SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2005
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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0-27672
(Commission File Number)
NORTH CENTRAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-1449849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
825 Central Avenue, Fort Dodge, Iowa 50501
(Address of principal executive offices) (Zip Code)
(515) 576-7531
(Registrant's telephone number; including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
YES NO X
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Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES NO X
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer
Large accelerated filer Accelerated filer X Non-accelerated filer
- --- --- ---
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).
YES NO X
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The aggregate value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of the
common stock as of June 30, 2005 was $58,323,497.
As of March 6, 2006, there were issued and outstanding 1,445,053 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the registrant's 2006 Annual Meeting of
Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of
Part III hereof.
2. Portions of the 2005 Annual Report to Shareholders are incorporated by
reference into Items 7, 7A, 8 and 9 of Part II hereof.
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Table of Contents
PART I
Item 1 Business 2
Item 1A Risk Factors 26
Item 1B Unresolved SEC Comments 29
Item 2 Properties 30
Item 3 Legal Proceedings 31
Item 4 Submission of Matters to a Vote of Security Holders 31
PART II
Item 5 Market For Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 31
Item 6 Selected Financial Data 31
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation 31
Item 7A Quantitative and Qualitative Disclosures About Market Risk 31
Item 8 Financial Statements and Supplementary Data 32
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 32
Item 9A Controls and Procedures 32
Item 9B Other Information 32
PART III
Item 10 Directors and Executive Officers of the Registrant 32
Item 11 Executive Compensation 32
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions 33
PART IV
Item 14 Principal Accounting Fees and Services 33
Item 15 Exhibits, Financial Statement Schedules 34
PART I
North Central Bancshares, Inc. (the "Company") and First Federal Savings
Bank of Iowa (the "Bank") may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be contained
in this annual filing with the Securities and Exchange Commission (the "SEC"),
the Annual Report to Shareholders, other filings with the SEC, and in other
communications by the Company and the Bank, which are made in good faith
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "may", "could", "should", "would", "believe",
"anticipate", "estimate", "expect", "intend", "plan" and similar expressions are
intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties. The
following factors, many of which are subject to change based on various other
factors beyond the Company's control, and other factors discussed in this Form
10-K, as well as other factors identified in the Company's filings with the SEC
and those presented elsewhere by management from time to time, could cause its
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements:
o the strength of the United States economy in general and the strength
of the local economies in which the Company and the Bank conduct
operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and services
and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute competitors' products and
services for the Company's and the Bank's products and services;
o the Company's and the Bank's success in gaining regulatory approval of
their products and services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o the Company's and the Bank's success at managing the risks involved in
their business.
This list of important factors is not exclusive. The Company or the Bank
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 or the
Bank.
ITEM 1. BUSINESS
General
North Central Bancshares, Inc., an Iowa corporation, is the holding company
for First Federal Savings Bank of Iowa, a federally chartered savings bank. The
Company owns 100% of the outstanding stock of the Bank. The Company's stock is
quoted on the National Market System of the Nasdaq Stock Market under the symbol
"FFFD".
2
At this time, the Company conducts business as a unitary savings and loan
holding company and the principal business of the Company consists of the
operation of the Bank. The Company's executive offices are located at the home
office of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Company's
telephone number is (515) 576-7531.
First Federal Savings Bank of Iowa
The Bank is a federally chartered savings bank that conducts its operations
from its main office located in Fort Dodge, Iowa and nine branch offices located
in Iowa. Seven of the Bank's branches are located in north central and central
Iowa, in the cities of Fort Dodge, Nevada, Ames, Perry, Ankeny and Clive. Three
of the Bank's offices are located in southeast Iowa, in the cities of Burlington
and Mount Pleasant. The Bank is the successor to First Federal Savings and Loan
Association of Fort Dodge, which was chartered originally in 1954, and on May 7,
1987 became a federally chartered savings bank. The Bank adopted its present
name on February 27, 1998. The Bank is a community-oriented savings institution
that is primarily engaged in the business of attracting deposits from the
general public in the Bank's market areas, and investing such deposits in
one-to-four family residential real estate mortgages, multifamily and commercial
mortgages and, to a lesser extent, secured and unsecured consumer loans, with
emphasis on second mortgage loans. The Bank's lending activities have expanded
to include an increased emphasis on originations of construction loans. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1954. At December 31, 2005, the Bank had total assets of $485.7
million, total deposits of $335.4 million, and total shareholders' equity of
$41.0 million.
The Bank's principal executive office is located at 825 Central Avenue,
Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531. The
Bank's website address is www.firstfederaliowa.com.
Market Area and Competition
The Company is a savings and loan holding company serving its primary
market area of Webster, Story, Dallas, Polk, Henry and Des Moines Counties,
which are located in the central, north central and southeastern parts of the
State of Iowa. The Company's market area is influenced by agriculture,
manufacturing, retail sales, insurance, financial and other professional
services and public education. The Company is headquartered in Fort Dodge, the
Webster County seat, where it operates two Company locations.
The unemployment rate for the month of December 2005 for Webster County was
4.7%, for Story County 3.0%, for Dallas County 3.5%, for Polk County 4.2%, for
Henry County 6.3% and for Des Moines County 5.6%. These compare to the national
rate of 4.9% and the State of Iowa rate of 4.7%.
Due to the type of loan demand in the Company's overall market area,
increased competition, and the Company's decision to diversify its loan
portfolio, the Company has originated and purchased loans (primarily one-to
four-family, multifamily and commercial real estate loans) from out of state.
The Company intends to continue such originations and purchases pursuant to its
underwriting standards for Company-originated loans.
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks and credit
unions in its market area. Competition for loans comes from such financial
institutions as well as mortgage banking companies. The Company expects
continued strong competition in the foreseeable future. Many such institutions
have greater financial and marketing resources available to them than does the
Company. The Company competes for savings deposits by offering depositors a high
level of personal service and a wide range of
3
competitively priced financial products. In recent years, additional strong
competition has come from stock and bond dealers and brokers and, in particular,
mutual funds. The Company competes for real estate loans primarily through the
interest rates and loan fees it charges and advertising, as well as by offering
high levels of personal service.
Lending Activities
Loan Portfolio Composition. The principal components of the Company's loan
portfolio are fixed-rate and adjustable-rate first mortgage loans secured
primarily by one-to four-family owner-occupied residential real estate, fixed-
and adjustable-rate first mortgage loans secured by multifamily residential and
commercial real estate and, to a lesser extent, secured and unsecured consumer
loans, with emphasis on second mortgage real estate loans. At December 31, 2005,
the Company's total loans receivable totaled $438.6 million, of which $201.2
million, or 45.9 %, were one-to four-family residential real estate first
mortgage loans, $73.9 million, or 16.9%, were multifamily real estate first
mortgage loans, primarily purchased by the Company, $81.3 million, or 18.5%,
were commercial real estate first mortgage loans, primarily purchased by the
Company, and $21.2 million, or 4.8% were construction real estate loans.
Consumer loans, consisting primarily of automobile loans and second mortgage
loans, totaled $61.0 million, or 13.9%, of the Company's loan portfolio.
Loans to One Borrower. Savings banks, such as the Bank, are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if
any such loan or extension of credit is fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At December
31, 2005, it was the Company's policy to limit loans to one borrower to $4.0
million, with higher limits subject to board approval. In March 2006, the
Company's policy was changed, increasing the limit of loans to one borrower to
$5.5 million, with higher limits subject to board approval. These limitations
are less than regulatory requirements. At December 31, 2005, the Company's
largest aggregate outstanding loans to a single borrower or group of related
borrowers totaled $4.0 million. The Company had five other lending relationships
of over $3.0 million as of December 31, 2005. At December 31, 2005, each of
these loans were performing, pursuant to their respective terms, as of that
date.
4
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated:
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
First mortgage loans:
One-four-family residential(1).. $201,242 45.88% $179,311 42.81% $171,604 46.71% $148,751 43.17% $161,549 51.81%
Multifamily..................... 73,946 16.86 78,428 18.73 69,963 19.04 70,779 20.54 74,396 23.86
Commercial...................... 81,255 18.52 90,907 21.70 69,609 18.95 71,251 20.68 25,722 8.25
Construction.................... 21,192 4.83 14,308 3.42 2,285 0.62 - - - -
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total first mortgage loans..... 377,635 86.09 362,954 86.66 313,461 85.32 290,781 84.39 261,667 83.91
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Automobiles.................... 9,252 2.11% 9,052 2.16% 9,801 2.67% 10,115 2.94% 9,406 3.02%
Second mortgage(2)............. 44,218 10.08 39,701 9.48 37,601 10.23 38,239 11.10 35,619 11.42
Other(3)....................... 7,545 1.72 7,134 1.70 6,533 1.78 5,438 1.58 5,134 1.65
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total consumer loans.......... 61,015 13.91 55,887 13.34 53,935 14.68 53,792 15.61 50,159 16.09
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total loans receivable........ $438,650 100.00% $418,841 100.00% $367,396 100.00% $344,573 100.00% $311,826 100.00%
Less:
Undisbursed portion of
construction loans.......... $ 5,666 1.29% $ 9,114 2.18% 1,855 0.50% $ 929 0.27% 1,055 0.34%
Unearned loan (premium)
discount.................... (769) (0.18) (984) (0.24) (696) (0.19) (623) (0.18) (37) (0.01)
Net deferred loan origination
fees (costs)................ 149 0.03 160 0.04 113 0.03 3 0.00 (56) (0.02)
Allowance for loan losses..... 3,326 0.76 3,235 0.77 3,165 0.86 3,118 0.90 2,883 0.92
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total loans receivable, net. $430,278 98.10% $407,316 97.25% $362,959 98.80% $341,146 99.01% $307,981 98.77%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- -----------------------------------
(1) Includes interest-only construction loans that convert to permanent loans,
prior to 2003.
(2) Second mortgage loans included $5.0 million, $5.4 million, $4.9 million,
$4.0 million and $2.0 million of nonowner-occupied residential first
mortgage loans at December 31, 2005, 2004, 2003, 2002, and 2001,
respectively.
(3) Other consumer loans included $2.3 million, $2.8 million, $2.1 million, $1.9
million and $1.9 million of commercial mortgage loans at December 31, 2005,
2004, 2003, 2002, and 2001, respectively.
