UNITED STATES
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2004
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-22800
NORTH BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-3915073
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
100 West North Avenue, Chicago, Illinois 60610-1399
(Address of Principal Executive Offices) (Zip Code)
(312) 664-4320
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
As of April 30, 2004, 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 12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports 13
FORM 10-QSB SIGNATURE PAGE 14
CERTIFICATIONS 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS MARCH 31, 2004 DECEMBER 31, 2003
Cash and due from Banks $2,322 $2,003
Interest-bearing deposits 2,999 2,767
Federal funds sold 7,408 8,166
Investment in dollar denominated mutual funds 63 95
- ----------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 12,792 13,031
Securities available for sale 16,974 18,612
Stock in Federal Home Loan Bank of Chicago 4,252 4,252
Loans receivable, net of allowance for loan
losses of $354 at March 31, 2004 and $347 at
December 31, 2003 96,758 95,471
Accrued interest receivable 539 558
Premises and equipment, net 845 849
Other assets 1,164 973
- ----------------------------------------------------------------------------------
TOTAL ASSETS 133,324 133,746
- ----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------
Deposits
Interest-bearing 86,227 85,392
Non-interest-bearing 5,993 5,560
Borrowed Funds 25,000 27,500
Advance payments by borrowers for taxes and
insurance 375 657
Accrued interest payable and other liabilities 2,174 1,143
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES 119,769 120,252
- ----------------------------------------------------------------------------------
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 1,144,695 at
March 31, 2004 and at December 31, 2003 19 19
Additional paid in capital 13,179 13,179
Retained earnings, substantially restricted 12,059 12,075
Treasury stock, at cost (769,380 shares at March 31,
2004 and at December 31, 2003) (11,625) (11,625)
Accumulated other comprehensive (loss) (41) (115)
Unearned stock awards (36) (39)
- ----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,555 13,494
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,324 $133,746
- ----------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
3
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2004 2003
INTEREST INCOME:
Loans receivable $1,396 $1,431
Interest-bearing deposits and federal funds sold 27 56
Securities available for sale 185 298
Dividend on FHLB stock and other interest income 69 50
- ------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,677 1,835
- ------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposit accounts 479 587
Borrowed funds 364 401
- ------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 843 988
- ------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 834 847
PROVISION FOR LOAN LOSSES 7 -
- ------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 827 847
- ------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on sale of securities available for sale - 27
Gain on sale of mortgage loans held for sale 22 7
Other non-interest income 139 89
- ------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 161 123
- ------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Compensation and benefits 418 413
Occupancy expense 127 123
Professional fees 95 40
Data processing 71 72
Advertising and promotion 33 29
Other non-interest expense 135 191
- ------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 879 868
- ------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 109 102
INCOME TAX EXPENSE 34 36
- ------------------------------------------------------------------------------------
NET INCOME $ 75 $ 66
- ------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $.07 $.06
Diluted $.07 $.06
- ------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 1,142,545 1,138,681
Diluted 1,148,230 1,148,354
- ------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $149 $8
- ------------------------------------------------------------------------------------
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-
Additional rehensive Unearned
Common paid in Retained Treasury Income stock
Stock capital earnings stock (loss) awards Total
Balance at December 31, 2002 $19 13,284 12,140 (11,745) 259 52 13,905
Net income - - 66 - - - 66
Change in accumulated other
comprehensive income (loss) - - - - (58) - (58)
- --------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - 8
Stock awards earned - - - - - 3 3
Purchase of treasury stock, 2,560 shares - - - (36) - - (36)
Cash dividend ($.11 per share) - - (126) - - - (126)
Options exercised and reissuance of
treasury stock, 7,458 shares - (60) - 113 - - 53
- --------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 19 13,224 12,080 (11,668) 201 (49) 13,807
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 19 13,179 12,075 (11,625) (115) (39) 13,494
Net income - - 75 - - - 75
Change in accumulated other
comprehensive income (loss) - - - - 74 - 74
- --------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - - 149
Stock awards earned - - - - - 3 3
Cash dividend ($.08 per share) - - (91) - - - (91)
- --------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $19 13,179 12,059 (11,625) (41) (36) 13,555
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited condensed consolidated financial statements.
