SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------------
FORM 10-Q
[Mark One]
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ____________________
Commission File Number 0-27672
NORTH CENTRAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1449849
---- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
825 Central Avenue Fort Dodge, Iowa 50501
--------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code #(515)576-7531
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 13, 1998
- ----------------------------------------------------------------------------
(Common Stock, $.01 par value) 3,103,159
NORTH CENTRAL BANCSHARES, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Condensed
Financial Statements (unaudited) 1 to 4
Consolidated Condensed Statements of
Financial Condition at June 30,
1998 and December 31, 1997 (Unaudited) 1
Consolidated Condensed Statements of
Income for the three and six months ended
June 30, 1998 and 1997 (Unaudited) 2
Consolidated Condensed Statements of
Cash Flows for the six months ended
June 30, 1998 and 1997 (Unaudited) 3 & 4
Notes to Consolidated Condensed Financial
Statements 5 & 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7 to 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Part II. Other Information 16 to 18
Items 1 through 6 16 & 17
Signatures 18
Exhibits
PART 1. FINANCIAL INFORMATION
ITEM 1.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
--------------------- ---------------------
Cash:
Interest-bearing $ 8,711,853 $ 2,462,809
Noninterest-bearing 1,510,967 982,354
Securities available for sale 53,657,204 19,815,913
Loans receivable, net 250,370,758 191,248,830
Loans held for sale 1,219,401 - -
Accrued interest receivable 2,153,495 1,300,495
Foreclosed real estate 214,570 67,107
Premises and equipment, net 3,329,747 2,143,016
Rental real estate 2,002,989 2,059,148
Title plant 925,256 925,256
Goodwill 6,564,464 195,628
Deferred taxes - - 105,139
Prepaid expenses and other assets 463,327 647,913
------------ ------------------
$331,124,031 $ 221,953,608
Total assets ============ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $246,397,519 $141,123,707
Other borrowed funds 32,342,000 28,550,000
Advances from borrowers for taxes and insurance 1,020,379 918,369
Dividend payable 253,479 204,155
Deferred income taxes 100,944 - -
Income taxes payable 114,603 194,325
Accrued expenses and other liabilities 1,708,370 545,976
------------ ------------
Total liabilities 281,937,294 171,536,532
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, authorized 3,000,000 shares,
issued and outstanding none) - - - -
Common Stock ($.01 par value, authorized 15,500,000 shares;
issued and outstanding 4,011,057) 40,111 40,111
Additional paid-in capital 38,062,228 37,949,598
Retained earnings, substantially restricted 25,387,213 23,660,964
Accumulated other comprehensive income-unrealized gain on securities
available for sale, net of income taxes 310,952 354,781
Treasury stock at cost (884,674 and 744,574 shares, respectively) (13,502,812) (10,377,937)
Unearned shares, employee stock ownership plan (1,110,955) (1,210,441)
------------ ------------
Total stockholders' equity 49,186,737 50,417,076
------------ ------------
Total liabilities and stockholders' equity $331,124,031 $221,953,608
============ ============
See Notes to Consolidated Condensed Financial Statements.
-1-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ----------- ----------
Interest income:
Loans receivable $5,156,803 $3,551,492 $ 9,905,841 $7,055,562
Securities and cash deposits 893,120 380,070 1,609,302 780,948
---------- ---------- ----------- ----------
6,049,923 3,931,562 11,515,143 7,836,510
---------- ---------- ----------- ----------
Interest expense:
Deposits 2,820,935 1,580,062 5,214,252 3,130,329
Other borrowed funds 469,811 315,762 949,243 619,786
---------- ---------- ----------- ----------
3,290,746 1,895,824 6,163,495 3,750,115
---------- ---------- ----------- ----------
Net Interest Income 2,759,177 2,035,738 5,351,648 4,086,395
Provision for loan losses 60,000 60,000 120,000 120,000
---------- ---------- ----------- ----------
Net interest income after provision for loan losses 2,699,177 1,975,738 5,231,648 3,966,395
---------- ---------- ----------- ----------
Noninterest income:
Fees and service charges 311,779 154,636 549,398 309,000
Abstract fees 401,463 307,967 762,561 562,777
Gain on sale of securities available for sale, net - - - - 54,853 - -
Other income 260,505 135,995 422,277 211,206
---------- ---------- ----------- ----------
Total noninterest income 973,747 598,598 1,789,089 1,082,983
---------- ---------- ----------- ----------
Noninterest expense:
Salaries and employee benefits 873,667 531,720 1,644,236 1,055,903
Premises and equipment 181,514 102,675 334,729 206,489
Data processing 120,602 61,783 219,833 126,202
SAIF deposit insurance premiums 37,434 21,162 69,924 42,231
Goodwill amortization 116,730 13,973 196,339 13,973
Other expenses 564,693 387,745 1,064,009 783,890
---------- ---------- ----------- ----------
1,894,640 1,119,058 3,529,070 2,228,688
Total noninterest expense ---------- ---------- ----------- ----------
Income before income taxes 1,778,284 1,455,278 3,491,667 2,820,690
Provision for income taxes 661,995 495,954 1,269,875 972,216
---------- ---------- ----------- ----------
Net Income $1,116,289 $ 959,324 $ 2,221,792 $1,848,474
========== ========== =========== ==========
Basic earnings per common share $0.36 $0.30 $0.71 $0.57
========== ========== =========== ==========
Diluted earnings per common share $0.35 $0.30 $0.69 $0.56
========== ========== =========== ==========
Dividends declared per common share $0.0800 $0.0625 $0.1600 $0.1250
========== ========== =========== ==========
Comprehensive Income $1,115,926 $1,024,742 $ 2,082,420 $1,995,250
========== ========== =========== ==========
See Notes to Consolidated Condensed Financial Statements.
