,379,400
      FHLMC preferred stock                  975,000       20,748                       995,748
      FNMA preferred stock                 5,134,375      268,661                     5,403,036
      Other                                  861,509       92,573       (29,376)        924,706
                                        --------------------------------------------------------
                                           9,350,284      381,982       (29,376)      9,702,890
                                        --------------------------------------------------------
   Debt securities:
      U.S. Treasury notes                  9,325,175       84,919                     9,410,094
      U.S. Government agencies            18,859,431       48,583       (23,939)     18,884,075
      State and political
        subdivisions                       4,282,940       95,195          (182)      4,377,953
      Mortgage-backed securities           7,493,887       27,042       (13,397)      7,507,532
                                        --------------------------------------------------------
                                          39,961,433      255,739       (37,518)     40,179,654
                                        --------------------------------------------------------
                                        $ 49,311,717  $   637,721   $   (66,894)   $ 49,882,544
                                        ========================================================
</TABLE>

                                      -75-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Securities available-for-sale as of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
                                                           Gross        Gross
                                        Amortized Cost   Unrealized   Unrealized
                                                           Gains       (Losses)    Fair Value
                                        -------------------------------------------------------
   <S>                                  <C>               <C>          <C>        <C>
   Equity securities:
      Federal Home Loan Bank
        stock                           $   1,549,700     $       -    $      -   $  1,549,700
      FHLMC preferred stock                 1,005,810             -      (3,978)     1,001,832
      FNMA preferred stock                  5,134,375       265,445           -      5,399,820
      Other                                   557,078       261,858           -        818,936
   Debt securities
      U.S. Treasury notes                  10,995,766        50,994      (1,135)    11,045,625
                                        -------------------------------------------------------
                                        $  19,242,729     $ 578,297    $ (5,113)  $ 19,815,913
                                        =======================================================
</TABLE>

The amortized cost and fair value of debt securities as of December 31, 1998, 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:

                                       Securities Available-for-Sale
                                     ----------------------------------
                                      Amortized Cost       Fair Value
                                     ----------------------------------

   Due in one year or less            $   5,011,439      $   5,045,059
   Due from one to five years            15,146,447         15,132,285
   Due from five to ten years            10,747,060         10,851,721
   Due after ten years                    1,562,600          1,642,057
   Mortgage-backed securities             7,493,887          7,508,532
                                     ----------------------------------
                                      $  39,961,433      $  40,179,654
                                     ==================================

Gross gains of $71,923, $248,526 and $13,774 were realized on the sale of
available-for-sale securities in 1998, 1997 and 1996, respectively. Gross losses
of $20,561, none and none were realized on the sale of available-for-sale
securities in 1998, 1997 and 1996, respectively.

At December 31, 1998, the Bank has pledged securities available-for-sale with a
carrying amount of approximately $9,585,000 as collateral for certain deposits.

                                      -76-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The components of other comprehensive income - unrealized gains on securities
for the years ended December 31, 1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
                                                               1998         1997        1996
                                                           -------------------------------------
   <S>                                                     <C>         <C>          <C>
   Unrealized holding gains arising during
      the period                                           $    57,558 $    697,783 $    33,622
   Less reclassification adjustment for net gains
      realized in net income                                    51,362      248,526      13,774
                                                           -------------------------------------
              Net unrealized gains before tax
                 (expense)                                       6,196      449,257      19,848
   Tax (expense)                                               (2,311)    (167,573)     (7,403)
                                                           -------------------------------------
              Other comprehensive income - net
              unrealized gains on securities               $     3,885 $    281,684 $    12,445
                                                           =====================================
</TABLE>
Note 4.  Loans Receivable
Loans receivable at December 31, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
                                                                                     1998               1997
                                                                              -------------------------------------
   <S>                                                                        <C>               <C>
   First mortgage loans (principally conventional) Principal balances:
        Secured by one-to-four family residences                              $     144,777,159 $      114,692,784
        Secured by:
           Multifamily properties                                                    64,895,056         51,345,391
           Commercial properties                                                     11,396,311          3,799,728
        Construction loans                                                            4,213,903          1,070,100
                                                                              -------------------------------------
              Total first mortgage loans                                            225,282,429        170,908,003
                                                                              -------------------------------------

   Consumer loans
      Principal balances:
        Automobile                                                                    7,348,369          4,696,339
        Second mortgage                                                              20,784,380         16,225,834
        Other                                                                         5,946,051          2,794,877
                                                                              -------------------------------------
              Total consumer loans                                                   34,078,800         23,717,050
                                                                              -------------------------------------

              Total loans                                                           259,361,229        194,625,053

      Less:
        Undisbursed portion of construction loans                                   (2,023,859)          (453,434)
        Unearned discounts                                                            (312,381)          (423,640)
        Net deferred loan origination fees                                            (316,054)          (348,562)
        Allowance for loan losses                                                   (2,676,438)        (2,150,587)
                                                                              -------------------------------------
                                                                              $     254,032,497 $      191,248,830
                                                                              =====================================
</TABLE>

                                      -77-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
                                                                 1998              1997               1996
                                                           ----------------------------------------------------
   <S>                                                      <C>               <C>                 <C>
   Balance, beginning                                       $   2,150,587     $   1,952,887       $  1,735,599
      Provision charged to income                                 210,000           240,000            240,000
      Effect of acquisition of Valley Financial
        Corporation                                               343,418
      Loans charged-off                                          (28,422)          (52,724)           (24,297)
      Recoveries                                                      855            10,424              1,585
                                                           ----------------------------------------------------
   Balance, ending                                          $   2,676,438     $   2,150,587       $  1,952,887
                                                           ====================================================
</TABLE>

Nonaccrual loans totaled approximately $955,835 and $147,000, at December 31,
1998 and 1997, respectively. The amount of interest related to nonaccrual loans
for 1998 and 1997, is insignificant.

The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their immediate families (commonly referred to as related parties),
all of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.

Activity in loans receivable from certain executive officers and directors of
the Bank consisted of the following:
<TABLE>
<CAPTION>
  <S>                                               <C>              
   Balance, December 31, 1995                       $  1,083,291
      New loans                                          293,450
      Repayments                                       (173,128)
                                                    -------------
   Balance, December 31, 1996                          1,203,613
      New loans                                          221,983
      Repayments                                       (380,408)
                                                    -------------
   Balance, December 31, 1997                          1,045,188
      New loans                                          166,701
      Repayments                                       (135,925)
                                                    -------------
   Balance, December 31, 1998                       $  1,075,964
                                                    =============
</TABLE>

Note 5.  Loan Servicing
Mortgage loans serviced for FHLMC and other banks are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31, 1998 and 1997, are $7,742,415
and $2,963,396, respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing were approximately $53,000 and $27,000, at
December 31, 1998 and 1997, respectively.

