UNITED STATES U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 July 31, 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 13 Item 4. New Accounting Pronouncements 13 Part II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports 14 FORM 10-QSB SIGNATURE PAGE 15 CERTIFICATIONS 16 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NORTH BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS JUNE 30, 2004 DECEMBER 31, 2003 Cash and due from banks $2,442 $2,003 Interest-bearing deposits 3,230 2,767 Federal funds sold 16,599 8,166 Investment in dollar denominated mutual funds 63 95 - ------------------------------------------------------------------------------------------ TOTAL CASH AND CASH EQUIVALENTS 22,334 13,031 Securities available for sale 11,461 18,612 Stock in Federal Home Loan Bank (FHLB) of Chicago 4,252 4,252 Loans receivable, net of allowance for loan losses of $355 at June 30, 2004 and $347 at December 31, 2003 93,153 95,471 Accrued interest receivable 529 558 Premises and equipment, net 827 849 Other assets 1,113 973 - ------------------------------------------------------------------------------------------ TOTAL ASSETS 133,669 133,746 - ------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------ Deposits Interest-bearing 86,839 85,392 Non-interest-bearing 5,852 5,560 Borrowed funds 25,100 27,500 Advance payments by borrowers for taxes and insurance 653 657 Accrued interest payable and other liabilities 2,024 1,143 - ------------------------------------------------------------------------------------------ TOTAL LIABILITIES 120,468 120,252 - ------------------------------------------------------------------------------------------ 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 June 30, 2004 and December 31, 2003 19 19 Additional paid in capital 13,179 13,179 Retained earnings, substantially restricted 11,841 12,075 Treasury stock, at cost (769,380 shares at June 30, 2004 and December 31, 2003) (11,625) (11,625) Accumulated other comprehensive loss (181) (115) Unearned stock awards (32) (39) - ------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 13,201 13,494 - ------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,669 $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 SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 INTEREST INCOME: Loans receivable $1,407 $1,306 2,803 2,737 Interest-bearing deposits and federal funds sold 36 61 63 117 Securities available for sale 137 271 322 569 Dividend on FHLB stock and other interest income 64 64 133 114 - ---------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 1,644 1,702 3,321 3,537 - ---------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposit accounts 474 528 953 1,115 Borrowed funds 344 384 708 785 - ---------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 818 912 1,661 1,900 - ---------------------------------------------------------------------------------------------------------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 826 790 1,660 1,637 PROVISION FOR LOAN LOSSES - - 7 - - ---------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 826 790 1,653 1,637 - ---------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Gains (losses) on sale of securities available for sale (64) 37 (64) 64 Gain on sale of mortgage loans held for sale - 52 22 59 Other non-interest income 84 98 223 187 - ---------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME 20 187 181 310 - ---------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Compensation and benefits 460 469 878 882 Occupancy expense 122 119 249 242 Professional fees 149 46 244 86 Data processing 67 74 138 146 Advertising and promotion 23 34 56 63 Other non-interest expense 162 131 297 322 - ---------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE 983 873 1,862 1,741 - ---------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (137) 104 (28) 206 INCOME TAX EXPENSE (BENEFIT) (11) 34 23 70 - ---------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(126) $70 (51) 136 - ---------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE: Basic $(.11) $.06 (.04) .12 Diluted $(.11) $.06 (.04) .12 - ---------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 1,143,112 1,140,427 1,143,112 1,139,683 Diluted 1,158,157 1,151,936 1,154,387 1,150,234 - ---------------------------------------------------------------------------------------------------------- COMPREHENSIVE LOSS $(276) $(61) (117) (53) - ---------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited condensed consolidated financial statements. 4 NORTH BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) SIX MONTHS ENDED JUNE 30, 2003 AND 2004 (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 $19 13,284 12,140 (11,745) 259 52 13,905 Net income - - 136 - - - 136 Change in accumulated other comprehensive income (loss) - - - - (189) - (189) - ---------------------------------------------------------------------------------------------------------------- Total comprehensive loss - - - - - - (53) Stock awards earned - - - - - 6 6 Purchase of treasury stock, 2,560 shares - - - (36) - - (36) Cash dividend ($.22 per share) - - (251) - - - (251) Options exercised and reissuance of treasury stock, 7,458 shares - (60) - 113 - - 53 - ---------------------------------------------------------------------------------------------------------------- Balance at June 30, 2003 19 13,224 12,025 (11,668) 70 (46) 13,624 - ---------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 19 13,179 12,075 (11,625) (115) (39) 13,494 Net loss - - (51) - - - (51) Change in accumulated other comprehensive loss - - - - (66) - (66) - ----------------------------------------------------------------------------------------------------------------- Total comprehensive loss - - - - - - (117) Stock awards earned - - - - - 7 7 Cash dividend ($.16 per share) - - (183) - - - (183) - ----------------------------------------------------------------------------------------------------------------- Balance at June 30, 2004 $19 13,179 11,841 (11,625) (181) (32) 13,201 - ----------------------------------------------------------------------------------------------------------------- See accompanying notes to unaudited condensed consolidated financial statements. 5 NORTH BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 2004 2003 Cash flows from operating activities: Net Income (loss) $ (51) $ 136 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 74 54 Provision for loan losses 7 - Deferred loan fees, net of amortization (6) (116) Amortization of premiums and discounts, net 16 56 stock awards expense 7 6 FHLB stock dividend (133) (114) Gain on sale of loans held for sale (22) (59) Loss (Gain) on sale of securities available for sale 64 (64) Net changes in loans held for sale 22 59 Net change in accrued interest receivable 29 100 Other assets, net (140) (33) Other liabilities, net 915 422 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 782 447 - ----------------------------------------------------------------------------------------- Cash flows from investing activities: Maturities, repayments and calls of securities available for sale 2,937 8,353 Purchase of securities available for sale (26) (10,527) Proceeds from sales of securities available for sale 4,060 5,500 Loan originations and repayments, net 2,317 5,015 Redemption of FHLB stock 133 - Purchase of premises and equipment (52) (98) - ----------------------------------------------------------------------------------------- Net cash provided by investing activities 9,369 8,243 - ----------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in deposit accounts 1,739 (1,536) Repayments of borrowed funds (2,400) (3,500) Net change in advance payments by borrowers for taxes and insurance (4) (127) Payment of common stock dividends (183) (251) Proceeds from stock options exercised - 53 Purchase of treasury stock - (36) - ----------------------------------------------------------------------------------------- Net cash used in financing activities (848) (5,397) - ----------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 9,303 3,293 Cash and cash equivalents at beginning of period 13,031 18,303 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $22,334 $21,596 - ----------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash payments during the period for: Interest $1,082 $1,365 Taxes - 140 - ----------------------------------------------------------------------------------------- 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 June 30, 2004 and results of operations for the three and six month periods ended June 30, 2004 and June 30, 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 For the six months ended June 30, ended June 30, (In thousands, except share data) 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------------- Numerator: Net Income (loss) $(126) 70 (51) 136 Denominator: Basic earnings per share-weighted average shares outstanding 1,143,112 1,140,427 1,143,112 1,139,683 Effect of dilutive stock options outstanding (1) 14,511 11,345 10,893 10,414 Effect of dilutive stock awards outstanding (1) 534 164 382 137 Diluted earnings per share-adjusted weighted average shares outstanding 1,158,157 1,151,936 1,154,387 1,150,234 Basic earnings (loss) per share (.11) .06 (.04) .12 Diluted earnings (loss) per share (.11) .06 (.04) .12 ========================================================================================================== (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 signing of a definitive agreement for the sale of the Company on April 8, 2004. At June 30, 2004, 31,767 shares had been repurchased under this program at an average cost of $12.65 per share. (6) Dividend Declaration On April 15, 2004, the Company announced that the Board of Directors declared a quarterly dividend of $.08 per share, which was paid on May 14, 2004 to stockholders of record on April 30, 2004. On July 16, 2004, the Company announced that the Board of Directors declared a quarterly dividend of $.08 per share, to be paid on August 16, 2004 to stockholders of record on August 2, 2004. (7) Pension Plan Pension Disclosure: Description Three months ended Six months ended - ----------- June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost component $27,574 $23,365 $55,148 $46,730 Interest cost component $66,952 $58,443 $133,903 $116,886 Expected return on plan assets for period $(94,500) $(85,149) $(189,000) $(170,298) Recognized net actuarial (gain)/loss $10,297 0 $20,593 0 Amortization of transition (asset)/obligation 0 $(537) 0 (1,074) Amortization of prior service cost $(264) $(264) $(528) $(528) Net periodic benefit cost $10,059 $(4,142) $20,116 $8,284 Contributions that were paid, or that are expected to be paid for the current year are not significantly different that 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 