-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ve8ahH3xV/XvUt3fy6sFVXruGSg1AqXgV977AI/1v7KcDVeLyGWdwrEKqaCBy2IR 6wL7eH0ZSpzef1VJGuPZcw== 0000927797-01-000016.txt : 20010402 0000927797-01-000016.hdr.sgml : 20010402 ACCESSION NUMBER: 0000927797-01-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH CENTRAL BANCSHARES INC CENTRAL INDEX KEY: 0001005188 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 421449849 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27672 FILM NUMBER: 1587566 BUSINESS ADDRESS: STREET 1: 825 CENTRAL AVE STREET 2: C/O FIRST FED SAVINGS BANK OF FT DODGE CITY: FORT DODGE STATE: I0 ZIP: 50501 BUSINESS PHONE: 5155767531 MAIL ADDRESS: STREET 1: 825 CENTRAL AVENUE CITY: FORT DODGE STATE: IA ZIP: 50501 10-K 1 0001.txt FORM 10-K FOR DECEMBER 31, 2000 NORTH CENTRAL BANCSHARES, INC. 825 Central Avenue Fort Dodge, Iowa 50501 March 30, 2001 Via EDGAR - --------- Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 RE: North Central Bancshares, Inc. Commission File Number 0-27672 Annual Report on Form 10-K Ladies and Gentlemen: Pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, and Rule 13a-1 promulgated thereunder, enclosed is the Annual Report on Form 10-K for the year ended December 31, 2000, including exhibits. In accordance with Rule 302 of Regulation S-T, a copy of the Annual Report on Form 10-K has been manually signed and will be retained for five years. Upon request, such copy will be furnished to the Commission. Please direct questions or comments regarding the enclosures to the undersigned at 515-576- 7531. Sincerely, NORTH CENTRAL BANCSHARES, INC. By: /s/ John L. Pierschbacher John L. Pierschbacher Enclosure SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 0-27672 (Commission File Number) NORTH CENTRAL BANCSHARES, INC. (Exact Name of Registrant as Specified in its Charter) Iowa 421449849 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) c/o First Federal Savings Bank of Iowa 825 Central Avenue, Fort Dodge, Iowa 50501 (Address of Principal Executive Offices) (Zip Code) (515) 576-7531 (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES_X_ NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ] As of March 19, 2001, there were issued and outstanding 1,892,380 shares of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of March 12, 2001 was $35,545,823. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. 2. Portions of the 2000 Annual Report to Shareholders are incorporated by reference into Items 7, 7A, 8 and 9 of Part II hereof. -1- PART I North Central Bancshares, Inc., and First Federal Savings Bank may from time to time make written or oral "forward-looking statements." These forward-looking statements may be contained in this annual filing with the Securities and Exchange Commission (the "SEC"), the Annual Report to Shareholders, other filings with the SEC, and in other communications by the Company and the Bank, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "may,""could," "should,""would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties. The following factors, many of which are subject to change based on various other factors beyond the Company's control, and other factors discussed in this Form 10-K, as well as other factors identified in the Company's filings with the SEC and those presented elsewhere by management from time to time, could cause its financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: o the strength of the United States economy in general and the strength of the local economies in which the Company and the Bank conduct operations; o the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; o inflation, interest rate, market and monetary fluctuations; o the timely development of and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; o the willingness of users to substitute competitors' products and services for the Company's and the Bank's products and services; o the Company's and the Bank's success in gaining regulatory approval of their products and services, when required; o the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); o the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); o the impact of technological changes; o acquisitions; o changes in consumer spending and saving habits; and o the Company's and the Bank's success at managing the risks involved in their business. This list of important factors is not exclusive. The Company or the Bank does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. ITEM 1. BUSINESS General North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par value $0.01 per share, of which 1,385,590 shares 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 at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as -2- a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's telephone number is (515) 576-7531. First Federal Savings Bank of Iowa The Bank is a federally chartered savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and seven branch offices located in Iowa. Four of the Bank's branches are located in north central and central Iowa, in the cities of Fort Dodge, Nevada, Ames and Perry. On January 30, 1998, the Bank completed the acquisition of Valley Financial Corp., an Iowa corporation, and the holding company for Valley Savings Bank, FSB (the "Acquisition"). See "Acquisition of Valley Financial Corp." As a result of the Acquisition, the Bank also has three branches in southeastern Iowa, in the cities of Burlington and Mount Pleasant. The Bank is the successor to First Federal Savings and Loan Association of Fort Dodge, which was chartered originally in 1954, and on May 7, 1987 became a federally chartered savings bank. The Bank adopted its present name on February 27, 1998. The Bank is a community-oriented savings institution that is primarily engaged in the business of attracting deposits from the general public in the Bank's market areas, and investing such deposits in one-to-four family residential real estate mortgages, multifamily and commercial mortgages and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. The Bank's deposits are insured by the FDIC under the SAIF. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1954. At December 31, 2000, the Bank had total assets of $388.5 million, total deposits of $261.7 million, and total shareholders' equity of $34.6 million. The Bank's principal executive office is located at 825 Central Avenue, Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531. 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"), 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 (the "Bank Merger"). Valley Savings, formerly headquartered in Burlington, Iowa was a federally-chartered stock savings bank with three branch offices located in southeastern Iowa. 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 $525.00 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 source of funds for the Acquisition consisted of the Bank's accumulation of its cash flow from the maturity of short-term liquid investments, principal and interest on loans, sale of other investment securities, other cash receipts, net of operating expenses and other projected disbursements. Market Area and Competition The Company is an independent savings and loan holding company serving its primary market area of Webster, Story, Dallas, Henry and Des Moines Counties, which are located in the central and north central and southeastern parts of the State of Iowa. The Company's market area is influenced by agriculture as well as retail sales, professional services and public education. The Company is headquartered in Fort Dodge, the Webster County seat, where it operates two Company locations. The unemployment rate as of December 2000 for Webster County was 2.5%, for Story County was 1.8%, for Dallas County was 1.4%, for Henry County was 2.4% and for Des Moines County was 2.9%. These compare to the national rate of 4.0% and the State of Iowa rate of 2.5%. -3- Due to the loan demand in the Company's overall market area, increased competition, and the Company's decision to diversify its loan portfolio, the Company has originated and purchased loans (primarily multifamily and commercial real estate loans) from out of state. The Company intends to continue such originations and purchases pursuant to its underwriting standards for Company-originated loans. The Company encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has historically come from commercial and savings banks, other savings associations, and credit unions in its market area. Competition for loans comes from such financial institutions as well as mortgage banking companies. The Company expects continued strong competition in the foreseeable future. Many such institutions have greater financial and marketing resources available to them than does the Company. The Company competes for savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial products. In recent years, additional strong competition has come from stock and bond dealers and brokers and, in particular, mutual funds. The Company competes for real estate loans primarily through the interest rates and loan fees it charges and advertising, as well as by offering high levels of personal service. Lending Activities Loan Portfolio Composition. The principal components of the Company's loan portfolio are fixed- and adjustable-rate first mortgage loans secured by one-to-four family owner-occupied residential real estate, fixed- and adjustable-rate first mortgage loans secured by multifamily residential and commercial real estate and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. At December 31, 2000, the Company's loans receivable totalled $322.4 million, of which $176.6 million, or 54.8%, were one-to-four family residential real estate first mortgage loans, and $100.0 million, or 31.0%, were other first mortgage loans, primarily multifamily and commercial real estate loans purchased by the Company. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $45.8 million, or 14.2%, of the Company's loan portfolio. Savings associations, such as the Bank, are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 2000, it was the Company's policy to limit loans to one borrower to $2.5 million. At December 31, 2000, the Company's largest aggregate outstanding loan to one borrower was $2.5 million and the second largest borrower had an aggregate balance of $2.0 million, both of which were first mortgage multifamily residential real estate loans and both were performing as of that date. -4- Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan as of the dates indicated:
At December 31, --------------- 2000 1999 ---- ---- Percent Percent Amount of Total Amount of Total ------ -------- ------ -------- (Dollars in thousands) First mortgage loans: One-to-four family residential(1) $ 176,615 54.78% $ 164,057 56.23 Multifamily ..................... 75,858 23.53 73,417 25.16 Commercial ...................... 24,127 7.48 17,723 6.07 ------ ---- ------ ---- Total first mortgage loans .... $ 276,600 85.79 255,197 87.47 --------- ----- ------- ----- Consumer loans: Automobiles ..................... $ 8,803 2.73% $ 8,003 2.74% Second mortgage(2) .............. 31,910 9.90 23,604 8.09 Other(3) ........................ 5,095 1.58 4,956 1.70 ----- ---- ----- ---- Total consumer loans .......... 45,808 14.21 36,563 12.53 ------ ----- ------ ----- Total loans receivable ........ $ 322,408 100.00% $ 291,760 100.00% Less: Undisbursed portion of construction loans ............ $ 1,493 0.45% $ 1,982 0.68% Unearned loan discount .......... 69 0.02 136 0.05 Net deferred loan origination fee(expense) ................. (23) (0.01) 106 0.04 Allowance for loan losses ....... 2,843 0.88 2,777 0.95 ----- ---- ----- ---- Total loans receivable, net . $ 318,026 98.64% $ 286,759 98.29% ========= ===== ========= =====
At December 31, --------------- 1998 1997 1996 ---- ---- ---- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in thousands) First mortgage loans: One-to-four family residential(1) $ 148,992 57.46% $ 115,763 59.48% $ 107,168 63.44% Multifamily ..................... 64,895 25.02 51,345 26.38 34,488 20.42 Commercial ...................... 11,396 4.39 3,800 1.95 5,225 3.09 ------ ---- ----- ---- ----- ---- Total first mortgage loans .... 225,283 86.87 170,908 87.81 146,881 86.95 ------- ----- ------- ----- ------- ----- Consumer loans: Automobiles ..................... $ 7,348 2.83% $ 4,696 2.41% $ 4,155 2.46% Second mortgage(2) .............. 20,784 8.01 16,226 8.34 15,303 9.06 Other(3) ........................ 5,946 2.29 2,796 1.44 2,582 1.53 -- ----- ---- ----- ---- ----- ---- Total consumer loans .......... 34,078 13.13 23,718 12.19 22,040 13.05 ------ ----- ------ ----- ------ ----- Total loans receivable ........ $ 259,361 100.00% $ 194,626 100.00% $ 168,921 100.00% Less: Undisbursed portion of construction loans ............ $ 2,025 0.78% $ 453 0.23% $ 371 0.22% Unearned loan discount .......... 312 0.12 424 0.22 525 0.31 Net deferred loan origination fee(expense) ................. 316 0.12 349 0.18 241 0.14 Allowance for loan losses ....... 2,676 1.03 2,151 1.11 1,953 1.16 ----- ---- ----- ---- ----- ---- Total loans receivable, net . $ 254,032 97.95% $ 191,249 98.26% $ 165,831 98.17% ========= ===== ========= ===== ========= ===== (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $1.6 million, $1.5 million, $1.4 million, $1.1 million and $862,000 (in actual dollars) of nonowner-occupied residential first mortgage loans at December 31, 2000, 1999, 1998, 1997 and 1996, respectively. (3) Other consumer loans included $1.5 million, $1.6 million, $2.3 million, $269,000 and $213,000 (in actual dollars) of commercial mortgage loans at December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
-5- Loan Maturity Schedule. The following table sets forth the maturity or period to repricing of the Company's loan portfolio at December 31, 2000. Overdraft lines of credit are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they contractually mature, and fixed rate loans are included in the period in which the final contractual repayment is due.
