North Central Bancshares (FFFD) ARS 2007 FY Annual report to shareholders

NORTH CENTRAL

BANCSHARES, INC.

Holding Company for

First Federal Savings Bank

OF IOWA

2007ANNUAL REPORT

TABLE OF CONTENTS

MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER	3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA	4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	7
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	17
DIRECTORS AND MANAGEMENT OF THE COMPANY AND THE BANK	26
SHAREHOLDER INFORMATION	27
INDEX TO FINANCIAL STATEMENTS	29

This Annual Report to Shareholders contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations (including noninterest expense and availability of potential tax credits) and business of North Central Bancshares, Inc. (the "Company") that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic and market conditions, the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments, and changes in depositor preferences for financial products. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

		North Central Bancshares, Inc.
		Holding Company for
		First Federal Savings Bank of Iowa
		825 Central Avenue
		Fort Dodge, Iowa 50501
		515-576-7531
		www.firstfederaliowa.com
		Branch Locations
Fort Dodge, Iowa	Fort Dodge, Iowa		Ames, Iowa		Nevada, Iowa
825 Central Avenue	201 South 25th Street		316 South Duff		404 Lincoln Highway
Fort Dodge, Iowa 50501	Fort Dodge, Iowa 50501		Ames, Iowa 50010		Nevada, Iowa 50201
515-576-7531	515-576-3177		515-232-4304		515-382-5408
Perry, Iowa	Ankeny, Iowa		Clive, Iowa		West Des Moines, Iowa
1111 - 141st Street	2110 SE Delaware Street		13150 Hickman Road		120 South 68th Street
Perry, Iowa 50220	Ankeny, Iowa 50021		Clive, Iowa 50325		West Des Moines, Iowa 50266
515-465-3187	515-963-4488		515-440-6300		515-226-0800
Burlington, Iowa		Burlington, Iowa		Mt. Pleasant, Iowa
1010 N. Roosevelt		321 North 3rd Street		102 South Main
Burlington, Iowa 52601		Burlington, Iowa 52601		Mt. Pleasant, Iowa 52641
319-754-6521		319-754-7517		319-385-8000

MESSAGE OF THE CHAIRMAN, PRESIDENT AND

CHIEF EXECUTIVE OFFICER

Dear Shareholders:

We are pleased to report to you the operating results of North Central Bancshares, Inc. (“North Central Bancshares” or the “Company”) for the year ended December 31, 2007. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the “Bank”).

For the year ended December 31, 2007, North Central Bancshares’ net income was $4,001,000 or $2.93 diluted earnings per share. Total shareholder return was impacted favorably by a 6.1% increase in quarterly dividends effective April 2007.

2007 was a very challenging year for much of the financial services sector. The Company was not immune from these challenging times as our net income and net interest spread in 2007 declined from 2006 levels.

The year 2007 was a year of transition and change for the Company. Significant new investments in human resources and information technology were made which will position the Company well for future growth. These investments are already paying dividends and making a difference in increasing our level of customer care and service as well as increasing our operating efficiencies. During the year we also introduced several new innovative products that have been met with enthusiasm by our customers.

Also during 2007 we introduced our vision statement which is “To be the best bank in the communities we serve, as recognized by our customers, employees, shareholders and the community at large.” To get there, our new mission statement is “To relentlessly focus on our customers by working hard each and every day to exceed their expectations, thereby maximizing shareholder value.” This vision and mission statement will help guide the decisions we make now and in the future as we strive to differentiate our Bank from the many financial service competitors we face.

With the support of our team members, directors, and the continuing confidence of our shareholders, we look forward to meeting the challenges of 2008 and continue to build on our story of success in the coming year. As always, we remain committed to increasing shareholder value.

Sincerely,
	/s/ David M. Bradley
	David M. Bradley Chairman, President and Chief Executive Officer

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of North Central Bancshares set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual Report.

	At December 31,
	2007		2006		2005		2004		2003
	(In thousands)
Selected Consolidated Financial Condition Data:
Total assets	$	510,193	$	515,515	$	485,191	$	462,735	$	424,009
Cash (noninterest-bearing)		9,394		7,592		8,087		7,315		8,674
Loans receivable, net (1)		446,857		449,043		430,278		407,316		362,959
Investment securities (2)		19,731		32,461		21,260		23,710		28,297
Deposits (3)		365,948		360,330		334,338		316,334		283,964
Borrowed funds		97,379		107,908		102,444		100,975		95,005
Total shareholders' equity		40,977		42,192		44,279		41,534		41,592

	For the Year Ended December 31,
	2007		2006		2005		2004		2003
	(In thousands)
Selected Operating Data:
Interest income	$	31,119	$	28,537	$	26,272	$	24,757	$	25,412
Interest expense		18,153		15,415		12,607		11,367		12,342
Net interest income before provision for loan losses		12,966		13,122		13,665		13,390		13,070
Provision for loan losses		655		240		260		240		255
Net interest income after provision for loan losses		12,311		12,882		13,405		13,150		12,815
Noninterest income:
Fees and service charges		4,581		4,381		4,483		3,123		2,864
Abstract fees		991		1,223		1,289		1,461		1,811
Other income		1,820		1,507		776		1,476		1,910
Total noninterest income		7,392		7,111		6,548		6,060		6,585
Noninterest expense:
Salaries and employee benefits		7,699		7,223		6,660		6,192		5,950
Premises and equipment		1,573		1,500		1,452		1,429		1,287
Data processing		805		669		597		567		578
Other expenses		3,967		3,727		3,730		3,127		3,016
Total noninterest expense		14,044		13,119		12,439		11,315		10,831
Income before income taxes		5,659		6,874		7,514		7,895		8,569
Income tax expense		1,658		2,062		2,499		2,496		2,721
Net income	$	4,001	$	4,812	$	5,015	$	5,399	$	5,848

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	At or For the Year Ended December 31,
	2007			2006			2005			2004			2003
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)		2.39	%		2.56	%		2.83	%		3.02	%		3.03	%
Net interest margin (net interest income as a percentage of average interest- earning assets)		2.65			2.79			3.05			3.22			3.27
Return on average assets (net income divided by average total assets)		0.77			0.96			1.05			1.21			1.38
Return on average equity (net income divided by average equity)		9.53			11.24			11.57			12.97			14.65
Noninterest income to average assets		1.42			1.42			1.37			1.36			1.55
Efficiency ratio (4)		68.99			64.84			61.54			58.18			55.11
Noninterest expense to average assets		2.71			2.63			2.61			2.54			2.55
Net interest income after provision for  loan losses to noninterest expenses		87.66			98.19			107.76			116.22			118.32
Financial Condition Ratios: (%) (5)
Equity to assets at period end		8.03			8.18			9.13			8.98			9.81
Tangible equity to tangible assets at period end (6) (7)		7.01			7.17			8.01			7.80			8.54
Average shareholders' equity divided by average total assets		8.09			8.57			9.09			9.35			9.40
Average tangible shareholders equity divided by average tangible total assets (6) (7)		7.09			7.53			7.95			8.13			8.12
Average interest-earning assets to average interest-bearing liabilities		106.88			107.09			107.62			107.24			107.63
Asset Quality Ratios: (%) (5)
Nonaccrual loans to total net loans		0.53			0.13			0.14			0.16			0.17
Nonperforming assets to total assets (8)		0.97			0.20			0.36			0.37			0.49
Allowance for loan losses as a percent of total loans receivable at end of period		0.77			0.77			0.76			0.77			0.86
Allowance for loan losses to nonaccrual loans		146.36			603.41			567.98			513.13			515.02
Per Share Data:
Book value per share	$	30.56		$	30.56		$	29.37		$	27.14		$	25.92
Tangible book value per share (6)		26.37			26.49			25.46			23.28			22.24
Basic earnings per share (9)		2.96			3.36			3.29			3.47			3.69
Diluted earnings per share (10)		2.93			3.32			3.20			3.34			3.48
Dividends declared per share		1.40			1.32			1.16			1.00			0.84
Dividend payout ratio		0.47			0.39			0.35			0.29			0.23

(1) Loans receivable, net, represents total loans less discounts, loans in process, net deferred loan fees and allowance for loan losses, plus premiums. The allowance for loan losses at December 31, 2007, 2006, 2005, 2004 and 2003 was $3.5 million, $3.5 million, $3.3 million, $3.2 million and $3.2 million, respectively.

(2) Includes interest-bearing cash and Federal Home Loan Bank stock.

(3) Includes brokered certificates of deposits of $23.6 million, $30.4 million, $4.0 million, $0.0 million and $0.0 million for the years ended December 31, 2007, 2006, 2005, 2004 and 2003, respectively.

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

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(5) 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.

(6) Tangible equity consists of stockholders’ equity less goodwill and title plant. Goodwill and title plant was $5.6 million for the years ended December 31, 2007 and 2006 and $5.9 million for each of the years ended December 31, 2005, 2004, and 2003.

(7) Tangible assets consist of total assets less goodwill and title plant. Goodwill and title plant was $5.6 million for the years ended December 31, 2007 and 2006 and $5.9 million for each of the years ended December 31, 2005, 2004, and 2003.

(8) Nonperforming assets consists of nonaccrual loans and foreclosed real estate.

(9) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 2007, 2006, 2005, 2004 and 2003 were 1,353,399, 1,429,912, 1,524,056, 1,554,329, and 1,583,568 respectively.

(10) 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. The weighted average number of shares outstanding for diluted earnings per share computation for 2007, 2006, 2005, 2004 and 2003 were 1,367,295, 1,448,857, 1,566,848, 1,616,689, and 1,679,046 respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

North Central Bancshares, Inc. (the "Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally-chartered savings bank. The principal business of the 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 borrowed funds in the form of advances from the Federal Home Loan Bank of Des Moines (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, abstract fees, mortgage banking income and other income, and noninterest expense, which primarily consists of compensation and employee benefit expenses, premises and equipment, data processing and other expenses. 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.

Executive Overview

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

Management believes the following points were the most important to that analysis this year:

· The Company has effectively managed its capital since the Company’s inception in 1996. Annual dividends per share have increased from $.25 per share in 1997 to $1.40 per share in 2007. In addition, an active stock repurchase program has been used by the Company to manage capital and increase earnings per share. Since the Company’s inception, it has repurchased 2,996,304 shares at a cost of $62.4 million as of December 31, 2007, including 59,500 shares purchased in 2007 at a cost of $2.4 million.

· The Bank has opened new offices in market areas where population growth trends are positive. New offices were opened in Ankeny, Iowa in February 2003 and in Clive, Iowa in March, 2004. In August, 2006, the Bank opened a new branch office in West Des Moines, Iowa near Jordan Town Center Mall. These locations are in suburbs of Des Moines, Iowa, which is Iowa’s largest metropolitan area. The Company will continue to focus on and emphasize the growth and profitability potential of the de novo branches within the Des Moines metropolitan area. Noninterest expenses have increased each year since 2003 due in part to the Company’s past strategy of opening de novo branch offices. We believe that this strategy will result in long-term loan and deposit growth for the Company, but will negatively impact short-term earnings until each de novo branch achieves profitability.

· Consistent with the Bank’s emphasis on attracting and retaining core deposits, growth in deposit fees, including overdraft fees, continued a strong positive trend.

· The Company continues to be liability sensitive. The growth of interest-bearing liabilities primarily reflects the growth of higher cost certificates of deposit and borrowed funds. Also contributing to the liability sensitivity of the Company is the continuing shift of lower cost non-maturing deposits into higher cost short-term certificates of deposit.

· Management believes that the allowance for loan losses is adequate. The allowance for loan losses to nonaccrual loans was 146% at December 31, 2007. Net annualized charge-offs for 2007 were 0.14% of total loans and have averaged 0.06% of total loans for the past five years. During 2007, the Company’s total loan portfolio decreased $900,000, or 0.2%. This decrease primarily consisted of decreases in the one- to four-family residential real estate, offset by increases in second mortgage real estate loans, consumer loans, and commercial real estate loans. The Company’s provision for loan losses in 2007 was $655,000.

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· The Company has lowered its effective tax rate through the use of federal Low Income Housing Tax Credits (LIHTC). The Company owns and operates two LIHTC projects in Fort Dodge. The federal income tax credits associated with these projects declined to $180,578 in 2007.

· Purchases and originations of out of state real estate loans remained an integral part of the Company’s business plan. The Company has purchased and originated out of state real estate loans to supplement local mortgage loan originations and to geographically diversify its mortgage loan portfolio.

· The general economy is slowing. Based upon increasing numbers of foreclosures and slower sales of one- to four-family residences, it is generally agreed that the real estate market is in a slowdown. The Federal Reserve reduced the targeted fed funds rate and the discount rate by 225 basis points between September 2007 and January 2008, indicating its concern about the slowing economy. It is uncertain when this slowdown will turn around and the ripple effect it could have on other parts of the economy. The duration and magnitude of any near-term economic difficulties are not known.

Business Strategy

As described above, the Company's current business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented savings bank. Generally, the Company has sought to implement this strategy primarily by using deposits, including brokered certificates of deposit, 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, multifamily real estate 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 the Bank as a community-oriented financial institution, maintaining a strong core customer base by providing dedicated service to the individual consumer; (2) increasing loan and deposit balances in existing branch offices, including recently established de novo branch offices in markets where population growth trends are positive such as the Des Moines, Iowa metropolitan area; (3) maintaining high asset quality by emphasizing investment in residential mortgage, multifamily and commercial real estate loans and consumer loans; (4) emphasizing growth in core deposits, which includes demand deposit, NOW, money market and savings accounts; (5) maintaining capital in excess of regulatory requirements; (6) controlling noninterest expense; (7) managing interest rate risk exposure; and (8) increasing noninterest income through items such as 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" as its most recent Community Reinvestment Act rating.

Retail Deposit Base. In 2007, the Company had the following eleven offices located in Iowa: Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, West Des Moines, Burlington and Mount Pleasant. At December 31, 2007, 34.2% of the deposit base, or $125.4 million, consisted of core deposits, which included money market accounts, savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are generally considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company continues to emphasize growth in core deposits.

