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 September 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 October 31, 2003, there were 1,144,695 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 15
Item 2. Changes in Securities 15
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 SEPT 30, 2003 DEC 31, 2002
Cash and due from Banks $2,986 $ 1,629
Interest-bearing deposits 2,516 4,338
Federal funds sold 3,410 12,253
Investment in dollar denominated mutual funds 95 83
- ------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 9,007 18,303
Securities available for sale 24,888 26,875
Stock in Federal Home Loan Bank of Chicago 4,179 3,999
Loans receivable, net of allowance for loan losses
of $326 at September 30, 2003 and December 31, 2002 89,623 86,464
Accrued interest receivable 452 503
Premises and equipment, net 877 850
Other assets 955 799
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TOTAL ASSETS 129,981 137,793
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
Deposits
Interest-bearing 80,772 85,074
Non-interest-bearing 5,515 5,076
Borrowed Funds 27,500 31,000
Advance payments by borrowers for taxes and insurance 305 871
Accrued interest payable and other liabilities 2,286 1,867
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TOTAL LIABILITIES 116,378 123,888
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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 1,151,995 at
September 30, 2003 and 1,138,029 at December 31, 2002 19 19
Additional paid in capital 13,163 13,284
Retained earnings, substantially restricted 12,026 12,140
Treasury stock, at cost (762,080 shares at September
30, 2003 and 776,046 shares at December 31, 2002) (11,523) (11,745)
Accumulated other comprehensive (loss) income (40) 259
Unearned stock awards (42) (52)
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TOTAL STOCKHOLDERS' EQUITY 13,603 13,905
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,981 $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 NINE MONTHS ENDED
SEPT 30, SEPT 30,
2003 2002 2003 2002
INTEREST INCOME:
Loans receivable $1,309 $1,688 4,046 5,097
Interest-bearing deposits and federal funds sold 35 42 152 136
Securities available for sale 245 369 814 1,031
Dividend on FHLB stock and other interest income 67 50 181 132
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TOTAL INTEREST INCOME 1,656 2,149 5,193 6,396
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INTEREST EXPENSE:
Deposit accounts 478 655 1,593 2,063
Borrowed funds 380 443 1,165 1,311
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TOTAL INTEREST EXPENSE 858 1,098 2,758 3,374
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 798 1,051 2,435 3,022
PROVISION FOR LOAN LOSSES - - - 28
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 798 1,051 2,435 2,994
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain (loss) on sale of securities available for sale (3) 98 61 118
Gain on sale of mortgage loans held for sale - 16 59 41
Other non-interest income 99 88 286 241
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TOTAL NON-INTEREST INCOME 96 202 406 400
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NON-INTEREST EXPENSE:
Compensation and benefits 404 476 1,286 1,372
Occupancy expense 101 110 343 336
Professional fees 38 56 124 176
Data processing 67 66 213 190
Advertising and promotion 20 18 83 73
Other non-interest expense 111 120 433 380
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TOTAL NON-INTEREST EXPENSE 741 846 2,482 2,527
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INCOME BEFORE INCOME TAXES 153 407 359 867
INCOME TAX EXPENSE 60 165 130 335
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NET INCOME $93 $242 229 532
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EARNINGS PER SHARE:
Basic $.08 $.21 .20 .46
Diluted $.08 $.21 .20 .46
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WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,143,123 1,150,321 1,140,908 1,152,765
Diluted 1,144,048 1,170,468 1,147,646 1,168,263
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COMPREHENSIVE (LOSS) INCOME $(18) $409 (70) 833
- -------------------------------------------------------------------------------------------------------------
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)
NINE MONTHS ENDED SEPTEMBER 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 $19 13,251 11,928 (11,552) (42) - (111) 13,493
Net income - - 532 - - - - 532
Change in accumulated other
comprehensive income (loss) - - - - 301 - - 301
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - - 833
ESOP shares earned - 56 - - - - 83 139
Stock awards earned - - - - - 10 - 10
Issuance of stock awards-5,000 shares - (11) - 76 - (65) - -
Purchase of treasury stock, 8,743 shares - - - (345) - - - (345)
Cash dividend ($.33 per share) - - (383) - - - - (383)
Options exercised and reissuance of
treasury stock, 5,000 shares - (32) - 76 - - - 44
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 19 13,264 12,077 (11,745) 259 (55) (28) 13,791
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19 13,284 12,140 (11,745) 259 (52) - 13,905
Net income - - 229 - - - - 229
Change in accumulated other
comprehensive income (loss) - - - - (299) - - (299)
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - - - - - (70)
Stock awards earned - - - - - 10 - 10
Purchase of treasury stock, 3,554 shares - - - (52) - - - (52)
Cash dividend ($.30 per share) - - (343) - - - - (343)
Options exercised and reissuance of
treasury stock, 18,120 shares - (121) - 174 - - - 153
- ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $19 13,163 12,026 (11,523) (40) (42) - 13,603
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
5
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
Cash flows from operating activities:
Net Income $ 229 $ 532
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 79 86
Provision for loan losses - 28
Deferred loan fees, net of amortization 219 (14)
Amortization of premiums and discounts, net (123) 62
ESOP and stock awards expense 10 150
FHLB stock dividend (180) (121)
Gain on sale of loans held for sale (59) (41)
Gain on sale of securities available for sale (61) (118)
Net changes in loans held for sale 59 41
Net change in accrued interest receivable 51 64
Other assets, net (156) (179)
Other liabilities, net (333) 301
- ---------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (265) 791
- ---------------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities, repayments and calls of securities
available for sale 12,228 6,498
Purchase of securities available for sale (15,556) (22,300)
Proceeds from sales of securities available for sale 5,952 6,265
Loan originations and repayments, net (3,378) 835
Purchase of Federal Home Loan Bank stock - (1,000)
Purchase of premises and equipment (106) (204)
- ---------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (860) (9,906)
- ---------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposit accounts (3,863) 4,370
Proceeds from borrowed funds - 15,000
Repayments of borrowed funds (3,500) (14,100)
Net change in advance payments by borrowers for taxes
and insurance (566) 392
Payment of common stock dividends (343) (385)
Proceeds from stock options exercised 153 49
Purchase of treasury stock (52) (318)
- ---------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (8,171) 5,008
- ---------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (9,296) 9,456
Cash and cash equivalents at beginning of period 18,303 9,084
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $9,007 $18,540
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Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $1,925 $3,520
Taxes 140 460
- ---------------------------------------------------------------------------------------
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
September 30, 2003 and results of operations for the three and nine month
periods ended September 30, 2003 and September 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 nine months
ended September 30, ended September 30,
(In thousands, except share data) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Numerator:
Net Income $93 242 229 532
Denominator:
Basic earnings per share-weighted average
shares outstanding 1,143,123 1,150,321 1,140,908 1,152,765
Effect of dilutive stock options outstanding (1) 761 20,147 6,601 15,498
Effect of dilutive stock awards outstanding (1) 164 - 137 -
Diluted earnings per share-adjusted weighted
average shares outstanding 1,144,048 1,170,468 1,147,646 1,168,263
Basic earnings per share .08 .21 .20 .46
Diluted earnings per share .08 .21 .20 .46
===================================================================================================
(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 nine month periods ended September 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 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.
7
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 93 $242 $229 $532
Deduct: Stock-based compensation expense
determined under fair value based method 4 - 4 -
Pro forma net income $ 89 $242 $225 $532
Basic earnings per share as reported .08 .21 .20 .46
Pro forma basic earnings per share .08 .21 .20 .46
Diluted earnings per share as reported .08 .21 .20 .46
Pro forma diluted earnings per share .08 .21 .20 .46
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003
----
Risk-free interest rate 3.91%
Expected option life 8
Expected stock price volatility 7.15%
Dividend yield 3.01%
(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 September 30, 2003,
24,467 shares had been repurchased under this program at an average cost of
$12.25 per share. Management continues to believe that stock repurchase programs
provide enhanced value to both the Company and its stockholders.
(7) Dividend Declaration
On July 15, 2003, the Company announced that the Board of Directors
declared a quarterly dividend of $.08 per share, which was paid on August 15,
2003 to stockholders of record on August 1, 2003. On October 16, 2003, the
Company announced that the Board of Directors declared a quarterly dividend of
$.08 per share, to be paid on November 14, 2003 to stockholders of record on
October 31, 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 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
8
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 September 30, 2003, the Bank's liquidity ratio was
15.9% compared with 24.8% at December 31, 2002. The decrease in liquidity was
primarily due to a decrease in federal funds sold.
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 September 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 $7.9
million or 6.2%, $7.9 million or 6.2%, and $6.9 million or 8.6%, respectively.
Certificates of deposit scheduled to mature in one year or less at
September 30, 2003, totaled approximately $17.8 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 September 30, 2003, the Bank had $9.2 million in loan applications
pending approval and closing and unused lines of credit totaling $14.0 million.