At December 31, 2000 -------------------- Within 1-3 3-5 5-10 10-20 Beyond 20 1 Year Years Years Years Years Years Total ------ ----- ----- ----- ----- ----- ----- (In thousands) First mortgage loans: One-to-four family residential(1).... $28,785 $28,897 $ 51,373 $59,487 $ 7,213 $ 860 $176,615 Multifamily......... 37,829 10,788 17,556 9,673 12 -- 75,858 Commercial.......... 5,045 5,044 9,342 3,217 1,479 -- 24,127 Consumer loans (2)...... 5,254 12,456 26,336 1,676 74 12 45,808 ----- ------ ------ ----- ----- ----- ------ Total ............ $76,913 $57,185 $104,607 $74,053 $ 8,778 $ 872 $322,408 ======= ======= ======== ======= ======= ======= ======== (1) One-to-four family loans include $102.7 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $49.4 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $53.3 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $31.9 million at December 31, 2000.
The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 2000 due after December 31, 2001.
Due After December 31, 2001 --------------------------- Fixed Adjustable Total ----- ---------- ----- (In thousands) First mortgage loans: One-to-four family residential(1)..... $ 66,376 $ 81,454 $ 147,830 Multifamily........................... 5,126 32,903 38,029 Commercial............................ 7,095 11,987 19,082 Consumer loans (2)........................ 38,894 1,660 40,554 ------ ----- ------ Total............................... $ 117,491 $ 128,004 $ 245,495 ========= ========= ========= (1) One-to-four family loans include $93.5 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $49.4 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $44.1 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $28.6 million at December 31, 2000.
One-to-Four Family Residential Real Estate Loans. Traditionally, the Company's primary lending activity consists of the origination of fixed- and adjustable-rate one-to-four family owner-occupied residential first mortgage loans, substantially all of which are collateralized by properties located in the Company's market area. The Company also originates one-to-four family, interest only construction loans that convert to permanent loans after an initial construction period that generally does not exceed nine months. At December 2000, 37.7% of the Company's residential real estate loans had fixed rates, and 62.3% had adjustable rates. The Company originates loans for portfolio and sells loans in the secondary mortgage market. However, the Company's one-to-four family, fixed-rate, residential real estate loans originated for portfolio are generally originated and underwritten according to standards that qualify such loans to be included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") purchase and guarantee programs and that otherwise permit resale in the secondary mortgage market. The Bank has sold fixed-rate loans with maturities equal to or in excess of 15 years in the secondary mortgage market. For the year ended December 31, 2000, the Bank sold $818,000 of mortgage loans consisting of fifteen one-to-four family residential mortgage loans. One-to-four family loans are underwritten and originated according to policies approved by the Board of Directors. First Iowa Mortgage, Inc., the Bank's wholly owned mortgage banking subsidiary, sold $13.3 million of mortgage loans consisting of 146 one-to-four family residential mortgage loans. -6- Originations of one-to-four family fixed-rate first mortgage loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, the Company's interest rate gap position, and loan products offered by the Company's competitors. The Company's one-to-four family fixed-rate first mortgage loans amortize on a monthly basis with principal and interest due each month. The Company also offers 5 and 7-year fixed-rate first mortgage loans that convert to adjustable-rate loans that adjust on an annual basis after the initial fixed rate term. The overall maturity of these loans may be up to 30 years. The Company determines whether a customer qualifies for these loans based upon the initial fixed interest rate. The Company's adjustable rate mortgage loans, or "ARM loans", are generally originated for terms of up to 30 years, with interest rates that adjust annually. The Company establishes various annual and life-of-the-loan caps on ARM loan interest rate adjustments. Currently, the Company offers ARM loans with annual rate caps of 1.5% and maximum life-of-loan caps of 11.95%. Prior to 1995, the Company's ARM loans originated for retention in its portfolio generally were based on the 11th District Cost of Funds Index, a lagging market index. At present, the interest rate on its ARM loans is calculated by using the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year. The Company determines whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated, rather than the introductory or "teaser" rate or the maximum life-of-the rate to which the loan could adjust. In addition, the Company establishes floors for each loan originated below which the loan may not adjust. One-to- four family residential ARM loans totalled $110.0 million, or 34.1%, of the Company's total net loan portfolio at December 31, 2000. The primary purpose of offering ARM loans is to make the Company's loan portfolio more interest rate sensitive. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the risk of default on ARM loans may increase due to the upward adjustment of interest costs to the borrower. Management believes that the Company's credit risk associated with its ARM loans is reduced because of the annual and lifetime interest rate adjustment limitations on such loans, although such limitations do create an element of interest rate risk. See Item 7A. "Discussion of Market Risk-- Interest Rate Sensitivity Analysis" in the 2000 Annual Report to Shareholders, which is attached to this Form 10-K as Exhibit 13. The Company's one-to-four family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed rate mortgage loan portfolio, and the Company has generally exercised its rights under these clauses. Regulations limit the amount that a savings institution may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. "Regulation-Regulation of Federal Savings Associations-Real Estate Lending Standards." The Company's lending policies limit the maximum loan-to-value ratio on mortgage loans without private mortgage insurance to 80% of the lesser of the appraised value or the purchase price of the property to serve as collateral for the loan. The Company generally makes one-to-four family first real estate loans with loan-to-value ratios of up to 95%; however, for one-to-four family real estate loans with loan-to-value ratios greater than 80%, the Company requires the loan amount to be covered by private mortgage insurance. The Company requires fire and casualty insurance, flood insurance, where applicable, an abstract of title, and a title opinion on all properties securing real estate loans originated by the Company. Multifamily Residential and Commercial Real Estate Loans. The Company's loan portfolio contains loans secured by multifamily residential and commercial real estate. Such loans constituted approximately $100.0 million, or 31.4%, of the Company's total net loan portfolio at December 31, 2000. Of such loans, $92.2 million, or 92.3%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). There were two loans secured by multifamily and commercial real estate more than 90 days past due at December 31, 2000. They consisted of one commercial real estate loan in the amount of $489,000 and one multifamily real estate loan in the amount of $67,000. Subsequent to year end, the $67,000 loan was paid in full. The multifamily and commercial real estate loans are primarily secured by -7- multifamily residences such as apartment buildings and by commercial facilities such as office buildings and retail buildings. Multifamily residential real estate loans are offered with fixed and adjustable rates and are structured in a number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed rate loans generally amortize over 15 to 30 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to fifteen years. Such loans are priced as five to fifteen year loans with maximum loan-to-value ratios of 80%. See " -- Purchased or Out of State Originated Loans". All purchased or out of state originated loans in excess of $200,000 are approved by the Chief Executive Officer, Chief Operating Officer and the Board of Directors and are subject to the same underwriting standards as for loans originated by the Company. All purchased or out of state originated loans less than $200,000 are approved by the Chief Executive Officer and Chief Operating Officer and ratified by the Board of Directors and are subject to the same underwriting standards as loans originated by the Company. Before a loan is purchased, the Company obtains a copy of the original loan application, certified rent rolls, the original title insurance policy and personal financial statements of any guarantors of the loan. An executive officer or director of the Company also makes a personal inspection of the property securing the loan. Such purchases are made without recourse to the seller. $25.4 million, or 24.9%, of out of state loans are serviced by the Bank. $76.3 million, or 75.1% of the out of state loans are serviced by the originating financial institution or mortgage company. The Company imposes a $2.5 million limit on the aggregate size of multifamily and commercial loans to any one borrower. Any exceptions to the limit must be specifically approved by the Board of Directors on a loan-by-loan basis within the Company's legal lending limit. See "Regulation -- Regulation of Federal Savings Associations -- Loans to One Borrower". Loans secured by multifamily and commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and typically, such loans also have larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily and commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from such real estate projects are reduced, the borrower's ability to repay the loan may be impaired. Consumer Loans, Including Second Mortgage Loans. The Company also originates consumer loans, which primarily include second mortgage loans. As of December 31, 2000, consumer loans totalled $45.8 million, of which second mortgage loans totalled $31.9 million, or 10.0%, of the Company's net total loan portfolio. The Company's second mortgage loans have fixed interest rates and are generally for terms of 3 to 5 years. The Company's second mortgage loans are secured by the borrower's principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of generally no more than 80%. The average principal amount of the Company's second mortgage loans is approximately $15,000. To a lesser extent, the Company also originates loans secured by automobiles, with fixed rates generally on a 80% loan-to-value basis for new cars. All of the Company's automobile loans were originated by the Company and generally, have terms of up to five years. In addition, the Company also makes other types of consumer loans, primarily unsecured signature loans for various