Exhibit 13.1 Annual Report to Shareholders
NORTH CENTRAL BANCSHARES, INC.
Holding Company for First Federal
Savings Bank of Iowa
2003 ANNUAL REPORT
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)...................................58
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK................................61
SHAREHOLDER INFORMATION.......................................................62
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 the 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.
The Company does not undertake to update any forward looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
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, 2003. North Central Bancshares is the holding company for
First Federal Savings Bank of Iowa (the "Bank).
For the year ended December 31, 2003, North Central Bancshares' net
income was $5,848,000 or $3.48 diluted earnings per share, as compared to
$5,865,000, or $3.37 diluted earnings per share, for the year ended December 31,
2002. Some of our achievements during the past year include:
2003 HIGHLIGHTS
* Total earnings per share, assets and loans reached new Company highs.
o Diluted earnings per share reached a new high of $3.48.
o Total assets grew to a new high of $424.0 million.
o Total net loans increased $21.8 million.
* Repurchased a total of 94,700 shares or 5.8% of outstanding stock
during the year ended December 31, 2003.
* Increased quarterly dividends in April, 2003 to $0.21 per share, a
16.7% increase.
* Moved into a newly constructed 5,000 sq. ft. full service office in
Ankeny, Iowa.
* Opened a new office in Clive, Iowa and began construction on a
permanent 5,000 sq. ft. full service facility.
* Completed construction on a $1.6 million 23 unit Low Income Housing
Tax Credit elderly apartment building in Fort Dodge and achieved 100%
leaseup.
* Originated a record $118 million of Single Family Mortgage Loans.
Sadly, on another note, Director KaRene Egemo lost her valiant battle
against cancer on February 18, 2004. During KaRene's 11 year tenure as a
director she was an important part of the evolution of the Company from a mutual
savings and loan to a fully stock savings bank holding company. We will sorely
miss her wise counsel and positive attitude. KaRene was a very special person
and we extend our condolences to her family.
I want to thank our outstanding staff who helped make 2003 another
successful year for the Company. The directors, officers and staff of North
Central Bancshares, 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, CPA
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,
---------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
--------------
Selected Consolidated Financial
Condition Data:
Total assets .................. $424,009 $403,872 $379,375 $388,998 $367,433
Cash (noninterest-bearing) .... 2,894 2,143 2,259 2,519 8,542
Loans receivable, net:(1)
First mortgage loans secured
by one-to four-family
residences ................ 171,468 147,479 159,943 174,413 161,547
First mortgage loans secured
by multifamily properties . 69,507 70,194 73,311 74,644 71,503
First mortgage loans secured
by commercial properties .. 68,933 70,502 25,263 23,825 17,470
Consumer loans .............. 53,051 52,971 49,464 45,144 36,239
------- ------- ------- -------- -------
Total loans receivable, net 362,959 341,146 307,981 318,026 286,759
Investment securities(2) ...... 34,077 35,859 49,016 49,682 53,820
Deposits ...................... 283,964 277,000 268,814 261,167 271,031
Borrowed funds ................ 95,005 85,026 71,413 88,592 55,715
Total shareholders' equity .... 41,592 38,748 35,913 36,398 38,127
For the Year Ended December 31,
-------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
--------------
Selected Operating Data:
Interest income ................... $25,456 $26,965 $27,500 $27,284 $24,556
Interest expense .................. 12,342 13,911 16,514 16,707 13,604
------- ------- ------- ------- -------
Net interest income before
provision for loan losses .... 13,114 13,054 10,986 10,577 10,952
Provision for loan losses ......... 255 383 210 120 120
------- ------- ------- ------- -------
Net interest income after
provision for loan losses .... 12,859 12,671 10,776 10,457 10,832
------- ------- ------- ------- -------
Noninterest income:
Fees and service charges ..... 2,864 2,375 1,993 1,592 1,485
Abstract fees ................ 1,811 1,686 1,506 1,233 1,421
Other income ................. 1,895 1,668 1,593 1,189 1,157
------- ------- ------- ------- -------
Total noninterest income ... 6,570 5,729 5,092 4,014 4,063
------- ------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 5,950 5,223 4,500 4,103 4,026
Premises and equipment ....... 1,287 1,192 1,226 1,092 931
Data processing .............. 578 544 470 455 522
Goodwill ..................... -- -- 472 472 472
Other expenses ............... 3,045 2,623 2,378 2,465 2,503
------- ------- ------- ------- -------
Total noninterest expense .. 10,860 9,582 9,046 8,587 8,454
------- ------- ------- ------- -------
Income before income taxes ........ 8,569 8,818 6,822 5,884 6,441
Income tax expense ................ 2,721 2,953 2,347 1,873 2,241
------- ------- ------- ------- -------
Net income ..................... $ 5,848 $ 5,865 $ 4,475 $ 4,011 $ 4,200
======= ======= ======= ======= =======
4
At or for the Year Ended December 31,
-------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
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) ..................... 3.01% 3.15% 2.68% 2.57% 2.86%
Net interest margin (net interest income
as a percentage of average interest-
earning assets) .......................... 3.26 3.44 3.03 2.95 3.35
Return on average assets (net income
divided by average total assets) ......... 1.38 1.47 1.17 1.06 1.21
Return on average equity (net income
divided by average equity) ............... 14.65 15.57 12.21 11.08 9.51
Noninterest income to average assets ....... 1.55 1.43 1.33 1.07 1.21
Efficiency ratio(3) ........................ 55.17 51.01 56.26 58.85 56.30
Noninterest expense to average assets ...... 2.56 2.40 2.36 2.28 2.45
Net interest income after provision for
loan losses to noninterest expenses ...... 118.40 132.24 119.12 121.78 128.13
Financial Condition Ratios: (%) (4)
Equity to assets at period end ............. 9.81 9.59 9.47 9.36 10.38
Tangible equity to tangible assets
at period end (5) (6) .................. 8.54 8.25 8.03 7.84 8.68
Average shareholders' equity divided by
average total assets ..................... 9.40 9.42 9.57 9.61 12.77
Average tangible shareholders equity divided
by average tangible total assets (5) (6) 8.12 8.06 8.10 8.00 10.94
Average interest-earning assets to average
interest-bearing liabilities ............. 108.27 107.91 107.54 108.31 112.05
Asset Quality Ratios: (%) (4)
Nonaccrual loans to total net loans ........ 0.17 0.19 0.09 0.33 0.07
Nonperforming assets to total assets(7) .... 0.49 0.35 0.36 0.28 0.20
Allowance for loan losses as a percent of
total loans receivable at end of period .. 0.86 0.90 0.92 0.88 0.95
Allowance for loan losses to nonaccrual
loans .................................... 515.02 485.00 1,042.07 274.08 1,301.13
Per Share Data:
Book value per share ....................... $ 25.92 $ 23.62 $ 21.12 $ 19.04 $ 16.86
Tangible book value per share(5) ........... 22.24 20.03 17.65 15.71 13.83
Basic earnings per share (8) ............... 3.69 3.58 2.54 2.04 1.64
Diluted earnings per share (9) ............. 3.48 3.37 2.41 2.00 1.60
Dividends declared per share ............... 0.84 0.72 0.60 0.50 0.40
Dividend payout ratio ...................... 0.23 0.20 0.25 0.25 0.24
_______________________
(Notes on following page)
5
(1) Loans receivable, net represents total loans less discounts, loans in
process, net deferred loan fees and allowance for loan losses, plus
premiums. The allowance for loan losses at December 31, 2003, 2002,
2001, 2000 and 1999 was $3.2 million, $3.1 million, $2.9 million, $2.8
million and $2.8 million, respectively.
(2) Includes interest-bearing deposits.
(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, 2003, 2002, 2001,
2000 and 1999 was $5.9 million, $5.9 million, $5.9 million, $6.4
million and $6.8 million, respectively.
(6) Tangible assets consist of total assets less goodwill and title plant.
Goodwill and title plant at December 31, 2003, 2002, 2001, 2000 and
1999 was $5.9 million, $5.9 million, $5.9 million, $6.4 million, and
$6.8 million, respectively.
(7) Nonperforming assets consists of nonaccrual loans and foreclosed real
estate.
(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 2003, 2002, 2001, 2000 and 1999 were 1,583,568,
1,637,749, 1,762,900, 1,963,686 and 2,562,940, 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 2003,
2002, 2001, 2000 and 1999 were 1,679,046, 1,739,535, 1,856,643,
2,006,340 and 2,621,542, respectively.
6
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
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 Federal Home Loan Bank of
Des Moines (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, abstract fees, mortgage banking income and other income, and
noninterest expense, which primarily consists of compensation and employee
benefit expenses, premises and equipment, data processing and other expenses.
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.
Executive Overview
North Central Bancshares, Inc.'s business strategy is to operate the
Bank as a well-capitalized, profitable and independent community oriented
savings bank. Specifically, the Company's business strategy incorporates the
following elements: (1) operating as a community oriented financial institution;
(2) increasing loan and deposit balances in existing branch offices as well as
by establishing de novo branch offices in markets where population growth trends
are positive such as the Des Moines, Iowa metropolitan area; (3) maintaining
high asset quality by emphasizing investment in residential mortgage,
multifamily and commercial real estate loans and consumer loans; (4) emphasizing
growth in core deposits, which includes demand deposit, NOW, money market and
savings accounts; (5) maintaining capital in excess of regulatory requirements;
(6) controlling noninterest expense; (7) managing interest rate risk exposure;
and (8) increasing noninterest income through increases in fees and service
charges.
The purpose of this summary is to provide an overview of the items
management focuses on when evaluating the condition of the Company and our
success in implementing our stockholder value strategy. Our stockholder value
strategy has three major themes: (1) enhancing our shareholders' value; (2)
making our retail banking franchise more valuable; and (3) efficiently utilizing
our capital.
Management believes the following points were the most important to that
analysis this year:
o Earnings per share and dividends per share have increased each year
since the Company's inception in 1996. A key factor in these increases
is the Company's stock repurchase programs. An active stock repurchase
program has consistently been used by the Company to manage capital and
increase earnings per share. Since the Company's inception it has
repurchased 2,591,567 shares at a cost of $46.8 million as of December
31, 2003.
o The Bank continues to open new offices in market areas where population
growth trends are positive. A temporary office was opened in Clive, Iowa
in October, 2003. The Clive office's permanent location opened in March,
2004. The Bank opened a permanent office in Ankeny, Iowa in February,
2004. Both of these locations are in suburbs of Des Moines which is
Iowa's largest metropolitan area. The Company will continue to analyze
de novo branch opportunities in the Des Moines metropolitan area.
7
Noninterest expenses have increased during the years ended December 31,
2003 and 2002 in part due to the Company's strategy of opening de novo
branch offices. We believe that this strategy will result in loan and
deposit growth for the Company but will negatively impact net earnings
until each de novo branch achieves profitability.
o Consistent with the Bank's emphasis on attracting and retaining core
deposits, deposit fee growth continued a strongly positive trend. The
growth in core deposits is due in part to a new direct mail marketing
program implemented in early 2003 emphasizing checking accounts. This
direct mail program is ongoing and is expected to result in a continued
growth in core deposits and fee income. Marketing expenses are expected
to remain at 2003 levels for 2004.
o Our exposure to interest rate risk has increased from the prior year.
This is due in part to the increase in the one year repricing of
certificates of deposit and the decrease in the speed in which customers
prepaid their loans. Also, beginning in 2002, the Company began to
retain a portion of the 15 year fixed rate one- to four-family real
estate loans it originates.
o Management believes that the allowance for loan losses is adequate. The
allowance for loan losses to nonaccrual loans was 515.02% at December
31, 2003. Net annualized chargeoffs for 2003 were .06% of total loans
and have averaged under .04% of total loans for the past five years.
During 2003, the Company's total loan portfolio increased $22.8 million
or 6.6%. This increase primarily consisted of increases in the one- to
four-family first mortgage real estate loans, which carry a lower level
of credit risk than other loans in the portfolio. The Company's
provision for loan losses in 2003 was $255,000.
o The Company lowered its effective tax rate through the use of federal
Low Income Housing Tax Credits (LIHTC). The Company owns and operates
two elderly LIHTC projects in Fort Dodge. These projects will generate
$278,000 in federal income tax credits in 2004.
o Purchases and originations of out of state real estate loans remained an
integral part of the Company's business o plan. The Company has
purchased and originated out of state real estate loans to supplement
local mortgage loan originations and to diversify its mortgage loan
portfolio geographically.
Critical Accounting Policies
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and disclosures included within this report, are based on
the Company's audited consolidated financial statements. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The financial information contained in these
statements is, for the most part, based on approximate measures of the financial
effects of transactions and events that have already occurred. However, the
preparation of these statements requires management to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses.
