UNITED STATES
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
------------ ------------
Commission File Number 0-22800
NORTH BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-3915073
- -------- ----------
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
100 West North Avenue, Chicago, Illinois 60610-1399
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 664-4320
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
As of April 30, 2003, there were 1,142,927 outstanding shares of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
1
NORTH BANCSHARES, INC.
Table of Contents
Part I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Consolidated Financial Statements 3
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Controls and Procedures 13
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
FORM 10-QSB SIGNATURE PAGE 14
CERTIFICATION 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS MARCH 31, 2003 DECEMBER 31, 2002
Cash and due from Banks $1,899 $ 1,629
Interest-bearing deposits 3,224 4,338
Federal funds sold 19,419 12,253
Investment in dollar denominated mutual funds 83 83
- ------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 24,625 18,303
Securities available for sale 25,068 26,875
Stock in Federal Home Loan Bank of Chicago 4,049 3,999
Loans receivable, net of allowance for loan losses of $326 at
March 31, 2003 and at December 31, 2002 80,492 86,464
Accrued interest receivable 484 503
Premises and equipment, net 872 850
Other assets 854 799
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS 136,444 137,793
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Deposits
Interest-bearing 84,879 85,074
Non-interest-bearing 4,910 5,076
Borrowed Funds 30,000 31,000
Advance payments by borrowers for taxes and insurance 454 871
Accrued interest payable and other liabilities 2,394 1,867
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 122,637 123,888
- ------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value. Authorized 500,000 shares; none
outstanding - -
Common stock, $.01 par value. Authorized 3,500,000 shares; issued
1,914,075; outstanding 1,142,927 at March 31, 2003 and 1,138,029 at
December 31, 2002 19 19
Additional paid in capital 13,224 13,284
Retained earnings, substantially restricted 12,080 12,140
Treasury stock, at cost (771,148 shares at March 31, 2003 and 776,046
shares at December 31, 2002) (11,668) (11,745)
Accumulated other comprehensive income 201 259
Unearned stock awards (49) (52)
- ------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,807 13,905
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,444 $137,793
- ------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
3
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
INTEREST INCOME:
Loans receivable $1,431 $1,719
Interest-bearing deposits and federal funds sold 56 58
Securities available for sale 298 303
Dividend on FHLB stock and other interest income 50 34
- -----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,835 2,114
- -----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposit accounts 587 720
Borrowed funds 401 426
- -----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 988 1,146
- -----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 847 968
PROVISION FOR LOAN LOSSES - 18
- -----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 847 950
- -----------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on sale of securities available for sale 27 -
Gain on sale of mortgage loans held for sale 7 11
Other non-interest income 89 74
- -----------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 123 85
- -----------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Compensation and benefits 413 437
Occupancy expense 123 110
Professional fees 40 56
Data processing 72 55
Advertising and promotion 29 24
Other non-interest expense 191 111
- -----------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 868 793
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 102 242
INCOME TAX EXPENSE 36 85
- -----------------------------------------------------------------------------------------
NET INCOME $ 66 $ 157
- -----------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $.06 $.14
Diluted $.06 $.14
- -----------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 1,138,681 1,151,616
Diluted 1,148,354 1,161,030
- -----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $8 $(95)
- ------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial
statements.