purposes. The minimum loan amount for such loans is $1,000, the maximum loan amount for such loans is generally $7,500, and the average balance of such loans is approximately $2,600. The Company originates a limited number of commercial business loans, which the Company includes with its consumer loan portfolio for reporting purposes. Such loans may be unsecured and are originated for any business purpose, such as for the purchase of computers and business equipment. The maximum loan amount for such unsecured loans is generally $7,500. The Company's business plan calls for an increase in consumer lending for the foreseeable future, particularly second mortgage lending. The Company generally expects consumer loan demand will come from its mortgage loan customers. Consumer loans generally provide for shorter terms and higher yields as compared to residential first mortgage loans, but generally carry higher risks of default. At December 31, 2000, $244,000, or 0.53%, of the Company's consumer loan portfolio was on non-accrual status. -8- Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate agent referrals, existing customers, borrowers, builders, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to collateralize the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written loan policies, senior management approves all first mortgage loans. The Loan Committee of the Board of Directors meets monthly to review a sampling of all loans originated in the month. After a loan is approved, a loan commitment letter is promptly issued to the borrower. The commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. Commitments are typically issued for 60-day periods in the case of loans to refinance, loans to purchase existing real estate, and construction loans. The borrower must provide proof of fire and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. An abstract of title along with an attorney's title opinion is required on all first mortgage loans secured by real property in Iowa. At December 31, 2000, the Company had outstanding commitments to originate $480,000 of loans. This amount does not include commitments to purchase loans, the undisbursed overdraft loan privileges or the unfunded portion of loans in process. Purchased or Out of State Originated Loans. The Company's loan portfolio contains $101.7 million of loans secured by out of state properties. These loans represented 31.5% of the Company's total loan portfolio at December 31, 2000. Substantially all of the multifamily residential and commercial real estate loans in the Company's loan portfolio are purchased or originated out of state by the Company without recourse to the seller. At December 31, 2000, approximately $20.2 million of these purchased loans represented loans secured by real estate in the West Coast states of California, Oregon and Washington. At that date, the Company's investment in properties located in California totalled $16.4 million and was distributed primarily in southern California. The Company's investment in properties located in Wisconsin totalled $33.4 million and was primarily distributed between the Milwaukee and Madison areas. The Company's investment in properties in Colorado totalled $28.4 million and was primarily distributed between the Colorado Springs and Denver areas. The remainder of the Company's purchased or out of state originated loans are distributed in various states. At December 31, 2000, the Company's multifamily residential and commercial real estate loans had an average balance of $435,000 and the largest loan had a principal balance of $2.5 million. As of December 31, 2000 there was one multifamily and one commercial real estate loan that were more than 90 days past due and were on nonaccrual status. To supplement its origination of one-to-four family first mortgage loans, the Company also purchases loans secured by one-to-four family residences out of state. At December 31, 2000, $9.5 million, or 2.9%, of the Company's total loan portfolio consisted of purchased one-to-four family loans, of which $5.8 million were secured by properties located in Missouri and $1.6 million were secured by properties in Wisconsin. As of December 31, 2000 there were no purchased one-to-four family first mortgage loans that were on a nonaccrual status. Loans purchased by the Company entail certain risks not necessarily associated with loans the Company originates. The Company's purchased loans are generally acquired without recourse. $25.4 million, or 24.9%, of out of state loans are serviced by the Bank. $76.3 million, or 75.1% of the out of state loans are serviced by the originating financial institution or mortgage company. Although the Company reviews each purchased loan using the Company's underwriting criteria for originations and a Company officer or director performs an on-site inspection of each purchased loan, the Company is dependent on the servicer of the loan for ongoing collection efforts and collateral review. In addition, the Company purchases loans with a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in the Company's market areas. If economic conditions continue to limit the Company's opportunities to originate loans in its market areas, the Company may increase its investment in out of state mortgage loans. There can be no assurance, however, that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. -9- In an effort to reduce the risk of loss on out of state purchased loans, the Company only purchases loans that meet the underwriting policies for loans originated by the Company although specific rates and terms may differ from the rates and terms offered by the Company. The Company also requires appropriate documentation, and personal inspections of the underlying real estate collateral by an executive officer or director prior to purchase. Set forth below is a table of the Company's purchased or out of state originated loans by state of origin (including multifamily residential, commercial real estate and one-to-four family first mortgage loans) as of December 31, 2000. Balance as of State December 31, 2000 ----- ----------------- (In thousands) Arizona $ 695 California 16,370 Colorado 28,368 Florida 275 Georgia 48 Illinois 7 Indiana 802 Kansas 766 Michigan 11 Minnesota 772 Missouri 8,599 Montana 77 Nebraska 541 Nevada 640 New Mexico 7 North Carolina 653 North Dakota 61 Ohio 2,886 Oregon 1,880 South Carolina 117 Tennessee 189 Texas 1,393 Utah 1,157 Virginia 39 Washington 1,901 Wisconsin 33,442 ------ Total $ 101,696 =========== -10- Origination, Purchase and Sale of Loans. The table below shows the Company's originations, purchases and sales of loans for the periods indicated.
For the Years Ended December 31, ------------ 2000 1999 1998 ---- ---- ---- (In thousands) Total loans receivable at beginning of period......... $ 291,760 $ 258,361 $ 194,626 ----------- ----------- ----------- Originations: First mortgage loans: One-to-four family residential..................... 35,512 31,645 36,226 Multifamily........................................ -- 700 -- Commercial......................................... -- -- 1,100 Consumer loans: Automobile......................................... 6,856 4,866 6,349 Second mortgage ................................... 21,500 12,321 14,493 Other ............................................. 2,853 1,778 2,595 ----- ----- ----- Total originations:.............................. 66,721 51,310 60,763 Effect of Valley Financial Acquisition............. -- -- 58,911 Loan Purchases: First mortgage-- one-to-four family................ 1,677 5,870 3,159 First mortgage-- multifamily....................... 10,449 23,332 21,315 First mortgage-- commercial........................ 7,499 11,142 -- Loan Sales: First mortgage-- one-to-four family................ 818 475 4,517 Transfer of mortgage loans to (from) foreclosed real estate............................. (166) 212 373 Repayments............................................ 55,046 57,567 75,523 ------ ------ ------ Net loan activity..................................... 30,648 33,400 63,734 ------ ------ ------ Total loans receivable at end of period.......... $ 322,408 $ 291,760 $ 258,361 =========== =========== ===========
Loan Origination Fees and Other Income. In addition to interest earned on loans, the Company generally receives fees in connection with loan originations. Such loan origination fees, net of costs to originate, are deferred and amortized using an interest method over the contractual life of the loan. Fees deferred are recognized into income immediately upon prepayment of the related loan. At December 31, 2000, the Company had $23,000 of deferred loan origination expenses, net. Such fees vary with the type of loans and commitments made. The Company typically charges an document preparation fee on fixed- and adjustable-rate first mortgage loans. In addition to loan origination fees, the Company also receives other fees, service charges (such as overdraft fees), and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $1.6 million, $1.5 million and $1.2 million for the fiscal years ended December 31, 2000, 1999 and 1998 respectively. Investment Activities At December 31, 2000, the Company's investment portfolio is comprised of United States Government Agencies, Municipal Obligations, mortgage-backed securities, interest-bearing deposits and equity securities consisting of FHLMC preferred stocks, FNMA preferred stock, FHLB stock, other common and preferred stocks. At December 31, 2000, $362,000, or 1.2%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less, and $17.0 million, or 56.9% was scheduled to mature within one to five years. The Company is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short term securities and certain other investments. The Company generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as -11- management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. In addition, the Company's liquidity levels are affected by the level and source of its borrowed funds. Investment Portfolio. The following table sets forth the carrying value of the Company's investment portfolio at the dates indicated.
At December 31, --------------- 2000 1999 1998 ---- ---- ---- (In thousands) Investment securities: U.S. Treasury Notes.................. $ -- $ 4,260 $ 9,410 U.S. Government agencies (1).......... 17,278 18,799 18,884 Mortgage-backed securities............ 8,183 9,955 7,508 State and Local Obligations (1)....... 4,473 4,772 4,378 FHLB stock............................ 4,429 3,035 2,379 Equity securities..................... 8,989 8,872 7,323 ----- ----- ----- Total investment securities......... 43,352 49,693 49,882 Interest-earning deposits............. 6,331 4,127 13,201 ----- ----- ------ Total investments................... $ 49,683 $ 53,820 $ 63,083 =========== =========== =========== (1) Certain securities have call features which allows the issuer to call the security prior to maturity date.
-12- Investment Portfolio Maturities. The following table sets forth the scheduled maturities, carrying values, market values and weighted average yields for the Company's investment portfolio at December 31, 2000.
