Exhibit 13.1 2000 Annual Report to security holders
TABLE OF CONTENTS
MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER........... 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA........................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 7
INDEX TO FINANCIAL STATEMENTS............................................27
QUARTERLY RESULTS OF OPERATIONS (Unaudited)..............................61
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK...........................62
SHAREHOLDER INFORMATION..................................................63
This Annual Report to Shareholders contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations (including noninterest expense and availability of
potential tax credits) and business of Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include changes in general, economic and market
conditions, the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments, and changes in depositor preferences for
financial products.
MESSAGE OF THE CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dear Shareholders:
We are pleased to report to you the operating results of North Central
Bancshares, Inc. ("North Central Bancshares" or the "Company") for the year
ended December 31, 2000. North Central Bancshares is the holding company for
First Federal Savings Bank of Iowa (the "Bank).
For the year ended December 31, 2000, North Central Bancshares' net
income was $4.0 million or $2.00 diluted earnings per share, as compared to $4.2
million, or $1.60 diluted earnings per share, for the year ended December 31,
1999. Some of our achievements during the past year include:
2000 HIGHLIGHTS
* Total assets, loans and diluted earnings per share reached new Company
highs.
* Total assets reached a high of $389.0 million
* Total net loans increased by 10.9% or $31.3 million
* Diluted earnings per share for the year 2000 reached a record
$2.00, a 25% increase
* Increased quarterly dividends in April, 2000 to $0.125 per share, a
25% increase
* Repurchased a total of 349,862 shares or 15.5% of outstanding stock
during the year ended December 31, 2000
* Established a Dividend Reinvestment and Stock Purchase Plan for the
Company
* Established our presence on the Internet at www.firstfederaliowa.com
* Relocated Ames, Iowa office to a new larger building
Howard A. Hecht will retire from the Board of Directors at this year's
annual meeting of the Company. During his twelve year tenure on the Board, the
Company and the Bank have benefitted tremendously from his wise counsel and
input. We all wish him well in his retirement.
I want to thank our outstanding staff who helped make 2000 another
successful year for the Company. The directors, officers and staff of North
Central Bancshares, Inc. and its subsidiary, First Federal Savings Bank of Iowa,
wish to thank you for your continued interest and support. We remain committed
to increasing shareholder value.
Sincerely,
/s/ David M. Bradley
--------------------
David M. Bradley
Chairman, President and
Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of North Central
Bancshares, Inc. set forth below is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Annual Report.
At December 31,
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2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Selected Consolidated Financial
Condition Data:
Total assets............................ $ 388,998 $ 367,433 $ 336,690 $ 221,954 $ 203,093
Cash (noninterest bearing).............. 2,519 8,542 2,435 982 963
Loans receivable, net:(1)
First mortgage loans secured
by one-to-four family
residences.......................... 174,413 161,547 145,967 114,286 106,053
First mortgage loans secured
by multifamily properties........... 74,644 71,503 63,285 49,895 33,015
First mortgage loans secured
by commercial properties............ 23,825 17,470 11,168 3,724 5,068
Consumer loans........................ 45,144 36,239 33,612 23,344 21,695
---------- ------------ ---------- ---------- ----------
Total loans receivable, net......... 318,026 286,759 254,032 191,249 165,831
Investment securities(2)................ 49,682 53,820 63,084 22,279 29,577
Deposits................................ 261,167 271,031 246,690 141,124 129,722
Borrowed funds.......................... 88,592 55,715 38,832 28,550 22,335
Total shareholders' equity.............. 36,398 38,127 48,207 50,417 49,235
For the Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Selected Operating Data:
Interest income......................... $ 27,284 $ 24,556 $ 23,602 $ 16,205 $15,090
Interest expense........................ 16,707 13,604 12,869 7,900 6,929
---------- ---------- ---------- ---------- ----------
Net interest income before
provision for loan losses.......... 10,577 10,952 10,733 8,305 8,161
Provision for loan losses............... 120 120 210 240 240
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses.......... 10,457 10,832 10,523 8,065 7,921
---------- ---------- ---------- ---------- ----------
Noninterest income:
Fees and service charges........... 1,592 1,485 1,243 657 580
Abstract fees...................... 1,233 1,421 1,584 1,222 931
Other income....................... 1,189 1,157 1,088 658 382
---------- ---------- ---------- ---------- ----------
Total noninterest income......... 4,014 4,063 3,915 2,537 1,893
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits..... 4,103 4,026 3,482 2,209 2,004
Premises and equipment............. 1,092 931 812 444 421
Data processing.................... 455 522 553 258 244
One-time SAIF special assessment... -- -- -- -- 817
SAIF deposit insurance
premiums......... 55 147 143 85 279
Goodwill 472 472 436 28 29
Other expenses..................... 2,410 2,356 2,146 1,553 1,144
---------- ---------- ---------- ---------- ----------
Total noninterest expense........ 8,587 8,454 7,572 4,577 4,938
---------- ---------- ---------- ---------- ----------
Income before income taxes.............. 5,884 6,441 6,866 6,025 4,876
Income tax expense...................... 1,873 2,241 2,481 2,108 1,744
---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,011 $ 4,200 $ 4,385 $ 3,917 $ 3,132
========== ========== ========== ========== ==========
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At or for the Year Ended December 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Key Financial Ratios and Other Data:
Performance Ratios: (%)
Net interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities)...................... 2.57% 2.86% 2.81% 2.87% 3.01%
Net interest margin (net interest income
as a percentage of average interest-
earning assets)........................... 2.95 3.35 3.50 4.06 4.33
Return on average assets (net income
divided by average total assets).......... 1.06 1.21 1.35 1.86 1.62
Return on average equity (net income
divided by average equity)................ 11.08 9.51 8.73 7.94 6.30
Noninterest income to average assets........ 1.07 1.21 1.21 1.20 0.98
Efficiency ratio(3)......................... 58.85 56.30 51.69 42.21 49.11
Noninterest expense to average assets....... 2.28 2.45 2.34 2.17 2.56
Net interest income after provision for
loan losses to noninterest expenses....... 121.78 128.13 138.97 176.22 160.40
Financial Condition Ratios: (%) (4)
Equity to assets at period end.............. 9.36 10.38 14.32 22.72 24.24
Tangible equity to tangible assets
at period end (5) (6)..................... 7.84 8.68 12.42 22.32 23.80
Average shareholders' equity divided by
average total assets...................... 9.61 12.77 15.52 23.38 25.73
Average tangible shareholders equity divided
by average tangible total assets (5) (6).. 8.00 10.94 13.71 22.96 25.29
Average interest-earning assets to average
interest-bearing liabilities.............. 108.31 112.05 116.28 130.97 136.02
Asset Quality Ratios: (%) (4)
Nonaccrual loans to total net loans......... 0.33 0.07 0.38 0.08 0.11
Nonperforming assets to total assets(7)..... 0.28 0.20 0.34 0.10 0.15
Allowance for loan losses as a percent of
total loans receivable at end of period... 0.88 0.95 1.03 1.10 1.16
Allowance for loan losses to nonaccrual
loans..................................... 274.08 1,301.13 279.72 1,468.33 1,059.35
Per Share Data:
Book value per share........................ $19.04 $16.86 $16.26 $15.43 $14.36
Tangible book value per share(5)............ 15.71 13.83 13.79 15.09 14.01
Basic earnings per share (8)................ 2.04 1.64 1.44 1.23 0.82
Diluted earnings per share (9).............. 2.00 1.60 1.40 1.21 0.82
Dividends declared per share................ 0.50 0.40 0.32 0.25 0.28
Dividend payout ratio....................... 0.25 0.24 0.22 0.20 0.34
Key Financial Ratios Excluding
SAIF Assessment: (%) (10)
Return on average assets (net income divided
by average total assets).................. 1.06% 1.21% 1.35% 1.86% 1.89%
Return on average equity (net income
divided by average equity)................ 11.08 9.51 8.73 7.94 7.34
Efficiency ratio (3)........................ 58.85 56.30 51.69 42.21 40.99
Noninterest expense to average assets ...... 2.28 2.45 2.34 2.17 2.13
Net interest income after provision for
loan losses to noninterest expenses....... 121.78 128.13 138.97 176.22 192.21
(Notes on following page)
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[FN]
(1) Loans receivable, net represents total loans less discounts, loans in
process, net deferred loan fees and allowance for loan losses. The
allowance for loan losses at December 31, 2000, 1999, 1998, 1997 and
1996 was $2.8 million, $2.8 million, $2.7 million, $2.2 million and
$2.0 million, respectively.
(2) Includes interest-bearing deposits with the Federal Home Loan Bank of
Des Moines (the "FHLB").
(3) Efficiency ratio represents noninterest expense divided by the sum of
net interest income before provision for loan losses plus noninterest
income.
(4) Asset Quality Ratios are end of period ratios. With the exception of
end of period ratios, all ratios are based on average monthly balances
during the indicated periods and are annualized where appropriate.
(5) Tangible equity consists of stockholders' equity less goodwill and
title plant. Goodwill and title plant at December 31, 2000, 1999, 1998,
1997 and 1996 was $6.4 million, $6.8 million, $7.3 million, $1.1
million and $1.2 million, respectively.
(6) Tangible assets consists of total assets less goodwill and title plant.
Goodwill and title plant at December 31, 2000, 1999, 1998, 1997 and
1996 was $6.4 million, $6.8 million, $7.3 million, $1.1 million and
$1.2 million, respectively.
(7) Nonperforming assets consists of nonaccrual loans, foreclosed real
estate and other nonperforming assets.
(8) Basic earnings per share information is calculated by dividing net
income by the weighted average number of shares outstanding. The
weighted average number of shares outstanding for basic earnings per
share computation for 2000, 1999, 1998, 1997 and 1996 were 1,963,686,
2,562,940, 3,048,148, 3,184,269 and 3,818,273, respectively.
(9) Diluted earnings per share information is calculated by dividing net
income by the weighted average number of shares outstanding, adjusted
for the effect of dilutive potential common shares outstanding which
consists of stock options granted. The weighted average number of
shares outstanding for diluted earnings per share computation for 2000,
1999, 1998, 1997 and 1996 were 2,006,340, 2,621,542, 3,132,833,
3,241,069 and 3,818,273, respectively.
(10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment
for the recapitalization of the Savings Association Insurance Fund
("SAIF").
(11) As of the close of business on January 30, 1998, the Company completed
the Acquisition of Valley Financial Corp. Subsequent to January 30,
1998, the information contained in the Financial Selected Data tables
reflect the effect of the Acquisition. Financial data prior to January
30, 1998, does not reflect the Acquisition and is based upon historical
figures.
</FN>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company was
organized on December 5, 1995 at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank in connection with the conversion and reorganization of the Bank and North
Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding
company structure (these transactions are collectively referred to as the
"Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding
Company issued an aggregate of 4,011,057 shares of its common stock, par value
$0.01 per share ("Common Stock"), of which 1,385,590 shares were issued in
exchange for all of the Bank's issued and outstanding shares, except for shares
owned by the MHC which were cancelled, and 2,625,467 shares of which were sold
in Subscription and Community Offerings at a price of $10.00 per share, with
gross proceeds amounting to $26,254,670. At this time, the Holding Company
conducts business as a unitary savings and loan holding company and the
principal business of the Holding Company consists of the operation of its
wholly-owned subsidiary, the Bank.
The profitability of the Company depends primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans and investment
securities, and the interest paid on interest-bearing liabilities, which
primarily consist of deposits and advances from the FHLB. Net interest income is
a function of the Company's interest rate spread, which is the difference
between the average yield on interest-earning assets and the average rate paid
on interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The
Company's net income is affected by its level of noninterest income which
primarily consists of service fees and charges and abstract fees, and
noninterest expense, which primarily consists of compensation and employee
benefit expenses, premises and equipment and data processing. Net income also is
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Company.
Acquisition of Valley Financial Corp.
As of the close of business on January 30, 1998 (the "Effective Time"),
the Company completed the acquisition ( the "Acquisition") of Valley Financial
Corp., ("Valley Financial"), pursuant to an Agreement and Plan of Merger, dated
as of September 18, 1997, (the "Merger Agreement"). The Acquisition resulted in
the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank,
("Valley Savings") with and into the Bank, with the Bank as the resulting
financial institution. Valley Savings, headquartered in Burlington, Iowa, was a
federally-chartered stock savings bank with three branch offices located in
southeastern Iowa.
In connection with the Acquisition, each share of Valley Financial's
common stock, par value $1.00 per share, issued and outstanding (other than
shares held as treasury stock of Valley Financial) was cancelled and converted
automatically into the right to receive $525.00 per share in cash pursuant to
the terms and conditions of the Merger Agreement. As a result of the
Acquisition, shareholders of Valley Financial were paid $14,726,250 in cash.
SAIF Recapitalization
In response to the disparity in deposit insurance assessment rates that
existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts
insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act")
was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit
Insurance Corporation ("FDIC") to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. The Company's special SAIF assessment of $817,000 before
taxes (and $512,000 net of taxes) was charged against income in the third
quarter of 1996 and
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paid in November 1996 (the "SAIF Assessment"). In view of the recapitalization
of the SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits.
For the fiscal years ended December 31, 2000, 1999 and 1998, the Bank incurred
$55,000, $147,000 and $143,000, respectively, in deposit insurance premiums and
for the interest payments on the FICO bonds issued by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy primarily by using deposits and advances from
the FHLB as its source of funds and maintaining a substantial part of its assets
in loans secured by one- to four-family residential real estate, multi-family
loans and commercial real estate located both inside and outside the Company's
market area, consumer and other loans and in other liquid investment securities.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
locally-headquartered institution can offer; (2) maintaining high asset quality
by emphasizing investment in residential mortgage loans (including the purchase
of qualifying multifamily and commercial real estate loans) and securities
issued or guaranteed by the United States Government or agencies thereof and
mortgage-backed securities; (3) maintaining capital in excess of regulatory
requirements and growing only to the extent that adequate capital levels can be
maintained; (4) controlling noninterest expenses; (5) managing interest rate
risk exposure while achieving desirable levels of profitability; and (6)
increasing noninterest income through other increases in fees and service
charges.
Highlights of the Company's business strategy are as follows:
Community-Oriented Institution. The Company is committed to meeting the
financial needs of the communities in which it operates. Based in part on its
participation in several different programs designed to facilitate residential
lending to low- and moderate-income households, the Bank has received an
"Outstanding" Community Reinvestment Act rating. The Company believes it is
large enough to provide a full range of personal and business financial services
and yet is small enough to be able to provide such services on a personalized
and efficient basis. Management believes that the Company can be more effective
in servicing its customers than many of its competitors which are not
headquartered locally. Such proximity allows senior management of the Bank to
quickly and personally respond to customer needs and inquiries.
Strong Retail Deposit Base. In 2000, the Company had a relatively
strong and stable retail deposit base drawn from its offices located in Fort
Dodge, Ames, Nevada, Perry, Burlington and Mount Pleasant, Iowa. At December 31,
2000, 31.6% of the deposit base, or $82.5 million, consisted of core deposits,
which included money market accounts, savings accounts, NOW accounts, and
noninterest-bearing demand accounts. Core deposits are considered to be a more
stable and lower cost source of funds than certificates of deposit or outside
borrowings. The Company will continue to emphasize retail deposits by providing
quality customer service, offering competitive rates on deposit accounts, and
providing depositors with a full range of accounts.
Asset Quality and Emphasis on Residential Mortgage Lending. The Company
has historically emphasized residential real estate financing, and has been
primarily a portfolio lender. The Company expects to continue its commitment to
financing the purchase or improvement of residential real estate in its market
area. At December 31, 2000, 44.8% of the Company's total assets consisted of
one-to-four family residential first mortgage loans. To supplement local
mortgage loan originations and to diversify its mortgage loan portfolio
geographically, the Company has purchased loans in the secondary mortgage
market, with an emphasis on multifamily and commercial real estate loans secured
by properties outside the State of Iowa (the "out of state properties"). At
December 31, 2000, the Company's portfolio of loans which were either originated
or purchased by the Company and secured by out of state properties consisted of
$9.5 million of one-to-four family residential mortgage loans, or 2.9% of the
Company's total loan portfolio, and $92.2 million of multifamily and commercial
loans, or 28.6% of the Company's total loan portfolio. At December 31, 2000, the
Company's ratio of nonperforming assets to total assets was 0.28%. The Company
also invests in United
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States Government agencies, State and Local Obligations, mortgage-backed
securities, interest-earning deposits, equity securities and FHLB stock.
