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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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 Securities Exchange Act of
1934 during the preceding 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, 1999
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 2,507,242
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,
1999 (Unaudited) and December 31, 1998 1
Consolidated Condensed Statements of
Income for the three and six months ended
June 30, 1999 and 1998 (Unaudited) 2
Consolidated Condensed Statements of
Cash Flows for the six months ended
June 30, 1999 and 1998 (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 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. Other Information 17 & 18
Items 1 through 6 17
Signatures 18
Exhibits
PART 1. FINANCIAL INFORMATION
ITEM 1.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
ASSETS 1999 1998
-------------- -------------
(Unaudited)
Cash:
Interest-bearing $ 7,952,974 $ 13,201,437
Noninterest-bearing 1,485,408 2,435,439
Securities available for sale 50,988,313 49,882,544
Loans receivable, net 264,418,399 254,032,497
Loans held for sale 1,242,116 1,681,017
Accrued interest receivable 2,031,073 1,933,237
Foreclosed real estate 298,495 186,931
Premises and equipment, net 5,074,472 3,616,438
Rental real estate 1,895,983 1,945,851
Title plant 925,256 925,256
Goodwill 6,151,526 6,387,671
Deferred taxes 535,127 13,490
Prepaid expenses and other assets 614,909 448,331
------------ ------------
Total assets $343,614,051 $336,690,139
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $256,747,307 $246,690,313
Other borrowed funds 40,272,475 38,832,239
Advances from borrowers for taxes
and insurance 1,061,428 1,066,025
Dividend payable 274,324 237,133
Income taxes payable 133,891 199,224
Accrued expenses and other
liabilities 1,391,802 1,458,391
------------ ------------
Total liabilities 299,881,227 288,483,325
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock ($.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 38,209,653 38,135,817
Retained earnings, substantially
restricted 28,667,059 27,084,907
Accumulated other comprehensive
income-unrealized gain (loss) on
securities available for sale,
net of income taxes (362,786) 358,666
Treasury stock at cost (1,353,815 and
1,046,608 shares, respectively) (21,902,775) (16,399,403)
Unearned shares, employee stock
ownership plan (918,438) (1,013,284)
------------ ------------
Total stockholders' equity 43,732,824 48,206,814
------------ ------------
Total liabilities and
stockholders' equity $343,614,051 $336,690,139
============ ============
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,
1999 1998 1999 1998
----------- ----------- ------------ ----------------
Interest income:
Loans receivable $5,166,931 $5,156,803 $10,266,521 $ 9,905,841
Securities and cash deposits 837,791 893,120 1,704,969 1,609,302
---------- ---------- ----------- -----------
6,004,722 6,049,923 11,971,490 11,515,143
---------- ---------- ----------- -----------
Interest expense:
Deposits 2,685,510 2,820,935 5,351,290 5,214,252
Other borrowed funds 549,719 469,811 1,083,454 949,243
---------- ---------- ----------- -----------
3,235,229 3,290,746 6,434,744 6,163,495
---------- ---------- ----------- -----------
Net Interest Income 2,769,493 2,759,177 5,536,746 5,351,648
Provision for loan losses 30,000 60,000 60,000 120,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 2,739,493 2,699,177 5,476,746 5,231,648
---------- ---------- ----------- -----------
Noninterest income:
Fees and service charges 334,015 311,779 695,353 549,398
Abstract fees 382,683 401,463 726,156 762,561
Gain on sale of securities available for sale, net 31,989 -- 31,989 54,853
Other income 306,194 260,505 521,632 422,277
---------- ---------- ----------- -----------
Total noninterest income 1,054,881 973,747 1,975,130 1,789,089
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,006,980 873,667 1,979,984 1,644,236
Premises and equipment 215,630 181,514 422,964 334,729
Data processing 149,183 120,602 297,115 219,833
SAIF deposit insurance premiums 36,233 37,434 73,648 69,924
Goodwill amortization 118,075 116,730 236,145 196,339
Other expenses 631,202 564,693 1,201,756 1,064,009
---------- ---------- ----------- -----------
Total noninterest expense 2,157,303 1,894,640 4,211,612 3,529,070
---------- ---------- ----------- -----------
Income before income taxes 1,637,071 1,778,284 3,240,264 3,491,667
Provision for income taxes 563,126 661,995 1,108,627 1,269,875
---------- ---------- ----------- -----------
Net Income $1,073,945 $1,116,289 $ 2,131,637 $ 2,221,792
========== ========== =========== ===========
Basic earnings per common share $0.39 $0.36 $0.76 $0.71
========== ========== =========== ===========
Diluted earnings per common share $0.38 $0.35 $0.75 $0.69