                                      -78-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 6.  Accrued Interest Receivable
Accrued interest receivable at December 31, is summarized as follows:
<TABLE>
<CAPTION>
                                                                   1998               1997
                                                           --------------------------------------
   <S>                                                           <C>                <C>
   Securities                                                    $    515,681       $    127,653
   Loans receivable                                                 1,449,004          1,177,763
                                                           --------------------------------------
                                                                    1,964,685          1,305,416
   Less allowance for uncollectible interest                           31,448              4,921
                                                           --------------------------------------
                                                                 $  1,933,237       $  1,300,495
                                                           ======================================
</TABLE>

Note 7.  Premises and Equipment
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                                  1998               1997
                                                           -------------------------------------
   <S>                                                           <C>                <C>
   Land                                                          $   501,680        $   255,744
   Buildings and improvements                                      3,765,208          2,784,872
   Leasehold improvements                                             15,546             15,546
   Furniture, fixtures and equipment                               1,639,447          1,218,608
   Vehicles                                                           65,956             48,723
                                                           -------------------------------------
                                                                   5,987,837          4,323,493
   Less accumulated depreciation                                   2,371,399          2,180,477
                                                           -------------------------------------
                                                                 $ 3,616,438        $ 2,143,016
                                                           =====================================
</TABLE>
                                      -79-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 8.  Deposits
Deposits at December 31, were as follows:
<TABLE>
<CAPTION>
                             Weighted-                                  Weighted-
                              Average                                    Average
                              Rate at                  1998              Rate at                    1997
                            December 31,   --------------------------  December 31,  -----------------------------
Nature of Deposit              1998             Amount     Percentage     1997              Amount      Percentage
------------------------------------------------------------------------------------------------------------------
<S>                            <C>         <C>                 <C>        <C>        <C>                     <C>
Demand and NOW accounts:
   Noninterest bearing             - %     $     5,458,374       2.2%        - %     $     3,144,412          2.2%
   Interest-bearing             1.50            30,909,378      12.5      2.00            14,456,894         10.2

Savings accounts                2.25            26,098,591      10.6      2.25            17,119,633         12.1

Money market savings            3.90            19,828,064       8.0      4.35             8,958,483          6.4
                                           --------------------------                -----------------------------
                                                82,294,407      33.3                      43,679,422         30.9
                                           --------------------------                -----------------------------

Certificates of deposit:
   Less than 4.0%               3.41               231,825       0.1      3.32                90,438          0.1
   4.0% - 4.9%                  4.68            15,922,939       6.5      4.68             5,403,762          3.8
   5.0% - 5.9%                  5.52            94,229,132      38.2      5.60            40,345,775         28.6
   6.0% - 6.9%                  6.22            46,652,259      18.9      6.23            44,707,179         31.7
   7.0% - 7.9%                  7.08             7,176,955       2.9      7.06             6,877,794          4.9
   More than 8.0%               8.45               182,796       0.1      8.23                19,337
                                           --------------------------                -----------------------------
                                               164,395,906      66.7                      97,444,285         69.1
                                           --------------------------                -----------------------------

                                4.54%      $   246,690,313    100.0%     4.85%       $   141,123,707       100.0%
                                           ==========================                =============================
</TABLE>

At December 31, 1998, scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<CAPTION>
                            One year         One to         Two to        Three to       Four to
                            or less         two years     three years    four years     five years    Thereafter
                      ---------------------------------------------------------------------------------------------
   <S>                <C>               <C>            <C>            <C>            <C>            <C>
   Less than 4.0%     $         231,825 $              $              $              $              $
     4.0 - 4.9%              12,716,765      2,788,183        376,748         19,656         21,587
     5.0 - 5.9%              44,603,934     34,430,398      6,085,100        277,105      8,826,996          5,599
     6.0 - 6.9%              22,164,122      9,820,493      5,899,267      7,036,826      1,725,947          5,604
     7.0 - 7.9%               1,407,639      5,511,424         47,964          6,716         11,431        191,781
   More than 8.0%               173,224                                        9,572
                      ---------------------------------------------------------------------------------------------
                      $      81,297,509 $   52,550,498 $   12,409,079 $    7,349,875 $   10,585,961 $      202,984
                      =============================================================================================
</TABLE>
                                      -80-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
                                                          Years ended December 31,
                                           --------------------------------------------------------
                                                   1998              1997               1996
                                           --------------------------------------------------------
   <S>                                     <C>                <C>               <C>
   NOW accounts                            $          554,031 $         253,210 $          223,567
   Savings                                            594,276           392,064            431,724
   Money market savings                               797,372           378,981            306,005
   Certificates of deposit                          8,947,402         5,469,676          5,255,938
                                           --------------------------------------------------------
                                           $       10,893,081 $       6,493,931 $        6,217,234
                                           ========================================================
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
$9,899,375 and $5,782,000 as of December 31, 1998 and 1997, respectively.

Note 9.  Borrowed Funds
Borrowed funds at December 31, 1998, included miscellaneous borrowings of
$37,759 and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as
follows:
<TABLE>
<CAPTION>
                           Weighted-
         Stated             Average
        Maturity         Interest Rate      Amount                      Features
     -----------------------------------------------------------------------------------------
          <S>                 <C>        <C>            <C>
          1999                6.14%      $    3,000,000
          2000                5.97            9,000,000 $4,000,000 callable February 1999
          2001                6.02            4,300,000
          2002                6.06            6,000,000
          2003                5.13            1,000,000
          2008                5.16           13,000,000 All callable, various dates 1999-2003
          2013                5.25            2,494,480 15-year amortizing, repayable 2003
                        --------------------------------
                             5.62%       $   38,794,480
                        ================================
</TABLE>

The Bank has an open line of credit at the FHLB which matures on February 28,
1999. There were no advances on this line of credit at December 31, 1998. The
term borrowings and open line of credit are collateralized by the FHLB stock and
sufficient real estate loans to at least equal 150% of the total borrowings
outstanding.

                                      -81-
<PAGE>
 
Note 10.  Income Taxes and Retained Earnings
Through 1995, the provisions of the IRS and similar sections of Iowa Law Code
permitted the Bank to deduct from taxable income an allowance for bad debts
based on 8% of taxable income before such deduction or actual loss experience.
The Bank used the percentage of taxable income method to compute its deductions
in 1995. Legislation passed in 1996 eliminated the percentage of taxable income
method as an option for computing bad debt deductions for 1996, and in all
future years. The Bank will still be permitted to take deductions for bad debts,
but will be required to compute such deductions using an experience method.

The Bank is recapturing its tax bad debt reserves which have accumulated since
1987, amounting to approximately $1,659,000. The tax associated with the
recaptured reserves is approximately $615,000 and is being paid in years
beginning in 1996, and ending in 2003. Deferred income taxes have been
established for the taxes associated with the recaptured reserves.

Deferred taxes have been provided for the difference between tax bad debt
reserves and the loan loss allowances recorded in the financial statements
subsequent to December 31, 1987. However, at December 31, 1998, retained
earnings contain certain historical additions to bad debt reserves for income
tax purposes of approximately $2,445,000 as of December 31, 1987, for which no
deferred taxes have been provided because the Bank does not intend to use these
reserves for purposes other than to absorb losses. If these amounts which
qualified as bad debt deductions are used for purposes other than to absorb bad
debt losses or adjustments arising from the carryback of net operating losses,
income taxes may be imposed at the then existing rates. The approximate amount
of unrecognized tax liability associated with these historical additions is
$929,000.

Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
                                            Years ended December 31,
                                  -------------------------------------------
                                       1998          1997           1996
                                  -------------------------------------------
   <S>                            <C>            <C>           <C>
   Current                        $   2,645,466  $  2,188,895  $   1,886,626
   Deferred                            (164,846)      (80,591)      (143,069)
                                  -------------------------------------------
                                  $   2,480,620  $  2,108,304      1,743,557
                                  ===========================================
</TABLE>

                                      -82-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
Deferred tax assets and liabilities consisted of the following components as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                         1998                1997
                                                                     -------------------------------
   <S>                                                                <C>               <C>
   Deferred tax assets:
      Unearned shares, employee stock ownership plan                  $   30,000        $    24,000
      Allowance for loan losses                                          526,000            270,000
      Deferred directors fees and compensation                            57,000             62,000
      Deposit acquired                                                    23,000
      Other                                                               96,044             28,591
                                                                     -------------------------------
              Total gross deferred tax assets                            732,044            384,591
                                                                     -------------------------------

   Deferred tax liabilities:
      Federal Home Loan Bank stock dividend                               41,000              9,000
      Unrealized gain on securities available-for-sale                   214,000            218,452
      Premises and equipment                                              76,000             10,000
      Title plant                                                         67,000             42,000
      Loans acquired                                                     188,000
      Investments acquired                                               111,000
      Other                                                               21,554
                                                                     -------------------------------
              Total gross deferred tax liabilities                       718,554            279,452
                                                                     -------------------------------

              Net deferred tax assets                                 $   13,490        $   105,139
                                                                     ===============================
</TABLE>

Total income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rates of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                            --------------------------------------------------------------------------------------
                                        1998                        1997                         1996
                            --------------------------------------------------------------------------------------
                                             Percent of                  Percent of                   Percent of
                                               Pretax                      Pretax                       Pretax
                                  Amount       Income         Amount       Income          Amount       Income
                            --------------------------------------------------------------------------------------
<S>                         <C>                  <C>     <C>                 <C>     <C>                  <C>
Income before income
   taxes                    $     2,334,258        34.0% $    2,048,646        34.0% $     1,658,003        34.0%
Nontaxable dividends              (105,296)        (1.5)      (119,550)        (2.0)       (107,983)        (2.2)
State income taxes,
   net of federal income
   tax benefit                      226,613          3.1        174,621          2.9         125,286          2.6
Low income housing tax
   credit                         (148,867)        (2.1)       (97,894)        (1.6)
Goodwill amortization               137,536          2.1
Other                                36,376          0.5        102,481          1.7          68,251          1.4
                            --------------------------------------------------------------------------------------
                            $     2,480,620        36.1% $    2,108,304        35.0% $     1,743,557        35.8%
                            ======================================================================================
</TABLE>

                                      -83-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 11.  Employee Benefit Plans
Retirement plans: The Bank participates in a multiemployer defined benefit
pension plan covering substantially all employees. This is a multiemployer plan
and information as to actuarial valuations and net assets available for benefits
by participating institutions is not available. There was no pension expense for
the years ended December 31, 1998, 1997 and 1996.

The Bank has a defined contribution plan covering substantially all employees.
Contributions to the plan were approximately none, none and $19,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. As of July 31, 1996,
the Bank no longer contributes to this plan.

Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion
to stock ownership, the Bank established an ESOP for eligible employees. All
employees of the Bank as of January 1, 1994, were eligible to participate
immediately and employees of the Bank hired after January 1, 1994, are eligible
to participate after they attain age 21 and complete one year of service during
which they work at least 1,000 hours. The ESOP borrowed funds in the amount of
$960,000 to purchase 104,075 shares of common stock issued in the conversion in
1994 and $840,000 to purchase 84,000 shares of common stock issued in the
reorganization and conversion in 1996. These funds are borrowed from the
Company.

The Bank makes contributions to the ESOP equal to the ESOP's debt service less
dividends received by the ESOP. Dividends on unallocated ESOP shares are used to
pay debt service. Contributions to the ESOP and shares released from the
suspense account in an amount proportional to the repayment of the ESOP loan are
allocated among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of credited
service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment. If the Bank's stock is
not traded on an established market at the time of an ESOP participant's
termination, the terminated ESOP participant has the right to require the Bank
to purchase the stock at its current fair market value. Bank management believes
there is an established market for the Bank's stock and therefore the Bank
believes there is no potential repurchase obligation at December 31, 1998 and
1997.

As shares are released, the Bank reports compensation expense equal to the
current market price of the shares. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings. Dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $403,793, $354,482 and $233,027 for the years ended
December 31, 1998, 1997 and 1996, respectively.


                                      -84-
<PAGE>
 
Shares of the Company's common stock held by the ESOP, at December 31, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
                                                                  1998           1997
                                                              ----------------------------
   <S>                                                        <C>            <C>
   Allocated shares                                           $     80,254   $     62,408
   Unreleased (unearned) shares                                    105,098        125,667
                                                              ----------------------------
                                                              $    185,352   $    188,075
                                                              ============================

   Fair market value of unreleased (unearned) shares          $  1,773,529   $  2,497,632
                                                              ============================
</TABLE>

Stock option plan: In 1996, the stockholders of the Company ratified the 1996
Incentive Option Plan (the Plan). The Plan provides for the grant of options at
an exercise price equal to the fair market value on the date of grant. The Plan
is intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the success
of the Company and to encourage them to remain in the employment of the Company
or its subsidiaries. Awards granted under the Plan may include incentive stock
options, nonqualified stock options and limited rights which are exercisable
only upon a change in control of the Bank or the Company. All awards to date are
nonqualified stock options.

The Plan authorizes the granting of stock options for a total of 401,105 shares
of common stock or 10% of the shares issued in the 1996 conversion. All options
are granted at an exercise price which was the market price of the common stock
on the grant date.

Options granted to officers and directors become exercisable in five equal
annual installments commencing on the first anniversary of the grant date and
continuing on each anniversary date thereafter. The options granted to officers
expire ten years from the date of grant unless an earlier expiration date is
triggered by death, disability, retirement or termination, as described in the
Plan. A person who becomes a director after September 21, 1996, receives an
annual grant of options to purchase 2,000 shares of common stock. Options
granted to directors expire ten years from the date of grant, unless an earlier
expiration date is triggered by removal for cause.