Generally, the yield on mortgage loans originated and purchased by the
Company is greater than that of securities purchased by the Company. Future
economic conditions and continued strong banking competition could result in
diminished lending opportunities. If new loan originations are reduced in the
future, the Company may increase its investment in securities and in purchased
mortgage loans outside its market area.
Capital Strength and Controlled Internal Growth. Total equity decreased
from $49.2 million at December 31, 1996 to $36.4 million at December 31, 2000, a
decrease of 26.1%. Total assets have increased by $185.9 million, or 91.5%,
since December 31, 1996. As a result, the ratio of total equity to total assets
has decreased from 24.2% at December 31, 1996 to 9.4% at December 31, 2000. The
Company's growth can be attributed to the Acquisition and the Company's emphasis
on the origination and purchase of residential mortgage loans, the purchase of
multifamily and commercial mortgage loans and the origination of consumer loans.
The Company's growth has been funded through a combination of the use of
proceeds from the stock offerings held in 1994 and 1996, FHLB advances and
deposit growth. The Company intends to maintain strong levels of total equity
and capital ratios by controlling growth to the extent that adequate capital
levels can be maintained.
Acquisition Strategy. With the consummation of the Acquisition in 1998,
the Company has grown through the purchase of another financial institution. The
Acquisition resulted in an increase in total assets of approximately 42.0%,
making effective use of the Company's excess capital. The Company intends to
continue evaluating the possibility of acquiring branch offices and other
financial institutions, which involves executing confidentiality agreements and
conducting due diligence. Such evaluations by the Company provide no indication
of the likelihood that the Company will enter into any agreement to engage in an
acquisition transaction as, in many instances, such transactions are subject to
competitive bidding and, in every instance, are subject to extensive arm's
length negotiations once the Company's evaluation is complete.
Increasing Noninterest Income. The Company has attempted to increase
its level of noninterest income from both new and traditional lines of business
to supplement net interest income. The Company currently owns abstract companies
in Webster, Boone and Jasper counties in Iowa, through First Iowa Title
Services, Inc. ("First Iowa"), the Bank's wholly owned subsidiary. The abstract
business performed by First Iowa replaces the function of a title insurance
company. The Company believes that First Iowa can continue to be an excellent
source of fee income. Noninterest income from such business for the year ended
December 31, 2000 was $1.2 million, offset by noninterest expense attributable
to First Iowa. The Company also owns a mortgage banking company in Ames, Iowa,
First Iowa Mortgage, Inc. ("First Iowa Mortgage"), the Bank's wholly owned
subsidiary. On January 30, 1998, the Company acquired First Iowa Mortgage as a
part of the Acquisition of Valley Financial. Non-interest income for such
business for the year ended December 31, 2000 was $231,000, offset by
non-interest expense attributable to First Iowa Mortgage.
Liquidity and Interest Rate Risk Management. Management seeks to manage
the Company's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an acceptable interest
rate spread. At December 31, 2000, total interest-bearing liabilities maturing
or repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $29.9 million, representing a one-year gap to
total assets ratio of negative 7.7% as compared to a negative 14.7% at December
31, 1999. To reduce the potential volatility of the Company's earnings in a
changing interest rate environment, the Company has emphasized the origination
of 5 and 7-year fixed rate mortgage loans that convert to adjustable rates at
the conclusion of their initial terms and have overall maturities of up to 30
years, adjustable-rate loans, investment in short to medium term U. S.
Government agencies, mortgage-backed securities and has sought to lengthen the
terms of its deposits through its pricing strategies with respect to longer term
certificates of deposit. See "-- Discussion of Market Risk -- Interest Rate
Sensitivity Analysis".
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Liquidity and Capital Resources
OTS regulations require that thrift institutions such as the Bank
maintain an average daily balance of liquid assets (cash, certain time deposits,
banker's acceptances and specified United States Government, state or federal
agency obligations) equal to a monthly average of not less than 4% of its net
withdrawable deposits plus short-term borrowings. At December 31, 2000, the
amount of the Bank's liquid assets were $26.0 million, resulting in a liquidity
ratio of 8.3%.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of securities and other investments, and
earnings and funds provided from operations. While scheduled principal
repayments on loans are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests in
short-to- medium term interest-earning assets, which provide liquidity to meet
lending requirements. At December 31, 2000, $362,000, or 1.2%, of the Company's
investment portfolio, excluding equity and mortgage backed securities, was
scheduled to mature in one year or less and $17.0 million, or 56.9%, was
scheduled to mature in one to five years and $12.5 million, or 41.9%, was
scheduled to mature in more than five years. Certificates of deposit scheduled
to mature in less than one year, at December 31, 2000, totaled $93.0 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Company. If the Company requires funds beyond
its ability to generate them internally, borrowing agreements exist with the
FHLB which provide an additional source of funds. The amount of eligible
collateral for blanket lien pledges from the FHLB was $165.8 million as of
December 31, 2000. For additional information about cash flows from the
Company's operating, financing and investing activities, see the Statements of
Cash Flows included in the Consolidated Financial Statements.
At December 31, 2000, the Company had outstanding loan commitments of
$3.2 million. This amount does not include undisbursed overdraft loan privileges
and the undisbursed home equity lines of credit.
The main sources of liquidity for the Holding Company are net proceeds
from the sale of stock and payments from the Bank in the form of dividends and
loan repayments. The main cash outflows are payments of dividends to
shareholders and funds used to repurchase the Common Stock. During 2000, the
Holding Company repurchased 349,862 shares of its Common Stock. The Holding
Company's ability to pay dividends to shareholders depends substantially on
dividends and loan payments received from the Bank. The Bank may not declare or
pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause equity to be reduced below applicable regulatory
capital requirements or the amount required to be maintained for the liquidation
account. For a description of the liquidation account, see Notes 16 and 17 to
the Consolidated Financial Statements. Unlike the Bank, the Holding Company is
not subject to OTS regulatory restrictions on the payment of dividends to its
shareholders, however, it is subject to the requirements of Iowa law. Iowa law
generally prohibits the Holding Company from paying a dividend if, after giving
it effect, either of the following would result: (a) the Holding Company would
not be able to pay its debts as they become due in the usual course of business;
or (b) the Holding Company's total assets would be less than the sum of its
total liabilities, plus the amount that would be needed, if the Holding Company
were to be dissolved at the time of distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the distribution.
The primary investing activities of the Company are the origination and
purchase of mortgage and other loans and the purchase of securities. During the
years ended December 31, 2000, 1999 and 1998, the Company's disbursements for
loan originations and purchases totaled $86.3 million, $91.7 million and $85.2
million, respectively. These activities were funded primarily by net deposit
inflows, principal repayments on loans, proceeds from the maturity and sale of
securities and FHLB advances. Net cash flows used in investing activities
amounted to $25.4 million, $37.2 million and $2.2 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Net cash flows provided by
financing activities amounted to $16.4 million, $28.0 million and $9.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
The OTS regulations require savings associations, such as the Bank, to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations; a
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leverage ratio requirement of 3% of core capital to such adjusted total assets;
and a risk-based capital ratio requirement of 8% of core and supplementary
capital to total risk-based assets. The Bank satisfied these minimum capital
standards at December 31, 2000 with tangible and leverage capital ratios of 7.4%
and a total risk-based capital ratio of 14.0%. In determining the amount of
risk-weighted assets for purposes of the risk- based capital requirement, a
savings association must compute its risk-based assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as assigned by the OTS capital
regulations. These capital requirements, which are applicable to the Bank only,
do not consider additional capital held at the Holding Company level, and
require certain adjustments to shareholder's equity to arrive at the various
regulatory capital amounts.
The table below presents the Bank's regulatory capital amounts as
compared to the OTS regulatory capital requirements at December 31, 2000:
Capital Excess
Amount Requirements Capital
------ ------------ -------
(In thousands)
Tangible capital........... $ 28,456 $ 5,732 $ 22,724
Core capital............... 28,456 11,464 16,992
Risk-based capital......... 31,241 17,830 13,411
-11-
Discussion of Market Risk--Interest Rate Sensitivity Analysis
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate loan
portfolio, within Iowa, is subject to risks associated with the local economy.
The Company has sought to diversify its loan portfolio by purchasing loans
secured by properties outside of Iowa. At December 31, 2000, 31.5% of the
Company's loan portfolio was secured by properties outside the State of Iowa,
located in twenty- six states. See "Asset Quality." The Bank does not own any
trading assets. At December 31, 2000, neither the Company nor the Bank had any
hedging transactions in place, such as interest rate swaps and caps.
The Company seeks to manage its interest risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Company also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As discussed more fully below, there
are a variety of factors which influence the repricing characteristics of any
given asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The "interest rate
sensitivity gap" is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
The Company's policy in recent years has been to manage its exposure to
interest rate risk generally by focusing on the maturities of its interest rate
sensitive assets and by emphasizing adjustable-rate mortgage loans, and
maintaining a level of liquidity by investing in short to medium term U.S.
government agencies, mortgage-backed securities and short-term interest-earning
deposits. The Company generally offers competitive rates on deposit accounts and
prices certificates of deposit to provide customers with incentives to choose
certificates of deposit with longer terms.
At December 31, 2000, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $29.9 million, representing a one-year gap ratio
of negative 7.7%, compared to a one-year gap ratio of negative 14.7% at December
31, 1999. To manage the potential volatility of the Company's earnings in a
changing interest rate environment, the Company has emphasized the origination
of 5 and 7-year fixed rate mortgage loans that convert to adjustable rates at
the conclusion of their initial terms and have overall maturities of up to 30
years and has sought to lengthen the terms of its deposits through its pricing
strategies with respect to longer term certificates of deposit. The Chief
Executive Officer regularly meets with the Bank's senior executive officers to
review trends in deposits as well as mortgage and consumer lending. The Chief
Executive Officer also regularly meets with the investment committee to review
the investment portfolio. The Chief Executive Officer reports quarterly to the
Board of Directors on interest rate risks and trends, as well as liquidity and
capital ratios and requirements.
Gap Table. The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December 31, 2000 which
are expected to reprice or mature, based upon certain
-12-
assumptions, in each of the future time periods shown. Except as stated below,
the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of term of
repricing or the contractual terms of the asset or liability. Certain
assumptions used in preparing the table are set forth in the following table.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable.
At December 31, 2000 (1)
-------------------------------------------------------------------------------------------
Within 1-3 3-5 5-10 10-20 Over 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-earning assets:
First mortgage loans
Adjustable (2)................. $ 87,648 $ 71,313 $ 43,450 $ -- $ -- $ -- $202,411
Fixed (2)...................... 18,041 26,103 16,008 20,541 1,658 21 82,372
Consumer and other loans.......... 18,516 18,667 8,074 525 25 1 45,808
Investment securities(3)(4)....... 17,159 6,219 14,835 3,121 -- -- 41,334
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets.. $141,364 $122,302 $ 82,367 $ 24,187 $ 1,683 $ 22 $371,925
======== ======== ======== ======== ======== ======== ========
Rate sensitive liabilities:
Savings accounts.................. $ 3,693 $ 5,609 $ 3,864 $ 5,186 $ 2,848 $ 523 $ 21,723
NOW accounts...................... 11,183 11,484 4,558 2,702 295 3 30,225
Money market accounts............. 19,370 5,149 -- -- -- -- 24,519
Certificate accounts.............. 93,149 61,996 23,274 209 -- -- 178,628
Noninterest bearing deposits...... 6,071 -- -- -- -- -- 6,071
FHLB advances and other liabilities 37,803 44,769 983 5,038 -- -- 88,593
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $171,269 $129,007 $ 32,679 $ 13,135 $ 3,143 $ 526 $349,759
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap............. $(29,905) $ (6,705) $ 49,688 $ 11,052 $ (1,460) $ (504)
Cumulative interest-sensitivity gap.. $(29,905) $(36,610) $ 13,078 $ 24,130 $ 22,670 $ 22,166
Interest sensitivity gap to total assets (7.70)% (1.73)% 12.79% 2.85% (0.38)% (0.13)%
Cumulative interest-sensitivity gap to
total assets...................... (7.70) (9.42) 3.37 6.21 5.84 5.71
Ratio of interest-earning assets to
interest-bearing liabilities...... 82.54 94.80 252.05 184.14 53.55 4.18 106.34
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 82.54% 87.81% 103.93% 106.97% 106.49% 106.34% 106.34%
Total assets......................... $388,456 $388,456 $388,456 $388,456 $388,456 $388,456 $388,456
Cumulative interest bearing assets... $141,364 $263,666 $346,033 $370,220 $371,903 $371,925 $371,925
Cumulative interest sensitive $171,269 $300,276 $332,955 $346,090 $349,233 $349,759 $349,759
liabilities
[FN]
(1) The following assumptions were used in regard to prepayment speed for
loans: (i) multifamily adjustable rate loans will prepay at 10
percent per year, (ii) multifamily fixed rate loans and commercial
real estate loans (both fixed and adjustable rate) will prepay at 12
percent, (iii) one-to-four family fixed rate loans will prepay at 15
percent, (iv) one-to-four family adjustable, mortgage backed
securities, consumer and all other loans will prepay at 20 percent.
Besides prepayment assumptions, the chart above also includes normal
principal payments based upon the loan contractual agreements.
Savings accounts are assumed to be withdrawn at an annual rate of 17
percent. NOW accounts are assumed to be withdrawn at an annual rate
of 37 percent. Money Market accounts are assumed to be withdrawn at
79 percent during the first year with the balance being withdrawn
within the one-to-three year category. These assumptions are annual
percentages based on remaining balances and should not be regarded as
indicative of the actual prepayments and withdrawals that may be
experienced by the Company. Certain short comings are inherent in the
analysis presented by the foregoing table.
(2) Includes $417,000 and $7.8 million in mortgage-backed securities in
adjustable and fixed first mortgage loans, respectively.
(3) Includes other equity securities, interest-bearing deposits and FHLB
stock, all of which are shown in the within-one-year category.
Components include interest-bearing deposits of $6.3 million and
securities available for sale of $28.9 million.
(4) Includes FHLMC preferred stock and FNMA preferred stock, which are
included in the appropriate repricing category based upon their call
dates.
</FN>
Certain shortcomings are inherent in the method of analysis presented
in the Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of changes in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
-13-
NPV Analysis. As part of its efforts to maximize net interest income
and manage the risks associated with changing interest rates, management uses
the "market value of portfolio equity" ("NPV") methodology which the OTS has
adopted as part of its capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in Net Interest Income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall along the
yield curve. Projected values of NII and NPV at both higher and lower regulatory
defined rate scenarios are compared to base case values (no change in rates) to
determine the sensitivity to changing interest rates.
Presented below, as of December 31, 2000, is an analysis of the
Company's interest rate risk ("IRR") as measured by changes in NPV and NII for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Company's current capital position.
Interest Rate Sensitivity of Net Portfolio Value (NPV)(1)
Net Portfolio Value NPV as % of PV of Assets
--------------------------------------- ---------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp 30,835 -2,693 -8 8.31 -35bp
+200 bp 32,364 -1,165 -3 8.59 -7bp
+100 bp 33,348 -180 -1 8.72 6bp
0 bp 33,529 -- -- 8.66 --
-100 bp 32,383 -1,146 -3 8.28 -38bp
-200 bp 30,835 -2,694 -8 7.81 -84bp
-300 bp 29,791 -3,738 -11 7.47 -119bp
[FN]
(1) Denotes rate shock used to compute interest rate risk capital component.