-2-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,221,792 $ 1,848,474
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 120,000 120,000
Depreciation, premises and equipment 132,843 92,063
Depreciation, rental real estate 56,894 32,500
Amortization and accretion 274,982 67,550
Deferred taxes (65,216) (49,054)
Effect of contribution to employee stock ownership plan 223,616 164,913
(Gain) on sale of foreclosed real estate and loans, net (3,214) (21,107)
(Gain) on sale of securities available for sale (54,853) - -
Loss on disposal of equipment - - 4,674
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable 166,373 (13,800)
(Increase) decrease in prepaid expenses and other assets 394,492 (54,972)
Decrease in income taxes payable (67,157) (73,395)
Increase in accrued expenses and other liabilities 313,366 90,657
----------- -----------
Net cash provided by operating activities 3,713,918 2,208,503
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net( increase) decrease in loans 3,697,638 (801,969)
Purchase of loans (8,420,666) (6,077,253)
Proceeds from sale of loans 2,663,900 161,381
Proceeds from sales, calls and maturities of securities available for sale 17,345,264 500,000
Purchase of securities available for sale (9,522,246) (2,598,973)
Proceeds from maturities of securities held to maturity - - 3,500,000
Purchase of premises and equipment (237,684) (351,714)
Proceeds from sale of equipment - - 31,300
Purchase of rental real estate (735) (332,336)
Proceeds from sale of title plant - - 43,491
Cash paid in connection with acquisition of Valley Financial Corp.,
net of cash received (8,561,493) - -
Other 78,311 31,188
----------- -----------
Net cash (used in) investing activities (2,957,711) (5,894,885)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,011,817 6,535,862
Increase (decrease) in advances from borrowers for taxes and insurance (199,773) 12,681
Net change in short term borrowings - - (6,000,000)
Proceeds from other borrowed funds 10,042,000 13,250,000
Payments of other borrowings (6,250,000) (3,035,000)
Purchase of treasury stock (3,124,875) (2,706,750)
Dividends paid (446,219) (425,027)
Other (11,500) - -
----------- -----------
Net cash provided by financing activities 6,021,450 7,631,766
----------- -----------
Net increase in cash 6,777,657 3,945,384
CASH
Beginning 3,445,163 3,936,815
----------- -----------
Ending $10,222,820 $ 7,882,199
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 5,163,177 $ 3,103,105
Interest paid on borrowings 949,243 332,751
Income taxes 1,402,247 1,097,131
(Continued)
-3-
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corp.
Securities $ 41,818,057
Loans 58,567,364
Accrued interest receivable 1,019,373
Premises and equipment 1,081,890
Goodwill 6,565,174
Prepaid expenses and other assets 209,906
Deposits (99,261,995)
Advances from borrowers for taxes and insurance (301,783)
Deferred income taxes (300,030)
Accrued taxes payable 12,565
Accrued expenses and other liabilities (849,028)
------------
Cash Paid, less cash received $ 8,561,493
============
See Notes to Consolidated Condensed Financial Statements
-4-
ITEM 1.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements for the three and six month
period ended June 30, 1998 and 1997 are unaudited. In the opinion of the
management of North Central Bancshares, Inc. (the "Company" or the "Registrant")
these financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary to present fairly these consolidated financial
statements. The results of operations for the interim periods are not
necessarily indicative of results which may be expected for an entire year.
Certain information and footnote disclosure normally included in complete
financial statements prepared in accordance with generally accepted accounting
principles have been omitted in accordance with the requirements for interim
financial statements. The financial statements and notes thereto should be read
in conjunction with the Company's 1997 Annual Report on Form 10-K.
The consolidated condensed financial statements include the accounts of the
Company and its wholly-owned subsidiaries (See Note 2). All significant
intercompany balances and transactions have been eliminated in consolidation.
2. REORGANIZATION
The Company was organized on December 5, 1995 at the direction of the Board of
Directors of First Federal Savings Bank of Iowa (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank, in connection with the
conversion of the Bank and North Central Bancshares, M.H.C. (the "Mutual Holding
Company" or "MHC") from the mutual to the stock holding company structure (these
transactions are collectively referred to as the "Reorganization"). On March
20, 1996, upon completion of the Reorganization, the Company issued an aggregate
of 4,011,057 shares of its common stock, 1,385,590 shares of which were issued
in exchange for all of the Bank's issued and outstanding shares, except for
shares owned by the MHC which were cancelled, and 2,625,467 shares of which were
sold in Subscription and Community Offerings (the "Offering") at a price of
$10.00 per share, with gross proceeds amounting to $26,254,670. In addition,
the Company replaced the Bank as the issuer listed on The Nasdaq Stock Market.