5
Loan Maturity Schedule. The following table sets forth the maturity or
period to repricing of the Company's loan portfolio at December 31, 2005.
Overdraft lines of credit are reported as due in one year or less.
Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in which they contractually mature, and
fixed rate loans are included in the period in which the final contractual
repayment is due.
At December 31, 2005
--------------------
Within 1-3 3-5 5-10 10-20 Beyond 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In thousands)
First mortgage loans:
One-to four-family
residential(1).. $37,756 $39,809 $64,781 $38,993 $34,065 1,603 $217,007
Multifamily ....... 24,064 28,570 11,651 9,660 - - 73,945
Commercial ........ 14,202 30,807 20,669 17,001 4,003 - 86,682
Consumer loans (2) .. 10,374 16,298 25,082 7,145 1,938 179 61,016
------- ------- ------- ------- ------- ------ -------
Total .......... $86,396 115,484 $122,183 $72,799 $40,006 1,782 $438,650
======= ======= ======== ======= ======= ===== ========
(1) One-to four-family loans include $35.4 million of loans with repricing
periods greater than 5 years that have been classified as fixed rate loans.
$29.3 million of these loans with repricing periods less than 5 years have
been classified as adjustable rate loans.
(2) Includes second mortgage loans of $44.2 million at December 31, 2005.
The following table sets forth the dollar amounts of all fixed rate and
adjustable rate loans in each loan category at December 31, 2005 due after
December 31, 2006.
Due After December 31, 2006
---------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
First mortgage loans:
One-to four-family residential(1)... $ 79,432 $ 99,819 $ 179,251
Multifamily......................... 9,669 40,212 49,881
Commercial.......................... 27,843 44,637 72,480
Consumer loans (2)...................... 50,253 389 50,642
--------- --------- ---------
Total............................. $ 167,197 $ 185,057 $ 352,254
========= ========= =========
- ------------------------
(1) One-to four-family loans include $35.4 million of loans with repricing
periods greater than 5 years that have been classified as fixed rate loans.
(2) Includes second mortgage loans of $42.2 million at December 31, 2005.
One-to four-family Residential Real Estate Loans. Traditionally, the
Company's primary lending activity consists of the origination of fixed- and
adjustable-rate one-to four-family owner-occupied residential first mortgage
loans, substantially all of which are collateralized by properties located in
the Company's market area. The Company also originates one-to four-family,
interest only construction loans that convert to permanent loans after an
initial construction period that generally does not exceed nine months. At
December 31, 2005, 37.7% of the Company's residential real estate loans had
fixed rates, and 62.3% had adjustable rates.
The Company originates loans for portfolio and sells loans in the secondary
mortgage market. However, the Company's one-to four-family, fixed-rate,
residential real estate loans originated for portfolio are generally originated
and underwritten according to standards that qualify such loans to be included
in Freddie Mac and Fannie Mae purchase and guarantee programs and that otherwise
permit resale in the secondary mortgage market. The Company has sold fixed-rate
loans with maturities in excess of 15 years in the secondary mortgage market.
For the year ended December 31, 2005, the Company sold $19.5 million of one-to
four-family residential mortgage loans, generally to lower the Company's
interest rate risk. One-to four-family portfolio loans are underwritten and
originated according to policies approved by the board of directors.
6
Originations of one-to four-family fixed-rate first mortgage loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, the Company's interest rate gap position, and loan
products offered by the Company's competitors. The Company's one-to four-family
fixed-rate first mortgage loans amortize on a monthly basis with principal and
interest due each month. The Company also offers one-to four-family
adjustable-rate first mortgage loans that convert to adjustable-rate loans that
adjust on an annual basis after the initial fixed rate term. The initial fixed
rate term of these loans are primarily 5 and 7 years and the overall maturity of
these loans may be up to 30 years. The Company determines whether a customer
qualifies for these loans based upon the initial fixed interest rate.
The Company's adjustable rate mortgage loans, or "ARM loans," are generally
originated for terms of up to 30 years, with interest rates that adjust annually
after an initial fixed rate period. The Company establishes various annual and
life-of-the-loan caps on ARM loan interest rate adjustments. At December 31,
2005, the Company generally offered ARM loans with annual rate caps of 2.00% and
maximum life-of-loan caps of 6.00% above the beginning rate. At present, the
interest rate on its ARM loans is calculated by using the weekly average yield
on United States Treasury Securities adjusted to a constant maturity of one
year. In addition, the Company establishes floors for each loan originated below
which the loan may not adjust. One-to four-family residential ARM loans totaled
$135.3 million, or 30.8%, of the Company's total loan portfolio at December 31,
2005.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Company's credit risk associated with its ARM loans is reduced because
of the annual and lifetime interest rate adjustment limitations on such loans,
although such limitations do create an element of interest rate risk. See Item
7A. "Discussion of Market Risk Interest Rate Sensitivity Analysis" in the 2005
Annual Report to Shareholders, which is attached to this Form 10-K as Exhibit
13.1 and incorporated herein by reference.
The Company's one-to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings institution may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. The Company originates one-to
four-family residential mortgage loans with terms up to a maximum of 30 years
and with loan-to-value ratios up to 103% of the lesser of the appraised value of
the security property or the contract price. The Company generally requires that
private mortgage insurance be obtained in an amount sufficient to reduce the
Company's exposure to be at or below the 80% loan-to-value level. The Company
requires fire and casualty insurance, flood insurance, where applicable, an
abstract of title, and a title opinion on all properties securing real estate
loans originated by the Company.
Multifamily Residential and Commercial Real Estate Loans. The Company's
loan portfolio contains loans secured by multifamily residential and commercial
real estate. Such loans constituted approximately $160.6 million, or 36.6%, of
the Company's total loan portfolio at December 31, 2005. Of such loans, $128.0
million, or 79.7%, were purchased or originated by the Company and were secured
by properties outside the State of Iowa (the "out of state" properties). The
multifamily and commercial real estate loans are primarily secured by
multifamily residences such as apartment buildings and by commercial facilities
such as office buildings and retail buildings. Multifamily residential and
commercial real estate loans are offered with fixed and adjustable rates and are
structured in a number of different ways depending upon the circumstances of the
borrower and the type of project. See "Purchased or Out of State Originated
Loans".
All purchased or out of state originated multifamily or commercial real
estate loans in excess of $1.0 million are approved by the chief executive
officer, chief operating officer and the board of directors and are subject to
the same underwriting standards as for loans originated by the Company. All out
of state originated loans less than $1.0 million are approved by the chief
executive officer and chief operating officer and ratified by the board of
directors and are subject to the same underwriting standards as loans originated
by the Company. Before a loan is purchased, the Company obtains copies of the
original loan application, certified rent rolls, the original title insurance
policy, the original appraisal and personal financial statements of any
guarantors of the loan. An executive officer of the Company also makes a
personal inspection of the property securing the loan. Such purchases are made
without recourse to the seller. $15.9 million, or 12.4%, of out of state
multifamily and commercial real estate loans are serviced by the Bank. $112.1
million, or 87.6%, of the out of state multifamily and commercial real estate
loans are serviced by the originating financial institution or mortgage company.
At
7
December 31, 2005, the Company imposed a $3.0 million limit on the aggregate
size of multifamily and commercial loans to any one borrower for loans secured
by real estate located outside the State of Iowa. A $4.0 million limit on the
aggregate size of multifamily and commercial loans to one borrower applied to
loans secured by real estate located in Iowa. Any exceptions to the limit must
be specifically approved by the board of directors on a loan-by-loan basis
within the Company's legal lending limit. See "Regulation - Regulation of
Federal Savings Associations - Loans to One Borrower".
Loans secured by multifamily and commercial real estate generally involve a
greater degree of credit risk than single-family residential mortgage loans and
typically, such loans also have larger loan balances. This increased credit risk
is a result of several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily and commercial real estate is typically dependent
upon the successful operation of the related real estate property. If the cash
flow from such real estate projects is reduced, the borrower's ability to repay
the loan may be impaired. As a result, these types of loans present greater
potential loan delinquencies and loan losses than single-family residential
loans.
Construction Lending. The Company makes construction loans to individuals
for the construction of their residences as well as to builders for the
construction of one-to four-family residences and commercial and multi-family
real estate. At December 31, 2005, the Company's construction loan portfolio
totaled $21.2 million, or 4.8%, of the Company's total loan portfolio.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs up to twelve months. These construction loans have rates and
terms which generally match the one-to four-family ARM loan rates then offered
by the Company, except that during the construction phase the borrower pays
interest only. Generally, the maximum loan-to-value ratio of owner occupied
single family construction loans is 80% of appraised value. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans.
Generally, construction loans to builders of one- to four-family residences
require the payment of interest only for up to 12 months and have terms of up to
12 months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry adjustable rates of interest. At December 31, 2005,
the Company had $15.8 million of one-to four-family construction loans.
Construction loans on commercial and multi-family real estate projects may
be secured by apartments, small office buildings, strip retail centers, or other
property, and are generally structured to be converted to permanent loans at the
end of the construction phase, which generally runs up to 12 months. During the
construction phase the borrower pays interest only. These loans generally
provide for the payment of interest and loan fees from loan proceeds. At
December 31, 2005, the Company had approximately $5.4 million of loans for the
construction of commercial real estate.
Construction loans are obtained principally through continued business from
builders who have previously borrowed from the Company and from new or existing
customers who are building new facilities. The application process includes a
submission to the Company of accurate plans, specifications, and costs of the
project to be constructed and projected revenues from the project. These items
are also used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of the current appraised value of the
property or the cost of construction (land plus building).
Because of the uncertainties inherent in estimating construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.
Consumer Loans, Including Second Mortgage Loans. The Company also
originates consumer loans, which consists primarily of one-to four-family second
mortgage loans, including home equity lines of credit. As of December 31, 2005,
consumer loans totaled $61.0 million, of which second mortgage loans totaled
$44.2 million, or 10.1%, of the Company's total loan portfolio. The Company's
second mortgage loans generally have fixed interest rates for terms of 3 to 5
years. The Company's home equity lines of credit are adjustable rate loans with
terms up to ten years. The Company's second mortgage loans are generally secured
by the borrower's principal residence with a maximum loan-to-value ratio,
including the principal balances of both the first and second mortgage loans, of
generally no more than 90%. In recent years the Company has begun originating
one-to four-family second mortgage loans of up to 100%. These type loans are
subject to stricter underwriting
8
guidelines. Generally, loans in excess of 90% loan-to-value are insured through
a pool insurance product, unless the loan has secondary collateral. The average
principal amount of the Company's second mortgage loans is approximately
$19,500.