The Company's significant account policies are described in the "Notes
to Consolidated Financial Statements". Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgments,
management has identified its most critical accounting policy to be that related
to the allowance for loan losses, and asset impairment judgments, including the
recoverability of goodwill.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The Company has policies and procedures for evaluating the overall
credit quality of its loan portfolio including timely identification of
potential problem credits. On a quarterly basis, management reviews the
appropriate level for the allowance for loan losses incorporating a variety of
risk considerations, both quantitative and qualitative. Quantitative factors
include the Company's historical loss experience, delinquency and charge-off
trends, collateral values, known information about individual loans and other
factors. Qualitative factors include the general economic environment in the
8
Company's market area and the expected trend of those economic conditions. To
the extent actual results differ from forecasts and management's judgment, the
allowance for loan losses may be greater or less than future charge-offs.
Goodwill represents the excess of the acquisition cost over the fair
value of the net assets acquired in a purchase acquisition. Goodwill is tested
for impairment at least annually.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank.
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 real estate 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 dedicated service to the individual consumer; (2) maintaining
high asset quality by emphasizing investment in residential mortgage,
multifamily and commercial real estate loans, consumer loans and securities
issued or guaranteed by the United States Government or agencies thereof, State
and Local Obligations and mortgage-backed securities; (3) emphasizing growth in
core deposits, which include demand deposit, NOW, money market and savings
accounts; (4) maintaining capital in excess of regulatory requirements; (5)
controlling noninterest expenses; (6) managing interest rate risk exposure while
achieving desirable levels of profitability; and (7) 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.
Retail Deposit Base. In 2003, the Company had ten offices located in
Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, Burlington and Mount Pleasant,
Iowa. At December 31, 2003, 36.7% of the deposit base, or $104.3 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 growth in core deposits.
Asset Quality and Emphasis on Residential Mortgage Lending. The Company
has historically emphasized residential real estate financing. The Company
expects to continue its commitment to financing the purchase or improvement of
residential real estate in its market area. At December 31, 2003, 40.5% 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, 2003, the Company's portfolio of loans which
were either originated or purchased by the Company and secured by out of state
properties consisted of $16.9 million of one-to four-family residential mortgage
loans, or 4.6% of the Company's total loan portfolio, and $61.0 million of
multifamily real estate loans, or 16.6% of the Company's total loan portfolio
and $60.5 million of commercial real estate loans, or 16.5% of the Company's
total loan portfolio. At December 31, 2003, the Company's ratio of nonperforming
assets to total assets was 0.49%. The Company also invests in 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. The Company may increase its investment in
securities and in purchased mortgage loans outside its market area.
9
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, 2003 was $1.8 million, offset by noninterest expense attributable
to First Iowa. In addition, the Company has attempted to increase noninterest
income through emphasizing growth in core deposit accounts, mortgage banking
income, annuity and mutual fund sales and insurance sales.
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, 2003, total interest-bearing liabilities maturing
or repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $23.0 million, representing a one-year gap to
total assets ratio of negative 5.4% as compared to a positive 4.0% at December
31, 2002. To manage the Company's interest rate exposure, the Company emphasizes
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
mortgage-backed securities, municipal securities and equity securities and has
sought to lengthen the terms of its deposits through its pricing strategies with
respect to longer term certificates of deposit. In addition, the Company
generally sells all fixed rate one-to-four family residential loans with
maturities in excess of fifteen years. See "-- Discussion of Market Risk --
Interest Rate Sensitivity Analysis".
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, amortization and
prepayment of loans, other borrowings, 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 interest-earning assets, which provide liquidity to meet lending
requirements. At December 31, 2003, $237,000, or 4.6%, of the Company's
investment portfolio, excluding equity and mortgage backed securities and mutual
funds, was scheduled to mature in one year or less and $2.4 million, or 47.4%,
was scheduled to mature in one to five years and $2.5 million, or 48.0%, was
scheduled to mature in more than five years. Certificates of deposit scheduled
to mature in less than one year, at December 31, 2003, totaled $92.7 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 $170.0 million as of
December 31, 2003. 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, 2003, the Company had outstanding loan commitments of
$10.6 million. This amount does not include undisbursed overdraft loan
privileges and the undisbursed home equity lines of credit. The Company monitors
its liquidity position and expects to have sufficient funds to meet its current
funding commitments.
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 and the proceeds from the exercise of stock options. The main
cash outflows are payments of dividends to shareholders and funds used to
repurchase the Common Stock. During 2003, the Holding Company repurchased 94,700
shares of its Common Stock. The Company has determined that a share buyback is
appropriate to enhance shareholder value as such repurchases generally increase
earnings per share, return on average assets and on average equity, three
performance benchmarks against which bank and thrift holding companies are often
measured. The Company buys stock in the open market whenever the price of the
stock is deemed reasonable and the Company has funds available for the purchase.
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 Note 15 to the Consolidated Financial Statements. Unlike the Bank,
the Holding Company is not subject to OTS regulatory restrictions on the payment
10
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, 2003, 2002 and 2001, the Company's disbursements for
loan originations and purchases totaled $205.4 million, $210.3 million and
$150.4 million, respectively. These activities were funded primarily by net
deposit inflows, principal repayments on loans, proceeds from the sale of loans,
proceeds from the maturity and call of securities and FHLB advances. Net cash
flows provided by (used in) investing activities amounted to $(31.1) million,
$(27.6) million and $20.5 million for the years ended December 31, 2003, 2002
and 2001, respectively. Net cash flows provided by (used in) financing
activities amounted to $13.9 million, $18.3 million and $(15.0) million for the
years ended December 31, 2003, 2002 and 2001, 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 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, 2003 with tangible and leverage capital ratios of 7.6% and a total
risk-based capital ratio of 12.4%. 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 shareholders' 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, 2003:
Capital Excess
Amount Requirements Capital
------ ------------ -------
(In thousands)
Tangible capital....... $ 31,816 $ 6,270 $ 25,546
Core capital........... 31,816 12,541 19,275
Risk-based capital..... 34,958 22,554 12,404
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, 2003, 37.7% of the
Company's total loan portfolio was secured by properties outside the State of
Iowa, located in twenty-three states. See "Asset Quality." The Bank does not own
any trading assets. At December 31, 2003, 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 rate 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
11
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 short
term consumer loans, and maintaining a level of liquidity by investing in
short-term interest-earning deposits and equity securities. 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. In addition, the Company generally sells all fixed
rate one-to-four family residential loans with maturities in excess of fifteen
years.
At December 31, 2003, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $23.0 million, representing a one-year gap ratio
of negative 5.4%, compared to a one-year gap ratio of positive 4.0% at December
31, 2002. 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, 2003 which are expected to reprice or mature, based upon certain
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.
12
At December 31, 2003 (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) ...................... $ 70,509 $ 69,298 $ 51,730 $ -- $ -- $ -- $ 191,537
Fixed (2) ........................... 20,503 39,829 27,421 33,535 7,310 977 129,575
Consumer and other loans ............... 19,816 22,864 9,027 2,180 148 -- 54,035
Investment securities(3)(4) ............ 17,495 4,021 506 3,032 -- -- 25,054
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets ....... $ 128,323 $ 136,012 $ 88,684 $ 38,747 $ 7,458 $ 977 $ 400,201
========= ========= ========= ========= ========= ========= =========
Rate sensitive liabilities:
Savings accounts ...................... $ 4,720 $ 7,169 $ 4,939 $ 6,629 $ 3,640 $ 668 $ 27,765
NOW accounts .......................... 15,393 15,807 6,273 3,719 406 4 41,602
Money market accounts ................. 20,370 5,415 -- -- -- -- 25,785
Certificate accounts .................. 92,660 56,268 30,722 -- -- -- 179,650
Noninterest bearing deposits .......... 9,161 -- -- -- -- -- 9,161
FHLB advances and other ............... 9,002 27,503 27,491 31,009 -- -- 95,005
--------- --------- --------- --------- --------- --------- ---------
liabilities(5)......................
Total interest-bearing liabilities $ 151,306 $ 112,162 $ 69,425 $ 41,357 $ 4,046 $ 672 $ 378,968
========= ========= ========= ========= ========= ========= =========
Interest sensitivity gap ................. $ (22,983) $ 23,850 $ 19,259 $ (2,610) $ 3,412 $ 305
Cumulative interest-sensitivity gap ...... $ (22,983) $ 867 $ 20,126 $ 17,516 $ 20,928 $ 21,233
Interest sensitivity gap to total ..... (5.42)% 5.62% 4.54% (0.62)% 0.80% 0.07%
Cumulative interest-sensitivity gap to ... (5.42) 0.20 4.75 4.13 4.94 5.01
total assets
Ratio of interest-earning assets to ...... 84.81 121.26 127.74 93.69 184.33 145.39 105.60
interest-bearing liabilities
Cumulative ratio of interest-earning ..... 84.81 100.33 106.05 104.68 105.53 105.60 105.60
assets to interest-bearing liabilities
Total assets ............................. $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009
Cumulative interest bearing assets ....... $ 128,323 $ 264,335 $ 353,019 $ 391,766 $ 399,224 $ 400,201 $ 400,201
Cumulative interest sensitive liabilities $ 151,306 $ 263,468 $ 332,893 $ 374,250 $ 378,296 $ 378,968 $ 378,968
(1) The following assumptions were used in regard to prepayment speed for
loans: (i) all multifamily loans (both fixed and adjustable rate) and all
commercial real estate loans (both fixed and adjustable rate) will prepay
at 10 percent per year, (ii) one-to four-family fixed rate loans will
prepay at 12 percent per year, (iii) one-to four-family adjustable rate
loans, mortgage backed securities and all other loans will prepay at 15
percent per year. 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 shortcomings are inherent in the analysis presented by
the foregoing table.
(2) Includes $7.1 million and $1.9 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 $7.1 million and securities
available for sale of $12.0 million.
(4) Includes $5.0 million of FHLMC preferred stock and $1.0 million of FNMA
preferred stock, which are included in the appropriate repricing category
based upon their call dates.
(5) Includes $29.5 million of advances which are callable by the FHLB. These
callable advances have been in the category in which the advances mature.
13
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.
Net Portfolio Value 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 NPV which would hypothetically occur if
interest rates rapidly rise or fall along the yield curve. Projected values of
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, 2003, is an analysis of the
Company's interest rate risk ("IRR") as measured by changes in NPV 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 34,164 -5,548 -14 8.20 -90bp
+200 bp 37,029 -2,683 -7 8.74 -36bp
+100 bp 38,822 -890 -2 9.02 -8bp
0 bp 39,712 - - 9.10 -
-100 bp 38,855 -857 -2 8.80 -29bp
_________________________________
(1) Denotes rate shock used to compute interest rate risk capital component.
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.
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 90 days or
more 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.
14
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, 2003, the Company's
foreclosed real estate consisted of 16 properties with an aggregate carrying
value of $1.5 million.
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 and did not
have any loans that were ninety days past due and still accruing interest.
At December 31,
---------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans and nonperforming
assets:
First mortgage loans:
One-to four-family residential .... $ 414 $ 434 $ 130 $ 237 $ 111
Multifamily and commercial
properties ..................... -- 37 37 556 --
Consumer loans: ...................... 201 172 109 244 102
------ ------ ------ ------ ------
Total nonaccrual loans ............ 615 643 276 1,037 213
Total foreclosed real estate(1) ...... 1,453 769 1,074 64 503
Other nonperforming assets ........... -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets ....... $2,068 $1,412 $1,350 $1,101 $ 716
====== ====== ====== ====== ======
Total nonaccrual loans to net loans
receivable ....................... 0.17% 0.19% 0.09% 0.33% 0.07%
Total nonaccrual loans to total assets 0.15 0.16 0.07 0.27 0.06
Total nonperforming assets to total
assets .......................... 0.49 0.35 0.36 0.28 0.19
___________________________
(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.
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,
---------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Loans past due 60-89 days:
First mortgage loans:
One-to four-family residential ...... $ 649 $ 830 $1,083 $ 590 $ 521
Multifamily and commercial properties 463 -- -- -- 491
Consumer loans .......................... 223 183 153 96 198
------ ------ ------ ------ ------
Total past due 60-89 days ........... $1,335 $1,013 $1,236 $ 686 $1,210
====== ====== ====== ====== ======
15
The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 2003.
At December 31, 2003
--------------------
Balance Number
------- ------
(Dollars in thousands)
One-to four-family first mortgage loans:
Loans 60 to 89 days delinquent .............. $ 649 15
Loans 90 days or more delinquent ............ 414 9
Multifamily and commercial first mortgage loans:
Loans 60 to 89 days delinquent .............. 463 1
Loans 90 days or more delinquent ............ -- --
Consumer Loans:
Loans 60 to 89 days delinquent .............. 223 23
Loans 90 days or more delinquent ............ 201 24
Foreclosed real estate ........................... 1,453 16
Other nonperforming assets ....................... -- --
Loans to facilitate sale of foreclosed real estate 107 1
Special mention loans ............................ 1,409 47
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, 2003,
the Company had $1.4 million of special mention loans, consisting of fourteen
loans secured by one-to four-family residences, one loan secured by commercial
real estate and thirty-two consumer loans.
