October 4, 2005
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, DC 20549-0408
Attention: Mr. Don Walker
RE: North Central Bancshares, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004
Forms 10-Q for the Quarters Ended March 31, 2005 and June 30, 2005
File No. 000-27672
Dear Mr. Walker:
Filed today is our response to the comments of the Staff in its letter dated
September 20, 2005 relating to the above referenced filings. Set forth are
comments contained in the Staff's letter and our response to each.
Form 10-Q for the Fiscal Quarter Ended June 30, 2005
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Management's Discussion and Analysis - Executive Overview, page 7
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1. We noted that you recorded a $255,000 and $424,500 other-than-temporary
impairment in the first and second quarter of 2005, respectively, relating
to your investment in FHLMC preferred stock. Your unrealized losses on your
investment were $921,500 and $499,000 at December 31, 2004 and 2003,
respectively. Please tell us how you were able to conclude that no
other-than-temporary impairment relating to these securities existed as of
or prior to December 31, 2004.
As of December 31, 2004, North Central Bancshares, Inc. (Company) had
the following investments in FHLMC/FNMA preferred stock:
Unrealized Unrealized
Purchase 12/31/04 12/31/03 Gain/(Loss) Gain/(Loss)
Preferred Stock Interest Price/Share Price/Share Price/Share 12/31/04 12/31/03
--------------- -------- ------------ ----------- ----------- -------- --------
FHLMC "L" - 20,000 shares Variable $50.00 $39.50 $50.25 ($210,000) $5,000
FHLMC "K" - 40,000 shares Fixed $50.00 $49.00 $50.25 ($40,000) $10,000
FNMA "H" - 20,000 shares Fixed $50.00 $48.00 $50.50 ($40,000) $10,000
FHLMC "M" - 10,000 shares Variable $50.00 $36.75 $40.00 ($131,500) ($99,000)
FHLMC "N" - 40,000 shares Variable $50.00 $36.50 $40.00 ($540,000) ($400,000)
---------- ----------
($961,500) ($474,000)
========== ==========
Each quarter the Company evaluates its investment portfolio based on
SFAS 115, with further guidance from EITF Issue No. 03-1, to determine
if an other-than-temporary impairment exists. As outlined in EITF
Issue No. 03-1, the Company determines whether an investment is
impaired. The Company considers an investment impaired if the fair
value of the investment is less than its cost. To determine fair value
and impairment the Company obtains current market prices of each
security. If a security is impaired, the Company then evaluates
whether an impairment is other-than-temporary. In determining whether
an impairment is other-than-temporary, the Company considers its
intent and ability to hold the investment for a reasonable period of
time sufficient for a forecasted recovery of fair value up to (or
beyond) the cost of the investment. The Company considers the severity
and duration of the impairment in relation to the forecasted recovery
of fair value. The Company also considers the nature of the event (or
events) that give rise to the impairment, including general economic
conditions and the financial condition or stability of the issuer.
Based on the Company's judgment of its ability and intent to hold the
security for a reasonable period of time sufficient for an anticipated
recovery in fair value, it determines whether an impairment is
other-than-temporary. The Company's impairment decision is also
subject to review or audit by our independent auditors each quarter
and year-end prior to the Company filing its financial results.
As of December 31, 2004, management did not believe there was an
other-than-temporary impairment relative to the Company's investment
in FHLMC adjustable rate preferred stock. Management believed the
decline in the fair value of the securities was reflective of the
change (decline) in interest rates since the issuance of the
securities. It was management's intention and ability to hold these
investments for a period of time sufficient to allow for an
anticipated recovery in market value, through the current interest
rate cycle, during which management expected a recovery of the fair
value of the investments. Based on management's intention and ability
to hold these investments through the current interest rate cycle and
management's expectation that market interest rates would continue to
increase to levels in existence at the time of issuance, management
felt that the value of the securities would increase as the market and
dividend coupon rates of the securities continued to increase.
Therefore, it was management's judgment that there was not an
other-than-temporary impairment relating to these securities as of or
prior to December 31, 2004.