At this time, the Company conducts business as a unitary savings and loan
holding company and the principal business of the Company consists of the
operation of its wholly owned subsidiary, the Bank.
3. ACQUISITION OF VALLEY FINANCIAL CORP.
As of the close of business on January 30, 1998, the Bank completed the
acquisition of Valley Financial Corp., ("Valley Financial") (the "Acquisition")
pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997 (the
"Merger Agreement"). The acquisition resulted in the merger of Valley
Financial's wholly owned subsidiary, Valley Savings Bank, FSB ("Valley Savings")
with and into the Bank, with the Bank as the resulting financial institution.
Valley Savings, headquartered in Burlington, Iowa, was a federally-charted stock
savings bank with three branch offices located in southeastern Iowa. The former
offices of Valley Savings are being operated as a division of the Bank.
In connection with the Acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was cancelled and converted automatically
into the right to receive $525 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the Acquisition,
shareholders of Valley Financial were paid a total of $14,726,250 in cash. The
Acquisition was accounted for as a purchase transaction, resulting in goodwill
of $6.6 million. The operating results of the former offices of Valley Savings
are included in the 1998 operating results of the Company only from the date of
acquisition through June 30, 1998.
-5-
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
4. EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average number
of shares outstanding during the periods presented. In accordance with
Statement of Position No. 93-6, Employers' Accounting for Employee Stock
Ownership Plans, issued by the American Institute of Certified Public
Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. For the three month period ended June
30, 1998, the weighted average number of shares outstanding for basic and
diluted earnings per share computation were 3,105,277 and 3,216,117,
respectively. For the six month period ended June 30, 1998, the weighted
average number of shares outstanding for basic and diluted earnings per share
computation were 3,122,934 and 3,225,206, respectively. For the three month
period ended June 30, 1997, the weighted average number of shares outstanding
for basic and diluted earnings per share computation were 3,201,477 and
3,246,780, respectively. For the six month period ended June 30, 1997, the
weighted average number of shares outstanding for basic and diluted earning per
share computation were 3,241,620 and 3,283,629, respectively.
5. DIVIDENDS
On May 29, 1998, the Company declared a cash dividend on its common stock,
payable on July 6, 1998 to stockholders of record as of June 16, 1998, equal to
$0.08 per share.
6. STOCK REPURCHASE
The Company completed its fourth stock repurchase program on August 5, 1998.
The Company repurchased 163,324 shares of its outstanding stock, par value $.01
per share, at the aggregate cost of $3,584,419, in open market transactions.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivatives instruments, including
certain derivative instruments embedded in other contracts, and for hedging
contracts. It requires that an entity recognize all derivatives as either
assets or liabilities, and measures those instruments at fair value. It also
sets forth the proper accounting for hedging activities, which is determined by
the intended use of the derivative and how that use is designated by the entity.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
Earlier application is permitted and should not be applied retroactively to
financial statements of prior periods. Since the Company is not currently
holding any derivative instruments (as defined) and is not engaged in hedging
activities, the adoption of SFAS No. 133 is expected to have no effect on the
Company's financial condition or results of operations.
-6-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q contains forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include, changes in general, economic, market, legislative and
regulatory conditions, and the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments. The Company's actual
results may differ from the results discussed in the forward looking statements.
ACQUISITION OF VALLEY FINANCIAL CORP.
On September 18, 1997, the Company announced the execution of a definitive
agreement to acquire Valley Financial, a privately held Iowa corporation and
parent company of Valley Savings, Burlington, Iowa. As of the close of business
on January 30, 1998 the Bank completed the Acquisition. Under the terms of the
Merger Agreement, the Bank was acquired in a cash transaction totalling
$14,726,250, or $525 per share, of all 28,050 shares outstanding of Valley
Financial's common stock.
Valley Savings was a federally chartered savings bank, with two offices in
Burlington, Iowa and one office in Mount Pleasant, Iowa. At January 30, 1998,
just prior to the merger, Valley Financial had assets of $108.0 million, loans
of $57.9 million and deposits of $98.9 million.
The acquisition of Valley Financial resulted in the merger of Valley Financial's
wholly-owned subsidiary, Valley Savings, with and into First Federal, with the
three Valley Savings branches continuing to operate as Valley Savings Bank, a
division of First Federal Savings Bank of Iowa. The transaction was accounted
for as a purchase, resulting in goodwill of $6.6 million and closed on January
30, 1998 and, thus, the operating results of the former Valley Savings are
included in the 1998 operating results of the Company only from the date of
acquisition through June 30, 1998.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma consolidated financial statements presented on
the following pages are based on the historical financial statements of the
Company and Valley Financial. The unaudited pro forma consolidated statements
of income for the three and six months ended June 30, 1998 and 1997 were
prepared as if the Acquisition had occurred as of the beginning of the
respective periods for purposes of the combined consolidated statements of
income and as if such an acquisition had occurred at December 31, 1997 for
purposes of the combined consolidated statement of financial condition.
These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the Acquisition taken place
at the beginning of the period, or to project the Company's results of
operations at any future date or for any future period. The pro forma
consolidated condensed statements should be read in connection with the notes
thereto.