At December 31, 2000 -------------------- One Year or Less One to Five Years Five to Ten Years ---------------- ----------------- ----------------- Annualized Annualized Annualized Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- Investment securities: U.S. Government agencies(1) .. $ -- --% $16,091 5.92% $ 1,187 7.09% Mortgage-backed securities ... -- -- 1,561 5.51 1,950 5.76 State and Local Obligations(1) 362 4.35 937 4.09 2,609 4.78 FHLB Stock ................... -- -- -- -- -- -- Common and Preferred Stock ... -- -- -- -- -- -- Preferred Stock-FNMA ......... -- -- -- -- -- -- Preferred Stock-FHLMC ........ -- -- -- -- -- -- ------ ----- ------- ----- ----- ---- Total ...................... $ 362 4.35% $18,589 5.79% $5,746 5.59% Interest-bearing deposits at the FHLB .................. 6,330 6.10 -- -- -- -- ----- ----- ------ ----- ----- ----- Total investments .......... $ 6,692 6.01% $18,589 5.79% $ 5,746 5.59% ======= ==== ======= ==== ======= ====
At December 31, 2000 -------------------- Over Ten Years Total -------------- ----- Annualized Annualized Weighted Average Weighted Carrying Average Carrying Market Life in Average Value Yield Value Value Years Yield ----- ----- ----- ----- ----- ----- (Dollars in thousands) Investment securities: U.S. Government agencies(1) .. $ -- --% $17,278 $17,278 4 5.99% Mortgage-backed securities ... 4,672 6.16 8,183 8,183 4 5.94 State and Local Obligations(1) 565 5.20 4,473 4,473 4 4.65 FHLB Stock ................... -- -- 4,429 4,429 7.10 Common and Preferred Stock ... -- -- 464 464 4.78 Preferred Stock-FNMA ......... -- -- 5,130 5,130 6.48 Preferred Stock-FHLMC ........ -- -- 3,395 3,395 5.73 ----- ---- ----- ----- ---- Total ...................... $ 5,237 6.06% $43,352 $43,352 5.98% Interest-bearing deposits at the FHLB .................. -- -- 6,330 6,330 6.10 ----- ----- ----- ----- ---- Total investments .......... $ 5,237 6.06% $49,682 $49,682 5.99% ======= ==== ======= ======= ==== (1) Certain securities have call features which allows the issuer to call the security prior to maturity date.
-13- Sources of Funds General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from FHLB advances, the amortization and prepayment of loans, the maturity of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. The Company may use borrowings on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. Deposits. During 2000, consumer and commercial deposits were attracted principally from within the Company's market area through the offering of a broad selection of deposit instruments including NOW accounts, savings accounts, money market savings, certificates of deposit and individual retirement accounts. The Company also offers these products in its new market area which it now serves as a result of the Acquisition. See "Acquisition of Valley Financial Corp." Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest which the Company may pay is not established by regulatory authority. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. During 1999 and 2000, the Company became a more active bidder for public funds in the state of Iowa. As a result, public fund deposits totalled $15.8 million at December 31, 2000. The Company does not obtain retail funds through brokers through a solicitation of funds, nor by offering negotiated rates on certificates of deposit in excess of $100,000. Deposit Portfolio. Deposits with the Company as of December 31, 2000, were represented by the various types of deposit programs described below.
Weighted Percentage Average Checking and Minimum of Total Interest Rate Original Term Savings Deposits Balance Balances Deposits - ------------- ------------- ---------------- ------- -------- -------- (Dollars in thousands) 0.00% None Noninterest-bearing demand $ 50 $ 6,071 2.32% 1.25 None NOW accounts 50 30,225 11.57 1.83 None Savings accounts 25 21,724 8.32 4.92 None Money Market savings 2,500 24,519 9.39 Certificates of Deposit ----------------------- 6.43 1-3 months Fixed term, fixed rate $1,000 $ 2,114 0.81 4.63 4-6 months Fixed term, fixed rate 1,000 2,012 0.77 6.83 7-9 months Fixed term, fixed rate 1,000 11,330 4.34 5.99 10-12 months Fixed term, fixed rate 1,000 20,360 7.80 6.01 13-24 months Fixed term, fixed rate 1,000 64,793 24.82 5.81 25-36 months Fixed term, fixed rate 1,000 27,982 10.71 6.45 37-48 months Fixed term, fixed rate 1,000 3,454 1.32 6.03 49-60 months Fixed term, fixed rate 1,000 45,628 17.47 6.30 61 months or greater Fixed term, fixed rate 1,000 817 0.31 4.75 Various Variable rate 100 138 0.05 ------- ------ Total certificates of deposit $261,167 100.00% ======== ======
-14- The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Company between the dates indicated.
Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/00 % $ 12/31/99 % $ 12/31/98 ------------------------------------------------------------------------------------------------- (Dollars in thousands) Noninterest bearing demand.... $ 6,071 (5.32)% $ (341) $ 6,412 17.48% $ 954 $ 5,458 NOW........................... 30,225 0.43 129 30,096 2.63 (813) 30,909 Savings account .............. 21,724 (15.90) (4,106) 25,830 1.03 (269) 26,099 Money market savings.......... 24,519 40.40 7,055 17,464 11.92 (2,364) 19,828 Certificates of deposit that mature: within 12 months.......... 93,172 (20.71) (24,343) 117,515 44.55 36,220 81,295 within 12-36 months....... 61,972 17.58 9,265 52,707 18.86 (12,255) 64,962 beyond 36 months.......... 23,484 11.78 2,477 21,007 15.81 2,868 18,139 ------ ----- ----- ------ ----- ----- ------ Total................... $ 261,167 (3.64)% $ (9,864) $ 271,031 9.87% $ 24,341 $246,690 ========= ===== ========= ========== ====== ======== ========
Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/98 % $ 12/31/97 % $ 12/31/96 ------------------------------------------------------------------------------------------------- (Dollars in thousands) Noninterest bearing demand.. $ 5,458 73.55% $ 2,313 $ 3,145 38.24% $ 870 $ 2,275 NOW......................... 30,909 113.80 16,452 14,457 22.27 2,633 11,824 Passbook savings............ 26,099 52.45 8,979 17,120 (3.58) (636) 17,756 Money market savings........ 19,828 121.34 10,870 8,958 23.05 1,678 7,280 Certificates of deposit that mature: within 12 months........ 81,295 99.44 40,533 40,762 10.25 3,790 36,972 within 12-36 months..... 64,962 53.20 22,558 42,404 33.24 10,578 31,826 beyond 36 months........ 18,139 27.04 3,861 14,278 (34.47) (7,511) 21,789 -- ------ ----- ----- ------ ------ ------ ------ Total................ $ 246,690 $ 74.80% $ 105,566 $ 141,124 8.79% $ 11,402 $129,722 ========== ======== ========== ========== ====== ========= ========
-15- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
At December 31, ------------------------------------------------------------ 2000 1999 1998 ---- ---- ---- (In thousands) Rate - ---- 3.99% or less......... $ 24 $ 688 $ 232 4.00-5.99%............ 78,138 154,231 110,152 6.00-7.99%............ 100,455 36,300 53,829 8.00% or greater...... 11 10 183 ------- ------- ------- $ 178,628 $ 191,229 $ 164,396 =========== =========== ===========
The following table sets forth the amount and maturities of certificates of deposit at December 31, 2000.
Amount Due -------------------------------------------------------------------------------------- Less Than 1 1-2 2-3 3-4 4-5 After 5 Year Years Years Years Years Years Total ---- ----- ----- ----- ----- ----- ----- (In thousands) Rate - ---- 3.99% or less...... $ 24 $ -- $ -- $ -- $ -- $ -- $ 24 4.00-5.99% 46,225 11,553 9,270 8,227 2,861 2 78,138 6.00-7.99%......... 46,923 31,946 9,192 2,190 9,996 208 100,455 8.00% or greater... -- 11 -- -- -- -- 11 - ---- ------ ------ ------ ------ ------ ------ ------- $ 93,172 $ 43,510 $ 18,462 $ 10,417 $ 12,857 $ 210 $ 178,628 ======== ======== ======== ======== ======== ======== =========
The following table indicates the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 2000. This amount does not include savings accounts of greater than $100,000, which totalled approximately $697,000 at December 31, 2000. Certificates of Deposit over Remaining Maturity $100,000 - ------------------------------------------------- --------------- (In thousands) Three months or less............................. $ 6,955 Three through six months......................... 4,944 Six through twelve months........................ 7,995 Over twelve months............................... 10,437 ------ Total.......................................... $ 30,331 ========= -16- The following table sets forth the savings activities of the Company for the periods indicated:
Year Ended December 31, ---------------------------------------------------- 2000 1999 1998 ---- ---- ---- (In thousands) Net increase (decrease) before interest credited and deposits acquired......... $ (18,730) $ 15,582 $ (2,943) Effect of Valley Financial Acquisition..... -- -- 99,269 Interest credited.......................... 8,866 8,758 9,240 ----- ----- ----- Net increase (decrease) in deposits.... $ (9,864) $ 24,340 $ 105,566 ========== ========== ==========
Borrowings Deposits are the Company's primary source of funds. The Company may also obtain funds from the FHLB. FHLB advances are collateralized by selected assets of the Company. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. In conjunction with the Bank's conversion from mutual to stock form in 1994, the Bank established an Employee Stock Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed $960,000 from an unrelated third party lender to finance the purchase of 104,075 shares of the Bank's common stock. Collateral for such loan consisted of the common stock held by the ESOP. The term of the loan was 10 years. The ESOP also borrowed funds in the amount of $840,000 from the Holding Company to purchase 84,000 shares of the Holding Company's Common Stock issued in the reorganization of the Bank and the MHC to the stock holding company form in 1996. In September 1996, these two loans were consolidated into a single loan from the Holding Company to the ESOP.
For the Year Ended December 31, --------------------------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in thousands) Weighted average rate paid on: (1) FHLB advances.................. 6.20% 5.62% 5.81% FHLB advances: Maximum balance................ $ 88,572 $ 60,691 $ 42,550 Average balance................ 71,570 43,711 33,980 Weighted average rate paid on: Other borrowings............... 1.00% 1.00% 1.00% Other borrowings: Maximum balance................ $ 34 $ 38 $ 42 Average balance................ 32 36 40 (1) Calculated using monthly weighted average interest rates.