                                      -85-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The table below reflects option activity for the period indicated:
<TABLE>
<CAPTION>                                                                                                     Weighted-
                                                                          Average
                                                                          Exercise
                                                         Number       Price per Share
                                                        of Shares
                                                    -----------------------------------
   <S>                                                        <C>            <C>
   Outstanding, December 31, 1995                                   -        $       -
      Granted                                                 237,000            12.38
      Exercised
                                                    -----------------------------------
   Outstanding, December 31, 1996                             237,000            12.38
      Granted                                                   3,500            15.44
      Forfeited                                               (1,000)            12.38
      Exercised                                               (8,500)            12.45
                                                    -----------------------------------
   Outstanding, December 31, 1997                             231,000            12.42
      Granted                                                  62,000            19.32
      Forfeited
      Exercised                                              (10,290)            12.38
                                                    -----------------------------------
   Outstanding, December 31, 1998                             282,710        $   13.93
                                                    ===================================

   Options exercisable                                         80,810        $   12.79
                                                    ===================================

   Remaining shares available for grant                        98,605
                                                    ==================
</TABLE>

As of December 31, 1998, the 282,710 options outstanding under the Plan have
exercise prices between $12.375 and $20.00. The weighted average fair value per
option of options granted during the years ended December 31, 1998, 1997 and
1996, were $5.96, $5.75 and $4.54, respectively.

Had compensation cost for the Plan been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), the
approximate 1998, 1997 and 1996, reported net income and earnings per common
share would have been decreased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
                                                         1998          1997          1996
                                                      ----------------------------------------
   <S>                                                <C>           <C>           <C>
   Net income:
      As reported                                     $ 4,384,845   $ 3,917,124   $ 3,132,921
      Pro forma                                         4,202,056     3,780,710     3,098,600

   Earnings per common share:
      As reported                                            1.44          1.23          0.82
      Pro forma                                              1.38          1.19          0.81

   Earnings per common share - assuming dilution:
      As reported                                            1.40          1.21          0.82
      Pro forma                                              1.34          1.17          0.81
</TABLE>

                                      -86-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The fair values of the grants are estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend rate of 1.30%, price volatility of 25%, risk-free interest
rates of 5.49% to 6.62% and expected lives of eight years.

Employment agreements: The Company and the Bank have entered into employment
agreements with a key officer. Under the terms of the agreements, the officer is
entitled to additional compensation in the event of certain conditions of
involuntary termination. The agreements extend for up to 36 months.

The Bank has entered into certain employment retention agreements with key
officers. Under the terms of the agreements, the employees are entitled to
additional compensation in the event of a change of control of the Bank or the
Company and the employees are involuntarily terminated within the remaining
unexpired employment period, up to 36 months. A change in control is generally
triggered by the acquisition or control of 20% or more of the common stock.

Note 12.  Stockholders' Equity
Regulatory capital requirements: The Bank is subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier I capital (as defined) to average
assets (as defined) and tangible capital to adjusted assets. Management
believes, as of December 31, 1998, the Bank meets all capital adequacy
requirements to which it is subject.

                                      -87-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The Bank's actual capital amounts and ratios are also presented in the following
table:
<TABLE>
<CAPTION>
                                                                                          To Be Well Capitalized
                                                                   For Capital           Under Prompt Corrective
                                           Actual               Adequacy Purposes           Action Provisions
                                 ---------------------------------------------------------------------------------
                                     Amount        Ratio        Amount        Ratio        Amount        Ratio
                                 ---------------------------------------------------------------------------------
                                     (000's)                    (000's)                    (000's)
<S>                                   <C>            <C>         <C>              <C>       <C>             <C>
As of December 31, 1998:
   Total Capital (to risk
      weighted assets)                $   40,509      23.8%      $   13,614       8.0%      $   17,018      10.0%
   Tier 1 Capital (to risk
      weighted assets)                    38,245       22.5           6,807        4.0          10,211        6.0
   Tier I (Core) Capital
      (to adjusted assets)                38,245       11.7           9,834        3.0          16,390        5.0
   Tangible Capital (to
      adjusted assets)                    38,245       11.7           4,917        1.5
As of December 31, 1997:
   Total Capital (to risk
      weighted assets)                $   39,478      32.1%      $    9,830       8.0%      $   12,288      10.0%
   Tier 1 Capital (to risk
      weighted assets)                    37,935       30.9           4,915        4.0           7,373        6.0
   Tier I (Core) Capital
      (to adjusted assets)                37,935       17.3           6,595        3.0          10,992        5.0
   Tangible Capital (to
      adjusted assets)                    37,935       17.3           3,298        1.5
</TABLE>

Limitations on Dividends and Other Capital Distributions: OTS regulations impose
limitations on dividends and other capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash out merger and other distributions
charged against capital. The rule establishes three tiers of institutions. An
institution such as the Bank that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year up to the higher of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period, subject to certain
limitations and restrictions as described in the regulations. Any additional
capital distributions would require prior regulatory approval. A savings
institution that does not meet its current regulatory capital requirement before
or after payment of a proposed capital distribution may not make any capital
distributions without the prior approval of the OTS. At December 31, 1998, the
Bank was considered a Tier 1 Association.

                                      -88-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

The MHC, which owned 2,421,711 shares of common stock prior to the 1996
conversion, requested and received permission from the OTS to waive the receipt
of dividends from the Bank for several quarterly periods. This waiver had the
effect of reducing the actual amount of dividends paid in cash. The total amount
of dividends waived totaled approximately $1,897,000. As a result of the 1996
reorganization and conversion, the waived dividends were added to the
liquidation account (see Note 18).

Note 13.  Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
                                                                1998           1997            1996
                                                           ---------------------------------------------
   <S>                                                      <C>            <C>            <C>
   Advertising and promotion                                $    168,105   $    147,605   $      92,245
   Professional fees                                             171,761        249,617         202,677
   Printing, postage, stationery and supplies                    369,877        215,332         182,134
   Checking account charges                                      299,530        158,512         151,724
   Insurance                                                      85,987         81,056          72,236
   OTS general assessment                                         80,337         49,326          54,825
   Telephone                                                      91,900         45,069          40,237
   ATM costs                                                      82,285         37,580          29,216
   Other                                                         796,072        596,525         349,156
                                                           ---------------------------------------------
                                                            $  2,145,854   $  1,580,622   $   1,174,450
                                                           =============================================
</TABLE>

Note 14.  Financial Instruments With Off-Statement of Financial Condition Risk
The Bank 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 Bank has in particular classes of
financial instruments.

The Bank uses the same credit policies in making commitments and conditional
obligations as they do for on-statement of financial condition instruments.

The Bank does require collateral, or other security, to support financial
instruments with credit risk.


                                      -89-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk for commitments to extend credit is as follows:
<TABLE>
<CAPTION>
                                                                           Contract or Notional Amount
                                                                           ---------------------------
                                                                                    December 31,
                                                                           ---------------------------
                                                                                 1998          1997
                                                                           ---------------------------
   <S>                                                                        <C>           <C>
   Mortgage loans (including one-to-four family and multifamily
      loans)                                                                  $ 4,788,000   $ 1,412,000
   Undisbursed overdraft loan privileges and undisbursed home
      equity lines of credit                                                      770,000       255,000
</TABLE>

At December 31, 1998, the mortgage loan commitments above were comprised of
variable-rate commitments carrying a weighted-average interest rate of 8.30% and
fixed-rate commitments carrying a weighted-average interest rate of 7.28%.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but normally includes
real estate and personal property.