-7-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
Actual Pro Forma
June 30, December 31,
ASSETS 1998 1997
------------ ------------
Cash:
Interest-bearing $ 8,711,853 $ 6,481,513
Noninterest-bearing 1,510,967 2,035,107
Securities available for sale 53,657,204 58,892,100
Loans receivable, net 250,370,758 250,700,535
Loans held for sale 1,219,401 - -
Accrued interest receivable 2,153,495 2,273,563
Foreclosed real estate 214,570 74,240
Premises and equipment, net 3,329,747 3,229,923
Rental real estate 2,002,989 2,059,148
Title plant 925,256 925,256
Goodwill 6,564,464 6,734,983
Prepaid expenses and other assets 463,327 742,395
------------ ------------
$331,124,031 $334,148,763
Total assets ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $246,397,519 $240,634,725
Other borrowed funds 32,342,000 39,858,760
Advances from borrowers for taxes and insurance 1,020,379 1,164,417
Dividend payable 253,479 204,155
Deferred income taxes 100,944 209,657
Income taxes payable 114,603 98,558
Accrued expenses and other liabilities 1,708,370 1,561,415
------------ ------------
Total liabilities 281,937,294 283,731,687
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, authorized 3,000,000 shares,
issued and outstanding none) - - - -
Common Stock ($.01 par value, authorized 15,500,000 shares;
issued and outstanding 4,011,057) 40,111 40,111
Additional paid-in capital 38,062,228 37,949,598
Retained earnings, substantially restricted 25,387,213 23,660,964
Unrealized gain on securities available for sale, net of
income taxes 310,952 354,781
Treasury stock at cost (884,674 and 744,574 shares, respectively) (13,502,812) (10,377,937)
Unearned shares, employee stock ownership plan (1,110,955) (1,210,441)
------------ ------------
Total stockholders' equity 49,186,737 50,417,076
------------ ------------
Total liabilities and stockholders' equity $331,124,031 $334,148,763
============ ============
-8-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
Interest income $6,049,923 $5,878,111 $12,137,452 $11,667,444
Interest expense 3,290,746 3,267,867 6,613,575 6,412,096
---------- ---------- ----------- -----------
Net interest income 2,759,177 2,610,244 5,523,877 5,255,348
Provision for loan losses 60,000 (40,000) 120,000 20,000
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,699,177 2,650,244 5,403,877 5,235,348
---------- ---------- ----------- -----------
Noninterest income:
Fees and service charges 311,779 261,404 585,303 516,961
Abstract fees 401,463 307,967 762,561 562,777
Gain on sale of securities available for
sale, net - - - - 54,853 - -
Other income 253,122 228,552 440,112 382,804
---------- ---------- ----------- -----------
Total noninterest income 966,364 797,923 1,842,829 1,462,542
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 874,417 818,310 1,812,931 1,600,097
Premises and equipment 181,514 174,071 369,227 353,120
Data processing 120,602 105,078 249,656 213,323
SAIF deposit insurance premiums 37,434 37,023 75,218 61,289
Goodwill amortization 116,892 116,891 232,812 232,811
Other expenses 616,608 564,948 1,195,755 1,115,495
---------- ---------- ----------- -----------
Total noninterest expense 1,947,467 1,816,321 3,935,599 3,576,135
---------- ---------- ----------- -----------
Income before income taxes 1,718,074 1,631,846 3,311,107 3,121,755
Provision for income taxes 640,928 595,150 1,228,687 1,126,505
---------- ---------- ----------- -----------
Net Income $1,077,146 $1,036,696 $ 2,082,420 $ 1,995,250
========== ========== =========== ===========
-9-
FINANCIAL CONDITION
The pro forma statement of financial condition as of December 31, 1997 was used
for comparison purposes to the June 30, 1998 statement of financial condition in
order to more clearly present the changes in financial condition.
Total assets decreased $3.0 million, or 0.9%, to $331.1 million at June 30, 1998
compared to $334.1 million at December 31, 1997. Interest bearing cash
increased $2.2 million, or 34.4%. Securities available for sale decreased $5.2
million, or 8.9%, primarily due to $14.5 million of maturities, calls and
proceeds from sales, partially offset by $9.6 million of purchases. Total loans
receivable, net, decreased by $330,000, or 0.13%, from December 31, 1997, due
primarily to payments and prepayments of loans (of approximately $33.6 million)
and loan sales of $2.7 million, which payments, prepayments and sales were
offset in part by originations of $18.1 million of first mortgage loans secured
primarily by one-to-four family residences, purchases of $8.3 million of first
mortgage loans secured by multi-family residences and originations of $7.2
million of second mortgage loans. Deposits increased $5.8 million, or 2.4%,
from $240.6 million at December 31, 1997 to $246.4 million at June 30, 1998,
reflecting increases in certificates of deposit, NOW and money market
accounts. These increases were primarily due to advertising by the Company to
promote noninterest bearing checking accounts and offering competitive interest
rates on certain deposit products. Other borrowings, primarily FHLB advances,
decreased by $7.5 million, to $32.3 million at June 30, 1998 from $39.9 million
at December 31, 1997, primarily due to the repayment of short term advances with
excess cash available from the Acquisition of Valley Financial. Total
stockholders' equity decreased $1.2 million, from $50.4 million at December 31,
1997 to $49.2 million at June 30, 1998, primarily due to stock repurchases and
dividends declared, which were offset in part by earnings. See "Capital".