Asset Quality and Emphasis on Residential Mortgage Lending. The Company has historically emphasized residential real estate financing. The Company expects to continue its commitment to financing the purchase, construction or improvement of residential real estate in its market area. At December 31, 2007, 38.3% 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 originated or purchased loans in the secondary mortgage market, with an emphasis on multifamily and commercial real estate loans, secured by properties outside the State of Iowa (the "out of state properties"). At December 31, 2007, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties totaled $133.8 million and consisted of $14.3 million one- to four-family residential mortgage loans, or 3.2%, $43.9 million multifamily real estate loans, or 9.7%, and $75.6 million commercial real estate loans, or 16.7%, of the Company's total loan portfolio. At December 31, 2007, the Company's ratio of nonperforming assets to total assets was 0.97%. The Company also invests in state and local obligations, mortgage-backed securities, interest-earning deposits, equity securities and FHLB stock.

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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. The Company may increase its investment in securities and in purchased mortgage loans outside its market area.

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 generally increases noninterest income by emphasizing growth in core deposit accounts. During the year ended December 31, 2007, fees and service charges totaled $4.6 million, an increase of $200,000 from the prior year. The Company also maintains its noninterest income through emphasizing growth in mortgage banking income, annuity and mutual fund sales, and insurance sales. In addition, the Company currently owns abstract companies in Webster and Boone counties in Iowa, through 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 important source of fee income. Noninterest income from First Iowa’s business for the years ended December 31, 2007 and 2006 was $991,000 and $1.2 million, respectively. The decline in First Iowa’s income in 2007 compared to 2006 was due in part to the sale of one of the Company’s three abstract offices at the end of the second quarter of 2006.

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, 2007, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $53.8 million, representing a one-year gap to total assets ratio of -10.5%, compared to a -10.1% at December 31, 2006. To manage the Company’s interest rate exposure, the Company originates 5 year fixed-rate mortgage loans that convert to adjustable rates at the conclusion of their initial term and have overall maturities of up to 30 years, and the origination of adjustable rate home equity lines of credit and short-term consumer loans. The Company also manages its interest rate risk and liquidity by investing in mortgage-backed, municipal and equity securities. In addition, the Company generally sells all fixed rate one- to four-family residential loans with maturities of fifteen years or greater. See "Discussion of Market Risk - Interest Rate Sensitivity Analysis" below for additional information.

Critical Accounting Policies

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

The Company’s significant accounting policies are described in the notes to consolidated financial statements included in the audited consolidated financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies as loan receivables, securities available for sale, and goodwill, which relate to the allowance for loan losses and asset impairment judgments, including the recoverability of goodwill.

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

Asset impairment judgments include evaluating the decline in fair value of available-for-sale securities below their cost. Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in a purchase acquisition. Goodwill is tested for impairment at least annually.

Comparison of Financial Condition as of December 31, 2007 and December 31, 2006

Total assets decreased $5.3 million, or 1.0%, to $510.2 million at December 31, 2007 from $515.5 million at December 31, 2006. The decrease in assets consisted primarily of decreases in cash and cash equivalents, securities available-for-sale and net loans, offset in part by the purchase of bank owned life insurance.

Total loans receivable, net, decreased by $2.1 million, or 0.5%, to $446.9 million at December 31, 2007 from $449.0 million at December 31, 2006, primarily due in part to payments and prepayments of $126.1 million and sales of loans of $36.1 million during the year ended December 31, 2007. The Company sells substantially all fixed-rate loans with maturities of 15 years or more in the secondary mortgage market in order to reduce interest rate risk. These payments and sales of loans were offset in part by the origination of $55.1 million of first mortgage loans secured by one-to-four family residences, the origination of $21.3 million of first mortgage loans secured by commercial real estate, the origination of $2.1 million of first mortgage loans secured by multifamily residences; the purchase of first mortgage loans secured by one-to-four family residences, multifamily residences and commercial real estate of $40.6 million; and the origination of $31.6 million of second mortgage loans during the year ended December 31, 2007. Cash and cash equivalents decreased $7.5 million, or 37.4%, to $12.5 million at December 31, 2007 from $20.0 million at December 31, 2006. The decrease in cash and cash equivalents was primarily due to a decrease in borrowed funds and the purchase of $5.0 million of bank owned life insurance. Securities available-for-sale decreased $3.0 million, or 20.7%, to $11.5 million at December 31, 2007 from $14.5 million at December 31, 2006. The decrease in securities available-for- sale was primarily due to calls, payments, maturities and an increase in unrealized losses.

Deposits increased $5.6 million, or 1.6%, to $365.9 million at December 31, 2007 from $360.3 million at December 31, 2006, primarily reflecting increases in NOW account balances and certificates of deposit, offset in part by decreases in money market and savings account balances. For the year ended December 31, 2007, brokered certificates decreased by $6.8 million, to $23.6 million compared to $30.4 million at December 31, 2006. Borrowed funds, primarily FHLB advances, decreased $10.5 million, or 9.8%, to $97.4 million at December 31, 2007 from $107.9 million at December 31, 2006.

Total shareholders' equity decreased $1.2 million, or 2.9%, to $41.0 million at December 31, 2007 from $42.2 million at December 31, 2006, primarily due to the change in accumulated other comprehensive loss of $1.3 million mainly attributable to the Company’s preferred stock investment portfolio as discussed below. The decrease in equity also reflects stock repurchases, declared dividends, and the Company’s adoption of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income taxes, offset in part by earnings and the exercise of stock options.

For the year ended December 31, 2007 the Company experienced a decline in the market value of certain available-for-sale (AFS) securities. The AFS securities balance as of December 31, 2007 and 2006 included $5.8 million in book value of Freddie Mac and Fannie Mae perpetual preferred stock. These investment grade AFS securities are rated AA- by Standard & Poor’s and Aa3 by Moody’s. As of December 31, 2007 the company recorded a $1.2 million unrealized mark-to-market loss reflected as a reduction to equity through accumulated other comprehensive loss. In recent months, well publicized volatility in the national credit markets has resulted in significant fluctuations in the value of these securities which was a factor in the decrease in stockholder’s equity at December 31, 2007.

Comparison of Financial Condition as of December 31, 2006 and December 31, 2005

Total assets increased $30.3 million, or 6.3%, to $515.5 million at December 31, 2006 from $485.2 million at December 31, 2005. The increase in assets was primarily due to increases in net loans receivable, cash and cash equivalents, and premises and equipment, offset in part by a decrease in securities available-for-sale. Asset growth was funded by increases in deposits, consisting primarily of brokered certificates of deposit, and FHLB advances.

Total loans receivable, net, increased by $18.8 million, or 4.4%, to $449.0 million at December 31, 2006 from $430.3 million at December 31, 2005, primarily due to the origination of $46.2 million of first mortgage loans secured by one- to four-family residences, the origination of $16.3 million of first mortgage loans secured by commercial real estate, the origination of $9.7 million of first mortgage loans secured by multifamily residences; the purchase of first mortgage loans secured by one- to four-family residences, multifamily residences and commercial real estate of $40.4 million; and the origination of $28.8 million of second mortgage loans during the year ended December 31, 2006. These originations and purchases were offset in part by payments and prepayments of $119.2 million and sales of loans of $19.2 million during the year ended December 31, 2006. The Company sells substantially all fixed-rate loans with maturities of 15 years or more in the secondary mortgage market in order to reduce interest rate risk. Cash and cash equivalents increased $11.4 million, or 131.7%, to $20.0 million at December 31, 2006 from $8.6 million at December 31, 2005. The increase in cash and cash equivalents was primarily due to large commercial loan payoffs in December. Premises and equipment, net, increased by $1.7 million, or 15.2%, to $12.6 million at December 31, 2006 from $11.0 million at December 31, 2005. The increase in premises and equipment was primarily due to the construction costs associated with the construction of a new branch office located at the Jordan Creek Town Center in West Des Moines, Iowa and the expansion of the Crossroads branch in Fort Dodge, Iowa. Securities available-for-sale decreased $904,000, or 5.8%, to $14.6 million at December 31, 2006 from $15.5 million at December 31, 2005. The decrease in securities available-for-sale consisted primarily of a decrease in investments in mortgage-backed securities, offset in part by an increase in investments in municipal securities and an increase in unrealized gains. Proceeds of such calls, payments and maturities were used to fund loan growth.

10

Deposits increased $26.0 million, or 7.8%, to $360.3 million at December 31, 2006 from $334.3 million at December 31, 2005, primarily reflecting an increase in certificates of deposit, offset in part by decreases in money market and savings account balances. The increase in certificates of deposit is primarily due to the utilization of brokered certificates of deposit, which increased $26.4 million, to $30.4 million at December 31, 2006. Borrowed funds, primarily FHLB advances, increased $5.5 million, or 5.3%, to $107.9 million at December 31, 2006 from $102.4 million at December 31, 2005. The increases in the deposits and borrowed funds were used to fund loan growth.

Total shareholders' equity decreased $2.1 million, or 4.7%, to $42.2 million at December 31, 2006 from $44.3 million at December 31, 2005, primarily due to stock repurchases and declared dividends, offset in part by earnings, the exercise of stock options, and an increase in unrealized gain on securities available-for-sale.

Comparison of Results of Operations for the Years Ended December 31, 2007 and 2006

Net Income. Net income decreased by $811,000, or 16.9%, to $4.0 million for the year ended December 31, 2007, compared to $4.8 million for the year ended December 31, 2006. Net income is primarily dependent on net interest income, noninterest income, noninterest expense and income tax expense. The decrease in net income was primarily due to a decrease in net interest income, an increase in provision for loan losses and an increase in noninterest expense, offset in part by an increase in noninterest income and a decrease in income tax expense.

Net Interest Income. Net interest income before provision for loan losses decreased by $156,000, or 1.2%, to $13.0 million for the year ended December 31, 2007 from $13.1 million for the year ended December 31, 2006. The decrease is due to an increase in the average balance of interest-bearing liabilities and an increase in the average cost of funds, offset in part by an increase in the average balance of interest-earning assets and an increase in the yield on interest-earning assets. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 2.39% for the year ended December 31, 2007 from 2.56% for the year ended December 31, 2006. The decrease in interest rate spread reflects the increase in the overall cost of interest-bearing liabilities, offset in part by an increase in the yield on interest-earning assets. The increase in the cost of interest-bearing liabilities primarily reflects the repricing of interest-bearing liabilities at higher current market interest rates and the growth of interest-bearing liabilities in higher cost certificates of deposit and borrowed funds. Also contributing to the increase of the cost of funds is the continuing shift of lower cost non-maturing deposits into higher cost short-term certificates of deposit.

Interest Income. Interest income increased by $2.6 million, or 9.1%, to $31.1 million for the year ended December 31, 2007, compared to $28.5 million for the year ended December 31, 2006. The increase in interest income was due to increases in the average balance of interest-earning assets and the average yield on interest-earning assets. The average balance of interest-earning assets increased $18.7 million, or 4.0%, to $488.5 million for the year ended December 31, 2007, from $469.8 million for 2006. The increase in the average balance of interest-earning assets primarily reflects increases in the average balances of interest bearing cash, first mortgage loans and consumer loans. The average yield on interest-earning assets increased to 6.36% for the year ended December 31, 2007, from 6.07% for the year ended December 31, 2006. The increase in the average yield on interest-earning assets was primarily due to loan growth at rates generally higher than portfolio rates and the repricing of adjustable rate loans within the portfolio at generally higher current market interest rates.

Interest Expense. Interest expense increased by $2.8 million, or 17.8%, to $18.2 million for the year ended December 31, 2007, compared to $15.4 million for the year ended December 31, 2006. The increase in interest expense was due to an increase in the average cost of funds and an increase in the average balance of interest-bearing liabilities. The average cost of funds increased to 3.97% for the year ended December 31, 2007 from 3.51% for the year ended December 31, 2006, due to an increase in the current market interest rates, a shift of core deposits into higher cost certificates of deposits, and an increase in certificates of deposit. The average balance of interest-bearing liabilities increased $18.2 million, or 4.2%, to $457.0 million for the year ended December 31, 2007 from $438.8 million for 2006. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the average balances of certificates of deposits, offset in part by a decrease in the average balance of NOW, money market and savings balances and borrowed funds. The increase in the average balance of certificates of deposit was primarily due to management’s decision to offer very competitive rates on certificate of deposits, offset in part by decreases in brokered certificates of deposit, which decreased $6.8 million, to $23.6 million at December 31, 2007. Borrowed funds, primarily FHLB advances, decreased $10.5 million, or 9.8%, to $97.4 million at December 31, 2007 from $107.9 million at December 31, 2006.

11

Provision for Loan Losses. The Company's provision for loan losses was $655,000 and $240,000 for the years ended December 31, 2007 and December 31, 2006, respectively. Net charge-offs were $661,000 for the year ended December 31, 2007, compared to $73,000 for the year ended December 31, 2006. The increase in provision for loan losses and charge-offs in 2007 were primarily due to losses on single family construction loans. 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 loan portfolio. During 2007, the Company’s total loan portfolio decreased $900,000, or 0.2%. This decrease primarily consisted of decreases in one-to-four family and multifamily loans, offset in part by increases in commercial real estate and consumer loans, which carries a higher level of risk than other loans in the portfolio. The Company’s out-of-state commercial real estate loans decreased $1.6 million, or 1.1%, during 2007. Purchased out-of-state real estate loans generally constitute a higher rate of risk that originated loans due to the size, location and type of collateral securing such loans.

The Company’s allowance for loan loss was $3.5 million at both December 31, 2007 and December 31, 2006. The allowance for loan losses as a percentage of total loans receivable was 0.77% at both December 31, 2007 and December 31, 2006. The level of nonperforming loans was $2.4 million at December 31, 2007 and $579,000 at December 31, 2006. Non-performing assets were 0.97% of total assets as of December 31, 2007, compared to 0.20% of total assets as of December 31, 2006. Non-performing assets included 0.47% non-accrual loans and 0.50% other real estate owned as of December 31, 2007, compared to 0.11% non-accrual loans and 0.09% other real estate owned as of December 31, 2006.

Management believes that the allowance for loan losses is adequate as of December 31, 2007. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management's control.

Noninterest Income. Total noninterest income increased by $281,000, or 4.0%, to $7.4 million for the year ended December 31, 2007 from $7.1 million for the year ended December 31, 2006. The increase in noninterest income was primarily due to increases in 2007 of fees and service charges and mortgage banking income, offset in part by decreases in 2007 of loan prepayment fees and abstract fees. Fees and service charges increased $200,000 primarily due to an increase in fees associated with checking accounts, including overdraft fees. Mortgage banking income increased $219,000 due to an increase in loans originated for the secondary market. These increases were offset by a decrease in loan prepayment fees which totaled $186,000 for December 31, 2007 compared to $569,000 for December 31, 2006. Abstract fees decreased $232,000 due in part to the sale of one of the Company’s three abstract offices at the end of the second quarter of 2006.

