Exhibit 13.1 Annual Report to Shareholders.
NORTH CENTRAL BANCSHARES, INC.
Holding Company for First Federal
Savings Bank of Iowa
2005 ANNUAL REPORT
TABLE OF CONTENTS
MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER........3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA........................4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................7
INDEX TO FINANCIAL STATEMENTS.........................................27
QUARTERLY RESULTS OF OPERATIONS (Unaudited)...........................60
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK........................62
SHAREHOLDER INFORMATION...............................................63
This Annual Report to Shareholders contains certain forward-looking
statements consisting of estimates with respect to the financial
condition, results of operations (including noninterest expense and
availability of potential tax credits) and business of North Central
Bancshares, Inc. (the "Company") that are subject to various factors
which could cause actual results to differ materially from these
estimates. These factors include changes in general, economic and market
conditions, the development of an interest rate environment that
adversely affects the interest rate spread or other income anticipated
from the Company's operations and investments, and changes in depositor
preferences for financial products. The Company does not undertake to
update any forward-looking statement, whether written or oral, that may
be made from time to time by or on behalf of the Company.
North Central Bancshares, Inc.
Holding Company for
First Federal Savings Bank of Iowa
825 Central Avenue
Fort Dodge, Iowa 50501
515-576-7531
www.firstfederaliowa.com
Branch Locations
----------------
Fort Dodge, Iowa Fort Dodge, Iowa Ames, Iowa
825 Central Avenue 201 South 25th Street 316 South Duff
Fort Dodge, Iowa 50501 Fort Dodge, Iowa Ames, Iowa 50010
515-576-7531 515-576-3177 515-232-4304
Nevada, Iowa Perry, Iowa Ankeny, Iowa
404 Lincoln Highway 1111 - 141st Street 2110 SE Delaware Street
Nevada, Iowa 50201 Perry, Iowa 50220 Ankeny, Iowa 50021
515-382-5408 515-465-3187 515-963-4488
Clive, Iowa Burlington, Iowa Burlington, Iowa
13150 Hickman Road 1010 N. Roosevelt 321 North 3rd Street
Clive, Iowa 50325 Burlington, Iowa 52601 Burlington, Iowa 52601
515-440-6300 319-754-6521 319-754-7517
Mt. Pleasant, Iowa
102 South Main
Mt. Pleasant, Iowa 52641
319-385-8000
New Branch Opening in 2006
120 South 68th Street
Jordan Creek Town Center, West Des Moines, Iowa
MESSAGE OF THE CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dear Shareholders:
We are pleased to report to you the operating results of North Central
Bancshares, Inc for the year ended December 31, 2005. North Central Bancshares
is the holding company for First Federal Savings Bank of Iowa.
For the year ended December 31, 2005, North Central Bancshares' net
income was $5,015,000 or $3.20 diluted earnings per share. Total shareholder
return was impacted favorably by a 16% increase in quarterly dividends effective
April 2005. Some of our achievements during the past year include:
2005 HIGHLIGHTS
* Total assets increased 4.9% to a new high of $485.2 million.
* Deposits increased 5.7% to a new high of $334.3 million.
* Net loans increased 5.6% to a new high of $430.3 million.
* Increased quarterly dividends in April, 2005 to $0.29 per share, a
16.0% increase.
* We repurchased a total of 50,932 shares, or 3.3%, of outstanding stock
during the year ended December 31, 2005.
* We began construction of a new 6,000 sq. ft. full service office in
West Des Moines, Iowa.
* Paul F. Bognanno was newly elected to the Board of Directors at the
2005 annual meeting
With the support of our directors, officers, staff and the continuing
confidence of our shareholders, we look forward to continued success in the
coming year. We remain committed to increasing shareholder value.
Sincerely,
/s/ David M. Bradley
--------------------
David M. Bradley, CPA
Chairman, President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of North Central
Bancshares set forth below is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Annual Report.
At December 31,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
Selected Consolidated Financial
Condition Data:
Total assets........................... $ 485,191 $ 462,735 $ 424,009 $ 403,872 $ 379,375
Cash (noninterest-bearing)............. 8,087 7,315 8,674 2,143 2,259
Loans receivable, net: (1)
First mortgage loans secured
by one- to four-family
residences......................... 210,793 184,324 171,468 147,479 159,943
First mortgage loans secured
by multifamily properties.......... 73,453 77,995 69,507 70,194 73,311
First mortgage loans secured
by commercial properties........... 85,794 89,816 68,933 70,502 25,263
Consumer loans....................... 60,238 55,181 53,051 52,971 49,464
---------- ---------- ---------- ---------- ----------
Total loans receivable, net........ 430,278 407,316 362,959 341,146 307,981
Investment securities (2).............. 21,260 23,710 28,297 35,859 49,016
Deposits............................... 334,338 316,334 283,964 277,000 268,814
Borrowed funds......................... 102,444 100,975 95,005 85,026 71,413
Total shareholders' equity............. 44,279 41,534 41,592 38,748 35,913
For the Year Ended December 31,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
Selected Operating Data:
Interest income....................... $ 26,272 $ 24,757 $ 25,412 $ 26,965 $ 27,500
Interest expense...................... 12,607 11,367 12,342 13,911 16,514
------------ ------------ ------------ ------------ ------------
Net interest income before
provision for loan losses........ 13,665 13,390 13,070 13,054 10,986
Provision for loan losses............. 260 240 255 383 210
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses........ 13,405 13,150 12,815 12,671 10,776
------------ ------------ ------------ ------------ ------------
Noninterest income:
Fees and service charges......... 4,483 3,123 2,864 2,375 1,993
Abstract fees.................... 1,289 1,461 1,811 1,686 1,506
Other income..................... 776 1,476 1,910 1,668 1,593
------------ ------------ ------------ ------------ ------------
Total noninterest income....... 6,548 6,060 6,585 5,729 5,092
------------ ------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits... 6,660 6,192 5,950 5,223 4,500
Premises and equipment........... 1,452 1,429 1,287 1,192 1,226
Data processing.................. 597 567 578 544 470
Goodwill......................... - - - - 472
Other expenses................... 3,730 3,127 3,016 2,623 2,378
------------ ------------ ------------ ------------ ------------
Total noninterest expense...... 12,439 11,315 10,831 9,582 9,046
------------ ------------ ------------ ------------ ------------
Income before income taxes............ 7,514 7,895 8,569 8,818 6,822
Income tax expense.................... 2,499 2,496 2,721 2,953 2,347
------------ ------------ ------------ ------------ ------------
Net income......................... $ 5,015 $ 5,399 $ 5,848 $ 5,865 $ 4,475
============ ============ ============ ============ ============
4
At or For the Year Ended December 31,
-------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Key Financial Ratios and Other Data:
Performance Ratios: (%)
Net interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-bearing
liabilities)......................................... 2.83% 3.02% 3.03% 3.15% 2.68%
Net interest margin (net interest income
as a percentage of average interest-
earning assets)...................................... 3.05 3.22 3.27 3.44 3.03
Return on average assets (net income
divided by average total assets)..................... 1.05 1.21 1.38 1.47 1.17
Return on average equity (net income
divided by average equity)........................... 11.57 12.97 14.65 15.57 12.21
Noninterest income to average assets................... 1.37 1.36 1.55 1.43 1.33
Efficiency ratio (3)................................... 61.54 58.18 55.11 51.01 56.26
Noninterest expense to average assets.................. 2.61 2.54 2.55 2.40 2.36
Net interest income after provision for
loan losses to noninterest expenses.................. 107.76 116.22 118.32 132.24 119.12
Financial Condition Ratios: (%) (4)
Equity to assets at period end......................... 9.13 8.98 9.81 9.59 9.47
Tangible equity to tangible assets
at period end (5) (6).............................. 8.01 7.80 8.54 8.25 8.03
Average shareholders' equity divided by
average total assets................................. 9.09 9.35 9.40 9.42 9.57
Average tangible shareholders equity divided
by average tangible total assets (5) (6)........... 7.95 8.13 8.12 8.06 8.10
Average interest-earning assets to average
interest-bearing liabilities......................... 107.62 107.24 107.63 107.91 107.54
Asset Quality Ratios: (%) (4)
Nonaccrual loans to total net loans.................... 0.14 0.16 0.17 0.19 0.09
Nonperforming assets to total assets (7)............... 0.36 0.37 0.49 0.35 0.36
Allowance for loan losses as a percent of
total loans receivable at end of period.............. 0.76 0.77 0.86 0.90 0.92
Allowance for loan losses to nonaccrual
loans................................................ 567.98 513.13 515.02 485.00 1,042.07
Per Share Data:
Book value per share................................... $ 29.37 $ 27.14 $ 25.92 $ 23.62 $ 21.12
Tangible book value per share (5)...................... 25.46 23.28 22.24 20.03 17.65
Basic earnings per share (8)........................... 3.29 3.47 3.69 3.58 2.54
Diluted earnings per share (9)......................... 3.20 3.34 3.48 3.37 2.41
Dividends declared per share........................... 1.16 1.00 0.84 0.72 0.60
Dividend payout ratio.................................. 0.35 0.29 0.23 0.20 0.25
- -----------------------
(Notes on following page)
- -------------------------
5
(1) Loans receivable, net, represents total loans less discounts, loans in
process, net deferred loan fees and allowance for loan losses, plus
premiums. The allowance for loan losses at December 31, 2005, 2004, 2003,
2002 and 2001 was $3.3 million, $3.2 million, $3.2 million, $3.1 million
and $2.9 million, respectively.
(2) Includes interest-bearing cash and Federal Home Loan Bank stock.
(3) Efficiency ratio represents noninterest expense divided by the sum of net
interest income before provision for loan losses plus noninterest income.
(4) Asset Quality Ratios are end of period ratios. With the exception of end of
period ratios, all ratios are based on average monthly balances during the
indicated periods and are annualized where appropriate.
(5) Tangible equity consists of stockholders' equity less goodwill and title
plant. Goodwill and title plant was $5.9 million for each of the years
ended December 31, 2005, 2004, 2003, 2002 and 2001.
(6) Tangible assets consist of total assets less goodwill and title plant.
Goodwill and title plant was $5.9 million for each of the years ended
December 31, 2005, 2004, 2003, 2002 and 2001.
(7) Nonperforming assets consists of nonaccrual loans and foreclosed real
estate.
(8) Basic earnings per share information is calculated by dividing net income
by the weighted average number of shares outstanding. The weighted average
number of shares outstanding for basic earnings per share computation for
2005, 2004, 2003, 2002 and 2001 were 1,524,056, 1,554,329, 1,583,568,
1,637,749 and 1,762,900, respectively.
(9) Diluted earnings per share information is calculated by dividing net income
by the weighted average number of shares outstanding, adjusted for the
effect of dilutive potential common shares outstanding which consists of
stock options granted. The weighted average number of shares outstanding
for diluted earnings per share computation for 2005, 2004, 2003, 2002 and
2001 were 1,566,848, 1,616,689, 1,679,046, 1,739,535 and 1,856,643,
respectively.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
North Central Bancshares, Inc. (the "Company"), an Iowa corporation, is
the holding company for First Federal Savings Bank of Iowa (the "Bank"), a
federally chartered savings bank. The principal business of the Company consists
of the operation of its wholly-owned subsidiary, the Bank.
The profitability of the Company depends primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans and investment
securities, and the interest paid on interest-bearing liabilities, which
primarily consist of deposits and borrowed funds in the form of advances from
the Federal Home Loan Bank of Des Moines (the "FHLB"). Net interest income is a
function of the Company's interest rate spread, which is the difference between
the average yield on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The
Company's net income is affected by its level of noninterest income which
primarily consists of service fees and charges, abstract fees, mortgage banking
income and other income, and noninterest expense, which primarily consists of
compensation and employee benefit expenses, premises and equipment, data
processing and other expenses. Net income also is affected significantly by
general, economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Company.
Executive Overview
The Company's business strategy is to operate the Bank as a
well-capitalized, profitable and independent community oriented savings bank.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating the Bank as a community oriented financial institution;
(2) increasing loan and deposit balances in existing branch offices as well as
by establishing de novo branch offices in markets where population growth trends
are positive such as the Des Moines, Iowa metropolitan area; (3) maintaining
high asset quality by emphasizing investment in residential mortgage,
multifamily and commercial real estate loans and consumer loans; (4) emphasizing
growth in core deposits, which includes demand deposit, NOW, money market and
savings accounts; (5) maintaining capital in excess of regulatory requirements;
(6) controlling noninterest expense; (7) managing interest rate risk exposure;
and (8) increasing noninterest income through increases in fees and service
charges.
The purpose of this summary is to provide an overview of the items
management focuses on when evaluating the condition of the Company and our
success in implementing our shareholder value strategy. Our shareholder value
strategy has three major themes: (1) enhancing our shareholders' value; (2)
making our retail banking franchise more valuable; and (3) efficiently utilizing
our capital.
Management believes the following points were the most important to that
analysis this year:
o The Company has effectively managed its capital since the Company's
inception in 1996. Annual dividends per share have increased from $.25
per share in 1997 to $1.16 per share in 2005. In addition, an active
stock repurchase program has consistently been used by the Company to
manage capital and increase earnings per share. Since the Company's
inception, it has repurchased 2,785,554 shares at a cost of $54.1
million as of December 31, 2005.
o The Bank has opened new offices in market areas where population
growth trends are positive. New offices were opened in Ankeny, Iowa in
February 2003 and in Clive, Iowa in March, 2004. In October 2005, the
Bank began construction of a new branch office in West Des Moines,
Iowa near Jordan Town Center Mall. These locations are in suburbs of
Des Moines, Iowa, which is Iowa's largest metropolitan area. The
Company will continue to analyze de novo branch opportunities in the
Des Moines metropolitan area. Noninterest expenses have increased
during the years ended December 31, 2005, 2004 and 2003 in part due to
the Company's strategy of opening de novo branch offices. We believe
that this strategy will result in loan and deposit growth for the
Company, but will negatively impact net earnings until each de novo
branch achieves profitability.
7
o Consistent with the Bank's emphasis on attracting and retaining core
deposits, deposit fee growth continued a strong positive trend. The
growth in core deposits is due in part to a direct mail marketing
program implemented in early 2003 emphasizing checking accounts. This
direct mail program is ongoing and is expected to result in a
continued growth in core deposits and fee income.
o The Company's exposure to interest rate risk has increased from the
prior year. This is due in part to a shift of certificates of deposit
to shorter term maturities and a decrease in the speed in which
customers prepaid their loans. The Company has also retained a portion
of the 15 year fixed rate one- to four-family real estate loans it
originated.
o Noninterest income for the year ended December 31, 2005, included $1.0
million in loan prepayment fees, compared to $0.4 million for the year
ended December 31, 2004. This increase in noninterest income for the
year was offset in part by a provision for impairment of
available-for-sale securities, as described below.
o During the year ended December 31, 2005, the Company recognized an
other-than-temporary impairment of $680,000 on three Freddie Mac
adjustable rate, perpetual preferred stocks that had declined in
value. The securities are investment grade securities that are held in
the Company's available-for-sale portfolio. The Company recognized an
other-than-temporary impairment on the securities based on the facts
and circumstances surrounding each of the securities at the time,
including the duration and amount of the unrealized loss, as well as
the prospect for the recovery of market value within a reasonable
period of time.
o Management believes that the allowance for loan losses is adequate.
The allowance for loan losses to nonaccrual loans was 567.98% at
December 31, 2005. Net annualized charge-offs for 2005 were 0.04% of
total loans and have averaged under 0.05% of total loans for the past
five years. During 2005, the Company's total loan portfolio increased
$19.8 million, or 4.7%. This increase primarily consisted of increases
in the one- to four-family first and second mortgage real estate
loans. The Company's provision for loan losses in 2005 was $260,000.
o The Company has lowered its effective tax rate through the use of
federal Low Income Housing Tax Credits (LIHTC). The Company owns and
operates two LIHTC projects in Fort Dodge. These projects generated
$278,000 in federal income tax credits in 2005.
o Purchases and originations of out of state real estate loans remained
an integral part of the Company's business plan. The Company has
purchased and originated out of state real estate loans to supplement
local mortgage loan originations and to diversify its mortgage loan
portfolio geographically.