Title Abstract Business A component of the Company's operating strategy is to increase non-interest income, primarily through the expansion of the abstract company business conducted through a wholly owned subsidiary, First Iowa Title Services Inc. ("First Iowa"). First Iowa currently provides real estate title abstracting services in Webster, Boone and Jasper counties. These services include researching recorded documents at the county courthouse and providing a history -17- of those documents as they pertain to specific parcels of real estate. This information is used to determine who owns specific parcels of real estate and what encumbrances are on those specific parcels. The abstract business performed by First Iowa replaces a significant portion of the function of a title insurance company. Iowa law prohibits Iowa insurance companies or companies authorized to do business in Iowa from issuing title insurance or insurance against loss or damage by reason of defective title, encumbrance or otherwise. Institutions can purchase title insurance, for their own protection or to sell loans on the secondary market, but the cost of this insurance may not be passed on to the borrower. First Iowa had 15 employees as of December 31, 2000. Insurance and Annuity Business The Company has another wholly-owned subsidiary, First Federal Investment Services, Inc. (formerly known as First Financial Service Corporation) ("First Federal Investments"), which the Company began in 1971. First Federal Investments activities include the sale of life insurance on mortgage loans, and credit life and accident and health insurance on consumer loans made by the Company. In addition, First Federal Investments sells life insurance annuity products and mutual funds. In connection with the Acquisition, the Bank acquired Valley Services, Inc., which was merged into First Federal Investments. First Federal Investments has no employees. The subsidiary has executed a management agreement with the Company which provides its management and staff. Mortgage Company Business First Iowa Mortgage, Inc. was acquired as a part of the Acquisition of Valley Financial and is a wholly-owned subsidiary of the Bank. First Iowa Mortgage, Inc. originates first mortgage loans and subsequently sells these loans and the mortgage servicing rights to investors. First Iowa Mortgage, Inc. currently operates in the Bank's office in Ames, Iowa. First Iowa Mortgage, Inc. had 3 employees at December 31, 2000. Multifamily Apartment Building On July 13, 1995, the Company formed the Northridge Apartments Limited Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa corporation formed to acquire, develop and manage low-and moderate- income housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort Dodge Municipal Housing Agency, an agency chartered by the City of Fort Dodge. The Northridge Partnership is a low-income housing tax credit project for certain federal tax purposes. A 44-unit apartment complex was completed on February 1, 1997. The tax credits for the year ended December 31, 2000 are approximately $154,000. The tax credits will continue for a six-year period. Personnel At December 31, 2000, the Company had 103 full-time and 28 part-time employees (including the 15 employees of First Iowa and the 3 employees at First Iowa Mortgage, Inc.). None of the Company's employees is represented by a collective bargaining group. The Company believes its relationship with its employees to be good. -18- FEDERAL AND STATE TAXATION Federal Taxation General. The following is a general discussion of material tax matters and does not purport to be a comprehensive description of the tax rules applicable to the Holding Company or the Bank. The Bank has not been audited in the last five years. For federal income tax purposes, the Holding Company and the Bank will be eligible to file consolidated income tax returns and report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of December 31, 1995. Distributions. To the extent that the Company makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Company's "base year reserve", i.e. its reserve as of December 31, 1987, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Company's taxable income. Nondividend distributions include distributions in excess of the Company's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Company's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Company's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Maximum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating losses. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). The Company does not expect to be subject to the AMT. Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. State and Local Taxation Iowa Taxation. The Holding Company and the Bank's subsidiaries will file Iowa corporation tax returns and the Bank will file an Iowa franchise tax return. The Bank currently files an Iowa franchise tax return, and the Holding Company and the Bank's subsidiaries file Iowa corporation tax returns, on a calendar year basis. The State of Iowa imposes a tax on the Iowa franchise taxable income of thrift institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and -19- municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryback and carryforward rules are similar to the federal rules. The state corporation income tax rate ranges from 6% to 12% depending upon Iowa corporation taxable income. Interest from federal securities is not deductible for purposes of the Iowa corporation income tax. REGULATION General The Bank is a federal savings bank subject to the regulation, examination and supervision by the OTS and is subject to the examination and supervision of the Federal Deposit Insurance Corporation ("FDIC") as its deposit insurer. The Bank is a member of the SAIF, and its deposit accounts are insured up to applicable limits by the FDIC. All of the deposit premiums paid by the Bank to the FDIC for deposit insurance are currently paid to the SAIF. The Bank is also a member of the FHLB of Des Moines, which is one of the 12 regional FHLBs. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Holding Company, as a savings and loan holding company, files certain reports with, and otherwise complies with, the rules and regulations of the OTS and of the SEC under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and their operations and stockholders. On November 12, 1999, President Clinton signed into law landmark financial services legislation, titled the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act repeals depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial services providers. The impact of the GLB Act on the Company and the Bank, where relevant, is discussed throughout the regulation section below. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations. Regulation of Savings and Loan Holding Companies The Holding Company is a savings and loan holding company and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and any of its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings association. The Home Owner and Loan Act ("HOLA"), as amended, prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5.0% of a non-subsidiary savings association, a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. -20- As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See "-- Regulation of Federal Savings Associations -- QTL Test" for a discussion of the QTL requirements. In addition, for grandfathered savings and loans companies (such as the Company), the GLB Act prohibits the sale of such entities to nonfinancial companies. This prohibition is intended to restrict the transfer of grandfathered rights to other entities and, thereby, prevent evasion of the limitation on the creation of new unitary savings and loan holding companies. The Company believes that the GLB Act will not have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets that the Company currently serves. Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings association by the OTS and that will be held as a separate subsidiary, the Holding Company would become a multiple savings and loan holding company and would be subject to limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured association subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act (the "BHC Act"), subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (i) in a supervisory transaction, and (ii) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions. The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary. Some states impose conditions of reciprocity, which have the effect of requiring that the laws of both the state in which the acquiring holding company is located (as determined by the location of its subsidiary savings association) and the state in which the association to be acquired is located, have each enacted legislation allowing its savings associations to be acquired by out-of-state holding companies on the condition that the laws of the other state authorize such transactions on terms no more restrictive than those imposed on the acquiror by the state of the target association. Some of these states also impose regional limitations, which restrict such acquisitions to states within a defined geographic region. Other states allow full nationwide banking without any condition of reciprocity. Some states do not authorize interstate acquisitions of savings associations. Transactions between the Bank and the Holding Company and its other subsidiaries are subject to various conditions and limitations. See "-- Regulation of Federal Savings Associations -- Transactions with Related Parties." The Bank must give 30-days written notice to the OTS prior to any declaration of the payment of any dividends or other capital distributions to the Holding Company. See "-- Regulation of Federal Savings Associations -- Limitation on Capital Distributions." Federal Securities Laws The Company's common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Regulation of Federal Savings Associations Business Activities. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to -21- various limitations, including: (i) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (ii) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (iii) a limit of 20% of an association's assets on commercial loans with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (iv) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (v) a limit of 5.0% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (vi) a limit of the greater of 5.0% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 2000, the Bank imposed a $2.5 million limit on the aggregate size of loans to any one borrower. Any exception to the limit must be specifically approved by the Board of Directors on a loan-by-loan basis within the Bank's legal lending limit. At December 31, 2000, the Bank's largest aggregate amount of loans to one borrower was $2.5 million, and the second largest borrower had an aggregate balance of $2.0 million. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." QTL Test. HOLA requires a savings association to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (i) specified liquid assets up to 20% of total assets, (ii) goodwill and other intangible assets, and (iii) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of an association's portfolio assets. Recent legislation broadened the scope of "qualified thrift investments" to include 100% of an institution's credit card loans, education loans, and small business loans. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. At December 31, 2000, the Bank maintained 90.9% of its portfolio assets in qualified thrift investments, and it had more than 65% of its portfolio assets in qualified thrift investments in the requisite number of the prior 12 months. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. Capital Requirements. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of core capital to such adjusted total assets, if a savings association has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System, and a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets. The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks found by the OTS to be inherent in the type of asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. -22- The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS and the other federal banking agencies are required to take into account interest rate risk ("IRR") in their risk-based capital standards. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk-based capital regulations. The OTS has indefinitely deferred the implementation of the IRR component in the computation of an institution's risk-based capital requirement. The OTS continues to monitor the IRR of individual institutions and retains the right to impose additional capital on individual institutions. At December 31, 2000, the Bank was not required to maintain any additional risk-based capital under this regulation. At December 31, 2000, the Bank met each of its capital requirements, in each case on a fully phased-in basis. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at December 31, 2000:
Capital Bank Requirements Excess Capital ------ ------------ -------------- (In thousands) Tangible capital............................. $ 28,456 $ 5,732 $ 22,724 Core capital................................. 28,456 11,464 16,992 Risk-based capital........................... 31,241 17,830 13,411