Noninterest Expense. Total noninterest expense increased by $925,000, or 7.1%, to $14.0 million for the year ended December 31, 2007 from $13.1 million for the year ended December 31, 2006. The increase is primarily due to increases in salaries and employee benefits and data processing expenses. Salaries and employee benefits increased $476,000 primarily due to normal salary increases, additions to staff, an increase in the Company’s contribution to its defined contribution retirement plan, and an increase in option expense due to the Company’s adoption of FAS 123(R) in 2006. Data processing expense increased $136,000 primarily due to outsourcing of certain data processing support functions during the year. The Company's efficiency ratio for the years ended December 31, 2007 and 2006 was 68.99% and 64.84%, respectively. The Company's ratio of noninterest expense to average assets for the years ended December 31, 2007 and 2006 was 2.71% and 2.63%, respectively.

12

Income Taxes. The Company’s provision for income taxes was $1.7 million and $2.1 million for the years ended December 31, 2007 and 2006, respectively. The decrease in the provision for income taxes was primarily due to the lower 2007 income before income taxes.

Comparison of Results of Operations for the Years Ended December 31, 2006 and 2005

Net Income. Net income decreased by $203,000, or 4.1%, to $4.8 million for the year ended December 31, 2006, compared to $5.0 million for the year ended December 31, 2005. Net income is primarily dependent on net interest income, noninterest income, noninterest expense and income tax expense. The decrease in net income was primarily due to a decrease in net interest income and an increase in noninterest expense, offset in part by an increase in noninterest income.

Net Interest Income. Net interest income before provision for loan losses decreased by $543,000, or 4.0%, to $13.1 million for the year ended December 31, 2006 from $13.7 million for the year ended December 31, 2005. The decrease is due to an increase in the average balance of interest-bearing liabilities and an increase in the average cost of funds, offset in part by an increase in the average balance of interest-earning assets and an increase in the yield on interest-earning assets. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 2.56% for the year ended December 31, 2006 from 2.83% for the year ended December 31, 2005. The decrease in interest rate spread reflects the increase in the overall cost of interest-bearing liabilities, offset in part by an increase in the yield on interest-earning assets. The increase in the cost of interest-bearing liabilities primarily reflects the repricing of interest-bearing liabilities at higher current market interest rates and the growth of interest-bearing liabilities in higher cost certificates of deposit and borrowed funds. Also contributing to the increase of the cost of funds is the continuing shift of lower cost non-maturing deposits into higher cost short-term certificates of deposit.

Interest Income. Interest income increased by $2.3 million, or 8.6%, to $28.5 million for the year ended December 31, 2006, compared to $26.3 million for the year ended December 31, 2005. The increase in interest income was due to increases in the average balance of interest-earning assets and the average yield on interest-earning assets. The average balance of interest-earning assets increased $21.5 million, or 4.8%, to $469.8 million for the year ended December 31, 2006, from $448.4 million for 2005. The increase in the average balance of interest-earning assets primarily reflects increases in the average balances of first mortgage loans and consumer loans. The increases in first mortgage loans and consumer loans were primarily derived from the origination of $46.2 million of first mortgage loans secured by one- to four-family residences, the origination of $16.3 million of first mortgage loans secured by commercial real estate, the origination of $9.7 million of first mortgage loans secured by multifamily residences; the purchase of first mortgage loans secured by one- to four-family residences, multifamily residences, and commercial real estate of $40.4 million; and the origination of $28.8 million of second mortgage loans, which originations and purchases were offset in part by payments and prepayments of $119.2 million and sales of loans of $19.2 million during the year ended December 31, 2006. This reflects the Company's continued emphasis on residential lending. See “-Business Strategy.” The average yield on interest-earning assets increased to 6.07% for the year ended December 31, 2006, from 5.86% for the year ended December 31, 2005. The increase in the average yield on interest-earning assets was primarily due to loan growth at rates generally higher than portfolio rates and the repricing of adjustable rate loans within the portfolio at generally higher current market interest rates.

Interest Expense. Interest expense increased by $2.8 million, or 22.3%, to $15.4 million for the year ended December 31, 2006, compared to $12.6 million for the year ended December 31, 2005. The increase in interest expense was due to an increase in the average cost of funds and an increase in the average balance of interest-bearing liabilities. The average cost of funds increased to 3.51% for the year ended December 31, 2006 from 3.03% for the year ended December 31, 2005, due to an increase in the current market interest rates, a shift of core deposits into higher cost certificates of deposits, and an increase in certificates of deposit and borrowed funds. The average balance of interest-bearing liabilities increased $22.1 million, or 5.3%, to $438.8 million for the year ended December 31, 2006 from $416.6 million for 2005. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the average balances of certificates of deposit and borrowed funds, offset in part by a decrease in the average balance of money market and savings accounts. The increase in certificates of deposit is primarily due to the Company’s utilization of brokered certificates of deposit, which increased $26.4 million, to $30.4 million at December 31, 2006. Borrowed funds, primarily FHLB advances, increased $5.5 million, or 5.3%, to $107.9 million at December 31, 2006 from $102.4 million at December 31, 2005. The increase in interest-bearing liabilities was used to fund asset growth.

Provision for Loan Losses. The Company's provision for loan losses was $240,000 and $260,000 for the years ended December 31, 2006 and December 31, 2005, 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 and commercial real estate 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. During 2006, the Company’s total loan portfolio increased $14.7 million, or 3.4%. This increase primarily consisted of increases in commercial real estate and consumer loans, which carries a higher level of risk than other loans in the portfolio. The Company purchased $40.4 million of loans in 2006, compared to $24.0 million of loans in 2005. The properties securing the loans purchased are primarily out of state and constitute a higher rate of risk than originated loans due to the size, locations and type of collateral securing such loans. The Company’s out of state loans decreased by $7.8 million, or 5.4% during 2006. The economic conditions in the Bank’s primary market areas remain generally stable. The net charge-offs were $73,000 for the year ended December 31, 2006 and $170,000 for the year ended December 31, 2005. The charge-offs were primarily due to losses on automobile and second mortgage loans. The resulting allowance for loan loss was $3.5 million and $3.3 million at December 31, 2006 and December 31, 2005, respectively.

13

The allowance for loan losses as a percentage of total loans receivable increased to 0.77% at December 31, 2006 from 0.76% at December 31, 2005. The level of nonperforming loans was $579,000 at December 31, 2006 and $585,000 at December 31, 2005.

Noninterest Income. Total noninterest income increased by $563,000, or 8.6%, to $7.1 million for the year ended December 31, 2006 from $6.5 million for the year ended December 31, 2005. The increase in noninterest income was primarily due to an impairment of securities available-for-sale recognized during the year ended December 31, 2005. During 2005, the Company recorded an other-than-temporary impairment of $679,500 related to three Freddie Mac adjustable rate, perpetual preferred stocks with a face value of $3.5 million, due to the facts and circumstances surrounding these securities at the time, including the duration and amount of the unrealized loss in the securities, as well as the prospect for a change in market value within a reasonable period of time. These perpetual preferred stock issues are investment grade securities that are held in the Company’s available-for-sale securities portfolio. The increase in 2006 was offset in part by decreases in fees and service charges, including loan prepayment fees, abstract fees, and mortgage banking income. Fees and service charges decreased $102,000 primarily due to a decrease in loan prepayment fees, offset in part by an increase in fees associated with checking accounts, including overdraft fees. During the year ended December 31, 2006, the Company recorded $569,000 in loan prepayment fees, compared to $1.0 million for the year ended December 31, 2005. Abstract fees decreased $66,000 due in part to the sale of one of the Company’s three abstract offices at the end of the second quarter of 2006. Mortgage banking income decreased $43,000 due to a decline in loans originated for the secondary market.

Noninterest Expense. Total noninterest expense increased by $680,000, or 5.5%, to $13.1 million for the year ended December 31, 2006 from $12.4 million for the year ended December 31, 2005. The increase is primarily due to increases in salaries and employee benefits and data processing expenses. Salaries and employee benefits increased $563,000 primarily due to normal salary increases, additions to staff, an increase in the Company’s contribution to its defined contribution retirement plan, and an increase in option expense due to the Company’s adoption of FAS 123(R) in 2006. Data processing expense increased $72,000 primarily due to outsourcing of certain data processing support functions during the year. The Company's efficiency ratio for the years ended December 31, 2006 and 2005 was 64.84% and 61.54%, respectively. The Company's ratio of noninterest expense to average assets for the years ended December 31, 2006 and 2005 was 2.63% and 2.61%, respectively.

Income Taxes. The Company’s provision for income taxes was $2.1 million and $2.5 million for the years ended December 31, 2006 and 2005, respectively. The decrease in the provision for income taxes was primarily due to the lower 2006 income before income taxes and the limited deductibility of the other-than-temporary impairment of securities available-for-sale in 2005.

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, amortization and prepayment of loans, borrowings such as FHLB advances, brokered certificates of deposit, maturities of securities and other investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by 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 interest-earning assets, which provide liquidity to meet lending requirements. At December 31, 2007, $967,000, or 34.9% of the Company's investment portfolio excluding mortgage-backed, mutual fund and equity securities, was scheduled to mature within one year or less, $832,000, or 30.0%, was scheduled to mature within one to five years and $972,000, or 35.1%, was scheduled to mature in more than five years. At December 31, 2007, certificates of deposit scheduled to mature in less than one year totaled $144.0 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 was $185.4 millionas of December 31, 2007. The Company may also use brokered certificates of deposit, up to 15% of total assets, as an additional source of funds. 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 included in this report.

14

At December 31, 2007, the Company had outstanding loan commitments of $1.1 million. This amount does not include undisbursed overdraft loan privileges and the undisbursed home equity lines of credit. The Company monitors its liquidity position and expects to have sufficient funds to meet its current funding commitments.

The main sources of liquidity for the Company are proceeds from dividends and loan repayments from the Bank and the proceeds from stock options exercised. The main cash outflows are dividend payments to shareholders and funds used to repurchase shares of the Company’s common stock. During 2007, the Company repurchased 59,500 shares of its common stock. The Company has determined that a share repurchase program is appropriate to enhance shareholder value. Share repurchases generally increase earnings per share, return on average assets, and return on average equity, three performance benchmarks against which the Company and other thrift holding companies are often measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase. The 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 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 Note 17 to the consolidated financial statements included in this report. Unlike the Bank, the Company is not subject to OTS formula-based 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 Company from paying a dividend if either of the following would result: (a) the Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Company's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the 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, 2007, 2006 and 2005, the Company's disbursements for loan originations and purchases totaled $166.2 million, $153.3 million, and $143.1 million, respectively. These activities were funded primarily by net deposit inflows, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and call of securities, brokered certificates of deposit, and FHLB advances. Net cash flows (used in) investing activities were $(4.3) million, $(20.0) million and $(23.1) million for the years ended December 31, 2007, 2006 and 2005, respectively. Net cash flows (used in) provided by financing activities were $(8.8) million, $24.4 million and $16.5 million for the years ended December 31, 2007, 2006 and 2005, 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, 2007 with tangible and leverage capital ratios of 7.0% and a total risk-based capital ratio of 10.3 %. 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 Company level, and require certain adjustments to shareholders’ 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, 2007:

	Amount		Capital Requirements (In thousands)		Excess Capital
Tangible capital	$	35,176	$	7,580	$	27,596
Core capital		35,176		15,160		20,016
Risk-based capital		38,582		30,046		8,536

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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 accounting principles generally accepted in the United States of America, 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.

Off-Balance Sheet Arrangements

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

The Company uses the same credit polices in making commitments and conditional obligations as it does for on-statement of financial condition instruments. The Company does require collateral, or other security, to support financial instruments with credit risks.

For additional information regarding off-balance sheet arrangements, see Note 14 to the consolidated financial statements included in this report.

Contractual Obligations

	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Borrowings (1)	$	97,379	$	26,413	$	45,577	$	25,068	$	321
Loan commitments		1,108		1,108		-		-		-
Available home equity and unadvanced lines of credit		8,563		8,563		-		-		-
Total	$	107,050	$	36,084	$	45,577	$	25,068	$	321

(1)Callable advances are included in the category in which the advances mature

16

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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. Due to nature of the Bank's 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, 2007, $133.8 million, or 29.7%, of the Company's total loan portfolio was secured by properties outside the State of Iowa, located in twenty-four states. The Bank does not own any trading assets. At December 31, 2007, 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 rate 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 same 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 short-term consumer loans, and maintaining a level of liquidity by investing in short-term interest-earning deposits and equity securities. In addition, the Company generally sells all fixed rate one- to four-family residential loans with maturities of fifteen years or greater.

At December 31, 2007, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $53.8 million, representing a one-year gap ratio of -10.5%, compared to a one-year gap ratio of -10.1% at December 31, 2006. The chief executive officer meets regularly with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending activities. The chief executive officer reports quarterly to the board of directors on interest rate risks and trends, as well as liquidity and capital ratio requirements.

Gap Table. The following table (the “Gap Table”) sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2007, 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 the terms 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.