Critical Accounting Policies
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the disclosures included within this report, are
based on the Company's audited consolidated financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. The financial information contained in
these statements is, for the most part, based on approximate measures of the
financial effects of transactions and events that have already occurred.
However, the preparation of these statements requires management to make certain
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses.
The Company's critical accounting policies are described in the "Notes
to Consolidated Financial Statements." Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgments,
management has identified its most critical accounting policies to be that
related to the allowance for loan losses and asset impairment judgments,
including the recoverability of goodwill.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The Company has policies and procedures for evaluating the overall
credit quality of its loan portfolio, including timely identification of
potential problem credits. On a quarterly basis, management reviews the
appropriate level for the allowance for loan losses, incorporating a variety of
risk considerations, both quantitative and qualitative. Quantitative
8
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, known information about individual loans
and other factors. Qualitative factors include the general economic environment
in the Company's market area and the expected trend of those economic
conditions. To the extent that actual results differ from forecasts and
management's judgment, the allowance for loan losses may be greater or less than
future charge-offs.
Asset impairment judgments include evaluating the decline in fair value
of held-to-maturity and available-for-sale securities below their cost. Declines
in fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other-than-temporary are reflected in earnings as
realized losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Goodwill represents the excess of the acquisition cost over the fair
value of the net assets acquired in a purchase acquisition. Goodwill is tested
for impairment at least annually.
Business Strategy
The Company's current business strategy is to operate the Bank as a
well-capitalized, profitable and independent community-oriented savings bank.
Generally, the Company has sought to implement this strategy primarily by using
deposits, including brokered certificates of deposit, and advances from the FHLB
as its source of funds and maintaining a substantial part of its assets in loans
secured by one- to four-family residential real estate, multifamily real estate
and commercial real estate located both inside and outside the Company's market
area, consumer and other loans and in other liquid investment securities.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating the Bank as a community-oriented financial institution,
maintaining a strong core customer base by providing dedicated service to the
individual consumer; (2) maintaining high asset quality by emphasizing
investment in residential mortgage, multifamily and commercial real estate
loans, consumer loans and securities issued or guaranteed by the United States
Government or agencies thereof, state and local obligations and mortgage-backed
securities; (3) emphasizing growth in core deposits, which include demand
deposit, NOW, money market and savings accounts; (4) maintaining capital in
excess of regulatory requirements; (5) controlling noninterest expenses; (6)
managing interest rate risk exposure while achieving desirable levels of
profitability; and (7) increasing noninterest income through increases in fees
and service charges.
Highlights of the Company's business strategy are as follows:
Community-Oriented Institution. The Company is committed to meeting the
financial needs of the communities in which it operates. Based in part on its
participation in several different programs designed to facilitate residential
lending to low- and moderate-income households, the Bank has received an
"Outstanding" as its most recent Community Reinvestment Act rating.
Retail Deposit Base. In 2005, the Company had ten offices located in
Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, Burlington and Mount Pleasant,
Iowa. At December 31, 2005, 39.9% of the deposit base, or $133.3 million,
consisted of core deposits, which included money market accounts, savings
accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits
are generally considered to be a more stable and lower cost source of funds than
certificates of deposit or outside borrowings. The Company will continue to
emphasize growth in core deposits.
Asset Quality and Emphasis on Residential Mortgage Lending. The Company
has historically emphasized residential real estate financing. The Company
expects to continue its commitment to financing the purchase, construction or
improvement of residential real estate in its market area. The Company's lending
activities have expanded to include an increased emphasis on originations of
construction loans. At December 31, 2005, 43.5% of the Company's total assets
consisted of one- to four-family residential first mortgage loans. To supplement
local mortgage loan originations and to diversify its mortgage loan portfolio
geographically, the Company has originated or purchased loans in the secondary
mortgage market, with an emphasis on multifamily and commercial real estate
loans, secured by properties outside the State of Iowa (the "out of state
properties"). At December 31, 2005, the Company's portfolio of loans which were
either originated or purchased by the Company and secured by out of state
properties totaled $143.1
9
million and consisted of $15.1 million one- to four-family residential mortgage
loans, or 3.5%, $65.4 million multifamily real estate loans, or 14.9%, and $62.6
million commercial real estate loans, or 14.3%, of the Company's total loan
portfolio. At December 31, 2005, the Company's ratio of nonperforming assets to
total assets was 0.36%. The Company also invests in state and local obligations,
mortgage-backed securities, interest-earning deposits, equity securities and
FHLB stock.
Generally, the yield on mortgage loans originated and purchased by the
Company is greater than that of securities purchased by the Company. Future
economic conditions and continued strong banking competition could result in
diminished lending opportunities. The Company may increase its investment in
securities and in purchased mortgage loans outside its market area.
Increasing Noninterest Income. The Company has attempted to increase
its level of noninterest income from both new and traditional lines of business
to supplement net interest income. The Company has increased noninterest income
through emphasizing growth in core deposit accounts. During the year ended
December 31, 2005, fees and service charges totaled $4.5 million, an increase of
$1.36 million from the prior year. This increase was primarily due to an
increase in loan prepayment fees of $644,000 and fees associated with checking
accounts, including overdraft fees, of $328,000. The Company has also increased
noninterest income through emphasizing growth in mortgage banking income,
annuity and mutual fund sales and insurance sales. In addition, the Company
currently owns abstract companies in Webster, Boone and Jasper counties in Iowa,
through First Iowa Title Services, Inc. ("First Iowa"), the Bank's wholly owned
subsidiary. The abstract business performed by First Iowa replaces the function
of a title insurance company. The Company believes that First Iowa can continue
to be an important source of fee income. Noninterest income from First Iowa's
business for the years ended December 31, 2005 and 2004 was $1.3 and $1.5
million, respectively, offset by noninterest expense attributable to First Iowa.
Liquidity and Interest Rate Risk Management. Management seeks to manage
the Company's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an acceptable interest
rate spread. At December 31, 2005, total interest-bearing liabilities maturing
or repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $59.7 million, representing a one-year gap to
total assets ratio of -12.3%, compared to a -7.0% at December 31, 2004. To
manage the Company's interest rate exposure, the Company emphasizes the
origination of five and seven year fixed rate mortgage loans that convert to
adjustable rates at the conclusion of their initial terms and have overall
maturities of up to 30 years, and the origination of adjustable rate home equity
lines of credit and short-term consumer loans. The Company also manages its
interest rate risk and liquidity by investing in mortgage-backed, municipal and
equity securities. In addition, the Company generally sells all fixed rate one-
to four-family residential loans with maturities in excess of fifteen years. See
"Discussion of Market Risk - Interest Rate Sensitivity Analysis".
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, amortization and
prepayment of loans, borrowings such as FHLB advances, brokered certificates of
deposit, maturities of securities and other investments, and earnings and funds
provided from operations. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by interest rates, economic conditions, and competition. The
Company manages the pricing of its deposits to maintain a desired deposit
balance. In addition, the Company invests in interest-earning assets, which
provide liquidity to meet lending requirements. At December 31, 2005, $610,000,
or 18.1%, of the Company's investment portfolio, excluding equity and
mortgage-backed securities and mutual funds, was scheduled to mature in one year
or less and $1.7 million, or 50.5%, was scheduled to mature in one to five years
and $1.1 million, or 31.4%, was scheduled to mature in more than five years. At
December 31, 2005, certificates of deposit scheduled to mature in less than one
year totaled $106.7 million. Based on prior experience, management believes that
a significant portion of such deposits will remain with the Company. If the
Company requires funds beyond its ability to generate them internally, borrowing
agreements exist with the FHLB, which provide an additional source of funds. The
amount of eligible collateral for blanket lien pledges from the FHLB was $172.1
million as of December 31, 2005. The Company may also use brokered certificates
of deposit as an additional source of funds. For additional information about
cash flows from the Company's operating, financing and investing activities, see
the Statements of Cash Flows included in the Consolidated Financial Statements.
10
At December 31, 2005, the Company had outstanding loan commitments of
$2.5 million. This amount does not include undisbursed overdraft loan privileges
and the undisbursed home equity lines of credit. The Company monitors its
liquidity position and expects to have sufficient funds to meet its current
funding commitments.
The main sources of liquidity for the Company are proceeds from
dividends and loan repayments from the Bank and the proceeds from stock options
exercised. The main cash outflows are dividend payments to shareholders and
funds used to repurchase shares of the Company's common stock. During 2005, the
Company repurchased 50,932 shares of its common stock. The Company has
determined that a share repurchase program is appropriate to enhance shareholder
value. Share repurchases generally increase earnings per share, return on
average assets, and return on average equity, three performance benchmarks
against which the Company and thrift holding companies are often measured. The
Company buys stock in the open market whenever the price of the stock is deemed
reasonable and the Company has funds available for the purchase. The Company's
ability to pay dividends to shareholders depends substantially on dividends and
loan payments received from the Bank. The Bank may not declare or pay cash
dividends on any of its shares of common stock if the effect thereof would cause
equity to be reduced below applicable regulatory capital requirements or the
amount required to be maintained for the liquidation account. For a description
of the liquidation account, see Note 16 to the Consolidated Financial
Statements. Unlike the Bank, the Company is not subject to OTS formula-based
regulatory restrictions on the payment of dividends to its shareholders;
however, it is subject to the requirements of Iowa law. Iowa law generally
prohibits the Company from paying a dividend if either of the following would
result: (a) the Company would not be able to pay its debts as they become due in
the usual course of business; or (b) the Company's total assets would be less
than the sum of its total liabilities, plus the amount that would be needed, if
the Company were to be dissolved at the time of distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
The primary investing activities of the Company are the origination and
purchase of mortgage and other loans and the purchase of securities. During the
years ended December 31, 2005, 2004 and 2003, the Company's disbursements for
loan originations and purchases totaled $143.1 million, $160.2 million and
$205.4 million, respectively. These activities were funded primarily by net
deposit inflows, principal repayments on loans, proceeds from the sale of loans,
proceeds from the maturity and call of securities, brokered certificates of
deposit, and FHLB advances. Net cash flows (used in) investing activities were
$(23.1) million, $(42.4) million and $(31.1) million for the years ended
December 31, 2005, 2004 and 2003, respectively. Net cash flows provided by
financing activities were $16.5 million, $33.2 million and $13.9 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
The OTS regulations require savings associations, such as the Bank, to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations; a leverage ratio
requirement of 3% of core capital to such adjusted total assets; and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. The Bank satisfied these minimum capital standards at
December 31, 2005 with tangible and leverage capital ratios of 7.3% and a total
risk-based capital ratio of 11.9 %. In determining the amount of risk-weighted
assets for purposes of the risk-based capital requirement, a savings association
must compute its risk-based assets by multiplying its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations. These
capital requirements, which are applicable to the Bank only, do not consider
additional capital held at the Company level, and require certain adjustments to
shareholders' equity to arrive at the various regulatory capital amounts.
The table below presents the Bank's regulatory capital amounts as
compared to the OTS regulatory capital requirements at December 31, 2005:
Capital Excess
Amount Requirements 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
11
Discussion of Market Risk--Interest Rate Sensitivity Analysis
As a financial institution, the Company's primary component of market
risk is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate loan
portfolio, within Iowa, is subject to risks associated with the local economy.
The Company has sought to diversify its loan portfolio by purchasing loans
secured by properties outside of Iowa. At December 31, 2005, $143.1 million, or
32.6%, of the Company's total loan portfolio was secured by properties outside
the State of Iowa, located in twenty-two states. See "Asset Quality." The Bank
does not own any trading assets. At December 31, 2005, neither the Company nor
the Bank had any hedging transactions in place, such as interest rate swaps and
caps.
The Company seeks to manage its interest rate risk by monitoring and
controlling the variation in repricing intervals between its assets and
liabilities. To a lesser extent, the Company also monitors its interest rate
sensitivity by analyzing the estimated changes in market value of its assets and
liabilities assuming various interest rate scenarios. As discussed more fully
below, there are a variety of factors which influence the repricing
characteristics of any given asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's "interest rate sensitivity gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The "interest rate
sensitivity gap" is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income, while a
positive gap would tend to adversely affect net interest income.
The Company's policy in recent years has been to manage its exposure to
interest rate risk generally by focusing on the maturities of its interest rate
sensitive assets and by emphasizing adjustable-rate mortgage loans and
short-term consumer loans, and maintaining a level of liquidity by investing in
short-term interest-earning deposits and equity securities. In addition, the
Company generally sells all fixed rate one- to four-family residential loans
with maturities in excess of fifteen years.
At December 31, 2005, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $59.7 million, representing a one-year gap ratio
of -12.3%, compared to a one-year gap ratio of -7.0% at December 31, 2004. The
chief executive officer meets regularly with the Bank's senior executive
officers to review trends in deposits as well as mortgage and consumer lending
activities. The chief executive officer reports quarterly to the board of
directors on interest rate risks and trends, as well as liquidity and capital
ratio requirements.
Gap Table. The following table (the "Gap Table") sets forth the amounts
of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2005, which are expected to reprice or mature, based upon certain
assumptions, in each of the future time periods shown. Except as stated below,
the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the terms of
repricing or the contractual terms of the asset or liability. Certain
assumptions used in preparing the table are set forth in the following table.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable.
12
At December 31, 2005 (1)
------------------------
Within 1-3 3-5 5-10 10-20 Over 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-earning assets:
First mortgage loans..............
Adjustable (2).................. $ 81,588 $ 114,259 $ 56,007 $ - $ - $ - $ 251,854
Fixed (2)....................... 22,858 38,562 25,071 34,863 3,495 90 124,939
Consumer and other loans........... 22,956 25,070 9,967 2,961 110 2 61,066
Investment securities (3)(4)....... 11,077 1,296 3,599 1,033 - - 17,005
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets... $ 138,479 $ 179,187 $ 94,644 $ 38,857 $ 3,605 $ 92 $ 454,864
========== ========== ========== ========== ========== ========== ==========
Rate sensitive liabilities:
Savings accounts.................. $ 4,598 $ 6,984 $ 4,811 $ 6,458 $ 3,546 $ 651 $ 27,048
NOW accounts...................... 18,219 18,710 7,426 4,402 480 5 49,242
Money market accounts............. 35,425 9,416 - - - - 44,841
Certificate accounts.............. 106,717 71,972 22,288 43 - - 201,020
Noninterest bearing deposits...... 12,186 - - - - - 12,186
FHLB advances and other
liabilities (5)................ 21,009 53,435 25,000 3,000 - - 102,444
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities................ $ 198,154 $ 160,517 $ 59,525 $ 13,903 $ 4,026 $ 656 $ 436,781
========== ============ ========== ========== ========== ========== ==========
Interest sensitivity gap............. $ (59,675) $ 18,670 $ 35,119 $ 24,954 $ (421) $ (564)
Cumulative interest-sensitivity gap.. $ (59,675) $ (41,005) $ (5,886) $ 19,068 $ 18,647 $ 18,083
Interest sensitivity gap to total
assets.......................... (12.30)% 3.85% 7.24% 5.14% (0.09)% (0.12)%
Cumulative interest-sensitivity gap to
total assets.................... (12.30) (8.45) (1.21) 3.93 3.84 3.73
Ratio of interest-earning assets to
interest-bearing liabilities..... 69.88 111.63 159.00 279.49 89.54 14.02 104.14%
Cumulative ratio of interest-earning
assets to interest-bearing
liabilities...................... 69.88 88.57 98.59 104.41 104.28 104.14 104.14
Total assets......................... $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191
Cumulative interest-earning assets... $ 138,479 $ 317,666 $ 412,310 $ 451,167 $ 454,772 $ 454,864 $ 454,864
Cumulative interest-bearing liabilities $ 198,154 $ 358,671 $ 418,196 $ 432,099 $ 436,125 $ 436,781 $ 436,781
- ----------------------------------------
(1) The following assumptions were used in regard to prepayment speed for
loans: (i) fixed rate commercial real estate loans and mortgage-backed
securities will prepay at 10 percent per year, (ii) one- to four-family
loans (both fixed rate and adjustable rate) will prepay at 12 percent per
year, (iii) all multifamily loans (both fixed and adjustable rate) will
prepay at 15 percent per year, (iv) all second mortgage real estate loans
and all other loans will prepay at 20 percent year. Besides prepayment
assumptions, the chart above also includes normal principal payments
based upon the loan contractual agreements. Savings accounts are assumed
to be withdrawn at an annual rate of 17 percent. NOW accounts are assumed
to be withdrawn at an annual rate of 37 percent. Money market accounts
are assumed to be withdrawn at 79 percent during the first year with the
balance being withdrawn within the one-to-three year category. These
assumptions are annual percentages based on remaining balances and should
not be regarded as indicative of the actual prepayments and withdrawals
that may be experienced by the Company. Certain shortcomings are inherent
in the analysis presented by the foregoing table.