To a lesser extent, the Company also originates loans secured by
automobiles, with fixed rates generally up to 90% loan-to-value basis for new
cars. All of the Company's automobile loans were originated by the Company and
generally have terms of up to five years. At December 31, 2005, automobile loans
totaled $9.3 million, or 2.1%, of the Company's total loan portfolio.
In addition, the Company also makes other types of consumer loans,
including unsecured signature loans for various purposes. At December 31, 2005,
other consumer loans totaled $7.5 million, or 1.7%, of the Company's total loan
portfolio. Included in the other consumer loans are unsecured consumer loans
which totaled $654,000, or 0.15 %, of the Company's total loan portfolio. The
minimum loan amount for unsecured signature loans is $2,000, the maximum loan
amount for such loans is generally $7,500, and the average balance of such loans
is approximately $2,300.
The Company originates a limited number of commercial business loans, which
the Company includes with its consumer loan portfolio for reporting purposes.
Such loans are generally secured and are originated for any business purpose,
such as for the purchase of business equipment.
The Company's business plan calls for an increase in consumer lending for
the foreseeable future, particularly second mortgage lending. The Company
expects consumer loan demand will come from its existing customer base. Consumer
loans generally provide for shorter terms and higher yields as compared to
residential first mortgage loans, but generally carry higher risks of default.
At December 31, 2005, $196,000, or 0.32%, of the Company's consumer loan
portfolio was on non-accrual status.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, and walk-in customers. Upon
receiving a loan application, the Company obtains a credit report and employment
verification to verify specific information relating to the applicant's
employment, income, and credit standing. In the case of a real estate loan, an
appraiser approved by the Company appraises the real estate intended to
collateralize the proposed loan. An underwriter in the Company's loan department
reviews the loan application file for accuracy and completeness, and verifies
the information provided. Pursuant to the Company's written loan policies, two
members of management, including at least one member of senior management,
approves all first mortgage loans. The loan committee of the board of directors
meets quarterly to review a sampling of all loans originated in the previous
three months.
After a loan is approved, a loan commitment letter is promptly issued to
the borrower. The commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, and amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 60-day periods in the case of
loans to refinance, loans to purchase existing real estate, and construction
loans. The borrower must provide proof of fire and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. At December 31, 2005, the Company had outstanding
commitments to originate $2.5 million of loans. This amount does not include
commitments to purchase loans, undisbursed overdraft loan privileges,
undisbursed home equity lines of credit or the unfunded portion of loans in
process.
Purchased or Out of State Originated Loans. The Company's loan portfolio
contains $143.1 million of loans secured by out of state properties. These loans
represented 32.6% of the Company's total loan portfolio at December 31, 2005.
All of the one-to four-family, multifamily residential and commercial real
estate loans in the Company's loan portfolio, which are purchased out of state
by the Company, are without recourse to the seller. At December 31, 2005, the
Company's purchased multifamily residential and commercial real estate loans had
an average balance of $742,000 and the largest loan had a principal balance of
$2.96 million. As of December 31, 2005, there were no multifamily or commercial
real estate loans that were more than 90 days past due.
To supplement its origination of one-to four-family first mortgage loans,
the Company also purchases first mortgage loans secured by one-to four-family
residences. At December 31, 2005, $15.5 million, or 3.5%, of the Company's total
loan portfolio consisted of purchased one-to four-family loans. As of December
31, 2005, there were no purchased one-to four-family first mortgage loans that
were more than 90 days past due.
Loans purchased by the Company entail certain risks not necessarily
associated with loans the Company originates. The Company's purchased loans are
generally acquired without recourse against the seller. $23.4 million, or 14.5%,
of purchased loans are serviced by the Bank. $137.6 million, or 85.5%, of
purchased loans are serviced by the originating
9
financial institution or mortgage company. Although the Company reviews each
purchased loan using the Company's underwriting criteria for originations and a
Company officer performs an on-site inspection of each purchased multifamily and
commercial real estate loan, the Company is dependent on the servicer of the
loan for ongoing collection efforts and collateral review. In addition, the
Company purchases loans with a variety of terms, including maturities, interest
rate caps and indices for adjustment of interest rates that may differ from
those offered at the time by the Company in connection with loans the Company
originates. Finally, the market areas in which the properties which secure the
purchased loans are located are subject to economic and real estate market
conditions that may significantly differ from those experienced in the Company's
market areas. If economic conditions continue to limit the Company's
opportunities to originate loans in its market areas, the Company may increase
its investment in out of state mortgage loans. There can be no assurance,
however, that economic conditions in these out of state areas will not
deteriorate in the future resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.
In an effort to reduce the risk of loss on out of state purchased loans,
the Company generally purchases loans that meet the underwriting policies for
loans originated by the Company although specific rates and terms may differ
from the rates and terms offered by the Company. The Company requires
appropriate documentation, and personal inspections of the underlying real
estate collateral by an executive officer prior to purchase. The Company limits
its out of state loan portfolio concentration within a single state to 10% of
the Bank's total assets. The Company also limits its loan portfolio
concentration to a single servicer to 10% of the Bank's total assets.
Set forth below is a table of the Company's out of state purchased or
originated loans by state of origin (including multifamily residential,
commercial real estate and one-to four-family first mortgage loans) as of
December 31, 2005.
Balance as of Percentage as of
State December 31, 2005 December 31, 2005
----- ----------------- -----------------
(In thousands)
California $ 23,960 16.7%
Washington 22,107 15.5
Wisconsin 15,272 10.7
Colorado 11,419 8.0
Missouri 11,275 7.9
Oregon 10,760 7.5
Minnesota 9,992 7.0
Nebraska 7,536 5.3
Illinois 4,883 3.4
South Carolina 4,059 2.8
Ohio 3,673 2.6
Texas 3,491 2.4
Indiana 3,014 2.1
Michigan 2,469 1.7
Arizona 2,382 1.7
Utah 1,883 1.3
Kansas 1,765 1.2
South Dakota 1,667 1.2
Nevada 1,043 0.7
North Carolina 449 0.3
Georgia 2 0.0
----------- ---------
Total $ 143,101 100.0%
=========== =========
10
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations, purchases and sales of loans for the periods indicated.
For the Years Ended
December 31,
2005 2004 2003
---- ---- ----
(In thousands)
Total loans receivable at beginning of period... $ 418,841 $ 367,396 $ 344,574
---------- --------- ----------
Originations:
First mortgage loans:
One-to four-family residential............... 74,583 64,771 117,916
Multifamily.................................. - 4,720 3,491
Commercial................................... 8,455 3,924 1,244
Consumer loans:
Automobile................................... 7,095 6,246 7,288
Second mortgage ............................. 24,779 21,709 25,857
Other........................................ 4,208 6,115 4,482
---------- --------- ----------
Total originations:........................ 119,120 107,485 160,278
Loan Purchases:
First mortgage one-to four-family............ 1,579 1,769 13,001
First mortgage multifamily................... 9,983 19,907 20,545
First mortgage commercial.................... 12,462 31,049 11,540
Loan Sales:
First mortgage - one-to- four family......... (19,488) (17,805) (48,188)
Transfer of mortgage loans (to)
foreclosed real estate....................... (840) (335) (954)
Repayments...................................... (103,007) (90,625) (133,400)
---------- --------- ----------
Net loan activity............................... 19,809 51,445 22,822
---------- --------- ----------
Total loans receivable at end of period.... $ 438,650 $ 418,841 $ 367,396
========== ========= ==========
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using an interest method over the contractual life of the loan. Net
deferred fees and costs are recognized into income immediately upon prepayment
of the related loan. At December 31, 2005, the Company had $149,000 of deferred
loan origination fees, net. Such fees vary with the type of loans and
commitments made. The Company typically charges a document preparation fee on
fixed- and adjustable-rate first mortgage loans. In addition to loan origination
fees, the Company also receives other fees, service charges (such as overdraft
fees), and other income that consist primarily of deposit transaction account
service charges and late charges and loan prepayment fees. The Company
recognized fees and service charges of $4.5 million, $3.1 million and $2.9
million for the fiscal years ended December 31, 2005, 2004 and 2003,
respectively.
Investment Activities
At December 31, 2005, the Company's investment portfolio is comprised of
state and local obligations, mortgage-backed securities, mutual funds,
interest-bearing deposits and equity securities consisting of Freddie Mac
preferred stocks, Fannie Mae preferred stock, Federal Home Loan Bank stock and
other common stock. At December 31, 2005, $610,000, or 18.1%, of the Company's
investment portfolio, excluding mortgage-backed securities, mutual funds and
equity securities, was scheduled to mature in one year or less, $1.7 million, or
50.5%, was scheduled to mature within one to five years, and $1.1 million, or
31.4%, was scheduled to mature in more than five years.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future, as well
as management's projections as to the short term demand for funds to be used in
the Company's loan origination and other activities. In addition, the Company's
liquidity levels are affected by the level and source of its borrowed funds.
11
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment portfolio at the dates indicated.
At December 31,
2005 2004 2003
---- ---- ----
(In thousands)
Investment securities:
U.S. Government agencies (1)...... $ - $ - $ -
Mortgage-backed securities........ 4,255 6,044 9,023
State and local obligations (1)... 3,366 4,497 5,133
FHLB stock........................ 5,250 5,045 4,778
Mutual funds...................... 1,950 1,976 1,989
Equity securities(2).............. 5,887 5,544 6,029
-------- -------- --------
Total investment securities..... 20,708 23,106 26,952
Interest-earning deposits......... 552 604 1,345
-------- -------- --------
Total investments............... $ 21,260 $ 23,710 $ 28,297
======== ======== ========
---------------------------------------------
(1) Certain securities have call features which allow the issuer to call
the security prior to maturity date.
(2) Certain securities have call features which allow the issuer to call
the security.
12
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 2005.