CAPITAL
The Company's total stockholders' equity decreased by $1.2 million to $49.2
million at June 30, 1998 from $50.4 million at December 31, 1997, primarily due
to stock repurchases and dividends declared, which were offset in part by
earnings. The changes in stockholders' equity were also due to a decrease in
the unrealized gain on securities available for sale by $44,000 to $311,000 at
June 30, 1998 from $355,000 at December 31, 1997. The unearned shares from the
Employee Stock Ownership Plan (the "ESOP") decreased by $99,000 to $1,111,000 at
June 30, 1998 from $1,210,000 at December 31, 1997, due to the release of shares
by the ESOP to employees of the Bank.
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of June 30,
1998, the Bank exceeded all of its regulatory capital requirements. The Bank's
required, actual and excess capital levels as of June 30, 1998 are as follows:
Amount Percentage of Assets
------- --------------------
(dollars in thousands)
Tangible capital:
Capital level $38,979 12.10%
Less Requirement 4,833 1.50%
------- -----
Excess $34,146 10.60%
======= =====
Core capital:
Capital level $38,979 12.10%
Less Requirement 12,887 4.00%
------- -----
Excess $26,092 8.10%
======= =====
Risk-based capital:
Capital level $41,383 24.23%
Less Requirement 13,662 8.00%
------- -----
Excess $27,721 16.23%
======= =====
LIQUIDITY
The Company's primary sources of funds are cash provided by operating activities
(including principal and interest payment on loans), certain financing
activities (including increases in deposits and proceeds from borrowings) and
certain investing activities (including maturities and calls of securities and
other investments). During the first six months of 1998 and 1997, principal
payments and repayments on loans totalled $33.6 million and $16.9 million,
respectively. The net increases in deposits during the first six months of 1998
and 1997 totalled $6.0 million and $6.5
-10-
million, respectively. The proceeds from borrowed funds during the first six
months of 1998 and 1997 totalled $10.0 million and $13.3 million, respectively.
During the first six months of 1998 and 1997, the proceeds from the maturities,
calls and sales of securities totalled $17.3 million and $4.0 million,
respectively. Cash provided from operating activities during the first six
months of 1998 and 1997 totalled $3.7 million and $2.2 million, respectively, of
which $2.2 million and $1.8 million, respectively, represented net income of the
Company. The Company's primary use of funds is cash used to originate and
purchase loans, repayment of borrowed funds and other financing activities.
During the first six months of 1998 and 1997, the Company's gross purchases and
origination of loans totalled $37.6 million and $24.7 million, respectively. The
repayment of borrowed funds during the first six months of 1998 and 1997
totalled $6.2 million and $9.0 million, respectively. For additional information
about cash flows from the Company's operating, financing and investing
activities, see "Statements of Cash Flows in the Condensed Consolidated
Financial Statements."
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) in each calendar
quarter of not less than four percent of either (1) the liquidity base at the
end of the preceding quarter, or (2) the average daily balance of the liquidity
base during the preceding quarter equal to a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10%, depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be
imposed for failure to meet these liquidity requirements. At June 30, 1998, the
Bank's liquidity position was $40.9 million or 16.26% of liquid assets,
compared to $14.0 million, or 9.28%, at December 31, 1997. The increase in the
Bank's liquidity position was due primarily to the Acquisition of Valley
Financial on the close of business as of January 30, 1998. During the fourth
quarter of 1997, the OTS revised its liquidity requirements by reducing the
minimum liquidity requirements from 5% to 4%, eliminating the short term
liquidity requirement and requiring each savings association to maintain
sufficient liquidity to ensure its safe and sound operation.
Stockholders' equity totaled $49.2 million at June 30, 1998 compared to $50.4
million at December 31, 1997, reflecting the Company's earnings for the quarter,
stock repurchases, the amortization of the unallocated portion of shares held by
the ESOP, dividends declared on common stock and the change in the net
unrealized gains on securities, net of taxes.
On April 6, 1998, the Company paid a quarterly cash dividend equal to $0.08 per
share on common stock outstanding as of the close of business on March 16, 1998,
aggregating $261,000. On May 29, 1998, the Company declared a quarterly cash
dividend of $0.08 per share payable on July 6, 1998 to shareholders of record as
of the close of business on June 16, 1998, aggregating $253,000.
RESULTS OF OPERATIONS
The pro forma statements of income for the three and six months ended June 30,
1998 and 1997 were used for comparison purposes in order to more clearly present
the changes in the results of operations.
Interest Income. Interest income increased by $172,000 to $6.0 million for the
three months ended June 30, 1998 compared to $5.9 million for the three months
ended June 30, 1997. The increase in interest income was primarily due to a
$8.8 million increase in the average balance of interest assets (primarily first
mortgage and consumer loans) to $314.6 million for the three months ended June
30, 1998 from $305.8 million for the comparable 1997 period. The increase in
the average balance of loans generally reflects an increase over the past
twelve months in originations of first and second mortgage loans and purchases
of first mortgage loans secured by multi-family residences, which were offset,
in part, by payments and prepayments on such loans. See "Financial Condition."