4
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2002 AND 2003
(UNAUDITED)
Accumulated
other comp- Common
Additional rehensive Unearned stock
Common paid in Retained Treasury Income stock acquired
Stock capital earnings stock (loss) awards by ESOP Total
Balance at December 31, 2001 $19 13,251 11,928 (11,552) (42) - (111) 13,493
Net income - - 157 - - - - 157
Change in accumulated other
comprehensive income (loss) - - - - (252) - - (252)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - - (95)
ESOP shares earned - 18 - - - - 28 46
Stock awards earned - - - - - 4 - 4
Issuance of stock awards-5,000 shares - (11) - 76 - (65) - -
Purchase of treasury stock, 2,739 shares - - - (33) - - - (33)
Cash dividend ($.11 per share) - - (128) - - - - (128)
Options exercised and reissuance of
treasury stock, 5,000 shares - (32) - 76 - - - 44
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 19 13,226 11,957 (11,433) (294) (61) (83) 13,331
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19 13,284 12,140 (11,745) 259 52 - 13,905
Net income - - 66 - - - - 66
Change in accumulated other
comprehensive income (loss) - - - - (58) - - (58)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - - 8
Stock awards earned - - - - - 3 - 3
Purchase of treasury stock, 2,560 shares - - - (36) - - - (36)
Cash dividend ($.11 per share) - - (126) - - - - (126)
Options exercised and reissuance of
treasury stock, 7,458 shares - (60) - 113 - - - 53
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 $19 13,224 12,080 (11,668) 201 (49) - 13,807
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
5
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
Cash flows from operating activities:
Net Income $ 66 $157
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21 29
Provision for loan losses - 18
Deferred loan fees, net of amortization 25 1
Amortization of premiums and discounts, net (5) 2
ESOP and stock awards expense 3 50
FHLB stock dividend (50) (40)
Gain on sale of loans held for sale (7) (11)
Gain on sale of securities available for sale (27) -
Net changes in loans held for sale 7 11
Net change in accrued interest receivable 19 (8)
Other assets, net (55) (88)
Other liabilities, net 539 (208)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 536 (87)
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities, repayments and calls of securities available for sale 1,797 3,944
Purchase of securities available for sale (3,055) (10,194)
Proceeds from sales of securities available for sale 3,027 -
Loan originations and repayments, net 5,947 (511)
Purchase of premises and equipment (43) (68)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 7,673 (6,829)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposit accounts (361) 281
Proceeds from borrowed funds - 1,000
Repayments of borrowed funds (1,000) -
Net change in advance payments by borrowers for taxes and insurance (417) (362)
Payment of common stock dividends (126) (128)
Proceeds from stock options exercised 53 44
Purchase of treasury stock (36) (33)
- ------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,887) 802
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,322 (6,114)
Cash and cash equivalents at beginning of period 18,303 19,738
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $24,625 $13,624
- ------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $612 $756
Taxes 40 60
- ------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial
statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-B. Accordingly, they
do not include all the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. These interim statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2002 Annual Report on Form 10KSB filed with the Securities and Exchange
Commission. The December 31, 2002 balance sheet presented herein has been
derived from the audited financial statements included on the Company's 2002
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission,
but does not include all disclosures required by generally accepted accounting
principles.
To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses and status of contingencies are particularly subject to change.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments which are normal and recurring in
nature and necessary for a fair presentation of the financial condition as of
March 31, 2003 and results of operations for the three month periods ended March
31, 2003 and March 31, 2002, but are not necessarily indicative of the results
which may be expected for the entire year.
(2) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements
include the accounts of North Bancshares, Inc. (the "Company"), its wholly-owned
subsidiary, North Federal Savings Bank (the "Bank"), and the Bank's subsidiary
North Financial Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(3) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
For the three months
ended March 31,
(In thousands, except share data) 2003 2002
- -----------------------------------------------------------------------------
Numerator:
Net Income $66 157
Denominator:
Basic earnings per share-weighted average
shares outstanding 1,138,681 1,151,616
Effect of dilutive stock options outstanding (1) 9,475 9,414
Effect of dilutive stock awards outstanding (1) 198 -
Diluted earnings per share-adjusted weighted
average shares outstanding 1,148,354 1,161,030
Basic earnings per share .06 .14
Diluted earnings per share .06 .14
==============================================================================
(1) Only options and stock awards where the exercise price is below the
current market price are included in calculating diluted earnings per share.
Stock awards were only considered in the computation of diluted earnings per
share for the three months ended March 31, 2003 because the effects of the
assumed exercise would have been antidilutive in the other periods presented.
7
(4) Comprehensive income (loss)
The Company's comprehensive income includes net income and other
comprehensive income (loss) comprised of unrealized gains or losses on
securities available for sale, net of tax effect, which are also recognized as
separate components of equity.
(5) Stock Repurchase Program
On April 18, 2002, the Company announced a stock repurchase program
that amounts to 50,000 shares or approximately 4.3% of the outstanding shares.
The Company intends to repurchase shares in open market transactions or in
privately negotiated transactions until the program is complete. At March 31,
2003, 23,473 shares had been repurchased under this program at an average cost
of $12.13 per share. Management continues to believe that stock repurchase
programs provide enhanced value to both the Company and its stockholders.