17

		At December 31, 2007 (1)
		Within 1 Year			1-3 Years			3-5 Years			5-10 Years			10-20 Years			Over 20 Years			Total
		(Dollars in thousands)
Interest-earning assets:
First mortgage loans
Adjustable (2)	$	117,682		$	111,353		$	43,743		$	-		$	-		$	-		$	272,778
Fixed (2)		24,324			35,178			20,989			23,323			2,035			158			106,007
Consumer and other loans		26,092			29,401			11,974			5,869			411			4			73,751
Investment securities (3)(4)		12,490			1,657			961			45			-			2,387			17,540
Total interest-earning assets	$	180,588		$	177,589		$	77,667		$	29,237		$	2,446		$	2,549		$	470,076
Rate sensitive liabilities:
Savings accounts	$	4,171		$	6,335		$	4,364		$	5,857		$	3,216		$	590		$	24,533
NOW accounts		20,046			20,585			8,171			4,844			528			6			54,180
Money market accounts		26,110			6,941			-			-			-			-			33,051
Certificate accounts		143,970			70,749			25,792			-			-			-			240,511
Noninterest bearing deposits		13,673			-			-			-			-			-			13,673
FHLB advances and other liabilities (5)		26,413			45,577			25,068			299			22			-			97,379
Total interest-bearing liabilities	$	234,383		$	150,187		$	63,395		$	11,000		$	3,766		$	596		$	463,327
Interest sensitivity gap	$	(53,795	)	$	27,402		$	14,272		$	18,237		$	(1,320	)	$	1,953
Cumulative interest-sensitivity gap	$	(53,795	)	$	(26,393	)	$	(12,121	)	$	6,116		$	4,796		$	6,749
Interest sensitivity gap to total assets		(10.53	)%		5.36	%		2.79	%		3.57	%		(0.26	)%		0.38	%
Cumulative interest-sensitivity gap to total assets		(10.53	)		(5.16	)		(2.37	)		1.20			0.94			1.32
Ratio of interest-earning assets to  interest-bearing liabilities		77.05			118.25			122.51			265.79			64.95			427.68			101.46	%
Cumulative ratio of interest-earning assets to interest-bearing liabilities		77.05			93.14			97.29			101.33			101.04			101.46			101.46
Total assets	$	511,014		$	511,014		$	511,014		$	511,014		$	511,014		$	511,014		$	511,014
Cumulative interest-earning assets	$	180,588		$	358,177		$	435,844		$	465,081		$	467,527		$	470,076		$	470,076
Cumulative interest-bearing liabilities	$	234,383		$	384,570		$	447,965		$	458,965		$	462,731		$	463,327		$	463,327

(1) The following assumptions were used in regard to prepayment speed for loans: (i) fixed rate commercial real estate loans and mortgage-backed securities will prepay at 10 percent per year, (ii) one- to four-family loans (both fixed rate and adjustable rate) will prepay at 12 percent per year, (iii) all multifamily loans (both fixed and adjustable rate) and adjustable rate commercial real estate loans will prepay at 15 percent per year, (iv) all second mortgage real estate loans and all other loans will prepay at 20 percent year. Besides prepayment assumptions, the chart above also includes normal principal payments based upon the loan contractual agreements. Savings accounts are assumed to be withdrawn at an annual rate of 17 percent. NOW accounts are assumed to be withdrawn at an annual rate of 37 percent. Money market accounts are assumed to be withdrawn at 79 percent during the first year with the balance being withdrawn within the one-to-three year category. 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) Includes $1.9 million and $0.3 million in mortgage-backed securities in adjustable and fixed first mortgage loans, respectively.

(3) Includes 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 $3.1 million and securities available-for-sale of $9.3 million.

(4) Includes $3.8 million of FHLMC preferred stock and $0.8 million of FNMA preferred stock. $2.4 million is fixed rate and $2.2 million is adjustable rate. The fixed rate preferred stock was included in the appropriate category based upon their maturity date. The adjustable rate preferred stock was included in the appropriate category based upon their repricing date.

(5) Includes $97.4 million of advances from the FHLB. Of these advances, $47.9 million are term advances and $39.5 million are callable. The term advances have been categorized based upon their maturity date. The $49.5 million of callable advances were also categorized based upon maturity, because the interest rates on such advances are near or above current market rates.

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

18

Net Portfolio Value Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the "net portfolio value" ("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 NPV which would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of 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, 2007, is an analysis of the Company's interest rate risk ("IRR") as measured by changes in NPV for instantaneous and sustained parallel shifts of 50 or 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.

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)
+300 bp	38,695	(7,028	)	(15	)	7.69	(107) bp
+200 bp	42,316	(3,407	)	(7	)	8.30	(47) bp
+100 bp	44,960	(762	)	(2	)	8.70	(6) bp
+50 bp	45,547	(175	)	0		8.77	+1 bp
0 bp	45,722					8.77	-
-50 bp	45,628	(94	)	0		8.71	(5) bp
-100 bp	45,341	(381	)	(1	)	8.62	(14) bp
-200 bp	44,194	(1,529	)	(3	)	8.35	(42) bp

(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 above 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.

Loan Analysis

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 90 days or more 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.

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, 2007, the Company's foreclosed real estate had an aggregate carrying value of $2,569,000 of which 77% is due to a project related to one previous one-to four-family residential construction borrower.

19

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 and did not have any loans that were ninety days past due and still accruing interest.

	At December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Nonaccrual loans and nonperforming assets:
First mortgage loans:
One- to four-family residential	$	917		$	222		$	389		$	335		$	414
Multifamily and commercial properties(1)		1,216			-			-			-			-
Consumer loans		250			357			196			299			201
Total nonaccrual loans(2)		2,383			579			585			634			615
Total foreclosed real estate		2,569			468			1,143			1,079			1,453
Other nonperforming assets		-			-			-			-			-
Total nonperforming assets	$	4,952		$	1,047		$	1,728		$	1,713		$	2,068
Total nonaccrual loans to net loans receivable		0.53	%		0.13	%		0.14	%		0.16	%		0.17	%
Total nonaccrual loans to total assets		0.47			0.11			0.12			0.14			0.15
Total nonperforming assets to total assets		0.97			0.20			0.36			0.37			0.49

(1) Includes one- to four-family residential construction.

(2) The increase in nonaccrual loans is due primarily to increase of $1.2 million in the multifamily and commercial properties category. Of this increase, $914,000 is related to two borrowers which are experiencing financial difficulties. The Company has evaluated these particular loans and believes them to be adequately collateralized at this time.

The following table sets forth information with respect to loans delinquent 60-89 days in the Company's portfolio at the dates indicated.

	At December 31,
	2007		2006		2005		2004		2003
	(In thousands)
Loans past due 60-89 days:
First mortgage loans:
One- to four-family residential	$	948	$	765	$	1,106	$	1,001	$	649
Multifamily and commercial properties		812		-		-		40		463
Consumer loans		91		68		214		238		223
Total past due	$	1,851	$	833	$	1,320	$	1,279	$	1,335

20

The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2007.

	At December 31, 2007
	Balance		Number
	(Dollars in thousands)
One- to four-family first mortgage loans:
Loans 60 to 89 days delinquent	$	948		15
Loans 90 days or more delinquent		917		15
Multifamily and commercial first mortgage loans:
Loans 60 to 89 days delinquent		812		2
Loans 90 days or more delinquent		1,216		5
Consumer Loans:
Loans 60 to 89 days delinquent		91		13
Loans 90 days or more delinquent		250		18
Foreclosed real estate		2,569		12
Other nonperforming assets		-		-
Loans to facilitate sale of foreclosed real estate		196		4
Special mention loans		490		14

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, 2007, the Company had $490,000 of special mention loans, consisting of five loans secured by one- to four-family residences, eight consumer loans, and one commercial real estate loan.

The following table sets forth the aggregate amount of the Company's classified assets, which include nonperforming loans and foreclosed real estate, at the dates indicated.

	At December 31,
	2007		2006		2005		2004		2003
	(In thousands)
Substandard assets	$	4,941	$	1,038	$	1,670	$	1,680	$	2,046
Doubtful assets		-		-		-		-		-
Loss assets		44		24		58		58		22
Total classified assets	$	4,985	$	1,062	$	1,728	$	1,738	$	2,068

Allowance for Loan Losses. It is management's policy to provide an allowance and provision for probable 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 and commercial 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 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 2007 the Company’s total loan portfolio decreased $900,000, or 0.2%. During the years ended December 31, 2007, 2006 and 2005 the Company's provision for loan losses were $655,000, $240,000, and $260,000, respectively. The Company's allowance for loan losses totaled $3.5 million, $3.5 million and $3.3 million at December 31, 2007, 2006 and 2005, respectively.

21

Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize losses on loans, 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.

Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.

	For the Year Ended December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Total loans outstanding	$	452,457		$	453,335		$	438,650		$	418,841		$	367,396
Average loans outstanding		460,429			447,440			424,633			389,190			358,260
Allowance balances (at beginning of period)		3,493			3,326			3,235			3,165			3,118
Provisions for losses		655			240			260			240			255
Charge-Offs:
First mortgage loans(1)		526			22			5			66			36
Consumer loans		147			70			182			114			265
Recoveries:
First mortgage loans		12			-			3			2			-
Consumer loans		-			19			15			8			93
Net charge-offs		661			73			169			170			208
Allowance balance (at end of period)	$	3,487		$	3,493		$	3,326		$	3,235		$	3,165
Allowance for loan losses as a percent of total loans receivable at end of period		0.77	%		0.77	%		0.76	%		0.77	%		0.86	%
Net loans charged off as a percent of average loans outstanding		0.14			0.02			0.04			0.04			0.06
Ratio of allowance for loan losses to total nonaccrual loans at end of period		146.36			603.41			567.98			513.13			515.02
Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period		70.42			333.63			192.41			188.86			153.05

(1) Includes one- to four-family construction loans.

22

Allocation of Allowance for Loan Losses. The following table sets forth the allocation for loan losses by loan category for the periods indicated:

	At December 31,
	2007					2006					2005					2004					2003
	Amount		% of Loans In Each Category to Total Loans			Amount		% of Loans In Each Category to Total Loans			Amount		% of Loans In Each Category to Total Loans			Amount		% of Loans In Each Category to Total Loans			Amount		% of Loans In Each Category to Total Loans
	(Dollars in thousands)
Balance at end of period applicable to:
One- to four-family residential mortgage loans	$	518		44.36	%	$	570		48.01	%	$	593		49.47	%	$	510		45.99	%	$	517		47.33	%
Multifamily residential mortgage loans		472		12.51			646		14.52			704		16.86			731		18.73			686		19.04
Commercial mortgage loans		1,598		26.84			1,443		23.04			1,201		19.76			1,240		21.94			978		18.95
Consumer loans		899		16.29			834		14.43			828		13.91			754		13.34			984		14.68
Total allowance for loan losses	$	3,487		100.00	%	$	3,493		100.00	%	$	3,326		100.00	%	$	3,235		100.00	%	$	3,165		100.00	%

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 table, average balances were computed on a monthly basis.

23

	For the Year Ended December 31,
	2007								2006								2005
	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
First mortgage loans(1)	$	390,972		$	24,535		6.27	%	$	384,965		$	23,102		6.00	%	$	365,647		$	21,391		5.85	%
Consumer loans(1)		69,457			5,219		7.51			62,474			4,420		7.07			58,986			3,933		6.67
Investment securities		28,056(4	)		1,365		4.87			22,403(5	)		1,015		4.53			23,738(6	)		948		3.99
Total interest-earning assets	$	488,485		$	31,119		6.37	%	$	469,842		$	28,537		6.07	%	$	448,371		$	26,272		5.86	%
Noninterest-earning assets		30,329								29,578								28,724
Total assets	$	518,814							$	499,420							$	477,095
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings	$	83,416		$	1,109		1.33	%	$	85,008		$	1,048		1.23	%	$	95,781		$	1,061		1.11	%
Savings		25,828			126		0.47			26,335			87		0.33			28,710			91		0.32
Certificates of Deposit		241,197			11,651		4.83			218,655			9,119		4.17			189,900			6,743		3.55
Borrowed funds		106,591			5,267		4.94			108,753			5,161		4.75			102,234			4,712		4.61
Total interest-bearing liabilities	$	457,032		$	18,153		3.97	%	$	438,751		$	15,415		3.51	%	$	416,625		$	12,607		3.03	%
Noninterest-bearing liabilities		19,786								17,858								17,110
Total liabilities	$	476,818							$	456,609							$	433,735
Equity		41,996								42,811								43,360
Total liabilities and equity	$	518,814							$	499,420							$	477,095
Net interest income				$	12,966							$	13,122							$	13,665
Net interest rate spread(2)							2.39	%							2.56	%							2.83	%
Net interest margin (3)							2.65								2.79								3.05
Ratio of average interest-earning assets to average interest- bearing liabilities							106.88								107.09								107.62

(1) Balance is net of deferred loan fees, deferred loan costs, loan premiums 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 $8,951,000, Federal Home Loan Bank stock of $5,456,000, and securities available-for-sale of $13,649,000.

(5) Includes interest-bearing deposits of $1,238,000, Federal Home Loan Bank stock of $5,563,000, and securities available-for-sale of $15,602,000.

(6) Includes interest-bearing deposits of $1,150,000, Federal Home Loan Bank stock of $5,212,000, and securities available-for-sale of $17,376,000.

24

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.

	Year Ended December 31, 2007 Compared to Year Ended December 31, 2006												Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
	Increase/(Decrease)Due to												Increase/(Decrease)Due to
	Volume			Rate			Rate/ Volume			Total Increase (Decrease)			Volume			Rate			Rate/ Volume			Total Increase (Decrease)
										(In thousands)
Interest income:
First mortgage loans	$	360		$	1,057		$	16		$	1,433		$	1,130		$	552		$	29		$	1,711
Consumer loans		494			274			31			799			233			240			14			487
Investment securities		251			70			29			350			(59	)		123			3			67
Total interest-earning assets	$	1,105		$	1,401		$	76		$	2,582		$	1,304		$	915		$	46		$	2,265
Interest expense:
NOW and money market savings	$	(20	)	$	83		$	(2	)	$	61		$	(119	)	$	120		$	(14	)	$	(13	)
Savings		(2	)		42			(1	)		39			(8	)		4			-			(4	)
Certificate of deposits		940			1,443			149			2,532			1,021			1,177			178			2,376
Borrowed funds		(103	)		213			(4	)		106			301			139			9			449
Total interest-bearing liabilities		815			1,781			142			2,738			1,195			1,440			173			2,808
Net change in net interest income	$	290		$	(380	)	$	(66	)	$	(156	)	$	109		$	(525	)	$	(127	)	$	(543	)

25

DIRECTORS AND MANAGEMENT OF THE COMPANY AND THE BANK

The Board of Directors of the Company is divided into three classes, each of which contains approximately one-third of the Board. The Bylaws of the Company currently authorize seven directors. Currently, all directors of the Company are also directors of the Bank.

Continuing Directors

David M. Bradley was reappointed President and Chief Executive Officer of the Company and as Chief Executive Officer of the Bank on October 31, 2007. Mr. Bradley served as the President and CEO of the Company since its inception in December 1995 until July 1, 2007. He has been employed by the Bank since 1982 and had served as its CEO from 1992 to July 1, 2007. He has served as Chairman of the Board of the Company and the Bank since 1997.

Robert H. Singer, Jr. is Executive Director of the Fort Dodge Area Chamber of Commerce. Mr. Singer was formerly the co-owner of Calvert, Singer & Kelley Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa.

C. Thomas Chalstrom is Executive Vice President of the Company and President of the Bank and has been employed with the Bank since 1985. He was Executive Vice President of the Bank from 1994 until 2004. Mr. Chalstrom was named Chief Operating Officer of the Bank in December 1998. He became President of the Bank in April 2004. Mr. Chalstrom became Corporate Secretary of the Company and the Bank in January 2008.