5
NORTH BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
Cash flows from operating activities:
Net Income $ 75 $ 66
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47 21
Provision for loan losses 7 -
Deferred loan fees, net of amortization (3) 25
Amortization of premiums and discounts, net 8 (5)
stock awards expense 3 3
FHLB stock dividend (69) (50)
Gain on sale of loans held for sale (22) (7)
Gain on sale of securities available for sale - (27)
Net changes in loans held for sale 22 7
Net change in accrued interest receivable 19 19
Other assets, net (191) (55)
Other liabilities, net 994 539
- -----------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 890 536
- -----------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities, repayments and calls of securities
available for sale 1,767 1,797
Purchase of securities available for sale (26) (3,055)
Proceeds from sales of securities available for sale - 3,027
Loan originations and repayments, net (1,291) 5,947
Redemption of FHLB stock 69 -
Purchase of premises and equipment (43) (43)
- -----------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 476 7,673
- -----------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposit accounts 1,268 (361)
Proceeds from borrowed funds - -
Repayments of borrowed funds (2,500) (1,000)
Net change in advance payments by borrowers for taxes
and insurance (282) (417)
Payment of common stock dividends (91) (126)
Proceeds from stock options exercised - 53
Purchase of treasury stock - (36)
- -----------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,605) (1,887)
- -----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (239) 6,322
Cash and cash equivalents at beginning of period 13,031 18,303
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $12,792 $24,625
- -----------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash
payments during the period for:
Interest $551 $612
Taxes - 40
- -----------------------------------------------------------------------------------
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
2003 Annual Report on Form 10KSB filed with the Securities and Exchange
Commission. The December 31, 2003 balance sheet presented herein has been
derived from the audited financial statements included on the Company's 2003
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission,
but does not include all disclosures required by accounting principles generally
accepted in the United States of America.
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
March 31, 2004 and results of operations for the three month periods ended March
31, 2004 and March 31, 2003, but are not necessarily indicative of the results
which may be expected for the entire year.
(2) Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements
include the accounts of North Bancshares, Inc. (the "Company"), its wholly-owned
subsidiary, North Federal Savings Bank (the "Bank"), and the Bank's subsidiary
North Financial Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(3) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
For the three months ended March 31,
(In thousands, except share data) 2004 2003
- -----------------------------------------------------------------------------
Numerator:
Net Income $75 $66
Denominator:
Basic earnings per share-weighted average
shares outstanding 1,142,845 1,138,681
Effect of dilutive stock options outstanding (1) 5,524 9,475
Effect of dilutive stock awards outstanding 161 198
Diluted earnings per share-adjusted weighted
average shares outstanding 1,148,230 1,148,354
Basic earnings per share .07 .06
Diluted earnings per share .07 .06
============================================================================
(1) Only options and stock awards where the exercise price is below the
current market price are included in calculating diluted earnings per share.
7
(4) Comprehensive income (loss)
The Company's comprehensive income includes net income and other
comprehensive income (loss) comprised of unrealized gains or losses on
securities available for sale, net of tax effect, which are also recognized as
separate components of equity.
(5) Stock Repurchase Program
On April 18, 2002, the Company announced a stock repurchase program that
amounts to 50,000 shares or approximately 4.4% of the outstanding shares. The
Company has halted the program due to the pending transaction with Diamond
Bancorp, Inc. referred to above in Note 1. At March 31, 2004, 31,767 shares had
been repurchased under this program at an average cost of $12.65 per share.