The following table sets forth the aggregate amount of the Company's
classified assets, which include nonperforming loans and foreclosed real estate,
at the dates indicated.
At December 31,
---------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Substandard assets ........... $2,046 $1,361 $1,291 $1,048 $ 656
Doubtful assets .............. -- -- -- -- --
Loss assets .................. 22 51 59 53 60
------ ------ ------ ------ ------
Total classified assets $2,068 $1,412 $1,350 $1,101 $ 716
====== ====== ====== ====== ======
Allowance for Loan Losses. It is management's policy to provide an
allowance and provision for probable 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 and
commercial 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 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 2003 the Company's total loan portfolio
increased $22.8 million or 6.6%. This increase primarily consisted of increases
in the one-to-four family first mortgage real estate loans, which carries a
lower level of risk than other loans in the portfolio. During the years ended
December 31, 2003, 2002 and 2001 the Company's provision for loan losses were
16
$255,000, $383,000 and $210,000, respectively. The Company's allowance for loan
losses totaled $3.2 million, $3.1 million and $2.9 million at December 31, 2003,
2002 and 2001, respectively.
Management believes that the allowances for losses on loans is
adequate. While management uses available information to recognize losses on
loans, 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,
-------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding .................. $367,396 $344,574 $311,826 $322,408 $291,760
Average net loans outstanding ............ 358,260 337,693 318,197 307,104 265,553
Allowance balances (at beginning of ..... 3,118 2,883 2,843 2,776 2,676
-------- -------- -------- -------- --------
period)..............................
Provisions for losses .................... 255 383 210 120 120
Charge-Offs:
First mortgage loans ................ 36 27 15 15 5
Consumer loans ...................... 265 135 168 41 23
Recoveries:
First mortgage loans ................ -- -- -- -- --
Consumer loans ...................... 93 14 13 3 8
-------- -------- -------- -------- --------
Net charge-offs ..................... 208 148 170 53 20
-------- -------- -------- -------- --------
Allowance balance (at end of..............
period).............................. $ 3,165 $ 3,118 $ 2,883 $ 2,843 $ 2,776
======== ======== ======== ======== ========
Allowance for loan losses as a percent of
total loans receivable at end of
period .............................. 0.86% 0.90% 0.92% 0.88% 0.95%
Net loans charged off as a percent of
average net loans outstanding ....... 0.06 0.04 0.05 0.02 0.01
Ratio of allowance for loan losses to
total nonaccrual loans at end of
period .............................. 515.02 485.00 1,042.07 274.08 1,301.13
Ratio of allowance for loan losses to
total nonaccrual loans and foreclosed
real estate at end of period ........ 153.05 220.90 213.48 258.18 387.78
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,
---------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------
% 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 ..................... $ 517 47.33% $ 395 43.17% $ 608 51.80%
Multifamily residential mortgage loans 686 19.04 709 20.54 1,121 23.86
Commercial mortgage loans ............ 978 18.95 1,223 20.68 459 8.25
Consumer loans ....................... 984 14.68 791 15.61 695 16.09
------ ------ ------ ------ ------ ------
Total allowance for loan losses .... $3,165 100.00% $3,118 100.00% $2,883 100.00%
====== ====== ====== ====== ====== ======
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%
====== ====== ====== ======
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, 2003 2003 2002
------------------------------------------------------------------------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Assets:
Interest-earning assets:
First mortgage loans(1).... $ 312,416 6.22% $ 304,573(8) $ 19,978 6.56 $ 285,065(8) $ 21,108 7.40%
Consumer loans(1).......... 54,035 7.22 53,687(8) 4,146 7.72 52,628(8) 4,449 8.45
Investment securities...... 34,144(4) 3.53 43,905(5) 1,332 3.03 42,144(6) 1,409 3.34
--------- ---- --------- -------- ---- --------- -------- ----
Total interest-earning
assets................ $ 400,595 6.12% $ 402,165 $ 25,456 6.33% $ 379,837 $ 26,966 7.10%
Noninterest-earning assets....... 23,414 22,402 20,078
--------- --------- ---------
Total assets................ $ 424,009 $ 424,567 $ 399,915
========= ========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings.................. $ 67,387 0.44% $ 65,897 $ 383 0.58% $ 61,677 $ 560 0.91%
Passbook savings............ 27,765 0.30 27,619 149 0.54 24,810 281 1.13
Certificates of Deposit..... 179,651 3.77 180,983 7,318 4.04 182,496 8,649 4.74
Borrowed funds.............. 95,005 4.59% 96,923 4,492 4.63 83,022 4,421 5.33
--------- ---- --------- -------- ---- --------- -------- ----
Total interest-bearing
liabilities.............. $ 369,808 3.11% $ 371,422 $ 12,342 3.32% $ 352,005 $ 13,911 3.95%
Noninterest-bearing liabilities.. 12,609 13,236 10,241
--------- --------- ---------
Total liabilities........... $ 382,417 $ 384,658 $ 362,246
Equity........................... 41,592 39,909 37,669
--------- --------- ---------
Total liabilities and equity $ 424,009 $ 424,567 $ 399,915
========= ========= =========
Net interest income.............. $ 13,114 $ 13,055
======== ========
Net interest rate spread(2)...... 3.01% 3.01% 3.15%
==== ==== ====
Net interest margin (3).......... 3.25 3.26 3.44%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities....... 108.25 108.28 107.91%
====== ====== ======
For the Year Ended December 31,
--------------------------------------
2001
--------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
Assets:
Interest-earning assets:
First mortgage loans(1).... $ 269,274(8) $ 20,902 7.76%
Consumer loans(1).......... 48,923(8) 4,369 8.93
Investment securities...... 44,739(7) 2,229 4.98
---------- -------- ----
Total interest-earning
assets................ $ 362,936 $ 27,500 7.58%
Noninterest-earning assets....... 20,217
---------
Total assets................ $ 383,153
=========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings.................. $ 58,891 $ 1,224 2.08%
Passbook savings............ 21,713 362 1.67
Certificates of Deposit..... 180,796 10,368 5.73
Borrowed funds.............. 75,854 4,560 6.01
--------- -------- ----
Total interest-bearing $ 337,254 $ 16,514 4.90%
liabilities......................
Noninterest-bearing liabilities.. 9,246
---------
Total liabilities........... $ 346,500
Equity........................... 36,653
---------
Total liabilities and equity $ 383,153
=========
Net interest income.............. $ 10,986
========
Net interest rate spread(2)...... 2.68%
====
Net interest margin (3).......... 3.03
====
Ratio of average interest-earning
assets to average interest-
bearing liabilities....... 107.54
======
___________________
(1) Balance is net of deferred loan fees, loan premiums 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 $7,079,000 and securities available
for sale of $27,065,000.
(5) Includes interest-bearing deposits of $14,217,000 and securities available
for sale
of $29,688,000.
(6) Includes interest-bearing deposits of $16,910,000 and securities available
for sale of $25,234,000.
(7) Includes interest-bearing deposits of $9,984,000 and securities available
for sale of $34,755,000.
(8) Includes loan fee (cost) amortization of $64,000, $(34,000) and $(54,000)
for the years ended December 31, 2003, 2002 and 2001.
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, 2003 December 31, 2002
Compared to Compared to
Year Ended Year Ended
December 31, 2002 December 31, 2001
--------------------------------------------------------------------------------------
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................... $1,445 $(2,409) $(165) $(1,129) $1,227 $ (964) $ (57) $ 206
Consumer loans......................... 90 (384) (9) (303) 332 (234) (18) 80
Investment securities.................. 246 (250) (73) (77) (277) (459) (84) (820)
------ ------- ----- ------- ------ ------- ----- -------
Total interest-earning assets....... $1,781 $(3,043) $(247) $(1,509) $1,282 $(1,657) $(159) $ (534)
====== ======= ===== ======= ====== ======= ===== =======
Interest expense:
NOW and money market savings........... $ 38 $ (200) $ (14) $ (176) $ 58 $ (689) $ (33) $ (664)
Passbook savings....................... 32 (148) (17) (133) 52 (116) (17) (81)
Certificate of deposits................ (72) (1,270) 11 (1,331) 97 (1,799) (17) (1,719)
Borrowed funds......................... 740 (573) (96) 71 431 (521) (49) (139)
------ ------- ----- ------- ------ ------- ----- -------
Total interest-bearing liabilities. 738 (2,191) (116) (1,569) 638 (3,125) (116) (2,603)
------ ------- ----- ------- ------ ------- ----- -------
Net change in net interest income........... $1,043 $ (852) $(131) $ 60 $ 644 $ 1,468 $ (43) $ 2,069
====== ======= ===== ======= ====== ======= ===== =======
20
Comparison of Financial Condition as of December 31, 2003 and December 31, 2002
Total assets increased $20.1 million, or 5.0%, to $424.0 million at
December 31, 2003 from $403.9 million at December 31, 2002. The increase in
assets was due primarily to increases in net loans receivable and to a lesser
extent securities available for sale, offset in part by a decrease in interest
bearing cash. Asset growth was funded by increases in FHLB advances and
deposits.
Total loans receivable, net, increased by $21.8 million, or 6.4%, to
$363.0 million at December 31, 2003 from $341.1 million at December 31, 2002,
primarily due to origination of $117.9 million of first mortgage loans secured
by one-to four-family residences, originations of $4.7 million of first mortgage
loans secured by multifamily residences and commercial real estate loans,
purchases of first mortgage loans primarily secured by one-to four-family
residences, multifamily residences and commercial real estate loans of $45.1
million, and originations of $25.9 million of second mortgage loans during the
year ended December 31, 2003. These originations and purchases were offset in
part by payments and prepayments of $133.4 million and sales of loans of $48.2
million during the year ended December 31, 2003. Also contributing to the
Company's increase in loans receivable was a $9.6 million increase in the loans
receivable at the Company's two new offices in Ankeny and Clive, Iowa. The
increases in loan originations and repayments were due primarily to the ongoing
low interest rate environment in 2003. The Company sells substantially all
fixed-rate loans primarily with maturities in excess of 15 years in the
secondary mortgage market in order to reduce interest rate risk. Securities
available for sale increased $4.1 million, or 18.0%, primarily due to the
increase in the mortgage backed security investments, partially offset by calls,
payments and maturities of mortgage-backed securities and municipal securities.
Proceeds of such calls, payments and maturities were used to fund loan growth.
Interest bearing cash decreased $5.9 million, or 45.3%, from $13.0 million at
December 31, 2002 to $7.1 million at December 31, 2003 as the Company invested
cash in loans and securities.
Borrowings, primarily FHLB advances, increased $10.0 million, to $95.0
million at December 31, 2003 from $85.0 million at December 31, 2002 as the
Company utilized borrowings to fund loans and securities. Deposits increased
$7.0 million, or 2.5%, to $284.0 million at December 31, 2003 from $277.0
million at December 31, 2002, primarily reflecting increases in NOW accounts,
savings accounts, money market accounts and certain public funds deposits,
offset in part by decreases in retail certificate of deposit accounts. The
increase in deposits is due primarily to the opening of two new offices in
Ankeny and Clive, Iowa and management's marketing efforts.
Total shareholders' equity increased $2.8 million to $41.6 million at
December 31, 2003 from $38.7 million at December 31, 2002, primarily due to net
income and stock options exercised, offset in part by dividends paid to
shareholders, funds used for the repurchase of stock and decreased unrealized
gains on securities available for sale.
Comparison of Financial Condition as of December 31, 2002 and December 31, 2001
Total assets increased $24.5 million, or 6.5%, to $403.9 million at
December 31, 2002 from $379.4 million at December 31, 2001. The increase in
assets was due primarily to increases in net loans receivable, offset in part by
decreases in securities available for sale and interest bearing cash. Asset
growth was funded by increases in FHLB advances and deposits.
Total loans receivable, net, increased by $33.2 million, or 10.8%, to
$341.1 million at December 31, 2002 from $308.0 million at December 31, 2001,
primarily due to the origination of $84.1 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 of $84.4 million, and originations
of $28.6 million of second mortgage loans during the year ended December 31,
2002. These originations and purchases were offset in part by payments,
prepayments and sales of loans during the year ended December 31, 2002. The
increases in loan originations and repayments were due primarily to the ongoing
low interest rate environment in 2002. The Company sells substantially all
fixed-rate loans primarily with maturities in excess of 15 years in the
secondary mortgage market in order to reduce interest rate risk. Securities
available for sale decreased $8.5 million, or 27.2%, primarily due to the calls,
payments, maturities and sales of U.S. Government agencies, mortgage-backed
21
securities and equity securities, partially offset by the purchase of municipal
securities. Proceeds of such calls, payments and sales were used to fund asset
growth. Interest bearing cash decreased $4.6 million, or 26.2%, from $17.7
million at December 31, 2001 to $13.0 million at December 31, 2002 as the
Company invested cash in loans.