(2) Includes $3.5 million and $0.7 million in mortgage-backed securities in
adjustable and fixed first mortgage loans, respectively.
(3) Includes other equity securities, interest-bearing deposits and FHLB
stock, all of which are shown in the within-one-year category. Components
include interest-bearing deposits of $0.6 million and securities
available-for-sale of $11.2 million.
(4) Includes $4.9 million of FHLMC preferred stock and $1.0 million of FNMA
preferred stock. $3.0 million is fixed rate and $2.9 million is
adjustable rate. The fixed rate preferred stock was included in the
appropriate category based upon their call date. The adjustable rate
preferred stock was included in the appropriate category based upon their
repricing date.
(5) Includes $102.4 million of advances which have been categorized based
upon their maturity date. As of December 31, 2005, the Company has $29.5
million of advances which are callable by the FHLB. These callable
advances have been placed in the repricing category that they mature.
13
Certain shortcomings are inherent in the method of analysis presented
in the above Gap Table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets and liabilities
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of changes in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
Net Portfolio Value Analysis. As part of its efforts to maximize net
interest income and manage the risks associated with changing interest rates,
management uses the "net portfolio value" ("NPV") methodology which the OTS has
adopted as part of its capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in NPV which would hypothetically occur if
interest rates rapidly rise or fall along the yield curve. Projected values of
NPV at both higher and lower regulatory defined rate scenarios are compared to
base case values (no change in rates) to determine the sensitivity to changing
interest rates.
Presented below, as of December 31, 2005, is an analysis of the
Company's interest rate risk ("IRR") as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Company's current capital position.
Interest Rate Sensitivity of Net Portfolio Value (NPV)(1)
Net Portfolio Value NPV as % of PV of Assets
------------------- ------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp 40,649 (8,764) (18) 8.60 (142) bp
+200 bp 44,395 (5,017) (10) 9.25 (77) bp
+100 bp 47,430 (1,983) (4) 9.74 (28) bp
0 bp 49,412 - - 10.02 -
-100 bp 50,035 622 1 10.04 2 bp
-200 bp 49,164 (249) (1) 9.79 (23) bp
- ---------------------------------
(1) Denotes rate shock used to compute interest rate risk capital component.
As is the case with the Gap Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented above assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Mortgage loans and consumer loans are placed
on nonaccrual status generally when either principal or interest is 90 days or
more past due. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure, or by
deed in lieu of foreclosure, is deemed foreclosed real estate until such time as
it is sold.
14
When foreclosed real estate is acquired or otherwise deemed foreclosed
real estate, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management and any subsequent decline
in fair value is charged to operations. At December 31, 2005, the Company's
foreclosed real estate consisted of 15 properties with an aggregate carrying
value of $1.1 million.
Delinquent Loans, Nonaccrual Loans and Nonperforming Assets. The
following table sets forth information regarding loans on nonaccrual status and
foreclosed real estate of the Company at the dates indicated. At the dates
indicated, the Company did not have any material restructured loans and did not
have any loans that were ninety days past due and still accruing interest.
At December 31,
---------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans and nonperforming
assets:
First mortgage loans:
One- to four-family residential..... $ 389 $ 335 $ 414 $ 434 $ 130
Multifamily and commercial
properties ...................... - - - 37 37
Consumer loans:........................ 196 299 201 172 109
----------- ----------- ----------- ----------- -----------
Total nonaccrual loans.............. 585 634 615 643 276
Total foreclosed real estate (1)....... 1,143 1,079 1,453 769 1,074
Other nonperforming assets............. - - - - -
----------- ----------- ----------- ----------- -----------
Total nonperforming assets......... $ 1,728 $ 1,713 $ 2,068 $ 1,412 $ 1,350
=========== =========== =========== =========== ===========
Total nonaccrual loans to net loans
receivable......................... 0.14% 0.16% 0.17% 0.19% 0.09%
Total nonaccrual loans to total assets.. 0.12 0.14 0.15 0.16 0.07
Total nonperforming assets to total
assets............................ 0.36 0.37 0.49 0.35 0.36
- --------------------------------------
(1) Represents the net book value of property acquired by the Company
through foreclosure or deed in lieu of foreclosure. Upon acquisition,
this property is recorded at the lower of cost or fair value less
estimated selling expenses.
The following table sets forth information with respect to loans
delinquent 60-89 days in the Company's portfolio at the dates indicated.
At December 31,
---------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
Loans past due 60-89 days:
First mortgage loans:
One- to four-family residential........... $ 1,106 $ 1,001 $ 649 $ 830 $ 1,083
Multifamily and commercial properties..... - 40 463 - -
Consumer loans................................ 214 238 223 183 153
--------- --------- --------- --------- ---------
Total past due............................ $ 1,320 $ 1,279 $ 1,335 $ 1,013 $ 1,236
========= ========= ========= ========= =========
15
The following table sets forth information with respect to the
Company's delinquent loans and other problem assets at December 31, 2005.
At December 31, 2005
--------------------
Balance Number
------- ------
(Dollars in thousands)
One- to four-family first mortgage loans:
Loans 60 to 89 days delinquent.................... $ 1,106 32
Loans 90 days or more delinquent.................. 389 7
Multifamily and commercial first mortgage loans:
Loans 60 to 89 days delinquent.................... - -
Loans 90 days or more delinquent.................. - -
Consumer Loans:
Loans 60 to 89 days delinquent.................... 214 24
Loans 90 days or more delinquent.................. 196 22
Foreclosed real estate................................. 1,143 15
Other nonperforming assets............................. - -
Loans to facilitate sale of foreclosed real estate..... 241 4
Special mention loans.................................. 1,972 44
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 2005,
the Company had $1.97 million of special mention loans, consisting of seventeen
loans secured by one- to four-family residences, two loans secured by commercial
real estate and twenty-five consumer loans.
The following table sets forth the aggregate amount of the Company's
classified assets, which include nonperforming loans and foreclosed real estate,
at the dates indicated.
At December 31,
---------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
Substandard assets.............. $ 1,670 $ 1,680 $ 2,046 $ 1,361 $ 1,291
Doubtful assets................. - - - - -
Loss assets..................... 58 58 22 51 59
---------- ---------- ---------- ------------ ----------
Total classified assets.. $ 1,728 $ 1,738 $ 2,068 $ 1,412 $ 1,350
========== ========== ========== ========== ==========
Allowance for Loan Losses. It is management's policy to provide an
allowance and provision for probable losses on the Company's loan portfolio
based on management's evaluation of the prior loss experience, industry
standards, past due loans, economic conditions, the volume and type of loans in
the Company's portfolio, which includes a significant amount of multifamily and
commercial loans, substantially all of which are purchased and are
collateralized by properties located outside of the Company's market area, and
other factors related to the collectibility of the Company's loan portfolio. The
Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans require classification or the establishment of
appropriate allowances for losses. Such evaluation, which includes a review of
all loans of which full collectibility of interest and principal may not be
reasonably assured, considers, among other matters, the estimated fair value of
the underlying collateral. During 2005 the Company's total loan portfolio
increased $19.8 million or 4.7%. During the years ended December 31, 2005, 2004
and 2003 the Company's provision for loan losses were $260,000, $240,000 and
$255,000, respectively. The
16
Company's allowance for loan losses totaled $3.3 million, $3.2 million and $3.2
million at December 31, 2005, 2004 and 2003, respectively.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowances for loan
losses. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
Analysis of the Allowance for Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
For the Year Ended December 31,
-------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding............ $ 438,650 $ 418,841 $ 367,396 $ 344,574 $ 311,826
Average net loans outstanding...... 424,633 389,190 358,260 337,693 318,197
Allowance balances (at beginning of
period)....................... 3,235 3,165 3,118 2,883 2,843
----------- ----------- ----------- ----------- ----------
Provisions for losses.............. 260 240 255 383 210
Charge-Offs:
First mortgage loans.......... 5 66 36 27 15
Consumer loans................ 182 114 265 135 168
Recoveries:
First mortgage loans.......... 3 2 - - -
Consumer loans................ 15 8 93 14 13
----------- ----------- ----------- --------- ----------
Net charge-offs............... 169 170 208 148 170
----------- ----------- ----------- --------- ----------
Allowance balance (at end of
period)....................... $ 3,326 $ 3,235 $ 3,165 $ 3,118 $ 2,883
=========== =========== =========== ========= ==========
Allowance for loan losses as a percent of
total loans receivable at end of
period........................ 0.76% 0.77% 0.86% 0.90% 0.92%
Net loans charged off as a percent of
average net loans outstanding. 0.04 0.04 0.06 0.04 0.05
Ratio of allowance for loan losses to
total nonaccrual loans at end of
period......................... 567.98 513.13 515.02 485.00 1,042.07
Ratio of allowance for loan losses to
total nonaccrual loans and foreclosed
real estate at end of period.. 192.41 188.86 153.05 220.90 213.48
17
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation for loan losses by loan category for the periods indicated:
At December 31,
---------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period applicable to:
One- to four-family residential
mortgage loans.................... $ 593 49.47% $ 510 45.99% $ 517 47.33%
Multifamily residential mortgage loans 704 16.86 731 18.73 686 19.04
Commercial mortgage loans........... 1,201 19.76 1,240 21.94 978 18.95
Consumer loans...................... 828 13.91 754 13.34 984 14.68
------- ---------- ------- ---------- ------- ----------
Total allowance for loan losses... $ 3,326 100.00% $ 3,235 100.00% $ 3,165 100.00%
======= ========== ======= ========== ======= ==========
At December 31,
----------------------------------------------------
2002 2001
----------------------------------------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period applicable to:
One- to four-family residential
mortgage loans.................... $ 395 43.17% $ 608 51.80%
Multifamily residential mortgage loans 709 20.54 1,121 23.86
Commercial mortgage loans........... 1,223 20.68 459 8.25
Consumer loans...................... 791 15.61 695 16.09
------- ---------- ------- ----------
Total allowance for loan losses... $ 3,118 100.00% $ 2,883 100.00%
======= ========== ======= ==========
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. For purposes of this table, average balances were computed on a
monthly basis.
18
For the Year Ended December 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------------------
Average Average Average
Average Interest Yield/ Average Yield/ Average Yield/
Balance Cost Cost Balance Interest Cost Balance Interest Cost
------- ------- ------- ------- -------- ------- -------- --------- -------
(Dollars in thousands)
Assets:
Interest-earning assets:
First mortgage loans(1)....... $ 365,647 $ 21,391 5.85% $ 334,676 $ 20,027 5.98% $ 304,573 $ 19,978 6.56%
Consumer loans(1)............. 58,986 3,933 6.67 54,513 3,757 6.89 53,687 4,146 7.72
Investment securities......... 23,738(4) 948 3.99 27,232(5) 973 3.57 41,486(6) 1,288 3.11
--------- -------- ----- --------- -------- ------ --------- -------- ------
Total interest-earning
assets..................... $ 448,371 $ 26,272 5.86% $ 416,421 $ 24,757 5.95% $ 399,746 $ 25,412 6.35%
Noninterest-earning assets...... 28,724 28,818 24,821
--------- --------- ---------
Total assets.................. $ 477,095 $ 445,239 $ 424,567
========= ========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings..................... $ 95,781 $ 1,061 1.11% $ 78,865 $ 542 0.69% $ 65,897 $ 383 0.58%
Passbook savings.............. 28,710 91 0.32 29,217 91 0.31 27,619 149 0.54
Certificates of Deposit....... 189,900 6,743 3.55 182,368 6,324 3.47 180,983 7,318 4.04
Borrowed funds................ 102,234 4,712 4.61 97,848 4,410 4.51 96,923 4,492 4.63
--------- -------- ----- --------- -------- ----- --------- -------- ------
Total interest-bearing
liabilities................... $ 416,625 $ 12,607 3.03% $ 388,298 $ 11,367 2.93% $ 371,422 $ 12,342 3.32%
Noninterest-bearing liabilities.. 17,110 15,322 13,236
--------- --------- ---------
Total liabilities..............$ 433,735 $ 403,620 $ 384,658
Equity........................... 43,360 41,619 39,909
--------- --------- ---------
Total liabilities and equity...$ 477,095 $ 445,239 $ 424,567
========= ========= =========
Net interest income.............. $ 13,665 $ 13,390 $ 13,070
======== ======== ========
Net interest rate spread(2)...... 2.83% 3.02% 3.03%
====== ====== ======
Net interest margin (3).......... 3.05 3.22 3.27
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 107.62 107.24 107.63
====== ====== ======
- -------------------
(1) Balance is net of deferred loan fees, deferred loan costs, loan premiums
and loans in process. Nonaccrual loans are included in the balances.
(2) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
(4) Includes interest-bearing deposits of $1,150,000, Federal Home Loan Bank
stock of $5,212,000, and securities available-for-sale of $17,376,000.
(5) Includes interest-bearing deposits of $1,735,000, Federal Home Loan Bank
stock of $4,993,000, and securities available-for-sale of $20,504,000.
(6) Includes interest-bearing deposits of $11,798,000, Federal Home Loan Bank
stock of $4,931,000, and securities available-for-sale of $24,757,000.
19
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
Year Ended Year Ended
December 31, 2005 December 31, 2004
Compared to Compared to
Year Ended Year Ended
December 31, 2004 December 31, 2003
-------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
-------------------------------------------------------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume Decrease Volume Rate Volume Decrease
------ ---- ------ -------- ------ ---- ------ --------
(In thousands)
Interest income:
First mortgage loans................. $ 1,853 $ (447) $ (41) $ 1,365 $ 1,974 $ (1,753) $ (173) $ 48
Consumer loans....................... 308 (122) (10) 176 64 (446) (7) (389)
Investment securities................ (125) 113 (13) (25) (252) (55) (7) (314)
-------- ------- ------ ------- -------- -------- ------ ------
Total interest-earning assets...... $ 2,036 $ (456) $ (64) $ 1,516 $ 1,786 $ (2,254) $ (187) $ (655)
======= ======= ====== ======= ======= ======== ====== ======
Interest expense:
NOW and money market savings......... $ 117 $ 331 $ 71 $ 519 $ 75 $ 70 $ 14 $ 159
Passbook savings..................... (2) 2 - - 9 (63) (4) (58)
Certificate of deposits.............. 261 152 6 419 56 (1,042) (8) (994)
Borrowed funds....................... 199 100 4 303 43 (124) (1) (82)
------- ------- ------ ------- ------- -------- ------ -------
Total interest-bearing liabilities. 575 585 81 1,241 183 (1,159) 1 (975)
------- ------- ------ ------- ------- -------- ------ ------
Net change in net interest income...... $ 1,461 $(1,041) $ (145) $ 275 $ 1,603 $ (1,095) $ (188) $ 320
======= ======== ====== ======= ======= ========= ====== ======
20
Comparison of Financial Condition as of December 31, 2005 and December 31, 2004
Total assets increased $22.5 million, or 4.9%, to $485.2 million at
December 31, 2005 from $462.7 million at December 31, 2004. The increase in
assets was primarily due to increases in net loans receivable, premises and
equipment, and cash and cash equivalents, offset in part by a decrease in
securities available-for-sale. Asset growth was funded by increases in deposits
and FHLB advances.
Total loans receivable, net, increased by $23.0 million, or 5.6%, to
$430.3 million at December 31, 2005 from $407.3 million at December 31, 2004,
primarily due to the origination of $74.6 million of first mortgage loans
secured by one- to four-family residences, originations of $8.5 million of first
mortgage loans secured by commercial real estate, purchases of first mortgage
loans primarily secured by one- to four-family residences, multifamily
residences and commercial real estate of $24.0 million, and originations of
$24.8 million of second mortgage loans during the year ended December 31, 2005.