8 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 date for the Special Meeting of the Stockholders has been set at August 6, 2004 for stockholders of record on June 23, 2004. The transaction is anticipated to close in the third quarter or early 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 not limited to, the following: (1) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs; (2) changes in managements's estimate of the adequacy of the allowance for loan losses; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior and the Company's net interest margin; (5) the impact of repricing and competitor's pricing initiatives on loan and deposit products; (6) the Company's ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (7) the Company's ability to access cost-effective funding; (8) changes in financial markets and general economic conditions; (9) new legislation or regulatory changes; (10) changes in accounting principles, policies or guidelines. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made. Liquidity and Capital Resources The Bank's primary sources of funds are deposits, borrowings from the FHLB of Chicago, prepayment of loans and mortgage-backed securities, sales and maturities of investment and mortgage-backed securities and occasionally the use of reverse repurchase agreements. The Bank can also borrow from its correspondent banks. The Bank uses its liquid resources to fund loan commitments, to meet operating expenses, to make investments and to fund deposit withdrawals. Management believes that loan repayments and the Bank's other sources of funds will be adequate to meet the liquidity needs of the Bank. The OTS requires the Bank to maintain sufficient liquidity to ensure its safe and sound operation. At June 30, 2004, the Bank's liquidity ratio was 19.1% compared with 16.4% at December 31, 2003. The increase in liquidity was primarily due to an increase in cash and cash equivalents. Current regulatory standards impose the following capital requirements on the Bank and other thrifts: a tangible capital ratio expressed as a percentage of total adjusted assets, a leverage ratio of core capital to total adjusted assets and a risk-based capital standard expressed as a percentage of risk-adjusted assets. At June 30, 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 $13.0 million, $13.0 million and $13.4 million, respectively, exceeded the applicable minimum requirements by $7.6 million or 5.7%, $7.6 million or 5.7%, and $6.5 million or 7.1%, respectively. Certificates of deposit scheduled to mature in one year or less at June 30, 2004, totaled approximately $23.5 million. Management believes, based on its ability to adjust rates on those accounts to market levels, that a significant portion of such deposits will remain with the Company. The Company will continue to focus on shifting its liability mix from higher cost certificates of deposit to lower cost transaction accounts that do not earn interest and produce fee income. The Company will continue to use retail and brokered certificates of deposit as alternate funding sources. 9 Commitments and Contingencies At June 30, 2004, the Bank had $4.2 million in loan applications pending approval and closing and unused lines of credit totaling $15.4 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 June 30, 2004: Total Less Than 1 1 - 3 Years 4 - 5 Years Over 5 Year Years ------------------------------------------------------------------ FHLB advances $25,000 7,000 2,000 3,000 13,000 - ------------------------------------------------------------------------------------------------------ Total contractual cash obligations $25,000 7,000 2,000 3,000 13,000 ====================================================================================================== Total Amounts Less than 1 1 - 3 Years 4 - 5 Years Over 5 Committed Year Years ------------------------------------------------------------------- Lines of credit $15,433 278 5,237 10,474 0 Commitments to make loans 1,193 1,193 0 0 0 Other commercial commitments 3,038 3,038 0 0 0 - ------------------------------------------------------------------------------------------------------ Total commitments $19,664 4,509 5,237 10,474 0 ====================================================================================================== Changes In Financial Condition Total assets remained steady at $133.7 million at both June 30, 2004 and at December 31, 2003. Cash and cash equivalents increased by $9.3 million but were offset by a $7.2 million decrease in investment securities available for sale and a $2.3 million decrease in net loans receivable. Net loans receivable decreased by $2.3 million and amounted to $93.2 million at June 30, 2004 compared with $95.5 million at December 31, 2003. The $2.3 million decrease was due primarily to a decrease in commercial loan participations. Equity line of credit loans, that adjust to the prime rate or prime rate plus a margin increased to $21.7 million at June 30, 2004 from $20.5 million at December 31, 2003. The Bank originated $20.8 million in loans during the six month period ended June 30, 2004 and recorded $22.9 million in repayments and $1.6 million in loan sales compared with $25.8 million in originations, $29.4 million in repayments and $1.5 million in loan sales during the six month period ended June 30, 2003. At June 30, 2004, the Bank had $4.2 million in loan applications