Note 15.  Lending Activities and Concentrations of Credit Risk
Most of the Bank's lending activity is with customers located within the state
of Iowa. The Bank generally originates single family residential loans within
its primary lending area of Webster, Story, Des Moines and Henry counties. The
Bank's underwriting policies require such loans to be 80% loan to value based
upon appraised values unless private mortgage insurance is obtained.
Approximately 30% of the Bank's first mortgage loan portfolio at December 31,
1998, consisted of loans purchased or originated outside the state of Iowa,
generally multifamily residential loans. Approximately $27,800,000 of loans
purchased at December 31, 1998, were purchased from a bank in Wisconsin. These
loans are secured by the underlying properties. The properties securing these
loans are physically inspected. The loans are subject to the same underwriting
guidelines as loans originated locally. The Bank is also active in originating
secured consumer loans to its customers, primarily automobile and second
mortgage loans. Collateral for substantially all consumer loans are security
agreements and/or Uniform Commercial Code filings on the purchased asset.

                                      -90-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 16.  Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
                                                       1998                                   1997
                                       -------------------------------------  -------------------------------------
                                           Carrying             Fair              Carrying             Fair
                                            Amount             Value               Amount             Value
                                       ----------------------------------------------------------------------------
                                                           (nearest 000)                          (nearest 000)
   <S>                                 <C>               <C>                  <C>                <C>
   Financial assets:
      Cash                             $   15,636,876    $    15,637,000      $    3,445,163     $    3,445,000
      Securities                           49,882,544         49,883,000          19,815,913         19,816,000
      Loans, net                          254,032,497        258,001,000         191,248,830        192,436,000
      Accrued interest receivable           1,933,237          1,933,000           1,300,495          1,300,000
   Financial liabilities:
      Deposits                            246,690,313        249,040,000         141,123,707        142,850,000
      Borrowed funds                       38,832,239         39,183,000          28,550,000         28,620,000
      Accrued interest payable                423,958            424,000              28,532             29,000
</TABLE>

Note 17.  1994 Reorganization and Conversion to Stock Ownership On January 27,
1994, the Board of Directors of First Federal Savings Bank of Fort Dodge (a
mutual savings bank), adopted a plan of reorganization whereby the Bank would
reorganize from a federally chartered mutual savings bank into a federal mutual
holding company and concurrently form a new federally chartered stock savings
bank subsidiary. Pursuant to the reorganization, the Bank (a stock savings bank)
was formed as a new federal stock savings bank subsidiary of the mutual savings
bank. The mutual savings bank transferred substantially all of its assets and
liabilities to the stock savings bank in exchange for 2,421,711 shares of newly
issued common stock of the stock savings bank. The mutual savings bank then
converted its mutual savings bank charter to a federal mutual holding company
charter under the name of North Central Bancshares, Inc. (the mutual holding
company).

The reorganization was effective August 31, 1994, at which time 2,421,711 shares
of stock were issued to the mutual holding company representing approximately
65.5% of the common stock of the Bank and the remaining 35%, or 1,278,289
shares, were sold in a public offering to persons other than the holding company
at a price of $10 per share.

The reorganization and stock offering were completed on August 31, 1994. The
Bank received proceeds of $12,038,638, net of costs of $644,252 and net of
$100,000 retained by the mutual holding company.

Persons who had membership or liquidation rights with respect to the mutual
savings bank as of the date of reorganization shall, as long as they remain
depositors of the Bank, continue to have such rights solely with respect to the
mutual holding company after the reorganization (see Note 18).

                                      -91-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 18.  The 1996 Reorganization and Conversion
On September 29, 1995, the Boards of Directors of the Bank and the Mutual
Holding Company (MHC) adopted a Plan of Conversion and Agreement and Plan of
Reorganization (the Plan). The reorganization became effective March 20, 1996.
Pursuant to the Plan, (1) the MHC, which owned approximately 65.5% of the Bank,
converted to an interim federal stock savings association and simultaneously
merged into the Bank, with the Bank being the surviving entity. (2) The Bank
then merged into an interim institution (Interim) formed as a wholly-owned
subsidiary of the Company, a newly formed Iowa corporation formed in connection
with the reorganization, with the Bank being the surviving entity. (3) The
outstanding shares of the Bank's common stock (other than those held by the MHC,
which were canceled) were converted into shares of common stock of the Company
pursuant to a ratio that resulted in the holders of such shares owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank. The Company then offered for sale pursuant to the Plan additional shares
equal to 65.5% of the common shares of the Company.

The reorganization was effective on March 20, 1996, at which time the Company
issued an aggregate of 4,011,057 shares of its common stock, 1,385,590 shares of
which were issued in exchange for all of the Bank's issued and outstanding
shares, except for shares owned by the MHC which were canceled, and 2,625,467
shares of which were sold in Subscription and Community Offerings at a price of
$10.00 per share, with gross proceeds amounting to $26,252,159.

The Plan provided that when the conversion was completed, a "Liquidation
Account" would be established in an amount equal to the amount of any dividends
waived by the MHC, plus 65.5% of the Bank's total stockholders' equity, as
reflected in its latest statement of financial condition in the final prospectus
utilized in the conversion. The Liquidation Account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors as of
specified dates (Eligible Account Holders and Supplemental Eligible Account
Holders) who continue to maintain deposits in the Bank after the conversion. In
the unlikely event of a complete liquidation of the Bank, and only in such an
event, Eligible Account Holders and Supplemental Eligible Account Holders would
receive from the Liquidation Account a liquidation distribution based on their
proportionate share of the then total remaining qualifying deposits.

                                      -92-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 19.  Earnings Per Common Share
Presented below is the reconciliation of the numerators and denominators of the
computations for earnings per common share and earnings per common share -
diluted, for the years ended December 31:
<TABLE>
<CAPTION>
                                                               1998               1997               1996
                                                          ----------------------------------------------------
<S>                                                        <C>               <C>                <C>
Numerator, income available to common
   stockholders                                            $  4,384,845      $   3,917,124      $   3,132,921
                                                          ====================================================

Denominator:
   Weighted-average shares outstanding                        3,166,041          3,323,346          3,960,394
   Less unallocated ESOP                                        117,894            139,077            142,121
                                                          ----------------------------------------------------
   Weighted-average shares outstanding-basic                  3,048,147          3,184,269          3,818,273
   Dilutive effect of stock options                              84,684             56,800
                                                          ----------------------------------------------------
Weighted-averages shares outstanding-diluted                  3,132,831          3,241,069          3,818,273
                                                          ====================================================

Basic earnings per common share                                   1.44               1.23                .82
Earnings per common share-assuming dilution                       1.40               1.21                .82
</TABLE>

Note 20.  Pending Accounting Pronouncements and Regulations
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivatives
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging contracts.
It requires an entity recognize all derivatives as either assets or liabilities,
and measures those instruments at fair value. It also sets forth the proper
accounting for hedging activities, which is determined by the intended use of
the derivative and how that use is designated by the entity. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Earlier application is
permitted and should not be applied retroactively to financial statements of
prior periods. Since the Company is not currently holding any derivative
instruments (as defined) and is not engaged in hedging activities, the adoption
of SFAS No. 133 is expected to have no effect on the Company's financial
condition or results of operations.