</FN>
As is the case with the Gap Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
Asset Quality
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge for mortgage loans. If
delinquency continues, on the 20th day past due, a telephone call is made to the
borrower seeking payment. If the loan is 30 days past due, a delinquent notice
is mailed along with a letter advising that the mortgagors are in violation of
the terms of their mortgage contract. If a loan becomes 60 days past due, the
loan becomes subject to possible legal action. After 90 days, if satisfactory
payment terms are not reached with the borrower, foreclosure proceedings are
initiated. To the extent required by the Department of Housing and Urban
Development ("HUD") regulations, generally within 45 days of delinquency, a
Section 160 HUD notice is given to the borrower which provides access to
consumer counseling services.
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment schedule which is closely
monitored for compliance. Under these terms, the account is brought to date,
usually within a few months.
-14-
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans and consumer loans are placed
on nonaccrual status generally when either principal or interest is more than 90
days past due. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is deemed foreclosed real estate until such time as
it is sold. In general, the Company considers collateral for a loan to be in
substance foreclosed if: (i) the borrower has little or no equity in the
collateral; (ii) proceeds for repayment of the loan can be expected to come only
from the operation or sale of the collateral; and (iii) the borrower has either
formally or effectively abandoned control of the collateral to the Company, or
retained control of the collateral but is unlikely to be able to rebuild equity
in the collateral or otherwise repay the loan in the foreseeable future.
When foreclosed real estate is acquired or otherwise deemed foreclosed
real estate, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. At December 31, 2000, the Company's
foreclosed real estate consisted of two properties with an aggregate value of
$64,000.
Delinquent Loans, Nonaccrual Loans and Nonperforming Assets. The
following table sets forth information regarding loans on nonaccrual status and
foreclosed real estate of the Company at the dates indicated. At the dates
indicated, the Company did not have any material restructured loans within the
meaning of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings, and did not have any loans that were ninety days past due and
still accruing interest.
At December 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans and
nonperforming assets:
First mortgage loans:
One-to-four family residential....... $ 237 $ 111 $ 403 $ 122 $ 149
Multifamily and commercial
properties ........................ 556(2) -- 423(3) -- --
Consumer loans:......................... 244 102 130 25 35
-------- -------- -------- -------- --------
Total nonaccrual loans............... 1,037 213 956 147 184
Total foreclosed real estate(1)......... 64 503 187 67 128
Other nonperforming assets.............. -- -- 1 -- 2
-------- -------- -------- -------- --------
Total nonperforming assets........... $ 1,101 $ 716 $ 1,144 $ 214 $ 314
======== ======== ======== ======== ========
Total nonaccrual loans to net loans
receivable........................... 0.33% 0.07% 0.38% 0.08% 0.11%
Total nonaccrual loans to total assets.. 0.27 0.06 0.28 0.07 0.09
Total nonperforming assets to total
assets.............................. 0.28 0.19 0.34 0.10 0.15
[FN]
(1) Represents the net book value of property acquired by the Company
through foreclosure or deed in lieu of foreclosure. Upon acquisition,
this property is recorded at the lower of cost or fair value less
estimated selling expenses.
(2) Includes a purchase loan which was secured by a commercial property
that was 90 days past due in the amount of $488,822 (in actual dollars)
(3) Includes a purchase loan which was secured by a commercial property
that was 90 days past due in the amount of $364,636 (in actual dollars).
This loan was repaid in March, 1999.
</FN>
-15-
The following table sets forth information with respect to loans
delinquent 60-89 days in the Company's portfolio at the dates indicated.
At December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Loans past due 60-89 days:
First mortgage loans:
One-to-four family residential................ $ 590 $ 521 $ 1,070 $ 275 $ 323
Multifamily and commercial properties......... -- 491 22 -- --
Consumer loans................................... 96 198 270 135 51
------- ------- ------- ------- -------
Total past due 60-89 days................... $ 686 $ 1,210 $ 1,362 $ 410 $ 374
======= ======= ======= ======= =======
The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 2000.
At December 31, 2000
--------------------
Balance Number
------- ------
(Dollars in thousands)
One-to-four family first mortgage loans:
Loans 60 to 89 days delinquent................... $ 590 16
Loans 90 days or more delinquent................. 237 6
Multifamily and commercial first mortgage loans:
Loans 60 to 89 days delinquent................... - -
Loans 90 days or more delinquent................. 556 2
Consumer Loans:
Loans 60 to 89 days delinquent................... 96 15
Loans 90 days or more delinquent................. 244 22
Foreclosed real estate............................. 64 2
Other nonperforming assets......................... - - - -
Loans to facilitate sale of foreclosed real estate. 116 1
Special mention loans.............................. 924 33
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 2000,
the Company had $924,000 of special mention loans, consisting of eighteen loans
secured by one-to-four family residences, one commercial property and fifteen
consumer loans.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Substandard assets............ $ 1,087(3) $ 689(2) $ 745(1) $ 208 $ 311
Doubtful assets............... -- -- -- -- --
Loss assets................... 53 60 35 18 9
--------- --------- --------- --------- ---------
Total classified assets..... $ 1,140 $ 749 $ 780 $ 226 $ 320
========= ========= ========= ========= =========
(Notes on following page)
-16-
[FN]
(1) Includes one purchase loan which was secured by a commercial property that
was 90 days past due in the amount of $364,636 (in actual dollars). This
loans was repaid in March, 1999.
(2) Includes one loan secured by a commercial property that was not delinquent
at December 31, 1999
(3) Includes one purchase loan which was secured by a commercial property that
was 10 months past due in the amount of $489,000 (in actual dollars).
</FN>
Allowance for Loan Losses. It is management's policy to provide an
allowance for estimated losses on the Company's loan portfolio based on
management's evaluation of the prior loss experience, industry standards, past
due loans, economic conditions, the volume and type of loans in the Company's
portfolio, which includes a significant amount of multifamily loans,
substantially all of which are purchased and are collateralized by properties
located outside of the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The Company regularly reviews
its loan portfolio, including problem loans, to determine whether any loans
require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. During the years ended December 31, 2000, 1999 and 1998
the Company's provision for loan losses were $120,000, $120,000 and $210,000,
respectively. The Company's allowance for loan losses totaled $2.8 million, $2.8
million and $2.7 million at December 31, 2000, 1999 and 1998, respectively.
Management believes that the allowances for losses on loans and
foreclosed real estate are adequate. While management uses available information
to recognize losses on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for loan losses. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Analysis of the Allowance for Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
For the Year Ended December 31,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding................. $ 322,408 $ 291,760 $ 259,360 $ 194,626 $ 168,921
Average net loans outstanding........... 307,104 265,553 246,510 175,284 156,708
Allowance balances (at beginning of
period............................... 2,776 2,676 2,151 1,953 1,736
--------- --------- --------- --------- ---------
Provisions for losses................... 120 120 210 240 240
Effect of-
Valley Financial Corporation........ -- -- 343 -- --
Charge-Offs:
First mortgage loans.................. 15 5 6 21 5
Consumer loans........................ 41 23 23 31 19
Recoveries:
First mortgage loans.................. -- -- -- -- --
Consumer loans........................ 3 8 1 10 1
--------- --------- --------- --------- ---------
Net charge-offs....................... 53 20 28 42 23
--------- --------- --------- --------- ---------
Allowance balance (at end of period).... $ 2,843 $ 2,776 $ 2,676 $ 2,151 $ 1,953
========= ========= ========= ======== ========
Allowance for loan losses as a percent
of total loans receivable at end of
period................................ 0.88% 0.95% 1.03% 1.10% 1.16%
Net loans charged off as a percent of
average net loans outstanding......... 0.02 0.01 0.01 0.02 0.01
Ratio of allowance for loan losses to
total nonaccrual loans at end of
period................................ 274.08 1,301.13 279.72 1,468.33 1,059.35
Ratio of allowance for loan losses to
total nonaccrual loans and foreclosed
real estate at end of period.......... 258.18 387.78 233.95 1,006.96 621.31
-17-
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation for loan losses by loan category for the periods indicated:
At December 31,
----------------------------------------------------
2000 1999
---- ----
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period applicable to:
One-to-four family residential
mortgage loans ....................... $ 731 54.78% $ 726 56.23%
Multifamily residential mortgage loans . 1,145 23.45 1,332 25.16
Commercial mortgage loans .............. 303 7.56 252 6.07
Consumer loans ......................... 664 14.21 466 12.53
------ ------ ------ ------
Total allowance for loan losses ...... $2,843 100.00% $2,776 100.00%
====== ====== ====== ======
At December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ----- -----------
(Dollars in thousands)
Balance at end of period applicable to:
One-to-four family residential
mortgage loans ....................... $ 684 57.45% $ 675 59.48% $ 503 63.44%
Multifamily residential mortgage loans . 1,298 25.02 1,026 26.38 948 20.42
Commercial mortgage loans .............. 228 4.39 76 1.95 157 3.09
Consumer loans ......................... 466 13.14 374 12.19 345 13.05
------ ------ ------ ------ ------ ------
Total allowance for loan losses ...... $2,676 100.00% $2,151 100.00% $1,953 100.00%
====== ====== ====== ====== ====== ======
Average Balance Sheet
The following table sets forth 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 and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. For purposes of this table, average balances were computed on
a monthly basis.
-18-
For the Year Ended December 31,
-------------------------------
At December 31,
2000 2000 1999 1998
--------------- ------------------------- ---------------------------- ---------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- ----- ------- -------- ----- -------- -------- ---- -------- --------
(Dollars in thousands)
Assets:
Interest-earning assets:
First mortgage loans(1)....$275,061 7.92% $265,557 $20,586(8) 7.75% $233,457 $18,104(8) 7.75% $216,914 $17,318(8) 7.98%
Consumer loans(1).......... 45,808 8.93 41,547 3,677 8.85 34,831 3,111 8.93 32,173 3,014 9.37
Investment securities...... 50,081(4) 5.99 51,097(5) 3,020 5.91 58,666(6) 3,341 5.69 57,826(7) 3,270 5.65
-------- ---- ------- ------- ------ ------- ------- ----- ------- ------- ----
Total interest-earning assets 370,950 7.78% $358,201 $27,283 7.62% 326,954 24,556 7.51% 306,913 23,602 7.69%
Noninterest-earning assets.. 18,048 18,470 18,750 16,847
-------- -------- ------- -------
Total assets..............$388,998 $376,671 $345,704 $323,760
======== ======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings.............. $ 54,744 2.85% $ 48,262 $ 1,185 2.46% 47,551 $ 1,088 2.29% $ 44,622 $ 1,351 3.03%
Passbook savings....... 21,724 1.83 24,571 485 1.97 27,189 562 2.07 25,591 594 2.32
Certificates of Deposit 178,628 6.01 186,292 10,599 5.69 173,329 9,463 5.46 159,701 8,948 5.60
Borrowed funds........ 88,592 6.11 71,602 4,438 6.20 43,711 2,491 5.62 34,020 1,976 5.81
-------- ----- -------- ------- ---- ------- ------ ----- ------- ------- ----
Total interest-bearing
liabilities........ $343,688 5.27% $330,727 $16,707 5.05% $291,780 $13,604 4.65% $263,934 $12,869 4.88%
Noninterest-bearing 8,912 9,739 9,776 9,587
liabilities ------- -------- ------- --------
Total liabilities.... $352,600 $340,466 $301,556 $273,522
Equity.................... 36,398 36,205 44,148 50,239
--------- --------- -------- --------
Total liabilities and $388,998 $376,671 $345,704 $323,760
equity ========= ======== ======== =========
Net interest income....... $10,576 $10,952 $10,733
======= ======= =======
Net interest rate spread(2) 2.51% 2.57% 2.86% 2.81%
==== ==== ==== ====
Net interest margin (3).... 2.90 2.95 3.35 3.50
==== ==== ==== ====
Ratio of average 107.93 108.31 112.05 116.28
interest-earning assets ====== ====== ====== ======
to average interest-
bearing liabilities........
[FN]
(1) Balance is net of deferred loan fees, loan discounts and loans in process.
Nonaccrual loans are included in the balances.
(2) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
(4) Includes interest-bearing deposits of $6,331,000 and securities available
for sale of $43,750,000.
(5) Includes interest-bearing deposits of $4,392,000 and securities available
for sale of $46,705,000.
(6) Includes interest-bearing deposits of $7,309,000 and securities available
for sale of $51,357,000.
(7) Includes interest-bearing deposits of $8,235,000 and securities available
for sale of $49,590,000.
(8) Includes loan fee amortization of $(60,000), $(9,000) and $(29,000) for the
years ended December 31, 2000, 1999 and 1998.
</FN>
-19-
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
Year Ended Year Ended
December 31, 2000 December 31, 1999
Compared to Compared to
Year Ended Year Ended
December 31, 1999 December 31, 1998
---------------------------------------- ---------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
----------------------------- ----------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- -------- -------- -------- -------- ------- --------
(In thousands)
Interest income:
First mortgage loans ................ $ 2,490 $ (7) $ (1) $ 2,482 $ 1,321 $ (496) $ (38) $ 787
Consumer loans ...................... 601 (29) (6) 566 249 (140) (12) 97
Investment securities ............... (408) 126 (39) (321) 77 6 (12) 71
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... $ 2,683 $ 90 $ (46) $ 2,727 $ 1,647 $ (630) $ (62) $ 955
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
NOW and money market savings ........ $ 16 $ 80 $ 1 $ 97 $ 89 $ (330) $ (22) $ (263)
Passbook savings .................... (53) (26) 2 (77) 37 (65) (4) (32)
Certificate of deposits ............. 708 398 30 1,136 763 (228) (19) 516
Borrowed funds ...................... 1,588 219 140 1,947 563 (38) (11) 514
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 2,259 $ 671 $ 173 $ 3,103 $ 1,452 $ (661) $ (56) $ 735
======= ======= ======= ======= ======= ======= ======= =======
Net change in net interest income ....... $ 424 $ (581) $ (219) $ (376) $ 195 $ 31 $ (6) $ 220
======= ======= ======= ======= ======= ======= ======= =======
-20-
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (Unaudited)
The unaudited pro forma consolidated statement of income is based on
the historical financial statements of the Company and Valley Financial. The
unaudited pro forma consolidated statement of income for the year ended December
31, 1998 was prepared as if the Acquisition had occurred as of the beginning of
the period for purposes of the combined consolidated statements of income. The
income statement for the year ended December 31, 1998 would therefore include
the month January 31, 1998 for Valley Financial.
These pro forma financial statements are not necessarily indicative of
the results of operations that might have occurred had the Acquisition taken
place at the beginning of the period, or to project the Company's results of
operations at any future date or for any future period.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Years Ended
December 31,
--------------------------------------------------------------
Actual Actual Pro forma
2000 1999 1998
-------------- -------------- --------------
Interest income............................... $ 27,283,447 $ 24,556,267 $ 24,223,861
Interest expense.............................. 16,706,620 13,603,841 13,319,040
-------------- -------------- --------------
Net interest income....................... 10,576,827 10,952,426 10,904,821
Provision for loan losses..................... 120,000 120,000 210,000
-------------- -------------- --------------
Net interest income after provision for
loan losses............................ 10,456,827 10,932,426 10,694,821
-------------- -------------- --------------
Noninterest income:
Fees and service charges.................. 1,591,780 1,484,962 1,279,153
Abstract fees............................. 1,233,091 1,420,955 1,583,773
Gain on sale of securities
available for sale, net................ 42 61,564 51,362
Mortgage banking income................... 231,170 367,696 454,992
Other income.............................. 957,935 727,869 599,159
-------------- -------------- --------------
Total noninterest income............... 4,014,018 4,063,046 3,968,439
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits............ 4,103,419 4,025,744 3,650,905
Premises and equipment.................... 1,091,653 930,988 846,223
Data processing........................... 455,389 522,122 583,111
SAIF deposit insurance premiums........... 55,332 147,243 148,226
Goodwill amortization..................... 472,290 472,290 472,290
Other expenses............................ 2,408,276 2,356,024 2,277,600
-------------- -------------- --------------
Total noninterest expense.............. 8,586,359 8,454,411 7,978,355
-------------- -------------- --------------
Income before income taxes.................... 5,884,486 6,441,061 6,684,905
Provision for income taxes.................... 1,873,369 2,240,886 2,439,432
-------------- -------------- --------------
Net Income.................................... $ 4,011,117 $ 4,200,175 $ 4,245,473
============== ============== ==============
-21-
Comparison of Financial Condition as of December 31, 2000, December 31, 1999 and
December 31, 1998
Total assets increased $21.6 million, or 5.9%, from $367.4 million at
December 31, 1999 to $389.0 million at December 31, 2000. Interest bearing cash
increased $2.2 million, or 53.4%, from $4.1 million at December 31, 1999 to $6.3
million at December 31, 2000. Noninterest bearing cash decreased $6.0 million,
or 70.5%, from $8.5 million at December 31, 1999 to $2.5 million at December 31,
2000. Securities available for sale decreased $6.3 million, or 12.8%, primarily
due to the sales, calls, payments and maturities on U.S. Treasury notes, U.S.