Randall L. Minear is President of Terrus Real Estate Group, located in Des Moines, Iowa. He formerly served as the Director of Corporate Real Estate for The Principal Financial Group and as President of Principal Real Estate Services, a subsidiary of The Principal Financial Group.

Melvin R. Schroeder was formerly the Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in 2001.

Nominees for Election as Directors at Upcoming Annual Meeting of Stockholders

Mark Thompson has been an owner of Thompson & Eich CPAs (formerly known as Mark Thompson CPA, P.C.) in Fort Dodge, Iowa since 1984 and has been a certified public accountant since 1978.

Paul F. Bognanno served as Senior Executive Vice President of the Company from February 2007 to July 1, 2007 when Mr. Bognanno became President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank until October 31, 2007. From 1993 to 2004, he was the President and Chief Executive Officer of Principal Residential Mortgage, a wholly-owned subsidiary of The Principal Financial Group. From November 1, 2007 to present, Mr. Bognanno is employed as Vice Chairman of Radian Guaranty (“NYSE RDN”).

Executive Officers Who are Not Directors or Director Nominees

Kyle C. Cook, CPA has been employed with the Company and the Bank since June 2007. He is the Chief Financial Officer of the Company and the Bank and is in charge of the accounting functions of the Bank and the Company. Prior to joining the Company, Mr. Cook was chief financial officer for Liberty Bank in West Des Moines for three years. He began his career with KPMG LLP and was employed there from 1996 to 2004, most recently as a tax senior manager.

Kirk A. Yung has been employed with the Bank since 1990, was named Senior Vice President in January 1995 and is in charge of commercial real estate lending.

26

SHAREHOLDER INFORMATION

Price Range of the Company's Common Stock

The Company's common stock trades on the Nasdaq Global Market 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.

	Price Range ($)
Quarter Ended	High		Low		Dividends Declared Per Share
2007
First Quarter		41.17		38.20		0.35
Second Quarter		41.24		39.75		0.35
Third Quarter		41.00		38.00		0.35
Fourth Quarter		39.50		30.18		0.35
2006
First Quarter		39.52		37.25		0.33
Second Quarter		40.12		38.30		0.33
Third Quarter		41.23		38.95		0.33
Fourth Quarter		41.33		39.22		0.33

The Company’s Common Stock was traded at $31.50as of March 3, 2008. As of March 3, 2008, there were 425 common stockholders of record and an estimated 700 additional beneficial holders whose stock was held in street name by brokerage houses.

27

Annual Meeting

The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Central Time, Friday, April 25, 2008 at the Boston Centre, Suite 100, located at 809 Central Avenue, Fort Dodge, Iowa 50501.

Stockholders and General Inquiries	Stock Exchange
David M. Bradley North Central Bancshares, Inc. c/o First Federal Savings Bank of Iowa 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 www.firstfederaliowa.com	The Company’s Common Shares are listed under the symbol “FFFD” on the Nasdaq Global Market
General Counsel The Law Office of Eric J. Eide, P.L.C. 805 Central Avenue, Suite 619 Fort Dodge, Iowa 50501 Special Counsel Paul, Hastings, Janofsky & Walker LLP 875 15th Street, N.W. Washington, D.C. 20005 www.paulhastings.com	Independent Auditor McGladrey & Pullen, LLP 400 Locust Street, Suite 640 Des Moines, Iowa 50309 Transfer Agent Computershare Investor Services 350 Indiana Street, Suite 800 Golden, Colorado 80401 (303) 262-0600 or 800-962-4284 e-mail: inquire@computershare.com www.computershare.com

Publications - Annual Report on Form 10-K

A copy of the Company's Annual Report Form 10-K (without exhibits) for the fiscal year ended December 31, 2007 will be furnished without charge to shareholders of record as of March 3, 2008 upon written request to C. Thomas Chalstrom, Corporate Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. The Annual Report Form 10-K report will also be available online at www.sec.gov or via the Bank’s website at www.firstfederaliowa.com. The information set forth on the Company’s website is not incorporated by reference into this report or any of our other filings under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, except to the extent that the Company specifically so provides.

Dividend Reinvestment and Stock Purchase Plan

The Company maintains a Dividend Reinvestment and Stock Purchase Plan which provides shareholders with the ability to automatically reinvest their cash dividends in additional shares of North Central Bancshares, Inc. common stock. This plan also provides shareholders the opportunity to make quarterly cash purchases of additional shares of the Company’s common stock.

For more information, contact Computershare Investor Services (see address above) or visit Computershare’s website at www.computershare.com.

28

NORTH CENTRAL BANCSHARES, INC.

AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	30
FINANCIAL STATEMENTS
Consolidated statements of financial condition	31
Consolidated statements of income	32
Consolidated statements of stockholders' equity	33 - 34
Consolidated statements of cash flows	35 - 36
Notes to consolidated financial statements	37 - 68

29

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

North Central Bancshares, Inc.

Fort Dodge, Iowa

We have audited the consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that 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 that 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

As described in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company changed its method of accounting for stock-based compensation to adopt Statement of Financial Accounting Standards No. 123(R). As described in Note 9 to the consolidated financial statements, effective January 1, 2007, the Company changed its method of accounting for uncertain tax positions to adopt FASB Interpretation No. 48.

We were not engaged to examine management’s assertion about the effectiveness of North Central Bancshares, Inc.’s internal control over financial reporting as of December 31, 2007 included in the Company’s Annual Report on Form 10-K for the period then ended and, accordingly, we do not express an opinion thereon.

Des Moines, Iowa

March 17, 2008

McGladrey & Pullen, LLP is an independent member firm of RSM International,

an affiliation of separate and independent legal entities.

30

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2007 and 2006
	2007			2006
ASSETS
Cash and due from banks (Note 2):
Interest-bearing	$	3,132,298		$	12,430,709
Noninterest-bearing		9,394,409			7,591,567
Total cash and cash equivalents		12,526,707			20,022,276
Securities available-for-sale (Note 3)		11,534,942			14,554,052
Federal Home Loan Bank stock, at cost (Note 8)		5,064,200			5,476,000
Loans held for sale		1,402,488			583,700
Loans receivable, net (Notes 4, 5, 8, 14 and 15)		446,857,436			449,043,259
Accrued interest receivable		2,278,635			2,262,273
Foreclosed real estate		2,569,314			468,117
Premises and equipment, net (Note 6)		12,466,305			12,633,711
Rental real estate		2,473,633			2,583,492
Title plant		671,704			671,704
Goodwill		4,946,960			4,946,960
Deferred taxes (Note 9)		1,110,306			1,027,680
Bank-owned life insurance (BOLI)		5,044,601			-
Prepaid expenses and other assets		1,245,733			1,241,504
Total assets	$	510,192,964		$	515,514,728
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits (Notes 5 and 7)	$	365,947,856		$	360,329,810
Borrowed funds (Note 8)		97,378,800			107,907,563
Advances from borrowers for taxes and insurance		2,016,809			2,050,991
Dividends payable		468,981			455,616
Accrued expenses and other liabilities		3,403,808			2,578,799
Total liabilities		469,216,254			473,322,779
COMMITMENTS AND CONTINGENCIES (Notes 14 and 17)
STOCKHOLDERS’ EQUITY (Notes 12 and 17)
Preferred stock, $.01 par value, authorized 3,000,000 shares;
none issued and outstanding		-			-
Common stock, $.01 par value, authorized 15,500,000 shares;
issued and outstanding 2007 1,340,948 shares;
2006 1,380,653 shares		13,392			13,807
Additional paid-in capital		17,686,444			17,723,697
Retained earnings, substantially restricted (Note 9)		24,483,022			24,358,445
Accumulated other comprehensive income (loss)		(1,206,148	)		96,000
Total stockholders’ equity		40,976,710			42,191,949
Total liabilities and stockholders’ equity	$	510,192,964		$	515,514,728
See Notes to Consolidated Financial Statements.

31

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2007, 2006 and 2005
	2007		2006		2005
Interest income:
Loans receivable:
First mortgage loans	$	24,535,039	$	23,102,096	$	21,391,426
Consumer loans		5,218,773		4,419,574		3,932,736
Securities and cash deposits		1,365,481		1,015,332		948,256
		31,119,293		28,537,002		26,272,418
Interest expense:
Deposits (Note 7)		12,886,416		10,254,099		7,894,920
Other borrowed funds		5,266,967		5,161,348		4,712,535
		18,153,383		15,415,447		12,607,455
Net interest income		12,965,910		13,121,555		13,664,963
Provision for loan losses (Note 4)		655,000		240,000		260,000
Net interest income after provision
for loan losses		12,310,910		12,881,555		13,404,963
Noninterest income:
Fees and service charges		4,581,180		4,381,340		4,482,923
Abstract fees		991,147		1,223,191		1,289,624
Mortgage banking income		465,041		245,827		289,042
Provision for impairment of securities available-for-sale		-		-		(679,500	)
Other income		1,355,028		1,261,178		1,166,280
Total noninterest income		7,392,396		7,111,536		6,548,369
Noninterest expense:
Compensation and employee benefits (Notes 10 and 11)		7,699,027		7,223,295		6,659,922
Premises and equipment		1,572,818		1,499,563		1,452,136
Data processing		804,728		669,027		597,127
Other expenses (Note 13)		3,967,683		3,727,271		3,729,921
Total noninterest expense		14,044,256		13,119,156		12,439,106
Income before income taxes		5,659,050		6,873,935		7,514,226
Provision for income taxes (Note 9)		1,658,300		2,062,300		2,499,500
Net income	$	4,000,750	$	4,811,635	$	5,014,726
Basic earnings per common share (Note 18)	$	2.96	$	3.37	$	3.29
Earnings per common share - assuming dilution (Note 18)		2.93		3.32		3.20
Dividends declared per common share		1.40		1.32		1.16
See Notes to Consolidated Financial Statements.

32

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2007, 2006 and 2005
												Unearned
												Shares, Employee			Accumulated
						Additional						Stock			Other						Total
	Comprehensive		Common			Paid-in			Retained			Ownership			Comprehensive			Treasury			Stockholders’
	Income		Stock			Capital			Earnings			Plan			Income (Loss)			Stock			Equity
Balance, December 31, 2004			$	15,305		$	18,681,041		$	23,438,369		$	(81,200	)	$	(519,309	)	$	-		$	41,534,206
Comprehensive income:
Net income	$	5,014,726		-			-			5,014,726			-			-			-			5,014,726
Other comprehensive income, net of
reclassification adjustment and tax (Note 3)		504,025		-			-			-			-			504,025			-			504,025
Total comprehensive income	$	5,518,751
Purchase of 50,932 shares of Treasury stock				-			-			-			-			-			(1,947,167	)		(1,947,167	)
Dividends on common stock				-			-			(1,765,053	)		-			-			-			(1,765,053	)
Retirement of 50,932 shares of Treasury stock				(509	)		(1,105,961	)		(840,697	)		-			-			1,947,167			-
Effect of contribution to employee stock ownership plan				-			189,875			-			65,503			-			-			255,378
Issuance of 28,105 shares of common stock as a
result of stock options exercised				281			682,104			-			-			-			-			682,385
Balance, December 31, 2005				15,077			18,447,059			25,847,345			(15,697	)		(15,284	)		-			44,278,500
Comprehensive income:
Net income	$	4,811,635		-			-			4,811,635			-			-			-			4,811,635
Other comprehensive income, net of
reclassification adjustment and tax (Note 3)		111,284		-			-			-			-			111,284			-			111,284
Total comprehensive income	$	4,922,919
Purchase of 151,250 shares of Treasury stock				-			-			-			-			-			(5,945,505	)		(5,945,505	)
Dividends on common stock				-			-			(1,867,530	)		-			-			-			(1,867,530	)
Retirement of 151,250 shares of Treasury stock				(1,512	)		(1,510,988	)		(4,433,005	)		-			-			5,945,505			-
Effect of contribution to employee stock ownership plan				-			44,261			-			15,697			-			-			59,958
Employee stock-based compensation expense				-			113,147			-			-			-			-			113,147
Issuance of 24,200 shares of common stock as a
result of stock options exercised				242			630,218			-			-			-			-			630,460
Balance, December 31, 2006				13,807			17,723,697			24,358,445			-			96,000			-			42,191,949

(Continued)

33

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Continued)
Years Ended December 31, 2007, 2006 and 2005
													Unearned
													Shares, Employee		Accumulated
							Additional						Stock		Other						Total
	Comprehensive			Common			Paid-in			Retained			Ownership		Comprehensive			Treasury			Stockholders’
	Income			Stock			Capital			Earnings			Plan		Income (Loss)			Stock			Equity
Comprehensive income:
Cumulative effect of adoption of FIN 48				$	-		$	-		$	(200,000	)	$	-	$	-		$	-		$	(200,000	)
Net income	$	4,000,750			-			-			4,000,750			-		-			-			4,000,750
Other comprehensive income (loss), net of
reclassification adjustment and tax (Note 3)		(1,302,148	)		-			-			-			-		(1,302,148	)		-			(1,302,148	)
Total comprehensive income	$	2,698,602
Purchase of 59,500 shares of Treasury stock					-			-			-			-		-			(2,377,500	)		(2,377,500	)
Dividends on common stock					-			-			(1,893,673	)		-		-			-			(1,893,673	)
Retirement of 59,500 shares of Treasury stock					(595	)		(594,405	)		(1,782,500	)		-		-			2,377,500			-
Employee stock-based compensation expense					23			127,830			-			-		-			-			127,853
Issuance of 15,700 shares of common stock
as a result of stock options exercised					157			429,322			-			-		-			-			429,479
Balance, December 31, 2007				$	13,392		$	17,686,444		$	24,483,022		$	-	$	(1,206,148	)	$	-		$	40,976,710
See Notes to Consolidated Financial Statements.