pending approval or closing and $15.4 million in unused lines of credit. The Company did not add to the allowance for loan losses during the quarter ended June 30, 2004 and 2003, respectively. The total allowance for loan losses amounted to $354,000 or 0.38% of loans receivable at June 30, 2004 compared with $347,000 and 0.36% of loans receivable at December 31, 2003. Total deposits increased by $1.8 million and amounted to $92.7 million at June 30, 2004 compared with $90.9 million at December 31, 2003. The increase was due primarily to a $2.5 million increase in money market deposit accounts. This increase was partially offset by a $700,000 decrease in certificates of deposits. The weighted average cost of deposits decreased to 2.20% at June 30, 2004 from 2.47% at June 30, 2003. Borrowed funds decreased by $2.4 million and amounted to $25.1 million at June 30, 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 six month period. Stockholders' equity was $13.2 million at June 30, 2004 compared with $13.5 million at December 31, 2003. The decrease was primarily attributable to a $234,000 decrease in retained earnings as a result of a net loss of $51,000 and $183,000 in dividend payments. In addition, there was a $66,000 increase in accumulated other comprehensive loss due primarily to an increase in interest rates that occurred during the quarter and the resulting negative effect on the available for sale securities portfolio. Book value per share decreased to $11.53 at June 30, 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 June Six Months Ended June 30, 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------- 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) $95,121 $1,407 5.92% $81,214 $1,306 6.43% $95,290 $2,803 5.88% $83,003 $2,737 6.59% Securities available for sale 17,675 201 4.55 28,654 335 4.68 19,607 455 4.64 29,369 683 4.65 Interest-earning deposits and federal funds sold 15,984 36 0.90 20,460 61 1.19 14,580 63 0.86 19,679 117 1.19 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 128,780 1,644 5.11 30,328 1,702 5.21 29,477 3,321 5.13 132,051 3,537 5.36 Non-interest-earning assets 4,757 4,723 4,641 4,527 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $133,537 $135,051 $134,118 $136,578 - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: MMDA & NOW accounts 27,504 52 0.76 27,420 69 1.01 27,090 102 0.75 27,370 149 1.09 Passbook accounts 12,749 17 0.53 12,605 20 0.63 12,812 33 0.52 12,539 53 0.85 Certificate accounts 46,518 405 3.48 43,999 439 3.99 46,536 818 3.52 44,768 913 4.08 Borrowed funds 25,150 344 5.47 28,500 384 5.39 26,114 708 5.42 29,571 785 5.31 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 111,921 818 2.92 112,524 912 3.24 12,552 1,661 2.95 114,248 1,900 3.33 Non-interest bearing deposits 5,882 5,655 5,810 5,352 Other liabilities 2,405 3,140 2,339 3,185 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 120,208 121,319 120,701 122,785 Stockholders' equity 13,329 13,732 13,417 13,793 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $133,537 $135,051 $134,118 $136,578 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income/interest rate spread (2) 826 2.19% 790 1.98% 1,660 2.18% 1,637 2.03% - -------------------------------------------------------------------------------------------------------------------------------- Net earning assets/net interest margin (3) $16,859 2.57% $17,804 2.42% $16,925 2.65% $17,803 2.48% - -------------------------------------------------------------------------------------------------------------------------------- Percentage of interest-earning assets to interest-bearing liabilities 115.06% 115.82% 115.04% 115.58% - -------------------------------------------------------------------------------------------------------------------------------- 1. Calculated net of deferred loan fees, loan discounts, loans in process and allowance for loan losses. 2. Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. 3. Net interest margin represents net interest income divided by average interest-earning assets. Comparison Of Operating Results For The Three Months Ended June 30, 2004 And June 30, 2003 General. Net income decreased by $196,000 and amounted to a loss of $126,000 for the three months ended June 30, 2004 from a profit of $70,000 for the three months ended June 30, 2003. Basic and diluted loss per share decreased to $.11 for the three months ended June 30, 2004 from a profit of $.06 per share for the three months ended June 30, 2003. The decrease in net income and earnings per share was primarily related to a $134,000 increase in non tax deductible professional fees and other non-interest expense incurred as a result of the definitive agreement for the sale of all the common stock of the Company. In addition, there was a $64,000 loss on the sale of securities available for sale recorded during the three months ended June 30, 2004 compared with a gain of $37,000 recorded during the three months ended June 30, 2003. Interest Income. Interest income decreased by $58,000 and amounted to $1.6 million for the three months ended June 30, 2004 from $1.7 million for the three months ended June 30, 2003. There was a decrease in the annualized yield on average interest-earning assets to 5.11% for the three months ended June 30, 2004 from 5.22% for the three 11 months ended June 30, 2003. 