A reconciliation between regulatory capital and GAAP capital at December 31, 2000 in the accompanying financial statements is presented below:
Tangible Capital Core Capital Risk-based Capital ---------------- ------------ ------------------ (In thousands) GAAP capital................................... $ 34,649 $ 34,649 $ 34,649 Intangible assets.............................. (6,368) (6,368) (6,368) Unrealized loss on certain available for sale assets....................................... 175 175 175 Allowance for loan losses includable in supplementary capital..................... -- -- 2,785 -------- -------- -------- Regulatory capital............................. $ 28,456 $ 28,456 $ 31,241 ======== ======== ========
Limitation on Capital Distributions. Under OTS capital distribution regulations, certain savings associations are permitted to pay capital distributions during a calendar year that do not exceed the association's net income for that year plus its retained net income for the prior two years, without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, will continue to have to file a notice unless the specific capital distribution requires an application. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described below. See "Prompt Corrective Regulatory Action." Liquidity. 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) equal to a monthly average of not less than 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 December 31, 2000, the Bank's liquidity position was $26.0 million or 8.27% of liquid assets, compared to $31.7 million or 10.84% at December 31, 1999. -23- Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed by totaling three components: the size of the association, on which the basic assessment would be based; the association's supervisory condition, which would result in an additional assessment based of a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which would result in an additional assessment based of a percentage of the basic assessment for any savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion. In order to avoid a disproportionate impact on the smaller savings institutions, which are those whose total assets never exceeded $100 million, the new regulations provide that the portion of the assessment based on assets size will be lesser of the assessment under the amended regulations or the regulations before the amendment. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (i) in states that expressly authorize branches of savings associations located in another state and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent examination. The CRA regulations establish an assessment system that bases an associations rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefitting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (i) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. -24- The Bank's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board (the "FRB") thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any stockholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $10 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"), the OTS and the federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. See "-- Prompt Corrective Regulatory Action." If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Real Estate Lending Standards. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (i) are secured by real estate or (ii) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. -25- Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, based upon the five categories of institutions established by FDICIA: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," which are categories defined by the institution's regulatory capital ratios. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to any undercapitalized institution, including restrictions on growth of assets and other forms of expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Generally, subject to a narrow exception, FDICIA requires the applicable banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 2000, the Association met the criteria for being considered "well capitalized" by the OTS. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. The Bank is a member of the SAIF, and the Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund, which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the quarter ending three months before the beginning of the assessment period. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212 of insured deposits to fund interest payment on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines in an amount at least equal to the greater of 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of Des Moines. The Bank was in compliance with this requirement with an investment in FHLB of Des Moines stock at December 31, 2000 of $4.4 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would be affected. -26- Under the GLB Act, membership in the FHLB is now voluntary for all federally-chartered savings associations, such as the Bank. The GLB Act also replaces the existing redeemable stock structure of the FHLB System with a capital structure that requires each FHLB to meet a leverage limit and a risk-based permanent capital requirement. Two classes of stock are authorized: Class A (redeemable on 6-months notice) and Class B (redeemable on 5-years notice). Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depositary institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts up to $46.5 million. The amount of aggregate transaction accounts in excess of $46.5 million are currently subject to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations currently exempt $4.9 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window, but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. New Privacy Regulations. Pursuant to the GLB Act, the OTS has published final regulations implementing the privacy protection provisions of the GLB Act. These regulations, effective on November 13, 2000 with full compliance required by July 1, 2001, require each financial institution to adopt procedures to protect customers' "nonpublic personal information." The new regulations generally require that the Bank disclose its privacy policy, including identifying with whom it shares a customer's "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank will be required to provide its customers with the ability to "opt-out" of having it share their personal information with unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing purposes. The Bank currently has a privacy protection policy in place and intends to review and amend that policy, if necessary, for compliance with the regulations. ATM Fees. The GLB Act also requires the Bank to disclose, on its ATM machines and to its customers upon the issuance of an ATM card, any fees that may be imposed on ATM users. For older ATMs, the Bank will have until December 31, 2004 to provide such notices. -27- ITEM 2. PROPERTIES The Company conducts its business through its main office located in Fort Dodge, Iowa and seven full-service offices located in Fort Dodge, Nevada, Ames, Perry, Burlington and Mount Pleasant, Iowa. The following table sets forth certain information concerning the main office and each branch office of the Company and the offices of First Iowa Title Services and First Iowa Mortgage, Inc. at December 31, 2000. All of the offices of the Company are owned. In addition to the properties listed below, First Federal Investments owns land and an office building in Fort Dodge, Iowa with a net book value of $322,000 and Northridge Apartments Limited Partnership owns a multifamily apartment building with a net book value of $1.8 million at December 31, 2000. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $6.7 million at December 31, 2000.
Lease Location Opening Date Expiration Date Net Book Value -------- ------------ --------------- -------------- Main Office: 825 Central Avenue 1973 N/A $ 1,056,101 Fort Dodge, Iowa Branch Offices: 201 South 25th Street 1977 N/A $ 258,026 Fort Dodge, Iowa 404 Lincolnway 1977 N/A $ 504,965 Nevada, Iowa 316 South Duff 1977 N/A $ 1,973,966 Ames, Iowa 1st Avenue and Hwy 141 1999 N/A $ 900,898 Perry, Iowa 321 North Third Street 1953 N/A $ 565,305 Burlington, Iowa 1010 North Roosevelt 1975 N/A $ 813,792 Burlington, Iowa 102 South Main 1991 N/A $ 228,208 Mount Pleasant, Iowa First Iowa Offices: 628 Central Avenue 1982 N/A $ 44,652 Fort Dodge, Iowa 814 8th Street 1996 2003 (1) $ 35,702 Boone, Iowa 200 1st Street South 1996 2003 (1) $ 34,662 Newton, Iowa First Iowa Mortgage Office: 1998 N/A $ 22,005 316 South Duff Ames, Iowa (1) Does not include option to renew for an additional 5 years.
-28- ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this Item is incorporated herein by reference to page 63 of the Company's 2000 Annual Report to Shareholders under the heading "Shareholder Information," which section is included in Exhibit 13.1 to this Annual Report. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference to page 4 of the Company's 2000 Annual Report to Shareholders under the heading "Selected Financial Data," which section is included in Exhibit 13.1 to this Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to pages 7 through 26 of the Company's 2000 Annual Report to Shareholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which section is included in Exhibit 13.1 to this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated herein by reference to pages 12 through 14 of the Company's 2000 Annual Report to Shareholders under the heading "Discussion of Market Risk--Interest Rate Sensitivity Analysis," which section is included in Exhibit 13.1 to this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to pages 28 through 60 of the Company's 2000 Annual Report to Shareholders under the headings "Independent Auditor's Report," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements," which section are included in Exhibit 13.1 to this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -29- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding Directors and Executive Officers of the Registrant is included under the headings "Information with Respect to Nominees and Continuing Directors," "Nominees for Election as Directors," "Continuing Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2001, which has been filed with the SEC and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is included under the headings "Executive Compensation" (excluding the Stock Performance Graph and the Compensation Committee Report) and "Directors' Compensation" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2001, which has been filed with the SEC and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is included under the headings "Principal Shareholders of the Company" and "Security Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2001, which has been filed with the SEC and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the heading "Transaction with Certain Related Persons" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 27, 2001, which has been filed with the SEC and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits 1. The consolidated balance sheets of North Central Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, equity and cash flows for the years ended December 31, 2000, 1999 and 1998, together with the related notes and the independent auditor's report of McGladrey & Pullen, LLP, independent certified public accounts. 2. Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 3. See Exhibit Index on following page. (b) Reports on Form 8-K filed during the last quarter of 2000 None. -30- (c) Exhibits Required by Item 601 of Securities and Exchange Commission Regulation S-K:
Exhibit No. Description Page No. - ----------- ----------- -------- 3.1 Articles of Incorporation of North Central Bancshares, Inc. * 3.2 Bylaws of North Central Bancshares, Inc. * 3.3 Amendment to Article IV of the Bylaws of North Central Bancshares, Inc. 4.1 Federal Stock Charter of First Federal Savings Bank of Iowa (formerly * known as First Federal Savings Bank of Fort Dodge) 4.2 Bylaws of First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge). * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 4.4 Amendment to Article III of the Bylaws of First Federal Savings Bank of Iowa 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Iowa ***** (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP Trust Agreement (incorporating Amendments 1 and 2) 10.2 ESOP Loan Documents, dated September 3, 1996 **** 10.3 Employee Retention Agreements between First Federal Savings Bank of Fort ** Dodge and certain executive officers 10.4 Employment Agreement between First Federal Savings Bank of Iowa * (formerly known as First Federal Savings Bank of Fort Dodge) and David M. Bradley, effective as of August 31, 1994 10.5 Form of Employment Agreement between First Federal Savings Bank of * Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and David M. Bradley 10.6 Form of Employment Agreement between North Central Bancshares, Inc. * and David M. Bradley 10.8 North Central Bancshares, Inc. 1996 Stock Option Plan *** 10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock Option ***** Plan 13.1 Annual Report to security holders 21.1 Subsidiaries of the Registrant * 23.1 Consent of McGladrey & Pullen, LLP 99.1 Press Release dated October 27, 2000 99.2 Press Release dated November 29, 2000 99.3 Press Release dated January 22, 2001