Government agencies and mortgage-backed securities, partially offset by the
purchase of FHLB stock. Total loans receivable, net, increased by $31.3 million,
or 10.9%, from $286.8 million at December 31, 1999 to $318.0 million at December
31, 2000, primarily due to the origination of $35.5 million of first mortgage
loans secured by one-to-four family residences, purchases and originations of
first mortgage loans primarily secured by one-to-four family residences,
multifamily residences and commercial real estate loans located out of state of
$19.6 million, and originations of $21.5 million of second mortgage loans. These
originations and purchases were offset in part by payments, prepayments and
sales of loans during the year ended December 31, 2000. Deposits decreased $9.9
million, or 3.6%, from $271.0 million at December 31, 1999 to $261.2 million at
December 31, 2000, primarily reflecting decreases in certificates of deposit
accounts, due in part to decreases in deposits of certain public funds and
decreases in savings accounts, offset in part by an increase in money market
accounts. Other borrowings, primarily FHLB advances, increased $32.9 million,
from $55.7 million at December 31, 1999 to $88.6 million at December 31, 2000.
Total shareholders' equity decreased $1.7 million from $38.1 million at December
31, 1999 to $36.4 million at December 31, 2000, primarily due to dividends paid
to shareholders and funds used for repurchases of Common Stock less, net income
and decreased unrealized losses.
Total assets increased $30.7 million, or 9.1%, from $336.7 million at
December 31, 1998 to $367.4 million at December 31, 1999. Interest bearing cash
decreased $9.1 million, or 68.7%, from $13.2 million at December 31, 1998 to
$4.1 million at December 31, 1999. Noninterest bearing cash increased $6.1
million, or 250.7%, from $2.4 million at December 31, 1998 to $8.5 million at
December 31, 1999. Securities available for sale decreased $190,000, or 0.4%,
primarily due to the sales, calls, payments and maturities on U.S. Treasury
notes, U.S. Government agencies and mortgage-backed securities, partially offset
by the purchase of U.S. Government agencies and mortgage-backed securities.
Total loans receivable, net, increased by $32.7 million, or 12.9%, from $254.0
million at December 31, 1998 to $286.8 million at December 31, 1999, primarily
due to the origination of $31.6 million of first mortgage loans secured by
one-to-four family residences, purchases and originations of first mortgage
loans primarily secured by one-to-four family residences, multifamily residences
and commercial real estate loans located out of state of $40.3 million, and
originations of $12.3 million of second mortgage loans. These originations and
purchases were offset in part by payments, prepayments and sales of loans during
the year ended December 31, 1999. Deposits increased $24.3 million, or 9.9%,
from $246.7 million at December 31, 1998 to $271.0 million at December 31, 1999,
primarily reflecting increases in certificates of deposit accounts, primarily
due to deposits of certain public funds. Other borrowings, primarily FHLB
advances, increased $16.9 million, from $38.8 million at December 31, 1998 to
$55.7 million at December 31, 1999. Total shareholders' equity decreased $10.1
million from $48.2 million at December 31, 1998 to $38.1 million at December 31,
1999, primarily due to dividends paid to shareholders and funds used for
repurchases of Common Stock less, net income and decreased unrealized losses.
Comparison of Results of Operations for the Years Ended December 31, 2000
and 1999
Interest Income. Interest income increased by $2.7 million to $27.3
million for the year ended December 31, 2000 compared to $24.6 million for the
year ended December 31, 1999. The increase in interest income was primarily due
to a $31.2 million increase in average interest earning assets to $358.2 million
for the year ended December 31, 2000, from $327.0 million for 1999. The increase
in the average balances of interest earning assets primarily reflects increases
in the average balances of first and second mortgage loans, partially offset by
decreases in securities available for sale. These increases were primarily
derived from originations of $35.5 million of first mortgage loans secured by
one-to-four family residences, purchases and originations of first mortgage
loans secured by one-to-four family residences, multifamily residences and
commercial real estate located outside of the State of Iowa of $19.6 million and
originations of $21.5 million of second mortgage loans, which originations and
purchases were offset in part by payments, prepayments and sales of loans during
the year ended December 31, 2000. The increase in average interest-earning
assets reflects the Company's continued emphasis on residential lending. See
"-Business Strategy." The decreases in available for sale
-22-
securities were primarily due to the sales, calls, payments and maturities on
U.S. Treasury Notes, U.S. Government agencies and mortgage-backed securities,
partially offset by the purchase of FHLB stock. The average yield on interest
earning assets increased to 7.62% for the year ended December 31, 2000 from
7.51% for the year ended December 31, 1999, primarily due to a general increase
in market interest rates.
Interest Expense. Interest expense increased by $3.1 million to $16.7
million for the year ended December 31, 2000 compared to $13.6 million for the
year ended December 31, 1999. The increase in interest expense was primarily due
to a $38.9 million increase in the average balance of interest-bearing
liabilities to $330.7 million for the year ended December 31, 2000, from $291.8
million for 1999. The increase in the average balance of interest-bearing
liabilities primarily reflects an increase in the certificates of deposits and
borrowed funds. The increases in certificates of deposits is primarily due to an
increase in the average balance of deposits of certain public funds. The
increase in borrowed funds was due to the borrowing of funds in part to fund the
corresponding asset growth. The average cost of interest bearing liabilities
increased to 5.05% for the year ended December 31, 2000 from 4.65% for the year
ended December 31, 1999. The increase in the average cost of interest bearing
liabilities is primarily due to an increase in the average cost of certificates
of deposits and borrowed funds. The increase in the average cost of funds is due
to the general increase in market interest rates.
Net Interest Income. Net interest income before provision for loan
losses decreased by $376,000 to $10.6 million for the year ended December 31,
2000 from $11.0 million for the year ended December 31, 1999. The decrease is
primarily due to the increases in the average yield on the average
interest-bearing assets being less than the increase in the cost of the average
interest-bearing liabilities. The interest rate spread (i.e., the difference in
the average yield on assets and average cost of liabilities) decreased to 2.57%
for the year ended December 31, 2000 from 2.86% for the year ended December 31,
1999. The decrease in the spread reflects the general increase in the overall
costs on interest bearing liabilities in excess of the increase in yields on the
interest-earning assets offset by the increase in the average interest bearing
liabilities in excess of the increase in the interest earning assets.
Provision for Loan Losses. The Company's provision for loan losses was
$120,000 for each of the years ended December 31, 2000 and December 31, 1999,
respectively. The Company establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan losses at a
level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multifamily and commercial real estate loans, substantially all of
which are purchased and are secured by properties located out of state, and
other factors related to the collectibility of the Company's loan portfolio. The
net charge offs were $53,000 for the year ended December 31, 2000 as compared to
$20,000 for the year ended December 31, 1999. The resulting allowance for loan
loss was $2.8 million at December 31, 2000 and December 31, 1999.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.88% at December 31, 2000 from 0.95% at December 31, 1999. The
level of nonperforming loans has increased to $1.0 million at December 31, 2000
from $213,000 at December 31, 1999. See "Asset Quality".
Management believes that the allowance for loan losses is adequate.
While management estimates loan losses using the best available information,
such as independent appraisals for significant collateral properties, no
assurance can be made that future adjustments to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding no problem loans, identification of
additional problem loans, and other factors, both within and outside of
management's control.
Noninterest income. Total noninterest income decreased by $49,000, or
1.2%, to $4.0 million for the year ended December 31, 2000 from $4.1 million for
the year ended December 31, 1999. The decrease is due to decreases in abstract
fees and mortgage banking fees, partially offset by an increase in fees and
service charges and other income. Abstract fees decreased $188,000 due to
decreased sales volume. Sales volume decreased in part due to a general decline
in real estate activity. Mortgage banking fees decreased $137,000 due to higher
interest rates during the year ended December 31, 2000. Fees and service charges
increased $107,000 due to increases in overdraft fees on NOW accounts, service
charges on NOW accounts and service charges on ATM/debit cards, offset by a
decrease in loan prepayment fees. Other income increased $230,000 due to
increases in annuity and mutual fund sales, insurance sales, gain on the sale of
foreclosed real estate and interest
-23-
income on a disputed income tax item. Noninterest income for the year ended
December 31, 1999 also reflects gains on the sales of securities available for
sale of $62,000. See "-Business Strategy-Increased Noninterest Income".
Noninterest Expense. Total non-interest expense increased by $132,000
to $8.6 million for the year ended December 31, 2000 from $8.5 million for the
year ended December 31, 1999. The increase is primarily due to an increase in
the premises and equipment, offset in part by a decrease in data processing and
SAIF deposit insurance premiums. The increase in premises and equipment was
primarily due to an increase in depreciation expense relating to the purchase of
computer equipment and software, the opening of a branch located in Perry and
Ames, Iowa and normal cost increases. The decrease in data processing is
primarily due to the signing of a multi year data processing contract in 1999.
The decrease in SAIF deposit insurance premiums is due to lower SAIF deposit
premium rates. The Company's efficiency ratio for the year ended December 31,
2000 and 1999 were 58.85% and 56.30%, respectively. The Company's ratio of
noninterest expense to average assets for the year ended December 31, 1999 and
1998 were 2.28% and 2.45%, respectively.
Income Taxes. Income taxes decreased by $368,000 to $1.9 million for
the year ended December 31, 2000 as compared to $2.2 million for the year ended
December 31, 1999. The decrease was principally due to a decrease in pre-tax
earnings during the 2000 period as compared to the 1999 period and an income tax
benefit of $100,000 received due to a state franchise tax refund related to an
issue that had been under dispute for several years.
Net Income. Net income totaled $4.0 million for the year ended December
31, 2000 compared to $4.2 million for the same period in 1999.
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998.
The actual statement of income for the year ended December 31, 1999 was
compared to the pro forma statement of income for the years ended December 31,
1998 for comparison purposes in order to more clearly present the changes in the
results of operations.
Interest Income. Interest income increased by $332,000 to $24.6 million
for the year ended December 31, 1999 compared to $24.2 million for the year
ended December 31, 1998. The increase in interest income was primarily due to a
$11.9 million increase in average interest earning assets to $327.0 million for
the year ended December 31, 1999, from $315.1 million for 1998. The increase in
the average balances of interest earning assets primarily reflects increases in
the average balances of first and second mortgage loans, partially offset by
decreases in securities available for sale. These increases were primarily
derived from originations of $31.6 million of first mortgage loans secured by
one-to-four family residences, purchases and originations of first mortgage
loans secured by one-to-four family residences, multifamily residences and
commercial real estate located outside of the State of Iowa of $40.3 million and
originations of $12.3 million of second mortgage loans, which originations and
purchases were offset in part by payments, prepayments and sales of loans during
the year ended December 31, 1999. The increase in average interest-earning
assets reflects the Company's continued emphasis on residential lending. See
"-Business Strategy." The decreases in available for sale securities were
primarily due to the sales, calls, payments and maturities on U.S. Treasury
Notes, U.S. Government agencies and mortgage-backed securities, partially offset
by the purchase of U.S. Government agencies, mortgage-backed securities and
certain equities. The impact of the increase in average interest-earning assets
was offset in part by a decrease in the average yields. The average yield on
interest earning assets decreased to 7.51% for the year ended December 31, 1999
from 7.69% for the year ended December 31, 1998, primarily due to a general
decrease in market interest rates.
Interest Expense. Interest expense increased by $285,000 to $13.6
million for the year ended December 31, 1999 compared to $13.3 million for the
year ended December 31, 1998. The increase in interest expense was primarily due
to a $18.5 million increase in the average balance of interest-bearing
liabilities to $291.8 million for the year ended December 31, 1999, from $273.3
million for 1998. The increase in the average balance of interest-bearing
liabilities primarily reflects an increase in the certificates of deposits and
borrowed funds. The increases in certificates of deposits is primarily due to an
increase in deposits of certain public funds. The increase in borrowed funds was
due to the borrowing of funds in part to fund the corresponding asset growth.
-24-
The impact of the increase in the average balances of interest-bearing
liabilities was offset in part by a decrease in the average cost of
interest-bearing liabilities. The average cost of interest bearing liabilities
decreased to 4.65% for the year ended December 31, 1999 from 4.87% for the year
ended December 31, 1998. The decrease in the average cost of funds is due to the
general decrease in market interest rates.
Net Interest Income. Net interest income before provision for loan
losses increased by $47,000 to $11.0 million for the year ended December 31,
1999 from $10.9 million for the year ended December 31, 1998. The increase is
primarily due to the decreases in the average yield on the average
interest-bearing assets being less than the decrease in the cost of the average
interest-bearing liabilities. This was offset in part by a decrease in the
excess of average interest earning assets over the average balances of
interest-bearing liabilities. The interest rate spread (i.e., the difference in
the average yield on assets and average cost of liabilities) increased to 2.86%
for the year ended December 31, 1999 from 2.82% for the year ended December 31,
1998. The increase in the spread reflects the general decline in the overall
costs on interest bearing liabilities in excess of the decline in yields on the
interest-earning assets offset by the increase in the average interest bearing
liabilities in excess of the increase in the interest earning assets.
The following table sets forth certain information relating to the
Company's actual and pro forma average balance sheets and reflects the actual
and pro forma average yield on assets and the actual and pro forma average cost
of liabilities for the years ended December 31, 1999 and 1998, respectively.
For Years Ended December 31,
----------------------------
1999 1998
--------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans.................................... $ 268,288 $ 21,215 7.91% $ 253,863 $ 20,737 8.17%
Securities available for sale............ 51,357 2,998 5.84 53,138 3,106 5.85
Interest bearing cash.................... 7,309 343 4.69 8,103 381 4.70
--------- --------- ------------ --------- --------- ------------
Total interest-earning assets.......... 326,954 24,556 7.51% 315,104 $ 24,224 7.69%
--------- ------------ --------- ------------
Noninterest-earning assets................. 18,750 18,299
--------- ---------
Total assets........................... $ 345,704 $ 333,403
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings............. $ 47,551 $ 1,088 2.29% $ 46,457 $ 1,416 3.05%
Savings.................................. 27,189 562 2.07 26,329 616 2.34
Certificates of deposit.................. 173,329 9,463 5.46 165,207 9,236 5.59
Borrowed funds........................... 43,711 2,491 5.62 35,275 2,051 5.81
--------- --------- ------------ --------- --------- ------------
Total interest-bearing liabilities......... $ 291,780 $ 13,604 4.65% $ 273,268 $ 13,319 4.87%
--------- ------------ --------- ------------
Noninterest-bearing liabilities............ 9,776 9,896
--------- ---------
Total liabilities...................... 301,556 283,164
Equity..................................... 44,148 50,239
--------- ---------
Total liabilities and equity .......... $ 345,704 $ 333,403
========= =========
Net interest income......................... $ 10,952 $ 10,905
========= =========
Net interest rate spread.................... 2.86% 2.82%
============ ============
Net interest margin......................... 3.35% 3.46%
============ ============
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 112.05% 115.31%
============ ============
Provision for Loan Losses. The Company's provision for loan losses was
$120,000 and $210,000 for years ended December 31, 1999 and December 31, 1998,
respectively. The Company establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan losses at a
level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multifamily loans, substantially all of which are purchased and are
secured by properties located out of state, and other factors related to the
collectibility of the Company's loan portfolio. The net charge offs were $20,000
for the year ended December 31, 1999 as compared to $28,000 for the year ended
December 31, 1998. The resulting allowance for loan loss was $2.8 million at
December 31, 1999 as compared to $2.7 million at December 31, 1998.