At December 31, 2005
--------------------
One Year or Less One to Five Years Five to Ten Years Over Ten Years
---------------- ----------------- ----------------- --------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Investment securities:
Mortgage-backed securities $ - -% $ 253 5.81% $ 393 5.83% $ 3,609 3.87%
State and local obligations(1) 611 4.95 1,699 4.25 572 5.13 484 6.00
Mutual funds.................. - - - - - - - -
FHLB stock.................... - - - - - - - -
Common stock.................. - - - - - - - -
Preferred stock-Fannie Mae(2) - - - - - - - -
Preferred stock-Freddie Mac(2) - - - - - - - -
------- ------- -------- ------- -------- ------- -------- -------
Total securities
available-for-sale...... $ 611 4.95% $ 1,952 4.45% $ 965 5.42% $ 4,093 4.12%
Interest-bearing deposits...... 552 3.23 - - - - - -
------ ------ -------- ------- ------- ------- ------- -------
Total investments......... $ 1,163 4.13% $ 1,952 4.45% $ 965 5.42% $ 4,093 4.12%
======= ======= ======== ======= ======= ======= ======== =======
At December 31, 2005
--------------------
Total
-----
Annualized
Average Weighted
Carrying Fair Life in Average
Value Value Years Yield
------- ----- ----- -----
(Dollars in thousands)
Investment securities:
Mortgage-backed securities $ 4,255 $ 4,255 3 4.17%
State and local obligations(1) 3,366 3,366 3 4.78
Mutual funds.................. 1,950 1,950 4.05
FHLB stock.................... 5,250 5,250 2.80
Common stock.................. 7 7 -
Preferred stock-Fannie Mae(2) 1,000 1,000 5.81
Preferred stock-Freddie Mac(2) 4,880 4,880 5.06
-------- -------- -------
Total securities
available-for-sale...... $ 20,708 $ 20,708 4.20%
Interest-bearing deposits...... 552 552 3.23
-------- -------- -------
Total investments......... $ 21,260 $ 21,260 4.17%
======== ======== =======
(1) Certain securities have call features which allow the issuer to call the
security prior to maturity date.
(2) Certain securities have call features which allow the issuer to call the
security.
13
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from FHLB advances, the amortization and prepayment of loans, the maturity
and calls of investment securities and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. The Company uses short-term borrowings to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
Deposits. During 2005, consumer and commercial deposits were attracted
principally from within the Company's market area through the offering of a
broad selection of deposit instruments including noninterst-bearing demand
accounts, NOW accounts, savings accounts, money market savings, certificates of
deposit, including brokered certificates of deposits and individual retirement
accounts. Deposit account terms vary according to the minimum balance required,
the period of time during which the funds must remain on deposit, and the
interest rate, among other factors. The maximum rate of interest which the
Company may pay is not established by regulatory authority. The Company
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Company's cash flow requirements for lending
and liquidity, and executes rate changes when deemed appropriate. Public fund
deposits totaled $1.8 million at December 31, 2005, a reduction of $610,000 from
December 31, 2004. Beginning fiscal year 2004, the Company's Board approved
acceptance of deposits through brokers, through a solicitation of funds, and by
offering negotiated rates on certificates of deposit in excess of $100,000. As
of December 1, 2005, the Company had $4.0 million in brokered certificates of
deposit.
Deposit Portfolio. Deposits with the Company as of December 31, 2005, were
represented by the various types of deposit programs described below.
Weighted Percentage
Average Checking and Minimum of Total
Interest Rate Original Term Savings Deposits Balance Balances Deposits
- ------------- ------------- ---------------- ------- -------- --------
(Dollars in
thousands)
0.00% None Noninterest-bearing demand $ 50 $ 12,186 3.6%
0.19 None NOW accounts 50 49,242 14.7
0.32 None Savings accounts 25 27,048 8.1
2.16 None Money Market savings 2,500 44,841 13.4
-------- ----
Total non-maturing deposits 133,317 39.8
Certificates of Deposit
-----------------------
2.27 1-3 months Fixed term, fixed rate $ 1,000 $ 291 0.1
2.59 4-6 months Fixed term, fixed rate 1,000 1,542 0.5
3.44 7-9 months Fixed term, fixed rate 1,000 5,417 1.6
3.59 10-12 months Fixed term, fixed rate 1,000 24,596 7.4
3.43 13-24 months Fixed term, fixed rate 1,000 69,505 20.8
3.19 25-36 months Fixed term, fixed rate 1,000 29,878 8.9
3.83 37-48 months Fixed term, fixed rate 1,000 1,937 0.6
4.46 49-60 months Fixed term, fixed rate 1,000 64,771 19.4
5.23 61 months or greater Fixed term, fixed rate 1,000 3,084 0.9
------- ------
Total certificate of deposits 201,021 60.2
------- ------
Total deposits $334,338 100.0%
======== ======
14
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Company between the
dates indicated.
Increase Increase Increase Increase
Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance
12/31/05 % $ 12/31/04 % $ 12/31/03
-------- --------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
Noninterest bearing demand.. $ 12,186 11.35% $ 1,242 $ 10,944 19.46% $ 1,783 $ 9,161
NOW......................... 49,242 4.15 1,960 47,282 13.65 5,680 41,602
Savings account ............ 27,048 (5.38) (1,538) 28,586 2.96 821 27,765
Money market savings........ 44,841 (2.51) (1,153) 45,994 78.38 20,209 25,785
Certificates of deposit
that mature:
within 12 months........ 106,717 33.54 26,805 79,912 (13.76) (12,748) 92,660
within 12-36 months..... 71,973 (9.53) (7,582) 79,555 41.39 23,287 56,268
beyond 36 months........ 22,331 (7.19) (1,730) 24,061 (21.68) (6,662) 30,723
---------- ----------- ---------- ---------- -------- ---------- ----------
Total................. $ 334,338 5.69% $ 18,004 $ 316,334 11.40% $ 32,370 $ 283,964
========== ========== ========== ========== ======== ========== ==========
Increase Increase Increase Increase
Balance (Decrease) Decrease) Balance (Decrease) (Decrease) Balance
12/31/03 % $ 12/31/02 % $ 12/31/01
-------- ----------- --------- -------- -------- ---------- ----------
(Dollars in thousands)
Noninterest bearing demand.. $ 9,161 12.32% $ 1,005 $ 8,156 18.82% $ 1,292 $ 6,864
NOW......................... 41,602 14.37 5,228 36,374 7.72 2,607 33,767
Passbook savings............ 27,765 8.06 2,072 25,693 17.44 3,815 21,878
Money market savings........ 25,785 8.58 2,037 23,748 (15.48) (4,348) 28,096
Certificates of deposit
that mature:
within 12 months........ 92,660 36.52 24,788 67,872 (28.33) (26,833) 94,705
within 12-36 months..... 56,268 (24.83) (18,587) 74,855 41.16 21,828 53,027
beyond 36 months........ 30,723 (23.77) (9,579) 40,302 32.24 9,825 30,477
---------- ---------- --------- ---------- -------- ---------- ----------
Total................ $ 283,964 2.51% $ 6,964 $ 277,000 3.05% $ 8,186 $ 268,814
========== ========= ======== ========== ======== ========== ==========
15
The following table sets forth the certificates of deposit in the
Company classified by rates as of the dates indicated:
At December 31,
2005 2004 2003
---- ---- ----
(In thousands)
Rate
1.99% or less...... $ 3,747 $ 25,555 $ 24,608
2.00-2.99%......... 50,257 77,070 44,391
3.00-3.99%......... 72,508 27,977 26,627
4.00-5.99%......... 69,999 37,685 66,580
6.00-7.99%......... 4,510 15,241 17,445
----------- ----------- -----------
$ 201,021 $ 183,528 $ 179,651
=========== =========== ===========
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 2005.
Amount Due
Less
Than 1 1-2 2-3 3-4 4-5 After 5
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In thousands)
Rate
1.99% or less.... $ 3,403 $ 335 $ 8 $ - $ 1 $ - $ 3,747
2.00-2.99%....... 38,574 9,767 1,548 368 - - 50,257
3.00-3.99%....... 35,692 13,354 7,312 11,226 4,924 - 72,508
4.00-5.99%....... 24,627 34,184 5,376 956 4,813 43 69,999
6.00-7.99%....... 4,421 89 - - - - 4,510
--------- ------- ------- ------- ------- ------- --------
$ 106,717 $57,729 $14,244 $12,550 $ 9,738 $ 43 $201,021
========= ======= ======= ======= ======= ======= ========
The following table indicates the amount of the Company's certificates of
deposit greater than $100,000 by time remaining until maturity at December 31,
2005. This amount does not include savings accounts of greater than $100,000,
which totaled approximately $1.2 million at December 31, 2005.
Certificates
of Deposit over
Remaining Maturity $100,000
- --------------------------------------------------- --------------------
(In thousands)
Three months or less............................... $ 3,525
Three through six months........................... 3,638
Six through twelve months.......................... 11,860
Over twelve months................................. 9,225
---------
Total............................................ $ 28,248
=========
16
The following table sets forth the changes in deposits of the Company for
the periods indicated:
Year Ended December 31,
2005 2004 2003
---- ---- ----
(In thousands)
Net increase (decrease) before interest
credited.............................. $ 11,330 $ 26,633 $ 607
Interest credited......................... 6,674 5,737 6,357
---------- ---------- ----------
Net increase in deposits.............. $ 18,004 $ 32,370 $ 6,964
========== ========== ==========
Borrowings
Deposits are the Company's primary source of funds. The Company may also
obtain funds from the Federal Home Loan Bank. FHLB advances are collateralized
by selected assets of the Company. Such advances are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the Office of
Thrift Supervision ("OTS") and the FHLB. The maximum amount of FHLB advances to
a member institution generally is reduced by borrowings from any other source.