(6) Dividend Declaration
On January 20, 2004, the Company announced that the Board of Directors
declared a quarterly dividend of $.08 per share, which was paid on February 14,
2004 to stockholders of record on February 1, 2004. On April 15, 2004, the
Company announced that the Board of Directors declared a quarterly dividend of
$.08 per share, to be paid on May 14, 2004 to stockholders of record on April
30, 2004.
(7) Pension Plan
Pension Disclosure:
Description Three months ended
March 31,
---------
2004 2003
---- ----
Service cost component $ 27,574 $ 23,365
Interest cost component $ 66,952 $ 58,443
Expected return on plan assets for period $(94,500) $(85,149)
Recognized net actuarial (gain)/loss $ 10,297 0
Amortization of transition (asset)/obligation 0 $ (537)
Amortization of prior service cost $ (264) $ (264)
Net periodic benefit cost $ 10,058 $ (4,141)
Contributions that were paid, or that are expected to be paid for the
current year are not significantly different than what was disclosed in the 2003
Annual Report to Stockholders. Contributions for the year 2004, thus far, amount
to $124,561 and for the year 2003 amounted to $158,814
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The primary business of the Company is that of an independent
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Company attracts
deposits from the general public, obtains brokered deposits or borrows funds and
uses such funds to originate or acquire one-to-four family residential
mortgages, loans secured by small apartment buildings or mixed use properties,
equity lines of credit secured by real estate and commercial real estate loans.
The Company also invests in U.S. Government and agency securities, mutual funds
that invest in U.S. Government securities, federal agency mortgage-backed
securities, investment grade securities, common stocks of other financial
institutions and money market accounts.
The Company's consolidated results of operations are primarily dependent on
net interest income, which is the difference between the interest income earned
on interest-earning assets and the interest paid on deposits and other
borrowings less loan loss provisions and to a lesser degree on non-interest
income less non-interest expense and income taxes. The Company's operating
expenses consist principally of employee compensation and benefits, occupancy
expenses, and other non-interest expenses. The Company's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
On April 8, 2004, the Company announced that they have signed a definitive
agreement with Diamond Bancorp, Inc., a wholly owned subsidiary of Northbrook
Investments, LLP, to purchase all the outstanding shares of common stock of
North Bancshares, Inc., which are not currently owned by Northbrook Investments
LLC for $22.75 per diluted share in cash. The total transaction value amounts to
approximately $26.4 million with a price to tangible book value as of December
31, 2003, of approximately 193% and a premium over core deposits of
approximately 17.2%. The transaction is subject to regulatory approvals and
approval by a majority of the holders of North Bancshares's common stock. The
transaction is anticipated to close in the fourth quarter of 2004.
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
8
not limited to, the following: (1) the credit risks of lending activities,
including changes in the level and direction of loan delinquencies and
write-offs; (2) changes in managements's estimate of the adequacy of the
allowance for loan losses; (3) competitive pressures among depository
institutions; (4) interest rate movements and their impact on customer behavior
and the Company's net interest margin; (5) the impact of repricing and
competitor's pricing initiatives on loan and deposit products; (6) the Company's
ability to adapt successfully to technological changes to meet customers' needs
and developments in the market place; (7) the Company's ability to access
cost-effective funding; (8) changes in financial markets and general economic
conditions; (9) new legislation or regulatory changes; (10) changes in
accounting principles, policies or guidelines.
The Company does not undertake any obligation to update any forward-looking
statement to reflect circumstances or events that occur after the date on which
the forward-looking statement is made.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, borrowings from the FHLB
of Chicago, prepayment of loans and mortgage-backed securities, sales and
maturities of investment and mortgage-backed securities and occasionally the use
of reverse repurchase agreements. The Bank can also borrow from its
correspondent banks. The Bank uses its liquid resources to fund loan
commitments, to meet operating expenses, to make investments and to fund deposit
withdrawals. Management believes that loan repayments and the Bank's other
sources of funds will be adequate to meet the liquidity needs of the Bank.