These originations and purchases were offset in part by payments and prepayments
of $103.0 million and sales of loans of $19.5 million during the year ended
December 31, 2005. The Company sells substantially all fixed-rate loans with
maturities in excess of 15 years in the secondary mortgage market in order to
reduce interest rate risk. Premises and equipment, net, increased by $1.1
million, or 10.8%, to $11.0 million at December 31, 2005 from $9.9 million at
December 31, 2004. The increase in premises and equipment was primarily due to
the initial construction costs associated with the construction of a new branch
office located at the Jordan Creek Town Center in West Des Moines, Iowa and the
expansion of the Crossroads branch in Fort Dodge, Iowa. Cash and cash
equivalents increased $721,000, or 9.1%, to $8.6 million at December 31, 2005
from $7.9 million at December 31, 2004. Securities available-for-sale decreased
$2.6 million, or 14.4%, to $15.5 million at December 31, 2005 from $18.1 million
at December 31, 2004, primarily due to calls, payments and maturities of
mortgage-backed and municipal securities. Proceeds of such calls, payments and
maturities were used to fund loan growth.
Deposits increased $18.0 million, or 5.7%, to $334.3 million at
December 31, 2005 from $316.3 million at December 31, 2004, primarily reflecting
increases in checking accounts, NOW accounts, and certificates of deposit,
offset in part by decreases in savings accounts and money market accounts. The
increase in deposits is due primarily to management's pricing strategies,
continued marketing efforts, and the utilization of brokered certificates of
deposit. In 2005, the Company began issuing brokered certificates of deposit. At
December 31, 2005, the Company had $4.0 million of brokered certificates of
deposit. Borrowed funds, primarily FHLB advances, increased $1.5 million, or
1.5%, to $102.4 million at December 31, 2005 from $101.0 million at December 31,
2004. The increases in the deposits and borrowed funds were used to fund loan
growth.
Total shareholders' equity increased $2.8 million, or 6.6%, to $44.3
million at December 31, 2005 from $41.5 million at December 31, 2004, primarily
due to earnings, the exercise of stock options, and a decrease in unrealized
loss on securities available-for-sale, offset in part by stock repurchases and
declared dividends.
Comparison of Financial Condition as of December 31, 2004 and December 31, 2003
Total assets increased $38.7 million, or 9.1%, to $462.7 million at
December 31, 2004 from $424.0 million at December 31, 2003. The increase in
assets was due primarily to an increase in net loans receivable, offset in part
by decreases in securities available-for-sale and cash and cash equivalents.
Asset growth was funded by increases in deposits and FHLB advances.
Total loans receivable, net, increased by $44.3 million, or 12.2%, to
$407.3 million at December 31, 2004 from $363.0 million at December 31, 2003,
primarily due to the origination of $64.8 million of first mortgage loans
secured by one- to four-family residences, originations of $8.6 million of first
mortgage loans secured by multifamily residences and commercial real estate,
purchases of first mortgage loans primarily secured by one- to four-family
residences, multifamily residences and commercial real estate of $52.7 million,
and originations of $21.7 million of second mortgage loans during the year ended
December 31, 2004. These originations and purchases were offset in part by
payments and prepayments of $90.6 million and sales of loans of $17.8 million
during the year ended December 31, 2004. Securities available-for-sale decreased
$4.1 million, or 18.6%, primarily due to calls, payments and maturities of
mortgage-backed securities and municipal securities. Proceeds of such calls,
payments and maturities were used to fund loan growth. Cash and cash equivalents
decreased $2.1 million, or 21.0%, to $7.9 million at December 31, 2004 from
$10.0 million at December 31, 2003 as the Company invested cash in loans and
securities.
Deposits increased $32.3 million, or 11.4%, to $316.3 million at
December 31, 2004 from $284.0 million at December 31, 2003, primarily reflecting
increases in checking accounts, money market deposit accounts, savings
21
accounts, and retail certificate of deposit accounts, offset in part by
decreases in certain public funds deposits. The increase in deposits was due
primarily to the deposit activity associated with the opening of the Company's
newest offices in Ankeny and Clive, Iowa and management's continued marketing
efforts. Borrowings, primarily FHLB advances, increased $6.0 million, to $101.0
million at December 31, 2004 from $95.0 million at December 31, 2003 as the
Company utilized borrowings to fund loans.
Total shareholders' equity decreased $57,000 to $41.5 million at
December 31, 2004 from $41.6 million at December 31, 2003, primarily due to
dividends paid to shareholders, funds used for the repurchase of stock and
increased unrealized losses on securities available-for-sale, offset in part by
net income and stock options exercised.
Comparison of Results of Operations for the Years Ended December 31, 2005 and
2004
Net Income. Net income decreased by $384,000, or 7.1%, to $5.0 million
for the year ended December 31, 2005 compared to $5.4 million for the year ended
December 31, 2004. Net income is primarily dependent on net interest income,
noninterest income, noninterest expense and income tax expense. The decrease in
net income was primarily due to an increase in noninterest expense, offset in
part by increases in net interest income and noninterest income.
Net Interest Income. Net interest income before provision for loan
losses increased by $275,000, or 2.1%, to $13.7 million for the year ended
December 31, 2005 from $13.4 million for the year ended December 31, 2004. The
increase is primarily due to an increase in the average balance of
interest-earning assets, offset in part by a decrease in the yield on
interest-earning assets, an increase in the average balance of interest-bearing
liabilities, and an increase in the average cost of funds. The interest rate
spread (i.e., the difference in the average yield on assets and average cost of
liabilities) decreased to 2.83% for the year ended December 31, 2005 from 3.02%
for the year ended December 31, 2004. The decrease in interest rate spread
reflects the general decrease in the yield on interest-earning assets and the
increase in the overall cost of interest-bearing liabilities. The decrease in
the yield on interest-earning assets primarily reflects loan growth at rates
generally lower than portfolio rates. The increase in the cost of
interest-bearing liabilities reflects repricing of interest-bearing liabilities
at generally higher current market interest rates.
Interest Income. Interest income increased by $1.5 million, or 6.1%, to
$26.3 million for the year ended December 31, 2005 compared to $24.8 million for
the year ended December 31, 2004. The increase in interest income was primarily
due to an increase in the average balance of interest-earning assets, offset in
part by a decrease in the average yield on interest-earning assets. The average
balance of interest-earning assets increased $32.0 million, or 7.7%, to $448.4
million for the year ended December 31, 2005, from $416.4 million for 2004. The
increase in the average balances of interest-earning assets primarily reflects
increases in the average balances of first mortgage loans and consumer loans.
The increases in first mortgage loans were primarily derived from originations
of $74.6 million of first mortgage loans secured by one- to four-family
residences, originations of $8.5 million of first mortgage loans secured by
commercial real estate, purchases of first mortgage loans secured by one- to
four-family residences, multifamily residences and commercial real estate of
$24.0 million, and originations of $24.8 million of second mortgage loans, which
originations and purchases were offset in part by payments and prepayments of
$103.0 million and sales of loans of $19.5 million during the year ended
December 31, 2005. This reflects the Company's continued emphasis on residential
lending. See "Business Strategy." The average yield on interest-earning assets
decreased to 5.86% for the year ended December 31, 2005 from 5.95% for the year
ended December 31, 2004, primarily due to loan growth at rates generally lower
than portfolio rates.
Interest Expense. Interest expense increased by $1.2 million, or 10.9%,
to $12.6 million for the year ended December 31, 2005, compared to $11.4 million
for the year ended December 31, 2004. The increase in interest expense was
primarily due to increases in the average cost of funds and in the average
balance of interest-bearing liabilities. The average cost of funds increased to
3.03% for the year ended December 31, 2005 from 2.93% for the year ended
December 31, 2004, primarily due to a general increase in market interest rates.
The average balance of interest-bearing liabilities increased $28.3 million, or
7.3%, to $416.6 million for the year ended December 31, 2005 from $388.3 million
for 2004. The increase in the average balance of interest-bearing liabilities
primarily reflects an increase in the average balances of checking and money
market accounts, certificates of deposit and borrowed funds, offset in part by a
decrease in the average balance of savings accounts. The increase in average
interest-bearing deposits was primarily due to the Company's pricing strategies
and continued marketing efforts. The increase in interest-bearing liabilities
was used to fund asset growth.
22
Provision for Loan Losses. The Company's provision for loan losses was
$260,000 and $240,000 for the years ended December 31, 2005 and December 31,
2004, respectively. The Company establishes provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multifamily and commercial real estate loans, substantially all of
which are purchased and are secured by properties located out of state, and
other factors related to the collectibility of the Company's loan portfolio.
During 2005, the Company's total loan portfolio increased $19.8 million, or
4.7%. This increase primarily consisted of increases in the one- to four-family
first mortgage real estate loans, which carries a lower level of risk than other
loans in the portfolio. The Company purchased $24.0 million of loans in 2005,
compared to $52.7 million of loans in 2004. The properties securing the loans
purchased are primarily out of state and constitute a higher rate of risk than
originated loans due to the size, locations and type of collateral securing such
loans. The Company's out of state loans decreased by $15.0 million, or 9.5%
during 2005. The economic conditions in the Bank's primary market areas remain
generally stable. The net charge-offs were $170,000 for both of the years ended
December 31, 2005 and 2004. The charge-offs were primarily due to losses on
automobile and second mortgage loans. The resulting allowance for loan loss was
$3.3 million and $3.2 million at December 31, 2005 and December 31, 2004,
respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.76% at December 31, 2005 from 0.77% at December 31, 2004. The
level of nonperforming loans was $585,000 at December 31, 2005 and $634,000 at
December 31, 2004. See "Asset Quality."
Management believes that the allowance for loan losses is adequate as
of December 31, 2005. While management estimates loan losses using the best
available information, such as independent appraisals for significant collateral
properties, no assurance can be made that future adjustments to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans, and other factors, both within and outside of
management's control.
Noninterest income. Total noninterest income increased by $489,000, or
8.1%, to $6.5 million for the year ended December 31, 2005 from $6.0 million for
the year ended December 31, 2004. The increase is primarily due to increases in
fees and service charges and mortgage banking income (gain on sale of loans),
offset in part by a provision for impairment on securities available-for-sale
and decreases in abstract fees and other income. Fees and service charges
increased $1.36 million due primarily to an increase in loan prepayment fees of
$644,000 and fees associated with checking accounts, including overdraft fees,
of $328,000. Mortgage banking income increased $34,000 due in part to an
increase in loan originations of loans held for sale. During 2005, the Company
recognized an other-than-temporary impairment of $680,000 on three Freddie Mac
adjustable rate, perpetual preferred stocks that had declined in value, reducing
noninterest income for the year. The securities are investment grade securities
that are held in the Company's available-for-sale portfolio. The Company
recognized an other-than-temporary impairment on the securities based on the
facts and circumstances surrounding each of the securities at the time,
including the duration and amount of the unrealized loss, as well as the
prospect for the recovery of market value within a reasonable period of time.
Abstract fees decreased $171,000 due to decreased sales volume as a result of a
general decrease in real estate activity, such as loan originations, in Webster,
Boone and Jasper Counties. Other income, which primarily includes insurance,
annuity, and mutual fund sales, rent income, and income associated with
foreclosed real estate decreased $54,000 due in part to decreases in annuity
sales.
Noninterest Expense. Total noninterest expense increased by $1.1
million, or 9.9%, to $12.4 million for the year ended December 31, 2005 from
$11.3 million for the year ended December 31, 2004. The increase is primarily
due to an increase in salaries and employee benefits and other expenses.
Salaries and employee benefits increased $467,000 primarily due to normal salary
increases, additions to staff, and an increase in the Company's contribution to
its defined benefit retirement plan. Other expenses increased $603,000 due
primarily to the write-down of other real estate owned and an increase in
professional fees. The Company's efficiency ratio for the years ended December
31, 2005 and 2004 was 61.54% and 58.18%, respectively. The Company's ratio of
noninterest expense to average assets for the years ended December 31, 2005 and
2004 was 2.61% and 2.54%, respectively.
Income Taxes. The Company's provision for income taxes was $2.5 million
for both of the years ended December 31, 2005 and 2004. The provision for income
taxes remained steady primarily due to the decrease in income before income
taxes, offset in part by the limited deductibility of the other-than-temporary
impairment of securities available-for-sale.
23
Comparison of Results of Operations for the Years Ended December 31, 2004 and
2003
Net Income. Net income decreased by $450,000 to $5.4 million for the
year ended December 31, 2004 compared to $5.9 million for the same period in
2003. The decrease in net income was primarily due to a decrease in noninterest
income and an increase in noninterest expense, offset in part by an increase in
net interest income and a decrease in income tax expense.
Net Interest Income. Net interest income before provision for loan
losses increased by $319,000 to $13.4 million for the year ended December 31,
2004 from $13.1 million for the year ended December 31, 2003. The increase is
primarily due to an increase in the average balance of interest-earning assets
and the decrease in the average cost of funds, offset in part by a decrease in
the yield on interest-earning assets and an increase in the average balance of
interest-bearing liabilities. The interest rate spread (i.e., the difference in
the average yield on assets and average cost of liabilities) decreased to 3.02%
for the year ended December 31, 2004 from 3.03% for the year ended December 31,
2003. The decrease in interest rate spread reflects the general decrease in the
yield on interest-earning assets offset in part by the decrease in the overall
cost of interest-bearing liabilities. The decrease in the yield on
interest-earning assets and the cost of interest-bearing liabilities reflects
repricing of interest-earning assets and interest-bearing liabilities at
generally lower current market interest rates.
Interest Income. Interest income decreased by $656,000 to $24.8 million
for the year ended December 31, 2004 compared to $25.4 million for the year
ended December 31, 2003. The decrease in interest income was primarily due to a
decrease in the average yield on interest-earning assets, offset in part by an
increase in the average balance of interest-earning assets. The average yield on
interest-earning assets decreased to 5.95% for the year ended December 31, 2004
from 6.36% for the year ended December 31, 2003, primarily due to a general
decrease in market interest rates compared to their original rates. The average
balance of interest-earning assets increased $16.7 million to $416.4 million for
the year ended December 31, 2004, from $399.7 million for 2003. The increase in
the average balances of interest-earning assets primarily reflects increases in
the average balances of first mortgage loans. The increases in first mortgage
loans were primarily derived from originations of $64.8 million of first
mortgage loans secured by one- to four-family residences, originations of $8.6
million of first mortgage loans secured by multifamily residences and commercial
real estate loans, purchases of first mortgage loans secured by one- to
four-family residences and multifamily residences and commercial real estate of
$52.7 million, which originations and purchases were offset in part by payments
and prepayments of $90.6 million and sales of loans of $17.8 million during the
year ended December 31, 2004. This reflects the Company's continued emphasis on
residential lending. See "Business Strategy."
Interest Expense. Interest expense decreased by $975,000 to $11.4
million for the year ended December 31, 2004 compared to $12.3 million for the
year ended December 31, 2003. The decrease in interest expense was primarily due
to a decrease in the average cost of funds, offset in part by an increase in the
average balance of interest-bearing liabilities. The average cost of funds
decreased to 2.93% for the year ended December 31, 2004 from 3.32% for the year
ended December 31, 2003, primarily due to a general decrease in market interest
rates compared to their original rates. The decrease in interest expense was
partially offset by a $16.9 million increase in the average balance of
interest-bearing liabilities to $388.3 million for the year ended December 31,
2004, from $371.4 million for the year ended December 31, 2003. The increase in
the average balance of interest-bearing liabilities primarily reflects an
increase in the checking, money market, savings, retail certificates of deposit
and borrowed funds, offset by a decrease in certain public funds deposits. The
increase in average interest-bearing deposits was due to the Company's marketing
efforts and the deposit activity associated with the Company's new branches in
Ankeny and Clive, Iowa. The increase in interest-bearing liabilities was used to
fund asset growth.
Provision for Loan Losses. The Company's provision for loan losses was
$240,000 and $255,000 for the years ended December 31, 2004 and December 31,
2003, respectively. The Company establishes provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multifamily and commercial real estate loans, substantially all of
which are purchased and are secured by properties located out of state, and
other factors related to the collectibility of the Company's loan portfolio.