========== ========== =========== ===========
Dividends declared per common share $0.10 $0.08 $0.20 $0.16
========== ========== =========== ===========
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,
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,131,637 $ 2,221,792
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 60,000 120,000
Depreciation 255,848 189,737
Amortization and accretion 249,187 274,982
Deferred taxes (91,514) (65,216)
Effect of contribution to employee stock ownership plan 168,682 223,616
(Gain) on sale of foreclosed real estate and loans, net (19,220) (3,214)
(Gain) on sale of securities available for sale (31,989) (54,853)
Loss on sale and disposal of equipment, net 14,061 --
Net decrease in loans held for sale 438,901 --
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable (97,836) 166,373
(Increase) decrease in prepaid expenses and other assets (166,578) 394,492
(Decrease) in income taxes payable (65,333) (67,157)
Increase (decrease) in accrued expenses and other liabilities (66,589) 313,366
------------ -----------
Net cash provided by operating activities 2,779,257 3,713,918
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 8,609,698 6,361,538
Purchase of loans (19,044,921) (8,420,666)
Proceeds from sales of securities available-for-sale 146,625 3,357,148
Purchase of securities available-for-sale (13,657,719) (9,522,246)
Proceeds from maturities of securities available-for-sale 11,170,300 13,988,116
Purchase of premises and equipment and rental real estate (1,678,312) (237,684)
Proceeds from sale of equipment 237 --
Purchase of rental real estate -- (735)
Cash paid in connection with acquisition of Valley Financial Corporation,
net of cash received -- (8,532,270)
Other (626) 49,088
------------ -----------
Net cash (used in) investing activities (14,454,718) (2,957,711)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,056,994 6,011,817
(Decrease) in advances from borrowers for taxes and insurance (4,597) (199,773)
Net change in short term borrowings 3,500,000 --
Proceeds from other borrowed funds 1,000,000 10,042,000
Payments of other borrowings (3,059,764) (6,250,000)
Purchase of treasury stock (5,503,372) (3,124,875)
Dividends paid (512,294) (446,219)
Other -- (11,500)
------------ -----------
Net cash provided by financing activities 5,476,967 6,021,450
------------ -----------
Net increase (decrease) in cash (6,198,494) 6,777,657
CASH
Beginning 15,636,876 3,445,163
------------ -----------
Ending $ 9,438,382 $10,222,820
============ ===========
(Continued)
-3-
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 5,441,405 $ 5,163,177
Interest paid on borrowings 1,083,642 949,243
Income taxes 1,265,475 1,402,247
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corporation
Cash
Securities $ 6,157,507
Loans 41,818,057
Accrued interest receivable 58,567,364
Premises and equipment 1,019,373
Goodwill 1,081,890
Prepaid expenses and other assets 6,565,174
Deposits 209,906
Advances from borrowers for taxes and insurance (99,261,995)
Deferred income taxes (301,783)
Accrued taxes payable (300,030)
Accrued expenses and other liabilities 12,565
(878,251)
------------
Cash Paid
Less Cash Received $ 14,689,777
(6,157,507)
Cash Paid, net of cash received ------------
$ 8,532,270
============
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
periods ended June 30, 1999 and 1998 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 1998 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, formerly known as First Federal
Savings Bank of Fort Dodge, (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 canceled, 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 $26.3 million. 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-
chartered 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 canceled 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 $14.7 million 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, 1999, the weighted
average number of shares outstanding for basic and diluted earnings per share
computation were 2,728,666 and 2,791,482, respectively. For the six month period
ended June 30, 1999, the weighted average number of shares outstanding for basic
and diluted earnings per share computation were 2,788,780 and 2,848,838,
respectively. 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 3,140,815 and 3,233,867, 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.
5. DIVIDENDS
On May 21, 1999, the Company declared a cash dividend on its common stock,
payable on July 6, 1999 to stockholders of record as of June 16, 1999, equal to
$0.10 per share.
6. COMPREHENSIVE INCOME
Comprehensive income for the three months ended June 30, 1999 and 1998 was
$512,458 and $1,115,926, respectively. Comprehensive income for the six months
ended June 30, 1999 and 1998 was $1,390,128 and $2,082,420, respectively.