(6) Dividend Declaration
On January 22, 2003, the Company announced that the Board of Directors
declared a quarterly dividend of $.11 per share, which was paid on February 14,
2003 to stockholders of record on January 31, 2003. On April 15, 2003, the
Company announced that the Board of Directors declared a quarterly dividend of
$.11 per share, to be paid on May 15, 2003 to stockholders of record on May 1,
2003.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The primary business of the Company is that of an independent
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Company attracts
deposits from the general public, obtains brokered deposits or borrows funds and
uses such funds to originate or acquire one-to-four family residential
mortgages, loans secured by small apartment buildings or mixed use properties,
equity lines of credit secured by real estate and commercial real estate loans.
The Company also invests in U.S. Government and agency securities, mutual funds
that invest in U.S. Government securities, federal agency mortgage-backed
securities, investment grade securities, common stocks of other financial
institutions and money market accounts.
The Company's consolidated results of operations are primarily
dependent on net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest paid on deposits and
other borrowings less loan loss provisions and to a lesser degree on
non-interest income less non-interest expense and income taxes. The Company's
operating expenses consist principally of employee compensation and benefits,
occupancy expenses, and other non-interest expenses. The Company's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Forward-Looking Statements
When used in this Quarterly Report on Form 10-QSB and in other filings
with the Securities and Exchange Commission, in press releases or other public
or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, the words or phrases "believe," "Will likely
result," "are expected to," "will continue", "is anticipated", "estimate",
"project", "plans," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. You are cautioned not to place undue reliance on
any forward-looking statements, which speak only as of the date made. By their
nature, these statements are subject to numerous uncertainties that could cause
actual results to differ materially from those anticipated in the statements.
Important factors that could cause actual results to differ materially
from the results anticipated or projected include, but are not limited to, the
following: (1) the credit risks of lending activities, including changes in the
level and direction of loan delinquencies and write-offs; (2) changes in
managements's estimate of the adequacy of the allowance for loan losses; (3)
competitive pressures among depository institutions; (4) interest rate movements
and their impact on customer behavior and the Company's net interest margin; (5)
the impact of repricing and competitor's pricing initiatives on loan and deposit
products; (6) the Company's ability to adapt successfully to technological
changes to meet customers' needs and developments in the market place; (7) the
Company's ability to access cost-effective funding; (8) changes in financial
markets and general economic conditions; (9) new legislation or regulatory
changes; (10) changes in accounting principles, policies or guidelines.
The Company does not undertake any obligation to update any
forward-looking statement to reflect circumstances or events that occur after
the date on which the forward-looking statement is made.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, borrowings from the
FHLB of Chicago, prepayment of loans and mortgage-backed securities, sales and
maturities of investment and mortgage-backed securities and occasionally the use
of reverse repurchase agreements. The Bank can also borrow from its
correspondent banks. The Bank uses its liquid resources to fund loan
commitments, to meet operating expenses, to make investments and to fund deposit
withdrawals. Management believes that loan repayments and the Bank's other
sources of funds will be adequate to meet the liquidity needs of the Bank.
The OTS requires the Bank to maintain sufficient liquidity to ensure
its safe and sound operation. At March 31, 2003, the Bank's liquidity ratio was
29.4% compared with 24.8% at December 31, 2002. The increase in liquidity was
primarily due to loan prepayments which were not reinvested into new loans at
the end of the quarter.
Current regulatory standards impose the following capital requirements
on the Bank and other thrifts: a tangible
9
capital ratio expressed as a percentage of total adjusted assets, a leverage
ratio of core capital to total adjusted assets and a risk-based capital standard
expressed as a percentage of risk-adjusted assets. At March 31, 2003, the Bank
exceeded all of its regulatory capital requirements. At such date, the Bank's
core capital, tier 1 capital and risk-based capital of $13.2 million, $13.2
million and $13.5 million, respectively, exceeded the applicable minimum
requirements by $7.7 million or 5.7%, $7.7 million or 5.7%, and $7.9 million or
10.7%, respectively.
Certificates of deposit scheduled to mature in one year or less at
March 31, 2003, totaled approximately $19.1 million. Management believes, based
on its ability to adjust rates on those accounts to market levels, that a
significant portion of such deposits will remain with the Company. The Company
will continue to focus on shifting its liability mix from higher cost
certificates of deposit to lower cost transaction accounts that do not earn
interest and produce fee income. The Company will continue to use retail and
brokered certificates of deposit as alternate funding sources.