34

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,000,750		$	4,811,635		$	5,014,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses		655,000			240,000			260,000
Depreciation		821,960			777,979			813,829
Amortization and accretion		208,338			410,486			409,436
Deferred taxes		(11,768	)		(140,255	)		(151,064	)
Effect of contribution to employee stock
ownership plan		-			59,958			255,378
Stock-based compensation expense		127,853			113,147			-
Excess benefit related to stock-based compensation		(89,877	)		(182,520	)		-
Gain on sale of foreclosed real estate and loans, net		(487,569	)		(287,056	)		(336,012	)
Provision for impairment of securities available-for-sale		-			-			679,500
Write-down of other real estate owned		-			82,035			181,900
Loss on sale or disposal of equipment and other assets, net		2,837			50,836			26,796
Proceeds from sales of loans held for sale		36,536,776			19,433,905			19,776,886
Originations of loans held for sale		(36,890,523	)		(19,033,940	)		(19,321,555	)
Change in assets and liabilities:
Accrued interest receivable		(16,362	)		(116,171	)		(192,497	)
Prepaid expenses and other assets		(55,897	)		(199,589	)		(283,053	)
Accrued expenses and other liabilities		738,176			966,215			141,838
Net cash provided by operating activities		5,539,694			6,986,665			7,276,108
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans		39,561,748			20,744,260			(405,303	)
Purchase of loans		(40,590,622	)		(40,401,781	)		(24,024,223	)
Proceeds from sale of Federal Home Loan Bank stock		1,245,700			1,206,300			1,082,600
Purchase of Federal Home Loan Bank stock		(833,900	)		(2,926,866	)		(1,932,700	)
Proceeds from maturities and calls of securities
available-for-sale		1,628,051			2,550,786			3,330,724
Purchase of Bank-owned life insurance		(5,000,000	)		-			-
Purchase of premises, equipment and rental real estate		(549,254	)		(2,371,892	)		(1,796,814	)
Net proceeds from sale of foreclosed real estate		280,893			901,251			641,641
Proceeds from sale of equipment		1,722			7,954			9,082
Other		-			242,043			-
Net cash (used in) investing activities		(4,255,662	)		(20,047,945	)		(23,094,993	)

(Continued)

35

North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	5,618,046		$	25,992,227		$	18,003,852
Net increase (decrease) in advances from borrowers for
taxes and insurance		(34,182	)		153,480			41,262
Net (decrease) in short-term borrowings		-			(1,000,000	)		(5,000,000	)
Proceeds from other borrowed funds		17,000,000			32,500,000			21,000,000
Payments of other borrowed funds		(27,528,763	)		(26,036,180	)		(14,530,952	)
Purchase of common stock for retirement		(2,377,500	)		(5,945,505	)		(1,947,167	)
Proceeds from issuance of common stock		333,229			447,940			682,385
Excess benefit related to stock-based compensation		89,877			182,520			-
Dividends paid		(1,880,308	)		(1,850,598	)		(1,709,002	)
Net cash provided by (used in) financing activities		(8,779,601	)		24,443,884			16,540,378
Net change in cash and cash equivalents		(7,495,569	)		11,382,604			721,493
CASH AND CASH EQUIVALENTS
Beginning		20,022,276			8,639,672			7,918,179
Ending	$	12,526,707		$	20,022,276		$	8,639,672
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash payments for:
Interest paid to depositors	$	12,579,202		$	9,583,989		$	7,829,434
Interest paid on borrowings		5,266,967			5,161,390			4,712,564
Income taxes		1,759,786			1,974,237			2,651,490
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES, transfer
of loans to foreclosed real estate	$	2,359,562		$	267,273		$	840,215
See Notes to Consolidated Financial Statements.

36

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 ten branch offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny, Clive, West Des Moines, Burlington and Mt. Pleasant, Iowa.

Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, First Federal Investment Services, Inc. (which sells insurance, annuity products and mutual funds), First Iowa Title Services, Inc. (which provides real estate abstracting services) and Northridge Apartments Limited Partnership and Northridge Apartments Limited Partnership II (which own multifamily apartment buildings). 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 and 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of goodwill, unrealized gains and losses on securities available-for-sale and fair value of financial instruments.

Revenue recognition: Interest income and expense is recognized on the accrual method based on the respective outstanding balances. Other revenue is recognized at the time the service is rendered or transaction occurs.

Cash and cash equivalents and cash flows: For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash and balances due from banks. Cash flows from loans, deposits and short-term borrowings are reported net.

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 (loss), net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income.

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

37

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans held for sale: Residential real estate loans, which are originated and intended for resale in the secondary market in the foreseeable future, are classified as held-for-sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

Loans receivable: Loans that management has the intent and ability to hold for the foreseeable future, or until payoff or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, any net deferred fees and/or costs on originated loans and net unearned premiums (discounts). Interest is credited to earnings as earned based on the principal amount outstanding. Deferred bank loan origination fees and/or costs are amortized 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. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluation of the collectibility of loans and prior credit loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem credits, and current economic conditions that may affect the borrower's ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as updated information becomes available

In addition, regulatory agencies, as an integral part of their examination processes, periodically review the Company's allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific and general components. For loans that are classified as impaired, a specific allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan, pursuant to SFAS 114, Accounting by Creditors for impairment of a Loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative and environmental factors, pursuant to SFAS 5, Accounting for Contingencies.

A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

38

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

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.

Premiums (discounts) on first mortgage loans purchased are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments.

Transfers of financial assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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 fair 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 following estimated useful lives:

	Years
Building and improvements		5 - 50
Automobiles, furniture and equipment		3 - 20

Rental real estate: Rental real estate is comprised of two low-income housing, multifamily apartment buildings and equipment which is stated at cost, net of accumulated depreciation of approximately $1,402,000 and $1,256,000 for the years ended December 31, 2007 and 2006, respectively. Depreciation is computed primarily by the straight-line and double-declining balance methods over the estimated useful lives of the assets. Useful lives are the same as used for premises and equipment.

Title plant: Title plant is carried at cost and, in accordance with Statement No. 61, is not depreciated. Costs incurred to maintain and update the title plant are expensed as incurred. During the year ended December 31, 2006, title plant was reduced by $253,552 due to the sale of a branch of First Iowa Title Services.

39

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Goodwill: Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, goodwill is not amortized but is subject to an annual impairment test, or more often if conditions indicate a possible impairment. The Company has completed its annual goodwill impairment test and has determined that there has been no impairment of goodwill. During the year ended December 31, 2006, goodwill was reduced by $23,840 due to the sale of a branch of First Iowa Title Services.

Bank-owned life insurance: The carrying amount of bank-owned life insurance consists of the initial premium paid plus increases in cash value less the carrying amount associated with any death benefit received. Death benefits paid in excess of the applicable carrying amount are recognized as income, which is exempt from income taxes.

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 differences between the reported amounts of assets and liabilities and their income tax basis. 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.

When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

Interest and penalties related to income taxes are recorded as miscellaneous expense in the statements of income.

Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income or loss.

Earnings per share: Basic earnings per common share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the periods presented. The earnings per common share amounts - assuming dilution was 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.

40

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Operating segments: The Company uses the “management approach” for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the management approach model, the Company has determined that its business is comprised of two reporting segments. The Company operates primarily in the banking industry, which accounts for the majority of its revenues, operating income and assets, with the remaining operations consisting of real estate abstracting services, insurance and investment services, and ownership of low-income housing tax credit apartment complexes. The primary source of income for the Company is interest from the origination or purchase of residential real estate, commercial real estate, and consumer loans. The Company accepts deposits from customers in the normal course of business primarily in north central, central and southeastern Iowa.

Stock compensation: Effective January 1, 2006, the Company adopted SFAS No. 123(R), Shared-Based Payments, using the modified prospective transition method. Prior to that date, the Company accounted for stock option awards under APB Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with SFAS No. 123(R), compensation expense for stock-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The recording of such compensation began on January 1, 2006 for shares not yet vested as of that date and for all new grants subsequent to that date. Prior years’ results have not been restated. The exercise price of options granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock-based compensation, since actual historical pre-vesting forfeiture rates on its stock-based incentive awards have been negligible.

Recent accounting pronouncements: In September 2006, the Financial Accounting Standards Board (FASB) issued No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. The requirements of SFAS No. 157 are first effective for our fiscal year beginning January 1, 2008. However, in February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on January 1, 2008 is limited to financial assets and liabilities and any nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company is currently evaluating the impact that the adoption of this statement will have on its financial position, results of operation and cash flows.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115, which provides all entities, including not-for-profit organizations, with an option to report selected financial assets and liabilities at fair value. The objective of the statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. Certain specified items are eligible for the irrevocable fair value measurement option as established by Statement No. 159. Statement No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of Statement No. 157. The Company is currently evaluating the impact that the adoption of this statement will have on its financial position, results of operation and cash flows.

41

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations. SFAS No. 141 replaces the original SFAS. This Statement applies to all transactions in which an entity obtains control of one or more businesses. SFAS No. 141 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values, with limited exceptions, as of the acquisition date. Goodwill is to be recognized as a residual. If the acquisition-date fair value exceeds the consideration transferred, a gain is to be recognized. The Statement generally requires that acquisition costs be expensed. This Statement is effective for the Company for business combinations for which the acquisition date is on or after January 1, 2009. The Company does not expect the adoption of this Statement will have a material impact on its financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 requires companies to report ownership interest in subsidiaries held by other parties (minority interest) be clearly identified, labeled and presented in the consolidated statement of financial condition separately within the equity section. The amount of consolidated net income attributable to the parent company and to the noncontrolling interest is to be clearly identified and presented on the face of the consolidated statement of income. The statement also requires changes in a parent’s ownership interest be accounted for on a consistent basis. This statement is effective for the Company beginning January 1, 2009. The Company does not expect the adoption of this statement will have a material impact on its financial position or results of operations.

Note 2.  Restrictions on Cash and Due from Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. Those reserve balances totaled approximately $2,672,000 and $2,055,000 at December 31, 2007 and 2006, respectively.

42

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3.  Securities

Securities available-for-sale as of December 31, 2007 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
Equity securities:
Mutual fund	$	2,000,000	$	-	$	(62,374	)	$	1,937,626
FHLMC preferred stock		4,819,500		-		(964,700	)		3,854,800
FNMA preferred stock		1,000,000		-		(218,800	)		781,200
		7,819,500		-		(1,245,874	)		6,573,626
Debt securities:
State and local obligations		2,709,025		66,029		(5,022	)		2,770,032
Mortgage-backed securities		2,226,039		6,669		(41,424	)		2,191,284
		4,935,064		72,698		(46,446	)		4,961,316
	$	12,754,564	$	72,698	$	(1,292,320	)	$	11,534,942

Securities available-for-sale as of December 31, 2006 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value
Equity securities:
Mutual fund	$	2,000,000	$	-	$	(54,326	)	$	1,945,674
FHLMC preferred stock		4,819,500		295,000		(51,200	)		5,063,300
FNMA preferred stock		1,000,000		-		(19,000	)		981,000
Other		2,100		6,350		-			8,450
		7,821,600		301,350		(124,526	)		7,998,424
Debt securities:
State and local obligations		3,616,018		76,853		(18,575	)		3,674,296
Mortgage-backed securities		2,963,050		2,777		(84,495	)		2,881,332
		6,579,068		79,630		(103,070	)		6,555,628
	$	14,400,668	$	380,980	$	(227,596	)	$	14,554,052

43

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Securities available-for-sale with carrying amounts of approximately $75,000 and $126,000 at December 31, 2007 and 2006, respectively, were pledged on deposit accounts. Securities available-for-sale with carrying amounts of approximately $1,887,000 and $2,372,000 at December 31, 2007 and 2006, respectively, were pledged as collateral on Federal Home Loan Bank advances.

Gross unrealized losses and estimated fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2007 and 2006, are summarized as follows:

	2007
	Less than 12 Months					12 Months or More					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Equity securities:
Mutual funds	$	-	$	-		$	1,937,626	$	(62,374	)	$	1,937,626	$	(62,374	)
FHLMC preferred stock		3,854,800		(964,700	)		-		-			3,854,800		(964,700	)
FNMA preferred stock		781,200		(218,800	)		-		-			781,200		(218,800	)
		4,636,000		(1,183,500	)		1,937,626		(62,374	)		6,573,626		(1,245,874	)
Debt securities:
State and local obligations		99,749		(251	)		615,229		(4,771	)		714,978		(5,022	)
Mortgage-backed securities		15,514		(42	)		1,887,119		(41,382	)		1,902,633		(41,424	)
		115,263		(293	)		2,502,348		(46,153	)		2,617,611		(46,446	)
	$	4,751,263	$	(1,183,793	)	$	4,439,974	$	(108,527	)	$	9,191,237	$	(1,292,320	)

	2006
	Less than 12 Months					12 Months or More					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Equity securities:
Mutual funds	$	-	$	-		$	1,945,674	$	(54,326	)	$	1,945,674	$	(54,326	)
FHLMC preferred stock		1,948,800		(51,200	)		-		-			1,948,800		(51,200	)
FNMA preferred stock		981,000		(19,000	)		-		-			981,000		(19,000	)
		2,929,800		(70,200	)		1,945,674		(54,326	)		4,875,474		(124,526	)
Debt securities:
State and local obligations		1,414,004		(3,016	)		804,441		(15,559	)		2,218,445		(18,575	)
Mortgage-backed securities		108,438		(96	)		2,372,017		(84,399	)		2,480,455		(84,495	)
		1,522,442		(3,112	)		3,176,458		(99,958	)		4,698,900		(103,070	)
	$	4,452,242	$	(73,312	)	$	5,122,132	$	(154,284	)	$	9,574,374	$	(227,596	)

For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary by the Company. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. During 2005, the Company determined that the unrealized losses related to the FHLMC preferred stock issues were other-than-temporary. Accordingly, an impairment loss of $679,500 was recorded, and the cost basis of the securities was reduced by the same amount.

44

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The amortized cost and fair value of debt securities as of December 31, 2007 by contractual maturity are shown below. Certain securities have call features, which allow the issuer to call the security prior to maturity. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:

	Debt Securities Available-for-Sale
	Amortized
	Cost		Fair Value
Due in one year or less	$	964,004	$	966,992
Due from one to five years		829,025		831,507
Due from five to ten years		915,996		971,533
Mortgage-backed securities		2,226,039		2,191,284
	$	4,935,064	$	4,961,316

There were no material securities sold during 2007, 2006 or 2005 except for Federal Home Loan Bank (FHLB) stock.

Included in the interest income on securities and cash deposits was dividend income of $570,100, $537,166 and $434,251 for the years ended December 31, 2007, 2006 and 2005, respectively.

