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 June 30, 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 July 31, 2003, there were 1,143,881 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 14
Item 4. New Accounting Pronouncements 14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports 15
FORM 10-QSB SIGNATURE PAGE 16
CERTIFICATIONS 17
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 JUNE 30, 2003 DEC 31, 2002
Cash and due from Banks $2,460 $ 1,629
Interest-bearing deposits 6,219 4,338
Federal funds sold 12,830 12,253
Investment in dollar denominated mutual funds 87 83
- --------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 21,596 18,303
Securities available for sale 23,673 26,875
Stock in Federal Home Loan Bank of Chicago 4,113 3,999
Loans receivable, net of allowance for loan losses of $326 at
June 30, 2003 and December 31, 2002 81,565 86,464
Accrued interest receivable 403 503
Premises and equipment, net 895 850
Other assets 831 799
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TOTAL ASSETS 133,076 137,793
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LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Deposits
Interest-bearing 82,260 85,074
Non-interest-bearing 6,354 5,076
Borrowed Funds 27,500 31,000
Advance payments by borrowers for taxes and insurance 744 871
Accrued interest payable and other liabilities 2,594 1,867
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TOTAL LIABILITIES 119,452 123,888
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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 June 30, 2003 and 1,138,029 at
December 31, 2002 19 19
Additional paid in capital 13,224 13,284
Retained earnings, substantially restricted 12,025 12,140
Treasury stock, at cost (771,148 shares at June 30, 2003 and 776,046
shares at December 31, 2002) (11,668) (11,745)
Accumulated other comprehensive income 70 259
Unearned stock awards (46) (52)
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TOTAL STOCKHOLDERS' EQUITY 13,624 13,905
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,076 $137,793
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
INTEREST INCOME:
Loans receivable $1,306 $1,690 2,737 3,409
Interest-bearing deposits and federal funds sold 61 36 117 94
Securities available for sale 271 359 569 662
Dividend on FHLB stock and other interest income 64 48 114 82
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TOTAL INTEREST INCOME 1,702 2,133 3,537 4,247
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INTEREST EXPENSE:
Deposit accounts 528 687 1,115 1,407
Borrowed funds 384 443 785 869
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TOTAL INTEREST EXPENSE 912 1,130 1,900 2,276
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 790 1,003 1,637 1,971
PROVISION FOR LOAN LOSSES - 10 - 28
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 790 993 1,637 1,943
- --------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on sale of securities available for sale 37 20 64 20
Gain on sale of mortgage loans held for sale 52 14 59 25
Service charges and other non-interest income 98 79 187 153
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TOTAL NON-INTEREST INCOME 187 113 310 198
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NON-INTEREST EXPENSE:
Compensation and benefits 469 459 882 896
Occupancy expense 119 116 242 226
Professional fees 46 64 86 120
Data processing 74 69 146 124
Advertising and promotion 34 31 63 55
Other non-interest expense 131 149 322 260
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TOTAL NON-INTEREST EXPENSE 873 888 1,741 1,681
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 104 218 206 460
INCOME TAX EXPENSE 34 85 70 170
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NET INCOME $70 $133 136 290
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EARNINGS PER SHARE:
Basic $.06 $.11 .12 .25
Diluted $.06 $.11 .12 .25
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WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,140,427 1,148,605 1,139,683 1,150,732
Diluted 1,151,936 1,164,359 1,150,234 1,166,191
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COMPREHENSIVE INCOME (LOSS) $(61) $519 (53) 424
- --------------------------------------------------------------------------------------------------------------------
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)
SIX MONTHS ENDED JUNE 30, 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 $19 13,251 11,928 (11,552) (42) - (111) 13,493
Net income - - 290 - - - - 290
Change in accumulated other
comprehensive income (loss) - - - - 134 - - 134
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - - 424
ESOP shares earned - 37 - - - - 55 92
Stock awards earned - - - - - 6 - 6
Issuance of stock awards-5,000 shares - (11) - 76 - (65) - -
Purchase of treasury stock, 8,743 shares - - - (108) - - - (108)
Cash dividend ($.22 per share) - - (256) - - - - (256)
Options exercised and reissuance of
treasury stock, 5,000 shares - (32) - 76 - - - 44
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Balance at June 30, 2002 19 13,245 11,962 (11,508) 92 (59) (56) 13,695
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19 13,284 12,140 (11,745) 259 (52) - 13,905
Net income - - 136 - - - - 136
Change in accumulated other
comprehensive income (loss) - - - - (189) - - (189)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - - - - - (53)
Stock awards earned - - - - - 6 - 6
Purchase of treasury stock, 2,560 shares - - - (36) - - - (36)