-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 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 $14.7
million, 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 the Bank, 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.
Consequently, 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.
FINANCIAL CONDITION
Total assets increased $6.9 million, or 2.1%, to $343.6 million at June 30, 1999
compared to $336.7 million at December 31, 1998. Interest bearing cash decreased
$5.2 million, or 39.8%, due to the use of cash to fund growth in other areas of
the balance sheet. Securities available for sale increased $1.1 million, or
2.2%, primarily due to $13.7 million of purchases, partially offset by $11.3
million of maturities, sales and calls. Total loans receivable, net, increased
by $10.4 million from December 31, 1998, due to originations of $20.5 million of
first mortgage loans secured primarily by one-to-four family residences,
purchases of $19.0 million of first mortgage loans secured by multi-family
residences and commercial real estate and originations of $8.5 million of second
mortgage loans. These increases were offset in part by payments and prepayments
of loans (of approximately $40.5 million) and loan sales of $425,000. Deposits
increased $10.1 million, or 4.1%, to $256.7 million at June 30, 1999 from $246.7
million at December 31, 1998, reflecting increases primarily in certificate of
deposit accounts. This increase was due in part to the deposit of certain public
funds and the marketing of retail certificate of deposits during the six months
ended June 30, 1999. Other borrowings, primarily Federal Home Loan Bank ("FHLB")
advances, increased by $1.4 million to $40.3 million at June 30, 1999 from $38.8
million at December 31, 1998, due to borrowings on the Bank's FHLB open line of
credit, offset in part by the maturities of certain FHLB advances. Total
stockholders' equity decreased $4.5 million, to $43.7 million at June 30, 1999
from $48.2 million at December 31, 1998. See "Capital."
-7-
CAPITAL
The Company's total stockholders' equity decreased by $4.5 million to $43.7
million at June 30, 1999 from $48.2 million at December 31, 1998, primarily due
to stock repurchases and dividends declared, which were offset in part by
earnings. The changes in stockholders' equity were also due to an decrease in
the unrealized (gain) loss on securities available for sale by $721,000 to
$363,000 at June 30, 1999 from $(359,000) at December 31, 1998. The unearned
shares from the Employee Stock Ownership Plan (the "ESOP") decreased by $95,000
to $918,000 at June 30, 1999 from $1,013,000 at December 31, 1998, 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,
1999, the Bank exceeded all of its regulatory capital requirements. The Bank's
required, actual and excess capital levels as of June 30, 1999 are as follows:
Amount Percentage of Assets
-------- ---------------------
(dollars in thousands)
Tangible capital:
Capital level $30,557 9.11%
Less Requirement 5,034 1.50%
------- -----
Excess $25,523 7.61%
======= =====
Core capital:
Capital level $30,557 9.11%
Less Requirement 13,424 4.00%
------- -----
Excess $17,133 5.11%
======= =====
Risk-based capital:
Capital level $32,926 18.10%
Less Requirement 14,557 8.00%
------- -----
Excess $18,369 10.10%
======= =====
LIQUIDITY
The Company's primary sources of funds are cash provided by operating activities
(including net income), certain financing activities (including increases in
deposits and proceeds from borrowings) and certain investing activities
(including principal payments on loans and maturities and calls of securities).
During the first six months of 1999 and 1998, principal payments and repayments
on loans totalled $40.5 million and $33.6 million, respectively. The increase in
loan payments and repayments is due primarily to the current low interest rate
environment. The net increase in deposits during the first six months of 1999
and 1998 totalled $10.1 million and $6.0 million, respectively. The proceeds
from borrowed funds during the first six months ended June 30, 1999 and 1998
totalled $1.0 million and $10.0 million, respectively. During the first six
months of 1999 and 1998, the proceeds from the maturities, calls and sales of
securities totalled $11.3 million and $17.3 million, respectively. The decrease
in proceeds from securities is due in part to the proceeds from the sales of
certain investments in 1998 of $3,357,000 compared to proceeds of $146,000 in
1999. Cash provided from operating activities during the first six months of
1999 and 1998 totalled $2.8 million and $3.7 million, respectively, of which
$2.1 million and $2.2 million, respectively, represented net income of the
Company. The Company's primary use of funds is cash used to originate and
purchase loans, purchase of securities available for sale, repayment of borrowed
funds and other financing activities. During the first six months of 1999 and
1998, the Company's gross purchases and origination of loans totalled $52.5
million and $37.6 million, respectively. The increase in purchase and
origination of loans is due in part to the current low interest rate
environment. The purchase of securities available for sale for the six months
ended June 30, 1999 and 1998 totalled $13.7 million and $9.5 million,
respectively. The repayment of borrowed funds during the first six months of
1999 and 1998 totalled $3.1 million and $6.3 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."