On March 31, 2005, the Company recorded a $255,000
other-than-temporary impairment loss on the investment of 20,000
adjustable rate preferred shares of FHLMC, Series L. The Company
purchased this security November 1999 which carried an initial
dividend coupon rate of 5.97% until December 31, 2004, its first reset
date. The security's dividend coupon rate was based on the 5 year CMT
rate with a reset frequency of 5 years. As the security approached its
initial reset date, it began to decline in fair value. Management
believed the decline was reflective of the decline in interest rates
compared to the security's initial dividend coupon rate. At December
31, 2004, this security had been impaired for only 10 months. During
the first quarter of 2005, after the initial reset date, the security
continued to experience a decline in fair value. At March 31, 2005,
based on the continued decline in fair value and the 5 year reset
frequency, it was management's judgment that the impairment associated
with this security had become other-than-temporary.
On June 30, 2005, the Company recorded a $424,500 other-than-temporary
impairment loss on the investment of 10,000 and 40,000 adjustable rate
preferred shares of FHLMC, Series M and N. The Company purchased
10,000 shares of Series M February 2001 which carried an initial
dividend coupon rate of 4.82% until March 31, 2003, its first call
date. Thereafter, the dividend coupon rate reset every two years on
March 31 to a rate equal to the two year treasury plus 10 basis
points. The Company purchased 40,000 shares of Series N March 2001
which carried an initial dividend coupon rate of 4.50% until April 1,
2002; its first annual reset date. Thereafter, the dividend coupon
rate reset annually on April 1 of each year to a rate equal to the 12
month LIBOR minus 20 basis points. At December 31, 2004, we expected
the price of these securities to recover at their upcoming reset date
because the dividend coupon rate was projected to
increase by over 200 basis points at the reset date. (The actual
increase in the dividend coupon rate of Series M and N was 234 and 250
basis points, respectively.) The increase in rates has the effect of
increasing both the dividend coupon rate received and the tax
advantage of the 70% dividend received deduction related to these
securities. During the first quarter of 2005, these securities began
to experience a significant recovery in their fair value as they
approached their reset dates of March 31 and April 1, respectively. At
March 31, 2005, we expected the price of these securities to continue
to increase as the market fully factored in the effects of the
dividend coupon adjustment. At June 30, 2005, the fair value of the
securities remained at low levels even after the increase in the
dividend coupon rates which led to management's judgment that the
impairment associated with these securities had become
other-than-temporary.
Despite management's intention and ability to hold these investments
through the current interest rate cycle and management's continued
expectation that the value of the securities would continue to
increase as the market and dividend coupon rates of the securities
continued to increase, management reassessed this position based on
perceived changes by the financial industry and the accounting
community relative to what was considered a reasonable recovery
period.
2. Please tell us how you determined the amounts of the $255,000 and $424,500
impairment charges and tell us how long the preferred stock was in an
unrealized loss position. Please refer to the specific relevant guidance in
SFAS No. 115 and SAB Topic 5:M in your response.
The amounts of the $255,000 and $424,500 impairment charges were
determined by calculating the difference between the cost basis of the
individual security and their fair value at the time the impairment
was judged to be other-than-temporary, as instructed in paragraph 16
of SFAS No. 115. The impairment charges were reflected in earnings as
of March 31, 2005 and June 30, 2005, respectively. For your
information, the loss on FHLMC Series L increased from $210,000 at
December 31, 2004 to $255,000 at March 31, 2005 and the loss on FHLMC
Series M & N decreased from $671,500 at December 31, 2004 to $424,500
at June 30, 2005. The preferred stocks were in an unrealized loss
position for 13 months (Series L) and 42 months (Series M & N) at the
time of their respective impairment charges.
In connection with our response, North Central Bancshares, Inc. acknowledges
that:
o The Company is responsible for the adequacy and accuracy of the disclosure
in the filing;
o Staff comments or changes to disclosure in response to Staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
o The Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of the United States.
Please do not hesitate to call me if you have any questions regarding this
response.
Very truly yours,
/s/ David M. Bradley
David M. Bradley
President and Chief Executive Officer