Borrowings, primarily FHLB advances, increased $13.6 million, to $85.0
million at December 31, 2002 from $71.4 million at December 31, 2001 as the
Company utilized borrowings to fund loans. Deposits increased $8.2 million, or
3.0%, to $277.0 million at December 31, 2002 from $268.8 million at December 31,
2001, primarily reflecting increases in NOW accounts, savings accounts and
retail certificates of deposit accounts, offset in part by decreases in money
market accounts and certain public funds deposits as the Company utilized
deposits to fund loans.
Total shareholders' equity increased $2.8 million to $38.7 million at
December 31, 2002 from $35.9 million at December 31, 2001, primarily due to net
income and stock options exercised, offset in part by dividends paid to
shareholders, funds used for the repurchase of stock and decreased unrealized
gains on securities available for sale.
Comparison of Results of Operations for the Years Ended December 31, 2003 and
2002
Net Income. Net income decreased by $17,000 to $5.9 million for the
year ended December 31, 2003 compared to $5.9 million for the same period in
2002. Net income is primarily dependent on net interest income, noninterest
income, noninterest expense and income tax expense. The decrease in net income
was primarily due to increases in noninterest expenses, offset in part by
increases in noninterest income and decreases in income tax expense.
Net Interest Income. Net interest income before provision for loan
losses increased by $60,000 to $13.1 million for the year ended December 31,
2003 from $13.1 million for the year ended December 31, 2002. The increase is
primarily due to an increase in the average balance of interest earning assets
and the decrease in the average cost of funds, offset in part by a decrease in
the yield on interest earning assets and an increase in the average balance of
interest bearing liabilities. The interest rate spread (i.e., the difference in
the average yield on assets and average cost of liabilities) decreased to 3.01%
for the year ended December 31, 2003 from 3.15% for the year ended December 31,
2002. The decrease in interest rate spread reflects the general decrease in the
yield on interest earning assets offset in part by the decrease in the overall
cost of interest bearing liabilities. The decrease in the yield on interest
earning assets and the cost of interest bearing liabilities reflects a general
decrease in market interest rates.
Interest Income. Interest income decreased by $1.5 million to $25.5
million for the year ended December 31, 2003 compared to $27.0 million for the
year ended December 31, 2002. The decrease in interest income was primarily due
to a decrease in the average yield on interest earning assets, offset in part by
an increase in the average balance of interest earning assets. The average yield
on interest earning assets decreased to 6.33% for the year ended December 31,
2003 from 7.10% for the year ended December 31, 2002, primarily due to a general
decrease in market interest rates. The average interest earning assets increased
$22.3 million to $402.2 million for the year ended December 31, 2003, from
$379.8 million for 2002. The increase in the average balances of interest
earning assets primarily reflects increases in the average balances of first
mortgage loans. The increases in first mortgage loans were primarily derived
from originations of $117.9 million of first mortgage loans secured by one-to
four-family residences, originations of $4.7 million of first mortgage loans
secured by multifamily residences and commercial real estate loans, purchases of
first mortgage loans secured by one-to four-family residences and multifamily
residences and commercial real estate of $45.1 million, which originations and
purchases were offset in part by payments and prepayments of $133.4 million and
sales of loans of $48.2 million during the year ended December 31, 2003. This
reflects the Company's continued emphasis on residential lending. See "-Business
Strategy."
Interest Expense. Interest expense decreased by $1.6 million to $12.3
million for the year ended December 31, 2003 compared to $13.9 million for the
year ended December 31, 2002. The decrease in interest expense was primarily due
to a decrease in the average cost of funds, offset in part by an increase in the
average balances of interest bearing liabilities. The average cost of funds
decreased to 3.32% for the year ended December 31, 2003 from 3.95% for the year
ended December 31, 2002, primarily due to a general decrease in market interest
22
rates. The decrease in interest expense was partially offset by a $19.4 million
increase in the average balance of interest-bearing liabilities to $371.4
million for the year ended December 31, 2003, from $352.0 million for 2002. The
increase in the average balance of interest-bearing liabilities primarily
reflects an increase in the NOW, money market, savings and borrowed funds,
offset by a decrease in certificates of deposit. The increase in average
interest bearing deposits was due to the Company's marketing efforts and the
opening of two new branches in Ankeny and Clive, Iowa. The increase in interest
bearing liabilities was used to fund asset growth.
Provision for Loan Losses. The Company's provision for loan losses was
$255,000 and $383,000 for the years ended December 31, 2003 and December 31,
2002, 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.
During 2003 the Company's total loan portfolio increased $22.8 million or 6.6%.
This increase primarily consisted of increases in the one-to-four family first
mortgage real estate loans, which carries a lower level of risk than other loans
in the portfolio. The Company purchased $45.1 million of loans in 2003, as
compared to $84.4 million of loans in 2002. The properties securing the loans
purchased are primarily out of state and constitute a higher rate of risk than
originated loans due to the size, locations and type of collateral securing such
loans. The Company's out of state loans increased by $2.8 million or 2.1% during
2003. The economic conditions in the Bank's primary market areas are currently
stable. The net charge offs were $208,000 for the year ended December 31, 2003
as compared to $148,000 for the year ended December 31, 2002. The increase in
charge offs were primarily due to an increase in the charge offs of automobile
and second mortgage loans. The resulting allowance for loan loss was $3.2
million and $3.1 million at December 31, 2003 and December 31, 2002,
respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.86% at December 31, 2003 from 0.90% at December 31, 2002. The
level of nonperforming loans was $615,000 at December 31, 2003 and $643,000 at
December 31, 2002. See "Asset Quality".
Management believes that the allowance for loan losses is adequate as
of December 31, 2003. 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 problem loans, identification
of additional problem loans, and other factors, both within and outside of
management's control.
Noninterest income. Total noninterest income increased by $841,000, or
14.7%, to $6.6 million for the year ended December 31, 2003 from $5.7 million
for the year ended December 31, 2002. The increase is due to increases in fees
and service charges, other income, abstract fees and mortgage banking income
(gain on sale of loans). Fees and service increased $488,000 due to an increase
in loan prepayment fees and fees associated with checking accounts, including
overdraft fees. Other income, which primarily includes annuity and mutual fund
sales, rent income, insurance sales and income associated with foreclosed real
estate increased $146,000 due to an increase in annuity and mutual fund sales,
increased rental income associated with the opening of a second multifamily
apartment building in March, 2003 and income associated with foreclosed real
estate, offset by a decrease in insurance sales. Abstract fees increased
$125,000 due to increased sales volume as a result of a general increase in real
estate activity, such as loan originations. Mortgage banking income increased
$81,000 due in part to increased pricing, offset by a decrease in loan
originations of loans held for sale.
Noninterest Expense. Total noninterest expense increased by $1.3
million to $10.9 million for the year ended December 31, 2003 from $9.6 million
for the year ended December 31, 2002. The increase is primarily due to an
increase in salaries and employee benefits, other expenses, premises and
equipment and data processing. Salaries and benefits increased $726,000 due to
an increase in the Company's contribution to the retirement plan, increases as a
result of the employee stock ownership plan, an increase in personnel at the
Ankeny and Clive offices, normal salary increases and increases in other
23
employee benefits. Other expenses increased $423,000 primarily due to increases
in marketing costs in conjunction with a direct mail checking account promotion,
increased apartment operating costs associated primarily from the opening of a
second multifamily apartment building in March, 2003, increases in write-offs of
overdrafts and an increase in costs associated with the Ankeny and Clive
offices. Premises and equipment increased $95,000 primarily due to an increase
in the costs associated with the Ankeny and Clive offices. Data processing
increased $34,000 primarily due to normal data processing cost increases and
increases in conjunction with internet banking costs. The Company's efficiency
ratio for the year ended December 31, 2003 and 2002 was 55.17% and 51.01%,
respectively. The Company's ratio of noninterest expense to average assets for
the year ended December 31, 2003 and 2002 was 2.56% and 2.40%, respectively.
Income Taxes. Income taxes decreased by $233,000 to $2.7 million for
the year ended December 31, 2003 as compared to $3.0 million for the year ended
December 31, 2002. The decrease was principally due to a decrease in pre-tax
earnings during the 2003 period as compared to the 2002 period, a new recurring
federal income tax credit from Northridge Apartment Limited Partnership II and a
one time state tax credit from Northridge Apartment Limited Partnership II,
which decreased income tax expense by approximately $110,000, partially offset
by a decrease in nontaxable income.
Comparison of Results of Operations for the Years Ended December 31, 2002 and
2001
Net Income. Net income totaled $5.9 million for the year ended December
31, 2002 compared to $4.5 million for the same period in 2001. Net income is
primarily dependent on net interest income, noninterest income, noninterest
expense and income tax expense. The increase in net income was primarily due to
increases in net interest income and noninterest income, offset in part by
increases in noninterest expense and income taxes.
Net Interest Income. Net interest income before provision for loan
losses increased by $2.1 million to $13.1 million for the year ended December
31, 2002 from $11.0 million for the year ended December 31, 2001. The increase
in primarily due to an increase in the average balance of interest earning
assets and the decrease in the average cost of funds, offset in part by a
decrease in the yield on interest earning assets and an increase in the average
balance 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 3.15% for the year ended December 31, 2002 from 2.68% for the year
ended December 31, 2001. The increase in the spread reflects the general
decrease in the overall costs on interest bearing liabilities offset in part by
a decrease in the yield on interest earning assets. The decrease in the yield on
interest earning assets and the cost of interest bearing liabilities reflects a
general decrease in market interest rates.
Interest Income. Interest income decreased by $534,000 to $27.0 million
for the year ended December 31, 2002 compared to $27.5 million for the year
ended December 31, 2001. The decrease in interest income was primarily due to a
decrease in the average yield on interest earning assets, offset in part by an
increase in the average balance of interest earning assets. The average yield on
interest earning assets decreased to 7.10% for the year ended December 31, 2002
from 7.58% for the year ended December 31, 2001, primarily due to a general
decrease in market interest rates. The average interest earning assets increased
$16.9 million to $379.8 million for the year ended December 31, 2002, from
$362.9 million for 2001. The increase in the average balances of interest
earning assets primarily reflects increases in the average balances of first
mortgage loans, offset in part by a decrease in the average balance of
investment securities. The increases in first mortgage loans were primarily
derived from originations of $84.1 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 of $84.4 million and originations of $28.6 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,
2002. This reflects the Company's continued emphasis on residential lending. See
"-Business Strategy." The decrease in investment securities were primarily from
the calls, payments, maturities and sales of investments, partially offset by
purchases.
Interest Expense. Interest expense decreased by $2.6 million to $13.9
million for the year ended December 31, 2002 compared to $16.5 million for the
24
year ended December 31, 2001. The decrease in interest expense was primarily to
a decrease in the average cost of funds, offset in part by an increase in the
average balances of interest bearing liabilities. The average cost of funds
decreased to 3.95% for the year ended December 31, 2002 from 4.90% for the year
ended December 31, 2001, primarily due to a general decrease in market interest
rates. The decrease in interest expense was partially offset by a $14.8 million
increase in the average balance of interest-bearing liabilities to $352.0
million for the year ended December 31, 2002, from $337.3 million for 2001. The
increase in the average balance of interest-bearing liabilities primarily
reflects an increase in borrowed funds, NOW, savings and retail certificates of
deposits, offset by a decrease in certain public funds certificates of deposit.
The increase in average interest bearing liabilities was used in part to fund
asset growth.
Provision for Loan Losses. The Company's provision for loan losses
was $383,000 and $210,000 for the years ended December 31, 2002 and December 31,
2001, respectively. The increase in the provision for loan loss is primarily due
to the increase in nonperforming loans, increases in the loan portfolio and
general economic conditions. 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 $148,000 for the year ended December
31, 2002 as compared to $170,000 for the year ended December 31, 2001. The
resulting allowance for loan loss was $3.1 million and $2.9 million at December
31, 2002 and December 31, 2001, respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.90% at December 31, 2002 from 0.92% at December 31, 2001. The
level of nonperforming loans was $643,000 at December 31, 2002 and $276,000 at
December 31, 2001. See "Asset Quality".
Management believes that the allowance for loan losses is adequate as
of December 31, 2002. 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 problem loans, identification
of additional problem loans, and other factors, both within and outside of
management's control.