For the
Year Ended December 31,
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Weighted average rate paid on:
FHLB advances...................... 4.59% 4.51% 4.63%
FHLB advances:
Maximum balance.................... $ 111,446 $ 103,979 $ 103,021
Average balance.................... 102,223 97,833 96,904
Weighted average rate paid on:
Other borrowings................... 1.00% 1.00% 1.00%
Other borrowings:
Maximum balance.................... $ 13 $ 17 $ 21
Average balance.................... 11 15 19
Title Abstract Business
A component of the Company's operating strategy to increase non-interest
income is through the abstract company business conducted through a wholly owned
subsidiary of the Bank, First Iowa Title Services, Inc. ("First Iowa"). First
Iowa currently provides real estate title abstracting services in Webster, Boone
and Jasper counties. These services include researching recorded documents at
the county courthouse and providing a history of those documents as they pertain
to specific parcels of real estate. This information is used to determine who
owns specific parcels of real estate and what encumbrances are on those specific
parcels. The abstract business performed by First Iowa replaces a significant
portion of the function of a title insurance company. Iowa law prohibits Iowa
insurance companies or companies authorized to do business in Iowa from issuing
title insurance or insurance against loss or damage by reason of defective
title, encumbrance or otherwise. Institutions can purchase title insurance, for
their own protection or to sell loans on the secondary market. First Iowa had 13
employees as of December 31, 2005.
Insurance and Annuity Business
Another component of the Company's operating strategy to increase
non-interest income is through First Federal Investment Services, Inc. ("First
Federal Investments"), a wholly owned subsidiary of the Bank. First Federal
Investments' activities include the sale of life insurance on mortgage loans,
and credit life and accident and health insurance on consumer loans made by the
Company. In addition, First Federal Investments sells life insurance, annuity
products, mutual funds and other noninsured products. First Federal Investments
had four employees as of December 31, 2005.
17
Mortgage Company Business
First Iowa Mortgage, Inc. is a wholly-owned subsidiary of the Bank. First
Iowa Mortgage, Inc. originated first mortgage loans and subsequently sold these
loans and the mortgage servicing rights to investors. First Iowa Mortgage, Inc.
currently is inactive and these services are provided by the Bank.
Multifamily Apartment Buildings
On July 13, 1995, the Company formed the Northridge Apartments Limited
Partnership, a subsidiary of the Bank, with the Fort Dodge Housing Corporation
("FDHC"), a non-profit Iowa corporation formed to acquire, develop and manage
low- and moderate-income housing for residents of the Fort Dodge area. The FDHC
is controlled by the Fort Dodge Municipal Housing Agency, an agency chartered by
the City of Fort Dodge. The Northridge Partnership is a low-income housing tax
credit project for certain federal tax purposes. A 44-unit apartment complex was
completed on February 1, 1997. The tax credits for the year ended December 31,
2005 were approximately $151,000. The tax credits will continue for an
additional 1.3 year period.
On October 24, 1996, the Company formed the Northridge Apartments Limited
Partnership II, a subsidiary of the Bank, to acquire, develop and manage low-
and moderate-income housing for residents of the Fort Dodge area. Northridge
Partnership II was awarded low-income housing tax credits in 2002 by the Iowa
Finance Authority. These credits were awarded to construct a 23-unit apartment
building in Fort Dodge, Iowa, which was completed on March 31, 2003. The tax
credits for the year ended December 31, 2005 were approximately $127,000. The
tax credits will continue for an additional 7.3 year period. In addition, this
building is located in an area designated as a state enterprise zone. A State of
Iowa one time income tax credit of approximately $166,000 was awarded for the
year ended December 31, 2003.
Personnel
At December 31, 2005, the Company had 119 full-time and 32 part-time
employees (including the 13 employees of First Iowa and the 4 employees of First
Federal Investments). None of the Company's employees are represented by a
collective bargaining group. The Company believes its relationship with its
employees to be good.
18
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company. For federal income tax purposes, the Company, the
Bank and the Bank's subsidiaries will be eligible to file consolidated income
tax returns and report their income on a calendar year basis using the accrual
method of accounting and are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly the
Bank's tax reserve for bad debts, discussed below. The Company and the Bank are
not currently under audit by the IRS and have not been audited for the past five
years.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to loans and to make, within specified formula
limits, annual additions to the reserve which are deductible for purposes of
computing the Bank's taxable income. Pursuant to the Small Business Job
Protection Act of 1996, the Bank has now recaptured (and taken into income) over
a multi-year period a portion of the balance of its bad debt reserve as of
December 31, 1995.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve", i.e. its reserve as of
December 31, 1987, to the extent thereof and then from its supplemental reserve
for losses on loans, and an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute nondividend distributions and, therefore, will not be
included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, in some situations,
approximately one and one-half times the nondividend distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
federal corporate income tax rate. We do not intend to pay distributions that
would result in the recapture of any portion of our bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by AMTI minimum tax net operating loss
carryovers, of which there is none. AMTI is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. The Company does not
expect to be subject to the AMT.
Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.
State and Local Taxation
Iowa and Colorado Taxation. The Company and the Bank's subsidiaries file
Iowa corporation tax returns and the Bank files an Iowa franchise and Colorado
income tax return.
The State of Iowa imposes a tax on the Iowa franchise taxable income of
thrift institutions at the rate of 5%. Iowa franchise taxable income is
generally similar to federal taxable income except that interest from state and
municipal obligations is taxable, and no deduction is allowed for state
franchise taxes. The net operating loss carryback and carryforward rules are
similar to the federal rules.
The state corporation income tax rate ranges from 6% to 12% depending upon
Iowa corporation taxable income. Interest from federal securities is not taxable
for purposes of the Iowa corporation income tax.
19
REGULATION
General
North Central Bancshares, Inc. is regulated as a savings and loan holding
company by the Office of Thrift Supervision ("OTS"). First Federal Savings Bank
of Iowa, as a federal savings bank, is subject to regulation, examination and
supervision by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
The Bank must file reports with the OTS concerning its activities and financial
condition. The Company is also required to file reports with, and otherwise
comply with, the rules and regulations of the OTS and of the SEC under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the Bank's capital levels, classification of assets and
establishment of adequate loan loss reserves for regulatory purposes. Any change
in such policies, whether by the OTS, the FDIC, SEC or the Congress, could have
a material adverse impact on the Company, the Bank, and their operations and
stockholders.
Regulation of Federal Savings Associations
Business Activities. The Bank derives its lending and investment powers
from the Home Owners' Loan Act, as amended (the "HOLA"), and OTS regulations.
Under these laws and regulations, the Bank may invest in mortgage loans secured
by residential and commercial real estate, commercial and consumer loans,
certain types of debt securities, and certain other assets. The Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. The Bank's authority to invest in certain
types of loans or other investments is limited by federal law and regulation.
Loans to One Borrower. The Bank is generally subject to the same limits
on loans to one borrower as a national bank. With specified exceptions, the
Bank's total loans or extensions of credit to a single borrower cannot exceed
15% of the Bank's unimpaired capital and surplus which does not include
accumulated other comprehensive income. The Bank may lend additional amounts up
to 10% of its unimpaired capital and surplus which does not include accumulated
other comprehensive income, if the loans or extensions of credit are
fully-secured by readily-marketable collateral. The Bank currently complies with
applicable loans-to-one borrower limitations.
QTL Test. Under federal law, the Bank must comply with the qualified thrift
lender or "QTL" test. Under the QTL test, the Bank is required to maintain at
least 65% of its "portfolio assets" in certain "qualified thrift investments" in
at least nine months of the most recent 12-month period. "Portfolio assets"
means, in general, the Bank's total assets less the sum of:
o specified liquid assets up to 20% of total assets;
o goodwill and other intangible assets; and
o the value of property used to conduct the Bank's business
The Bank may also satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
The Bank met the QTL test at December 31, 2005, and in each of the prior 12
months, and, therefore, is a "qualified thrift lender."
If the Bank fails the QTL test it must promptly come into compliance,
operate under certain restrictions on its activities or convert to a bank
charter.
Capital Requirements. OTS regulations require the Bank to meet three
minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations;
(2) a leverage ratio requirement of 3.0% of core capital to such adjusted
total assets, if a savings association has been assigned the highest
composite rating of 1 under the Uniform Financial Institutions Rating
System; and
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(3) a risk-based capital ratio requirement of 8.0% of core and
supplementary capital to total risk-based assets, provided that the
amount of supplementary capital used to satisfy this requirement shall
not exceed the amount of core capital.
The minimum leverage capital ratio for any other depository institution
that does not have a composite rating of 1 will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. 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 and certain other assets to 100%
for consumer, commercial, home equity and constructions loans and certain other
assets, as assigned by the OTS capital regulations based on the risks found by
the OTS to be inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles assets (other than certain servicing
rights and nonsecurity financial instruments) and investments in and loans to
subsidiaries engaged in activities not permissible for a national bank. Core
capital (or tier 1 capital) is defined similarly to tangible capital, but core
capital also includes certain qualifying supervisory goodwill and certain
purchased credit card relationships. Supplementary capital (or tier 2 capital)
includes cumulative and other preferred stock, mandatory convertible debt
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. In addition, up to 45% of unrealized gains on
available-for-sale equity securities with a readily determinable fair value may
be included in tier 2 capital. The allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets.
At December 31, 2005, the Bank met and exceeded each of its capital
requirements. The table below presents the Bank's regulatory capital as compared
to the OTS regulatory capital requirements at December 31, 2005:
Capital
Bank Requirements Excess Capital
---- ------------ --------------
(In thousands)
Tangible capital......... $35,084 $ 7,210 $27,874
Core capital............. 35,084 14,419 20,665
Risk-based capital....... 38,361 25,882 12,479
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for the
Bank, nor does it limit the Bank's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of the Bank, to assess the association's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications by the Bank. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The Bank received
the highest rating of "Outstanding" in its most recent examination.
CRA regulations rate an institution based on its actual performance in
meeting community needs. In particular, the assessment system focuses on three
tests:
o a lending test, to evaluate the institution's record of making loans
in its assessment areas;
o an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses in its
assessment area, or a broader area that includes its assessment areas;
and
o a service test, to evaluate the institution's delivery of services
through its retail banking channels and the extent and innovateness of
its community development services.
Transactions with Affiliates. The Bank's authority to engage in
transactions with its affiliates is limited by the OTS regulations, the Federal
Reserve Board's Regulation W and Sections 23A and 23B of the Federal Reserve Act
(the "FRA"). In general, these transactions must be on terms which are as
favorable to the Bank as comparable transactions with non-
21
affiliates. In addition, certain types of these transactions referred to as
"covered transactions" are subject to quantitative limits based on a percentage
of the Bank's capital, thereby restricting the total dollar amount of
transactions the Bank may engage in with each individual affiliate and with all
affiliates in the aggregate. Affiliates must pledge qualifying collateral in
amounts between 100% and 130% of the covered transaction in order to receive
loans from the Bank. In addition, applicable regulations prohibit a savings
association from lending to any of its affiliates that engage in activities that
are not permissible for bank holding companies and from purchasing low-quality
(i.e., non-performing) assets from an affiliate or purchasing the securities of
any affiliate, other than a subsidiary.