-8-
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. Currently, it is 4.0%. Monetary penalties may be imposed
for failure to meet these liquidity requirements. At June 30, 1999, the Bank's
liquidity position was $40.4 million, or 15.8%, of liquid assets, compared to
$45.7 million, or 17.6%, at December 31, 1998.
Stockholders' equity totaled $43.7 million at June 30, 1999 compared to $48.2
million at December 31, 1998, reflecting the Company's stock repurchases,
earnings for the quarter, 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 (losses) on securities, net of taxes.
On April 6, 1999, the Company paid a quarterly cash dividend equal to $0.10 per
share on common stock outstanding as of the close of business on March 16, 1999,
aggregating $286,000. On May 21, 1999, the Company declared a quarterly cash
dividend of $0.10 per share payable on July 6, 1999 to shareholders of record as
of the close of business on June 16, 1999, aggregating $274,000.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
The following unaudited pro forma consolidated statement of income for the six
months ended June 30, 1998 presented on the following page is based on the
historical income statements of the Company and Valley Financial. The unaudited
pro forma consolidated statement of income for the six months ended June 30,
1998 was prepared as if the Acquisition had occurred as of the beginning of the
respective period for purposes of the combined consolidated statements of
income.
This pro forma income statement is 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
statement of income should be read in connection with the notes thereto.
-9-
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Actual Actual Actual ProForma
1999 1998 1999 1998
----------- ----------- ------------ ----------------
Interest income $6,004,722 $6,049,923 $11,971,490 $12,137,452
Interest expense 3,235,229 3,290,746 6,434,744 6,613,575
---------- ---------- ----------- -----------
Net interest income 2,769,493 2,759,177 5,536,746 5,523,877
Provision for loan losses 30,000 60,000 60,000 120,000
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,739,493 2,699,177 5,476,746 5,403,877
---------- ---------- ----------- -----------
Noninterest income:
Fees and service charges 334,015 311,779 695,353 585,303
Abstract fees 382,683 401,463 726,156 762,561
Gain on sale of securities available for
sale, net 31,989 -- 31,989 54,853
Other income 306,194 260,505 521,632 440,112
---------- ---------- ----------- -----------
Total noninterest income 1,054,881 973,747 1,975,130 1,842,829
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,006,980 873,667 1,979,984 1,812,931
Premises and equipment 215,630 181,514 422,964 369,227
Data processing 149,183 120,602 297,115 249,656
SAIF deposit insurance premiums 36,233 37,434 73,648 75,218
Goodwill amortization 118,075 116,730 236,145 232,812
Other expenses 631,202 564,693 1,201,756 1,195,755
---------- ---------- ----------- -----------
Total noninterest expense 2,157,303 1,894,640 4,211,612 3,935,599
---------- ---------- ----------- -----------
Income before income taxes 1,637,071 1,778,284 3,240,264 3,311,107
Provision for income taxes 563,126 661,995 1,108,627 1,228,687
---------- ---------- ----------- -----------
Net Income $1,073,945 $1,116,289 $ 2,131,637 $ 2,082,420
========== ========== =========== ===========
The actual statement of income for the three months ended June 30, 1999 was used
for comparison purposes to the actual statement of income for the three months
ended June 30, 1998. The actual statement of income for the six months ended
June 30, 1999 was used for comparison purposes to the pro forma statement of
income for the six months ended June 30, 1998 in order to more clearly present
the changes in the results of operations.
Interest Income. Interest income decreased by $45,000 to $6.0 million for the
three months ended June 30, 1999 compared to $6.0 million for the three months
ended June 30, 1998. The decrease in interest income was primarily due to a
decrease in the average yield on loans and interest bearing cash. The yields on
interest earning assets decreased from 7.70% for the three months ended June 30,
1998 to 7.51% for the three months ended June 30, 1999. The average yields on
loans and interest bearing cash declined due to a general decrease in the market
interest rates. The impact of the decrease in average yields was offset in part
by an increase in the average balance of interest earning assets. The average
balance of interest bearing assets increased $5.4 million (primarily first
mortgage and
-10-
RESULTS OF OPERATIONS (Continued)
consumer loans, offset by decreases in securities available for sale and
interest bearing cash) to $320.1 million for the three months ended June 30,
1999 from $314.6 million for the comparable 1998 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 primarily by multi-family residences and commercial real
estate, 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 available for sale securities.