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. The decrease was partially offset by a $13.9 million increase in average loans receivable from $81.2 million for the three months ended June 30, 2003 to $95.1 million for the three months ended June 30, 2004. Interest Expense. Interest expense decreased $94,000 and amounted to $818,000 for the three months ended June 30, 2004 from $912,000 for the three months ended June 30, 2003. The annualized average cost of interest- bearing liabilities decreased to 2.92% for the three months ended June 30, 2004 from 3.24% for the three months ended June 30, 2003. The decrease was due primarily to a decrease in the average cost of certificates of deposit from 3.99% for the three months ended June 30, 2003 to 3.48% for the three months ended June 30, 2004. There were also decreases in the average cost of all other categories of interest-bearing deposits, primarily attributable to the decline in interest rates. Provision For Loan Losses. The Company did not add to its allowance for loan losses for the quarter ended June 30, 2004 or June 30, 2003. The lack of a provision was primarily attributable to a decrease in total loans receivable during the quarter and in the amount of commercial real estate loans in the portfolio, which by their nature generally experience higher rates of losses than single family loans. The allowance for loan losses was $355,000 at June 30, 2004 and $348,000 at December 31, 2003 and amounted to .38% of loans receivable and .36% 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, 2004, there can be no assurance that such losses will not exceed estimated amounts. Non-Interest Income. Non-interest income decreased by $167,000 and amounted to $20,000 for the three months ended June 30, 2004 compared with $187,000 for the three months ended June 30, 2003. The decrease was primarily attributable to a $101,000 decrease in gain on sale of securities available for sale due primarily to a $64,000 loss on the sale of investment securities available for sale recorded during the three months ended June 30, 2004. In addition, there was a $52,000 decrease in gains on the sale of mortgage loans held for sale due primarily to a decline in loan volume. Non-Interest Expense. Non-interest expense increased by $110,000 to $983,000 for the quarter ended June 30, 2004 compared with $873,000 for the quarter ended June 30, 2003. The increase was primarily attributable to increases in professional fees and other non-interest expense related to costs associated with the signing of a definitive agreement for the sale of all the common stock of the Company. Income Tax Expense. Income tax expense decreased by $45,000 and amounted to a benefit of $11,000 for the three months ended June 30, 2004 from an expense of $34,000 for the three months ended June 30, 2003. The decrease in expense was primarily related to a decrease in pretax income. Because certain expenses related to the merger and acquisition agreement were not tax deductible, the Company was not able to recognize an additional tax benefit of approximately $40,000 during the period. 12 Comparison Of Operating Results For The Six Months Ended June 30, 2004 And June 30, 2003 General. Net income decreased by $187,000 and amounted to a loss of $51,000 for the six months ended June 30, 2004 compared with a profit of $136,000 for the six months ended June 30, 2003. Basic and diluted earnings per share decreased by $.16 and amounted to a loss of $.04 for the six months ended June 30, 2004 compared with a profit of $.12 per share for the six months ended June 30, 2003. The decrease was primarily attributable to a $158,000 increase in non-tax deductible professional fees related to a definitive agreement for the sale of all the common stock of the Company dated April 8, 2004 and a $129,000 decrease in other non-interest income. Interest Income. Interest income decreased by $216,000 and amounted to $3.3 million for the six months ended June 30, 2004 compared with $3.5 million for the six months ended June 30, 2003. The decrease was primarily attributable to a decrease in the annualized yield on average interest-earning assets to 5.13% for the six months ended June 30, 2004 from 5.36% for the six months ended June 30, 2003. 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 $2.6 million decrease in average interest -earning assets from $132.1million for the six months ended June 30, 2003 to $129.5 million for the six months ended June 30, 2004. Interest Expense. Interest expense decreased $239,000 and amounted to $1.7 million for the six months ended June 30, 2004 compared with $1.9 million for the six months ended June 30, 2003. The decrease was primarily attributable to a decrease in the average cost of interest-bearing liabilities to 2.95% for the six months ended June 30, 2004 from 3.33% for the six months ended June 30, 2003 due primarily to a decrease in the average cost of certificates of deposit. There was also a $1.7 million decrease in average interest-bearing liabilities primarily due to a reduction in borrowed funds. Provision For Loan Losses. The Company added $7,000 to its allowance for loan losses for the six months ended June 30, 2004 compared with no provision for the six months ended June 30, 2003. The increase in the provision was primarily attributable to an increase 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. The allowance for loan losses was $354,000 at June 30, 2004 and $347,000 at December 31, 2003 and amounted to .38% of loans