The OTS requires the Bank to maintain sufficient liquidity to ensure its
safe and sound operation. At March 31, 2004, the Bank's liquidity ratio was
14.6% compared with 16.4% at December 31, 2003. 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 March 31, 2004, 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 $13.5 million,
respectively, exceeded the applicable minimum requirements by $7.7 million or
5.8%, $7.7 million or 5.8%, and $6.5 million or 7.3%, respectively.
Certificates of deposit scheduled to mature in one year or less at March
31, 2004, totaled approximately $11.3 million. Management believes, based on its
ability to adjust rates on those accounts to market levels, that a significant
portion of such deposits will remain with the Company. The Company will continue
to focus on shifting its liability mix from higher cost certificates of deposit
to lower cost transaction accounts that do not earn interest and produce fee
income. The Company will continue to use retail and brokered certificates of
deposit as alternate funding sources.
Commitments and Contingencies
At March 31, 2004, the Bank had $4.1 million in loan applications pending
approval and closing and unused lines of credit totaling $15.5 million. The Bank
leases a branch office in Wilmette, Illinois. Monthly rent and maintenance and
tax payments amount to $2,941 per month.
The following tables disclose contractual obligations and commercial
commitments of the Company as of March 31, 2004:
Total Less Than 1 1 - 3 Years 4 - 5 Years Over 5
Year Years
--------------------------------------------------------------
FHLB advances $25,000 - 9,000 3,000 13,000
- -------------------------------------------------------------------------------------------------------
Total contractual cash obligations $25,000 - 9,000 3,000 13,000
=======================================================================================================
Total Amounts Less than 1 1 - 3 Years 4 - 5 Years Over 5
Committed Year Years
---------------------------------------------------------------
Lines of credit $15,512 248 910 14,354 0
Commitments to make loans 1,498 1,498
Other commercial commitments 2,583 2,583 0 0 0
- ------------------------------------------------------------------------------------------------------
Total commitments $19,593 $4,329 $910 $14,354 $0
======================================================================================================
9
Changes In Financial Condition
Total assets decreased slightly to $133.3 million at March 31, 2004 from
$133.7 million at December 31, 2003. Investment securities available for sale
decreased by $1.6 million to $17.0 million which was partially offset by a $1.3
million increase in net loans receivable.
Net loans receivable increased by $1.3 million and amounted to $96.8
million at March 31, 2004 compared with $95.5 million at December 31, 2003. The
$1.3 million increase was due primarily to a $1.4 million increase in
outstanding equity lines of credit. Equity line of credit loans, that adjust to
the prime rate or prime rate plus a margin increased to $21.9 million at March
31, 2004 from $20.5 million at December 31, 2003. The Bank originated $11.2
million in loans during the three month period ended March 31, 2004 and recorded
$8.3 million in repayments and $1.6 million in loan sales compared with $13.5
million in originations, $12.4 million in repayments and $509,000 in loan sales
during the three month period ended March 31, 2003. At March 31, 2004, the Bank
had $4.1 million in loan applications pending approval or closing and $15.5
million in unused lines of credit. The Company added $7,500 to the allowance for
loan losses during the quarter ended March 31, 2004 compared with no addition to
the allowance for the quarter ended March 31, 2003, due primarily to an increase
in consumer and commercial loans in the portfolio. The total allowance for loan
losses amounted to $354,000 or 0.36% of loans receivable at March 31, 2004
compared with $347,000 and 0.36% of loans receivable at December 31, 2003.
Total deposits increased by $1.3 million and amounted to $92.2 million at
March 31, 2004 compared with $90.9 million at December 31, 2003. The increase
was due primarily to a $2.1 million increase in certificates of deposit. This
increase was partially offset by a $1.3 million decrease in money market deposit
accounts. The weighted average cost of deposits decreased to 2.25% at March 31,
2004 from 2.47% at March 31, 2003.
Borrowed funds decreased by $2.5 million and amounted to $25.0 million at
March 31, 2004 compared with $27.5 million at December 31, 2003. The decrease is
attributable to repayment of a higher cost FHLB advance that matured during the
three month period.