Cash dividend ($.22 per share) - - (251) - - - - (251)
Options exercised and reissuance of
treasury stock, 7,458 shares - (60) - 113 - - - 53
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $19 13,224 12,025 (11,668) 70 (46) - 13,624
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
5
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
Cash flows from operating activities:
Net Income $ 136 $290
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 54 54
Provision for loan losses - 28
Deferred loan fees, net of amortization (116) 7
Amortization of premiums and discounts, net 56 128
ESOP and stock awards expense 6 98
FHLB stock dividend (114) (74)
Gain on sale of loans held for sale (59) (25)
Gain on sale of securities available for sale (64) (20)
Net changes in loans held for sale 59 25
Net change in accrued interest receivable 100 (26)
Other assets, net (33) (128)
Other liabilities, net 422 1,053
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 447 1,410
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities, repayments and calls of securities
available for sale 8,353 4,944
Purchase of securities available for sale (10,527) (16,356)
Proceeds from sales of securities available for sale 5,500 1,022
Loan originations and repayments, net 5,015 (2,293)
Purchase of Federal Home Loan Bank stock - (1,000)
Purchase of premises and equipment (98) (157)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 8,243 (13,840)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposit accounts (1,536) 3,915
Proceeds from borrowed funds - 2,500
Repayments of borrowed funds (3,500) -
Net change in advance payments by borrowers for taxes
and insurance (127) 200
Payment of common stock dividends (251) (256)
Proceeds from stock options exercised 53 44
Purchase of treasury stock (36) (108)
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (5,397) 6,295
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,293 (6,135)
Cash and cash equivalents at beginning of period 18,303 19,738
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $21,596 $13,603
- -------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $1,365 $1,720
Taxes 140 180
- ------------------------------------------------------------------------------------------
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, mortgage servicing rights, 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
June 30, 2003 and results of operations for the six month periods ended June 30,
2003 and June 30, 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 For the six months
ended June 30, ended June 30,
(In thousands, except share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Numerator:
Net Income $70 133 136 290
Denominator:
Basic earnings per share-weighted average
shares outstanding 1,140,427 1,148,605 1,139,683 1,150,732
Effect of dilutive stock options outstanding (1) 11,345 15,754 10,414 15,459
Effect of dilutive stock awards outstanding (1) 164 - 137 -
Diluted earnings per share-adjusted weighted
average shares outstanding 1,151,936 1,164,359 1,150,234 1,166,191
Basic earnings per share .06 .11 .12 .25
Diluted earnings per share .06 .11 .12 .25
===========================================================================================================
(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 and six month periods ended June 30, 2003 because the
effects of the assumed exercise would have been antidilutive in the other
periods presented.
(4) Stock Compensation
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market
7
price of the underlying common stock at date of grant. The following table
illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
For the three months ended For the six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 70 $133 $136 $290
Deduct: Stock-based compensation expense
determined under fair value based method 4 n/a 4 n/a
Pro forma net income $ 66 $133 $132 $290
Basic earnings per share as reported .06 .11 .12 .25
Pro forma basic earnings per share .06 .11 .12 .25
Diluted earnings per share as reported .06 .11 .12 .25
Pro forma diluted earnings per share .06 .11 .12 .25
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002
---- ----
Risk-free interest rate 3.91% n/a%
Expected option life 8 n/a
Expected stock price volatility 7.15% n/a
Dividend yield 3.01% n/a%
(5) 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.
(6) Stock Repurchase Program
On April 18, 2002, the Company announced a stock repurchase program that
amounts to 50,000 shares or approximately 4.4% 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 June 30, 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.
(7) Dividend Declaration
On April 15, 2003, the Company announced that the Board of Directors
declared a quarterly dividend of $.11 per share, which was paid on May 15, 2003
to stockholders of record on May 1, 2003. On July 15, 2003, the Company
announced that the Board of Directors declared a quarterly dividend of $.08 per
share, to be paid on August 15, 2003 to stockholders of record on August 1,
2003. The decrease in the dividend reflects results of operations for the first
quarter of 2003.
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
8
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 June 30, 2003, the Bank's liquidity ratio was 27.1%
compared with 24.8% at December 31, 2002. The increase in liquidity was
primarily due to loan and security prepayments which were not reinvested at the
end of the quarter.