Noninterest Income. Total noninterest income increased by $636,000, or
12.5%, to $5.7 million for the year ended December 31, 2002 from $5.1 million
for the year ended December 31, 2001. The increase is due to increases in fees
and service charges, abstract fees and other income. Fees and service increased
$382,000 due to an increase in loan prepayment fees. Abstract fees increased
$180,000 due to increased sales volume as a result of a general increase in real
estate activity, such as loan originations. Other income, which primarily
includes annuity and mutual fund sales, insurance sales, rent income and income
associated with foreclosed real estate, increased $105,000 due to an increase in
annuity and mutual fund sales, offset by a decrease in insurance sales.
Noninterest Expense. Total non-interest expense increased by $536,000
to $9.6 million for the year ended December 31, 2002 from $9.0 million for the
year ended December 31, 2001. The increase is primarily due to an increase in
salaries and employee benefits, other expenses and data processing, partially
offset by a decrease in goodwill amortization. Salaries and benefits increase
$723,000 primarily due to normal salary increases, the opening of the Ankeny
office, increases in the Company's contribution to the retirement plan,
increases as a result of the employee stock ownership plan, increases in
salaries due to mortgage loan volume, increases in salaries due to annuity and
mutual fund sales and increases in health insurance costs. Other expenses
increased $245,000 primarily due to the opening of the Ankeny office, marketing
expenses, expenses in connection with loan purchases, costs associated with
First Iowa, apartment operating costs, office supplies and losses associated
with checking accounts, offset in part by a decrease in the costs associated
with ATM and debit cards. Data processing costs increased $74,000 primarily due
to normal data processing cost increases, Internet banking costs and an increase
in consulting costs. The Company's efficiency ratio for the year ended December
31, 2002 and 2001 was 51.01% and 56.26%, respectively. The Company's ratio of
25
noninterest expense to average assets for the year ended December 31, 2002 and
2001 was 2.40% and 2.36%, respectively.
Income Taxes. Income taxes increased by $606,000 to $3.0 million for
the year ended December 31, 2002 as compared to $2.3 million for the year ended
December 31, 2001. The increase was principally due to an increase in pre-tax
earnings during the 2002 period as compared to the 2001 period, partially offset
by a decrease in nondeductible amortization as a result of the Company's
adoption of SFAS 142, a reduction in nontaxable interest income and an increase
in taxable deductions due to a change in the Company's retirement plan.
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 accounting
principles generally accepted in the United States of America, 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.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Contractual Obligations (Dollars in thousands)
Contractual
obligations Payments due by period
----------- ----------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----- ------ --------- --------- -------
Borrowings (1) $ 94,988 $ 9,002 $ 27,503 $ 16,502 $ 41,981
Loan Commitments $ 10,601 $ 10,601 --
Available home equity and
unadvanced lines of credit $ 2,452 $ 2,452 -- -- --
-------- -------- -------- -------- --------
Total $108,041 $ 22,055 $ 27,503 $ 16,502 $ 41,981
======== ======== ======== ======== ========
(1) Callable advances are included in the category in which the advances mature
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 stockholders' equity....................31
Consolidated statements of cash flows..............................32
Notes to consolidated financial statements.........................34
-------------------------------------------
27
McGladrey & Pullen
Certified Public Accountants
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, 2003 and
2002 and the related consolidated statements of income, stockholders' equity and
cash flows for the years ended December 31, 2003, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002 and the
results of their operations and their cash flows for the years ended December
31, 2003, 2002 and 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/McGladrey & Pullen, LLP
Des Moines, Iowa
January 30, 2004
McGladrey & Pullen, LLP is an independent member firm of RSM International,
an affiliation of independent accounting and consulting firms.
28
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2003 and 2002
ASSETS 2003 2002
- -------------------------------------------------------------------------------------------------
Cash and due from banks (Note 19):
Interest-bearing $ 7,124,828 $ 13,025,657
Noninterest-bearing 2,893,745 2,142,944
------------- -------------
Total cash and cash equivalents 10,018,573 15,168,601
Securities available-for-sale (Notes 2 and 7) 26,952,157 22,833,742
Loans receivable, net (Notes 3, 4, 7 and 13) 362,959,238 341,146,364
Loans held for sale 326,900 2,372,134
Accrued interest receivable 1,866,521 1,928,278
Foreclosed real estate 1,453,353 768,726
Premises and equipment, net (Note 5) 9,842,477 8,195,963
Rental real estate 2,968,918 2,197,382
Title plant 925,256 925,256
Goodwill (Note 1) 4,970,800 4,970,800
Deferred taxes (Note 8) 757,543 608,657
Prepaid expenses and other assets 967,565 2,755,778
------------- -------------
Total assets $ 424,009,301 $ 403,871,681
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6) $ 283,963,569 $ 277,000,082
Borrowed funds (Note 7) 95,004,605 85,026,438
Advances from borrowers for taxes and insurance (Note 4) 1,736,755 1,512,114
Dividends payable 337,907 295,250
Accrued expenses and other liabilities 1,374,824 1,289,593
------------- -------------
Total liabilities 382,417,660 365,123,477
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 15)
STOCKHOLDERS' EQUITY (Notes 10 and 15)
Common stock, $.01 par value, authorized 15,500,000 shares;
issued and outstanding 2003 1,604,780 shares;
2002 1,640,280 shares 16,048 16,403
Preferred stock, $.01 par value, authorized 3,000,000 shares;
none issued and outstanding -- --
Additional paid-in capital 17,711,322 17,011,095
Retained earnings, substantially restricted (Note 8) 24,103,330 21,862,248
Unearned shares, employee stock ownership plan (Note 9) (167,793) (318,097)
Accumulated other comprehensive income (loss) (71,266) 176,555
------------- -------------
Total stockholders' equity 41,591,641 38,748,204
------------- -------------
Total liabilities and stockholders' equity $ 424,009,301 $ 403,871,681
============= =============
See Notes to Consolidated Financial Statements.
29
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- -----------------------------------------------------------------------------------------------------
Interest income:
Loans receivable:
First mortgage loans $ 19,977,961 $ 21,107,541 $ 20,902,405
Consumer loans 4,146,118 4,448,629 4,369,468
Securities and cash deposits 1,331,927 1,409,314 2,227,695
------------ ------------ ------------
25,456,006 26,965,484 27,499,568
------------ ------------ ------------
Interest expense:
Deposits (Note 6) 7,849,586 9,489,921 11,953,966
Other borrowed funds 4,492,129 4,420,959 4,559,807
------------ ------------ ------------
12,341,715 13,910,880 16,513,773
------------ ------------ ------------
Net interest income 13,114,291 13,054,604 10,985,795
Provision for loan losses (Note 3) 255,000 383,000 210,000
------------ ------------ ------------
Net interest income after provision
for loan losses 12,859,291 12,671,604 10,775,795
------------ ------------ ------------
Noninterest income:
Fees and service charges 2,863,713 2,375,228 1,992,794
Abstract fees 1,810,924 1,686,271 1,506,099
Mortgage banking income 828,099 746,983 778,923
(Loss) on sale of securities available-for-sale, net -- (523) (933)
Other income 1,067,401 921,125 815,733
------------ ------------ ------------
Total noninterest income 6,570,137 5,729,084 5,092,616
------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits (Note 9) 5,949,737 5,223,411 4,500,178
Premises and equipment 1,287,229 1,192,153 1,226,056
Data processing 577,836 544,169 470,147
Goodwill amortization (Note 1) -- -- 472,290
Other expenses (Note 11) 3,045,650 2,622,462 2,377,466
------------ ------------ ------------
Total noninterest expense 10,860,452 9,582,195 9,046,137
------------ ------------ ------------
Income before income taxes 8,568,976 8,818,493 6,822,274
Provision for income taxes (Note 8) 2,720,566 2,953,332 2,347,411
------------ ------------ ------------
Net income $ 5,848,410 $ 5,865,161 $ 4,474,863
============ ============ ============
Basic earnings per common share (Note 16) $ 3.69 $ 3.58 $ 2.54
Earnings per common share - assuming dilution (Note 16) 3.48 3.37 2.41
Dividends declared per common share 0.84 0.72 0.60
See Notes to Consolidated Financial Statements.
30
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
Unearned
Shares,
Additional Employee Stock
Comprehensive Common Paid-in Retained Ownership
Income Stock Capital Earnings Plan
- -------------------------------------------------------- --------------- ------------ -------------- -------------- ----------------
Balance, December 31, 2000 $40,111 $38,378,315 $33,345,852 $ (646,912)
Comprehensive income:
Net income $4,474,863 - - 4,474,863 -
Other comprehensive income, net of tax (Note 2) 437,331 - - - -
----------
Total comprehensive income $4,912,194
==========
Purchase of treasury stock - - - -
Dividends on common stock - - (1,044,562) -
Retirement of treasury stock (23,460) (22,355,549) (17,373,447) -
Effect of contribution to employee stock ownership
plan - 200,821 - 169,086
Issuance of common stock 352 557,288 - -
---------------------------------------------------------
Balance, December 31, 2001 17,003 16,780,875 19,402,706 (477,826)
Comprehensive income:
Net income $ 5,865,161 - - 5,865,161 -
Other comprehensive (loss), net of tax (Note 2) (13,436) - - - -
----------
Total comprehensive income $5,851,725
==========
Purchase of treasury stock - - - -
Dividends on common stock - - (1,167,291) -
Retirement of treasury stock (1,331) (1,329,669) (2,238,328) -
Effect of contribution to employee stock ownership
plan - 277,255 - 159,729
Issuance of common stock 731 1,282,634 - -
---------------------------------------------------------
Balance, December 31, 2002 16,403 17,011,095 21,862,248 (318,097)
Comprehensive income:
Net income $5,848,410 - - 5,848,410 -
Other comprehensive (loss), net of tax (Note 2) (247,821) - - - -
----------
Total comprehensive income $5,600,589
==========
Purchase of treasury stock - - - -
Dividends on common stock - - (1,320,089) -
Retirement of treasury stock (947) (946,053) (2,287,239) -
Effect of contribution to employee stock ownership
plan - 398,642 - 150,304
Issuance of common stock 592 1,247,638 - -
---------------------------------------------------------
Balance, December 31, 2003 $16,048 $17,711,322 $24,103,330 $ (167,793)
=========================================================
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (Loss) Stock Equity
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ (247,340) $(34,471,911) $ 36,398,115
Comprehensive income:
Net income - - 4,474,863
Other comprehensive income, net of tax (Note 2) 437,331 - 437,331
Total comprehensive income
Purchase of treasury stock - (5,280,545) (5,280,545)
Dividends on common stock - - (1,044,562)
Retirement of treasury stock - 39,752,456 -
Effect of contribution to employee stock ownership
plan - - 369,907
Issuance of common stock - - 557,640
---------------------------------------------
Balance, December 31, 2001 189,991 - 35,912,749
Comprehensive income:
Net income - - 5,865,161
Other comprehensive (loss), net of tax (Note 2) (13,436) - (13,436)
Total comprehensive income
Purchase of treasury stock - (3,569,328) (3,569,328)
Dividends on common stock - - (1,167,291)
Retirement of treasury stock - 3,569,328 -
Effect of contribution to employee stock ownership
plan - - 436,984
Issuance of common stock - - 1,283,365
--------------------------------------------
Balance, December 31, 2002 176,555 - 38,748,204
Comprehensive income:
Net income - - 5,848,410
Other comprehensive (loss), net of tax (Note 2) (247,821) - (247,821)
Total comprehensive income
Purchase of treasury stock - (3,234,239) (3,234,239)
Dividends on common stock - - (1,320,089)
Retirement of treasury stock - 3,234,239 -
Effect of contribution to employee stock ownership
plan - - 548,946
Issuance of common stock - - 1,248,230
--------------------------------------------
Balance, December 31, 2003 $ (71,266) $ - $ 41,591,641
============================================
31
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,848,410 $ 5,865,161 $ 4,474,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 255,000 383,000 210,000
Depreciation 797,117 721,762 743,796
Amortization and accretion 677,301 268,424 639,003
Deferred taxes (1,475) (114,715) (193,638)
Effect of contribution to employee stock
ownership plan 548,946 436,984 369,907
Gain on sale of foreclosed real estate and loans, net (873,444) (743,017) (776,179)
Loss on sale of securities available-for-sale, net -- 523 933
Loss on disposal of equipment 4,916 5,923 11,396
Proceeds from sales of loans held for sale 51,061,653 53,645,852 50,087,483
Originations of loans held for sale (48,188,320) (53,665,293) (50,415,883)
Change in assets and liabilities:
Accrued interest receivable 61,757 (14,721) 343,596
Prepaid expenses and other assets 1,788,213 (2,123,150) (58,263)
Accrued expenses and other liabilities 85,231 (100,530) 107,628
------------ ------------ ------------
Net cash provided by operating activities 12,065,305 4,566,203 5,544,642
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans 26,056,456 51,036,816 36,679,436
Purchase of loans (49,583,830) (84,619,011) (27,784,114)
Proceeds from sale of securities available-for-sale 702,400 750,227 220,125
Purchase of securities available-for-sale (11,197,958) (322,763) (7,293,386)
Proceeds from maturities and calls of securities
available-for-sale 5,888,849 8,053,186 19,714,516
Purchase of premises, equipment, and rental real
estate (3,344,928) (2,609,603) (834,613)
Proceeds from sale of equipment 124,846 1,015 18,376
Other 235,978 95,354 (193,518)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (31,118,187) (27,614,779) 20,526,822
------------ ------------ ------------
(Continued)
32
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 6,963,487 $ 8,186,351 $ 7,647,085
Net increase (decrease) in advances from borrowers
for taxes and insurance 224,641 (77,200) 271,245
Net increase (decrease) in short-term borrowings 1,500,000 (250,000) (4,750,000)
Proceeds from other borrowed funds 17,500,000 39,500,000 11,000,000
Payments of other borrowed funds (9,021,833) (25,636,285) (23,429,503)
Purchase of treasury stock (3,234,239) (3,569,328) (5,280,545)
Proceeds from issuance of common stock 1,248,230 1,283,365 557,640
Dividends paid (1,277,432) (1,128,628) (1,028,210)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 13,902,854 18,308,275 (15,012,288)
------------ ------------ ------------
Net change in cash and cash equivalents (5,150,028) (4,740,301) 11,059,176
CASH AND CASH EQUIVALENTS
Beginning 15,168,601 19,908,902 8,849,726
------------ ------------ ------------
Ending $ 10,018,573 $ 15,168,601 $ 19,908,902
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash payments for:
Interest paid to depositors $ 7,872,840 $ 9,782,295 $ 12,081,559
Interest paid on borrowings 4,492,129 4,421,374 4,610,964
Income taxes 2,330,008 2,712,103 2,127,615
See Notes to Consolidated 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 nine branch offices located in Fort Dodge, Nevada, Ames, Perry,
Ankeny, Clive, 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. (which sells insurance, annuity products and mutual funds), First
Iowa Title Services, Inc. (which provides real estate abstracting services) and
Northridge Apartments Limited Partnership and Northridge Apartments Limited
Partnership II (which own multifamily apartment buildings). 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. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate, deferred tax assets and fair value of financial
instruments.