-31- * Incorporated herein by reference to Registration Statement No. 33-80493 on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed with the Securities and Exchange Commission, (the "Commission") on December 18, 1995, as amended. ** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K filed by Registrant for fiscal year 1995, filed with the Commission on March 29, 1996. *** Incorporated herein by reference to the Amended Schedule 14A of Registrant filed with the Commission on August 19, 1996. **** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1997. ***** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1998. -32- Conformed SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant and has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. North Central Bancshares, Inc. Date: March 21, 2001 /s/ David M. Bradley -------------------- By: David M. Bradley Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ David M. Bradley President, Chief Executive 03/21/01 - -------------------- Officer, Director,and Chairman David M. Bradley of the Board(principal executive officer) /s/ John L. Pierschbacher Treasurer 03/21/01 - ------------------------- (principal accounting and John L. Pierschbacher financial officer) /s/ Robert H. Singer, Jr. Director 03/21/01 - ------------------------- Robert H. Singer, Jr. /s/ KaRene Egemo Director 03/21/01 - ---------------- KaRene Egemo /s/ Howard A. Hecht Director 03/21/01 - ------------------- Howard A. Hecht /s/ Melvin R. Schroeder Director 03/21/01 - ----------------------- Melvin R. Schroeder /s/ Mark M. Thompson Director 03/21/01 - -------------------- Mark M. Thompson /s/ Craig R. Barnes Director 03/21/01 - ------------------- Craig R. Barnes -33- TABLE OF CONTENTS List of Exhibits (filed herewith unless otherwise noted)
Exhibit No. Description Page No. - ----------- ----------- -------- 3.1 Articles of Incorporation of North Central Bancshares, Inc. * 3.2 Bylaws of North Central Bancshares, Inc. * 3.3 Amendment to Article IV of the Bylaws of North Central Bancshares, Inc. 4.1 Federal Stock Charter of First Federal Savings Bank of Iowa (formerly * known as First Federal Savings Bank of Fort Dodge) 4.2 Bylaws of First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge). * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 4.4 Amendment to Article III of the Bylaws of First Federal Savings Bank of Iowa 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Iowa ***** (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP Trust Agreement (incorporating Amendments 1 and 2) 10.2 ESOP Loan Documents, dated September 3, 1996 **** 10.3 Employee Retention Agreements between First Federal Savings Bank of Fort ** Dodge and certain executive officers 10.4 Employment Agreement between First Federal Savings Bank of Iowa * (formerly known as First Federal Savings Bank of Fort Dodge) and David M. Bradley, effective as of August 31, 1994 10.5 Form of Employment Agreement between First Federal Savings Bank of * Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and David M. Bradley 10.6 Form of Employment Agreement between North Central Bancshares, Inc. * and David M. Bradley 10.8 North Central Bancshares, Inc. 1996 Stock Option Plan *** 10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock Option ***** Plan 13.1 Annual Report to security holders 21.1 Subsidiaries of the Registrant * 23.1 Consent of McGladrey & Pullen, LLP 99.1 Press Release dated October 27, 2000 99.2 Press Release dated November 29, 2000 99.3 Press Release dated January 22, 2001
-34- * Incorporated herein by reference to Registration Statement No. 33-80493 on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed with the Securities and Exchange Commission, (the "Commission") on December 18, 1995, as amended. ** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K filed by Registrant for fiscal year 1995, filed with the Commission on March 29, 1996. *** Incorporated herein by reference to the Amended Schedule 14A of Registrant filed with the Commission on August 19, 1996. **** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1997. ***** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1998. -35- EX-3.3 2 0002.txt AMENDMENT TO BYLAWS Exhibit 3.3 Amendment to North Central Bancshares, Inc.'s Bylaws (Adopted on and Effective as of December 15, 2000) Article IV, Section 1 of the bylaws of North Central Bancshares, Inc. is amended to read as follows: Section 1. Responsibilities; Number of Directors. The business and affairs of the Corporation shall be under the direction of the Board. The Board shall consist of seven (7) directors. No more than two (2) directors shall be officers or employees of the Corporation or its subsidiaries. EX-4.4 3 0003.txt AMENDMENT TO BYLAWS Exhibit 4.4 Amendment to First Federal Savings Bank of Iowa's Bylaws (Adopted on and Effective as of December 15, 2000) Article III, Section 2 of the bylaws of First Federal Savings Bank of Iowa is amended to read as follows: Section 2. Number and Term. The board of directors shall consist of seven members, and shall be divided into three classes as nearly equal in number as possible. The member of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. EX-13.1 4 0004.txt ANNUAL REPORT TO SECURITY HOLDERS Exhibit 13.1 2000 Annual Report to security holders TABLE OF CONTENTS MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER........... 3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA........................... 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 7 INDEX TO FINANCIAL STATEMENTS............................................27 QUARTERLY RESULTS OF OPERATIONS (Unaudited)..............................61 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK...........................62 SHAREHOLDER INFORMATION..................................................63 This Annual Report to Shareholders contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations (including noninterest expense and availability of potential tax credits) and business of Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic and market conditions, the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments, and changes in depositor preferences for financial products. MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dear Shareholders: We are pleased to report to you the operating results of North Central Bancshares, Inc. ("North Central Bancshares" or the "Company") for the year ended December 31, 2000. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the "Bank). For the year ended December 31, 2000, North Central Bancshares' net income was $4.0 million or $2.00 diluted earnings per share, as compared to $4.2 million, or $1.60 diluted earnings per share, for the year ended December 31, 1999. Some of our achievements during the past year include: 2000 HIGHLIGHTS * Total assets, loans and diluted earnings per share reached new Company highs. * Total assets reached a high of $389.0 million * Total net loans increased by 10.9% or $31.3 million * Diluted earnings per share for the year 2000 reached a record $2.00, a 25% increase * Increased quarterly dividends in April, 2000 to $0.125 per share, a 25% increase * Repurchased a total of 349,862 shares or 15.5% of outstanding stock during the year ended December 31, 2000 * Established a Dividend Reinvestment and Stock Purchase Plan for the Company * Established our presence on the Internet at www.firstfederaliowa.com * Relocated Ames, Iowa office to a new larger building Howard A. Hecht will retire from the Board of Directors at this year's annual meeting of the Company. During his twelve year tenure on the Board, the Company and the Bank have benefitted tremendously from his wise counsel and input. We all wish him well in his retirement. I want to thank our outstanding staff who helped make 2000 another successful year for the Company. The directors, officers and staff of North Central Bancshares, Inc. and its subsidiary, First Federal Savings Bank of Iowa, wish to thank you for your continued interest and support. We remain committed to increasing shareholder value. Sincerely, /s/ David M. Bradley -------------------- David M. Bradley Chairman, President and Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated financial and other data of North Central Bancshares, Inc. set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual Report.
At December 31, ------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Selected Consolidated Financial Condition Data: Total assets............................ $ 388,998 $ 367,433 $ 336,690 $ 221,954 $ 203,093 Cash (noninterest bearing).............. 2,519 8,542 2,435 982 963 Loans receivable, net:(1) First mortgage loans secured by one-to-four family residences.......................... 174,413 161,547 145,967 114,286 106,053 First mortgage loans secured by multifamily properties........... 74,644 71,503 63,285 49,895 33,015 First mortgage loans secured by commercial properties............ 23,825 17,470 11,168 3,724 5,068 Consumer loans........................ 45,144 36,239 33,612 23,344 21,695 ---------- ------------ ---------- ---------- ---------- Total loans receivable, net......... 318,026 286,759 254,032 191,249 165,831 Investment securities(2)................ 49,682 53,820 63,084 22,279 29,577 Deposits................................ 261,167 271,031 246,690 141,124 129,722 Borrowed funds.......................... 88,592 55,715 38,832 28,550 22,335 Total shareholders' equity.............. 36,398 38,127 48,207 50,417 49,235
For the Year Ended December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Selected Operating Data: Interest income......................... $ 27,284 $ 24,556 $ 23,602 $ 16,205 $15,090 Interest expense........................ 16,707 13,604 12,869 7,900 6,929 ---------- ---------- ---------- ---------- ---------- Net interest income before provision for loan losses.......... 10,577 10,952 10,733 8,305 8,161 Provision for loan losses............... 120 120 210 240 240 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.......... 10,457 10,832 10,523 8,065 7,921 ---------- ---------- ---------- ---------- ---------- Noninterest income: Fees and service charges........... 1,592 1,485 1,243 657 580 Abstract fees...................... 1,233 1,421 1,584 1,222 931 Other income....................... 1,189 1,157 1,088 658 382 ---------- ---------- ---------- ---------- ---------- Total noninterest income......... 4,014 4,063 3,915 2,537 1,893 ---------- ---------- ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits..... 4,103 4,026 3,482 2,209 2,004 Premises and equipment............. 1,092 931 812 444 421 Data processing.................... 455 522 553 258 244 One-time SAIF special assessment... -- -- -- -- 817 SAIF deposit insurance premiums......... 55 147 143 85 279 Goodwill 472 472 436 28 29 Other expenses..................... 2,410 2,356 2,146 1,553 1,144 ---------- ---------- ---------- ---------- ---------- Total noninterest expense........ 8,587 8,454 7,572 4,577 4,938 ---------- ---------- ---------- ---------- ---------- Income before income taxes.............. 5,884 6,441 6,866 6,025 4,876 Income tax expense...................... 1,873 2,241 2,481 2,108 1,744 ---------- ---------- ---------- ---------- ---------- Net income........................... $ 4,011 $ 4,200 $ 4,385 $ 3,917 $ 3,132 ========== ========== ========== ========== ==========
-4-
At or for the Year Ended December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Key Financial Ratios and Other Data: Performance Ratios: (%) Net interest rate spread (difference between average yield on interest-earning assets and average cost of interest- bearing liabilities)...................... 2.57% 2.86% 2.81% 2.87% 3.01% Net interest margin (net interest income as a percentage of average interest- earning assets)........................... 2.95 3.35 3.50 4.06 4.33 Return on average assets (net income divided by average total assets).......... 1.06 1.21 1.35 1.86 1.62 Return on average equity (net income divided by average equity)................ 11.08 9.51 8.73 7.94 6.30 Noninterest income to average assets........ 1.07 1.21 1.21 1.20 0.98 Efficiency ratio(3)......................... 58.85 56.30 51.69 42.21 49.11 Noninterest expense to average assets....... 2.28 2.45 2.34 2.17 2.56 Net interest income after provision for loan losses to noninterest expenses....... 121.78 128.13 138.97 176.22 160.40 Financial Condition Ratios: (%) (4) Equity to assets at period end.............. 9.36 10.38 14.32 22.72 24.24 Tangible equity to tangible assets at period end (5) (6)..................... 7.84 8.68 12.42 22.32 23.80 Average shareholders' equity divided by average total assets...................... 9.61 12.77 15.52 23.38 25.73 Average tangible shareholders equity divided by average tangible total assets (5) (6).. 8.00 10.94 13.71 22.96 25.29 Average interest-earning assets to average interest-bearing liabilities.............. 108.31 112.05 116.28 130.97 136.02 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans......... 0.33 0.07 0.38 0.08 0.11 Nonperforming assets to total assets(7)..... 0.28 0.20 0.34 0.10 0.15 Allowance for loan losses as a percent of total loans receivable at end of period... 0.88 0.95 1.03 1.10 1.16 Allowance for loan losses to nonaccrual loans..................................... 274.08 1,301.13 279.72 1,468.33 1,059.35 Per Share Data: Book value per share........................ $19.04 $16.86 $16.26 $15.43 $14.36 Tangible book value per share(5)............ 15.71 13.83 13.79 15.09 14.01 Basic earnings per share (8)................ 2.04 1.64 1.44 1.23 0.82 Diluted earnings per share (9).............. 2.00 1.60 1.40 1.21 0.82 Dividends declared per share................ 0.50 0.40 0.32 0.25 0.28 Dividend payout ratio....................... 0.25 0.24 0.22 0.20 0.34 Key Financial Ratios Excluding SAIF Assessment: (%) (10) Return on average assets (net income divided by average total assets).................. 1.06% 1.21% 1.35% 1.86% 1.89% Return on average equity (net income divided by average equity)................ 11.08 9.51 8.73 7.94 7.34 Efficiency ratio (3)........................ 58.85 56.30 51.69 42.21 40.99 Noninterest expense to average assets ...... 2.28 2.45 2.34 2.17 2.13 Net interest income after provision for loan losses to noninterest expenses....... 121.78 128.13 138.97 176.22 192.21