Loans to Insiders. The Bank's authority to extend credit to its directors,
executive officers and principal shareholders, as well as to entities controlled
by such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other
things, these provisions require that extensions of credit to insiders:
o be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with third parties and that do
not involve more that the normal risk of repayment or present other
features that are unfavorable to the Bank; and
o not exceed certain limitations on the amount of credit extended to
such persons, individually and in the aggregate, which limits are
based, in part, on the amount of the Bank's capital.
In addition, extensions for credit in excess of certain limits must be
approved by the Bank's Board of Directors.
Enforcement. The OTS has primary enforcement responsibility over savings
associations, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
Standards for Safety and Soundness. Under federal law, the OTS has adopted
a set of guidelines prescribing safety and soundness standards. These guidelines
establish general standards relating to internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth, asset quality, earnings standards, compensation,
fees and benefits. In general, the guidelines require appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines.
In addition, the OTS adopted regulations that authorize, but do not
require, the OTS to order an institution that has been given notice that it is
not satisfying these safety and soundness standards to submit a compliance plan.
If, after being notified, an institution fails to submit an acceptable plan or
fails in any material respect to implement an accepted plan, the OTS must issue
an order directing action to correct the deficiency. Further, the OTS may issue
an order directing corrective actions and may issue an order directing other
actions of the types to which an undercapitalized association is subject under
the "prompt corrective action" provisions of federal law. If an institution
fails to comply with such an order, the OTS may seek to enforce the order in
judicial proceedings and to impose civil money penalties.
Limitation on Capital Distribution. The OTS imposes various restrictions or
requirements on the Bank's ability to make capital distributions, including cash
dividends. A savings institution that is the subsidiary of a savings and loan
holding company must file a notice with the OTS at least 30 days before making a
capital distribution. The Bank must file an application for prior approval if
the total amount of its capital distributions, including the proposed
distribution, for the applicable calendar year would exceed an amount equal to
the Bank's net income for that year plus the Bank's retained net income for the
previous two years.
The OTS may disapprove of a notice of application if:
o The Bank would be undercapitalized following the distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
Liquidity. The Bank is required to maintain a sufficient amount of liquid
assets to ensure its safe and sound operation.
22
Prompt Corrective Action Regulations. Under the OTS "prompt corrective
action" regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association is placed in one of the following four
categories based on the association's capital:
o well capitalized;
o adequately capitalized;
o undercapitalized; or
o critically undercapitalized.
At December 31, 2005, the Bank met the criteria for being considered
"well-capitalized." When appropriate, the OTS can require corrective action by a
savings association holding company under the "prompt corrective action"
provision of federal law.
Insurance of Deposit Accounts. The Bank is a member of the Savings
Association Insurance Fund ("SAIF") maintained by the FDIC, and the Bank pays
its deposit insurance assessments to the SAIF. The FDIC also maintains another
insurance fund, the Bank Insurance Fund, which primarily insures the deposits of
banks and state chartered savings banks.
Under federal law, the FDIC established a risk based assessment system for
determining the deposit insurance assessments to be paid by insured depositary
institutions. Under the assessment system, the FDIC assigns an institution to
one of three capital categories based on the institution's history and its
financial information as of the quarter ending three months before the beginning
of the assessment period. An institution's assessment rate depends on the length
of time the institution has been operating and the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%.
In addition, all FDIC insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately 0.0132% of insured deposits to
fund interest payments on bonds issued by the Financing Corporation, an agency
of the federal government established to recapitalize the predecessor to the
SAIF. These assessments will continue until the Financing Corporation bonds
mature in 2017.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Des Moines, which is one of the regional FHLBs composing
the FHLB System. Each FHLB provides a central credit facility primarily for its
member institutions. The Bank, as a member of the FHLB of Des Moines, is
required to acquire and hold shares of capital stock in the FHLB of Des Moines
in an amount at least equal to the greater of $10,000 or 0.12% of the total
assets of the Bank. The Bank is also required to own activity based stock, which
is based on 4.45% of the Bank's outstanding advances. These percentages are
subject to change by the FHLB. The Bank was in compliance with this requirement
with an investment in FHLB of Des Moines stock at December 31, 2005 of $5.25
million. Any advances from a FHLB must be secured by specified types of
collateral, and all long-term advances may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
be affected.
Federal Reserve System. Under regulations of the FRB, the Bank is required
to maintain noninterest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations exempt $7.8
million of otherwise reservable balances from the reserve requirements. A 3%
reserve is required for transaction account balances from $7.8 million to $48.3
million. Transaction account balances over $48.3 million are subject to a 10%
reserve requirement. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The
23
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS. FHLB System members
are also authorized to borrow from the Federal Reserve discount window, but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
Prohibitions Against Tying Arrangements. Federal savings banks are subject
to the prohibitions on certain tying arrangements. A depository institution is
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
product or service from the institution or its affiliates or not obtain services
of a competitor of the institution.
The Bank Secrecy Act. The Company and the Bank are subject to the Bank
Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal
government powers to address money laundering and terrorist threats through
enhanced domestic security measures, expanded surveillance powers, and mandatory
transaction reporting obligations. By way of example, the Bank Secrecy Act
imposes an affirmative obligation on the Bank to report currency transactions
that exceed certain thresholds and to report other transactions determined to be
suspicious.
Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among financial institutions, bank regulatory agencies and
law enforcement bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act. Among other requirements,
the USA PATRIOT Act imposes the following obligations on financial institutions:
o all financial institutions must establish anti-money laundering
programs that include, at minimum: (i) internal policies, procedures,
and controls, (ii) specific designation of an anti-money laundering
compliance officer, (iii) ongoing employee training programs, and (iv)
an independent audit function to test the anti-money laundering
program:
o all financial institutions must establish and meet minimum standards
for customer due diligence, identification and verification:
o financial institutions that establish, maintain, administer, or manage
private banking accounts or correspondent accounts in the United
States for non-United States persons or their representatives
(including foreign individuals visiting the United States) must
establish appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and
report money laundering through those accounts:
o financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell
banks (foreign banks that do not have a physical presence in any
country), and are subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks:
o bank regulators are directed to consider a bank's or holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications:
Office of Foreign Asset Control. The Bank and the Company, like all United
States companies and individuals, are prohibited from transacting business with
certain individuals and entities named on the Office of Foreign Asset Control's
list of Specially Designated Nationals and Blocked Persons. Failure to comply
may result in fines and other penalties. Recently, the Office of Foreign Asset
Control issued guidance directed at financial institutions in which it asserted
that it may, in its discretion, examine institutions determined to be high-risk
or to be lacking in their efforts to comply with these prohibitions.
Regulation of Savings and Loan Holding Companies
The Company is registered as a unitary savings and loan holding company and
is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and any of its non-savings association subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the financial safety, soundness or stability of a
subsidiary savings association. Unlike bank holding companies, federal savings
and loan holding companies are not subject to any regulatory capital
requirements or to supervision by the FRB.
24
HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring control (as defined under
HOLA) of another savings institution without prior OTS approval. In addition, a
savings and loan holding company is prohibited from directly or indirectly
acquiring (i) through mergers, consolidation or purchase of assets, another
savings institution or a holding company thereof, or acquiring all or
substantially all of the assets of such institution or company without prior OTS
approval; and (ii) control of any depository institution not insured by the FDIC
(except through a merger with and into the holding company's savings institution
subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution in located, except, (i) in
the case of certain emergency acquisitions approved by the FDIC; (ii) if such
holding company controls a savings institution subsidiary that operated a home
or branch office in such additional state as of March 5, 1987; or (iii) if the
laws of the home state of the savings institution to be acquired specifically
authorize a savings institution chartered by that state to be acquired by a
savings institution chartered by the state where the acquiring savings
institution or savings and loan holding company is located or by a holding
company that controls such a state chartered association.
As a grandfathered unitary savings and loan holding company, the Company
generally is not restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to satisfy
the QTL test. See "Regulation of Federal Savings Associations - QTL Test" for a
discussion of the QTL requirements. In addition, the GLB Act prohibits the sale
of grandfathered savings and loan holding companies to nonfinancial companies.
This prohibition is intended to restrict the transfer of grandfathered rights to
other entities and, thereby, prevent evasion of the limitation on the creation
of new unitary savings and loan holding companies.
Transactions between the Bank and the Company and its other subsidiaries
are subject to various conditions and limitations. See "Regulation of Federal
Savings Associations - Transactions with Affiliates" and "Regulation of Federal
Savings Associations - Limitation on Capital Distributions."
Federal Securities Laws. The Company's common stock is registered with the
SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
Quotation on Nasdaq. The Company's common stock is quoted on The Nasdaq
Stock Market. In order to maintain such quotation, the Company is subject to
certain corporate governance requirements, including:
o a majority of its board must be composed of independent directors;
o it is required to have an audit committee composed of at least three
directors, each of whom is an independent director, as such term is
defined by both the rules of the National Association of Securities
Dealers ("NASD") and by Securities Exchange Act regulations;
o its nominating committee and compensation committee must also be
composed entirely of independent directors; and
o each of its audit committee and nominating committee must have a
publicly available written charter.
Sarbanes-Oxley Act. As a public company, the Company is subject to the
Sarbanes-Oxley Act, which implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from corporate
wrongdoing. The Sarbanes-Oxley Act's principal legislation and the derivative
regulation and rule making promulgated by the SEC includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including
the requirement that the chief executive officer and chief financial
officer certify financial statements;
25
o a requirement that companies establish and maintain a system of
internal control over financial reporting and that a company's
management provide an annual report regarding its assessment of the
effectiveness of such internal control over financial reporting to the
company's independent accountants and that such accountants provide an
attestation report with respect to management's assessment of the
effectiveness of the company's internal control over financial
reporting. The Company, as a non-accelerated filer, is not subject to
this provision until the year ending December 31, 2007;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
o an increase in the oversight of, and enhancement of certain
requirements relating to audit committees of public companies and how
they interact with the company's independent auditors;
o requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other
compensatory fees from the issuer;
o requirement that companies disclose whether at least one member of the
committee is a "financial expert" (as such term is defined by the
Securities and Exchange Commission) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a
prohibition on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except
certain loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o mandatory disclosure by analysts of potential conflicts of interest;
and
o a range of enhanced penalties for fraud and other violations.