In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. (SFAS No. 134). SFAS No. 134
amends FASB Statement No. 65 and conforms the subsequent accounting for
securities retained after the securitization of mortgage loans held for sale by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. Therefore, after the securitization of a mortgage loan held
for sale, any retained mortgage-backed securities shall be classified in
accordance with the provisions of FASB Statement No. 115. The adoption of SFAS
No. 134 is expected to have no effect on a company's financial condition or
results of operations.

                                      -93-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

Note 21.  NORTH CENTRAL BANCSHARES, INC. (Parent Company Only) Financial
Information

                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1998 and 1997
<TABLE>
<CAPTION>
                                                                                 1998          1997
                                                                            ----------------------------
<S>                                                                         <C>           <C>
ASSETS

Cash                                                                        $     409,397 $     740,722
Securities available-for-sale                                                     924,706       818,936
Loan receivables, net                                                           1,261,000     9,941,000
Investment in First Federal Savings Bank of Iowa                               45,876,022    39,250,882
Income taxes receivable                                                            28,490
Prepaid expenses and other assets                                                  10,586        12,777
                                                                            ----------------------------

              Total assets                                                  $  48,510,201 $  50,764,317
                                                                            ============================

LIABILITIES AND EQUITY

LIABILITIES
   Dividend payable                                                         $     237,133 $     204,155
   Income taxes payable                                                                           2,723
   Accrued expenses and other liabilities                                          47,129        41,293
   Deferred taxes                                                                  19,125        99,070
                                                                            ----------------------------

              Total liabilities                                                   303,387       347,241
                                                                            ----------------------------

EQUITY
   Common stock                                                                    40,111        40,111
   Additional paid-in capital                                                  38,135,817    37,949,598
   Retained earnings                                                           27,084,907    23,660,964
   Unearned shares, employee stock ownership plan                              (1,013,284)   (1,210,441)
   Accumulated other comprehensive income                                         358,666       354,781
   Treasury stock at cost                                                     (16,399,403)  (10,377,937)
                                                                            ----------------------------

              Total equity                                                     48,206,814    50,417,076
                                                                            ----------------------------

              Total liabilities and equity                                  $  48,510,201 $  50,764,317
                                                                            ============================
</TABLE>

                                      -94-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
                              STATEMENTS OF INCOME
             Years Ended December 31, 1998 and 1997 and the Period
                  From March 20, 1996 (Date of Inception), to
                               December 31, 1996

                                                             1998         1997          1996
                                                         ---------------------------------------
<S>                                                      <C>           <C>           <C>
Operating income:
   Equity in net income of subsidiary                    $ 4,393,955   $ 3,802,303   $ 2,523,316
   Interest income                                           200,055       334,775       418,948
   Gain on sale of securities available-for-sale, net         71,923       248,526
                                                         ---------------------------------------
                                                           4,665,933     4,385,604     2,942,264
                                                         ---------------------------------------

Operating expenses:
   Salaries and employee benefits                             45,000        39,950        21,440
   Other                                                     265,088       351,480       272,933
                                                         ---------------------------------------
                                                             310,088       391,430       294,373
                                                         ---------------------------------------

              Income before income taxes                   4,355,845     3,994,174     2,647,891

Provision for income taxes                                  (29,000)        77,050        65,400
                                                         ---------------------------------------

              Net income                                 $ 4,384,845   $ 3,917,124     2,582,491
                                                         =======================================
</TABLE>

                                      -95-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                     STATEMENTS OF EQUITY
December 31, 1998 and 1997, and the Period From March 20, 1996 (Date of Inception) to December 31, 1996


                                                                                                    Employee
                                                                        Additional                   Stock
                                               Comprehensive   Common    Paid-In      Retained     Ownership
                                                   Income      Stock     Capital      Earnings        Plan
                                               ----------------------------------------------------------------
<S>                                              <C>           <C>      <C>          <C>          <C>
Balance, March 20, 1996
 Comprehensive income:
  Net income                                     $2,582,491    $     -  $         -  $         -  $         -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax                           27,068          -            -    2,582,491            -
                                                 ----------
      Total comprehensive income                 $2,582,491          -            -            -            -
                                                 ==========

 Issuance of common stock in the conversion                     40,111   26,211,948            -            -
 Expenses incurred realating conversion to
  stock loan                                                         -     (844,469)           -            -
 Transfer of equity from First Federal
  Savings Bank                                                       -   12,387,940   18,659,843     (768,790)
 Purchase of treasury stock                                          -            -            -            -
 Unearned ESOP shares                                                -            -            -     (840,000)
 Dividends on common stock                                           -            -     (710,808)           -
 Effect of contribution to employees stock
  ownership plan                                                     -       41,192            -      191,835
                                                               ------------------------------------------------
Balance, December 31, 1996                                      40,111   37,796,611   20,531,604   (1,416,955)
 Comprehensive income:
  Net income                                     $3,917,124          -            -    3,917,124            -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                 281,684          -            -            -            -
                                                 ----------
      Total comprehensive income                 $4,198,808
                                                 ==========
 Purchase of treasury stock                                          -            -            -            -
 Dividends on common stock                                           -            -     (787,764)           -
 Effect of contribution to employees stock
  ownership plan                                                     -      147,968            -      206,514
 Effect of stock options exercised                                   -        5,019            -            -
                                                               ------------------------------------------------
Balance, December 31, 1997                                      40,111   37,949,598   23,660,964   (1,210,441)
 Comprehensive income:
  Net income                                     $4,384,845          -            -    4,384,845            -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax                            3,885          -            -            -            -
                                                 ----------
      Total comprehensive income                 $4,388,730
                                                 ==========
 Purchase of treasury stock                                          -            -            -            -
 Dividends on common stock                                           -            -     (960,902)           -
 Effect of contribution to employees stock
  ownership plan                                                     -      206,636            -      191,157
 Effect of stock options exercised                                   -      (20,417)           -            -
                                                               ------------------------------------------------
Balance, December 31, 1998                                     $40,111  $38,135,817  $27,084,907  $(1,013,284)
                                                               ================================================
</TABLE>
<TABLE>
<CAPTION>
                                                Accumulated
                                                   Other                     Total
                                               Comprehensive   Treasury   Stockholders'
                                                   Income       Stock        Equity
                                               ----------------------------------------
<S>                                               <C>        <C>           <C>
Balance, December 31, 1995
 Comprehensive income:
  Net income                                      $      -   $          -  $         -
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                      -              -    3,132,921