The impact of the increase in the average balances of loans was offset in part
by a decrease in the average balance of securities available for sale. The
decrease in the average balance of securities available for sale was due to
sales, calls and maturities, which were offset, in part, by purchases of lower
yielding available for sale securities. The average yield on interest earning
assets increased from 7.69% for the three months ended June 30, 1997 to 7.70%
for the three months ended June 30, 1998.
Interest income increased by $470,000 to $12.1 million for the six months ended
June 30, 1998 compared to $11.7 million for the six months ended June 30, 1997.
The increase in interest income was primarily due to a $12.2 million
-11-
RESULTS OF OPERATIONS (Continued)
increase in the average balance of interest earning assets (primarily first
mortgage and consumer loans) to $315.3 million for the six months ended June 30,
1998 from $303.1 million for the comparable 1997 period. The increase
in the average balance of loans generally reflects an increase over the past
twelve months in originations of first and second mortgage loans and purchases
of first mortgage loans secured by multi-family residences, which were offset,
in part, by payments and prepayments on such loans. See "Financial Condition."
The impact of the increase in the average balances of loans was offset in part
by a decrease in the average yield on loans and a decrease in the average
balance of securities available for sale. The average yield on loans decreased
to 8.21% for the six months ended June 30, 1998 from 8.25% for the six months
ended June 30, 1997, primarily due to a general decrease in market interest
rates. The decrease in the average balance of securities available for sale was
due to sale, calls and maturities, which were offset, in part, by purchases.
The average yield on interest earning assets remained the same at 7.71% for the
six months ended June 30, 1998 and 1997.
Interest Expense. Interest expense increased by $23,000 to $3.3 million for the
three months ended June 30, 1998 compared to $3.3 million for the three months
ended June 30, 1997. The increase in interest expense was primarily due to a
$4.2 million increase in the average balance of interest bearing deposits
(primarily NOW accounts, money market accounts and certificates of deposit),
partially offset by a decrease in borrowed funds, to $271.7 million for the
three months ended June 30, 1998 from $267.5 million for the comparable 1997
period. The increase in such deposit accounts are due to marketing of the
Company's noninterest bearing checking accounts, offering competitive rates on
the certificate of deposit and money market accounts. The decrease in borrowed
funds was due to the repayment of short term advances with excess cash available
from the Acquisition of Valley Financial. The impact of the increase in the
average balances of NOW accounts, money market accounts and certificates of
deposit was offset in part by a decrease in the average cost of interest bearing
liabilities. The decrease in the average cost of interest bearing liabilities
is primarily due to a general decrease in market interest rates. The average
cost of interest bearing liabilities decreased from 4.91% for the three months
ended June 30, 1997 to 4.87% for the three months ended June 30, 1998.
Interest expense increased by $201,000 to $6.6 million for the six months ended
June 30, 1998 compared to $6.4 million for the six months ended June 30, 1997.
The increase in interest expense was primarily due to a $9.3 million increase in
the average balance of interest bearing deposits (primarily NOW accounts, money
market accounts and certificates of deposit), partially offset by a decrease in
borrowed funds, to $273.0 million for the six months ended June 30, 1998 from
$263.7 million for the comparable 1997 period. The increase in such deposit
accounts are due to marketing of the Company's noninterest bearing checking
accounts, offering competitive rates on the certificate of deposit and money
market accounts and a $4.4 million money market account opened for a certain
governmental entity. The decrease in borrowed funds was due to the repayment
of short term advances with excess cash available from the Acquisition of Valley
Financial. The impact of the increase in the average balances of NOW accounts,
money market accounts and certificates of deposit was offset in part by a
decrease in the average cost of interest bearing liabilities. The decrease in
the average cost of interest bearing liabilities is primarily due to a general
decrease in market interest rates. The average cost of interest bearing
liabilities decreased from 4.89% for the six months ended June 30, 1997 to 4.88%
for the six months ended June 30, 1998.
Net Interest Income. Net interest income before the provision for loan losses
increased by $149,000 to $2.8 million for the three months ended June 30, 1998
from $2.6 million for the three months ended June 30, 1997. The increase is
primarily due to the increase in the excess of average interest earning assets
over the average interest bearing liabilities and an increase in the interest
rate spread. The interest rate spread (i.e., the difference in the average
yield on assets and average cost of liabilities) increased slightly from 2.78%
for the three months ended June 30, 1997 to 2.83% for the three months ended
June 30, 1998.
Net interest income before the provision for loan losses increased by $269,000
to $5.5 million for the six months ended June 30, 1998 from $5.3 million for the
six months ended June 30, 1997. The increase is primarily due to the increase
in the excess of average interest earning assets over the average interest
bearing liabilities and an increase in the interest rate spread. The interest
rate spread (i.e., the difference in the average yield on assets and average
cost of liabilities) increased slightly from 2.82% for the six months ended June
30, 1997 to 2.83% for the six months ended June 30, 1998.
The following table sets forth certain information relating to the Company's pro
forma average balance sheets and reflects the pro forma average yield on assets
and pro forma average cost of liabilities for the three and six month periods
ended June 30, 1998 and 1997.