The Bank leases a branch office in Wilmette, Illinois. Monthly rent and
maintenance and tax payments amount to $2,358 per month.
9
The following tables disclose contractual obligations and commercial
commitments of the Company as of September 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 $14,013 237 856 12,920 0
Commitments to make loans 1,654 1,654 0 0 0
Other commercial commitments 7,592 7,592 0 0 0
- --------------------------------------------------------------------------------------------------
Total commitments $23,259 $9,483 $856 $12,920 $0
==================================================================================================
Changes In Financial Condition
Total assets decreased by $7.8 million and amounted to $130.0 million at
September 30, 2003 from $137.8 million at December 31, 2002. The decrease was
primarily attributable to a $9.3 million decrease in cash and cash equivalents.
Cash and cash equivalents decreased by $9.3 million to $9.0 million at
September 30, 2003 compared with $18.3 million at December 31, 2002. The
decrease was due primarily to a $8.9 million decrease in federal funds sold. The
funds were used primarily to repay $3.5 million in higher cost FHLB advances and
a $2.5 million brokered certificate of deposit.
Net loans receivable increased by $3.1 million and amounted to $89.6
million at September 30, 2003 compared with $86.5 million at December 31, 2002.
The $3.1 million increase was due primarily to a $6.3 million increase in
utstanding equity lines of credit partially offset by a $2.2 million decrease in
one to four family loans and a $1.0 million decrease in multi-family loans.
Equity line of credit loans, that adjust to the prime rate or prime rate plus a
margin increased to $18.6 million at September 30, 2003 from $12.3 million at
December 31, 2002. The Bank originated $47.0 million in loans during the nine
month period ended September 30, 2003 and recorded $42.1 million in repayments
and $1.5 million in loan sales compared with $32.4 million in originations,
$31.1 million in repayments and $2.1 million in loan sales during the nine
month period ended September 30, 2002. At September 30, 2003, the Bank had $9.2
million in loan applications pending approval or closing and $14.0 million in
unused lines of credit. The Company did not add to the allowance for loan losses
during the quarter ended September 30, 2003 or September 30, 2002, due primarily
to a decrease in total loans receivable. The total allowance for loan losses
amounted to $326,000 or 0.36% of loans receivable at September 30, 2003 compared
with $326,000 and 0.35% of loans receivable at September 30, 2002.
Total deposits decreased by $3.9 million and amounted to $86.3 million at
September 30, 2003 compared with $90.2 million at December 31, 2002. The
decrease was due primarily to a $4.5 million decrease in certificates of deposit
primarily attributable to the repayment of a higher cost $2.5 million brokered
certificate of Deposit. This decrease was partially offset by a $500,000
increase in checking and money market accounts. The weighted average cost of
deposits decreased to 2.30% at September 30, 2003 from 3.06% at September 30,
2002.
Borrowed funds decreased by $3.5 million and amounted to $27.5 million at
September 30, 2003 compared with $31.0 million at December 31, 2002. The
decrease is attributable to repayment of higher cost FHLB advances that matured
during the nine month period.
Stockholders' equity was $13.6 million at September 30, 2003 compared with
$13.9 million at December 31, 2002. The slight decrease was primarily
attributable to a $299,000 decrease in accumulated other comprehensive income
due primarily to the increase in interest rates that occurred during the third
quarter and the resulting negative effect on the available for sale securities
portfolio. Treasury stock decreased by $222,000 primarily due to the exercise of
stock
10
options. In addition, there was a $114,000 decrease in retained earnings due to
net income of $229,000 that was offset by $343,000 in dividend payments. Book
value per share decreased to $11.81 at September 30, 2003 compared with $12.22
at December 31, 2002.