Revenue recognition: Interest income and expense is recognized on the accrual
method based on the respective outstanding balances. Other revenue is recognized
at the time the service is rendered.
Cash and cash equivalents and cash flows: For purposes of the consolidated
statements of cash flows, cash and cash equivalents include cash and balances
due from banks. Cash flows from loans, deposits and short-term borrowing are
reported net.
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, computed by the interest method over their contractual
lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary would result in write-downs of the
individual securities to their fair value. The related write-downs would be
included in earnings as realized losses.
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.
34
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Loans receivable: Loans receivable are stated at unpaid principal balances,
adjusted for the allowance for loan losses, net deferred loan origination costs
(fees), and net unearned premiums (discounts). Interest is accrued daily on the
outstanding principal balances.
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 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.
Premiums (discounts) on first mortgage loans purchased are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.
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 two low-income housing,
multifamily apartment buildings 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: Prior to January 1, 2002, goodwill had been amortized over 10 - 15
years using the straight-line method.
As of January 1, 2002, the Company adopted SFAS 142 which eliminated the
amortization and required a goodwill impairment test. The Company annually
completes a goodwill impairment test and has determined that there has been no
impairment of goodwill.
35
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Had provisions of SFAS 142 been applied in fiscal year 2001, the Company's net
income and net income per share would have been as follows:
Year Ended December 31, 2001
---------------------------------------
Basic Diluted
Net Earnings Earnings
Income Per Share Per Share
------------- ------------ ------------
Net income:
As reported $ 4,474,863 $ 2.54 $ 2.41
Add: Goodwill amortization 472,290 0.27 0.25
------------- ------------ ------------
Pro forma net income $ 4,947,153 $ 2.81 $ 2.66
============= ============ ============
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 or loss. Gains and losses on
available-for-sale securities are reclassified to net income as the gains or
losses are realized upon sale of the securities. Other-than-temporary impairment
charges are reclassified to net income at the time of the charge.
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.
Operating segments: The Company uses the "management approach" for reporting
information about segments in annual and interim financial statements. The
management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure and any other manner in which management
disaggregates a company. Based on the "management approach" model, the Company
has determined that its business is comprised of a single operating segment.
Stock-option plan: FASB Statement 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
36
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
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.
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 2003, 2002 and 2001, reported net income and earnings per common
share would have been decreased to the pro forma amounts shown below:
2003 2002 2001
------------------ ----------------- ------------------
Net income, as reported $ 5,848,410 $ 5,865,161 $ 4,474,863
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (66,773) (110,585) (183,477)
------------------ ----------------- ------------------
Pro forma net income $ 5,781,637 $ 5,754,576 $ 4,291,386
================== ================= ==================
Earnings per common share - basic:
As reported $ 3.69 $ 3.58 $ 2.54
Pro forma 3.65 3.51 2.43
Earnings per common share - assuming dilution:
As reported $ 3.48 $ 3.37 $ 2.41
Pro forma 3.44 3.31 2.31
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 2003, 2002 and 2001, respectively: dividend rate of
2.3%, 3.5% and 3.2%, price volatility of 20%, 20% and 22%, risk-free interest
rates of 3.70%, 4.92% and 4.93% and expected lives of eight years for all years.
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 forced 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. FASB 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.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and due from banks: The carrying amount of cash and due from banks
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.
37
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
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.
Loans held for sale: Fair values are based on quoted market prices of similar
loans sold on the secondary market.
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, 2003 and 2002, the carrying amount and
fair value of the commitments were not significant.
38
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 2. Securities
Securities available-for-sale as of December 31, 2003, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------------
Equity securities:
Mutual fund $ 2,000,000 $ -- $ (10,060) $ 1,989,940
Federal Home Loan Bank stock 4,778,200 -- -- 4,778,200
FHLMC preferred stock 5,499,000 15,000 (499,000) 5,015,000
FNMA preferred stock 1,000,000 10,000 -- 1,010,000
Other 2,100 1,675 -- 3,775
------------ ------------ ------------ ------------
13,279,300 6,675 (509,060) 12,796,915
------------ ------------ ------------ ------------
Debt securities:
State and local obligations 4,864,375 268,512 (260) 5,132,627
Mortgage-backed securities 8,922,072 104,434 (3,891) 9,022,615
------------ ------------ ------------ ------------
13,786,447 372,946 (4,151) 14,155,242
------------ ------------ ------------ ------------
$ 27,065,747 $ 399,621 $ (513,211) $ 26,952,157
============ ============ ============ ============
Securities available-for-sale as of December 31, 2002, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------------
Equity securities:
Mutual fund $ 2,000,000 $ -- $ -- $ 2,000,000
Federal Home Loan Bank stock 4,478,100 -- -- 4,478,100
FHLMC preferred stock 5,499,000 50,000 (319,000) 5,230,000
FNMA preferred stock 1,000,000 22,500 -- 1,022,500
Other 2,100 1,298 -- 3,398
------------ ------------ ------------ ------------
12,979,200 73,798 (319,000) 12,733,998
------------ ------------ ------------ ------------
Debt securities:
State and local obligations 5,736,867 336,652 (81) 6,073,438
Mortgage-backed securities 3,836,033 190,273 -- 4,026,306
------------ ------------ ------------ ------------
9,572,900 526,925 (81) 10,099,744
------------ ------------ ------------ ------------
$ 22,552,100 $ 600,723 $ (319,081) $ 22,833,742
============ ============ ============ ============
No ready market exists for Federal Home Loan Bank stock and it has no quoted
market value. For disclosure purposes, such stock is assumed to have a fair
value which is equal to cost.
39
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Securities available-for-sale with a carrying amount of approximately $516,000
and $522,000 at December 31, 2003 and 2002, respectively, were pledged on
deposit accounts.
Securities available-for-sale with a carrying amount of approximately $6,970,000
at December 31, 2003, were pledged as collateral on Federal Home Loan Bank
advances. There were no securities available-for-sale pledged as collateral for
Federal Home Loan Bank advances at December 31, 2002.
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003 are summarized as follows:
Less than 12 Months 12 Months or More Total
---------------------------- ---------------------------- ----------------------------
Unrealized Unrealized
Fair Fair Fair
Value Losses Value Losses Value Losses
--------------------------------------------------------------------------------------------
Equity securities:
Mutual funds $ 1,989,940 $ (10,060) $ -- $ -- $ 1,989,940 $ (10,060)
FHLMC preferred stock -- -- 2,000,000 (499,000) 2,000,000 (499,000)
--------------------------------------------------------------------------------------------
1,989,940 (10,060) 2,000,000 (499,000) 3,989,940 (509,060)
--------------------------------------------------------------------------------------------
Debt securities:
State and local obligations 259,740 (260) -- -- 259,740 (260)
Mortgage-backed securities 6,969,791 (3,891) -- -- 6,969,791 (3,891)
--------------------------------------------------------------------------------------------
7,229,531 (4,151) -- -- 7,229,531 (4,151)
--------------------------------------------------------------------------------------------
$ 9,219,471 $ (14,211) $ 2,000,000 $ (499,000) $ 11,219,471 $ (513,211)
============================================================================================
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates and, as such, are considered to be temporary,
by the Company.
The amortized cost and fair value of debt securities as of December 31, 2003, 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 $ 235,288 $ 236,693
Due from one to five years 2,325,032 2,430,705
Due from five to ten years 1,668,498 1,759,327
Due after ten years 635,557 705,902
Mortgage-backed securities 8,922,072 9,022,615
---------------- ----------------
$ 13,786,447 $ 14,155,242
================ ================
40
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
There were no securities sold during 2003. Gross gains of $26,352 and $800 were
realized on the sale of securities available-for-sale in 2002 and 2001,
respectively. Gross losses of $26,875 and $1,733 were realized on the sale of
securities available-for-sale in 2002 and 2001, respectively.
Included in the interest income on securities and cash deposits was dividend
income of $424,366, $550,306 and $827,994 for the years ended December 31, 2003,
2002 and 2001, respectively.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on available-for-sale securities for the years ended December 31, 2003,
2002 and 2001, were as follows:
2003 2002 2001
-----------------------------------------
Unrealized holding gains (losses) arising
during the period $ (395,232) $ (22,997) $ 702,045
Less reclassification adjustment for net
(losses) realized in net income - (523) (933)
-----------------------------------------
Net unrealized gains (losses)
before tax (expense) benefit (395,232) (22,474) 702,978
Tax (expense) benefit 147,411 9,038 (265,647)
-----------------------------------------
Other comprehensive income
(loss) - net unrealized gains
(losses) on securities $ (247,821) $ (13,436) $ 437,331
=========================================
41
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 3. Loans Receivable
Loans receivable at December 31, 2003 and 2002, are summarized as follows:
2003 2002
------------------------------
First mortgage loans:
Secured by one-to-four family residences $ 171,604,211 $ 146,457,845
Secured by:
Multifamily properties 69,962,902 70,778,861
Commercial properties 69,609,086 71,251,023
Construction loans 2,284,390 2,293,998
------------------------------
Total first mortgage loans 313,460,589 290,781,727
------------------------------
Consumer loans:
Automobile 9,800,805 10,114,605
Second mortgage 37,600,714 38,239,932
Other 6,533,556 5,437,535
------------------------------
Total consumer loans 53,935,075 53,792,072
------------------------------
Total loans 367,395,664 344,573,799
Undisbursed portion of construction loans (1,855,050) (928,855)
Unearned premiums, net 696,558 623,051
Net deferred loan origination (fees) (113,077) (3,237)
Allowance for loan losses (3,164,857) (3,118,394)
------------------------------
$ 362,959,238 $ 341,146,364
==============================
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
2003 2002 2001
------------------------------------------
Balance, beginning $ 3,118,394 $ 2,883,197 $ 2,843,149
Provision charged to income 255,000 383,000 210,000
Loans charged-off (301,978) (161,842) (182,954)
Recoveries 93,441 14,039 13,002
------------------------------------------
Balance, ending $ 3,164,857 $ 3,118,394 $ 2,883,197
==========================================
42
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
The following is a summary of information pertaining to impaired loans:
December 31,
------------------
2003 2002
-------------------
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 614,517 642,967
-------------------
Total impaired loans $614,517 $642,967
===================
Valuation allowance related to impaired loans $110,813 $121,737
===================
Average investment in impaired loans $538,153 $579,763
====================
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 Company consisted of the following for the years ended December 31, 2003 and
2002:
2003 2002
--------------------------
Beginning balance $ 1,927,727 $ 1,998,872
New loans 130,800 653,000
Change in status -- (37,971)
Repayments (211,184) (686,174)
--------------------------
Ending balance $ 1,847,343 $ 1,927,727
==========================
Note 4. Loan 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, 2003 and 2002, are $43,771,993
and $31,859,427, respectively. Custodial escrow balances maintained in
connection with the foregoing loan servicing were $286,580 and $217,884 at
December 31, 2003 and 2002, respectively.