-12-
RESULTS OF OPERATIONS (Continued)
For Three Months Ended June 30,
------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- -------- ---------- -------- -------- -----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans........................................ $251,736 $ 5,157 8.19% $236,257 $ 4,842 8.20%
Securities available for sale................ 54,324 792 5.85 65,666 986 6.02
Interest bearing cash........................ 8,550 101 4.74 3,898 50 5.19
-------- ------- ------ -------- ------- ------
Total interest-earning assets.............. 314,610 $ 6,050 7.70% 305,821 $ 5,878 7.69%
------- ------ ------- ------
Noninterest-earning assets..................... 16,326 18,077
-------- --------
Total assets............................... $330,936 $323,898
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings................. $ 47,365 $ 368 3.12% $ 40,894 $ 329 3.23%
Passbook savings............................. 26,625 156 2.35 26,566 164 2.47
Certificates of deposit...................... 165,289 2,297 5.57 161,027 2,207 5.50
Borrowed funds............................... 32,453 470 5.87 38,997 568 5.91
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities............. 271,732 $ 3,291 4.87% 267,484 $ 3,268 4.91%
------- ------ ------- ------
Noninterest-bearing liabilities................ 8,391 7,625
-------- --------
Total liabilities.......................... 280,123 275,109
Equity......................................... 50,813 48,789
-------- --------
Total liabilities and equity............... $330,936 $323,898
======== ========
Net interest income................................. $ 2,759 $ 2,610
======= =======
Net interest rate spread............................ 2.83% 2.78%
====== ======
Net interest margin................................. 3.51% 3.41%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 115.78% 114.33%
====== ======
For Six Months Ended June 30,
-----------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------- -------- ---------- -------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans........................................ $251,151 $10,311 8.21% $233,742 $ 9,644 8.25%
Securities available for sale................ 56,411 1,636 5.85 65,392 1,924 5.93
Interest bearing cash........................ 7,740 190 4.96 3,919 99 5.12
-------- ------- ------ -------- ------- ------
Total interest-earning assets.............. 315,302 $12,137 7.71% 303,053 $11,667 7.71%
------- ------ ------- ------
Noninterest-earning assets..................... 17,354 18,356
-------- --------
Total assets............................... $332,656 $321,409
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings................. $ 47,012 $ 728 3.12% $ 39,895 $ 604 3.05%
Passbook savings............................. 26,412 310 2.37 26,584 324 2.46
Certificates of deposit...................... 164,489 4,551 5.79 159,702 4,384 5.54
Borrowed funds............................... 35,048 1,024 5.81 37,511 1,100 5.83
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities............. 272,961 $ 6,613 4.88% 263,692 $ 6,412 4.89%
------- ------ ------- ------
Noninterest-bearing liabilities................ 8,798 8,456
-------- --------
Total liabilities.......................... 281,759 272,148
Equity......................................... 50,897 49,261
-------- --------
Total liabilities and equity............... $332,656 $321,409
======== ========
Net interest income................................. $ 5,524 $ 5,255
======= =======
Net interest rate spread............................ 2.83% 2.82%
====== ======
Net interest margin................................. 3.50% 3.47%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 115.51% 114.93%
====== ======
-13-
RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses. The Company's provision for loan losses was $60,000
for the three months ended June 30, 1998 and $(40,000) for the three months
ended June 30, 1997. The Company's provision for loan losses was $120,000 for
the six months ended June 30, 1998 and $20,000 for the six months ended June 30,
1997. 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 Bank's portfolio, which includes a significant amount of
multifamily and commercial real estate loans, substantially all of which are
purchased and are collateralized by properties located outside of the Bank's
market area, and other factors related to the collectibility of the Bank's loan
portfolio. The net charge offs were $8,000 for the six months ended June 30,
1998 as compared to net charge offs of $52,000 for the six months ended June 30,
1997. The resulting allowance for loan losses was $2.6 million at June 30, 1998
as compared to $2.5 million at December 31, 1997 and $2.4 million at June 30,
1997. The level of nonperforming loans decreased to $162,000 at June 30, 1998
from $296,000 at December 31, 1997 and from $220,000 at June 30, 1997.
Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, such as
independent appraisals for significant collateral properties, no assurance can
be made that future adjustments to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known 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 $168,000 to $966,000
for the three months ended June 30, 1998 from $798,000 for the three months
ended June 30, 1997. The increase is due to increases in all categories of
noninterest income. Abstract fees increased $93,000 due to increased sales
volume, which is in part attributable to an improved housing market and the
current level of interest rates. Other fees and service charges increased
$50,000, primarily due to increases in overdraft fees. Other income increased
$25,000, primarily due to increases in insurance sales.
Total noninterest income increased by $380,000 to $1.8 million for the six
months ended June 30, 1998 from $1.5 million for the six months ended June 30,
1997. The increase is due to increases in all categories of noninterest income.
Abstract fees increased $200,000 due to increased sales volume, which is in part
attributable to an improved housing market and the current level of interest
rates. Other fees and service charges increased $68,000, primarily due to
increases in overdraft fees. Other income increased $57,000, primarily due to
increases in insurance sales and rental income from the Bank's investment in the
Northridge Apartments Limited Partnership, which owns and operates a 44-unit
apartment complex in Fort Dodge, Iowa. Noninterest income for the six months
ended June 30, 1998 reflects gains on sales of securities available for sale of
$55,000, while no such gains were recorded for the corresponding six month
period in 1997.