      Total comprehensive income                    27,068              -       12,445

 Issuance of common stock in the conversion              -              -   26,252,059
 Expenses incurred realating conversion to
  stock loan                                             -              -     (844,469)
 Transfer of equity from First Federal
  Savings Bank                                      46,029              -   30,325,022
 Purchase of treasury stock                              -     (7,789,661)  (7,789,661)
 Unearned ESOP shares                                    -              -     (840,000)
 Dividends on common stock                               -              -     (710,808)
 Effect of contribution to employees stock
  ownership plan                                         -              -      233,027
                                               ---------------------------------------
  Balance, December 31, 1996                        73,097     (7,789,661)  49,234,729
 Comprehensive income:
  Net income                                             -              -    3,917,124
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                281,684              -      281,684

      Total comprehensive income

 Purchase of treasury stock                              -     (2,706,750)  (2,706,750)
 Dividends on common stock                               -              -     (787,764)
 Effect of contribution to employees stock
  ownership plan                                         -              -      354,482
 Effect of stock options exercised                       -        118,474      123,493
                                               ---------------------------------------
Balance, December 31, 1997                         354,781    (10,377,937)  50,417,076
 Comprehensive income:
  Net income                                             -              -    4,384,845
  Other comprehensive income, unrealized gains
   on securities, net of reclassification
    adjustment, net of tax (Note 3)                  3,885              -        3,885

      Total comprehensive income

 Purchase of treasury stock                              -     (6,164,419)  (6,164,419)
 Dividends on common stock                               -              -     (960,902)
 Effect of contribution to employees stock
  ownership plan                                         -              -      403,793
 Effect of stock options exercised                       -        142,953      122,536
                                               ---------------------------------------
Balance, December 31, 1998                        $358,666   $(16,399,403) $48,206,814
                                               =======================================
</TABLE>

See Notes to Consolidated Financial Statements.
                                      -96-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

                            STATEMENTS OF CASH FLOWS
      December 31, 1998 and 1997, and the Period From March 20, 1996 (Date
                       of Inception) to December 31, 1996
<TABLE>
<CAPTION>

                                                                      1998             1997               1996
                                                              -----------------------------------------------------
<S>                                                               <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                     $  4,384,845     $  3,917,124       $  2,582,491
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Equity in net income of First Federal Savings
        Bank                                                        (4,393,955)      (3,802,303)        (2,523,316)
      Dividends received from First Federal Savings
        Bank                                                         3,295,694       10,000,000                  -
      (Gain) on sale of securities available-for-sale                  (71,923)        (248,526)                 -
      Change in deferred income taxes                                     (485)           4,021             (7,228)
      Change in assets and liabilities:
        (Increase) in income taxes receivable                          (20,917)               -                  -
        Decrease in prepaid expenses and other assets                    2,191           13,499            (26,276)
        Increase (decrease) in income taxes payable                     (2,723)          11,913              8,522
        Increase in accrued expenses and other
           liabilities                                                   5,836            8,297             32,996
                                                              -----------------------------------------------------
              Net cash provided by operating
                  activities                                         3,198,563        9,904,025             67,189
                                                              -----------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Net (increase) decrease in loans                                  8,680,000       (6,120,000)        (3,821,000)
   Proceeds from sale of securities available-for-sale                 128,550        1,270,447
   Purchase of securities available-for-sale                          (361,058)      (1,103,749)          (475,250)
   Capital contributions to First Federal Savings Bank              (5,000,000)               -                  -
   One-half of stock proceeds paid to First Federal
      Savings Bank                                                           -                -        (12,703,561)
                                                              -----------------------------------------------------
              Net cash provided by (used in) investing
                  activities                                         3,447,492       (5,953,302)       (16,999,811)
                                                              -----------------------------------------------------
</TABLE>
                                   (Continued)

                                      -97-
<PAGE>
 
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   (Continued)

<S>                                                               <C>             <C>                 <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock                                    -                -         26,252,059
   Payments for expenses incurred relating to
      conversion to stock form                                               -                -           (844,469)
   Purchase of treasury stock                                       (6,164,419)      (2,706,750)        (7,789,661)
   Proceeds from issuance of treasury stock                            114,963          105,781
   Dividends paid                                                     (927,924)        (813,875)          (480,464)
                                                              -----------------------------------------------------
              Net cash provided by (used in)
                  financing activities                              (6,977,380)      (3,414,844)        17,137,465
                                                              -----------------------------------------------------

              Net increase (decrease) in cash                         (331,325)         535,879            204,843

CASH
   Beginning                                                           740,722          204,843
                                                              -----------------------------------------------------
   Ending                                                         $    409,397    $     740,722       $    204,843
                                                              =====================================================

SUPPLEMENTAL SCHEDULE OF CASH
   FLOW INFORMATION
   Cash payment for income taxes                                  $     82,158     $    105,781       $     56,000
</TABLE>

                                      -98-
<PAGE>
 
ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

        None.
                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        Information regarding Directors and Executive Officers of the Registrant
is included under the headings "Information with respect to Nominees and
Continuing Directors," "Nominees for Election as Directors," "Continuing
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for its Annual Meeting of Shareholders to
be held on April 23, 1999, which has been filed with the SEC and is incorporated
herein by reference. Information regarding Executive Officers, who are not
Directors, appears under the caption "Executive Officers" included in Item 1 of
this Form 10-K.

ITEM 11.          EXECUTIVE COMPENSATION

        Information relating to executive compensation is included under the
headings "Executive Compensation" (excluding the Stock Performance Graph and the
Compensation Committee Report) and "Directors' Compensation" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on April 23,
1999, which has been filed with the SEC and is incorporated herein by reference.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        Information relating to security ownership of certain beneficial owners
and management is included under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on April 23, 1999,
which has been filed with the SEC and is incorporated herein by reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information regarding certain relationships and related transactions is
included under the heading "Certain Relationships and Related Transactions" in
the Company's Proxy Statement for its Annual Meeting of Shareholders to be held
on April 23, 1999, which has been filed with the SEC and is incorporated herein
by reference.


                                      -99-
<PAGE>
 
                                    PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                  8-K

(a)     1.  Financial Statements

 The following are filed as part of this annual report on Form 10-K:

         -        Independent Auditor's Report
         -        Consolidated Statements of Financial Condition at December 31,
                  1998 and 1997
         -        Consolidated Statements of Income for each of the years in the
                  three year period ended December 31, 1998
         -        Consolidated Statements of Shareholders' Equity for each of
                  the years in the three year period ended December 31, 1998
         -        Consolidated Statements of Cash Flows for each of the years in
                  the three year period ended December 31, 1998
         -        Notes to the Consolidated Financial Statements

         2.  Financial Statement Schedules

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

(b)      Reports on Form 8-K filed during the last quarter of 1998:

         None.