Interest income decreased by $165,000 to $12.0 million for the six months ended
June 30, 1999 compared to $12.1 million for the six months ended June 30, 1998.
The decrease in interest income was primarily due to a decrease in the average
yield on loans and interest bearing cash. The average yield on interest earning
assets decreased from 7.71% for the six months ended June 30, 1998 to 7.53% for
the six months ended June 30, 1999. The average yields on loans and interest
earning cash declined due to a general decrease in the market interest rates.
The impact of the decrease in average yields was offset in part by an increase
in the average balance of interest earning assets. The average balance of
interest bearing assets increased $3.1 million (primarily first mortgage and
consumer loans and interest bearing cash) to $318.4 million for the six months
ended June 30, 1999 from $315.3 million for the comparable 1998 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 primarily by multi-family residences
and commercial real estate, 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 available for sale securities.
Interest Expense. Interest expense decreased by $56,000 to $3.2 million for the
three months ended June 30, 1999 compared to $3.3 million for the three months
ended June 30, 1998. The decrease in interest expense was primarily due to a
decrease in the average cost of interest bearing liabilities from 4.87% for the
three months ended June 30, 1998 to 4.54% for the three months ended June 30,
1999. The average cost of interest bearing liabilities declined due to a general
decrease in the market interest rates. The impact of the decrease in average
cost of interest bearing liabilities was offset in part by an increase in the
average balance of interest bearing liabilities. The increase in the average
balance of interest bearing liabilities was primarily due to a $5.0 million
increase in the average balance of NOW and money market savings accounts and a
$6.0 million increase in the average balance of borrowed funds. The increase in
such deposit accounts is due to increased marketing of the Company's NOW
accounts. The increase in the borrowed funds was due to the borrowing of funds
in part to fund the corresponding asset growth.
Interest expense decreased by $178,000 to $6.4 million for the six months ended
June 30, 1999 compared to $6.6 million for the six months ended June 30, 1998.
The decrease in interest expense was primarily due to a decrease in the average
cost of interest bearing liabilities from 4.88% for the six months ended June
30, 1998 to 4.59% for the six months ended June 30, 1999. The average cost of
interest bearing liabilities declined due to a general decrease in the market
interest rates. The impact of the decrease in average cost of interest bearing
liabilities was offset in part by an increase in the average balance of interest
bearing liabilities. The increase in the average balance of interest bearing
liabilities was primarily due to a $4.6 million increase in the average balance
of NOW and money market savings accounts and a $3.3 million increase in the
average balance of borrowed funds. The increase in such deposit accounts is due
to increased marketing of the Company's NOW accounts. The increase in the
borrowed funds was due to the borrowing of funds in part to fund the
corresponding asset growth.
Net Interest Income. Net interest income before the provision for loan losses
increased by $10,000 to $2.77 million for the three months ended June 30, 1999
from $2.76 million for the three months ended June 30, 1998. The increase is
primarily due to the increase in the interest rate spread, offset by the
decrease in the excess of average interest earning assets over the average
interest bearing liabilities. The interest rate spread (i.e., the difference in
-11-
RESULTS OF OPERATIONS (Continued)
the average yield on assets and average cost of liabilities) increased to 2.97%
for the three months ended June 30, 1999 from 2.83% for the three months ended
June 30, 1998.
Net interest income before the provision for loan losses increased by $13,000 to
$5.54 million for the six months ended June 30, 1999 from $5.52 million for the
six months ended June 30, 1998. The increase is primarily due to the increase in
the interest rate spread, offset by the decrease in the excess of average
interest earning assets over the average interest bearing liabilities. The
interest rate spread (i.e., the difference in the average yield on assets and
average cost of liabilities) increased to 2.94% for the six months ended June
30, 1999 from 2.83% for the six months ended June 30, 1998.
The following table sets forth certain information relating to the Company's
actual and pro forma average balance sheets and reflects the actual and pro
forma average yield on assets and actual and pro forma average cost of
liabilities for the three and six month periods ended June 30, 1999 and 1998,
respectively.