-25-
The increase in the allowance is primarily due to the increase in total
loans from $259.4 million at December 31, 1998 to $291.8 million at December 31,
1999. The allowance for loan losses as a percentage of total loans receivable
decreased to 0.95% at December 31, 1999 from 1.03% at December 31, 1998. The
level of nonperforming loans has decreased to $716,000 at December 31, 1999 from
$956,000 at December 31, 1998. See "Asset Quality".
Noninterest income. Total noninterest income increased by $95,000, or
2.4%, to $4.1 million for the year ended December 31, 1999 from $4.0 million for
the year ended December 31, 1998. The increase is due to increases in fees and
service charges, partially offset by a decrease in abstract fees. Fees and
service charges increased $206,000 due to increases in overdraft fees on NOW
accounts, service charges on NOW and savings accounts, service charges on
ATM/debit cards and loan prepayment fees. Abstract fees decreased $163,000 due
to decreased sales volume. Sales volume decreased in part due to a general
decline in real estate activity. Non interest income for the year ended December
31, 1999 also reflects gains on the sales of securities available for sale of
$62,000, as compared to gains on the sale of such securities of $51,000 for the
1998 comparable period. See "-Business Strategy-Increased Noninterest Income".
Noninterest Expense. Total non-interest expense increased by $476,000
to $8.5 million for the year ended December 31, 1999 from $8.0 million for the
year ended December 31, 1998. The increase is primarily due to an increase in
the employee salaries and benefits and premises and equipment, offset in part by
a decrease in data processing. The increase in salaries and benefits was
primarily a result of normal salary increases, the opening of a branch located
in Perry, Iowa, additional employees and related insurance costs and payroll
taxes. The increase in premises and equipment was primarily due to an increase
in depreciation expense relating to the purchase of computer equipment and
software, ATM's, the opening of a branch located in Perry, Iowa and normal cost
increases. The decrease in data processing is primarily due to the signing of a
multi year data processing contract in 1999, offset in part by additional data
processing services utilized by the Bank due to the Acquisition, upgrading the
Bank's operating systems and Year 2000 costs. The Company's efficiency ratio for
the year ended December 31, 1999 and 1998 were 56.30% and 53.64%, respectively.
The Company's ratio of noninterest expense to average assets for the year ended
December 31, 1999 and 1998 were 2.45% and 2.39%, respectively.
Income Taxes. Income taxes decreased by $199,000 to $2.2 million for
the year ended December 31, 1999 as compared to $2.4 million for the year ended
December 31, 1998. The decrease was principally due to a decrease in pre- tax
earnings during the 1999 period as compared to the 1998 period.
Net Income. Net income totaled $4.2 million for the year ended December
31, 1999 compared to $4.2 million for the same period in 1998.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities are monetary. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
SFAS No. 133, Accounting for Derivatives Instruments and Hedging will,
beginning with the quarter ended March 31, 2001, require an entity to recognize
all derivatives as either assets or liabilities, and measure those instruments
at fair value. It also sets forth the proper accounting for hedging activities,
which is determined by the intended use of the derivative and how that use is
designated by the entity. Since the Company is not currently holding any
derivative instruments (as defined) and is not engaged in hedging activities,
the adoption of SFAS No. 133 is expected to have no effect on the Company's
financial condition or results of operations.
SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities was issued in September 2000, and replaces
SFAS No. 125 of the same title. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The adoption of SFAS No. 140 is
not expected to have a material impact on the results of operations or financial
condition of the Company.
-26-
NORTH CENTRAL BANCSHARES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT...........................................28
FINANCIAL STATEMENTS
Consolidated statements of financial condition........................29
Consolidated statements of income.....................................30
Consolidated statements of shareholders' equity.......................31
Consolidated statements of cash flows.................................32
Notes to consolidated financial statements............................34
-27-
Independent Auditor's Report
To the Board of Directors
North Central Bancshares, Inc.
Fort Dodge, Iowa
We have audited the accompanying consolidated statements of financial condition
of North Central Bancshares, Inc. and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for the three years ended December 31, 2000, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Central
Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the three years ended
December 31, 2000, 1999 and 1998, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 2, 2001
-28-
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
ASSETS 2000 1999
- ------ ---- ----
Cash and due from banks:
Interest-bearing $ 6,330,525 $ 4,127,153
Noninterest-bearing 2,519,201 8,541,525
Securities available-for-sale (Notes 3 and 9) 43,351,850 49,692,857
Loans receivable, net (Notes 4, 5, 9 and 15) 318,025,782 286,759,101
Loans held for sale 498,387 335,564
Accrued interest receivable (Note 6) 2,257,153 2,082,598
Foreclosed real estate 63,866 503,150
Premises and equipment, net (Note 7) 6,660,783 5,356,097
Rental real estate 1,757,014 1,846,134
Title plant 925,256 925,256
Goodwill 5,443,091 5,915,381
Deferred taxes (Note 10) 556,913 921,057
Income taxes receivable 209,995 --
Prepaid expenses and other assets 397,970 426,772
------------- -------------
Total assets $ 388,997,786 $ 367,432,645
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 8) $ 261,166,646 $ 271,030,791
Borrowed funds (Note 9) 88,592,226 55,715,289
Advances from borrowers for taxes and insurance (Note 5) 1,318,069 1,204,025
Dividend payable 240,235 226,174
Income taxes payable -- 74,214
Accrued expenses and other liabilities 1,282,495 1,055,228
------------- -------------
Total liabilities 352,599,671 329,305,721
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 17)
STOCKHOLDERS' EQUITY (Notes 12 and 18)
Common stock, $.01 par value, authorized 15,500,000 shares;
issued and outstanding 2000 and 1999 4,011,057 shares 40,111 40,111
Preferred stock, $.01 par value, authorized 3,000,000 shares;
issued and outstanding 2000 and 1999 none -- --
Additional paid-in capital 38,378,315 38,278,872
Retained earnings, substantially restricted (Note 10) 33,345,852 30,290,488
Unearned shares, employee stock ownership plan (Note 11) (646,912) (825,484)
Accumulated other comprehensive income (loss) (247,340) (921,138)
Less cost of treasury stock, 2000 2,099,177 shares;
1999 1,749,315 shares (34,471,911) (28,735,925)
------------- -------------
Total stockholders' equity 36,398,115 38,126,924
------------- -------------
Total liabilities and stockholders' equity $ 388,997,786 $ 367,432,645
============= =============
See Notes to Financial Statements
-29-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Interest income:
Loans receivable:
First mortgage loans $20,585,997 $18,104,426 $17,317,988
Consumer loans 3,676,669 3,111,402 3,013,947
Securities and cash deposits 3,020,781 3,340,439 3,269,617
--------- --------- ---------
27,283,447 24,556,267 23,601,552
---------- ---------- ----------
Interest expense:
Deposits (Note 8) 12,268,726 11,113,533 10,893,081
Other borrowed funds 4,437,894 2,490,308 1,975,879
--------- --------- ---------
16,706,620 13,603,841 12,868,960
---------- ---------- ----------
Net interest income 10,576,827 10,952,426 10,732,592
Provision for loan losses (Note 4) 120,000 120,000 210,000
- ------- ------- -------
Net interest income after provision
for loan losses 10,456,827 10,832,426 10,522,592
---------- ---------- ----------
oninterest income:
Fees and service charges 1,591,780 1,484,962 1,243,248
Abstract fees 1,233,091 1,420,955 1,583,773
Mortgage banking fees 231,170 367,696 339,397
Gain on sale of securities available-for-sale, net 42 61,564 51,362
Other income 957,935 727,869 696,919
------- ------- -------
Total noninterest income 4,014,018 4,063,046 3,914,699
--------- --------- ---------
Noninterest expense:
Salaries and employee benefits (Note 11) 4,103,419 4,025,744 3,482,210
Premises and equipment 1,091,653 930,988 811,725
Data processing 455,389 522,122 553,288
SAIF deposit insurance premiums 55,332 147,243 142,932
Goodwill amortization 472,290 472,290 435,817
Other expenses (Note 13) 2,408,276 2,356,024 2,145,854
--------- --------- ---------
Total noninterest expense 8,586,359 8,454,411 7,571,826
--------- --------- ---------
Income before income taxes 5,884,486 6,441,061 6,865,465
Provision for income taxes (Note 10) 1,873,369 2,240,886 2,480,620
--------- --------- ---------
Net income $ 4,011,117 $ 4,200,175 $ 4,384,845
=========== =========== ===========
Basic earnings per common share (Note 19) $ 2.04 $ 1.64 $ 1.44
Earnings per common share - assuming dilution (Note 19) 2.00 1.60 1.40
Dividends declared per common share (Note 12) 0.50 0.40 0.32
See Notes to Financial Statements.
-30-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Employee Accumulated
Additional Stock Other Total
Comprehensive Common Paid-in Retained Ownership Compehensive Treasury Stockholders'
Income Stock Capital Earnings Plan Income (Loss) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 40,111 $37,949,598 $23,660,964 $(1,210,441) $354,781 $(10,377,937)$50,417,076
Comprehensive income:
Net income $ 4,384,845 - - 4,384,845 - - - 4,384,845
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) 3,885 - 3,885 - 3,885
-----------
Total comprehensive income $ 4,388,730
===========
Purchase of treasury stock - - - - - (6,164,419) (6,164,419)
Dividends on common stock - - (960,902) - (960,902)
Effect of contribution to employee
stock ownership plan - 206,636 - 197,157 - - 403,793
Effect of stock options exercised - (20,417) - - - 142,953 122,536
------------------------------------------------------------------------------------
Balance, December 31, 1998 40,111 38,135,817 27,084,907 (1,013,284) 358,666 (16,399,403) 48,206,814
Comprehensive income:
Net income $ 4,200,175 - - 4,200,175 - - - 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) (1,279,804) - - - - (1,279,804) - (1,279,804)
-----------
Total comprehensive income $ 2,920,371
===========
Purchase of treasury stock - - - - - (12,336,522) (12,336,522)
Dividends on common stock - - (994,594) - - - (994,594)
Effect of contribution to employee
stock ownership plan - 143,055 - 187,800 - - 330,855
------------------------------------------------------------------------------------
Balance, December 31, 1999 40,111 38,278,872 30,290,488 (825,484) (921,138)(28,735,925) 38,126,924
Comprehensive income:
Net income $ 4,011,117 - - 4,011,117 - - - 4,011,117
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) 673,798 - - - - 673,798 - 673,798
----------
Total comprehensive income $ 4,684,915
===========
Purchase of treasury stock - - - - - (5,799,736) (5,799,736)
Dividends on common stock - - (955,753) - - - (955,753)
Effect of contribution to employee
stock ownership plan - 108,723 - 178,572 - - 287,295
Issuance of treasury stock - (9,280) - - - 63,750 54,470
-----------------------------------------------------------------------------------
Balance, December 31, 2000 $ 40,111 $38,378,315 $33,345,852 $ (646,912) $(247,340)$(34,471,911)$36,398,115
===================================================================================
See Notes to Financial Statements
-31-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,011,117 $ 4,200,175 $ 4,384,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120,000 120,000 210,000
Depreciation 668,945 596,815 488,989
Amortization and accretion 488,021 483,546 539,878
Deferred taxes (38,062) (141,678) (164,846)
Effect of contribution to employee stock
ownership plan 287,295 330,855 403,793
(Gain) on sale of foreclosed real estate and
loans, net (66,744) (28,827) (4,726)
(Gain) on sale of securities available-for-sale (42) (61,564) (51,362)
Loss on disposal of equipment 28,297 19,270 9,191
Proceeds from sales of loans held for sale 13,261,815 20,146,594 26,334,791
Originations of loans held for sale (13,424,638) (18,801,141) (28,015,808)
Change in assets and liabilities:
Accrued interest receivable (174,555) (149,361) 386,631
Income taxes receivable (209,995) -- --
Prepaid expenses and other assets 28,802 21,559 453,985
Income taxes payable (74,214) (125,010) 25,036
Accrued expenses and other liabilities 227,267 (403,163) (41,121)
------- -------- -------
Net cash provided by operating activities 5,133,309 6,208,070 4,959,276
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans (11,278,698) 7,376,603 20,168,334
Purchase of loans (19,625,170) (40,343,689) (24,644,011)
Proceeds from sale of securities available-for-sale 224,792 438,915 4,445,868
Purchase of securities available-for-sale (1,594,100) (18,922,917) (18,371,558)
Proceeds from maturities of securities
available-for-sale 8,712,985 16,512,369 25,460,742
Purchase of premises, equipment and rental real
estate (2,171,097) (2,259,834) (776,473)
Proceeds from sale of equipment 258,289 3,807 58
Cash paid in connection with acquisition of Valley
Financial Corporation net of cash received -- -- (8,568,743)
Other 80,860 (975) 69,974
------ ---- ------
Net cash (used in) investing activities (25,392,139) (37,195,721) (2,215,809)
----------- ----------- ----------
(Continued)
-32-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (9,864,145) $ 24,340,478 $ 6,297,514
Net increase (decrease) in advances from
borrowers for taxes and insurance 114,044 138,000 (154,127)
Net increase (decrease) in short-term borrowings (9,000,000) 14,000,000 --
Proceeds from other borrowed funds 64,000,000 8,000,000 16,542,000
Payments of other borrowed funds (22,123,063) (5,116,950) (6,259,761)
Purchase of treasury stock (5,799,736) (12,336,522) (6,164,419)
Proceeds from issuance of treasury stock 54,470 -- 114,963
Dividends paid (941,692) (1,005,553) (927,924)
---------- ---------- ---------
Net cash provided by financing activities 16,439,878 28,019,453 9,448,246
---------- ---------- ---------
Net increase (decrease) in cash (3,818,952) (2,968,198) 12,191,713
CASH
Beginning 12,668,678 15,636,876 3,445,163
---------- ---------- ---------
Ending $ 8,849,726 $ 12,668,678 $ 15,636,876
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash payments for:
Interest paid to depositors $ 12,075,178 $ 11,181,280 $ 10,989,646
Interest paid on borrowings 4,461,883 2,414,957 1,975,691
Income taxes 2,195,640 2,507,574 2,628,003
See Notes to Financial Statements.
-33-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1. Significant Accounting Policies
Organization, nature of business and basis of presentation: North Central
Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and
loan holding company that owns 100% of the outstanding stock of First Federal
Savings Bank of Iowa (the Bank), which is a federally chartered stock savings
bank that conducts its operations from its main office located in Fort Dodge,
Iowa, and seven branch offices located in Fort Dodge, Nevada, Ames, Perry,
Burlington and Mt. Pleasant, Iowa.
Principles of consolidation: The consolidated financial statements, as described
above, include the accounts of the Company and its wholly-owned subsidiary, the
Bank and the Bank's wholly-owned subsidiaries, First Federal Investment
Services, Inc., formerly First Financial Service Corporation (which sells
insurance, annuity products, mutual funds and originates equipment leases),
First Iowa Title Services, Inc. (which provides real estate abstracting
services), Northridge Apartments Limited Partnership (which owns a multifamily
apartment building) and First Iowa Mortgage, Inc. (which originates and sells
mortgage loans in the secondary market). All significant intercompany balances
and transactions have been eliminated in consolidation.
Accounting estimates and assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.
Securities available-for-sale: Securities classified as available-for-sale are
those debt and equity securities the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors.
Securities available-for-sale are reported at fair value with unrealized gains
or losses reported as a separate component of other comprehensive income/(loss),
net of the related deferred tax effect. The amortization of premiums and
accretion of discounts is computed by the interest method over their contractual
lives.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Loans held for sale: Loans held for sale are those loans held with the intent to
sell in the foreseeable future. They are carried at the lower of aggregate cost
or market value. Sales are made without recourse and any gain or loss is
recognized at the settlement date.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, net deferred loan origination fees and unearned
discounts.
Discounts on first mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
-34-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.
Uncollectible interest on loans that are contractually past due is charged-off
or an allowance is established based on management's periodic evaluation,
generally when loans become 90 days past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is no longer in doubt, in which case the loan is
returned to accrual status.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Loan origination fees and related costs: Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less selling costs at
the date of foreclosure. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to income if the carrying value of a property exceeds
its fair value less estimated selling costs.