                                     -100-
<PAGE>
 
(c)      Exhibits Required by Item 601 of Securities and Exchange Commission
Regulation S-K:

<TABLE>
<CAPTION>
Exhibit No.                                            Description                                      Page No.
-----------                                            -----------                                      --------
<S>              <C>                                                                                    <C>
     3.1         Articles of Incorporation of North Central Bancshares, Inc.                               *
     3.2         Bylaws of North Central Bancshares, Inc.                                                  *
     4.1         Federal Stock Charter of First Federal Savings Bank of Iowa (formerly                     *
                 known as First Federal Savings Bank of Fort Dodge)
     4.2         Bylaws of First Federal Savings Bank of Iowa (formerly known as First                     *
                 Federal Savings Bank of Fort Dodge)
     4.3         Specimen Stock Certificate of North Central Bancshares, Inc.                              *
    10.1         Employee Stock Ownership Plan of First Federal Savings Bank of Iowa                     *****
                 (formerly known as First Federal Savings Bank of Fort Dodge)
                 and ESOP Trust Agreement (incorporating Amendments 1 and 2)
    10.2         ESOP Loan Documents, dated September 3, 1996                                             ****
    10.3         Employee Retention Agreements between First Federal Savings Bank of                       **
                 Fort Dodge and certain executive officers
    10.4         Employment Agreement between First Federal Savings Bank of Iowa                           *
                 (formerly known as First Federal Savings Bank of Fort Dodge) and David
                 M. Bradley, effective as of August 31, 1994
    10.5         Form of Employment Agreement between First Federal Savings Bank of                        *
                 Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and
                 David M. Bradley
    10.6         Form of Employment Agreement between North Central Bancshares, Inc.                       *
                 and David M. Bradley
    10.8         North Central Bancshares, Inc. 1996 Stock Option Plan                                    ***
    10.9         Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock                        *****
                 Option Plan
    11.1         Statement regarding computation of per share earnings
    13.1         Annual Report to security holders
    21.1         Subsidiaries of the Registrant
    23.1         Consent of McGladrey & Pullen, LLP
    27.1         Financial Data Schedule
    99.1         Proxy Statement for Annual Meeting of Shareholders of North Central
                 Bancshares, Inc. filed with the Securities and Exchange Commission is
                 incorporated herein by reference.
</TABLE>

                                     -101-
<PAGE>
 
*        Incorporated herein by reference to Registration Statement No. 33-80493
         on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed
         with the Securities and Exchange Commission, (the "Commission") on
         December 18, 1995, as amended.

**       Incorporated herein by reference to the Exhibits to the Annual Report
         on Form 10-K filed by Registrant for fiscal year 1995, filed with the
         Commission on March 29, 1996.

***      Incorporated herein by reference to the Amended Schedule 14A of
         Registrant filed with the Commission on August 19, 1996.

****     Incorporated herein by reference to the Annual Report on Form 10-K of
         the Registrant filed with the Commission on March 31, 1997.

*****    Incorporated herein by reference to the Annual Report on Form 10-K of
         the Registrant filed with the Commission on March 31, 1998.

                                     -102-
<PAGE>
 
Conformed

                                   SIGNATURES

         Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant and has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                           North Central Bancshares, Inc.

Date:  March 26, 1999                      /s/ David M. Bradley
                                           -----------------------------------
                                           By: David M. Bradley
                                           Chairman, President and Chief
                                           Executive Officer

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


       Name                               Title                        Date
       ----                               -----                        ----
/s/ David M. Bradley          President, Chief Executive Officer, March 26, 1999
----------------------------  Officer, Director, and Chairman of
David M. Bradley              the Board (principal executive
                              officer)

/s/ John L. Pierschbacher     Treasurer                           March 26, 1999
----------------------------  (principal accounting and
John L. Pierschbacher         financial officer)

/s/ Robert H. Singer, Jr.     Director                            March 26, 1999
----------------------------
Robert H. Singer, Jr.

/s/ KaRene Egemo              Director                            March 26, 1999
----------------------------
KaRene Egemo

/s/ Howard A. Hecht           Director                            March 26, 1999
----------------------------
Howard A. Hecht

/s/ John M. Peters            Director                            March 26, 1999
----------------------------
John M. Peters

/s/ Melvin R. Schroeder       Director                            March 26, 1999
----------------------------
Melvin R. Schroeder


                                     -103-
<PAGE>
 
                               TABLE OF CONTENTS
            List of Exhibits (filed herewith unless otherwise noted)

<TABLE>
<CAPTION>
Exhibit No.                           Description                                         Page No.
-----------                           -----------                                         --------
<S>             <C>                                                                       <C>
    3.1         Articles of Incorporation of North Central Bancshares, Inc.                    *
    3.2         Bylaws of North Central Bancshares, Inc.                                       *
    4.1         Federal Stock Charter of First Federal Savings Bank of Iowa (formerly          *
                known as First Federal Savings Bank of Fort Dodge)
    4.2         Bylaws of First Federal Savings Bank of Iowa (formerly known as First          *
                Federal Savings Bank of Fort Dodge)
    4.3         Specimen Stock Certificate of North Central Bancshares, Inc.                   *
   10.1         Employee Stock Ownership Plan of First Federal Savings Bank of Iowa          *****
                (formerly known as First Federal Savings Bank of Fort Dodge)
                and ESOP Trust Agreement (incorporating Amendments 1 and 2)
   10.2         ESOP Loan Documents, dated September 3, 1996                                  ****
   10.3         Employee Retention Agreements between First Federal Savings Bank of            **
                Fort Dodge and certain executive officers
   10.4         Employment Agreement between First Federal Savings Bank of Iowa                *
                (formerly known as First Federal Savings Bank of Fort Dodge) and David
                M. Bradley, effective as of August 31, 1994
   10.5         Form of Employment Agreement between First Federal Savings Bank of             *
                Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and
                David M. Bradley
   10.6         Form of Employment Agreement between North Central Bancshares, Inc.            *
                and David M. Bradley
   10.8         North Central Bancshares, Inc. 1996 Stock Option Plan                         ***
   10.9         Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock             *****
                Option Plan
   11.1         Statement regarding computation of per share earnings
   13.1         Annual Report to security holders
   21.1         Subsidiaries of the Registrant
   23.1         Consent of McGladrey & Pullen, LLP
   27.1         Financial Data Schedule
   99.1         Proxy Statement for Annual Meeting of Shareholders of North Central
                Bancshares, Inc. filed with the Securities and Exchange Commission is
                incorporated herein by reference.
</TABLE>
<PAGE>
 
*        Incorporated herein by reference to Registration Statement No. 33-80493
         on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed
         with the Securities and Exchange Commission, (the "Commission") on
         December 18, 1995, as amended.

**       Incorporated herein by reference to the Exhibits to the Annual Report
         on Form 10-K filed by Registrant for fiscal year 1995, filed with the
         Commission on March 29, 1996.

***      Incorporated herein by reference to the Amended Schedule 14A of
         Registrant filed with the Commission on August 19, 1996.

****     Incorporated herein by reference to the Annual Report on Form 10-K of
         the Registrant filed with the Commission on March 31, 1997.

*****    Incorporated herein by reference to the Annual Report on Form 10-K of
         the Registrant filed with the Commission on March 31, 1998.