During 2004, the Company's total loan portfolio increased $44.3 million or
12.2%. This increase primarily consisted of increases in the one- to four-family
first mortgage real estate loans, which carries a lower level of risk than other
loans in the portfolio. The Company purchased $52.7 million of loans in 2004,
compared to $45.1 million of loans in 2003. The properties securing the loans
purchased are primarily out of state and constitute a higher rate of risk than
originated loans due to the size, locations and type of collateral securing such
loans. The Company's out of state loans increased by $19.7 million, or
24
14.2%, during 2004. The net charge-offs were $170,000 for the year ended
December 31, 2004, compared to $208,000 for the year ended December 31, 2003.
The decrease in charge-offs were primarily due to a decrease in the charge-offs
of automobile and second mortgage loans. The resulting allowance for loan loss
was $3.2 million and $3.2 million at December 31, 2004 and December 31, 2003,
respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.77% at December 31, 2004 from 0.86% at December 31, 2003. The
level of nonperforming loans was $634,000 at December 31, 2004 and $615,000 at
December 31, 2003. See "Asset Quality."
Management believes that the allowance for loan losses was adequate as
of December 31, 2004.
Noninterest income. Total noninterest income decreased by $525,000, or
8.0%, to $6.0 million for the year ended December 31, 2004 from $6.6 million for
the year ended December 31, 2003. The decrease is primarily due to decreases in
mortgage banking income (gain on sale of loans) and abstract fees, offset in
part by increases in fees and service charges and other income. Mortgage banking
income decreased $573,000 due in part to a decrease in loan originations of
loans held for sale. Abstract fees decreased $350,000 due to decreased sales
volume as a result of a general decrease in real estate activity, such as loan
originations, in Webster, Boone and Jasper Counties. Fees and service charges
increased $260,000 due primarily to an increase in fees associated with checking
accounts, including overdraft fees, offset in part by a decrease in loan
prepayment fees. Other income, which primarily includes annuity and mutual fund
sales, rent income, insurance sales and income associated with foreclosed real
estate increased $138,000 due in part to increases in insurance sales, rental
income associated with the opening of a second multifamily apartment building in
March, 2003 and annuity and mutual fund sales, offset by a decrease in income
associated with foreclosed real estate.
Noninterest Expense. Total noninterest expense increased by $483,000 to
$11.3 million for the year ended December 31, 2004 from $10.8 million for the
year ended December 31, 2003. The increase was primarily due to an increase in
salaries and employee benefits, premises and equipment and other expenses.
Salaries and benefits increased $243,000 due primarily to normal salary
increases and an increase in the Company's contribution to its retirement plan.
Premises and equipment increased $141,000 primarily due to an increase in the
costs associated with the Ankeny and Clive offices. Other expenses increased
$110,000 due to an increase in losses associated with checking accounts,
primarily overdrafts, and an increase in professional fees. The Company's
efficiency ratio for the year ended December 31, 2004 and 2003 was 58.18% and
55.11%, respectively. The Company's ratio of noninterest expense to average
assets for the year ended December 31, 2004 and 2003 was 2.54% and 2.55%,
respectively.
Income Taxes. Income taxes decreased by $225,000 to $2.5 million for
the year ended December 31, 2004, compared to $2.7 million for the year ended
December 31, 2003. The decrease was primarily due to a decrease in pre-tax
earnings for the year ending 2004 compared to the year ending 2003, an increase
in recurring low-income federal income tax credit, offset in part by a one time
low-income housing Iowa income tax credit with an effect on net income of
approximately $110,000 that was recorded in 2003.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
25
Contractual Obligations
Payments due by period
----------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----- ------ --------- --------- -------
(In thousands)
Borrowings (1).............. $ 102,444 $ 21,005 $ 53,004 $ 25,000 $ 3,435
Loan commitments............ $ 2,537 $ 2,537 - - -
Construction contracts...... $ 1,737 $ 1,737 - - -
Available home equity and
unadvanced lines of credit.. $ 5,518 $ 5,518 - - -
--------- --------- --------- -------- -------
Total $ 112,236 $ 30,797 $ 53,004 $ 25,000 $ 3,435
========= ======== ========= ======== =======
(1) Callable advances are included in the category in which the advances mature
26
NORTH CENTRAL BANCSHARES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
---------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................28
---------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated statements of financial condition..........................29
Consolidated statements of income.......................................30
Consolidated statements of stockholders' equity.........................31
Consolidated statements of cash flows...................................32
Notes to consolidated financial statements..............................34
------------------------------------------
27
McGladrey & Pullen,
Certified Public Assountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors
North Central Bancshares, Inc.
Fort Dodge, Iowa
We have audited 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 each of the three years in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Central
Bancshares, Inc. and subsidiaries as of December 31, 2005 and 2004 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
/s/McGladrey & Pullen, LLP
--------------------------
Des Moines, Iowa
February 3, 2006
LLP is an independent member firm of RSM International,
an affiliation of separate and independent legal entities.
North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2005 and 2004
2005 2004
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 2):
Interest-bearing $ 552,456 $ 603,257
Noninterest-bearing 8,087,216 7,314,922
------------- -------------
Total cash and cash equivalents 8,639,672 7,918,179
Securities available-for-sale (Note 3) 15,457,942 18,061,271
Federal Home Loan Bank stock, at cost (Note 8) 5,250,100 5,045,000
Loans held for sale 737,838 904,127
Loans receivable, net (Notes 4, 5, 8 and 14) 430,278,191 407,316,318
Accrued interest receivable 2,146,102 1,953,605
Foreclosed real estate 1,142,901 1,079,257
Premises and equipment, net (Note 6) 10,962,248 9,889,737
Rental real estate 2,684,484 2,809,888
Title plant 925,256 925,256
Goodwill 4,970,800 4,970,800
Deferred taxes (Note 9) 953,676 1,102,612
Prepaid expenses and other assets 1,041,915 758,729
------------- -------------
Total assets $ 485,191,125 $ 462,734,779
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Notes 5 and 7) $ 334,337,583 $ 316,333,731
Borrowed funds (Note 8) 102,443,743 100,974,695
Advances from borrowers for taxes and insurance 1,897,511 1,856,249
Dividends payable 438,684 382,632
Accrued expenses and other liabilities 1,795,104 1,653,266
------------- -------------
Total liabilities 440,912,625 421,200,573
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 16)
STOCKHOLDERS' EQUITY (Notes 11 and 16)
Preferred stock, $.01 par value, authorized 3,000,000 shares;
none issued and outstanding - -
Common stock, $.01 par value, authorized 15,500,000 shares;
issued and outstanding 2005 1,507,703 shares;
2004 1,530,530 shares 15,077 15,305
Additional paid-in capital 18,447,059 18,681,041
Retained earnings, substantially restricted (Note 9) 25,847,345 23,438,369
Unearned shares, employee stock ownership plan (Note 10) (15,697) (81,200)
Accumulated other comprehensive (loss) (15,284) (519,309)
------------- -------------
Total stockholders' equity 44,278,500 41,534,206
------------- -------------
Total liabilities and stockholders' equity $ 485,191,125 $ 462,734,779
============= =============
See Notes to Consolidated Financial Statements.
29
North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Loans receivable:
First mortgage loans $ 21,391,426 $ 20,026,428 $ 19,977,961
Consumer loans 3,932,736 3,756,735 4,146,118
Securities and cash deposits 948,256 973,237 1,288,236
-------------------------------------------------
26,272,418 24,756,400 25,412,315
-------------------------------------------------
Interest expense:
Deposits (Note 7) 7,894,920 6,956,669 7,849,586
Other borrowed funds 4,712,535 4,410,057 4,492,129
-------------------------------------------------
12,607,455 11,366,726 12,341,715
-------------------------------------------------
Net interest income 13,664,963 13,389,674 13,070,600
Provision for loan losses (Note 4) 260,000 240,000 255,000
-------------------------------------------------
Net interest income after provision
for loan losses 13,404,963 13,149,674 12,815,600
-------------------------------------------------
Noninterest income:
Fees and service charges 4,482,923 3,123,253 2,863,713
Abstract fees 1,289,624 1,460,952 1,810,924
Mortgage banking income 289,042 254,731 828,099
Provision for impairment of securities available-for-sale (679,500) - -
Other income 1,166,280 1,220,672 1,082,226
-------------------------------------------------
Total noninterest income 6,548,369 6,059,608 6,584,962
-------------------------------------------------
Noninterest expense:
Compensation and employee benefits (Note 10) 6,659,922 6,192,515 5,949,737
Premises and equipment 1,452,136 1,428,534 1,287,229
Data processing 597,127 566,932 577,836
Other expenses (Note 12) 3,729,921 3,126,719 3,016,784
-------------------------------------------------
Total noninterest expense 12,439,106 11,314,700 10,831,586
-------------------------------------------------
Income before income taxes 7,514,226 7,894,582 8,568,976
Provision for income taxes (Note 9) 2,499,500 2,495,951 2,720,566
-------------------------------------------------
Net income $ 5,014,726 $ 5,398,631 $ 5,848,410
=================================================
Basic earnings per common share (Note 17) $ 3.29 $ 3.47 $ 3.69
Earnings per common share - assuming dilution (Note 17) 3.20 3.34 3.48
Dividends declared per common share 1.16 1.00 0.84
See Notes to Consolidated Financial Statements.
30
North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2005, 2004 and 2003
Unearned
Shares,
Additional Employee Stock
Comprehensive Common Paid-in Retained Ownership
Income Stock Capital Earnings Plan
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 16,403 $17,011,095 $21,862,248 $ (318,097)
Comprehensive income:
Net income $5,848,410 - - 5,848,410 -
Other comprehensive (loss), net of tax (Note 3) (247,821) - - - -
---------------
Total comprehensive income $5,600,589
===============
Purchase of 94,700 shares of treasury stock - - - -
Dividends on common stock - - (1,320,089) -
Retirement of 94,700 shares of treasury stock (947) (946,053) (2,287,239) -
Effect of contribution to employee stock ownership plan - 398,642 - 150,304
Issuance of 59,200 shares of common stock 592 1,247,638 - -
-----------------------------------------------------------
Balance, December 31, 2003 16,048 17,711,322 24,103,330 (167,793)
Comprehensive income:
Net income $5,398,631 - - 5,398,631 -
Other comprehensive (loss), net of tax (Note 3) (448,043) - - - -
---------------
Total comprehensive income $4,950,588
===============
Purchase of 143,055 shares of treasury stock - - - -
Dividends on common stock - - (1,537,685) -
Retirement of 143,055 shares of treasury stock (1,431) (831,969) (4,525,907) -
Effect of contribution to employee stock ownership plan - 241,466 - 86,593
Issuance of 68,805 shares of common stock 688 1,560,222 - -
-------------------------------------------------------------
Balance, December 31, 2004 15,305 18,681,041 23,438,369 (81,200)
Comprehensive income:
Net income $5,014,726 - - 5,014,726 -
Other comprehensive income, net of
reclassification adjustment and tax (Note 3) 504,025 - - - -
---------------
Total comprehensive income $5,518,751
===============
Purchase of 50,932 shares of treasury stock - - - -
Dividends on common stock - - (1,765,053) -
Retirement of 50,932 shares of treasury stock (509) (1,105,961) (840,697) -
Effect of contribution to employee stock ownership plan - 189,875 - 65,503
Issuance of 28,105 shares of common stock 281 682,104 - -
-----------------------------------------------------------
Balance, December 31, 2005 $ 15,077 $18,447,059 $25,847,345 $ (15,697)
===========================================================
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (Loss) Stock Equity
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 176,555 $ - $ 38,748,204
Comprehensive income:
Net income - - 5,848,410
Other comprehensive (loss), net of tax (Note 3) (247,821) - (247,821)
Total comprehensive income
Purchase of 94,700 shares of treasury stock - (3,234,239) (3,234,239)
Dividends on common stock - - (1,320,089)
Retirement of 94,700 shares of treasury stock - 3,234,239 -
Effect of contribution to employee stock ownership plan - - 548,946
Issuance of 59,200 shares of common stock - - 1,248,230
------------------------------------------------
Balance, December 31, 2003 (71,266) - 41,591,641
Comprehensive income:
Net income - - 5,398,631
Other comprehensive (loss), net of tax (Note 3) (448,043) - (448,043)
Total comprehensive income
Purchase of 143,055 shares of treasury stock - (5,359,307) (5,359,307)
Dividends on common stock - - (1,537,685)
Retirement of 143,055 shares of treasury stock - 5,359,307 -
Effect of contribution to employee stock ownership plan - - 328,059
Issuance of 68,805 shares of common stock - - 1,560,910
----------------------------------------------
Balance, December 31, 2004 (519,309) - 41,534,206
Comprehensive income:
Net income - - 5,014,726
Other comprehensive income, net of
reclassification adjustment and tax (Note 3) 504,025 - 504,025
Total comprehensive income
Purchase of 50,932 shares of treasury stock - (1,947,167) (1,947,167)
Dividends on common stock - - (1,765,053)
Retirement of 50,932 shares of treasury stock - 1,947,167 -
Effect of contribution to employee stock ownership plan - - 255,378
Issuance of 28,105 shares of common stock - - 682,385
------------------------------------------------
Balance, December 31, 2005 $ (15,284) $ - $ 44,278,500
================================================
See Notes to Consolidated Financial Statements.
31
North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,014,726 $ 5,398,631 $ 5,848,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 260,000 240,000 255,000
Depreciation 813,829 860,073 797,117
Amortization and accretion 409,436 578,352 677,301
Deferred taxes (151,064) (78,659) (1,475)
Effect of contribution to employee stock
ownership plan 255,378 328,059 548,946
Gain on sale of foreclosed real estate and loans, net (336,012) (319,650) (873,444)
Provision for impairment of securities available-for-sale 679,500 - -
Write-down of other real estate owned 181,900 - -
Loss on disposal of equipment 26,796 4,179 4,916
Proceeds from sales of loans held for sale 19,776,886 18,059,841 51,061,653
Originations of loans held for sale (19,321,555) (18,382,337) (48,188,320)
Change in assets and liabilities:
Accrued interest receivable (192,497) (87,084) 61,757
Prepaid expenses and other assets (283,053) 208,836 1,788,213
Accrued expenses and other liabilities 141,838 278,442 85,231
-----------------------------------------------------
Net cash provided by operating activities 7,276,108 7,088,683 12,065,305
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (405,303) 9,900,281 26,056,456
Purchase of loans (24,024,223) (55,175,363) (49,583,830)
Proceeds from sale of securities available-for-sale 1,082,600 1,178,800 702,400
Purchase of securities available-for-sale (1,932,700) (1,720,600) (11,197,958)
Proceeds from maturities and calls of securities
available-for-sale 3,330,724 3,613,903 5,888,849
Purchase of premises, equipment and rental real
estate (1,796,814) (752,992) (3,344,928)
Proceeds from sale of equipment 9,082 510 124,846
Other 641,641 597,996 235,978
-----------------------------------------------------
Net cash (used in) investing activities (23,094,993) (42,357,465) (31,118,187)
-----------------------------------------------------
(Continued)
32
North Central Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 18,003,852 $ 32,370,162 $ 6,963,487
Net increase in advances from borrowers for
taxes and insurance 41,262 119,494 224,641
Net increase (decrease) in short-term borrowings (5,000,000) 4,500,000 1,500,000
Proceeds from other borrowed funds 21,000,000 9,000,000 17,500,000
Payments of other borrowed funds (14,530,952) (7,529,910) (9,021,833)
Purchase of treasury stock (1,947,167) (5,359,307) (3,234,239)
Proceeds from issuance of common stock 682,385 1,560,910 1,248,230
Dividends paid (1,709,002) (1,492,961) (1,277,432)
----------------------------------------------------
Net cash provided by financing activities 16,540,378 33,168,388 13,902,854
----------------------------------------------------
Net change in cash and cash equivalents 721,493 (2,100,394) (5,150,028)
CASH AND CASH EQUIVALENTS
Beginning 7,918,179 10,018,573 15,168,601
----------------------------------------------------
Ending $ 8,639,672 $ 7,918,179 $ 10,018,573
====================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash payments for:
Interest paid to depositors $ 7,829,434 $ 6,909,056 $ 7,872,840
Interest paid on borrowings 4,712,564 4,410,092 4,492,129
Income taxes 2,651,490 1,837,562 2,330,008
See Notes to Consolidated Financial Statements.