Premises and equipment: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by straight-line
and double-declining balance methods over the estimated useful lives of the
assets.
Rental real estate: Rental real estate is comprised of a low-income housing,
multifamily apartment building and equipment which is stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by the
straight-line and double-declining balance methods over the estimated useful
lives of the assets.
Title plant: Title plant is carried at cost and, in accordance with FASB
Statement No. 61, is not depreciated. Costs incurred to maintain and update the
title plant are expensed as incurred.
Goodwill: Goodwill is stated at cost, net of accumulated amortization and is
being amortized over 10 - 15 years using the straight-line method.
-35-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the difference between the
reported amounts of assets and liabilities and their income tax bases. Income
taxes are allocated to the Company and its subsidiaries based on each entity's
income tax liability as if it filed a separate return.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of the deferred
tax assets, will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Comprehensive income: Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Earnings per share: Basic earnings per common share represents income available
to common stockholders divided by the weighted average number of common shares
outstanding during the periods presented. The earnings per common share amounts
- - assuming dilution were computed using the weighted average number of shares
outstanding during the periods presented, adjusted for the effect of dilutive
potential common shares outstanding, which consists of stock options granted. In
accordance with Statement of Position 93-6, shares owned by the ESOP that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share.
Stock-option plan: SFAS No. 123, Accounting for Stock-Based Compensation,
establishes a fair value based method for financial accounting and reporting for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
However, the standard allows compensation to continue to be measured by using
the intrinsic value based method of accounting prescribed by APB No. 25,
Accounting for Stock Issued to Employees, but requires expanded disclosures. The
Company has elected to apply the intrinsic value based method of accounting for
stock options issued to employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Fair value of financial instruments: The fair value of a financial instrument is
the current amount that would be exchanged between willing parties, other than
in a fixed liquidation. Fair value is best determined based upon quoted market
prices. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
-36-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash: The carrying amount of cash represents the fair value.
----
Securities: Fair values for all securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and have experienced
no significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated based on discounted
cash flows, using interest rates currently being offered for loans with
similar terms to borrowers with similar credit quality.
Deposits: Fair values disclosed for demand, NOW, savings and money market
savings deposits equal their carrying amounts, which represent the amount
payable on demand. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
monthly maturities on time deposits.
Borrowed funds: The fair value of borrowed funds is estimated based on
discounted cash flows using currently available borrowing rates.
Accrued interest receivable and payable: The fair values of both accrued
interest receivable and payable are their carrying amounts.
Commitments to extend credit: The fair values of commitments to extend credit
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and creditworthiness of
the counterparties. At December 31, 2000 and 1999, the carrying amount and
fair value of the commitments were not significant.
Note 2. Business Combination
As of the close of business on January 30, 1998, the Bank completed the
acquisition of Valley Financial Corp. ("Valley Financial") pursuant to an
Agreement and Plan of Merger, dated as of September 19, 1997. The acquisition
resulted in the merger of Valley Financial's wholly-owned subsidiary, Valley
Savings Bank, FSB ("Valley Savings") with and into the Bank, with the Bank as
the resulting financial institution. Valley Savings, headquartered in
Burlington, Iowa, was a federally-charted stock savings bank with three branch
offices located in southeastern Iowa. The former offices of Valley Savings are
being operated as branches of the Bank.
-37-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
In connection with the acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was canceled and converted automatically
into the right to receive $525 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the acquisition, shareholders
of Valley Financial were paid a total of $14,726,250 in cash. The excess of the
total acquisition cost over the fair value of the net assets acquired of
$6,627,859 is being amortized over 15 years by the straight-line method. The
acquisition was accounted for as a purchase transaction and therefore, the
operating results of the former offices of Valley Savings Bank are included in
the operating results of the Company from the date of acquisition.
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corporation:
Cash $ 6,157,507
Securities 41,818,057
Loans 58,567,364
Accrued interest receivable 1,019,373
Premises and equipment 1,081,890
Goodwill 6,627,859
Prepaid expenses and other assets 228,785
Deposits (99,269,092)
Advances from borrowers for taxes and insurance (301,783)
Deferred income taxes (262,738)
Accrued taxes payable 12,565
Accrued expenses and other liabilities (953,537)
------------
Cash paid 14,726,250
Less: cash received (6,157,507)
------------
Cash paid, net of cash received $ 8,568,743
============
Unaudited pro forma consolidated results of operations for the year ended
December 31, 1998, as though Valley Savings Bank had been acquired as of January
1, 1998, follow:
1998
----
Net interest income $ 10,904,821
Net income 4,245,473
Basic earnings per common share 1.39
Earnings per common share - assuming dilution 1.36
-38-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3. Securities
Securities available-for-sale as of December 31, 2000, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
-----------------------------------------------------------
Equity securities:
Federal Home Loan Bank
stock $ 4,428,700 $ -- $ -- $ 4,428,700
FHLMC preferred stock 3,499,375 -- (104,375) 3,395,000
FNMA preferred stock 5,134,375 5,625 (9,625) 5,130,375
Other 474,533 14,400 (24,884) 464,049
------- ------ ------- -------
13,536,983 20,025 (138,884) 13,418,124
---------- ------ -------- ----------
Debt securities:
U.S. Government agencies 17,501,722 -- (223,647) 17,278,075
State and political
subdivisions 4,472,262 597 (387) 4,472,472
Mortgage-backed securities 8,239,745 9,311 (65,877) 8,183,179
--------- ----- ------- ---------
30,213,729 9,908 (289,911) 29,933,726
---------- ----- -------- ----------
$ 43,750,712 $ 29,933 $ (428,795) $ 43,351,850
============ ============ ============ ============
Securities available-for sale as of December 31, 1999, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
-----------------------------------------------------------
Equity securities:
Federal Home Loan Bank
stock $ 3,034,600 $ -- $ -- $ 3,034,600
FHLMC preferred stock 3,499,375 -- (241,875) 3,257,500
FNMA preferred stock 5,134,375 37,625 (15,000) 5,157,000
Other 499,283 16,300 (58,478) 457,105
------- ------ ------- -------
12,167,633 53,925 (315,353) 11,906,205
---------- ------ -------- ----------
Debt securities:
U.S. Treasury notes 4,270,840 -- (10,410) 4,260,430
U.S. Government agencies 19,582,382 -- (782,856) 18,799,526
State and political
subdivisions 4,866,505 5,657 (100,165) 4,771,997
Mortgage-backed securities 10,280,363 -- (325,664) 9,954,699
---------- ------ -------- ---------
39,000,090 43,282 (115,165) 37,786,652
---------- ------ -------- ----------
$ 51,167,723 $ 59,582 $ (1,534,448) $ 49,692,857
============ ============ ============ ============
39
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The amortized cost and fair value of debt securities as of December 31, 2000, by
contractual maturity are shown below. Certain securities have call features,
which allow the issuer to call the security prior to maturity. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
Securities Available-for-Sale
-------------------------------
Amortized
Cost Fair Value
-------------------------------
Due in one year or less $ 362,615 $ 361,729
Due from one to five years 17,244,047 17,027,614
Due from five to ten years 3,801,682 3,796,276
Due after ten years 565,640 564,928
Mortgage-backed securities 8,239,745 8,183,179
--------- ---------
$30,213,729 $29,933,726
=========== ===========
Gross gains of $42, $61,564 and $71,923 were realized on the sale of
available-for-sale securities in 2000, 1999 and 1998, respectively. There were
no gross losses on the sale of available-for-sale securities in 2000 and 1999
and $20,561 in 1998.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on securities for the years ended December 31, 2000, 1999 and 1998,
were as follows:
2000 1999 1998
-----------------------------------------
Unrealized holding gains (losses) arising
during the period $ 1,076,046 $(1,984,129) $ 57,558
Less reclassification adjustment for net gains
realized in net income 42 61,564 51,362
-----------------------------------------
Net unrealized gains (losses)
before tax (expense) benefit 1,076,004 (2,045,693) 6,196
Tax (expense) benefit (402,206) 765,889 (2,311)
-----------------------------------------
Other comprehensive income
(loss) - net unrealized gains
(losses) on securities $ 673,798 $(1,279,804) $ 3,885
=========================================
-40-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 4. Loans Receivable
Loans receivable at December 31, 2000 and 1999, are summarized as follows:
2000 1999
------------------------------
First mortgage loans (principally conventional)
Principal balances:
Secured by one-to-four family residences $ 171,772,639 $ 159,970,037
Secured by:
Multifamily properties 75,857,571 73,416,278
Commercial properties 24,127,064 17,723,455
Construction loans 4,842,706 4,087,495
--------- ---------
Total first mortgage loans 276,599,980 255,197,265
----------- -----------
Consumer loans
Principal balances:
Automobile 8,803,211 8,003,907
Second mortgage 31,910,144 23,603,060
Other 5,094,295 4,955,638
--------- ---------
Total consumer loans 45,807,650 36,562,605
---------- ----------
Total loans 322,407,630 291,759,870
Less:
Undisbursed portion of construction loans (1,493,322) (1,981,962)
Unearned discounts (68,693) (135,953)
Net deferred loan origination fees 23,316 (106,315)
Allowance for loan losses (2,843,149) (2,776,539)
---------- ----------
$ 318,025,782 $ 286,759,101
============= =============
Activity in the allowance for loan losses us summarized as follows for the years
ended December 31:
2000 1999 1998
-----------------------------------------
Balance, beginning $ 2,776,539 $ 2,676,438 $ 2,150,587
Provision charged to income 120,000 120,000 210,000
Effect of acquisition of Valley Financial
Corporation -- -- 343,418
Loans charged-off (55,923) (28,032) (28,422)
Recoveries 2,533 8,133 855
----- ----- ----- ---
Balance, ending $ 2,843,149 $ 2,776,539 $ 2,676,438
=========== =========== ===========
-41-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The following is a summary of information pertaining to impaired loans:
December 31,
-----------------------
2000 1999
-----------------------
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 1,089,639 213,394
-----------------------
Total impaired loans $1,089,639 $ 213,394
=======================
Valuation allowance related to impaired loans $ 204,731 $ 32,009
=======================
Interest income recognized on impaired loans is insignificant.
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their immediate families (commonly referred to as related parties),
all of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
Activity in loans receivable from certain executive officers and directors of
the Bank consisted of the following for the years ended December 31, 2000, 1999
and 1998:
2000 1999 1998
-----------------------------------------
Beginning balance $ 1,685,101 $ 1,075,964 $ 1,045,188
New loans 283,688 825,200 166,701
Repayments (54,116) (216,063) (135,925)
------- -------- --------
Ending balance $ 1,914,673 $ 1,685,101 $ 1,075,964
=========== =========== ===========
Note 5. Servicing
Mortgage loans serviced for FHLMC and other banks are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31, 2000 and 1999, are $6,803,472
and $6,673,921, respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing were $49,441 and $53,236 at December 31, 2000
and 1999, respectively.
-42-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 6. Accrued Interest Receivable
Accrued interest receivable at December 31, is summarized as follows:
2000 1999
-----------------------
Securities $ 375,335 $ 467,804
Loans receivable 1,943,946 1,642,479
--------- ---------
2,319,281 2,110,283
Less allowance for uncollectible interest 62,128 27,685
--------- ---------
$2,257,153 $2,082,598
=======================
Note 7. Premises and Equipment
Premises and equipment consisted of the following at December 31:
2000 1999
-----------------------
Land $1,641,371 $1,696,695
Buildings and improvements 5,532,342 4,236,326
Leasehold improvements 32,061 15,546
Furniture, fixtures and equipment 2,276,566 2,020,593
Vehicles 88,279 87,968
--------- ---------
9,570,619 8,057,128
Less accumulated depreciation 2,909,836 2,701,031
--------- ---------
$6,660,783 $5,356,097
========== ==========
-43-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 8. Deposits
Deposits at December 31, were as follows:
Weighted- Weighted-
Average Average
Rate at Rate at
December 2000 December 1999
Nature of Deposit 31, 2000 Amount Percentage 31, 1999 Amount Percentage
- ------------------------------------------------------------------------------------------------------------------
Demand and NOW accounts:
Noninterest bearing -% $ 6,071,103 2.3% -% $ 6,411,709 2.4%
Interest-bearing 1.25 30,224,808 11.6 1.25 30,096,432 11.1
Savings accounts 1.83 21,723,847 8.3 2.00 25,829,919 9.5
Money market savings 4.92 24,518,731 9.4 3.61 17,463,869 6.4
------------------------- ------------------------
82,538,489 31.6 79,801,929 29.4
------------------------- ------------------------
Certificates of deposit:
Less than 4.0% 3.20 23,836 0.0 3.65 687,639 0.3
4.0% - 4.9% 4.72 15,550,125 6.0 4.65 30,875,083 11.4
5.0% - 5.9% 5.55 62,587,480 24.0 5.44 123,356,192 45.5
6.0% - 6.9% 6.47 91,429,871 35.0 6.24 30,506,154 11.3
7.0% - 7.9% 7.14 9,025,628 3.4 7.09 5,793,434 2.1
More than 8.0% 8.02 11,217 0.0 8.00 10,360 0.0
------------------------- ------------------------
178,628,157 68.4 191,228,862 70.6
------------------------- ------------------------
4.88% $261,166,646 100.0% 4.42% $271,030,791 100.0%
==================================================================================
At December 31, 2000, scheduled maturities of certificates of deposit were as
follows:
One year One to Two to Three to Four to
or less two years three years four years five years Thereafter
-------------------------------------------------------------------------------------------------
Less than 4.0% $ 23,836 $ - $ - $ - $ - $ -
4.0 - 4.9% 13,987,797 1,540,226 22,102 - - -
5.0 - 5.9% 32,237,534 10,012,828 9,248,088 8,226,981 2,860,585 1,464
6.0 - 6.9% 40,892,381 31,598,757 7,309,055 2,072,181 9,546,980 10,517
7.0 - 7.9% 6,030,834 347,606 1,883,346 117,490 449,403 196,949
More than 8.0% - 11,217 - - - -
-------------------------------------------------------------------------------------------------
$ 93,172,382 $ 43,510,634 $ 18,462,591 $ 10,416,652 $ 12,856,968 $ 208,930
=================================================================================================
-44-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Interest expense on deposits consisted of the following:
Years ended December 31,
---------------------------------------
2000 1999 1998
---------------------------------------
NOW accounts $ 345,100 $ 419,878 $ 554,031
Savings 484,774 562,178 594,276
Money market savings 839,957 668,340 797,372
Certificates of deposit 10,598,895 9,463,137 8,947,402
---------- --------- ---------
$12,268,726 $11,113,533 $10,893,081
=========== =========== ===========
The aggregate amount of certificates of deposit of $100,000 or more was
$30,330,601 and $32,215,908 as of of December 31, 2000 and 1999, respectively.
Note 9. Borrowed Funds
Borrowed funds at December 31, 2000 included miscellaneous borrowings of $29,605
and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted-
Stated Average
Maturity Interest Rate Amount Features
- -------------------------------------------------------------------------------------------
2001 6.49% $ 28,300,000 $5 million variable rate, renewable daily
2002 6.31 25,500,000
2003 5.72 5,000,000
2004 5.51 1,000,000
2008 5.31 9,000,000 All callable, various dates 2001 to 2003
2010 5.88 17,500,000 All callable, various dates 2001 to 2003
2013 5.25 2,262,621 5 - year amortizing, repayable 2003
----------------------------------------
6.11% $ 88,562,621
========================================
-45-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Borrowed funds at December 31, 1999, included miscellaneous borrowings of
$33,703 and borrowings from the FHLB of $55,681,586. Such borrowings carried a
weighted-average interest rate of 5.59% with maturities ranging from 2000
through 2013.
The borrowings are collateralized by the FHLB stock and qualifying first
mortgage loans representing 125% of the total borrowings outstanding.
Note 10. Income Taxes and Retained Earnings
Under previous law, the provisions of the IRS and similar sections of Iowa Law
Code permitted the Bank to deduct from taxable income an allowance for bad debts
based on 8% of taxable income before such deduction or actual loss experience.