Current regulatory standards impose the following capital requirements on
the Bank and other thrifts: a tangible 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 June 30, 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 $13.1 million, $13.1 million and $13.4 million,
respectively, exceeded the applicable minimum requirements by $7.8 million or
5.9%, $7.8 million or 5.9%, and $7.0 million or 8.8%, respectively.
Certificates of deposit scheduled to mature in one year or less at June 30,
2003, totaled approximately $17.2 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.
9
Commitments and Contingencies
At June 30, 2003, the Bank had $10.2 million in loan applications pending
approval and closing and unused lines of credit totaling $12.1 million. The Bank
leases a branch office in Wilmette, Illinois. Monthly rent and maintenance and
tax payments amount to $2,358 per month. In the third quarter of 2002, 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 would be
approximately 2,000 square feet and include a drive thru facility. The lease has
an initial ten year term with an annual average cost of $82,000. In March of
2003, 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. Four of the bids submitted to the City included a branch of the
Bank as part of their proposals. The results of the request for proposals and
their effect on the Bank is not known at this time.
The following tables disclose contractual obligations and commercial
commitments of the Company as of June 30, 2003:
Total Less Than 1 1 - 3 Years 4 - 5 Years Over 5
Year Years
-----------------------------------------------------------
FHLB advances $27,500 2,500 9,000 - 16,000
- --------------------------------------------------------------------------------------------------------
Total contractual cash obligations $27,500 2,500 9,000 - 16,000
========================================================================================================
Total Amounts Less than 1 1 - 3 Years 4 - 5 Years Over 5
Committed Year Years
-------------------------------------------------------------
Lines of credit $12,072 212 658 11,202 0
Commitments to make loans 7,448 7,448
Other commercial commitments (1) 2,757 2,757 0 0 0
- --------------------------------------------------------------------------------------------------------
Total commercial commitments $22,277 $10,417 $658 $11,202 $0
========================================================================================================
(1) Amounts primarily represent unfunded construction loans.
Changes In Financial Condition
Total assets decreased by $4.7 million and amounted to $133.1 million at
June 30, 2003 from $137.8 million at December 31, 2002. The decrease was
primarily attributable to a $4.9 million decrease in loans receivable and a $3.2
million decrease in securities available for sale offset by a $3.3 million
increase in cash and cash equivalents.
Cash and cash equivalents increased by $3.3 million to $21.6 million at
June 30, 2003 compared with $18.3 million at December 31, 2002. The increase was
due primarily to a $1.9 million increase in interest bearing deposits and a
$831,000 increase in cash and due from banks. The increase was the result of
loan and security prepayments not reinvested at the end of the quarter.
Net loans receivable decreased by $4.9 million and amounted to $81.6
million at June 30, 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 $4.1
million to $16.4 million at June 30, 2003 from $12.3 million at December 31,
2002. The Bank originated $25.8 million in loans during the six months ended
June 30, 2003 and recorded $29.4 million in repayments and $1.5 million in loan
sales compared with $24.1 million in originations, $20.1 in repayments and $1.7
million in loan sales during the six months ended June 30, 2002. At June 30,
2003, the Bank had $10.2 million in loan applications pending approval and
closing and $12.1 million in unused lines of credit. The total allowance for
loan losses was $326,000 at June 30, 2003 and December 31, 2002 and amounted to
0.40% and 0.38% respectively of loans receivable.
Total deposits decreased by $1.6 million and amounted to $88.6 million at
June 30, 2003 compared with $90.2 million at December 31, 2002. The decrease was
due to a $4.3 million decrease in certificates of deposits primarily as a result
of the repayment of a $2.5 million brokered certificate of deposit which matured
during the quarter. The decrease was partially offset by a $2.2 million increase
in checking and money market accounts.
Borrowed funds decreased by $3.5 million and amounted to $27.5 million at
June 30, 2003 compared with $31.0 million at December 31, 2002. The decrease was
attributable to repayment of matured FHLB borrowings during the six months ended
June 30, 2003.
10
Stockholders' equity was $13.6 million at June 30, 2003 compared with $13.9
million at December 31, 2002. The slight decrease was primarily attributable to
a $189,000 decrease in accumulated other comprehensive income due primarily to
the sale of securities available for sale and a $115,000 decrease in retained
earnings as a result of dividends of $251,000 exceeding net income of $136,000.
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. Average yields and costs for the three and six month
periods presented are annualized for presentation purposes.