33
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Organization, nature of business and basis of presentation: North Central
Bancshares, Inc. (the Company), an Iowa corporation, is a unitary savings and
loan holding company that owns 100% of the outstanding stock of First Federal
Savings Bank of Iowa (the Bank), which is a federally chartered stock savings
bank that conducts its operations from its main office located in Fort Dodge,
Iowa and nine branch offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny,
Clive, Burlington and Mt. Pleasant, Iowa.
Principles of consolidation: The consolidated financial statements, as described
above, include the accounts of the Company and its wholly owned subsidiary, the
Bank, and the Bank's wholly owned subsidiaries, First Federal Investment
Services, Inc. (which sells insurance, annuity products and mutual funds), First
Iowa Title Services, Inc. (which provides real estate abstracting services) and
Northridge Apartments Limited Partnership and Northridge Apartments Limited
Partnership II (which own multifamily apartment buildings). All significant
intercompany balances and transactions have been eliminated in consolidation.
Accounting estimates and assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses,
valuation of goodwill, unrealized gains and losses on securities
available-for-sale and fair value of financial instruments.
Revenue recognition: Interest income and expense is recognized on the accrual
method based on the respective outstanding balances. Other revenue is recognized
at the time the service is rendered.
Cash and cash equivalents and cash flows: For purposes of the consolidated
statements of cash flows, cash and cash equivalents includes cash and balances
due from banks. Cash flows from loans, deposits and short-term borrowings are
reported net.
Securities available-for-sale: Securities classified as available-for-sale are
those debt and equity securities the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors.
Securities available-for-sale are reported at fair value with unrealized gains
or losses reported as a separate component of other comprehensive income (loss),
net of the related deferred tax effect. The amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale securities
below their cost that are deemed to be other-than-temporary are reflected in
earnings as realized losses. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
34
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans held for sale: Residential real estate loans, which are originated and
intended for resale in the secondary market in the foreseeable future, are
classified as held-for-sale. These loans are carried at the lower of cost or
estimated market value in the aggregate. As assets specifically acquired for
resale, the origination of, disposition of, and gain/loss on these loans are
classified as operating activities in the statement of cash flows.
Loans receivable: Loans that management has the intent and ability to hold for
the foreseeable future, or until pay-off or maturity occurs, are classified as
held for investment. These loans are stated at the amount of unpaid principal
adjusted for charge-offs, the allowance for estimated losses on loans, net
unearned premiums (discounts) and any deferred fees and/or costs on originated
loans. Interest is credited to earnings as earned based on the principal amount
outstanding. Deferred bank loan origination fees and/or costs are amortized as
an adjustment of the related loan's yield. As assets held for and used in the
production of services, the origination and collection of these loans is
classified as an investing activity in the statement of cash flows.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.
Uncollectible interest on loans that are contractually past due is charged off
or an allowance is established based on management's periodic evaluation,
generally when loans become 90 days past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is no longer in doubt, in which case the loan is
returned to accrual status.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of the
collateral if the loan is collateral-dependent.
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience.
Premiums (discounts) on first mortgage loans purchased are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less selling costs at
the date of foreclosure. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to income if the carrying value of a property exceeds
its fair value less estimated selling costs.
35
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Premises and equipment: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by straight-line
and double-declining balance methods over the following estimated useful lives:
Years
-----
Building and improvements 10-40
Automobiles, furniture and equipment 3-20
Rental real estate: Rental real estate is comprised of two low-income housing,
multifamily apartment buildings and equipment which is stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by the
straight-line and double-declining balance methods over the estimated useful
lives of the assets. Useful lives are the same as used for premises and
equipment.
Title plant: Title plant is carried at cost and, in accordance with FASB
Statement No. 61, is not depreciated. Costs incurred to maintain and update the
title plant are expensed as incurred.
Goodwill: Under the provisions of SFAS 142, goodwill is not amortized but is
subject to an annual impairment test, or more often if conditions indicate a
possible impairment. The Company has completed its annual goodwill impairment
test and has determined that there has been no impairment of goodwill.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the difference
between the reported amounts of assets and liabilities and their income tax
basis. Income taxes are allocated to the Company and its subsidiaries based on
each entity's income tax liability as if it filed a separate return.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Comprehensive income: Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income or loss. Gains and losses on
available-for-sale securities are reclassified to net income as the gains or
losses are realized upon sale of the securities. Other-than-temporary impairment
charges are reclassified to net income at the time of the charge.
Earnings per share: Basic earnings per common share represents income available
to common stockholders divided by the weighted average number of common shares
outstanding during the periods presented. The earnings per common share amounts
- - assuming dilution were computed using the weighted average number of shares
outstanding during the periods presented, adjusted for the effect of dilutive
potential common shares outstanding, which consists of stock options granted. In
accordance with Statement of Position 93-6, shares owned by the ESOP that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share.
36
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Operating segments: The Company uses the "management approach" for reporting
information about segments in annual and interim financial statements. The
management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure and any other manner in which management
disaggregates a company. Based on the "management approach" model, the Company
has determined that its business is comprised of a single operating segment.
Stock-option plan: FASB Statement No. 123, Accounting for Stock-Based
Compensation, establishes a fair value based method for financial accounting and
reporting for stock-based employee compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods and services from
nonemployees. However, the standard allows compensation to continue to be
measured by using the intrinsic value based method of accounting prescribed by
APB No. 25, Accounting for Stock Issued to Employees, but requires expanded
disclosures. The Company has elected to apply the intrinsic value based method
of accounting for stock options issued to employees. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Had compensation cost for the Plan been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), the
approximate 2005, 2004 and 2003 reported net income and earnings per common
share would have been decreased to the pro forma amounts shown below:
2005 2004 2003
-----------------------------------------------------
Net income, as reported $ 5,014,726 $ 5,398,631 $ 5,848,410
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (40,513) (54,026) (66,773)
--------------------------------------------------------
Pro forma net income $ 4,974,213 $ 5,344,605 $ 5,781,637
========================================================
Earnings per common share - basic:
As reported $ 3.29 $ 3.47 $ 3.69
Pro forma 3.26 3.44 3.65
Earnings per common share - assuming dilution:
As reported $ 3.20 $ 3.34 $ 3.48
Pro forma 3.17 3.31 3.44
The fair values of the grants are estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2005, 2004 and 2003, respectively: dividend rates of
2.87%, 2.67% and 2.3%, price volatilities of 15%, 14% and 20%, risk-free
interest rates of 4.08%, 3.81% and 3.70% and expected lives of eight years for
all years.
37
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Recent accounting pronouncements: In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No.
123R, Share-Based Payment. This Statement revises SFAS Statement No. 123,
Accounting for Stock-Based Compensation, amends SFAS Statement No. 95, Statement
of Cash Flows, and supersedes APB Opinion No. 125, Accounting for Stock Issued
to Employees. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted stock plans, performance-based
stock awards, stock appreciation rights and employee stock purchase plans. It
requires that all stock-based compensation now be measured at fair value and
recognized as expense in the income statement. This Statement also clarifies and
expands guidance on measuring fair value of stock compensation, requires
estimation of forfeitures when determining expense, and requires that excess tax
benefits be shown as financing cash inflows versus a reduction of taxes paid in
the statement of cash flows. Various other changes are also required. This
Statement is effective beginning January 1, 2006, for the Company as a result of
recent SEC actions. Management believes the impact on the financial statements
will be similar to the disclosures made by footnote to the financial statements,
showing the pro forma effect on earnings and earnings per share of expensing the
value of stock options granted.
Reclassification: Certain items on the consolidated statement of financial
condition as of December 31, 2004 and the consolidated statements of income as
of December 31, 2004 and 2003 were reclassified with no effect on net income or
stockholders' equity, to be consistent with the classifications used in the
December 31, 2005 statements.
Fair value of financial instruments: The fair value of a financial instrument is
the current amount that would be exchanged between willing parties, other than
in a forced liquidation. Fair value is best determined based upon quoted market
prices. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. FASB Statement No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and due from banks: The carrying amount of cash and due from banks
represents the fair value.
Securities: Fair values for all securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Federal Home Loan Bank stock: The fair value of this untraded stock is
estimated at its carrying value because the Company is able to redeem the
stock with the Federal Home Loan Bank at par value.
Loans held for sale: Fair values are based on quoted market prices of similar
loans sold on the secondary market.
Loans: For variable-rate loans that reprice frequently and have experienced
no significant change in credit risk, fair values are based on carrying
values. Fair values for all other loans are estimated based on discounted
cash flows, using interest rates currently being offered for loans with
similar terms to borrowers with similar credit quality.
38
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deposits: Fair values disclosed for demand, NOW, savings and money market
savings deposits equal their carrying amounts, which represent the amount
payable on demand. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
monthly maturities on time deposits.
Borrowed funds: The fair value of borrowed funds is estimated based on
discounted cash flows using currently available borrowing rates.
Accrued interest receivable and payable: The fair values of both accrued
interest receivable and payable are their carrying amounts.
Commitments to extend credit: The fair values of commitments to extend credit
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and creditworthiness of
the counterparties. At December 31, 2005 and 2004, the carrying amount and
fair value of the commitments were not significant.
Note 2. Restrictions on Cash and Due from Banks
The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. The total of those
reserve balances was approximately $2,220,000 and $2,610,000 at December 31,
2005 and 2004, respectively.
39
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Securities
Securities available-for-sale as of December 31, 2005 were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------------------
Equity securities:
Mutual fund $ 2,000,000 $ - $ (50,300) $ 1,949,700
FHLMC preferred stock 4,819,500 94,000 (33,500) 4,880,000
FNMA preferred stock 1,000,000 - - 1,000,000
Other 2,100 5,219 - 7,319
------------------------------------------------------------------
7,821,600 99,219 (83,800) 7,837,019
------------------------------------------------------------------
Debt securities:
State and local obligations 3,320,475 71,280 (25,826) 3,365,929
Mortgage-backed securities 4,340,018 15,536 (100,560) 4,254,994
------------------------------------------------------------------
7,660,493 86,816 (126,386) 7,620,923
------------------------------------------------------------------
$ 15,482,093 $ 186,035 $ (210,186) $ 15,457,942
==================================================================
Securities available-for-sale as of December 31, 2004 were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------------------------------------------------------------
Equity securities:
Mutual fund $ 2,000,000 $ - $ (24,144) $ 1,975,856
FHLMC preferred stock 5,499,000 - (921,500) 4,577,500
FNMA preferred stock 1,000,000 - (40,000) 960,000
Other 2,100 4,650 - 6,750
------------------------------------------------------------------
8,501,100 4,650 (985,644) 7,520,106
------------------------------------------------------------------
Debt securities:
State and local obligations 4,333,060 165,205 (1,765) 4,496,500
Mortgage-backed securities 6,055,154 59,131 (69,620) 6,044,665
------------------------------------------------------------------
10,388,214 224,336 (71,385) 10,541,165
------------------------------------------------------------------
$ 18,889,314 $ 228,986 $ (1,057,029) $ 18,061,271
==================================================================
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Securities available-for-sale with a carrying amount of approximately $205,000
and $316,000 at December 31, 2005 and 2004, respectively, were pledged on
deposit accounts.
Securities available-for-sale with a carrying amount of approximately $3,452,000
and $4,765,000 at December 31, 2005 and 2004, respectively, were pledged as
collateral on Federal Home Loan Bank advances.
Unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2005 and 2004, are summarized as follows:
2005
--------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------------------------------------------------------------
Equity securities:
Mutual funds $ - $ - $ 1,949,700 $ (50,300) $ 1,949,700 $ (50,300)
FHLMC preferred stock 1,137,000 (33,500) - - 1,137,000 (33,500)
--------------------------------------------------------------------------------
1,137,000 (33,500) 1,949,700 (50,300) 3,086,700 (83,800)
--------------------------------------------------------------------------------
Debt securities:
State and local obligations 1,186,566 (19,232) 218,406 (6,594) 1,404,972 (25,826)
Mortgage-backed securities 25,228 (33) 3,451,534 (100,527) 3,476,762 (100,560)
--------------------------------------------------------------------------------
1,211,794 (19,265) 3,669,940 (107,121) 4,881,734 (126,386)
--------------------------------------------------------------------------------
$ 2,348,794 $ (52,765) $ 5,619,640 $ (157,421) $ 7,968,434 $ (210,186)
================================================================================
2004
--------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
--------------------------------------------------------------------------------
Equity securities:
Mutual funds $ - $ - $ 1,975,856 $ (24,144) $ 1,975,856 $ (24,144)
FHLMC preferred stock 2,750,000 (250,000) 1,827,500 (671,500) 4,577,500 (921,500)
FNMA preferred stock 960,000 (40,000) - - 960,000 (40,000)
--------------------------------------------------------------------------------
3,710,000 (290,000) 3,803,356 (695,644) 7,513,356 (985,644)
--------------------------------------------------------------------------------
Debt securities:
State and local obligations 268,326 (1,765) - - 268,326 (1,765)
Mortgage-backed securities 4,765,057 (69,620) - - 4,765,057 (69,620)
--------------------------------------------------------------------------------
5,033,383 (71,385) - - 5,033,383 (71,385)
--------------------------------------------------------------------------------
$ 8,743,383 $ (361,385) $ 3,803,356 $ (695,644) $12,546,739 $(1,057,029)
================================================================================
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates and, as such, are considered to be temporary by
the Company. In addition, the Company has the intent and ability to hold these
investment securities for a period of time sufficient to allow for an
anticipated recovery. During 2005, the Company determined that the unrealized
losses related to these FHLMC preferred stock issues were other-than-temporary.
Accordingly, an impairment loss of $679,500 was recorded and the cost basis of
the securities was reduced by the same amount.
41
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities as of December 31, 2005 by
contractual maturity are shown below. Certain securities have call features,
which allow the issuer to call the security prior to maturity. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
Debt Securities Available-for-Sale
----------------------------------
Amortized
Cost Fair Value
----------------------------------
Due in one year or less $ 610,028 $ 610,456
Due from one to five years 1,702,040 1,699,060
Due from five to ten years 554,998 572,002
Due after ten years 453,409 484,411
Mortgage-backed securities 4,340,018 4,254,994
----------------------------------
$ 7,660,493 $ 7,620,923
==================================
There were no securities sold during 2005, 2004 or 2003 except for FHLB stock.
Included in the interest income on securities and cash deposits was dividend
income of $434,251, $371,519 and $424,366 for the years ended December 31, 2005,
2004 and 2003, respectively.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on available-for-sale securities for the years ended December 31, 2005,
2004 and 2003 were as follows:
2005 2004 2003
-------------------------------------------------
Unrealized holding gains (losses) arising
during the period $ 124,392 $ (714,453) $ (395,232)
Less reclassification adjustment for impairment
of securities available-for-sale (losses)
realized in net income (679,500) - -
-------------------------------------------------
Net unrealized gains (losses)
before tax benefit 803,892 (714,453) (395,232)
Tax effect (299,867) 266,410 147,411
-------------------------------------------------
Other comprehensive income
(loss) - net unrealized gains
(losses) on securities $ 504,025 $ (448,043) $ (247,821)
=================================================
42
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 4. Loans Receivable
Loans receivable at December 31, 2005 and 2004 are summarized as follows:
2005 2004
-------------------------------
First mortgage loans:
Secured by one-to four-family residences $201,242,429 $179,310,983
Secured by:
Multifamily properties 73,945,443 78,427,518
Commercial properties 81,254,835 90,907,328
Construction loans 21,191,735 14,308,167
-------------------------------
Total first mortgage loans 377,634,442 362,953,996
-------------------------------
Consumer loans:
Automobile 9,251,553 9,052,114
Second mortgage 44,218,229 39,701,428
Other 7,545,532 7,133,602
-------------------------------
Total consumer loans 61,015,314 55,887,144
-------------------------------
Total loans 438,649,756 418,841,140
Undisbursed portion of construction loans (5,665,533) (9,113,451)
Unearned premiums, net 768,545 984,151
Net deferred loan origination (fees) (148,946) (160,195)
Allowance for loan losses (3,325,631) (3,235,327)
-------------------------------
$430,278,191 $407,316,318
===============================
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
2005 2004 2003
-------------------------------------------------
Balance, beginning $ 3,235,327 $ 3,164,857 $ 3,118,394
Provision charged to income 260,000 240,000 255,000
Loans charged off (187,108) (180,031) (301,978)
Recoveries 17,412 10,501 93,441
-------------------------------------------------
Balance, ending $ 3,325,631 $ 3,235,327 $ 3,164,857
=================================================
43
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following is a summary of information pertaining to impaired loans:
December 31,
----------------------
2005 2004
----------------------
Impaired loans without a valuation allowance $ - $ -
Impaired loans with a valuation allowance 585,522 630,944
----------------------
Total impaired loans $ 585,522 $ 630,944
======================
Valuation allowance related to impaired loans $ 136,919 $ 120,513
======================
Average investment in impaired loans $ 589,756 $ 578,180
======================
Total nonaccrual loans $ 586,000 $ 634,000
======================
Total loans past due 90 days or more and still accruing $ - $ -
======================
Interest income recognized on impaired loans is insignificant.