Legislation passed in 1996 eliminated the percentage of taxable income method as
an option for computing bad debt deductions for 1996, and in all future years.
The Bank is recapturing its tax bad debt reserves which have accumulated since
1987, amounting to approximately $1,659,000. The tax associated with the
recaptured reserves is approximately $615,000 and is being paid in years
beginning in 1996 and ending in 2003. Deferred income taxes have been
established for the taxes associated with the recaptured reserves.
Deferred taxes have been provided for the difference between tax bad debt
reserves and the loan loss allowances recorded in the financial statements
subsequent to December 31, 1987. However, at December 31, 2000, retained
earnings contain certain historical additions to bad debt reserves for income
tax purposes of approximately $2,445,000 as of December 31, 1987, for which no
deferred taxes have been provided because the Bank does not intend to use these
reserves for purposes other than to absorb losses. If these amounts which
qualified as bad debt deductions are used for purposes other than to absorb bad
debt losses or adjustments arising from the carryback of net operating losses,
income taxes may be imposed at the then existing rates. The approximate amount
of unrecognized tax liability associated with these historical additions is
$929,000.
Income tax expense is summarized as follows:
Years ended December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
Current $ 1,911,431 $ 2,382,564 $ 2,645,466
Deferred (38,062) (141,678) (164,846)
------- -------- --------
$ 1,873,369 $ 2,240,886 $ 2,480,620
=========== =========== ===========
-46-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Deferred tax assets and liabilities consisted of the following components as of
December 31, 2000 and 1999:
2000 1999
-----------------------
Deferred tax assets:
Unearned shares, employee stock ownership plan $ 40,000 $ 40,000
Allowance for loan losses 796,000 668,000
Deferred directors fees and compensation 46,000 52,000
Unrealized losses on securities available-for-sale 149,000 551,000
Other 19,258 133,894
------ -------
Total gross deferred tax assets 1,050,258 1,444,894
--------- ---------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend 45,000 47,000
Loan costs 44,000 43,000
Premises and equipment 74,000 75,000
Title plant 119,000 99,000
Loans acquired 89,000 129,000
Investments acquired 42,000 63,000
Deferred directors' fees and compensation 72,000 60,000
Other 8,345 7,837
----- -----
Total gross deferred tax liabilities 493,345 523,837
------- -------
Net deferred tax assets $ 556,913 $ 921,057
========== ==========
-47-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Total income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rates of 34% to income before income taxes as a result of the
following:
Years Ended December 31,
------------------------
2000 1999 1998
------------------------------------------------------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------
Income before income taxes $ 2,000,725 34.0% $ 2,189,961 34.0% $ 2,334,258 34.0%
Nontaxable dividends (132,386) (2.2) (109,022) (1.7) (105,296) (1.5)
State income tax, net of
federal income tax benefit 165,680 2.7 233,647 3.6 226,613 3.1
State income tax refund, net of
federal income tax benefit (66,233) (1.1) -- -- -- --
Municipal interest income (64,182) (1.1) (62,762) (1.0) (54,286) (0.8)
Low income housing tax
credit (153,680) (2.6) (153,680) (2.4) (148,867) (2.1)
Goodwill amortization 145,547 2.5 145,546 2.3 137,536 2.1
Other (22,102) (0.4) (2,804) 0.0 90,662 1.3
------- ---- ------ --- ------ ---
$ 1,873,369 31.8% $ 2,240,886 34.8% $ 2,480,620 36.1%
=========== ==== =========== ==== =========== ====
Note 11. Employee Benefit Plans
Retirement plans: The Bank participates in a multiemployer defined benefit
pension plan covering substantially all employees. This is a multiemployer plan
and information as to actuarial valuations and net assets available for benefits
by participating institutions is not available. There was no pension expense for
the years ended December 31, 2000, 1999 and 1998.
The Bank has a defined contribution plan covering substantially all employees.
The Bank does not contribute to this plan.
Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion
to stock ownership, the Bank established an ESOP for eligible employees. All
employees of the Bank as of January 1, 1994, were eligible to participate
immediately and employees of the Bank hired after January 1, 1994, are eligible
to participate after they attain age 21 and complete one year of service during
which they work at least 1,000 hours. The ESOP borrowed funds in the amount of
$960,000 to purchase 104,075 shares of common stock issued in the conversion in
1994 and $840,000 to purchase 84,000 shares of common stock issued in the
reorganization and conversion in 1996. These funds are borrowed from the
Company.
-48-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The Bank makes contributions to the ESOP equal to the ESOP's debt service less
dividends received by the ESOP. Dividends on unallocated ESOP shares are used to
pay debt service. Contributions to the ESOP and shares released from the
suspense account in an amount proportional to the repayment of the ESOP loan are
allocated among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of credited
service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment. If the Bank's stock is
not traded on an established market at the time of an ESOP participant's
termination, the terminated ESOP participant has the right to require the Bank
to purchase the stock at its current fair market value. Bank management believes
there is an established market for the Bank's stock and therefore the Bank
believes there is no potential repurchase obligation at December 31, 2000 and
1999.
As shares are released, the Bank reports compensation expense equal to the
current market price of the shares. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings. Dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $287,295, $330,855 and $403,793 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Shares of the Company's common stock held by the ESOP, at December 31, 2000 and
1999, are as follows:
2000 1999
-----------------------
Allocated shares 117,943 98,626
Unreleased (unearned) shares 66,881 85,507
------ ------
184,824 184,133
======= =======
Fair market value of unreleased (unearned) shares $1,162,057 $1,282,605
========== ==========
Stock option plan: In 1996, the stockholders of the Company ratified the 1996
Incentive Option Plan (the Plan). The Plan provides for the grant of options at
an exercise price equal to the fair market value on the date of grant. The Plan
is intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the success
of the Company and to encourage them to remain in the employment of the Company
or its subsidiaries. Awards granted under the Plan may include incentive stock
options, nonqualified stock options and limited rights which are exercisable
only upon a change in control of the Bank or the Company. All awards to date are
nonqualified stock options.
The Plan authorizes the granting of stock options for a total of 401,105 shares
of common stock or 10% of the shares issued in the 1996 conversion. All options
are granted at an exercise price which was the market price of the common stock
on the grant date.
-49-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Options granted to officers and directors become exercisable in five equal
annual installments commencing on the first anniversary of the grant date and
continuing on each anniversary date thereafter. The options granted to officers
expire ten years from the date of grant unless an earlier expiration date is
triggered by death, disability, retirement or termination, as described in the
Plan. A person who becomes a director after September 21, 1996, receives an
annual grant of options to purchase 2,000 shares of common stock. Options
granted to directors are exercisable immediately and expire ten years from the
date of grant, unless an earlier expiration date is triggered by removal for
cause.
The table below reflects option activity for the period indicated:
Weighted-
Average
Exercise
Number Price per
of Shares Share
---------------------
Outstanding, December 31, 1997 231,000 $ 12.42
Granted 62,000 19.32
Forfeited -- --
Exercised (10,290) 12.38
------- -----
Outstanding, December 31, 1998 282,710 13.93
Granted 12,000 15.76
Forfeited -- --
Exercised -- --
------- -----
Outstanding, December 31, 1999 294,710 14.01
Granted 13,000 15.44
Forfeited (4,400) 14.84
Exercised (4,600) 12.82
------ -----
Outstanding, December 31, 2000 298,710 $ 14.08
======= =========
Options exercisable 201,610 $ 13.45
======= =========
Remaining shares available for grant 73,605
======
-50-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
As of December 31, 2000, the 298,710 options outstanding under the Plan have
exercise prices between $12.375 and $20.00. The weighted average fair value per
option of options granted during the years ended December 31, 2000, 1999 and
1998, were $3.88, $4.68 and $5.96, respectively.
Had compensation cost for the Plan been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), the
approximate 2000, 1999 and 1998, reported net income and earnings per common
share would have been decreased to the pro forma amounts shown below:
2000 1999 1998
---------------------------------------------
Net income:
As reported $ 4,011,117 $ 4,200,175 $ 4,384,845
Pro forma 3,811,161 4,011,266 4,202,056
Earnings per common share:
As reported 2.04 1.64 1.44
Pro forma 1.94 1.57 1.38
Earnings per common share - assuming dilution:
As reported 2.00 1.60 1.40
Pro forma 1.90 1.53 1.34
The fair values of the grants are estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2000, 1999 and 1998, respectively: dividend rate of
3.2%, 2.4% and 1.3%, price volatility of 21%, 25% and 17%, risk-free interest
rates of 6.49%, 4.64% and 5.65% and expected lives of eight years for all years.
Employment agreements: The Company and the Bank have entered into employment
agreements with a key officer. Under the terms of the agreements, the officer is
entitled to additional compensation in the event of certain conditions of
involuntary termination. The agreements extend for up to 36 months.
The Bank has entered into certain employment retention agreements with key
officers. Under the terms of the agreements, the employees are entitled to
additional compensation in the event of a change of control of the Bank or the
Company and the employees are involuntarily terminated within the remaining
unexpired employment period, up to 36 months. A change in control is generally
triggered by the acquisition or control of 20% or more of the common stock.
-51-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 12. Stockholders' Equity
Regulatory capital requirements: The Bank is subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier I capital (as defined) to average
assets (as defined) and tangible capital to adjusted assets. Management
believes, as of December 31, 2000, the Bank meets all capital adequacy
requirements to which it is subject.
The Bank's actual capital amounts and ratios are also presented in the following
table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
(000's) (000's) (000's)
As of December 31, 2000:
Total Capital (to risk
weighted assets) $ 31,241 14.0% $ 17,830 8.0% $ 22,287 10.0%
Tier 1 Capital (to risk
weighted assets) 28,456 12.8 8,915 4.0 13,372 6.0
Tier I (Core) Capital
(to adjusted assets) 28,456 7.4 11,464 3.0 19,107 5.0
Tangible Capital (to
adjusted assets) 28,456 7.4 5,732 1.5 - -
As of December 31, 1999:
Total Capital (to risk
weighted assets) $ 33,168 16.7% $ 15,870 8.0% $ 19,837 10.0%
Tier 1 Capital (to risk
weighted assets) 30,685 15.4 7,935 4.0 11,902 6.0
Tier I (Core) Capital
(to adjusted assets) 30,685 8.5 10,833 3.0 18,054 5.0
Tangible Capital (to
adjusted assets) 30,685 8.5 5,416 1.5 - -
-52-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Limitations on Dividends and Other Capital Distributions: OTS regulations impose
limitations on dividends and other capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash out merger and other distributions
charged against capital. The rule establishes three tiers of institutions. An
institution such as the Bank that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year up to the higher of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period, subject to certain
limitations and restrictions as described in the regulations. Any additional
capital distributions would require prior regulatory approval. A savings
institution that does not meet its current regulatory capital requirement before
or after payment of a proposed capital distribution may not make any capital
distributions without the prior approval of the OTS. At December 31, 2000, the
Bank was considered a Tier 1 Association.
Note 13. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
2000 1999 1998
---------------------------------------------------
Advertising and promotion $ 237,482 $ 191,828 $ 168,105
Professional fees 152,648 207,211 171,761
Printing, postage, stationery and supplies 364,308 441,243 369,877
Checking account charges 329,821 328,380 299,530
Insurance 84,058 80,400 85,987
OTS general assessment 77,831 73,168 80,337
Telephone 120,302 108,292 91,900
ATM costs 106,821 111,982 82,285
Other 935,005 813,520 796,072
---------------------------------------------------
$2,408,276 $ 2,356,024 $ 2,145,854
===================================================
Note 14. Financial Instruments With Off-Statement of Financial Condition Risk
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as they do for on-statement of financial condition instruments.
-53-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The Bank does require collateral, or other security, to support financial
instruments with credit risk.
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount
---------------------------
December 31,
2000 1999
---- ----
Mortgage loans (including one-to-four family and multifamily
loans) $ 3,156,421 $ 5,440,249
Undisbursed overdraft loan privileges and undisbursed home
equity lines of credit 1,761,048 952,000
At December 31, 2000, the mortgage loan commitments above were comprised of
variable-rate commitments carrying a weighted-average interest rate of 8.18% and
fixed-rate commitments carrying a weighted-average interest rate of 8.76%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but normally includes
real estate and personal property.
Note 15. Lending Activities and Concentrations of Credit Risk
Most of the Bank's lending activity is with customers located within the state
of Iowa. The Bank generally originates single family residential loans within
its primary lending area of Webster, Story, Des Moines and Henry counties. The
Bank's underwriting policies require such loans to be 80% loan to value based
upon appraised values unless private mortgage insurance is obtained.
Approximately 37% of the Bank's first mortgage loan portfolio at December 31,
2000, consisted of loans purchased or originated outside the state of Iowa.
These are generally multifamily residential and commercial real estate loans for
properties located primarily in Wisconsin, Colorado and California. These loans
are secured by the underlying properties. The properties securing these loans
are physically inspected. The loans are subject to the same underwriting
guidelines as loans originated locally. The Bank is also active in originating
secured consumer loans to its customers, primarily automobile and second
mortgage loans. Collateral for substantially all consumer loans are security
agreements and/or Uniform Commercial Code filings on the purchased asset.
-54-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 16. Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
December 31, 2000 and 1999, were as follows:
2000 1999
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------
(nearest 000) (nearest 000)
Financial assets:
Cash $ 8,849,726 $ 8,850,000 $ 12,668,678 $ 12,669,000
Securities 43,351,850 43,352,000 49,692,857 49,693,000
Loans, net 318,025,782 320,667,000 286,759,101 285,004,000
Accrued interest receivable 2,257,153 2,257,000 2,082,598 2,083,000
Financial liabilities:
Deposits 261,166,646 261,231,000 271,030,791 270,849,000
Borrowed funds 88,592,226 88,334,000 55,715,289 54,860,000
Accrued interest payable 601,309 601,000 431,750 432,000
Note 17. 1994 Reorganization and Conversion to Stock Ownership
Effective August 31, 1994, First Federal Savings Bank of Iowa (a mutual savings
bank) reorganized such that its assets and liabilities were transferred to a
newly formed stock savings bank and a federal mutual holding company was formed
under the name of North Central Bancshares, Inc. The stock savings bank issued
approximately 65% of its shares of stock to the mutual holding company and the
remainder were sold in a public offering.
Persons who had membership or liquidation rights with respect to the mutual
savings bank as of the date of reorganization shall, as long as they remain
depositors of the Bank, continue to have such rights solely with respect to the
mutual holding company after the reorganization (see Note 18).
Note 18. The 1996 Reorganization and Conversion
Effective March 20, 1996, the mutual holding company and the Bank executed a
Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The
Company became an Iowa corporation owning 100% of the stock of the Bank and
offered shares to the public. The mutual holding company ceased to exist.
-55-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The Plan provided that when the conversion was completed, a "Liquidation
Account" would be established in an amount equal to the amount of any dividends
waived by the mutual holding company (totaling approximately $1,897,000), plus
65.5% of the Bank's total stockholders' equity, as reflected in its latest
statement of financial condition in the final prospectus utilized in the
conversion. The Liquidation Account is established to provide a limited priority
claim to the assets of the Bank to qualifying depositors as of specified dates
(Eligible Account Holders and Supplemental Eligible Account Holders) who
continue to maintain deposits in the Bank after the conversion. In the unlikely
event of a complete liquidation of the Bank, and only in such an event, Eligible
Account Holders and Supplemental Eligible Account Holders would receive from the
Liquidation Account a liquidation distribution based on their proportionate
share of the then total remaining qualifying deposits.