-12-
RESULTS OF OPERATIONS (Continued)
For Three Months Ended June 30,
------------------------------------------------------------------
Actual Actual
1999 1998
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- -------- -------- -----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans.................................. $261,015 $ 5,167 7.92% $251,736 $ 5,157 8.19%
Securities available for sale.......... 51,726 755 5.86 54,324 792 5.85
Interest bearing cash.................. 7,317 82 4.47 8,550 101 4.74
-------- ------- ------ -------- ------- ------
Total interest-earning assets........ 320,058 $ 6,004 7.51% 314,610 $ 6,050 7.70%
------- ------ ------- ------
Noninterest-earning assets............... 16,877 16,326
-------- --------
Total assets......................... $336,935 $330,936
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings........... $ 52,324 $ 277 2.12% $ 47,365 $ 368 3.12%
Passbook savings....................... 27,320 137 2.01 26,625 156 2.35
Certificates of deposit................ 166,811 2,271 5.46 165,289 2,297 5.57
Borrowed funds......................... 38,485 550 5.65 32,453 470 5.87
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities....... 284,940 $ 3,235 4.54% 271,732 $ 3,291 4.87%
-------- ------- ------ -------- ------- ------
Noninterest-bearing liabilities.......... 5,269 8,391
-------- --------
Total liabilities.................... 290,209 280,123
Equity................................... 46,726 50,813
-------- --------
Total liabilities and equity......... $336,935 $330,936
======== ========
Net interest income......................... $ 2,769 $ 2,759
======= =======
Net interest rate spread.................... 2.97% 2.83%
====== ======
Net interest margin......................... 3.46% 3.51%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 112.32% 115.78%
====== ======
For Six Months Ended June 30,
-----------------------------------------------------------------
Actual ProForma
1999 1998
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans.................................. $257,642 $10,267 7.98% $251,151 $10,311 8.21%
Securities available for sale.......... 51,077 1,486 5.86 56,411 1,636 5.85
Interest bearing cash.................. 9,708 219 4.55 7,740 190 4.96
-------- ------- ------ -------- ------- ------
Total interest-earning assets........ 318,427 $11,972 7.53% 315,302 $12,137 7.71%
------- ------ ------- ------
Noninterest-earning assets............... 17,154 17,354
-------- --------
Total assets......................... $335,581 $332,656
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings........... $ 51,574 $ 553 2.16% $ 47,012 $ 728 3.12%
Passbook savings....................... 26,945 285 2.14 26,412 310 2.37
Certificates of deposit................ 165,192 4,513 5.51 164,489 4,551 5.79
Borrowed funds......................... 38,317 1,084 5.62 35,048 1,024 5.81
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities....... 282,028 $ 6,435 4.59% 272,961 $ 6,613 4.88%
-------- ------- ------ -------- ------- ------
Noninterest-bearing liabilities.......... 5,896 8,798
-------- --------
Total liabilities.................... 287,924 281,759
Equity................................... 47,657 50,897
-------- --------
Total liabilities and equity......... $335,581 $332,656
======== ========
Net interest income......................... $ 5,537 $ 5,524
======= =======
Net interest rate spread.................... 2.94% 2.83%
====== ======
Net interest margin......................... 3.48% 3.50%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 112.91% 115.51%
====== ======
-13-
RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses. The Company's provision for loan losses was $30,000
and $60,000 for the three months ended June 30, 1999 and 1998, respectively. The
Company's provision for loan losses was $60,000 and $120,000 for the six months
ended June 30, 1999 and 1998, 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 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 $4,000 for
the six months ended June 30, 1999 as compared to net charge offs of $8,000 for
the six months ended June 30, 1998. The resulting allowance for loan losses was
$2.7 million at June 30, 1999 as compared to $2.7 million at December 31, 1998
and $2.6 million at June 30, 1998. The level of nonperforming loans decreased to
$276,000 at June 30, 1999 from $956,000 at December 31, 1998 and increased from
$162,000 at June 30, 1998. 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 $81,000 to $1,055,000
for the three months ended June 30, 1999 from $974,000 for the three months
ended June 30, 1998. The increase is primarily due to increases in fees and
service charges and other income. Other fees and service charges increased
$22,000, primarily due to increases in overdraft fees. Other income increased
$46,000, primarily due to an increase in revenues from the sale of loans,
annuity sales and gains on the sale of foreclosed real estate, offset by
decreases in insurance sales. Noninterest income for the three months ended June
30, 1999 reflects gains on sales of securities available for sale of $32,000,
while the three months ended June 30, 1998 does not include any gains on sale of
securities available for sale.