Commitments and Contingencies
At March 31, 2003, the Bank had $10.2 million in loan applications
pending approval and closing and unused lines of credit totaling $10.5 million.
The Bank leases a branch office in Wilmette, Illinois. Monthly rent and
maintenance and tax payments amount to $2,358 per month. The Bank signed a
lease for a free standing branch facility in a yet to be constructed shopping
center in the Logan Square neighborhood of Chicago. The office will be
approximately 2,000 square feet and will include a drive thru facility. The
lease has an initial ten year term with an annual average cost of $82,000. In
March, the Community Development Commission of the City of Chicago voted to
rescind it's contract with the developer of the property and placed the property
out for bid. The results of the City's request for proposals and their effect on
the Bank is not known at this time. The Bank has also committed approximately
$65,000 to capital improvement to the Bank's main office in order to address
several deferred maintenance issues.
The following tables disclose contractual obligations and commercial
commitments of the Company as of March 31, 2003:
Total Less Than 1 - 3 Years 4 - 5 Years Over 5
1 Year Years
-------------------------------------------------------------
FHLB advances $30,000 5,000 7,000 2,000 16,000
- ----------------------------------------------------------------------------------------------------------
Total contractual cash obligations $30,000 5,000 7,000 2,000 16,000
==========================================================================================================
Total Amounts Less than 1 - 3 Years 4 - 5 Years Over 5
Committed 1 Year Years
---------------------------------------------------------------
Lines of credit $10,524 328 1,628 8,568 0
Commitments to make loans 8,772 8,772 0 0 0
Other commercial commitments (1) 1,428 1,428 0 0 0
- -----------------------------------------------------------------------------------------------------------
Total commercial commitments $11,952 1,756 $1,628 $8,568 $0
===========================================================================================================
(1) Amounts primarily represent unfunded construction loans.
Changes In Financial Condition
Total assets decreased by $1.4 million and amounted to $136.4 million
at March 31, 2003 from $137.8 million at December 31, 2002. The decrease was
primarily attributable to a $6.0 million decrease in loans receivable and a $1.8
million decerase in securities available for sale offset by a $6.3 million
increase in cash and cash equivalents.
Cash and cash equivalents increased by $6.3 million to $24.6 million at
March 31, 2003 compared with $18.3 million at December 31, 2002. The increase
was due primarily to a $7.2 million increase in federal funds sold. The increase
in federal funds was the result of loan prepayments not reinvested into loans or
securities at the end of the quarter.
Net loans receivable decreased by $6.0 million and amounted to $80.5
million at March 31, 2003 compared with $86.5 million at December 31, 2002. The
decrease was primarily attributable to higher levels of refinance activity as
a result of the low interest rate environment and a decrease in originations.
Equity lines of credit, that adjust to the prime rate, have increased by $2.0
million to $14.3 million at March 31, 2003 from $12.3 at December 31, 2002. The
Bank originated $8.3 million in loans during the three months ended March 31,
2003 and recorded $14.2 million in repayments and $180,000 in loan sales
compared with $13.5 million in originations, $12.4 in repayments and $509,000 in
loan sales during the three months ended March 31, 2002. At March 31, 2003, the
Bank had $10.2 million in loan applications pending approval and closing and
$10.5 million in unused lines of credit. The total allowance for loan losses was
$326,000 at March 31, 2003 and at December 31, 2002 and amounted to 0.40% and
0.38% respectively of loans receivable.
Total deposits decreased by $361,000 and amounted to $89.8 million at
March 31, 2003 compared with $90.2 million at December 31, 2002. The decrease
was primarily due to a $1.0 million decrease in certificates of deposit
partially offset by a $700,000 increase in checking and money market accounts.
The weighted average cost of deposits decreased to 2.75% at March 31, 2003 from
3.46% at March 31, 2002.
Borrowed funds decreased by $1.0 million and amounted to $30.0 million
at March 31, 2003 compared with $31.0 million at December 31, 2002. The Bank
anticipates repaying an additional $2.5 million in FHLB borrowings during the
second quarter of 2003.
Stockholders' equity was $13.8 million at March 31, 2003 compared with
$13.9 million at December 31, 2002. The slight decrease was primarily
attributable to a $58,000 decrease in accumulated other comprehensive income due
primarily to the sale of securities available for sale and a $60,000 decrease in
retained earnings as a result of dividends of $126,000 exceeding net income of
$66,000.