Note 19. Earnings Per Common Share
Presented below is the reconciliation of the numerators and denominators of the
computations for earnings per common share and earnings per common share -
diluted, for the years ended December 31:
2000 1999 1998
------------------------------------
Numerator, income available to common
stockholders $4,011,117 $4,200,175 $4,384,845
========== ========== ==========
Denominator:
Weighted-average shares outstanding 2,042,140 2,660,629 3,166,041
Less unallocated ESOP 78,454 97,689 117,894
------ ------ -------
Weighted-average shares outstanding-basic 1,963,686 2,562,940 3,048,147
Dilutive effect of stock options 42,654 58,602 84,684
------ ------ ------
Weighted-average shares outstanding-diluted 2,006,340 2,621,542 3,132,831
========= ========= =========
Basic earnings per common share 2.04 1.64 1.44
Earnings per common share-assuming dilution 2.00 1.60 1.40
Note 20. Pending Accounting Pronouncements
SFAS No. 133, Accounting for Derivatives Instruments and Hedging will, beginning
with the quarter ended March 31, 2001, require an entity to recognize all
derivatives as either assets or liabilities, and measure those instruments at
fair value. It also sets forth the proper accounting for hedging activities,
which is determined by the intended use of the derivative and how that use is
designated by the entity. Since the Company is not currently holding any
derivative instruments (as defined) and is not engaged in hedging activities,
the adoption of SFAS No. 133 is expected to have no effect on the Company's
financial condition or results of operations.
SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities was issued in September 2000, and replaces SFAS
No. 125 of the same title. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. The adoption of SFAS No. 140 is not expected
to have a material impact on the results of operations or financial condition of
the Company.
-56-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 21. North Central Bancshares, INC. (Parent Company Only) Financial
STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
2000 1999
----------------------------
ASSETS
Cash $ 346,592 $ 190,106
Securities available-for-sale 464,049 457,105
Loan receivables, net 1,101,000 951,000
Investment in First Federal Savings Bank of Iowa 34,648,865 36,765,460
Income taxes receivable 71,629 30,809
Deferred taxes 6,215 --
Prepaid expenses and other assets -- 11,549
----- ------
Total assets $ 36,638,350 $ 38,406,029
============ ============
LIABILITIES AND EQUITY
LIABILITIES
Dividend payable $ 240,235 $ 226,174
Accrued expenses and other liabilities -- 32,639
Deferred taxes -- 20,292
------- ------
Total liabilities 240,235 279,105
------- -------
EQUITY
Common stock 40,111 40,111
Additional paid-in capital 38,378,315 38,278,872
Retained earnings 33,345,852 30,290,488
Unearned shares, employee stock ownership plan (646,912) (825,484)
Accumulated other comprehensive (loss) (247,340) (921,138)
Treasury stock, at cost (34,471,911) (28,735,925)
----------- -----------
Total equity 36,398,115 38,126,924
---------- ----------
Total liabilities and equity $ 36,638,350 $ 38,406,029
============ ============
-57-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------------------------------------
Operating income:
Equity in net income of subsidiary $ 4,050,607 $ 4,173,425 $ 4,393,955
Interest income 118,392 286,915 200,055
Gain on sale of securities available-for-sale, net 42 61,564 71,923
------- ------ ------
4,169,041 4,521,904 4,665,933
--------- --------- ---------
Operating expenses:
Salaries and employee benefits 47,400 45,750 45,000
Other 145,921 267,979 265,088
------- ------- -------
193,321 313,729 310,088
------- ------- -------
Income before income taxes 3,975,720 4,208,175 4,355,845
Provision for income taxes (35,397) 8,000 (29,000)
------- ----- -------
Net income $ 4,011,117 $ 4,200,175 $ 4,384,845
=========== =========== ===========
-58-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF EQUITY
Years Ended December 31, 2000, 1999 and 1998
Employee Accumulated
Additional Stock Other Total
Comprehensive Common Paid-in Retained Ownership Compehensive Treasury Stockholer's
Income Stock Capital Earnings Plan Income (Loss) Stock Equity
-------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $40,111 $37,949,598 $23,660,964 $(1,210,441) $354,781 $(10,377,937) $50,417,076
Comprehensive income:
Net income $4,384,845 -- -- 4,384,845 -- -- -- 4,384,845
Other comprehensive income,
unrealized gains on securities,
net of reclassification
adjustment,net of tax (Note 3) 3,885 -- -- -- -- 3,885 -- 3,885
---------
Total comprehensive income $4,388,730
==========
Purchase of treasury stock -- -- -- -- -- (6,164,419) (6,164,419)
Dividends on common stock -- -- (960,902) -- -- -- (960,902)
Effect of contribution to
employee stock ownership plan -- 206,636 -- 197,157 -- -- 403,793
Effect of stock options exercised -- (20,417) -- -- -- 142,953 122,536
------------------------------------------------------------------------------------
Balance, December 31, 1998 40,111 38,135,817 27,084,907 (1,013,284) 358,666 (16,399,403) 48,206,814
Comprehensive income:
Net income $4,200,175 -- -- 4,200,175 -- -- -- 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) (1,279,804) -- -- -- -- (1,279,804) -- (1,279,804)
-----------
Total comprehensive income $2,920,371
==========
Purchase of treasury stock -- -- -- -- -- (12,336,522) (12,336,522)
Dividends on common stock -- -- (994,594) -- -- -- (994,594)
Effect of contribution to employee
stock ownership plan -- 143,055 -- 187,800 -- -- 330,855
------------------------------------------------------------------------------------
Balance, December 31, 1999 40,111 38,278,872 30,290,488 (825,484) (921,138) (28,735,925) 38,126,924
Comprehensive income:
Net income $4,011,117 -- -- 4,011,117 -- -- -- 4,011,117
Other comprehensive (loss),
unrealized (losses)on securities,
net of reclassification adjustment,
net of tax (Note 3) 673,798 -- -- -- -- 673,798 -- 673,798
----------
Total comprehensive income $4,684,915
==========
Purchase of treasury stock -- -- -- -- -- (5,799,736) (5,799,736)
Dividends on common stock -- -- (955,753) -- -- -- (955,753)
Effect of contribution to
employee stock ownership plan -- 108,723 -- 178,572 -- -- 287,295
Issuance of treasury stock -- (9,280) -- -- -- 63,750 54,470
-------------------------------------------------------------------------------------
Balance, December 31, 2000 $40,111 $38,378,315 $33,345,852 $ (646,912) $(247,340) $(34,471,911) $36,398,115
=====================================================================================
-59-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,011,117 $ 4,200,175 $ 4,384,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of First Federal Savings
Bank of Iowa (4,050,607) (4,173,425) (4,393,955)
Dividends received from First Federal Savings
Bank of Iowa 7,100,000 12,398,262 3,295,694
(Gain) on sale of securities available-for-sale (42) (61,564) (71,923)
Change in deferred income taxes (29,906) 43,318 (485)
Change in assets and liabilities:
Income taxes receivable (40,820) (2,319) (20,917)
Prepaid expenses and other assets 11,549 (963) 2,191
Income taxes payable -- -- (2,723)
Accrued expenses and other liabilities (32,639) (14,490) 5,836
------- ------- -----
Net cash provided by operating activities 6,968,652 12,388,994 3,198,563
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans (150,000) 310,000 8,680,000
Proceeds from sale of securities available-for-sale 24,792 438,915 128,550
Purchase of securities available-for-sale -- (15,125) (361,058)
Capital contributions to First Federal Savings Bank -- -- (5,000,000)
-------- ------- ---------
Net cash provided by (used in) investing
activities (125,208) 733,790 3,447,492
-------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (5,799,736) (12,336,522) (6,164,419)
Proceeds from issuance of treasury stock 54,470 -- 114,963
Dividends paid (941,692) (1,005,553) (927,924)
-------- ---------- --------
Net cash (used in) financing activities (6,686,958) (13,342,075) (6,977,380)
---------- ----------- ----------
Net increase (decrease) in cash 156,486 (219,291) (331,325)
CASH
Beginning 190,106 409,397 740,722
------- ------- -------
Ending $ 346,592 $ 190,106 $ 409,397
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH
FLOW INFORMATION
Cash payment (receipts) for income taxes $ 44,608 $ (32,998) $ 82,158
-60-
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended December 31, 2000
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------- -------------------- -------------
(In thousands, except per share amounts)
Interest income....................... $ 6,530 $ 6,731 $ 6,951 $ 7,071
Interest expense...................... 3,786 4,030 4,356 4,535
----------- ----------- ----------- -----------
Net interest income................... 2,744 2,701 2,595 2,536
Provision for loan losses............. 30 30 30 30
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses....................... 2,714 2,671 2,565 2,506
----------- ----------- ----------- -----------
Noninterest income:
Fees and service charges.......... 354 380 424 434
Abstract fees..................... 304 354 305 270
Other income...................... 297 218 260 414
----------- ----------- ----------- -----------
Total noninterest income........ 955 952 989 1,118
Noninterest expense:
Salaries and employee benefits.... 1,043 992 1,005 1,063
Premises and equipment............ 237 245 283 327
Data Processing................... 113 116 112 114
SAIF deposit insurance premiums .. 13 14 14 14
Goodwill.......................... 118 118 118 118
Other............................. 588 625 546 650
----------- ----------- ----------- -----------
Total noninterest expense....... 2,112 2,110 2,078 2,286
----------- ----------- ----------- -----------
Income before income taxes............ 1,557 1,513 1,476 1,338
Provision for income tax expense...... 550 508 505 310
----------- ----------- ----------- -----------
Net Income............................ $ 1,007 $ 1,005 $ 971 $ 1,028
=========== =========== =========== ===========
Basic earnings per share.............. $ 0.48 $ 0.51 $ 0.50 $ 0.55
=========== =========== =========== ===========
Diluted earnings per share............ $ 0.47 $ 0.50 $ 0.49 $ 0.53
=========== =========== =========== ===========
Year Ended December 31, 1999
-------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------ --------------------- -------------
(In thousands, except per share amounts)
Interest income...................... $ 5,967 $ 6,005 $ 6,129 $ 6,455
Interest expense..................... 3,200 3,235 3,390 3,779
-------- -------- -------- --------
Net interest income.................. 2,767 2,770 2,739 2,676
Provision for loan losses............ 30 30 30 30
-------- -------- -------- --------
Net interest income after provision for
loan losses...................... 2,737 2,740 2,709 2,646
-------- -------- -------- --------
Noninterest income:
Fees and service charges......... 361 334 378 412
Abstract fees.................... 343 383 372 323
Other income..................... 216 338 379 224
-------- -------- -------- --------
Total noninterest income....... 920 1,055 1,129 959
Noninterest expense:
Salaries and employee benefits... 973 1,007 1,033 1,013
Premises and equipment........... 207 216 236 272
Data Processing.................. 148 149 111 114
SAIF deposit insurance premiums . 37 36 36 38
Goodwill......................... 118 118 118 118
Other............................ 571 631 594 560
-------- -------- -------- --------
Total noninterest expense...... 2,054 2,157 2,128 2,115
-------- -------- -------- --------
Income before income taxes........... 1,603 1,638 1,710 1,490
Provision for income tax expense..... 545 564 622 510
-------- -------- -------- --------
Net income........................... $ 1,058 $ 1,074 $ 1,088 $ 980
======== ======== ======== ========
Basic earnings per share............. $ 0.37 $ 0.39 $ 0.44 $ 0.44
========= ========= ========= =========
Diluted earnings per share........... $ 0.36 $ 0.38 $ 0.43 $ 0.43
========= ========= ========= =========
-61-
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK
The Board of Directors of the Holding Company is divided into three
classes, each of which contains approximately one-third of the Board. The Bylaws
of the Holding Company currently authorize seven directors. Currently, all
directors of the Holding Company are also directors of the Bank.
Directors
David M. Bradley, CPA is Chairman of the Board, President and Chief
Executive Officer.
Howard A. Hecht is a retired insurance executive, who was a Vice President
with Principal Mutual Life Insurance Company in Des Moines, Iowa. Mr. Hecht will
be retiring from the board of directors effective April 27, 2001.
Melvin R. Schroeder is Vice President of Instruction at Iowa Central
Community College in Fort Dodge, Iowa.
KaRene Egemo is the owner of Egemo Realty, Inc. in Fort Dodge, Iowa.
Robert H. Singer, Jr. is the co-owner of Calvert, Singer & Kelley Insurance
Services, Inc., an insurance agency, in Fort Dodge, Iowa.
Mark Thompson is the owner of Mark Thompson, CPA, P.C. , in Fort Dodge,
Iowa and has been a certified public accountant since 1978.
Craig R. Barnes is Executive Director of International Products for
Principal Capital Management, a member of the Principal Financial Group. He has
been employed with Principal in Des Moines, Iowa, since 1979.
Executive Officers Who are Not Directors
C. Thomas Chalstrom is Chief Operating Officer of the Bank and Executive
Vice President of the Holding Company and the Bank.
Jean L. Lake is Secretary of the Holding Company and the Bank.
John L. Pierschbacher, CPA is Treasurer of the Holding Company and the
Bank.
Kirk A. Yung is Senior Vice President of the Holding Company and the Bank.
-62-
SHAREHOLDER INFORMATION
Price Range of the Company's Common Stock
The Company's Common Stock trades on The Nasdaq National Market System
under the symbol "FFFD." The following table shows the high and low per share
sales prices of the Company's Common Stock as reported by Nasdaq and the
dividends declared per share during the periods indicated. Such quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
Price Range ($)
---------------
Dividends Declared
Quarter Ended High Low Per Share
------------- ---- --- ---------
1999
- ----
First Quarter................ $ 17.250 $ 16.250 $ 0.10
Second Quarter............... 18.750 16.000 0.10
Third Quarter................ 17.625 16.188 0.10
Fourth Quarter............... 17.000 15.000 0.10
2000
- ----
First Quarter................ 16.688 12.750 0.125
Second Quarter............... 14.750 13.750 0.125
Third Quarter................ 16.938 13.750 0.125
Fourth Quarter .............. 17.750 16.625 0.125
The Company's Common Stock was traded at $20.00 as of March 12, 2001.
Information Relating to the Company's Common Stock
As of March 12, 2001, the Company had 1,437 shareholders of record,
which does include the number of persons or entities who hold their Common Stock
in nominee or "street" name through various brokerage firms. As of such date
1,897,380 shares of the Common Stock were outstanding.
The Company's current quarterly dividend is $0.15 per share. The Board
of Directors of the Company plans to maintain a regular quarterly dividend in
the future and will continue to review the dividend payment amount in relation
to the Company's earnings, financial condition and other relevant factors (such
as regulatory requirements).
The Bank will not be permitted to pay dividends to the Holding Company
on its capital stock if its shareholders' equity would be reduced below the
amount required for the liquidation account. For information concerning federal
regulations which apply to the Bank in determining the amount of proceeds which
may be retained by the Company and regarding a savings institution's ability to
make capital distributions including payment of dividends to its holding
company, see Note 11 to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Holding Company and earnings thereon and may be dependent, in part, upon
dividends from the Bank. The Holding Company is subject to the requirements of
Iowa law, which prohibit the Holding Company from paying a dividend if, after
giving it effect, either of the following would result: (a) the Holding Company
would not be able to pay its debts as they become due in the usual course of
business; or (b) the Holding Company's total assets would be less than the sum
of its total liabilities plus the amount that would be needed, if the Holding
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
-63-
Annual Meeting
The Annual Meeting of Shareholders of the Company will be held at 10:00
a.m., Friday, April 27, 2001 at the Trolley Center, 900 Central Avenue, Fort
Dodge, Iowa.
Stockholders and General Inquiries
David M. Bradley
North Central Bancshares, Inc.
c/o First Federal Savings Bank of Iowa
825 Central Avenue
Fort Dodge, Iowa 50501
(515) 576-7531
www.firstfederaliowa.com
General Counsel Independent Auditor
Johnson, Erb, Bice, McGladrey & Pullen, LLP
Kramer, Good & Mulholland, P.C. 400 Locust Street Suite 640
809 Central Avenue Des Moines, Iowa 50309
Fort Dodge, Iowa 50501
Special Counsel Transfer Agent
Thacher Proffitt & Wood Computershare Investor Services
1700 Pennsylvania Avenue, N.W., Suite 800 12039 West Alameda Parkway Suite Z
Washington, D.C. 20006 Lakewood, Colorado 80228
(303) 986-5400
www.asttrust.com
Annual Report on Form 10-K
A copy of the Company's Form 10-K (without exhibits) for the fiscal
year ended December 31, 2000 will be furnished without charge to shareholders as
of March 12, 2001 upon written request to Jean L. Lake, Corporate Secretary,
North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825
Central Avenue, Fort Dodge, Iowa 50501.
-64-