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 September 30, Nine Months Ended September 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) $84,798 $1,309 6.17% $94,053 $1,688 7.17% $83,865 $4,046 6.43% $93,928 $5,097 7.23%
Securities available for sale 28,628 312 4.36 32,716 419 5.14 29,177 995 4.55 29,228 1,163 5.31
Interest-earning deposits and
federal funds sold 13,697 35 1.02 10,545 42 1.59 17,343 152 1.17 11,499 136 1.58
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 127,123 1,656 5.21 37,314 2,149 6.21 30,385 5,193 5.31 34,655 6,396 6.33
Non-interest-earning assets 4,690 4,501 4,637 3,248
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $131,813 $141,815 $135,022 $137,903
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
MMDA & NOW accounts 26,879 57 0.85 28,300 119 1.68 27,157 206 1.01 27,514 415 2.01
Passbook accounts 12,960 17 0.52 12,223 48 1.57 12,651 70 0.74 12,118 161 1.77
Certificate accounts 41,667 404 3.88 45,490 488 4.29 43,839 1,317 4.01 44,882 1,487 4.42
Borrowed funds 27,500 380 5.53 33,000 443 5.37 28,950 1,165 5.37 32,700 1,311 5.35
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 109,006 858 3.11 19,013 1,098 3.69 12,597 2,758 3.27 17,214 3,374 3.84
Non-interest bearing deposits 5,875 4,833 5,464 4,485
Other liabilities 3,434 4,169 3,269 2,593
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 118,315 128,015 121,330 124,292
Stockholders' equity 13,498 13,800 13,692 13,611
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $131,813 $141,815 $135,022 $137,903
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread (2) 798 2.06% 1,051 2.57% 2,435 2.04% 3,022 2.49%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earning assets/net
interest margin (3) $18,117 2.51% $18,301 3.06% $17,788 2.49% $17,441 2.99%
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage of interest-earning
assets to interest-bearing
liabilities 116.62% 115.38% 115.80% 114.88%
- ---------------------------------------------------------------------------------------------------------------------------------
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 September 30, 2003
And September 30, 2002
General. Net income decreased by $149,000 and amounted to $93,000 for the
three months ended September 30, 2003 from $242,000 for the three months ended
September 30, 2002. Basic and diluted earnings per share decreased to $.08 for
the three months ended September 30, 2003 from $.21 for the three months ended
September 30, 2002. The decrease in net income and earnings per share was
primarily related to a $253,000 decrease in net interest income, partially
offset by a $105,000 decrease in total non-interest expense.
11
Interest Income. Interest income decreased by $493,000 and amounted to $1.7
million for the three months ended September 30, 2003 from $2.2 million for the
three months ended September 30, 2002. There was a decrease in the annualized
yield on average interest-earning assets to 5.21% for the three months ended
September 30, 2003 from 6.26% for the three months ended September 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 $9.3 million decrease in average loans
receivable from $94.1 million for the three months ended September 30, 2002 to
$84.8 million for the three months ended September 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 $240,000 and amounted to
$858,000 for the three months ended September 30, 2003 from $1.1 million for the
three months ended September 30, 2002. The annualized average cost of
interest-bearing liabilities decreased to 3.15% for the three months ended
September 30, 2003 from 3.69% for the three months ended September 30, 2002. The
decrease was due primarily to a decrease in the average cost of NOW accounts and
money market deposit accounts from 1.68% for the three months ended September
30, 2002 to 0.85% for the three months ended September 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 $10.0 million decrease in average interest-bearing liabilities
primarily due to a reduction in borrowed funds and certificate accounts.
Provision For Loan Losses. The Company did not add to its allowance for
loan losses for the quarters ended September 30, 2003 or September 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 were no loans that were delinquent 60 days or more at
September 30, 2003. The allowance for loan losses was $326,000 at both September
30, 2003 and December 31, 2002 and amounted to .36% 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 September 30,
2003, there can be no assurance that such losses will not exceed estimated
amounts.
Non-Interest Income. Non-interest income decreased by $106,000 to $96,000
for the quarter ended September 30, 2003 compared with $202,000 for the quarter
ended September 30, 2002. The decrease was primarily attributable to a $101,000
decrease in gain on sale of securities available for sale.
Non-Interest Expense. Non-interest expense decreased by $105,000 to
$741,000 for the quarter ended September 30, 2003 compared with $846,000 for the
quarter ended September 30, 2002. The decrease was primarily attributable to
decreases in compensation and benefits expense, professional fees and other
non-interest expense. The decrease in compensation and benefits expense was
primarily due to the absence of expense associated with the Company's ESOP plan
and a reduction in staff. Expense control measures implemented during the first
and second quarters of the year accounted for the decrease in professional fees
and other non-interest expense.
Income Tax Expense. Income tax expense decreased by $105,000 and amounted
to $60,000 for the three months ended September 30, 2002 from $165,000 for the
three months ended September 30, 2002. The decrease in expense was primarily
related to a decrease in pretax income.