Stockholders' equity was $13.6 million at March 31, 2004 compared with
$13.5 million at December 31, 2003. The slight increase was primarily
attributable to a $74,000 increase in accumulated other comprehensive income due
primarily to a decrease in interest rates that occurred during the first quarter
and the resulting positive effect on the available for sale securities
portfolio. In addition, there was a $16,000 decrease in retained earnings due to
net income of $75,000 that was offset by $91,000 in dividend payments. Book
value per share increased to $11.84 at March 31, 2004 compared with $11.79
at December 31, 2003.
10
Average Balance Sheet
The following table presents certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
monthly balances. The yields and costs include fees which are considered
adjustments to yield. Average yields and costs for the three and six month
periods presented are annualized for presentation purposes.
Three Months Ended March 31,
2004 2003
------------------------------------------------------------------
Interest Average Interest Average
Average Earned\ Yield\ Average Earned\ Yield\
Balance Paid Cost Balance Paid Cost
------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------
Interest-earnings assets:
Loans receivable(1) $95,826 $1,396 5.83% $84,165 $1,431 6.80%
Securities available for sale 21,903 254 4.64 29,966 348 4.65
Federal funds sold and interest-earning
deposits 12,121 27 0.89 19,639 56 1.14
- --------------------------------------------------------------------------------------------------------
Total interest-earning assets 129,850 1,677 5.16 133,770 1,835 5.49
Non-interest-earning assets 4,651 4,302
- --------------------------------------------------------------------------------------------------------
Total Assets $134,501 $138,072
- --------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
MMDA & NOW accounts 25,662 50 0.78 27,357 81 1.18
Passbook accounts 13,077 16 0.49 12,437 33 1.06
Certificate accounts 47,455 413 3.48 45,607 473 4.15
Borrowed funds 26,875 364 5.42 30,750 401 5.22
- --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 113,069 843 2.98 116,151 988 3.40
Non-interest bearing deposits 5,642 4,910
Other liabilities 2,250 3,153
- --------------------------------------------------------------------------------------------------------
Total liabilities 120,961 124,214
Stockholders' equity 13,540 13,858
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $134,501 $138,072
- --------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread (2) 834 2.18% 847 2.09%
- --------------------------------------------------------------------------------------------------------
Net earning assets/net interest margin (3) $16,781 2.57% $17,619 2.53%
- ---------------------------------------------------------------------------------------------------------
Percentage of interest-earning assets 114.84% 115.17%
to interest-bearing liabilities
- ---------------------------------------------------------------------------------------------------------
1. Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
2. Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing liabilities.
3. Net interest margin represents net interest income divided by average
interest-earning assets.
Comparison Of Operating Results For The Three Months Ended March 31, 2004 And
March 31, 2003
General. Net income increased by $9,000 to $75,000 for the three months
ended March 31, 2004 from $66,000 for the three months ended March 31, 2003.
Both basic and diluted earnings per share increased to $.07 for the three months
ended March 31, 2004 from $.06 for the three months ended March 31, 2003. The
increase was primarily attributable to a $38,000 increase in non-interest income
which was partially offset by a $13,000 decrease in net interest income before
provision for loan losses.
11
Interest Income. Interest income decreased by $158,000 to $1.7million for
the three months ended March 31, 2004 from $1.8 million for the three months
ended March 31, 2003. There was a decrease in the annualized yield on average
interest-earning assets to 5.17% for the three months ended March 31, 2004 from
5.49% for the three months ended March 31, 2003. The decrease was primarily
attributable to number of loans prepaid or refinanced at lower rates as a result
of the current 40 year historic low rate interest rate environment.