43
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 5. Premises and Equipment
Premises and equipment consisted of the following at December 31:
2003 2002
---------------------------
Land $ 2,629,144 $ 2,268,985
Buildings and improvements 7,479,355 6,042,167
Construction in progress 921,905 871,865
Leasehold improvements 35,259 35,259
Furniture, fixtures and equipment 3,418,889 3,150,595
Vehicles 101,955 96,990
---------------------------
14,586,507 12,465,861
Less accumulated depreciation 4,744,030 4,269,898
---------------------------
$ 9,842,477 $ 8,195,963
===========================
Note 6. Deposits
Deposits at December 31 were as follows:
2003 2002
---------------------------
Demand and NOW accounts:
Noninterest bearing $ 9,161,277 $ 8,156,198
Interest-bearing 41,601,765 36,373,805
Savings accounts 27,764,803 25,692,683
Money market savings 25,785,186 23,747,823
Certificates of deposit 179,650,538 183,029,573
---------------------------
$283,963,569 $277,000,082
===========================
At December 31, 2003, scheduled maturities of certificates of deposit were as
follows:
Year ending December 31:
2004 $ 92,659,900
2005 34,269,210
2006 21,998,670
2007 19,513,073
2008 11,209,685
-------------
$ 179,650,538
=============
44
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Interest expense on deposits consisted of the following:
Years ended December 31,
---------------------------------------
2003 2002 2001
---------------------------------------
NOW accounts $ 125,078 $ 210,043 $ 295,684
Savings accounts 148,651 281,171 362,320
Money market savings 258,090 349,875 928,631
Certificates of deposit 7,317,767 8,648,832 10,367,331
---------------------------------------
$ 7,849,586 $ 9,489,921 $11,953,966
=======================================
The aggregate amount of certificates of deposit in excess of $100,000 was
$18,751,451 and $15,795,853 as of December 31, 2003 and 2002, respectively.
Note 7. Borrowed Funds
Borrowed funds at December 31, 2003, included miscellaneous borrowings of
$17,065 and borrowings from the Federal Home Loan Bank of Des Moines (FHLB) as
follows:
Weighted-
Stated Average
Maturity Interest Rate Amount Features
- -------------------------------------------------------------------------------------------------------------------
2004 3.04% $ 9,000,000 Includes $1.5 million variable rate, renewable daily
2005 3.51 13,500,000
2006 4.64 14,000,000
2007 4.14 16,500,000
2008 5.05 14,500,000 Includes $9.0 million callable, various dates in 2004
2009 4.49 3,500,000
2010 5.68 20,500,000 Includes $17.5 million callable, various dates in 2004
2011 4.83 3,000,000 All callable, January , 2004
2018 3.83 487,540 15-year amortizing, repayable 2008
---------------------------------
4.52% $ 94,987,540
=================================
At December 31, 2003, the Company had an unsecured $3,000,000 line of credit
agreement with a Bank. The line of credit bears interest at LIBOR plus 1.85%
(2.97% at December 31, 2003) and matures October 1, 2004. There were no
borrowings outstanding at December 31, 2003.
Borrowed funds at December 31, 2002, included miscellaneous borrowings of
$21,287 and borrowings from the FHLB of $85,005,151. Such borrowings carried a
weighted-average interest rate of 4.97% with maturities ranging from 2003
through 2013.
The FHLB borrowings are collateralized by FHLB stock and qualifying first and
second mortgage loans representing various percentages of the total borrowings
outstanding.
45
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 8. Income Taxes and Retained Earnings
Under previous law, the provisions of the IRS and similar sections of Iowa Law
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.
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, 2003, 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,
-------------------------------------------
2003 2002 2001
-------------------------------------------
Current $ 2,722,041 $ 3,068,047 $ 2,541,049
Deferred (1,475) (114,715) (193,638)
-------------------------------------------
$ 2,720,566 $ 2,953,332 $ 2,347,411
===========================================
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, 2003 and 2002:
2003 2002
-----------------------
Deferred tax assets:
Unearned shares, employee stock ownership plan $ 17,000 $ 28,000
Allowance for loan losses 1,180,000 1,075,000
Unrealized losses on securities available-for-sale 42,000 --
Deferred directors fees and compensation 42,000 42,000
Deferred income 73,000 8,000
Accrued expenses 56,000 46,000
Dividends on employee stock ownership plan 45,000 34,000
Other 39,198 52,049
-----------------------
Total gross deferred tax assets 1,494,198 1,285,049
-----------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend 39,000 45,000
Loan costs 3,000 17,000
Premises and equipment 234,000 108,000
Title plant 181,000 160,000
Loans acquired 22,000 42,000
Investments acquired 11,000 16,000
Servicing rights 137,000 107,000
Unrealized gains on securities available-for-sale -- 105,000
Other 109,655 76,392
-----------------------
Total gross deferred tax liabilities 736,655 676,392
-----------------------
Net deferred tax assets $ 757,543 $ 608,657
=======================
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,
----------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------ ------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------------
Income before income taxes $ 2,913,452 34.0% $ 2,998,288 34.0% $ 2,319,573 34.0%
Nontaxable income (149,455) (1.7) (187,175) (2.1) (235,557) (3.4)
State income tax, net of
federal income tax benefit 217,337 2.5 212,372 2.4 187,403 2.8
State tax credit, net of
federal income tax benefit (109,720) (1.3) -- -- -- --
Low income housing tax credit (237,441) (2.8) (153,680) (1.7) (153,680) (2.3)
Goodwill amortization -- -- -- -- 145,547 2.1
Other 86,393 1.0 83,527 0.9 84,125 1.2
-------------------------------------------------------------------------------
$ 2,720,566 31.7% $ 2,953,332 33.5% $ 2,347,411 34.4%
===============================================================================
Note 9. 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. The Bank recognized $278,400 and
$104,500 pension expense for the years ended December 31, 2003 and 2002,
respectively. There was no pension expense for the year ended December 31, 2001.
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.
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 Company'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 Company's stock and therefore the Bank
believes there is no potential repurchase obligation at December 31, 2003 and
2002.
48
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
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 $548,947, $436,984 and $369,907 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Shares of the Company's common stock held by the ESOP, at December 31, 2003 and
2002, are as follows:
2003 2002
--------------------------
Allocated shares 171,021 154,212
Unreleased (unearned) shares 16,916 32,588
--------------------------
187,937 186,800
==========================
Fair market value of unreleased (unearned) shares $ 623,185 $ 1,010,228
==========================
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 was modified in 2001 when the Company
authorized the granting of 40,000 additional shares of common stock.
The Plan authorizes the granting of stock options for a total of 441,105 shares
of common stock. All options are granted at an exercise price which is the
market price of the common stock on the grant date.
Options granted to officers 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.
49
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
The table below reflects option activity for the period indicated:
Weighted-
Average
Exercise
Number of Price per
Shares Share
Outstanding, December 31, 2000 298,710 $ 14.01
Granted 28,000 19.21
Forfeited (3,800) 19.12
Exercised (38,000) 12.94
-------------------------
Outstanding, December 31, 2001 284,910 14.67
Granted 11,000 20.59
Forfeited (1,000) 16.95
Exercised (73,100) 12.48
-------------------------
Outstanding, December 31, 2002 221,810 15.67
Granted 6,000 31.00
Forfeited (1,000) 19.51
Exercised (59,200) 13.34
-------------------------
Outstanding, December 31, 2003 167,610 $ 17.02
=========================
Options exercisable 146,210 $ 16.75
=========================
Remaining shares available for grant 68,605
=========
As of December 31, 2003, the 167,610 options outstanding under the Plan have
exercise prices between $12.38 and $31.00. The weighted average fair value per
option of options granted during the years ended December 31, 2003, 2002 and
2001, were $6.90, $4.20 and $4.48, respectively.
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.
Note 10. 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.
50
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
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, 2003, the Bank meets all capital adequacy
requirements to which it is subject.
The most recent notification from the federal regulatory agency categorize the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since those notifications
that management believes have changed the category.
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, 2003:
Total Capital (to risk
weighted assets) $ 34,958 12.4% $ 22,554 8.0% $ 28,192 10.0%
Tier 1 Capital (to risk
weighted assets) 31,816 11.3 11,277 4.0 16,915 6.0
Tier I (Core) Capital
(to adjusted assets) 31,816 7.6 12,541 3.0 20,901 5.0
Tangible Capital (to
adjusted assets) 31,816 7.6 6,270 1.5 - -
As of December 31, 2002:
Total Capital (to risk
weighted assets) $ 33,870 12.4% $ 21,805 8.0% $ 27,256 10.0%
Tier 1 Capital (to risk
weighted assets) 30,803 11.3 10,902 4.0 16,354 6.0
Tier I (Core) Capital
(to adjusted assets) 30,803 7.8 11,917 3.0 19,862 5.0
Tangible Capital (to
adjusted assets) 30,803 7.8 5,959 1.5 - -
Limitations on dividends and other capital distributions: Office of Thrift
Supervision (OTS) imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
(Tier 1 Association) and has not been advised by the OTS that it is in need of
more than normal supervision could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year provided the total
amount of capital distributions (including the proposed capital distribution)
for the applicable calendar year does not exceed the institution's year-to-date
net income plus retained net income for the preceding two years. Any additional
capital distributions would require prior regulatory approval.
51
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 11. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
2003 2002 2001
------------------------------------
Advertising and promotion $ 467,759 $ 277,702 $ 211,221
Professional fees 188,093 194,055 180,155
Printing, postage, stationery and supplies 445,609 437,453 382,832
Checking account charges 332,005 335,458 338,521
Insurance 129,875 106,826 83,602
OTS general assessment 93,455 88,799 84,138
Telephone 133,744 140,575 123,867
Apartment operating costs 335,098 172,941 143,730
Employee costs 132,632 164,508 133,380
Other 787,380 704,145 696,020
------------------------------------
$3,045,650 $2,622,462 $2,377,466
====================================
Note 12. 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.
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
financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount
---------------------------
December 31,
---------------------------
2003 2002
---------------------------
Mortgage loans (including one-to-four family, multifamily
and commercial loans) $10,601,444 $ 8,191,023
Undisbursed overdraft loan privileges and undisbursed home
equity lines of credit 2,452,139 2,094,819
52
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
At December 31, 2003, the mortgage loan commitments above were comprised of
variable-rate commitments carrying a weighted-average interest rate of 6.16% and
fixed-rate commitments carrying a weighted-average interest rate of 8.26%.
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 13. Lending Activities and Concentrations of Credit Risk
The Bank generally originates single family residential loans within its primary
lending area of Webster, Story, Des Moines, Dallas, Polk and Henry counties in
Iowa. 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 $138,396,000 of the Bank's first mortgage loan portfolio at
December 31, 2003, consisted of loans purchased or originated outside the state
of Iowa. Concentrations by state include California with $36,703,000, Colorado
with $16,710,000 and Wisconsin with $14,629,000. These are generally one-to-four
family, multifamily residential and commercial real estate loans secured by the
underlying properties. 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.