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their immediate families (commonly referred to as related parties),
all of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
Activity in loans receivable from certain executive officers and directors of
the Company consisted of the following for the years ended December 31, 2005 and
2004:
2005 2004
--------------------------
Beginning balance $ 292,514 $ 1,847,343
New loans 547,313 7,064
Change in status - (1,388,118)
Repayments (489,837) (173,775)
--------------------------
Ending balance $ 349,990 $ 292,514
==========================
Note 5. Loan Servicing
Mortgage loans serviced for FHLMC and other banks are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31, 2005 and 2004 are $45,422,224
and $46,497,707, respectively. Included in deposits are custodial escrow
balances maintained in connection with the foregoing loan servicing of $373,477
and $340,094 at December 31, 2005 and 2004, respectively.
44
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 6. Premises and Equipment
Premises and equipment consisted of the following at December 31:
2005 2004
-------------------------------
Land $ 3,640,741 $ 2,686,894
Buildings and improvements 9,004,276 8,844,543
Construction in progress 355,319 -
Leasehold improvements 35,259 35,259
Furniture, fixtures and equipment 3,665,659 3,462,330
Vehicles 111,202 104,129
-------------------------------
16,812,456 15,133,155
Less accumulated depreciation 5,850,208 5,243,418
-------------------------------
$ 10,962,248 $ 9,889,737
===============================
The Company has entered into contracts for the construction of a new banking
office and the remodeling of an existing office in the approximate amount of
$2,000,000. Of that amount, $272,000 has been paid and is in construction in
progress at year-end.
Note 7. Deposits
Deposits at December 31 were as follows:
2005 2004
------------------------------
Demand and NOW accounts:
Noninterest-bearing $ 12,185,910 $ 10,943,912
Interest-bearing 49,241,951 47,282,051
Savings accounts 27,047,780 28,586,120
Money market savings 44,841,368 45,993,670
Certificates of deposit 201,020,574 183,527,978
------------------------------
$334,337,583 $316,333,731
==============================
At December 31, 2005, scheduled maturities of certificates of deposit were as
follows:
Year ending December 31:
2006 $106,716,993
2007 57,729,061
2008 14,243,480
2009 12,550,220
2010 9,780,820
--------------
$201,020,574
==============
45
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Interest expense on deposits consisted of the following:
Years Ended December 31,
---------------------------------------------------
2005 2004 2003
---------------------------------------------------
NOW accounts $ 88,167 $ 79,732 $ 125,078
Savings accounts 90,916 90,586 148,651
Money market savings 972,667 462,738 258,090
Certificates of deposit 6,743,170 6,323,613 7,317,767
---------------------------------------------------
$ 7,894,920 $ 6,956,669 $ 7,849,586
===================================================
The aggregate amounts of certificates of deposit in excess of $100,000 were
$28,247,725 and $19,468,295 as of December 31, 2005 and 2004, respectively.
Note 8. Borrowed Funds
Borrowed funds at December 31, 2005 included miscellaneous borrowings of $8,495
and borrowings from the Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted-
Stated Average
Maturity Interest Rate Amount Features
- -----------------------------------------------------------------------------------------------------
2006 4.36 21,000,000 Includes $1.0 million variable rate, renewable daily
2007 4.09 26,500,000
2008 4.63 26,500,000 Includes $9.0 million callable, various dates in 2006
2009 4.49 3,500,000
2010 5.61 21,500,000 Includes $17.5 million callable, various dates in 2006
2011 4.83 3,000,000 All callable, January, 2006
2018 3.83 435,248 15-year amortizing, repayable 2008
---------------------------------
4.64 $102,435,248
=================================
At December 31, 2005, the Company had an unsecured $3,000,000 line of credit
agreement with a bank. The line of credit bears interest at LIBOR plus 1.85%
(6.14% at December 31, 2005) and matures October 1, 2006. There were no
borrowings outstanding at December 31, 2005.
Borrowed funds at December 31, 2004 included miscellaneous borrowings of $12,801
and borrowings from the FHLB of $100,961,894. Such borrowings carried a
weighted-average interest rate of 4.42% with maturities ranging from 2005
through 2018.
The FHLB borrowings are collateralized by FHLB stock and qualifying first and
second mortgage loans representing various percentages of the total borrowings
outstanding.
46
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9. Income Taxes and Retained Earnings
Under previous law, the provisions of the IRS and similar sections of Iowa law
permitted the Bank to deduct from taxable income an allowance for bad debts
based on 8% of taxable income before such deduction or actual loss experience.
Legislation passed in 1996 eliminated the percentage of taxable income method as
an option for computing bad debt deductions for 1996 and in all future years.
Deferred taxes have been provided for the difference between tax bad debt
reserves and the loan loss allowances recorded in the financial statements
subsequent to December 31, 1987. However, at December 31, 2005, retained
earnings contains certain historical additions to bad debt reserves for income
tax purposes of approximately $2,445,000 as of December 31, 1987, for which no
deferred taxes have been provided because the Bank does not intend to use these
reserves for purposes other than to absorb losses. If these amounts which
qualified as bad debt deductions are used for purposes other than to absorb bad
debt losses or adjustments arising from the carryback of net operating losses,
income taxes may be imposed at the then existing rates. The approximate amount
of unrecognized tax liability associated with these historical additions is
$929,000.
Income tax expense is summarized as follows:
Years Ended December 31,
---------------------------------------------------
2005 2004 2003
---------------------------------------------------
Current $ 2,650,564 $ 2,574,610 $ 2,722,041
Deferred (151,064) (78,659) (1,475)
---------------------------------------------------
$ 2,499,500 $ 2,495,951 $ 2,720,566
===================================================
47
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities consisted of the following components as of
December 31, 2005 and 2004:
2005 2004
--------------------------
Deferred tax assets:
Unearned shares, employee stock ownership plan $ 2,000 $ 11,000
Allowance for loan losses 1,240,000 1,212,000
Unrealized losses on securities available-for-sale 9,000 309,000
Impairment of real estate owned 66,000 -
Deferred directors fees and compensation 44,000 43,000
Deferred income 111,000 109,000
Accrued expenses 40,000 37,000
Dividends on employee stock ownership plan 66,000 58,000
Other 23,000 30,939
Impairment on available-for-sale securities 253,000 -
--------------------------
Total gross deferred tax assets 1,854,000 1,809,939
Valuation allowance (231,000) -
--------------------------
Net deferred tax assets 1,623,000 1,809,939
--------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend 22,000 28,000
Premises and equipment 211,000 238,000
Title plant 222,000 201,000
Loans acquired - 2,000
Investments acquired 3,000 7,000
Servicing rights 110,000 128,000
Other 101,324 103,327
-------------------------
Total gross deferred tax liabilities 669,324 707,327
-------------------------
Net deferred tax assets $ 953,676 $ 1,102,612
==========================
The valuation allowance for deferred tax assets at December 31, 2005 was
$231,000. The net change in the valuation allowance for the year ended December
31, 2005 was an increase of $231,000.
48
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rates of 34% to income before income taxes as a result of the
following:
Year Ended December 31,
--------------------------------------------------------------------------------
2005 2004 2003
------------------------- --------------------------- --------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------------
Income before income taxes $ 2,554,837 34.0% $ 2,684,158 34.0% $ 2,913,452 34.0%
Nontaxable income (142,790) (1.9) (144,088) (1.8) (149,455) (1.7)
State income tax, net of
federal income tax benefit 146,322 2.0 189,844 2.4 217,337 2.5
State tax credit, net of
federal income tax benefit - - - - (109,720) (1.3)
Low-income housing tax credit (278,468) (3.7) (278,468) (3.5) (237,441) (2.8)
Increase to valuation
allowance 231,000 3.1 - - - -
Other (11,401) (0.2) 44,505 0.5 86,393 1.0
-------------------------------------------------------------------------------
$ 2,499,500 33.3% $ 2,495,951 31.6% $ 2,720,566 31.7%
===============================================================================
Note 10. Employee Benefit Plans
Retirement plans: The Bank participates in a multiemployer defined benefit
pension plan covering substantially all full-time employees. This is a
multiemployer plan, and information as to actuarial valuations and net assets
available for benefits by participating institutions is not available. The Bank
recognized $566,000, $404,000 and $278,400 pension expense for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Bank has a defined contribution plan covering substantially all employees.
The Bank does not contribute to this plan.
Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion
to stock ownership, the Bank established an ESOP for eligible employees. All
employees of the Bank as of January 1, 1994 were eligible to participate
immediately, and employees of the Bank hired after January 1, 1994 are eligible
to participate after they attain age 21 and complete one year of service during
which they work at least 1,000 hours. The ESOP borrowed funds in the amount of
$960,000 to purchase 104,075 shares of common stock issued in the conversion in
1994 and $840,000 to purchase 84,000 shares of common stock issued in the
reorganization and conversion in 1996. These funds are borrowed from the
Company.
49
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank makes contributions to the ESOP equal to the ESOP's debt service less
dividends received by the ESOP. Dividends on unallocated ESOP shares are used to
pay debt service. Contributions to the ESOP and shares released from the
suspense account in an amount proportional to the repayment of the ESOP loan are
allocated among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of credited
service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment. If the Company's stock
is not traded on an established market at the time of an ESOP participant's
termination, the terminated ESOP participant has the right to require the Bank
to purchase the stock at its current fair market value. Bank management believes
there is an established market for the Company's stock and therefore the Bank
believes there is no potential repurchase obligation at December 31, 2005 and
2004.
As shares are released, the Bank reports compensation expense equal to the
current market price of the shares. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings. Dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $254,711, $328,075 and $548,947 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Shares of the Company's common stock held by the ESOP at December 31, 2005 and
2004 are as follows:
2005 2004
-------------------------
Allocated shares 166,159 159,491
Unreleased (unearned) shares 1,570 8,118
-------------------------
167,729 167,609
=========================
Fair market value of unreleased (unearned) shares $ 59,754 $ 336,816
=========================
Stock option plan: In 1996, the stockholders of the Company ratified the 1996
Incentive Option Plan (the Plan). The Plan provides for the grant of options at
an exercise price equal to the fair market value on the date of grant. The Plan
is intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the success
of the Company and to encourage them to remain in the employment of the Company
or its subsidiaries. Awards granted under the Plan may include incentive stock
options, nonqualified stock options and limited rights which are exercisable
only upon a change in control of the Bank or the Company. All awards to date are
nonqualified stock options. The Plan was modified in 2001 when the Company
authorized the granting of 40,000 additional shares of common stock. The Plan is
scheduled to expire in 2006.
The Plan authorizes the granting of stock options for a total of 441,105 shares
of common stock. All options are granted at an exercise price which is the
market price of the common stock on the grant date.
50
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Options granted to officers become exercisable in five equal annual installments
commencing on the first anniversary of the grant date and continuing on each
anniversary date thereafter. The options granted to officers expire ten years
from the date of grant unless an earlier expiration date is triggered by death,
disability, retirement or termination, as described in the Plan. A person who
becomes a director after September 21, 1996 receives an annual grant of options
to purchase 2,000 shares of common stock. Options granted to directors are
exercisable immediately and expire ten years from the date of grant, unless an
earlier expiration date is triggered by removal for cause.
The table below reflects option activity for the period indicated:
Weighted-
Average
Exercise
Number Price per
of Shares Share
----------------------------
Outstanding, December 31, 2002 221,810 $ 15.67
Granted 6,000 31.00
Forfeited (1,000) 19.51
Exercised (59,200) 13.34
----------------------------
Outstanding, December 31, 2003 167,610 17.02
Granted 11,000 36.94
Forfeited (1,400) 20.18
Exercised (68,805) 14.63
----------------------------
Outstanding, December 31, 2004 108,405 20.51
Granted 22,500 39.01
Forfeited (200) 22.52
Exercised (28,105) 15.63
----------------------------
Outstanding, December 31, 2005 102,600 $ 25.90
============================
Options exercisable 76,100 $ 23.15
============================
Remaining shares available for grant 35,105
==========
As of December 31, 2005, the 102,600 options outstanding under the Plan have
exercise prices between $12.38 and $41.49. The weighted average fair value per
option of options granted during the years ended December 31, 2005, 2004 and
2003 were $6.55, $7.63 and $6.90, respectively.
Employment agreements: The Company and the Bank have entered into employment
agreements with key officers. Under the terms of the agreements, the officers
are entitled to additional compensation in the event of certain conditions of
involuntary termination. The agreements extend for up to 36 months.
The Bank has entered into certain employment retention agreements with key
officers. Under the terms of the agreements, the employees are entitled to
additional compensation in the event of a change of control of the Bank or the
Company and the employees are involuntarily terminated within the remaining
unexpired employment period, up to 36 months. A change in control is generally
triggered by the acquisition or control of 20% or more of the common stock.
51
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 11. Stockholders' Equity
Regulatory capital requirements: The Bank is subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier I capital (as defined) to average
assets (as defined) and tangible capital to adjusted assets. Management
believes, as of December 31, 2005, the Bank meets all capital adequacy
requirements to which it is subject.
The most recent notification from the federal regulatory agency categorizes the
Bank as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the following table. There are no conditions or events since those notifications
that management believes have changed the category.
The Bank's actual capital amounts and ratios are also presented in the following
table:
To Be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------
(000's) (000's) (000's)
As of December 31, 2005:
Total Capital (to risk-
weighted assets) $ 38,361 11.9% $ 25,882 8.0% $ 32,353 10.0%
Tier I Capital (to risk-
weighted assets) 35,084 10.8 12,942 4.0 19,412 6.0
Tier I (Core) Capital
(to adjusted assets) 35,084 7.3 14,419 3.0 24,031 5.0
Tangible Capital (to
adjusted assets) 35,084 7.3 7,210 1.5 - -
As of December 31, 2004:
Total Capital (to risk-
weighted assets) $ 36,464 11.7% $ 24,847 8.0% $ 31,059 10.0%
Tier I Capital (to risk-
weighted assets) 33,324 10.7 12,424 4.0 18,636 6.0
Tier I (Core) Capital
(to adjusted assets) 33,324 7.3 13,735 3.0 22,568 5.0
Tangible Capital (to
adjusted assets) 33,324 7.3 6,868 1.5 - -
52
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Limitations on dividends and other capital distributions: Office of Thrift
Supervision (OTS) imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
(Tier 1 Association) and has not been advised by the OTS that it is in need of
more than normal supervision could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year provided the total
amount of capital distributions (including the proposed capital distribution)
for the applicable calendar year does not exceed the institution's year-to-date
net income plus retained net income for the preceding two years. Any additional
capital distributions would require prior regulatory approval.
Note 12. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
2005 2004 2003
----------------------------------------------
Advertising and promotion $ 433,631 $ 449,928 $ 467,759
Professional fees 424,418 230,300 188,093
Printing, postage, stationery and supplies 411,657 417,760 445,609
Checking account charges 275,001 296,636 303,139
Insurance 172,987 153,712 129,875
OTS general assessment 106,105 98,756 93,455
Telephone 132,932 132,844 133,744
Apartment operating costs 325,913 336,910 335,098
Employee costs 113,897 123,440 132,632
ATM expense 396,755 388,872 301,205
Other 936,625 497,561 486,175
----------------------------------------------
$ 3,729,921 $ 3,126,719 $ 3,016,784
==============================================
Note 13. Financial Instruments with Off-Statement of Financial Condition Risk
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-statement of financial condition instruments.