Interest Expense. Interest expense decreased $145,000 to $843,000 for the
three months ended March 31, 2004 from $1.0 million for the three months ended
March 31, 2003. The annualized average cost of interest-bearing liabilities
decreased to 3.03% for the three months ended March 31, 2004 from 3.40% for the
three months ended March 31, 2003. The decrease was due primarily to a decrease
in the average cost of certificates of deposit to 3.48% for the three months
ended March 31, 2004 from 4.15% for the three months ended March 31, 2003. There
were also decreases in the cost of all other categories of interest-bearing
liabilities, primarily attributable to the decline in interest rates.
Provision For Loan Losses. The Company added $7,500 to its allowance for
loan losses for the quarter ended March 31, 2004 compared with no provision for
the quarter ended March 31, 2003. The increase in the provision was primarily
attributable to an increase in total loans receivable and in the amount of
consumer and commercial real estate loans in the portfolio, which by their
nature generally experience higher rates of losses than single family loans. The
allowance for loan losses was $354,000 at March 31, 2004 and $347,000 at
December 31, 2003 and amounted to .36% of loans receivable for both periods.
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. Although management believes the
allowance for loan losses was at a level to absorb probable incurred losses on
existing loans at March 31, 2004, there can be no assurance that such losses
will not exceed estimated amounts.
Non-Interest Income. Non-interest income increased by $38,000 to $161,000
for the three months ended March 31, 2004 compared with $123,000 for the three
months ended March 31, 2003. The increase was primarily attributable to a
$50,000 increase in other non-interest income due primarily to a recovery of an
employee embezzlement.
Non-Interest Expense. Non-interest expense increased by $9,000 to $879,000
for the three months ended March 31, 2004 compared with $868,000 for the three
months ended March 31, 2003. The increase was primarily attributable a $55,000
increase in professional fees related to the hiring of an investment banking
firm and attorneys to review the company's strategic alternatives. Other
non-interest expense decreased by $56,000 which was primarily related to a
charge for an employee embezzlement which was recorded during the first quarter
of 2003.
Income Tax Expense. Income tax expense increased by $2,000 to $34,000 for
the three months ended March 31, 2004 from $36,000 for the three months ended
March 31, 2003. The increase in expense was primarily related to an increase in
pretax income.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section 13(a)-14(c)
of the Securities Exchange Act of 1934 (the "Act")) as of March 31, 2004, was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer, Chief Financial Officer and several other members of
the Company's senior management within the 90-day period preceding the filing
date of this quarterly report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2004, 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.
12
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.
31.2 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.
13
(B) 1. Form 8-K dated January 22, 2004, Registrant issued a press release
dated January 22, 2004 regarding fourth quarter 2003 earnings, the declaration
of a regular quarterly dividend and the date of the annual stockholders meeting.
2. Form 8-K dated March 25, 2004, Registrant issued a press release
dated March 25, 2004 regarding the hiring a Keefe, Bruyette and Woods, an
investment banking firm to review strategic alternatives.
3. Form DEFA14A dated April 8, 2004, Registrant issued a press
release dated April 8, 2004 regarding the signing of a definitive agreement for
the sale of all the common stock of the Company to Diamond Bancorp, Inc.
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH BANCSHARES, INC.
(Registrant)
Date May 5, 2004 /S/ Joseph A. Graber
------------------------------
Joseph A. Graber
President and Chief Executive Officer
Date May 5, 2004 /S/ Martin W. Trofimuk
------------------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
15
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: May 5, 2004
/S/ Joseph A. Graber
--------------------------------
Joseph A. Graber, President and
Chief Executive Officer
16
Exhibit 31.2
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: May 5, 2004
/S/ Martin W. Trofimuk
--------------------------------
Martin W. Trofimuk, Vice President, Treasurer
and Chief Financial Officer
17
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: May 5, 2004 /S/ Joseph A. Graber
-----------------------------
Joseph A. Graber
President and Chief Executive Officer
Dated: May 5, 2004 /S/ Martin W. Trofimuk
--------------------------------
Martin W. Trofimuk
Vice President, Treasurer and
Chief Financial Officer
18