receivable and .36% 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, 2004, there can be no assurance that such losses will not exceed estimated amounts. Non-Interest Income. Non-interest income decreased $129,000 and amounted to $181,000 for the six months ended June 30, 2004 compared with $310,000 for the six months ended June 30, 2003. The decrease was primarily attributable to a $128,000 decrease in gain on the sale of investment securities available for sale and a $37,000 decrease in gains on the sale of mortgage loans held for sale. These decreases were partially offset by a $62,000 recovery from an embezzlement recorded during the first quarter of 2004. Non-Interest Expense. Non-interest expense increased $131,000 and amounted to $1.9 million for the six months ended June 30, 2004 compared with $1.7 million for the six months ended June 30, 2003. The increase was primarily attributable to a $158,000 increase in professional fees. Income Tax Expense. Income tax expense decreased $47,000 and amounted to $23,000 for the six months ended June 30, 2004 compared with $70,000 for the six months ended June 30, 2003. The decrease was primarily 13 attributable to a decrease in pre-tax income. Because certain expenses related to the merger and acquisition agreement were not tax deductible, the Company was not able to recognize an additional tax benefit of approximately $40,000 during the period. Item 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management within the 90-day period preceding the filing date of this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls: In the quarter ended June 30, 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. Item 4. New Accounting Pronouncements Adoption of New Accounting Standards: During 2003, the Company adopted FASB Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, FASB Statement 132 (revised 2003), Employer's Disclosures about Pensions and Other Post retirement Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest Entities. Adoption of the new standards did not materially affect the Company's operating results or financial condition 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. On April 23, 2004, the annual meeting of stockholders was held. At the meeting, Mary Ann Hass and Joseph A. Graber were elected to serve as directors with terms expiring in 2007. Continuing on as directors were Gregory W. Rose and Mark W. Ferstel whose terms will expire in 2006 and Frank J. Donati whose term will expire in 2005. In addition, the stockholders ratified the appointment of Crowe, Chizek and Company LLC as the Company's independent auditors for the fiscal year ending December 31, 2004 and defeated a stockholder proposal regarding management employment contracts. 14 The voting on each item presented at the annual meeting was as follows: Election of Directors For Withheld --- -------- Mary Ann Hass 944,161 132,729 Joseph A. Graber 949,748 127,142 Ratification of the appointment of Crowe For Against Abstain Broker Non-Votes Chizek and Company LLC as the Company's --- ------- ------- ---------------- auditors for the fiscal year ending December 31, 2004 1,065,915 10,900 75 None For Against Abstain Broker Non-Votes --- ------- ------- ---------------- The stockholder proposal regarding management employment contracts 212,777 454,393 72,130 337,590 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. (B) 1. 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. 2. Form 8-K dated April 15, 2004, Registrant issued a press release dated April 15, 2004 regarding first quarter 2004 earnings and the declaration of a regular quarterly dividend. 3. Form PREM14A dated June 10, 2004, Registrant filed a preliminary proxy regarding the agreement and plan of merger dated April 8, 2004 with Diamond Bancorp, Inc. 15 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTH BANCSHARES, INC. (Registrant) Date August 9, 2004 /S/ Joseph A. Graber ------------------ --------------------- Joseph A. Graber President and Chief Executive Officer Date August 9, 2004 /S/ Martin W. Trofimuk ------------------ ----------------------- Martin W. Trofimuk Vice President, Treasurer and Chief Financial Officer 16 Exhibit 31.1 CERTIFICATION I, Joseph A. Graber, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of North Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly represent in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the small business issuer and have; a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors; a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers's internal control over financial reporting. Date: August 9, 2004 /S/ Joseph A. Graber --------------------- Joseph A. Graber, President and Chief Executive Officer 17. 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: August 9, 2004 /S/ Martin W. Trofimuk ----------------------- Martin W. Trofimuk, Vice President, Treasurer and Chief Financial Officer 18 Exhibit 32 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of North Bancshares, Inc. (the "Company") that the Quarterly Report on Form 10-QSB fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report. Dated: August 9, 2004 /S/ Joseph A. Graber --------------------- -------------------- Joseph A. Graber President and Chief Executive Officer Dated: August 9, 2004 /S/ Martin W. Trofimuk --------------------- ---------------------- Martin W. Trofimuk Vice President, Treasurer and Chief Financial Officer 19