The components of other comprehensive income (loss) - net unrealized gains (losses) on available-for-sale securities for the years ended December 31, 2007, 2006 and 2005 were as follows:

	2007			2006			2005
Unrealized holding gains (losses) arising
during the period	$	(1,373,006	)	$	177,535		$	124,392
Less reclassification adjustment for impairment
of securities available-for-sale (losses)
realized in net income		-			-			(679,500	)
Net unrealized gains (losses)
before tax benefit (expense)		(1,373,006	)		177,535			803,892
Tax effect		70,858			(66,251	)		(299,867	)
Other comprehensive income
(loss) - net unrealized gains
(losses) on securities	$	(1,302,148	)	$	111,284		$	504,025

45

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4.  Loans Receivable

Loans receivable at December 31, 2007 and 2006 are summarized as follows:

	2007			2006
First mortgage loans:
Secured by one- to four-family residences	$	195,586,415		$	214,498,586
Secured by:
Multifamily properties		56,586,779			65,807,585
Commercial properties		109,186,009			95,508,476
Construction loans		17,385,195			12,090,658
Total first mortgage loans		378,744,398			387,905,305
Consumer loans:
Automobile		12,666,770			10,458,878
Second mortgage		54,585,671			49,069,688
Other		6,460,289			5,901,097
Total consumer loans		73,712,730			65,429,663
Total loans		452,457,128			453,334,968
Undisbursed portion of construction loans		(2,363,622	)		(1,217,149	)
Unearned premiums, net		369,817			583,777
Net deferred loan origination (fees)		(119,036	)		(165,252	)
Allowance for loan losses		(3,486,851	)		(3,493,085	)
	$	446,857,436		$	449,043,259

Activity in the allowance for loan losses is summarized as follows for the years ended December 31:

	2007			2006			2005
Balance, beginning	$	3,493,085		$	3,325,631		$	3,235,327
Provision charged to income		655,000			240,000			260,000
Loans charged off		(673,087	)		(91,829	)		(187,108	)
Recoveries		11,853			19,283			17,412
Balance, ending	$	3,486,851		$	3,493,085		$	3,325,631

46

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following is a summary of information pertaining to impaired loans:

	December 31,
	2007		2006
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		2,424,021		606,924
Total impaired loans	$	2,424,021	$	606,924
Valuation allowance related to impaired loans	$	291,763	$	109,760
Total nonaccrual loans	$	2,382,350	$	579,000
Total loans past due 90 days or more and still accruing	$	-	$	-

The average investment in impaired loans during the years ended December 31, 2007, 2006 and 2005 totaled $1,819,491, $739,601 and $589,756, respectively. Interest income recognized on impaired loans 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 Company consisted of the following for the years ended December 31, 2007 and 2006:

	2007			2006
Beginning balance	$	328,281		$	349,990
New loans		-			7,500
Change in status		(164,301	)		-
Repayments		(8,556	)		(29,209	)
Ending balance	$	155,424		$	328,281

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, 2007 and 2006 are $68,869,431 and $51,348,477, respectively. Included in deposits are custodial escrow balances maintained in connection with the foregoing loan servicing of $577,416 and $432,143 at December 31, 2007 and 2006, respectively.

47

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 6.  Premises and Equipment

Premises and equipment consisted of the following at December 31:

	2007		2006
Land	$	3,765,799	$	3,765,799
Buildings and improvements		10,876,385		10,932,181
Leasehold improvements		36,829		35,259
Furniture, fixtures and equipment		4,356,388		4,065,577
Vehicles		156,808		127,306
		19,192,209		18,926,122
Less accumulated depreciation		6,725,904		6,292,411
	$	12,466,305	$	12,633,711

Note 7.  Deposits

Deposits at December 31 were as follows:

	2007		2006
Demand and NOW accounts:
Noninterest-bearing	$	13,672,614	$	12,788,046
Interest-bearing		54,179,548		49,635,608
Savings accounts		24,533,427		25,160,440
Money market savings		33,050,820		34,687,781
Certificates of deposit		240,511,447		238,057,935
	$	365,947,856	$	360,329,810

At December 31, 2007, scheduled maturities of certificates of deposit were as follows:

Year ending December 31:
2008	$	143,970,430
2009		55,506,667
2010		15,241,989
2011		12,171,801
2012		13,620,560
	$	240,511,447

48

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Interest expense on deposits consisted of the following:

	Years Ended December 31,
	2007		2006		2005
NOW accounts	$	176,140	$	91,296	$	88,167
Savings accounts		125,659		86,853		90,916
Money market savings		933,391		957,181		972,667
Certificates of deposit		11,651,226		9,118,769		6,743,170
	$	12,886,416	$	10,254,099	$	7,894,920

The aggregate amounts of certificates of deposit in excess of $100,000 were $54,960,393 and $55,694,178 as of December 31, 2007 and 2006, respectively. Certificates of deposit include approximately $23,635,000 and $30,400,000 of brokered certificates of deposit as of December 31, 2007 and 2006, respectively.

Note 8.  Borrowed Funds

Borrowed funds at December 31, 2007 consist of borrowings from the FHLB as follows:

	Weighted-
Stated	Average
Maturity	Interest Rate			Amount		Features
2008		4.60	%	$	26,500,000		Includes $5.0 million callable, various dates in 2008
2009		5.08			24,000,000
2010		5.61			21,500,000		Includes $17.5 million callable, various dates in 2008
2011		4.79			15,000,000		Includes $10.0 million callable February 2008 and
							$5.0 million callable May 2009
2012		4.75			10,000,000		Includes $5.0 million callable April 2009 and
							$5.0 million callable April 2010
2018		3.83			378,800		15-year amortizing, repayable in 2008
		4.98	%	$	97,378,800

At December 31, 2007, the Company had an unsecured $3,000,000 line of credit agreement with a bank. The line of credit bears interest at LIBOR plus 1.60% (6.84% at December 31, 2007) and matures October 1, 2008. There were no borrowings outstanding at December 31, 2007.

Borrowed funds at December 31, 2006 included borrowings from the FHLB of $107,907,563. Such borrowings carried a weighted-average interest rate of 4.78% with maturities ranging from 2007 through 2018.

The FHLB borrowings are collateralized by FHLB stock, certain securities available-for-sale and qualifying first and second mortgage loans representing various percentages of the total borrowings outstanding.

49

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9.  Income Taxes and Retained Earnings

Under previous law, the provisions of the IRS and similar sections of Iowa law 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. 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.

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, 2007, retained earnings contains 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.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under FIN 48, the Company recognizes the tax benefits from an uncertain tax position only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. As a result of the implementation of FIN 48, the Company recognized an increase in the liability for unrecognized tax benefits plus associated accrued interest and penalties of $200,000, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

Income tax expense is summarized as follows:

	Years Ended December 31,
	2007			2006			2005
Current	$	1,670,068		$	2,202,555		$	2,650,564
Deferred		(11,768	)		(140,255	)		(151,064	)
	$	1,658,300		$	2,062,300		$	2,499,500

50

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, 2007 and 2006:

	2007			2006
Deferred tax assets:
Allowance for loan losses	$	1,301,000		$	1,303,000
Impairment on available-for-sale securities		253,000			253,000
Deferred directors fees and compensation		49,000			47,000
Unrealized losses on securities available-for-sale		455,000			-
Deferred income		108,000			111,000
Accrued expenses		81,000			44,000
Dividends on employee stock ownership plan		84,000			79,000
Stock-based compensation expense		72,000			42,000
Other		19,000			16,000
Total gross deferred tax assets		2,422,000			1,895,000
Valuation allowance		(682,000	)		(236,000	)
Net deferred tax assets		1,740,000			1,659,000
Deferred tax liabilities:
Federal Home Loan Bank stock dividend		13,000			17,000
Premises and equipment		201,000			186,000
Unrealized gains on securities available-for-sale		-			57,000
Title plant		175,000			161,000
Servicing rights		140,000			111,000
Other		100,694			99,320
Total gross deferred tax liabilities		629,694			631,320
Net deferred tax assets	$	1,110,306		$	1,027,680

The valuation allowance for deferred tax assets at December 31, 2007 and 2006, respectively, totaled $682,000 and $236,000. The net change in the valuation allowance for the year ended December 31, 2007 was an increase of $446,000. The valuation allowance and the change in valuation allowance relate to unrealized capital losses on certain equity investments in which the Company does not expect to be able to realize related tax benefits because of limitations on utilization of capital losses only against capital gains for tax purposes.

51

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:

	Year Ended December 31,
	2007						2006						2005
				Percent						Percent						Percent
				of Pretax						of Pretax						of Pretax
	Amount			Income			Amount			Income			Amount			Income
Income before income taxes	$	1,924,077			34.0	%	$	2,337,138			34.0	%	$	2,554,837			34.0	%
Nontaxable income		(145,502	)		(2.6	)		(132,204	)		(1.9	)		(142,790	)		(1.9	)
State income tax, net of
federal income tax benefit		135,809			2.4			163,614			2.4			146,322			2.0
Low-income housing tax credit		(180,578	)		(3.2	)		(278,468	)		(4.1	)		(278,468	)		(3.7	)
ESOP		(76,208	)		(1.3	)		(57,178	)		(0.8	)		(103	)		-
Increase to valuation
allowance		3,856			0.1			5,246			0.1			231,000			3.1
Other		(3,154	)		(0.1	)		24,152			0.3			(11,298	)		(0.2	)
	$	1,658,300			29.3	%	$	2,062,300			30.0	%	$	2,499,500			33.3	%

The Company has established contingency reserves for material, known tax exposures, including potential tax audit adjustments with respect to its state nexus issues. The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances (i.e., new information) surrounding a tax issue, and (ii) any difference from the Company’s tax position as recorded in the financial statements and the final resolution of a tax issue during the period.

The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of applying this interpretation resulted in a reduction of $200,000 to the January 1, 2007 balance of retained earnings. There have been no subsequent changes to this liability.

Income tax returns for the years 2004 through 2007, with few exceptions, remain open to examination by federal and state taxing authorities.

Note 10.  Employee Benefit Plans

Retirement plans: The Bank participates in a multiemployer defined benefit pension plan covering substantially all full-time employees. This is a multiemployer plan, and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. The Bank recognized $547,000, $614,000 and $566,000 in pension expense for the years ended December 31, 2007, 2006 and 2005, respectively.

The Bank has a defined contribution plan covering substantially all employees. Contribution expense for the years ended December 31, 2007, 2006 and 2005 totaled $133,260, $127,450 and none, respectively.

52

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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 were borrowed from the Company and final repayment was made in 2006.

Prior to 2007, the Bank made contributions to the ESOP equal to the ESOP’s debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares were 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 were 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 Company’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 Company’s stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 2007 and 2006.

As shares were released, the Bank reported 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 were recorded as a reduction of debt and accrued interest. ESOP compensation expense totaled none, $62,953 and $254,711 for the years ended December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2006, all shares held by the ESOP were allocated. Shares held by the ESOP totaled 155,266 and 164,850 as of December 31, 2007 and 2006, respectively.

Employment agreements: The Company and the Bank have entered into employment agreements with key officers. Under the terms of the agreements, the officers are 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.

53

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11.  Stock Based Compensation Plans

In 1996, the stockholders of the Company ratified the 1996 Incentive Stock Option Plan (the Plan), which permitted the grant of 441,105 shares of common stock to its directors and employees. The Plan was intended to promote stock ownership by directors and selected officers 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. The Plan provided for the grant of options at an exercise price equal to the market price of the Company’s stock on the date of grant. The option awards have a 10-year contractual term. Options granted to officers vest in five equal annual installments commencing on the first anniversary of the grant date and continuing 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. Options granted to directors are vested immediately and expire ten years from the date of grant, unless an earlier expiration date is triggered by removal for cause. All awards were nonqualified stock options. Effective April 2006, upon stockholder approval of the North Central Bancshares, Inc. 2006 Stock Incentive Plan (the 2006 Plan), no further awards under the Plan may be granted.

On April 28, 2006, the stockholders of the Company approved the Company’s adoption of the 2006 Plan, which permits the grant of 125,000 shares of common stock to its directors and officers. The 2006 Plan is intended to promote growth and profitability, to provide certain key officers and non-employee directors of the Company with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence, and to provide such individuals with an equity interest in the Company. Awards granted under the 2006 Plan may include stock options, restricted stock grants and stock appreciation rights. The 2006 Plan provides for the grant of options at an exercise price no less than the market price of the Company’s stock on the date of grant. The option awards may have a contractual term up to 10 years. The 2006 Plan will be administered by the Compensation Committee of the Board of Directors, including determining the type of awards made and establishing other terms and conditions applicable to the award. As of December 31, 2007, a total of 9,095 shares have been awarded under this plan in the form of stock options and restricted stock grants. Shares available for grant under the 2006 Plan total 115,905 shares as of December 31, 2007.

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payments, using the modified prospective transition method. Prior to that date the Company accounted for stock option awards under APB Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with SFAS No. 123(R), compensation expense for stock-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The recording of such compensation began on January 1, 2006 for shares not yet vested as of that date and for all new grants subsequent to that date. Prior years’ results have not been restated. The exercise price of options granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock-based compensation, since actual historical pre-vesting forfeiture rates on its stock-based incentive awards have been negligible.

Total employee stock-based compensation was as follows as of December 31:

	2007		2006		2005
Total employee stock-based compensation
expense recognized in income, net of tax effect
of $46,300 in 2007 and $41,865 in 2006	$	81,553	$	71,282	$	-

54

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following table presents the effects on net income and earnings per share had stock-based compensation expense been recorded for the years ended December 31, 2005 based on the fair value method under FAS 123(R):

	Year Ended
	December 31,
	2005
Net income as reported	$	5,014,726
Total employee stock-based compensation expense
determined under fair-value-based method for all
awards, net of tax effects		(40,513	)
Pro forma net income	$	4,974,213
Earnings per common share, basic:
As reported	$	3.29
Pro forma		3.26
Earnings per common share, diluted:
As reported	$	3.20
Pro forma		3.17

As of December 31, 2007, stock-based compensation expense not yet recognized in income totaled $177,719, which is expected to be recognized over a weighted average remaining period of 2.7 years.

At grant date, the fair value of options awarded to recipients is estimated using a Black-Scholes valuation model. The exercise price of stock options equals the fair market value of the underlying stock at the date of grant. The following table shows the key valuation assumptions used for options granted during the years ended December 31, 2007, 2006 and 2005, and other information. Options are issued for 10-year periods with 100% vesting generally occurring either at grant date or over a five-year period.