Three Months Ended June Six Months Ended June 30,
2003 2002 2003 2002
----------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average Interest Average
Average Earned\ Yield\ Average Earned\ Yield\ Average Earned\ Yield\ Average Earned\ Yield\
Balance Paid Cost Balance Paid Cost Balance Paid Cost Balance Paid Cost
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------
Interest-earnings assets:
Loans receivable(1) $81,214 $1,306 6.43% $94,990 $1,690 7.12% $83,003 $2,737 6.59% $94,107 $3,409 7.24%
Securities available for sale 28,654 335 4.68 30,744 407 5.30 29,369 683 4.65 27,609 744 5.39
Interest- earning deposits and
federal funds sold 20,460 61 1.19 9,296 36 1.55 19,679 117 1.19 12,037 94 1.56
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 130,328 1,702 5.21 135,030 2,133 6.31 132,051 3,537 5.36 133,753 4,247 6.35
Non-interest-earning assets 4,723 4,153 4,527 3,873
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Total Assets $135,051 $139,183 $136,578 $137,626
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Interest-bearing liabilities:
MMDA & NOW accounts 27,420 69 1.01 27,804 149 2.14 27,370 149 1.09 27,206 296 2.18
Passbook accounts 12,605 20 0.63 12,162 54 1.78 12,539 53 0.85 12,060 113 1.87
Certificate accounts 43,999 439 3.99 44,626 484 4.34 44,768 913 4.08 44,688 998 4.47
Borrowed funds 28,500 384 5.39 33,500 443 5.29 29,571 785 5.31 32,750 869 5.31
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Total interest-bearing
liabilitie 112,524 912 3.24 118,092 1,130 3.81 114,248 1,900 3.33 116,704 2,276 3.90
Non-interest bearing deposits 5,655 4,304 5,352 4,327
Other liabilities 3,140 3,274 3,185 3,079
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Total liabilities 121,319 125,670 122,785 124,110
Stockholders' equity 13,732 13,513 13,793 13,516
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Total liabilities and
stockholders' equity $135,051 $139,183 $136,578 $137,626
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Net interest income/interest
rate spread (2) 790 1.98% 1,003 2.49% 1,637 2.03% 1,971 2.45%
- -----------------------------------------------------------------------------------------------------------------------------------
Net earning assets/net interest
margin (3) $17,804 2.42% $16,938 2.97% $17,803 2.48% $17,049 2.95%
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of interest-earning
assets to interest-bearing
liabilities 115.82% 114.34% 115.58% 114.61%
- -----------------------------------------------------------------------------------------------------------------------------------
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.
Comparison Of Operating Results For The Three Months Ended June 30, 2003 And
June 30, 2002
General. Net income decreased by $63,000 and amounted to $70,000 for the
three months ended June 30, 2003 from $133,000 for the three months ended June
30, 2002. Basic and diluted earnings per share decreased to $.06 for the three
months ended June 30, 2003 from $.11 for the three months ended June 30, 2002.
The decrease in net income and earnings per share was primarily related to a
$203,000 decrease in net interest income after provision for loan losses,
partially offset by a $51,000 decrease in income tax expense.
11
Interest Income. Interest income decreased by $431,000 and amounted to $1.7
million for the three months ended June 30, 2003 from $2.1 million for the three
months ended June 30, 2002. There was a decrease in the annualized yield on
average interest-earning assets to 5.22% for the three months ended June 30,
2003 from 6.32% for the three months ended June 30, 2002. The decrease was
primarily attributable to the decline in interest rates that has resulted in the
repricing of interest earning assets at rates which are near 50 year lows. In
addition, there was a $13.8 million decrease in average loans receivable from
$95.0 million for the three months ended June 30, 2002 to $$81.2 million for the
three months ended June 30, 2003, due primarily to refinance activity. The
repayments associated with the refinance activity were reinvested into lower-
yielding interest-earning deposits and federal funds.
Interest Expense. Interest expense decreased $218,000 and amounted to
$912,000 for the three months ended June 30, 2003 from $1.1 million for the
three months ended June 30, 2002. The annualized average cost of interest-
bearing liabilities decreased to 3.24% for the three months ended June 30, 2003
from 3.83% for the three months ended June 30, 2002. The decrease was due
primarily to a decrease in the average cost of NOW accounts and money market
deposit accounts from 2.14% for the three months ended June 30, 2002 to 1.01%
for the three months ended June 30, 2003. There were also decreases in the
average cost of all other categories of interest-bearing deposits, primarily
attributable to the decline in interest rates. In addition, there was a $5.5
million decrease in average interest- bearing liabilities primarily due to a
reduction in borrowed funds.