Note 14. Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
December 31, 2003 and 2002, were as follows:
2003 2002
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------
(nearest 000) (nearest 000)
Finacial assets:
Cash $ 10,018,573 $ 10,019,000 $ 15,168,601 $ 15,169,000
Securities 26,952,157 26,952,000 22,833,742 22,834,000
Loans, net 362,959,238 368,037,000 341,146,364 347,684,000
Loans held for sale 326,900 332,000 2,372,134 2,408,000
Accrued interest receivable 1,866,521 1,867,000 1,928,278 1,928,000
Financial liabilities:
Deposits 283,963,569 291,575,000 277,000,082 284,278,000
Borrowed funds 95,004,605 99,187,000 85,026,438 90,971,000
Accrued interest payable 106,538 107,000 129,899 130,000
53
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 15. Restriction on Stockholders' Equity
In 1996, the Company completed a Plan of Conversion and Reorganization, whereby
the Company became a publicly traded Iowa corporation and the previous mutual
organization ceased to exist. 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 previous 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 16. 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:
2003 2002 2001
------------------------------------
Numerator, income available to common
stockholders $5,848,410 $5,865,161 $4,474,863
====================================
Denominator:
Weighted-average shares outstanding 1,610,209 1,680,679 1,823,100
Less unallocated ESOP shares 26,641 42,930 60,200
------------------------------------
Weighted-average shares outstanding-basic
1,583,568 1,637,749 1,762,900
Dilutive effect of stock options 95,478 101,786 93,743
------------------------------------
Weighted-average shares outstanding-
assuming dilution 1,679,046 1,739,535 1,856,643
====================================
Basic earnings per common share $ 3.69 $ 3.58 $ 2.54
Earnings per common share-assuming dilution 3.48 3.37 2.41
54
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 17. North Central Bancshares, Inc. (Parent Company Only) Condensed
Financial Statements
STATEMENTS OF FINANCIAL CONDITION
December 31, 2003 and 2002
2003 2002
----------------------------
ASSETS
Cash $ 185,235 $ 410,620
Securities available-for-sale 3,775 3,398
Loans receivable, net 3,836,000 1,491,000
Investment in First Federal Savings Bank of Iowa 37,936,434 37,029,542
Deferred taxes 3,976 4,127
Prepaid and other assets -- 108,269
----------------------------
Total assets $ 41,965,420 $ 39,046,956
============================
LIABILITIES AND EQUITY
LIABILITIES
Dividend payable $ 337,907 $ 295,250
Accrued expenses and other liabilities 35,872 3,502
--------------- ------------
Total liabilities 373,779 298,752
----------------------------
EQUITY
Common stock 16,048 16,403
Additional paid-in capital 17,711,322 17,011,095
Retained earnings 24,103,330 21,862,248
Unearned shares, employee stock ownership plan (167,793) (318,097)
Accumulated other comprehensive income (loss) (71,266) 176,555
----------------------------
Total equity 41,591,641 38,748,204
----------------------------
Total liabilities and equity $ 41,965,420 $ 39,046,956
============================
55
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
-----------------------------------------
Operating income:
Equity in net income of subsidiary $ 5,897,750 $ 5,901,383 $ 4,525,221
Interest income 63,516 53,759 69,842
Gain (loss) on sale of securities
available-for-sale, net -- 26,352 (933)
-----------------------------------------
5,961,266 5,981,494 4,594,130
-----------------------------------------
Operating expenses:
Interest expense -- 844 394
Salaries and employee benefits 19,800 22,150 33,250
Other 122,077 112,759 118,804
-----------------------------------------
141,877 135,753 152,448
-----------------------------------------
Income before income tax (benefit) 5,819,389 5,845,741 4,441,682
Provision for income taxes (benefit) (29,021) (19,420) (33,181)
-----------------------------------------
Net income $ 5,848,410 $ 5,865,161 $ 4,474,863
=========================================
56
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,848,410 $ 5,865,161 $ 4,474,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of First Federal Savings
Bank of Iowa (5,897,750) (5,901,383) (4,525,221)
Dividends received from First Federal Savings
Bank of Iowa 5,750,000 5,000,000 4,750,000
(Gain) loss on sale of securities available-for-sale -- (26,352) 933
Change in deferred income taxes (458,243) (375,748) (107,233)
Change in assets and liabilities:
Prepaid expenses and other assets 108,269 (25,256) (11,384)
Accrued expenses and other liabilities 32,370 3,103 399
-----------------------------------------
Net cash provided by operating activities 5,383,056 4,539,525 4,582,357
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable (2,345,000) (920,000) 530,000
Proceeds from sale of securities available-for-sale -- 277,727 220,125
-----------------------------------------
Net cash provided by (used in) investing
activities (2,345,000) (642,273) 750,125
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings -- (250,000) 250,000
Purchase of treasury stock (3,234,239) (3,569,328) (5,280,545)
Proceeds from issuance of common stock 1,248,230 1,283,365 557,640
Dividends paid (1,277,432) (1,128,628) (1,028,210)
-----------------------------------------
Net cash (used in) financing activities (3,263,441) (3,664,591) (5,501,115)
-----------------------------------------
Net increase (decrease) in cash (225,385) 232,661 (168,633)
CASH
Beginning 410,620 177,959 346,592
-----------------------------------------
Ending $ 185,235 $ 410,620 $ 177,959
=========================================
57
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Note 18. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2003
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------
(In thousands, except per share amounts)
Interest income $6,526 $6,441 $6,343 $6,146
Interest expense 3,180 3,137 3,056 2,969
------ ------ ------ ------
Net interest income 3,346 3,304 3,287 3,177
Provision for loan losses 60 60 75 60
------ ------ ------ ------
Net interest income after
provision for loan losses 3,286 3,244 3,212 3,117
------ ------ ------ ------
Noninterest income:
Fees and service charges 564 627 681 992
Abstract fees 434 495 521 361
Mortgage banking income 174 275 311 68
Other income 221 302 251 293
------ ------ ------ ------
Total noninterest income 1,393 1,699 1,764 1,714
------ ------ ------ ------
Noninterest expense:
Compensation and employee benefits 1,432 1,412 1,506 1,600
Premises and equipment 309 307 321 350
Data processing 134 156 143 145
Other 682 779 791 793
------ ------ ------ ------
Total noninterest expense 2,557 2,654 2,761 2,888
------ ------ ------ ------
Income before income taxes 2,122 2,289 2,215 1,943
Provision for income taxes 620 761 721 619
------ ------ ------ ------
Net income $1,502 $1,528 $1,494 $1,324
====== ====== ====== ======
Basic earnings per share $ 0.94 $ 0.97 $ 0.95 $ 0.83
====== ====== ====== ======
Diluted earnings per share $ 0.88 $ 0.92 $ 0.90 $ 0.78
====== ====== ====== ======
58
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Year Ended December 31, 2002
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------
(In thousands, except per share amounts)
Interest income $ 6,531 $ 6,760 $ 6,937 $ 6,737
Interest expense 3,493 3,498 3,533 3,387
------- ------- ------- -------
Net interest income 3,038 3,262 3,404 3,350
Provision for loan losses 180 90 56 57
------- ------- ------- -------
Net interest income after
provision for loan losses 2,858 3,172 3,348 3,293
------- ------- ------- -------
Noninterest income:
Fees and service charges 589 596 662 528
Abstract fees 397 402 436 451
Mortgage banking fees 108 107 167 365
Gain (loss) on sale of securities
available-for-sale (1) -- 1 --
Other income 222 281 243 175
------- ------- ------- -------
Total noninterest income 1,315 1,386 1,509 1,519
------- ------- ------- -------
Noninterest expense:
Compensation and employee benefits 1,266 1,324 1,261 1,372
Premises and equipment 309 302 261 320
Data processing 129 132 131 152
Other 662 647 628 686
------- ------- ------- -------
Total noninterest expense 2,366 2,405 2,281 2,530
------- ------- ------- -------
Income before income taxes 1,807 2,153 2,576 2,282
Provision for income taxes 576 729 868 780
------- ------- ------- -------
Net income $ 1,231 $ 1,424 $ 1,708 $ 1,502
======= ======= ======= =======
Basic earnings per share $ 0.75 $ 0.87 $ 1.04 $ 0.92
======= ======= ======= =======
Diluted earnings per share $ 0.71 $ 0.81 $ 0.98 $ 0.87
======= ======= ======= =======
59
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
Year Ended December 31, 2001
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------
In thousands, except per share amounts)
Interest income $7,040 $6,922 $6,894 $6,644
Interest expense 4,381 4,255 4,105 3,773
------ ------ ------ ------
Net interest income 2,659 2,667 2,789 2,871
Provision for loan losses 30 60 60 60
------ ------ ------ ------
Net interest income after
provision for loan losses 2,629 2,607 2,729 2,811
------ ------ ------ ------
Noninterest income:
Fees and service charges 409 471 503 610
Abstract fees 302 378 388 438
Other income 328 386 377 502
------ ------ ------ ------
Total noninterest income 1,039 1,235 1,268 1,550
------ ------ ------ ------
Noninterest expense:
Compensation and employee benefits 1,100 1,048 1,127 1,225
Premises and equipment 297 289 290 350
Data processing 106 117 117 130
Goodwill amortization 118 118 118 118
Other expenses 553 612 583 630
------ ------ ------ ------
Total noninterest expense 2,174 2,184 2,235 2,453
------ ------ ------ ------
Income before income taxes 1,494 1,658 1,762 1,908
Provision for income taxes 513 548 608 678
------ ------ ------ ------
Net income $ 981 $1,110 $1,154 $1,230
====== ====== ====== ======
Basic earnings per share $ 0.53 $ 0.62 $ 0.66 $ 0.73
====== ====== ====== ======
Diluted earnings per share $ 0.51 $ 0.59 $ 0.62 $ 0.69
====== ====== ====== ======
60
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.
Continuing Directors
David M. Bradley, CPA is Chairman of the Board, President and Chief
Executive Officer.
Robert H. Singer, Jr. is the executive director of the Fort Dodge Area
Chamber of Commerce. Mr. Singer was formerly 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.
Nominees for Election as Directors
Melvin R. Schroeder was formerly the Vice President of Instruction at
Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in
2001.
Randall L. Minear is the President of Terrus Real Estate Group, located
in Des Moines, Iowa. He formerly served at the Director of Corporate Real Estate
for The Principal Financial Group and as President of Principal Real Estate
Services, a subsidiary of The Principal Financial Group.
C. Thomas Chalstrom has been employed with the Bank since 1985, was
named Executive Vice President in December 1994. Mr. Chalstrom was named Chief
Operating Officer of the Bank in December 1998.
Noncontinuing Directors
KaRene Egemo was the owner of Egemo Realty, Inc. in Fort Dodge, Iowa.
Mrs. Egemo passed away February 18, 2004.
Craig R. Barnes is a Senior Vice President for Commercial Capital
Markets for Washington Mutual. Mr. Barnes was formerly the Executive Director of
International Products for Principal Capital Management, a member of the
Principal Financial Group.
Executive Officers Who are Not Directors or Nominees
Jean L. Lake is Secretary of the Holding Company and the Bank.
John L. Pierschbacher, CPA is Chief Financial Officer of the Bank and
Treasurer of the Holding Company and the Bank.
Kirk A. Yung is Senior Vice President of the Holding Company and the
Bank.
61
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
- ------------- ---- --- ---------
2002
First Quarter......... 23.88 20.00 0.18
Second Quarter........ 29.40 23.35 0.18
Third Quarter......... 28.99 23.00 0.18
Fourth Quarter........ 31.00 27.10 0.18
2003
First Quarter......... 36.10 31.60 0.21
Second Quarter........ 35.87 31.30 0.21
Third Quarter......... 36.71 33.64 0.21
Fourth Quarter ....... 38.68 35.58 0.21
The Company's Common Stock was traded at $38.80 as of March 8, 2004.
Information Relating to the Company's Common Stock
As of March 8, 2004, the Company had 1,262 shareholders of record,
which includes the number of persons or entities who hold their Common Stock in
nominee or "street" name through various brokerage firms. As of such date
1,588,280 shares of the Common Stock were outstanding.
The Company's current quarterly dividend is $0.25 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 10 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 primarily upon the 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.
62
Annual Meeting
The Annual Meeting of Shareholders of the Company will be held at 10:00
a.m., Central Time, Friday, April 23, 2004 at the Trolley Center, located at 900
Central Avenue, Fort Dodge, Iowa.
Stockholders and General Inquiries Stock Exchange
David M. Bradley The Company's Common Shares are
North Central Bancshares, Inc. listed under the symbol "FFFD"
c/o First Federal Savings Bank of Iowa on NASDAQ
825 Central Avenue
Fort Dodge, Iowa 50501
(515) 576-7531
www.firstfederaliowa.com
General Counsel Independent Auditor
Johnson, Erb, Bice, Kramer, Good & McGladrey & Pullen, LLP
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 LLP Computershare Investor Services
1700 Pennsylvania Avenue, N.W., Suite 800 350 Indiana Street Suite 800
Washington, D.C. 20006 Golden, Colorado 80401
(303) 262-0600 or
800-962-4284
e-mail:
inquire@computershare.com
www.computershare.com
Publications - Annual Report on Form 10-K
A copy of the Company's Annual Report Form 10-K (without exhibits) for
the fiscal year ended December 31, 2003 will be furnished without charge to
shareholders of record as of March 8, 2004 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. The Annual Report Form
10-K report is available online through the SEC Electronic Data Gathering,
Analysis and Retrieval (EDGAR) filings at www.sec.gov.
Dividend Reinvestment and Stock Purchase Plan
This plan provides shareholders with the ability to reinvest
automatically their cash dividends in additional shares of North Central
Bancshares, Inc. common stock. This plan also provides shareholders the
opportunity to make quarterly cash purchases of additional shares of the
Company's common stock.
For more information, contact Computershare Investor Services (see
address above) or visit Computershare's website at www.computershare.com
63