Total noninterest income increased by $132,000 to $1,975,000 for the six months
ended June 30, 1999 from $1,843,000 for the six months ended June 30, 1998. The
increase is due primarily to increases in fees and service charges and other
income. Other fees and service charges increased $110,000, primarily due to
increases in overdraft fees, NOW and savings account service charges and loan
prepayment fees. Other income increased $82,000, primarily due to an increase in
revenues from the sale of loans, annuity sales and rent income, offset by losses
on disposal of certain equipment and decreases in insurance sales. Noninterest
income for the six months ended June 30, 1999 reflects gains on sales of
securities available for sale of $32,000, compared to gains on sale of
securities available for sale of $55,000 for the six months ended June 30, 1998.
Noninterest Expense. Total noninterest expense increased by $263,000 to $2.2
million for the three months ended June 30, 1999 from $1.9 million for the three
months ended June 30, 1998. The increase is primarily due to increases in
salaries and employee benefits, premises and equipment, data processing and
other expenses. The increase in salaries and employee benefits was primarily due
to normal salary increases and additional employees and related insurance and
payroll taxes. The increases in premises and equipment was primarily due to an
increase in depreciation expense relating primarily to the purchase of computer
equipment, software, ATMs, the opening of a branch located in Perry, Iowa and
normal cost increases. The increase in data processing expense was due to one
time costs incurred as a result of additional data processing services utilized
by the Bank due to the Acquisition, upgrading the Bank's operating systems, Year
2000 costs and normal cost increases. The increase in other expenses was
primarily due to increased professional fees and costs to process checking
account transactions. The Company's efficiency ratio for the three months ended
June 30, 1999 and 1998 were 56.41% and 50.78%, respectively. The Company's ratio
of noninterest expense to average assets for the three months ended June 30,
1999 and 1998 were 2.56% and 2.35%, respectively.
Total noninterest expense increased by $276,000 to $4.2 million for the six
months ended June 30, 1999 from $3.9 million for the six months ended June 30,
1998. The increase is primarily due to increases in salaries and employee
benefits, premises and equipment and data processing. The increase in salaries
and benefits was primarily due to normal salary increases and additional
employees and related insurance and payroll taxes. The increases in premises and
equipment was primarily due to an increase in depreciation expense relating to
the purchase of computer equipment and
-14-
RESULTS OF OPERATIONS (Continued)
software, ATMs and normal cost increases. The increase in data processing
expense was due to one time costs incurred as a result of additional data
processing services utilized by the Bank due to the Acquisition, upgrading the
Bank's operating systems, Year 2000 costs and normal cost increases. The
Company's efficiency ratio for the six months ended June 30, 1999 and 1998 were
56.07% and 53.42%, respectively. The Company's ratio of noninterest expense to
average assets for the six months ended June 30, 1999 and 1998 were 2.51% and
2.37%, respectively.
Income Taxes. Income taxes decreased by $99,000 to $563,000 for the three months
ended June 30, 1999 as compared to $662,000 for the three months ended June 30,
1998. The decrease was primarily due to a decrease in pre-tax earnings during
the 1999 period as compared to the corresponding 1998 period.
Income taxes decreased by $120,000 to $1,109,000 for the six months ended June
30, 1999 as compared to $1,229,000 for the six months ended June 30, 1998. The
decrease was primarily due to a decrease in pre-tax earnings during the 1999
period as compared to the corresponding 1998 period.
Net Income. Net income totaled $1,074,000 for the three months ended June 30,
1999, compared to $1,116,000 for the same period in 1998.
Net income totaled $2,132,000 for the six months ended June 30, 1999, compared
to $2,082,000 for the same period in 1998.
Year 2000 Compliance. The Year 2000 ("Y2K") issue is a serious operational
problem that is widespread and complex, affecting all industries. The problem
consists essentially of the risk that programming code in existing computer
systems will fail to properly recognize the new millennium when it occurs in the
Year 2000. Many computer programs and related hard-printed memory circuits were
developed with six-digit date fields. These programs and memory circuits 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. Because banks rely heavily on their
computer systems, the Federal Financial Institutions Examination Council
("FFIEC") has placed significant emphasis on the problems surrounding the Year
2000 issues and has required financial institutions to document the assessment,
testing and corrections made to ready their computer systems and programs for
the Year 2000 date change. The FFIEC and the OTS have strict regulations,
guidelines and milestones in place that each FDIC-insured financial institution
must follow in order to remain operational. The Company's board of directors has
remained informed of the Company's position and progress in its Year 2000
project.