Provision For Loan Losses. The Company did not add to its allowance for
loan losses for the quarter ended June 30, 2003 compared with a $10,000 for the
quarter ended June 30, 2002. The lack of a provision was primarily attributable
to a decrease in 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. There was one loan that was delinquent
60 days or more at June 30, 2003 and amounted to $159,000. The allowance for
loan losses was $326,000 at both June 30, 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 the regulatory 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. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for losses on loans. Such agencies may require the bank to provide
additions to the allowance based upon judgements which differ from those of
management. Although management believes the allowance for loan losses was at a
level to absorb probable incurred losses on existing loans at June 30, 2003,
there can be no assurance that such losses will not exceed estimated amounts.
Non-Interest Income. Non-interest income increased by $74,000 and amounted
to $187,000 for the three months ended June 30, 2003 compared with $113,000 for
the three months ended June 30, 2002. The increase was primarily attributable to
a $17,000 increase in gain on sale of securities available for sale, and a
$38,000 increase in gains on sale of mortgage loans held for sale. The increase
in gains on the sale of mortgage loans is primarily due to increased sales of
low rate long-term fixed rate mortgages into the secondary market.
Non-Interest Expense. Non-interest expense decreased by $15,000 to $873,000
for the quarter ended June 30, 2003 compared with $888,000 for the quarter ended
June 30, 2002. The decrease was primarily attributable to decreases in other
non-interest expense and professional fees .
Income Tax Expense. Income tax expense decreased by $51,000 and amounted to
$34,000 for the three months ended June 30, 2002 from $85,000 for the three
months ended June 30, 2002. The decrease in expense was primarily related to a
decrease in pretax income.
12
Comparison Of Operating Results For The Six Months Ended June 30, 2003 And
June 30, 2002
General. Net income decreased by $154,000 and amounted to $136,000 for the
six months ended June 30, 2003 compared with $290,000 for the six months ended
June 30, 2002. Basic and diluted earnings per share decreased by $.13 and
amounted to $.12 for the six months ended June 30, 2003 compared with $.25 per
share for the six months ended June 30, 2002. The decrease was primarily
attributable to a $306,000 decrease in net interest income after provision for
loan losses primarily attributable to the decline in interest rates that has had
a negative effect on the Bank's net interest margin.
Interest Income. Interest income decreased by $710,000 and amounted to $3.5
million for the six months ended June 30, 2003 compared with $4.2 million for
the six months ended June 30, 2002. The decrease was primarily attributable to
an decrease in the annualized yield on average interest-earning assets to 5.36%
for the six months ended June 30, 2003 from 6.35% for the six months ended June
30, 2002. The decrease in the annualized yield was primarily attributable to a
decline in market rates that has resulted in the repricing of interest earning
assets at rates which are near 50 year lows. In addition, there was a $11.1
million decrease in average loans receivable from $94.1 million for the six
months ended June 30, 2002 to $83.0 million for the six months ended June 30,
2003 resulting primarily from refinance activity. The repayments associated with
the refinance activity were reinvested into lower- yielding interest-earning
deposit and federal funds.
Interest Expense. Interest expense decreased $376,000 and amounted to $1.9
million for the six months ended June 30, 2003 compared with $2.3 million for
the six months ended June 30, 2002. The decrease was primarily attributable to a
decrease in the average cost of interest-bearing liabilities to 3.33% for the
six months ended June 30, 2003 from 3.90% for the six months ended June 30, 2002
due primarily to a decrease in the average cost of NOW and money market deposit
accounts. In addition, the average cost of certificates of deposit also
decreased during the period. In addition, there was a $2.5 million decrease in
average interest-bearing liabilities primarily due to a reduction in borrowed
funds.
Provision For Loan Losses. The Company did not add to its allowance for
loan losses for the six months ended June 30, 2003 compared with $28,000 for the
six months ended June 30, 2002. The lack of a provision was primarily
attributable to a decrease in 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. There was one loan
that was delinquent 60 days or more at June 30, 2003 and amounted to $159,000.
The allowance for loan losses was $326,000 at both June 30, 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 the regulatory 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. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for losses on loans. Such agencies may require the bank to provide
additions to the allowance based upon judgements which differ from those of
management. Although management believes the allowance for loan losses was at a
level to absorb probable incurred losses on existing loans at June 30, 2003,
there can be no assurance that such losses will not exceed estimated amounts.