	Year Ended December 31,
	2007			2006			2005
Risk-free interest rate		4.87	%		4.41	%		4.08	%
Weighted-average expected price volatility		16.42	%		21.74	%		15.25	%
Expected life (years)		8			8			8
Weighted-average expected dividend yield		3.48	%		3.28	%		2.87	%
Weighted-average fair value of options
granted during period	$	6.96		$	8.08		$	6.55
Intrinsic value of options exercised
during period	$	289,399		$	489,331		$	652,118

55

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The table below reflects option activity for the period indicated:

				Weighted-		Weighted-
				Average		Average
				Exercise		Remaining		Aggregate
	Number			Price per		Contractual		Intrinsic
	of Shares			Share		Term Years		Value
Outstanding, December 31, 2006		101,400		$	30.52
Granted		5,000			40.25
Forfeited		(11,500	)		37.93
Exercised		(15,700	)		21.22
Outstanding, December 31, 2007		79,200		$	31.89		6.1	$	333,630
Exercisable at December 31, 2007		59,400		$	29.54		5.3	$	333,630

A summary of the status of the Company’s nonvested restricted shares as of December 31, 2007, and changes during the year ended December 31, 2007, is presented below:

			Weighted-
			Average
			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2007		-	$	-
Granted		4,095		38.05
Vested		995		40.25
Forfeited		-		-
Nonvested at December 31, 2007		3,100	$	37.34

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.

56

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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 adjusted average assets (as defined) and tangible capital to adjusted assets. Management believes, as of December 31, 2007, the Bank meets all capital adequacy requirements to which it is subject.

The most recent notification from the federal regulatory agency categorizes the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since those notifications that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios are also presented in the following table:

											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)
As of December 31, 2007:
Total Capital (to risk-
weighted assets)	$	38,582		10.3	%	$	30,046		8.0	%	$	37,558		10.0	%
Tier I Capital (to risk-
weighted assets)		35,176		9.4			15,023		4.0			22,535		6.0
Tier I (Core) Capital
(to adjusted assets)		35,176		7.0			15,160		3.0			25,267		5.0
Tangible Capital (to
adjusted assets)		35,176		7.0			7,580		1.5			-		-
As of December 31, 2006:
Total Capital (to risk-
weighted assets)	$	39,851		11.4	%	$	28,072		8.0	%	$	35,090		10.0	%
Tier I Capital (to risk-
weighted assets)		36,174		10.3			14,036		4.0			21,054		6.0
Tier I (Core) Capital
(to adjusted assets)		36,174		7.1			15,330		3.0			25,549		5.0
Tangible Capital (to
adjusted assets)		36,174		7.1			7,665		1.5			-		-

Limitations on dividends and other capital distributions: Office of Thrift Supervision (OTS) imposes limitations upon all capital distributions by savings institutions, including cash dividends. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution (Tier 1 Association) and has not been advised by the OTS that it is in need of more than normal supervision could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year provided the total amount of capital distributions (including the proposed capital distribution) for the applicable calendar year does not exceed the institution’s year-to-date net income plus retained net income for the preceding two years. Any additional capital distributions would require prior regulatory approval.

57

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13.  Other Noninterest Expense

Other noninterest expense amounts are summarized as follows for the years ended December 31:

	2007		2006		2005
Advertising and promotion	$	523,945	$	493,412	$	433,631
Professional fees		538,291		324,277		424,418
Printing, postage, stationery and supplies		449,085		430,669		411,657
Checking account charges		290,313		261,975		275,001
Insurance		154,791		158,862		172,987
OTS general assessment		122,058		113,749		106,105
Telephone		137,029		127,243		132,932
Apartment operating costs		307,430		318,091		325,913
Employee costs		191,878		130,694		113,897
ATM expense		293,633		385,004		396,755
Other		959,230		983,295		936,625
	$	3,967,683	$	3,727,271	$	3,729,921

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 it does for on-statement of financial condition instruments.

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:

	Contract or Notional Amount
	December 31,
	2007		2006
Mortgage loans (including one- to four-family, multifamily
and commercial loans)	$	1,108,373	$	3,750,450
Undisbursed overdraft loan privileges and undisbursed home
equity lines of credit		8,563,111		6,600,207

At December 31, 2007, the mortgage loan commitments above were comprised of fixed-rate commitments carrying a weighted-average interest rate of 6.21%.

58

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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 creditworthiness 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.

Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

Note 15.  Lending Activities and Concentrations of Credit Risk

The Bank generally originates single family residential loans within its primary lending area of Webster, Story, Des Moines, Dallas, Polk and Henry counties in Iowa. 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 $133,759,000 of the Bank’s first mortgage loan portfolio at December 31, 2007 consisted of loans purchased or originated outside the state of Iowa. At December 31, 2007, concentrations by state include California with $25,182,000, Washington with $13,573,000 and Wisconsin with $10,333,000. These are generally one- to four-family, multifamily residential and commercial real estate loans secured by the underlying properties. 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 consists of security agreements and/or Uniform Commercial Code filings on the purchased asset.

Note 16.  Fair Values of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. 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. FASB 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 and due from banks: The carrying amount of cash and due from banks 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.

59

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

Commitments to extend credit: The fair values of commitments to extend credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties. At December 31, 2007 and 2006, the carrying amount and fair value of the commitments were not significant.

The carrying amounts and fair values of the Company’s financial instruments as of December 31, 2007 and 2006 were as follows:

	2007				2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(nearest 000)				(nearest 000)
Financial assets:
Cash	$	12,526,707	$	12,527,000	$	20,022,276	$	20,022,000
Securities		11,534,942		11,535,000		14,554,052		14,554,000
FHLB stock		5,064,200		5,064,000		5,476,000		5,476,000
Loans, net		446,857,436		442,576,000		449,043,259		443,985,000
Loans held for sale		1,402,488		1,402,000		583,700		584,000
Accrued interest receivable		2,278,635		2,279,000		2,262,273		2,262,000
Financial liabilities:
Deposits		365,947,856		369,191,000		360,329,810		362,258,000
Borrowed funds		97,378,800		99,064,000		107,907,563		107,606,000
Accrued interest payable		1,196,960		1,197,000		889,746		890,000

60

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 17.  Restriction on Stockholders’ Equity

In 1996, the Company completed a Plan of Conversion and Reorganization, whereby the Company became a publicly traded Iowa corporation, and the previous mutual organization ceased to exist. 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 previous mutual holding company (totaling approximately $1,897,000), 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.

Note 18.  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:

	2007		2006		2005
Numerator, income available to common
stockholders	$	4,000,750	$	4,811,635	$	5,014,726
Denominator:
Weighted-average shares outstanding		1,353,399		1,430,304		1,529,683
Less unallocated ESOP shares		-		392		5,627
Weighted-average shares outstanding - basic		1,353,399		1,429,912		1,524,056
Dilutive effect of stock options		11,907		18,945		42,792
Dilutive effect of restricted stock		1,989		-		-
Weighted-average shares outstanding -
assuming dilution		1,367,295		1,448,857		1,566,848
Basic earnings per common share	$	2.96	$	3.37	$	3.29
Earnings per common share - assuming dilution		2.93		3.32		3.20

61

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 19.  North Central Bancshares, Inc. (Parent Company Only) Condensed Financial Statements

Statements of Financial Condition
December 31, 2007 and 2006
	2007			2006
ASSETS
Cash	$	39,497		$	137,140
Securities available-for-sale		-			8,450
Loans receivable, net		606,875			611,473
Investment in First Federal Savings Bank of Iowa		40,771,877			41,897,207
Deferred taxes		8,721			253
Prepaid and other assets		18,721			3,267
Total assets	$	41,445,691		$	42,657,790
LIABILITIES AND EQUITY
LIABILITIES
Dividend payable	$	468,981		$	455,616
Accrued expenses and other liabilities		-			10,225
Total liabilities		468,981			465,841
EQUITY
Common stock		13,392			13,807
Additional paid-in capital		17,686,444			17,723,697
Retained earnings		24,483,022			24,358,445
Unearned shares, employee stock ownership plan		-			-
Accumulated other comprehensive income (loss)		(1,206,148	)		96,000
Total equity		40,976,710			42,191,949
Total liabilities and equity	$	41,445,691		$	42,657,790

62

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Statements of Income
Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
Operating income:
Equity in net income of subsidiary	$	4,085,905		$	4,856,011		$	5,033,977
Interest income		21,230			100,913			197,934
Other		7,750			-			-
		4,114,885			4,956,924			5,231,911
Operating expenses:
Salaries and employee benefits		15,300			18,000			17,100
Interest expense		5,243			-			-
Other		147,992			167,889			218,085
		168,535			185,889			235,185
Income before income tax (benefit)		3,946,350			4,771,035			4,996,726
Income tax (benefit)		(54,400	)		(40,600	)		(18,000	)
Net income	$	4,000,750		$	4,811,635		$	5,014,726

63

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,000,750		$	4,811,635		$	5,014,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of First Federal Savings
Bank of Iowa		(4,085,905	)		(4,856,011	)		(5,033,977	)
Dividends received from First Federal Savings
Bank of Iowa		3,937,000			4,387,000			4,375,000
Change in deferred income taxes		(5,927	)		(295,058	)		(242,782	)
Change in assets and liabilities:
Prepaid expenses and other assets		(13,355	)		(3,267	)		17,702
Accrued expenses and other liabilities		(10,225	)		8,008			2,217
Net cash provided by operating activities		3,822,338			4,052,307			4,132,886
CASH FLOWS FROM INVESTING ACTIVITIES, net
(increase) decrease in loans receivable		4,598			2,865,040			(1,171,513	)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock for retirement		(2,377,500	)		(5,945,505	)		(1,947,168	)
Proceeds from issuance of common stock		333,229			743,606			682,385
Dividends paid		(1,880,308	)		(1,850,599	)		(1,709,001	)
Net cash (used in) financing activities		(3,924,579	)		(7,052,498	)		(2,973,784	)
Net (decrease) in cash		(97,643	)		(135,151	)		(12,411	)
CASH
Beginning		137,140			272,291			284,702
Ending	$	39,497		$	137,140		$	272,291

64

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 20.  Quarterly Results of Operations (Unaudited)

	Year Ended December 31, 2007
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share amounts)
Interest income	$	7,553	$	7,881	$	7,990	$	7,695
Interest expense		4,278		4,556		4,716		4,603
Net interest income		3,275		3,325		3,274		3,092
Provision for loan losses		30		60		245		320
Net interest income after
provision for loan losses		3,245		3,265		3,029		2,772
Noninterest income:
Fees and service charges		1,007		1,078		1,229		1,267
Abstract fees		238		266		246		241
Mortgage banking income		57		112		149		147
Other income		340		300		322		393
Total noninterest income		1,642		1,756		1,946		2,048
Noninterest expense:
Compensation and employee benefits		1,955		1,956		1,897		1,891
Premises and equipment		387		389		382		415
Data processing		167		181		200		257
Other		922		1,016		1,029		1,000
Total noninterest expense		3,431		3,542		3,508		3,563
Income before income taxes		1,456		1,479		1,467		1,257
Provision for income taxes		421		443		455		339
Net income	$	1,035	$	1,036	$	1,012	$	918
Basic earnings per common share	$	0.75	$	0.76	$	0.75	$	0.69
Diluted earnings per common share	$	0.75	$	0.75	$	0.75	$	0.68

65

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

	Year Ended December 31, 2006
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share amounts)
Interest income	$	6,775	$	6,951	$	7,194	$	7,617
Interest expense		3,452		3,663		3,976		4,325
Net interest income		3,323		3,288		3,218		3,292
Provision for loan losses		60		60		60		60
Net interest income after
provision for loan losses		3,263		3,228		3,158		3,232
Noninterest income:
Fees and service charges		1,259		1,042		996		1,084
Abstract fees		333		350		283		257
Mortgage banking income		38		60		68		80
Other income		296		320		277		368
Total noninterest income		1,926		1,772		1,624		1,789
Noninterest expense:
Compensation and employee benefits		1,882		1,757		1,725		1,858
Premises and equipment		390		358		378		373
Data processing		162		164		178		166
Other		942		939		949		897
Total noninterest expense		3,376		3,218		3,230		3,294
Income before income taxes		1,813		1,782		1,552		1,727
Provision for income taxes		572		525		446		519
Net income	$	1,241	$	1,257	$	1,106	$	1,208
Basic earnings per common share	$	0.84	$	0.88	$	0.78	$	0.87
Diluted earnings per common share	$	0.82	$	0.87	$	0.77	$	0.86

66

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 21.  Segment Reporting

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

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

	Year Ended December 31, 2007
	Traditional
	Banking		All Others			Total
Interest income	$	31,119,293	$	-		$	31,119,293
Interest expense		18,153,383		-			18,153,383
Net interest income		12,965,910		-			12,965,910
Provision for loan losses		655,000		-			655,000
Net interest income after
provision for loan losses		12,310,910		-			12,310,910
Noninterest income		5,296,518		2,095,878			7,392,396
Noninterest expense		12,809,240		1,235,016			14,044,256
Income before income taxes		4,798,188		860,862			5,659,050
Provision for income taxes (Note 9)		1,616,600		41,700			1,658,300
Net income	$	3,181,588	$	819,162		$	4,000,750
Intersegment revenue (expense)	$	919,666	$	(919,666	)	$	-
Total assets		506,663,568		3,529,396			510,192,964
Total deposits		365,947,856		-			365,947,856

67

North Central Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

	Year Ended December 31, 2006
	Traditional
	Banking		All Others			Total
Interest income	$	28,537,002	$	-		$	28,537,002
Interest expense		15,415,401		46			15,415,447
Net interest income (loss)		13,121,601		(46	)		13,121,555
Provision for loan losses		240,000		-			240,000
Net interest income (loss) after
provision for loan losses		12,881,601		(46	)		12,881,555
Noninterest income		4,826,189		2,285,347			7,111,536
Noninterest expense		11,684,363		1,434,793			13,119,156
Income before income taxes		6,023,427		850,508			6,873,935
Provision for income taxes (Note 9)		2,006,400		55,900			2,062,300
Net income	$	4,017,027	$	794,608		$	4,811,635
Intersegment revenue (expense)	$	978,063	$	(978,063	)	$	-
Total assets		511,854,522		3,660,206			515,514,728
Total deposits		360,329,810		-			360,329,810

68

First Federal Savings Bank

OF IOWA

www.firstfederaliowa.com

Fort Dodge 825 Central 515-576-7531 Fort Dodge 201 So. 25^th St. 515-576-3177 Nevada 404 Lincoln Hwy. 515-382-5408 Ames 316 So. Duff 515-232-4304 Perry 1111 - 141^st St. 515-465-3187

Ankeny 2110 SE Delaware 515-963-4488 Clive 13150 Hickman Road 515-440-6300 Burlington 1010 No. Roosevelt 319-754-6521 Burlington 321 No. Third St. 319-754-7517 Mt. Pleasant 102 So. Main 319-385-8000 West Des Moines 120 So. 68^th St. 515-226-0800