10
Average Balance Sheet
The following table presents 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. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average monthly balances. The yields and costs include fees which are
considered adjustments to yield.
Three Months Ended March 31,
2003 2002
------------------------------------------------------------
Interest Average Interest Average
Average Earned\ Yield\ Average Earned\ Yield\
Balance Paid Cost Balance Paid Cost
------------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------
Interest-earnings assets:
Loans receivable(1) $84,165 $1,431 6.80% $93,177 $1,719 7.38%
Securities available for sale 29,966 348 4.65 24,376 337 5.53
Federal funds sold and interest-earning
deposits 19,639 56 1.14 14,496 58 1.60
- ---------------------------------------------------------------------------------------------------------
Total interest-earning assets 133,770 1,835 5.49 132,049 2,114 6.40
Non-interest-earning assets 4,302 3,665
- ---------------------------------------------------------------------------------------------------------
Total Assets $138,072 $135,714
- ---------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
MMDA & NOW accounts 27,357 81 1.18 26,609 146 2.15
Passbook accounts 12,437 33 1.06 12,020 59 1.96
Certificate accounts 45,607 473 4.15 44,628 515 4.62
Borrowed funds 30,750 401 5.22 32,000 426 5.33
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 116,151 988 3.40 115,257 1,146 3.98
Non-interest bearing deposits 4,910 4,272
Other liabilities 3,153 2,712
- ---------------------------------------------------------------------------------------------------------
Total liabilities 124,214 122,241
Stockholders' equity 13,858 13,473
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $138,072 $135,714
- ---------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread (2) 847 2.09% 968 2.42%
- ---------------------------------------------------------------------------------------------------------
Net earning assets/net interest margin (3) $17,619 2.53% $16,792 2.93%
- ---------------------------------------------------------------------------------------------------------
Percentage of interest-earning assets 115.17% 114.57%
to interest-bearing liabilities
- ---------------------------------------------------------------------------------------------------------
1. Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
2. Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing liabilities.
3. Net interest margin represents net interest income divided by average
interest-earning assets.
11
Comparison Of Operating Results For The Three Months Ended March 31, 2003 And
March 31, 2002
General. Net income decreased by $91,000 to $66,000 for the three
months ended March 31, 2003 from $157,000 for the three months ended
March 31, 2002. Both basic and diluted earnings per share decreased to $.06 for
the three months ended March 31, 2003 from $.14 for the three months ended March
31, 2002. The decrease was primarily attributable to a $121,000 decrease in net
interest income and a $75,000 increase in non-interest expense. These items were
partially offset by a $38,000 increase in non-interest income and a $49,000
decrease in income tax expense.
Interest Income. Interest income decreased by $279,000 to $1.8 million
for the three months ended March 31, 2003 from $2.1 million for the three months
ended March 31, 2002. There was a decrease in the annualized yield on average
interest-earning assets to 5.49% for the three months ended March 31, 2003 from
6.40% for the three months ended March 31, 2002. The decrease was primarily
attributable to higher rate loans prepaid or refinanced as a result of the
decline in interest rates that began in 2001 and has continued through 2003.
Interest Expense. Interest expense decreased $158,000 and amounted to
$1.0 million for the three months ended March 31, 2003 from $1.1 million for the
three months ended March 31, 2002. The annualized average cost of
interest-bearing liabilities decreased to 3.40% for the three months ended March
31, 2003 from 3.98% for the three months ended March 31, 2002. The decrease was
due primarily to a decrease in the average cost of certificates of deposit to
4.15% for the three months ended March 31, 2003 from 4.62% for the three months
ended March 31, 2002. There were also decreases in the cost of all other
categories of interest-bearing liabilities, primarily attributable to the
decline in interest rates that occurred during the year 2001 and has continued
through 2003.
Provision For Loan Losses. The Company did not add to its allowance for
loan losses for the quarter ended March 31, 2003 compared with $18,000 for the
quarter ended March 31, 2002. The lack of a provision was primarily attributable
to no loans delinquent over 60 days at March 31, 2003,a decrease total loans
receivable and in the amount of commercial real estate loans in the portfolio,
which by their nature generally experience higher rates of losses than single
family loans. The allowance for loan losses was $326,000 at both March 31, 2003
and December 31, 2002 and amounted to .40% of loans receivable and .38% of loans
receivable, respectively. Future additions to the Company's allowance for loan
losses and any change in the related ratio of the allowance for loan losses to
non-performing loans are dependent upon various factors such as the performance
and composition of the Company's loan portfolio, the economy, changes in real
estate values, interest rates and the view of theregulatory authorities toward
allowance levels and inflation.