Non-Interest Income. Non-interest income increased $112,000 and amounted to
$310,000 for the six months ended June 30, 2003 compared with $198,000 for the
six months ended June 30, 2002. The increase was primarily attributable to a
$34,000 increase in gain on the sale of mortgage loans held for sale and a
$44,000 increase in gain on sale of investment securities available for sale.
The increase in gains on the sale of mortgage loans is primarily due to
increased sales of low rate long-term fixed rate mortgages into the secondary
market.
Non-Interest Expense. Non-interest expense increased $60,000 and amounted
to $1.7 million for the six months
13
ended June 30, 2003 and June 30, 2002. The increase was primarily attributable
to a $67,000 charge recorded during the first quarter which was related to an
embezzlement by a former employee. The Company anticipates recovering
approximately $17,000 from insurance and $6,000 from frozen assets and has
obtained a judgement against the individual 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 charge
was partially offset by a $34,000 decrease in professional fees and a $14,000
decrease in compensation and benefits expense 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. Management continues to evaluate
and implement cost saving measures that are intended to improve performance on
an on going basis..
Income Tax Expense. Income tax expense decreased $100,000 and amounted to
$70,000 for the six months ended June 30, 2003 compared with $170,000 for the
six months ended June 30, 2002. The decrease was primarily attributable to a
decrease in pre-tax income.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.
Because the Company does not have these instruments or is only nominally
involved in these instruments, the new accounting standards will not materially
affect the Company's operating results or financial condition.
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 June 30, 2003, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
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
14
Item 3. Defaults Upon Senior Debt
None
Item 4. Submission of Matters to a Vote of Security Holders.
On April 25, 2003, the annual meeting of stockholders was held. At the
meeting, Gregory W. Rose and Mark W. Ferstel were elected to serve as directors
with terms expiring in 2006. Continuing on as directors were Mary Ann Hass and
Joseph A. Graber whose terms will expire in 2004 and Elmer L. Hass, Robert H.
Rusher and Frank J. Donati whose terms will expire in 2005. In addition, the
stockholders ratified the appointment of Crowe, Chizek and Company LLC as the
Company's independent auditors for the fiscal year ending December 31, 2003.
The voting on each item presented at the annual meeting was as follows:
Election of Directors For Withheld
--- --------
Gregory W. Rose 938,102 133,113
Mark W. Ferstel 940,802 130,413
Broker
Non-
Ratification of the appointment of Crowe, For Against Abstain Votes
Chizek and Company, LLC as the Company's --- ------- ------- ------
auditors for the fiscal year ending
ending December 31, 2003 1,047,525 20,667 3,023 None
Broker
Non-
For Against Abstain Votes
--- ------- ------- ------
The stockholder proposal regarding the
composition of the board of directors 183,738 515,841 55,835 252,899
Item 5. Other Information
None
Item 6. Exhibits and Reports
(A) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14a and 15d-14a.
31.1 Certification of Chief Financial Officer Pursuant to
Rule 13a-14a and 15d-14a.
32.1 Certifications of Chief Executive Officer and Chief financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Form 8-K dated April 15, 2003, Registrant issued a press release dated
April 15, 2003 regarding first quarter 2003 earnings and the declaration of a
regular quarterly dividend.
15
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 August 13, 2003 /S/ Joseph A. Graber
-------------------- ---------------------
Joseph A. Graber
President and Chief Executive Officer
Date August 13, 2003 /S/ Martin W. Trofimuk
-------------------- -----------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
16
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly represent in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15e and 15d-15e) for the small business
issuer and have;
a) Designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors;
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuers's internal
control over financial reporting.
Date: August 13, 2003
/S/ Joseph A. Graber
-----------------------------------
Joseph A. Graber, President and
Chief Executive Officer
17
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly represent in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15e and 15d-15e) for the small business
issuer and have;
a) Designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors;
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuers's internal
control over financial reporting.
Date: August 13, 2003
/S/ Martin W. Trofimuk
-----------------------------
Martin W. Trofimuk, Vice President,
Treasurer and Chief Financial Officer
18
Exhibit 32
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: August 13, 2003 /S/ Joseph A. Graber
--------------------- --------------------
Joseph A. Graber
President and Chief Executive Officer
Dated: August 13, 2003 /S/ Martin W. Trofimuk
--------------------- ----------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
19