Noninterest Expense. Total noninterest expense increased by $131,000 to $1.9
million for the three months ended June 30, 1998 from $1.8 million for the three
months ended June 30, 1997. The increase is primarily due to increases in
salaries and employee benefits, data processing and other expenses. The increase
in salaries and benefits was primarily a result of the increased costs
associated with the ESOP, normal salary increases and one time costs associated
with the acquisition of Valley Financial. The increase in data processing was
primarily a result of normal cost increases, additional data processing services
used and one time costs associated with the acquisition of Valley Financial. The
increase in other expenses was primarily as result of loan expenses, employee
expenses and one time costs associated with the acquisition of Valley Financial.
The Company's efficiency ratio for the three months ended June 30, 1998 and 1997
were 52.27% and 53.29%, respectively. The Company's ratio of noninterest expense
to average assets for the three moths ended June 30, 1998 and 1997 were 2.35%
and 2.24%, respectively.
Total noninterest expense increased by $359,000 to $3.9 million for the six
months ended June 30, 1998 from $3.6 million for the six months ended June 30,
1997. The increase is primarily due to increases in salaries and employee
benefits, data processing and other expenses. The increase in salaries and
benefits was primarily a result of the increased costs associated with the ESOP,
normal salary increases and one time costs associated with the acquisition of
Valley Financial. The increase in data processing was primarily a result of
normal cost increases, additional data processing services used and one time
costs associated with the acquisition of Valley Financial. The increase in other
expenses was primarily a result of one time costs associated with the
acquisition of Valley Financial,
-14-
RESULTS OF OPERATIONS (Continued)
employee expenses and rental expenses in connection with Northridge Limited
Partnership, offset in part by decreases in professional fees and marketing
expenses. The Company's efficiency ratio for the six months ended June 30, 1998
and 1997 were 53.42% and 53.23%, respectively. The Company's ratio of
noninterest expense to average assets for the six months ended June 30, 1998 and
1997 were 2.37% and 2.23%, respectively.
Income Taxes. Income taxes increased by $46,000 to $641,000 for the three months
ended June 30, 1998 as compared to $595,000 for the three months ended June 30,
1997. The increase was primarily due to an increase in pre-tax earnings during
the 1998 period as compared to the corresponding 1997 period.
Income taxes increased by $102,000 to $1.2 million for the six months ended June
30, 1998 as compared to $1.1 million for the six months ended June 30, 1997. The
increase was primarily due to an increase in pre-tax earnings during the 1998
period as compared to the corresponding 1997 period.
Net Income. Net income totaled $1,077,000 for the three months ended June 30,
1998, compared to $1,037,000 for the same period in 1997.
Net income totaled $2,082,000 for the six months ended June 30, 1998, compared
to $1,995,000 for the same period in 1997.
Year 2000 Compliance. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Company, working with its outside service providers, has initiated a project
to ensure that its computer systems are Year 2000 compliant. The Company has
sent letters to all service providers, that management believes impact the
Company's Year 2000 compliance, in order verify their status on Year 2000
compliance. The Company will begin testing for Year 2000 compliance of certain
computer applications in the fourth quarter of 1998. The Company believes that
the costs associated with Year 2000 compliance will not materially affect the
Company's future operating results or financial condition. The Company believes
the financial risk of noncompliance for Year 2000 is serious and would have a
material affect on the Company's financial condition and future operating
results.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, there has not been a material change in market risk
from December 31, 1997 as reported in Item 7A of the Form 10-K.
-15-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1998 Annual Meeting of Stockholders on April 24, 1998. At
the meeting, the stockholders of the Company considered and voted upon:
1. The election as directors are as follows:
Three-year term: Howard A. Hecht
Melvin R. Schroeder
The results of the election of directors are as follows:
Votes
---------
In favor Withheld
------------ ------------
Howard A. Hecht 2,924,027 12,007
Melvin R. Schroeder 2,924,243 11,791
There were no broker non-votes on this proposal.
2. The approval of Amendment No. 2 to the North Central Bancshares, Inc. 1996
Stock Option Plan was approved by a vote of 2,628,557 in favor, 276,607 votes
against and 30,870 votes abstaining.
There were no broker non-votes on this proposal.
3. The ratification of the engagement of McGladrey & Pullen LLP, as the
Company's independent auditors, was approved by a vote of 2,910,402 in favor,
2,089 votes against and 23,543 votes abstaining.
There were no broker non-votes on this proposal.
Item 5. Other Information
None
-16-
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10. Material Contracts - Revised employment agreements
Exhibit 27. Financial data schedule. (Only submitted with filing in electronic
format.)
Exhibit 99.1 Press Release, dated May 29, 1998 (regarding the declaration of a
dividend).
Exhibit 99.2 Press Release, dated July 27, 1998 (regarding the issuance of
limited financial information for the three and six months ended June 30, 1998).
(b) Reports of Form 8-K
None
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTH CENTRAL BANCSHARES, INC.
DATE: August 13, 1998 BY: /s/ David M. Bradley
David M. Bradley, CPA
Chairman, President and
Chief Executive Officer
DATE: August 13, 1998 BY: /s/ John L. Pierschbacher
John L. Pierschbacher, CPA
Principal Financial Officer
-18-