On a quarterly basis, management of the Bank meets to review the
allowance for loan losses. Management classifies loans in compliance with
regulatory classifications. Classified loans are individually reviewed to arrive
at specific reserves for those loans. Once the specific portion of the allowance
is calculated, management calculates a historical portion for each loan category
based on loan loss history, peer data, current economic conditions and trends in
the portfolio, including delinquencies and impairments, as well as changes in
the composition of the loan portfolio. Although management believes the
allowance for loan losses was at a level to absorb probable incurred losses on
existing loans at March 31, 2003, there can be no assurance that such losses
will not exceed estimated amounts.
Non-Interest Income. Non-interest income increased by $38,000 to
$123,000 for the three months ended March 31, 2003 compared with $85,000 for the
three months ended March 31, 2002. The increase was primarily attributable to a
$27,000 increase in gain on the sale of securities held for sale.
Non-Interest Expense. Non-interest expense increased by $75,000 to
$868,000 for the three months ended March 31, 2003 compared with $793,000 for
the three months ended March 31, 2002. The increase was primarily attributable
to a $67,000 charge related to an embezzlement by a former employee that was
discovered this quarter. The Company anticipates recovering approximately
$17,000 from insurance and is pursuing criminal and civil actions to recover the
balance. In the quarter ended March 31, 2003, the Company made several changes
to its internal controls to address the embezzlement that was discovered during
the quarter. The areas addressed were supervisory authority, the issuance of
checks for large withdrawals and accounting department review of large
transactions. This was partially offset by a $24,000 decrease in compensation
and benefits and a $16,000 decrease in professional fees. The decrease in
compensation and benefits was primarily related to a decrease in ESOP expense
due to the repayment of the loan that funded the Employee Stock Ownership Plan
in the fourth quarter of 2002.
12
Income Tax Expense. Income tax expense decreased by $49,000 to $36,000
for the three months ended March 31, 2003 from $85,000 for the three months
ended March 31, 2002. The decrease in expense was primarily related to a
decrease in pretax income.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section
13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management within the 90-day period preceding the filing date
of this quarterly report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2003,
the Company made several changes to its internal controls to address the
embezzlement that was discovered during the quarter. The areas addressed were
supervisory authority, the issuance of checks for large withdrawals and
accounting department review of large transactions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiary are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of the various legal proceedings involving the Company and
its subsidiary cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel, that the resolution of these legal
actions should not have a material effect on the Company's consolidated
financial position or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Debt
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(A) Form 8-K dated January 22, 2003, Registrant issued a press release
dated January 22, 2003 regarding first quarter 2003 earnings, the
declaration of a regular quarterly dividend and the date of the annual
stockholders meeting.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH BANCSHARES, INC.
(Registrant)
Date May 15, 2003 /S/ Joseph A. Graber
------------------- --------------------------
Joseph A. Graber
President and Chief Executive Officer
Date May 15, 2003 /S/ Martin W. Trofimuk
------------------- --------------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies in his capacity as an officer of North Bancshares,
Inc. (the "Company") that the Quarterly Report on Form 10-QSB fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
and that the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of the
Company as of the dates and for the periods presented in the financial
statements included in such report.
Dated: May 15, 2003 /S/ Joseph A. Graber
---------------- -------------------------
Joseph A. Graber
President and Chief Executive Officer
Dated: May 15, 2003 /S/ Martin W. Trofimuk
---------------- -------------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
14
14
CERTIFICATION
I, Joseph A. Graber, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of North
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluations Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee or registrants board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
the quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluations, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ Joseph A. Graber
----------------------
Joseph A. Graber, President and
Chief Executive Officer
15
CERTIFICATION
I, Martin W. Trofimuk, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of North
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluations Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee or registrants board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
the quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluations, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ Martin W. Trofimuk
-------------------------
Martin W. Trofimuk, Vice President,
Treasurer and Chief Financial Officer
16