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of
personal loans to directors and executive officers of issuers. The prohibition,
however, does not apply to mortgages advanced by an insured depository
institution, such as the Bank, that are subject to the insider lending
restrictions of Section 22(h) of the Federal Reserve Act.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
ITEM 1A. RISK FACTORS
Our loan portfolio includes loans with a higher risk of loss. We originate
commercial mortgage loans, commercial business loans, consumer loans, and
residential mortgage loans primarily within our market area. We also purchase
commercial mortgage loans and residential mortgage loans, primarily secured by
out of state properties, which entail certain risks not necessarily associated
with loans the Company originates. Commercial mortgage, commercial business, and
consumer loans may expose a lender to greater credit risk than loans secured by
residential real estate because the collateral securing these loans may not be
sold as easily as residential real estate. In addition, commercial real estate
and commercial business loans may also involve relatively large loan balances to
individual borrowers or groups of borrowers. These loans also have greater
credit risk than residential real estate for the following reasons:
o Commercial Mortgage Loans. Repayment is dependent upon income being
generated in amounts sufficient to cover operating expenses and debt
service.
o Commercial Loans. Repayment is generally dependent upon the successful
operation of the borrower's business.
26
o Consumer Loans. Consumer loans (such as personal lines of credit) may
or may not be collateralized with assets that provide an adequate
source of payment of the loan due to depreciation, damage, or loss.
Any downturn in the real estate market or local economy could adversely
affect the value of the properties securing the loans or revenues from the
borrower's business thereby increasing the risk of non-performing loans.
If our allowance for loan losses is not sufficient to cover actual loan
losses, our earnings could decrease. Our loan customers may not repay their
loans according to their terms and the collateral securing the payment of these
loans may be insufficient to pay any remaining loan balance. We therefore may
experience significant loan losses, which could have a material adverse effect
on our operating results.
Material additions to our allowance for loan losses also would materially
decrease our net income, and the charge-off of loans may cause us to increase
the allowance. We make various assumptions and judgments about the
collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. We rely on our loan quality
reviews, our experience and our evaluation of economic conditions, among other
factors, in determining the amount of the allowance for loan losses. If our
assumptions prove to be incorrect, our allowance for loan losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in
additions to our allowance.
Changes in interest rates could adversely affect our results of operations
and financial condition. Our profitability, like that of most financial
institutions, depends substantially on our net interest income, which is the
difference between the interest income earned on our interest-earning assets and
the interest expense paid on our interest-bearing liabilities. Increases in
interest rates may decrease loan demand and make it more difficult for borrowers
to repay adjustable rate loans. In addition, as market interest rates rise, we
will have competitive pressures to increase the rates we pay on deposits, which
will result in a decrease of our net interest income.
We also are subject to reinvestment risk associated with changes in
interest rates. Changes in interest rates may affect the average life of loans
and mortgage-related securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities as borrowers
refinance to reduce borrowing costs. Under these circumstances, we are subject
to reinvestment risk to the extent that we are unable to reinvest the cash
received from such prepayments at rates that are comparable to the rates on
existing loans and securities.
Our earnings may be adversely impacted by an increase in interest rates
because a significant portion of our interest-earning assets are long-term,
fixed rate mortgage-related assets that will not reprice as long-term interest
rates increase while a majority of our interest-bearing liabilities are expected
to reprice as interest rates increase. Therefore, in an increasing interest rate
environment, our cost of funds is expected to increase more rapidly than the
yields earned on our loan portfolio and securities portfolio. An increasing rate
environment is expected to cause a narrowing of our net interest rate spread and
a decrease in our net interest income.
Our local economy may affect our future growth possibilities. Our current
market area is principally located in Webster, Story, Dallas, Polk, Henry and
Des Moines Counties, which are located in the central, north central and
southeastern parts of the State of Iowa. Our future growth opportunities depend
on the growth and stability of our regional economy and our ability to expand
our market area. A downturn in our local economy may limit funds available for
deposit and may negatively affect our borrowers' ability to repay their loans on
a timely basis, both of which could have an impact on our profitability.
We depend on our executive officers and key personnel to continue the
implementation of our long-term business strategy and could be harmed by the
loss of their services. We believe that our continued growth and future success
will depend in large part upon the skills of our management team. The
competition for qualified personnel in the financial services industry is
intense, and the loss of our key personnel or an inability to continue to
attract, retain and motivate key personnel could adversely affect our business.
We cannot assure you that we will be able to retain our existing key personnel
or attract additional qualified personnel. Although we have employment
agreements with our chief executive officer and president and our executive vice
president (and the Bank's chief operating officer) that each contain a
non-compete provision, the loss of the services of one or more of our executive
officers and key personnel could impair our ability to continue to develop our
business strategy.
27
We operate in a highly regulated environment, and changes in laws and
regulations to which we are subject may adversely affect our results of
operations. We are subject to extensive regulation, supervision and examination
by the Office of Thrift Supervision (the "OTS"), as the Bank's chartering
authority, and by the Federal Deposit Insurance Corporation (the "FDIC") as the
insurer of our deposits up to certain limits. In addition, the OTS regulates and
oversees the Company as a savings and loan holding company. We also belong to
the Federal Home Loan Bank System and, as a member of such system; we are
subject to certain limited regulations promulgated by the Federal Home Loan Bank
of Des Moines. This regulation and supervision limits the activities in which we
may engage. The purpose of regulation and supervision is primarily to protect
our depositors and borrowers and, in the case of FDIC regulation, the FDIC's
insurance fund. Regulatory authorities have extensive discretion in the exercise
of their supervisory and enforcement powers. They may, among other things,
impose restrictions on the operation of a banking institution, the
classification of assets by such institution and such institution's allowance
for loan losses. Regulatory and law enforcement authorities also have wide
discretion and extensive enforcement powers under various consumer protection
and civil rights laws, including the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures
Act. Any change in the laws or regulations applicable to us, or in banking
regulators' supervisory policies or examination procedures, whether by the OTS,
the FDIC, other state or federal regulators, the United States Congress or the
Iowa legislature could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Competition in our primary market area may reduce our ability to attract
and retain deposits and originate loans. We operate in a competitive market for
both attracting deposits, which is our primary source of funds, and originating
loans. Historically, our most direct competition for savings deposits has come
from credit unions, community banks, large commercial banks and thrift
institutions in our primary market area. Particularly in times of extremely low
or extremely high interest rates, we have faced additional significant
competition for investors' funds from brokerage firms and other firms'
short-term money market securities and corporate and government securities. Our
competition for loans comes principally from mortgage brokers, commercial banks,
other thrift institutions, and insurance companies. Such competition for the
origination of loans may limit our future growth and earnings prospects.
Competition for loan originations and deposits may limit our future growth and
earnings prospects.
We expect to open a new branch in the near future. Opening a new branch
reduces our short-term profitability due to one-time fixed expenses coupled with
low levels of income earned by the branch until its customer base is built. We
intend to open a new branch in West Des Moines, Iowa in 2006. The expense
associated with building and staffing the new branch will significantly increase
our noninterest expense, with compensation and occupancy costs constituting the
largest amount of increased costs. Losses are expected from the proposed new
branch for some time as the expenses associated with it are largely fixed and is
typically greater than the income earned as a branch builds up its customer
base. There can be no assurance that our branch expansion strategy will result
in increased earnings, or that it will result in increased earnings within a
reasonable period of time. We expect that the success of our branching strategy
will depend largely on the ability of our staff to market the deposit and loan
products offered by us.
If we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our financial
results or prevent fraud, and, as a result, investors and depositors could lose
confidence in our financial reporting, which could adversely affect our
business, the trading price of our stock and our ability to attract additional
deposits. Beginning with our annual report for the fiscal year ending December
31, 2007, we will have to include in our annual reports filed with the
Securities and Exchange Commission (the "SEC") a report of our management
regarding internal control over financial reporting. As a result, we recently
have begun to document and evaluate our internal control over financial
reporting in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and SEC rules and
regulations, which require an annual management report on our internal control
over financial reporting, including, among other matters, management's
assessment of the effectiveness of internal control over financial reporting and
an attestation report by our independent auditors addressing these assessments.
Accordingly, management has retained outside consultants to assist us in (i)
assessing and documenting the adequacy of our internal control over financial
reporting, (ii) improving control processes, where appropriate, and (iii)
verifying through testing that controls are functioning as documented. If we
fail to identify and correct any significant deficiencies in the design or
operating effectiveness of our internal control over financial reporting or fail
to prevent fraud, current and potential stockholders and depositors could lose
confidence in our financial reporting, which could adversely affect our
business, financial condition and results of operations, the trading price of
our stock and our ability to attract additional deposits.
Our Articles of Incorporation and bylaws may prevent a transaction you may
favor or limit our growth opportunities, which could cause the market price of
our common stock to decline. Certain provisions of our Articles of Incorporation
and bylaws and applicable provisions of Iowa and federal law and regulations may
delay, inhibit or prevent an
28
organization or person from gaining control of the Company though a tender
offer, business combination, proxy context or some other method, even though you
might be in favor of the transaction.
We may not be able to pay dividends in the future in accordance with past
practice. We pay a quarterly dividend to stockholders. However, we are dependent
primarily upon the Bank for our earnings and funds to pay dividends on our
common stock. The payment of dividends also is subject to legal and regulatory
restrictions. Any payment of dividends in the future will depend, in large part,
on the Bank's earnings, capital requirements, financial condition and other
factors considered relevant by our Board of Directors.
ITEM 1B. UNRESOLVED SEC COMMENTS
Not applicable.
29
ITEM 2. PROPERTIES
The Company conducts its business through its main office located in
Fort Dodge, Iowa and nine full-service offices located in Fort Dodge, Nevada,
Ames, Perry, Ankeny, Clive, Burlington and Mount Pleasant, Iowa. The following
table sets forth certain information concerning the main office and each branch
office of the Company and the offices of First Iowa Title Services at December
31, 2005. In addition to the properties listed below, First Federal Investments
owned land and an office building in Fort Dodge, Iowa, Northridge Apartments
Limited Partnership owned a multifamily apartment building in Fort Dodge, Iowa
and Northridge Apartment Limited Partnership II owned a multifamily apartment
building in Fort Dodge, Iowa at December 31, 2005.