The Bank does require collateral, or other security, to support financial
instruments with credit risk.
53
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount
--------------------------------
December 31,
--------------------------------
2005 2004
--------------------------------
Mortgage loans (including one- to four-family, multifamily
and commercial loans) $ 2,537,014 $ 3,994,667
Undisbursed overdraft loan privileges and undisbursed home
equity lines of credit 5,518,248 3,878,024
At December 31, 2005, the mortgage loan commitments above were comprised of
variable-rate commitments carrying a weighted-average interest rate of 6.38% and
fixed-rate commitments carrying a weighted-average interest rate of 6.19%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but normally
includes real estate and personal property.
Note 14. Lending Activities and Concentrations of Credit Risk
The Bank generally originates single family residential loans within its primary
lending area of Webster, Story, Des Moines, Dallas, Polk and Henry counties in
Iowa. The Bank's underwriting policies require such loans to be 80%
loan-to-value based upon appraised values unless private mortgage insurance is
obtained. Approximately $143,101,000 of the Bank's first mortgage loan portfolio
at December 31, 2005 consisted of loans purchased or originated outside the
state of Iowa. Concentrations by state include California with $23,960,000,
Washington with $22,107,000 and Wisconsin with $15,272,000. These are generally
one- to four-family, multifamily residential and commercial real estate loans
secured by the underlying properties. The loans are subject to the same
underwriting guidelines as loans originated locally. The Bank is also active in
originating secured consumer loans to its customers, primarily automobile and
second mortgage loans. Collateral for substantially all consumer loans are
security agreements and/or Uniform Commercial Code filings on the purchased
asset.
54
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
December 31, 2005 and 2004 were as follows:
2005 2004
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------
(nearest 000) (nearest 000)
Financial assets:
Cash $ 8,639,672 $ 8,640,000 $ 7,918,179 $ 7,918,000
Securities 15,457,942 15,458,000 18,061,721 18,062,000
FHLB stock 5,250,100 5,250,100 5,045,000 5,045,000
Loans, net 430,278,191 427,343,000 407,316,318 409,789,000
Loans held for sale 737,838 738,000 904,127 924,000
Accrued interest receivable 2,146,102 2,146,000 1,953,602 1,954,000
Financial liabilities:
Deposits 334,337,583 335,902,000 316,333,731 320,991,000
Borrowed funds 102,443,743 102,762,000 100,974,695 103,735,000
Accrued interest payable 219,637 220,000 154,151 154,000
Note 16. Restriction on Stockholders' Equity
In 1996, the Company completed a Plan of Conversion and Reorganization, whereby
the Company became a publicly traded Iowa corporation and the previous mutual
organization ceased to exist. The Plan provided that when the conversion was
completed, a "Liquidation Account" would be established in an amount equal to
the amount of any dividends waived by the previous mutual holding company
(totaling approximately $1,897,000), plus 65.5% of the Bank's total
stockholders' equity, as reflected in its latest statement of financial
condition in the final prospectus utilized in the conversion. The Liquidation
Account is established to provide a limited priority claim to the assets of the
Bank to qualifying depositors as of specified dates (Eligible Account Holders
and Supplemental Eligible Account Holders) who continue to maintain deposits in
the Bank after the conversion. In the unlikely event of a complete liquidation
of the Bank, and only in such an event, Eligible Account Holders and
Supplemental Eligible Account Holders would receive from the Liquidation Account
a liquidation distribution based on their proportionate share of the then total
remaining qualifying deposits.
55
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 17. Earnings Per Common Share
Presented below is the reconciliation of the numerators and denominators of the
computations for earnings per common share and earnings per common share -
diluted, for the years ended December 31:
2005 2004 2003
--------------------------------------------------
Numerator, income available to common
stockholders $ 5,014,726 $ 5,398,631 $ 5,848,410
==================================================
Denominator:
Weighted-average shares outstanding 1,529,683 1,567,232 1,610,209
Less unallocated ESOP shares 5,627 12,903 26,641
-------------------------------------------------
Weighted-average shares outstanding - basic 1,524,056 1,554,329 1,583,568
Dilutive effect of stock options 42,792 62,360 95,478
-------------------------------------------------
Weighted-average shares outstanding -
assuming dilution 1,566,848 1,616,689 1,679,046
==================================================
Basic earnings per common share $ 3.29 $ 3.47 $ 3.69
Earnings per common share-assuming dilution 3.20 3.34 3.48
56
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 18. North Central Bancshares, Inc. (Parent Company Only) Condensed
Financial Statements
Statements of Financial Condition
December 31, 2005 and 2004
2005 2004
----------------------------
ASSETS
Cash $ 272,291 $ 284,702
Securities available-for-sale 7,319 6,750
Loans receivable, net 3,476,513 2,305,000
Investment in First Federal Savings Bank of Iowa 40,961,967 39,300,688
Deferred taxes 1,311 1,996
Prepaid and other assets -- 17,702
------------ ------------
Total assets $ 44,719,401 $ 41,916,838
============ ============
LIABILITIES AND EQUITY
LIABILITIES
Dividend payable $ 438,684 $ 382,632
Accrued expenses and other liabilities 2,217 --
------------ ------------
Total liabilities 440,901 382,632
------------ ------------
EQUITY
Common stock 15,077 15,305
Additional paid-in capital 18,447,059 18,681,041
Retained earnings 25,847,345 23,438,369
Unearned shares, employee stock ownership plan (15,697) (81,200)
Accumulated other comprehensive (loss) (15,284) (519,309)
------------ ------------
Total equity 44,278,500 41,534,206
------------ ------------
Total liabilities and equity $ 44,719,401 $ 41,916,838
============ ============
57
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Statements of Income
Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
---------------------------------------------------
Operating income:
Equity in net income of subsidiary $ 5,033,977 $ 5,431,875 $ 5,897,750
Interest income 197,934 113,677 63,516
---------------------------------------------------
5,231,911 5,545,552 5,961,266
---------------------------------------------------
Operating expenses:
Salaries and employee benefits 17,100 17,750 19,800
Other 218,085 129,459 122,077
---------------------------------------------------
235,185 147,209 141,877
---------------------------------------------------
Income before income tax (benefit) 4,996,726 5,398,343 5,819,389
Income tax (benefit) (18,000) (288) (29,021)
---------------------------------------------------
Net income $ 5,014,726 $ 5,398,631 $ 5,848,410
===================================================
58
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,014,726 $ 5,398,631 $ 5,848,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of First Federal Savings
Bank of Iowa (5,033,977) (5,431,875) (5,897,750)
Dividends received from First Federal Savings
Bank of Iowa 4,375,000 4,500,000 5,750,000
Change in deferred income taxes (242,782) (553,357) (458,243)
Change in assets and liabilities:
Prepaid expenses and other assets 17,702 (17,702) 108,269
Accrued expenses and other liabilities 2,217 (35,872) 32,370
------------------------------------------------
Net cash provided by operating activities 4,132,886 3,859,825 5,383,056
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES, net
(increase) decrease in loans receivable (1,171,513) 1,531,000 (2,345,000)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (1,947,168) (5,359,307) (3,234,239)
Proceeds from issuance of common stock 682,385 1,560,910 1,248,230
Dividends paid (1,709,001) (1,492,961) (1,277,432)
------------------------------------------------
Net cash (used in) financing activities (2,973,784) (5,291,358) (3,263,441)
------------------------------------------------
Net increase (decrease) in cash (12,411) 99,467 (225,385)
CASH
Beginning 284,702 185,235 410,620
------------------------------------------------
Ending $ 272,291 $ 284,702 $ 185,235
================================================
59
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 19. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2005
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
(In thousands, except per share amounts)
Interest income $ 6,308 $ 6,588 $ 6,624 $ 6,752
Interest expense 2,896 3,082 3,261 3,368
-----------------------------------------------------------
Net interest income 3,412 3,506 3,363 3,384
Provision for loan losses 50 70 60 80
-----------------------------------------------------------
Net interest income after
provision for loan losses 3,362 3,436 3,303 3,304
-----------------------------------------------------------
Noninterest income:
Fees and service charges 831 990 1,629 1,033
Abstract fees 276 341 375 298
Provision for impairment of securities
available-for-sale (255) (425) - -
Mortgage banking income 41 76 94 78
Other income 296 312 320 238
-----------------------------------------------------------
Total noninterest income 1,189 1,294 2,418 1,647
-----------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,579 1,607 1,711 1,763
Premises and equipment 350 354 366 382
Data processing 142 146 163 146
Other 851 920 895 1,064
-----------------------------------------------------------
Total noninterest expense 2,922 3,027 3,135 3,355
-----------------------------------------------------------
Income before income taxes 1,629 1,703 2,586 1,596
Provision for income taxes 553 671 839 436
-----------------------------------------------------------
Net income $ 1,076 $ 1,032 $ 1,747 $ 1,160
===========================================================
Basic earnings per common share $ 0.70 $ 0.67 $ 1.14 $ 0.77
===========================================================
Diluted earnings per common share $ 0.68 $ 0.65 $ 1.11 $ 0.75
===========================================================
60
North Central Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended December 31, 2004
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
(In thousands, except per share amounts)
Interest income $ 6,080 $ 6,145 $ 6,234 $ 6,298
Interest expense 2,817 2,803 2,859 2,888
-----------------------------------------------------------
Net interest income 3,263 3,342 3,375 3,410
Provision for loan losses 60 50 75 55
-----------------------------------------------------------
Net interest income after
provision for loan losses 3,203 3,292 3,300 3,355
-----------------------------------------------------------
Noninterest income:
Fees and service charges 704 826 798 795
Abstract fees 354 411 365 331
Mortgage banking income 54 74 68 59
Other income 325 326 281 288
-----------------------------------------------------------
Total noninterest income 1,437 1,637 1,512 1,473
-----------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,582 1,492 1,521 1,598
Premises and equipment 359 351 348 370
Data processing 140 140 137 150
Other 767 757 775 828
-----------------------------------------------------------
Total noninterest expense 2,848 2,740 2,781 2,946
-----------------------------------------------------------
Income before income taxes 1,792 2,189 2,031 1,882
Provision for income taxes 576 708 640 572
-----------------------------------------------------------
Net income $ 1,216 $ 1,481 $ 1,391 $ 1,310
===========================================================
Basic earnings per common share $ 0.77 $ 0.95 $ 0.90 $ 0.85
===========================================================
Diluted earnings per common share $ 0.73 $ 0.91 $ 0.87 $ 0.83
===========================================================
61
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK
The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The Bylaws of the
Company currently authorize seven directors. Currently, all directors of the
Company are also directors of the Bank.
Continuing Directors
Randall L. Minear is the President of Terrus Real Estate Group, located
in Des Moines, Iowa. He formerly served as the Director of Corporate Real Estate
for The Principal Financial Group and as President of Principal Real Estate
Services, a subsidiary of The Principal Financial Group.
C. Thomas Chalstrom has been employed with the Bank since 1985. He was
Executive Vice President from 1994 until 2004. Mr. Chalstrom was named Chief
Operating Officer of the Bank in December 1998. He became President of the Bank
in April 2004.
Melvin R. Schroeder was formerly the Vice President of Instruction at
Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in
2001.
Mark Thompson is the owner of Mark Thompson, CPA, P.C., in Fort Dodge,
Iowa and has been a certified public accountant since 1978.
Paul F. Bognanno is a self-employed consultant in Des Moines, Iowa.
From 1993 to 2004, he was the President and Chief Executive Officer of Principal
Residential Mortgage, Inc., a wholly-owned subsidiary of The Principal Financial
Group.
Nominees for Election as Directors
David M. Bradley, CPA is Chairman of the Board, President and Chief
Executive Officer.
Robert H. Singer, Jr. is Executive Director of the Fort Dodge Area
Chamber of Commerce. Mr. Singer was formerly the co-owner of Calvert, Singer &
Kelley Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa.
Executive Officers Who are Not Directors or Nominees
Jean L. Lake is Secretary of the Company and the Bank.
David W. Edge, CPA is Chief Financial Officer and Treasurer of the
Company and the Bank.
Kirk A. Yung is Senior Vice President of the Company and the Bank.
62
SHAREHOLDER INFORMATION
Price Range of the Company's Common Stock
The Company's common stock trades on The NASDAQ National Market under
the symbol "FFFD." The following table shows the high and low per share sales
prices of the Company's common stock as reported by NASDAQ, and the dividends
declared per share during the periods indicated. Such quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
Price Range ($)
---------------
Dividends
Declared
Quarter Ended High Low Per Share
- ------------- ---- --- ---------
2005
- ----
First Quarter........ 41.98 38.93 0.29
Second Quarter....... 40.95 37.30 0.29
Third Quarter........ 39.50 37.60 0.29
Fourth Quarter....... 39.12 37.70 0.29
2004
- ----
First Quarter........ 38.80 34.90 0.25
Second Quarter....... 38.80 36.66 0.25
Third Quarter........ 38.60 36.33 0.25
Fourth Quarter ...... 41.49 37.00 0.25
The Company's Common Stock was traded at $38.90 as of March 6, 2006.
Information Relating to the Company's Common Stock
As of March 6, 2006, the Company had 1,236 shareholders of record,
which includes the number of persons or entities who hold their Common Stock in
nominee or "street" name through various brokerage firms. As of such date
1,445,053 shares of the Common Stock were outstanding.
The Company's current quarterly dividend is $0.33 per share. The Board
of Directors of the Company plans to maintain a regular quarterly dividend in
the future and will continue to review the dividend payment amount in relation
to the Company's earnings, financial condition and other relevant factors (such
as regulatory requirements).
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its shareholders' equity would be reduced below the amount
required for the liquidation account. For information concerning federal
regulations which apply to the Bank in determining the amount of proceeds which
may be retained by the Company and regarding a savings institution's ability to
make capital distributions including payment of dividends to its holding
company, see Note 11 to the Consolidated Financial Statements.
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will be dependent primarily upon the dividends from the
Bank. The Company is subject to the requirements of Iowa law, which prohibit the
Company from paying a dividend if, after giving it effect, either of the
following would result: (a) the Company would not be able to pay its debts as
they become due in the usual course of business; or (b) the Company's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
63
Annual Meeting
The Annual Meeting of Shareholders of the Company will be held at 10:00
a.m., Central Time, Friday, April 28, 2006 at the Boston Centre, Suite 100,
located at 809 Central Avenue, Fort Dodge, Iowa 50501.
Stockholders and General Inquiries Stock Exchange
David M. Bradley The Company's Common Shares are
North Central Bancshares, Inc. listed under the
c/o First Federal Savings Bank of Iowa symbol "FFFD" on The NASDAQ
825 Central Avenue National Market
Fort Dodge, Iowa 50501
(515) 576-7531
www.firstfederaliowa.com
General Counsel Independent Auditor
Johnson, Erb, Bice, Kramer, Good & McGladrey & Pullen, LLP
Mulholland, P.C. 400 Locust Street, Suite 640
809 Central Avenue Des Moines, Iowa 50309
Fort Dodge, Iowa 50501
Special Counsel Transfer Agent
Thacher Proffitt & Wood LLP Computershare Investor Services
1700 Pennsylvania Avenue, N.W., Suite 800 350 Indiana Street, Suite 800
Washington, D.C. 20006 Golden, Colorado 80401
www.tpw.com (303) 262-0600 or 800-962-4284
e-mail: inquire@computershare.com
www.computershare.com
Publications - Annual Report on Form 10-K
A copy of the Company's Annual Report Form 10-K (without exhibits) for
the fiscal year ended December 31, 2005 will be furnished without charge to
shareholders of record as of March 6, 2006 upon written request to Jean L. Lake,
Corporate Secretary, North Central Bancshares, Inc., c/o First Federal Savings
Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. The Annual Report Form
10-K report is available online at www.sec.gov or via the Bank's website at
www.firstfederaliowa.com.
Dividend Reinvestment and Stock Purchase Plan
This plan provides shareholders with the ability to reinvest
automatically their cash dividends in additional shares of North Central
Bancshares, Inc. common stock. This plan also provides shareholders the
opportunity to make quarterly cash purchases of additional shares of the
Company's common stock.
For more information, contact Computershare Investor Services (see
address above) or visit Computershare's website at www.computershare.com.
64