12
Comparison Of Operating Results For The Nine Months Ended September 30, 2003 And
September 30, 2002
General. Net income decreased by $303,000 and amounted to $229,000 for the
nine months ended September 30, 2003 compared with $532,000 for the nine months
ended September 30, 2002. Basic and diluted earnings per share decreased by $.16
and amounted to $.20 for the nine months ended September 30, 2003 compared with
$.46 per share for the nine months ended September 30, 2002. The decrease was
primarily attributable to a $559,000 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 $1.2 million and amounted to
$5.2 million for the nine months ended September 30, 2003 compared with $6.4
million for the nine months ended September 30, 2002. The decrease was primarily
attributable to an decrease in the annualized yield on average interest-earning
assets to 5.31% for the nine months ended September 30, 2003 from 6.33% for the
nine months ended September 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 $10.0 million decrease in average loans receivable from
$93.9 million for the nine months ended September 30, 2002 to $83.9 million for
the nine months ended September 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 $616,000 and amounted to $2.8
million for the nine months ended September 30, 2003 compared with $3.4 million
for the nine months ended September 30, 2002. The decrease was primarily
attributable to a decrease in the average cost of interest-bearing liabilities
to 3.27% for the nine months ended September 30, 2003 from 3.84% for the nine
months ended September 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. There was also a $4.6
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 nine months ended September 30, 2003 compared with $28,000
for the nine months ended September 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 were
no loans that were delinquent 60 days or more at September 30, 2003. The
allowance for loan losses was $326,000 at both September 30, 2003 and December
31, 2002 and amounted to .36% 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 $6,000 and amounted to
$406,000 for the nine months ended September 30, 2003 compared with $400,000 for
the nine months ended September 30, 2002. There was a $45,000 increase in other
non-interest income due primarily to fees associated with equity lines of
credit. This increase was partially offset by a $39,000 decrease in gains on
sales of securities available for sale and mortgage loans held for sale.
13
Non-Interest Expense. Non-interest expense decreased $45,000 and amounted
to $2.5 million for the nine months ended September 30, 2003 and September 30,
2002. The decrease was primarily attributable to an $86,000 decrease in
compensation and benefits expense and a $52,000 decrease in professional fees.
The decrease in compensation and benefits expense was primarily due to the
absence of expense associated with the Company's ESOP plan and a reduction in
staff. These decreases were partially offset by $53,000 increase in other
non-interest expense primarily related to a $67,000 charge recorded during the
first quarter which was related to an embezzlement by a former employee. The
Company has recovered $6,000 from frozen assets and anticipates recovering
approximately $17,000 from insurance during the fourth quarter. A judgement
against the individual to recover the balance has been filed. 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 $205,000 and amounted to
$130,000 for the nine months ended September 30, 2003 compared with $335,000 for
the nine months ended September 30, 2002. The decrease was primarily
attributable to a decrease in pre-tax 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 September 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.
Item 4. New Accounting Pronouncements
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", an interpretation of SFAS No. 5, 57, and 107 and
Rescission of FIN 34. This Interpretation clarifies the requirements of SFAS No.
5, "Accounting for Contingencies," relating to the guarantor's accounting for
and disclosure of the issuance of certain types of guarantees. The disclosure
provisions of the Interpretation are effective for financial statements in
interim or annual reports for periods that end after December 15, 2002. However,
the provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of the guarantor's year-end. The application of this
Interpretation did not have a material impact on the Company's consolidated
statement of financial condition or consolidated statement of income.
In January 2003, FASB issued FIN 46, "Consolidation of Variable Interest
Entities. FIN 46 requires a company to consolidate a variable interest entity
("VIE") if the company has variable interests that give it a majority of the
expected losses or a majority of the expected residual returns of the entity.
FIN 46 is effective immediately for VIEs created after January 31, 2003. FIN 46
is effective immediately for VIEs created after January 31, 2003. For VIEs
created prior to February 1, 2003, FIN 46 will apply in the first interim period
or fiscal year beginning after September 15, 2003. The implementation of FIN 46
did not have an impact on the Company's consolidated statement of financial
condition or consolidated statement of income.
14
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
(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 July 15, 2003, Registrant issued a press release dated
July 15, 2003 regarding second quarter 2003 earnings and the declaration of a
regular quarterly dividend. Form 8-K dated October 16, 2003, Registrant issued a
press release dated October 16, 2003 regarding the declaration of a regular
quarterly dividend and consideration by the board of directors of deregistration
of the Company's stock.
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 November 13, 2003 /S/ Joseph A. Graber
------------------------- ---------------------
Joseph A. Graber
President and Chief Executive Officer
Date November 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: November 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: November 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: November 13, 2003 /S/ Joseph A. Graber
----------------------- --------------------
Joseph A. Graber
President and Chief Executive Officer
Dated: November 13, 2003 /S/ Martin W. Trofimuk
----------------------- ----------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
19