Location Opening Date Lease Expiration Date
Main Office:
825 Central Avenue 1973 N/A
Fort Dodge, Iowa
Branch Offices:
201 South 25th Street 1977 N/A
Fort Dodge, Iowa
404 Lincolnway 1977 N/A
Nevada, Iowa
316 South Duff 1995 N/A
Ames, Iowa
1111-141st Street 1999 N/A
Perry, Iowa
321 North Third Street 1953 N/A
Burlington, Iowa
1010 North Roosevelt 1975 N/A
Burlington, Iowa
102 South Main 1991 N/A
Mount Pleasant, Iowa
2110 SE Delaware 2003 N/A
Ankeny, Iowa
13150 Hickman Road 2004 N/A
Clive, Iowa
120 South 68th Street 2006 N/A
West Des Moines, Iowa
First Iowa Offices:
628 Central Avenue 1982 N/A
Fort Dodge, Iowa
814 8th Street 1994 2008
Boone, Iowa
200 1st Street South 1994 2009
Newton, Iowa
30
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The information required by this Item is incorporated herein by reference
to page 63 of the Company's 2005 Annual Report to Shareholders under the heading
"Shareholder Information," which section is included in Exhibit 13.1 to this
Annual Report.
The following table provides information with respect to purchases made by
or on behalf of the Company or any "affiliated purchases" (as defined in rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended December 31, 2005.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number of Average Price Paid Part of Publicly Be Purchased Under
Period Shares Purchased Per Share Announced Plans The Plan
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
October 1, 2005 to
October 31, 2005 -- -- -- 66,068
November 1, 2005 to
November 30, 2005 17,000 $38.32 17,000 49,068
December 1, 2005 to
December 31, 2005 -- -- -- 49,068
----------- ----------
Total 17,000 17,000
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference
to page 4 of the Company's 2005 Annual Report to Shareholders under the heading
"Selected Financial Data," which section is included in Exhibit 13.1 to this
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
to pages 7 through 26 of the Company's 2005 Annual Report to Shareholders under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which section is included in Exhibit 13.1 to this Annual
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated herein by reference
to pages 12 through 14 of the Company's 2005 Annual Report to Shareholders under
the heading "Discussion of Market Risk-Interest Rate Sensitivity Analysis,"
which section is included in Exhibit 13.1 to this Annual Report.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to pages 27 through 61 of the Company's 2005 Annual Report to Shareholders under
the headings "Independent Auditor's Report," "Consolidated Financial Statements"
and "Notes to Consolidated Financial Statements," which sections are included in
Exhibit 13.1 to this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer
and Chief Financial Officer and Treasurer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the Company's President and Chief Executive
Officer and Chief Financial Officer and Treasurer concluded that the disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
(i) recorded, processed, summarized and reported as and when required and (ii)
accumulated and communicated to the Company's management, including the
Company's President and Chief Executive Officer and Chief Financial Officer and
Treasurer, as appropriate to allow timely decisions regarding required
disclosure.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers of the Registrant is
included under the headings "Information with Respect to Nominees and Continuing
Directors," "Nominees for Election as Directors," "Continuing Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 28, 2006, which has been filed with the SEC and
is incorporated herein by reference.
The Company and the Bank have adopted a Code of Conduct and Ethics which
applies to all employees, officers and directors of the Company. The Company has
also adopted a Code of Ethics for Senior Financial Officers of North Central
Bancshares, Inc., which applies to the Company's principal executive officer,
principal financial officer, principal accounting officer or controller or
person performing similar functions for the Company. The Code of Ethics for
Senior Financial Officers of the Company meets the requirements of a "code of
ethics" as defined by Item 406 of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is included under the
headings "Executive Compensation" (excluding the Stock Performance Graph and the
Compensation Committee Report) and "Directors' Compensation" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on April 28,
2006, which has been filed with the SEC and is incorporated herein by reference.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Principal Shareholders of the
Company" and "Security Ownership of Management" in the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on April 28, 2006, which has
been filed with the SEC and is incorporated herein by reference.
The following table sets forth the aggregate information of our equity
compensation plans in effect as of December 31, 2005.
Number of securities remaining
available for future issuance
Number of securities to be Weighted-average under equity compensation plans
issued upon exercise of exercise price of (excluding securities reflected
Plan category outstanding options outstanding options in column (a))
------------- --------------------------- ------------------- -------------------------------
(a) (b) (c)
Equity compensation
plans approved by security
holders..................... 97,705 $ 25.30 --
Equity compensation
plans not approved by
security holders............ 4,895 $ 37.86 35,105(1)
Total..................... 102,600 $ 25.90 35,105
(1) The equity compensation plan not approved by shareholders is that portion
of the 1996 Stock Option Plan which grants nonqualified options to
directors and officers out of a pool of 40,000 shares reserved to the plan
without shareholder approval.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included under the heading "Transaction with Certain Related Persons" in the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held on
April 28, 2006, which has been filed with the SEC and is incorporated herein by
reference.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the aggregate fees billed for each of the last two
fiscal years by the Company's principal accountant is included under the heading
"Principal Accountant Fees and Services" in the Company's Proxy Statement for
its Annual Meeting of Shareholders to be held on April 28, 2006, which has been
filed with the SEC and is incorporated herein by reference.
33
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Schedules and Exhibits
1. The consolidated statements of financial condition of North Central
Bancshares, Inc. and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of income, stockholders'
equity and cash flows for the years ended December 31, 2005, 2004 and
2003, together with the related notes and the report of the
independent registered public accounting firm of McGladrey & Pullen,
LLP.
2. Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
3. See Exhibit Index on following page.
34
(b) Exhibits
Exhibit No. Description Reference No.
----------- ----------- -------------
3.1 Articles of Incorporation of North Central Bancshares, Inc. (1)
3.2 Bylaws of North Central Bancshares, Inc. (1)
3.3 Bylaws of North Central Bancshares, Inc., as amended (2)
4.1 Federal Stock Charter of First Federal Savings Bank of Iowa
(formerly known as First Federal Savings Bank of Fort Dodge) (1)
4.2 Bylaws of First Federal Savings Bank of Iowa (formerly known
as First Federal Savings Bank of Fort Dodge). (1)
4.3 Specimen Stock Certificate of North Central Bancshares, Inc. (1)
4.4 Bylaws of First Federal Savings Bank of Iowa, as amended (2)
10.1 Employee Stock Ownership Plan of First Federal Savings Bank
of Iowa (formerly known as First Federal Savings Bank of Fort
Dodge) and ESOP Trust Agreement (incorporating Amendments
1 and 2) (6)
10.1A Amendment #1 to Employee Stock Ownership Plan of First Federal
Savings Bank of Iowa (formerly known as First Federal Savings
Bank of Fort Dodge) and ESOP Trust Agreement (7)
10.1B Amendment #2 to Employee Stock Ownership Plan of First Federal
Savings Bank of Iowa (formerly known as First Federal Savings
Bank of Fort Dodge) and ESOP Trust Agreement (7)
10.2 ESOP Loan Documents, dated September 3, 1996 (5)
10.3 Employee Retention Agreements between First Federal Savings
Bank of Fort Dodge and certain executive officers (3)
10.4 Employment Agreement between First Federal Savings Bank of
Iowa (formerly known as First Federal Savings Bank of Fort
Dodge) and David M. Bradley, effective as of August 31, 1994 (1)
10.6 Form of Employment Agreement between North Central Bancshares,
Inc. and David M. Bradley (1)
10.8 North Central Bancshares, Inc. 1996 Stock Option Plan (4)
10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996
Stock Option Plan (6)
10.10 Supplemental Retirement and Deferred Compensation Plan of
First Federal Savings Bank of Iowa (7)
10.11 Form of Employment Agreement between First Federal Savings
Bank of Iowa and C. Thomas Chalstrom
10.12 Form of Employment Agreement between First Federal Savings
Bank of Iowa and Kirk A. Yung (8)
10.13 Tax Allocation Agreement between North Central Bancshares,
Inc. and Subsidiaries (2)
10.14 Form of Employment Agreement North Central Bancshares, Inc.
and C. Thomas Chalstrom
13.1 Annual Report to Shareholders
14.1 Code of Ethics for Senior Financial Officers of North Central
Bancshares, Inc. (2)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of McGladrey & Pullen, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
35
(1) Incorporated herein by reference to Registration Statement No. 33-80493
on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed
with the Securities and Exchange Commission, (the "Commission") on
December 18, 1995, as amended.
(2) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of the Registrant filed with the Commission on March 22, 2004.
(3) Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K of the Registrant for fiscal year 1995, filed with the
Commission on March 29, 1996.
(4) Incorporated herein by reference to the Amended Schedule 14A of the
Registrant filed with the Commission on August 19, 1996.
(5) Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 31, 1997.
(6) Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 31, 1998.
(7) Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 29, 2002.
(8) Incorporated by reference to Exhibit 10.3.
36
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
North Central Bancshares, Inc.
Date: March 31, 2006 /s/ David M. Bradley
--------------------------------------------
By: David M. Bradley
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ David M. Bradley President, Chief Executive Officer, 03/31/06
- --------------------------- Director, and Chairman of the Board
David M. Bradley (Principal Executive Officer)
/s/ David W. Edge Chief Financial Officer, Treasurer 03/31/06
- --------------------------- (Principal Accounting and
David W. Edge Financial Officer)
/s/ Robert H. Singer, Jr. Director 03/31/06
- ---------------------------
Robert H. Singer, Jr.
/s/ Melvin R. Schroeder Director 03/31/06
- ---------------------------
Melvin R. Schroeder
/s/ Mark M. Thompson Director 03/31/06
- ---------------------------
Mark M. Thompson
/s/ Randall L. Minear Director 03/31/06
- ---------------------------
Randall L. Minear
/s/ Paul F. Bognanno Director 03/31/06
- ---------------------------
Paul F. Bognanno
/s/ C. Thomas Chalstrom Director 03/31/06
- ---------------------------
C. Thomas Chalstrom