In addition, noninformation technology systems, such as equipment like
telephones, copiers, fax machines and elevators may also contain embedded
technology which controls its operation and which may be effected by the Y2K
problem. When the Year 2000 arrives, systems, including some of those with
embedded chips, may not work properly because of the way they store date
information. They may not be able to process correctly the date 01/01/00, and
may not be able to function with operational 'cycles' such as 'do X every 100
days'. Thus, even noninformation technology systems may affect the normal
operations of the Company upon arrival of the Year 2000.
In order to address the Y2K issue and to minimize its potential adverse impact
on the Company and its operations, management has begun a process to identify
areas that will be affected by the Y2K Problem, assess its potential impact on
the operations of the Company, monitor the progress of Fiserv, Inc. of Milwaukee
("Fiserv") and other third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for all
critical systems. An internal committee of the Company has been formed to
address the potential risks that Y2K poses for the Company. The Company's Y2K
committee has completed the awareness, inventory, assessment and testing phases
of Y2K. The Company's most critical exposure to Y2K system problems is with its
data processing provider, Fiserv. The Company has been advised by Fiserv that
Fiserv's on line real time processing platform ("Vision system") is Y2K ready as
of February, 1999. Although the effort to prepare for Y2K is intended to address
all Y2K issues, the Company has developed contingency plans to address potential
Y2K issues that arise despite the Company's Y2K compliance effort. Contingency
plans have been developed on a department-by-department basis in
-15-
RESULTS OF OPERATIONS (Continued)
anticipation of the possibility of unplanned system difficulties or failure of
third parties to successfully prepare reporting procedures. The testing phase on
the Company's contingency plans began in the second quarter of 1999 and will
continue to be tested through the third quarter of 1999.
The Company anticipates that it has and will incur internal staff costs,
consulting costs, data processing costs, additional purchase of equipment and
other expenses related to the enhancements necessary to prepare its systems for
Y2K. The Company has replaced some equipment, software and incurred consulting
fees at a cost of approximately $50,000. Management anticipates the additional
costs associated with Year 2000 compliance will not exceed $100,000. Any
personnel and consulting costs have been and will continue to be expensed as
incurred. If the Company is not Y2K compliant, the costs to become compliant
would likely be material to the financial condition and operating results of the
Company.
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, 1998 as reported in Item 7A of the Form 10-K.
-16-
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 1999 Annual Meeting of Stockholders on April 23, 1999. At
the meeting, the stockholders of the Company considered and voted upon:
1. The election of the following individuals as directors for a three-
year term:
KaRene Egemo
Mark M. Thompson
The results of the election of directors are as follows:
Votes
--------
In favor Withheld
------------ ------------
KaRene Egemo 2,271,996 18,979
Mark M. Thompson 2,269,426 21,549
There were no broker non-votes on this proposal.
2. The ratification of the engagement of McGladrey & Pullen LLP, as the
Company's independent auditors, was approved by a vote of 2,272,462 in
favor, 12,042 votes against and 6,471 votes abstaining.
There were no abstentions or broker non-votes on this proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial data schedule. (Only submitted with filing in
electronic format.)
Exhibit 99.1 Press Release, dated April 29, 1999 (regarding the
completion of a stock repurchase program).
Exhibit 99.2 Press Release, dated April 30, 1999 (regarding stock
repurchase program)
Exhibit 99.3 Press Release, dated May 21, 1999 (regarding the
declaration of a dividend).
Exhibit 99.4 Press Release, dated June 17, 1999 (regarding the
completion of a stock repurchase program)
Exhibit 99.5 Press Release, dated July 20, 1999 (regarding the
issuance of limited financial information for the three and six months
ended June 30, 1999).
(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, 1999 BY: /s/ David M. Bradley
David M. Bradley, CPA
Chairman, President and
Chief Executive Officer
DATE: August 13, 1999 BY: /s/ John L. Pierschbacher
John L. Pierschbacher, CPA
Principal Financial Officer
-18-