(Notes on following page) -5- [FN] (1) Loans receivable, net represents total loans less discounts, loans in process, net deferred loan fees and allowance for loan losses. The allowance for loan losses at December 31, 2000, 1999, 1998, 1997 and 1996 was $2.8 million, $2.8 million, $2.7 million, $2.2 million and $2.0 million, respectively. (2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des Moines (the "FHLB"). (3) Efficiency ratio represents noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. (4) Asset Quality Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (5) Tangible equity consists of stockholders' equity less goodwill and title plant. Goodwill and title plant at December 31, 2000, 1999, 1998, 1997 and 1996 was $6.4 million, $6.8 million, $7.3 million, $1.1 million and $1.2 million, respectively. (6) Tangible assets consists of total assets less goodwill and title plant. Goodwill and title plant at December 31, 2000, 1999, 1998, 1997 and 1996 was $6.4 million, $6.8 million, $7.3 million, $1.1 million and $1.2 million, respectively. (7) Nonperforming assets consists of nonaccrual loans, foreclosed real estate and other nonperforming assets. (8) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 2000, 1999, 1998, 1997 and 1996 were 1,963,686, 2,562,940, 3,048,148, 3,184,269 and 3,818,273, respectively. (9) Diluted earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding, adjusted for the effect of dilutive potential common shares outstanding which consists of stock options granted. The weighted average number of shares outstanding for diluted earnings per share computation for 2000, 1999, 1998, 1997 and 1996 were 2,006,340, 2,621,542, 3,132,833, 3,241,069 and 3,818,273, respectively. (10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for the recapitalization of the Savings Association Insurance Fund ("SAIF"). (11) As of the close of business on January 30, 1998, the Company completed the Acquisition of Valley Financial Corp. Subsequent to January 30, 1998, the information contained in the Financial Selected Data tables reflect the effect of the Acquisition. Financial data prior to January 30, 1998, does not reflect the Acquisition and is based upon historical figures. -6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its common stock, par value $0.01 per share ("Common Stock"), of which 1,385,590 shares 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 at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank. The profitability of the Company depends primarily on its level of net interest income, which is the difference between interest earned on the Company's interest-earning assets, consisting primarily of loans and investment securities, and the interest paid on interest-bearing liabilities, which primarily consist of deposits and advances from the FHLB. Net interest income is a function of the Company's interest rate spread, which is the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, as well as a function of the average balance of interest-earning assets as compared to interest-bearing liabilities. The Company's net income is affected by its level of noninterest income which primarily consists of service fees and charges and abstract fees, and noninterest expense, which primarily consists of compensation and employee benefit expenses, premises and equipment and data processing. Net income also is affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities, which events are beyond the control of the Company. Acquisition of Valley Financial Corp. As of the close of business on January 30, 1998 (the "Effective Time"), the Company completed the acquisition ( the "Acquisition") of Valley Financial Corp., ("Valley Financial"), 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, ("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. 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 $525.00 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 $14,726,250 in cash. SAIF Recapitalization In response to the disparity in deposit insurance assessment rates that existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act") was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. The Company's special SAIF assessment of $817,000 before taxes (and $512,000 net of taxes) was charged against income in the third quarter of 1996 and -7- paid in November 1996 (the "SAIF Assessment"). In view of the recapitalization of the SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For the fiscal years ended December 31, 2000, 1999 and 1998, the Bank incurred $55,000, $147,000 and $143,000, respectively, in deposit insurance premiums and for the interest payments on the FICO bonds issued by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Business Strategy The Company's current business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented savings bank dedicated to providing quality customer service. Generally, the Company has sought to implement this strategy primarily by using deposits and advances from the FHLB as its source of funds and maintaining a substantial part of its assets in loans secured by one- to four-family residential real estate, multi-family loans and commercial real estate located both inside and outside the Company's market area, consumer and other loans and in other liquid investment securities. Specifically, the Company's business strategy incorporates the following elements: (1) operating as a community-oriented financial institution, maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a locally-headquartered institution can offer; (2) maintaining high asset quality by emphasizing investment in residential mortgage loans (including the purchase of qualifying multifamily and commercial real estate loans) and securities issued or guaranteed by the United States Government or agencies thereof and mortgage-backed securities; (3) maintaining capital in excess of regulatory requirements and growing only to the extent that adequate capital levels can be maintained; (4) controlling noninterest expenses; (5) managing interest rate risk exposure while achieving desirable levels of profitability; and (6) increasing noninterest income through other increases in fees and service charges. Highlights of the Company's business strategy are as follows: Community-Oriented Institution. The Company is committed to meeting the financial needs of the communities in which it operates. Based in part on its participation in several different programs designed to facilitate residential lending to low- and moderate-income households, the Bank has received an "Outstanding" Community Reinvestment Act rating. The Company believes it is large enough to provide a full range of personal and business financial services and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that the Company can be more effective in servicing its customers than many of its competitors which are not headquartered locally. Such proximity allows senior management of the Bank to quickly and personally respond to customer needs and inquiries. Strong Retail Deposit Base. In 2000, the Company had a relatively strong and stable retail deposit base drawn from its offices located in Fort Dodge, Ames, Nevada, Perry, Burlington and Mount Pleasant, Iowa. At December 31, 2000, 31.6% of the deposit base, or $82.5 million, consisted of core deposits, which included money market accounts, savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail deposits by providing quality customer service, offering competitive rates on deposit accounts, and providing depositors with a full range of accounts. Asset Quality and Emphasis on Residential Mortgage Lending. The Company has historically emphasized residential real estate financing, and has been primarily a portfolio lender. The Company expects to continue its commitment to financing the purchase or improvement of residential real estate in its market area. At December 31, 2000, 44.8% of the Company's total assets consisted of one-to-four family residential first mortgage loans. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has purchased loans in the secondary mortgage market, with an emphasis on multifamily and commercial real estate loans secured by properties outside the State of Iowa (the "out of state properties"). At December 31, 2000, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $9.5 million of one-to-four family residential mortgage loans, or 2.9% of the Company's total loan portfolio, and $92.2 million of multifamily and commercial loans, or 28.6% of the Company's total loan portfolio. At December 31, 2000, the Company's ratio of nonperforming assets to total assets was 0.28%. The Company also invests in United -8- States Government agencies, State and Local Obligations, mortgage-backed securities, interest-earning deposits, equity securities and FHLB stock. Generally, the yield on mortgage loans originated and purchased by the Company is greater than that of securities purchased by the Company. Future economic conditions and continued strong banking competition could result in diminished lending opportunities. If new loan originations are reduced in the future, the Company may increase its investment in securities and in purchased mortgage loans outside its market area. Capital Strength and Controlled Internal Growth. Total equity decreased from $49.2 million at December 31, 1996 to $36.4 million at December 31, 2000, a decrease of 26.1%. Total assets have increased by $185.9 million, or 91.5%, since December 31, 1996. As a result, the ratio of total equity to total assets has decreased from 24.2% at December 31, 1996 to 9.4% at December 31, 2000. The Company's growth can be attributed to the Acquisition and the Company's emphasis on the origination and purchase of residential mortgage loans, the purchase of multifamily and commercial mortgage loans and the origination of consumer loans. The Company's growth has been funded through a combination of the use of proceeds from the stock offerings held in 1994 and 1996, FHLB advances and deposit growth. The Company intends to maintain strong levels of total equity and capital ratios by controlling growth to the extent that adequate capital levels can be maintained. Acquisition Strategy. With the consummation of the Acquisition in 1998, the Company has grown through the purchase of another financial institution. The Acquisition resulted in an increase in total assets of approximately 42.0%, making effective use of the Company's excess capital. The Company intends to continue evaluating the possibility of acquiring branch offices and other financial institutions, which involves executing confidentiality agreements and conducting due diligence. Such evaluations by the Company provide no indication of the likelihood that the Company will enter into any agreement to engage in an acquisition transaction as, in many instances, such transactions are subject to competitive bidding and, in every instance, are subject to extensive arm's length negotiations once the Company's evaluation is complete. Increasing Noninterest Income. The Company has attempted to increase its level of noninterest income from both new and traditional lines of business to supplement net interest income. The Company currently owns abstract companies in Webster, Boone and Jasper counties in Iowa, through First Iowa Title Services, Inc. ("First Iowa"), the Bank's wholly owned subsidiary. The abstract business performed by First Iowa replaces the function of a title insurance company. The Company believes that First Iowa can continue to be an excellent source of fee income. Noninterest income from such business for the year ended December 31, 2000 was $1.2 million, offset by noninterest expense attributable to First Iowa. The Company also owns a mortgage banking company in Ames, Iowa, First Iowa Mortgage, Inc. ("First Iowa Mortgage"), the Bank's wholly owned subsidiary. On January 30, 1998, the Company acquired First Iowa Mortgage as a part of the Acquisition of Valley Financial. Non-interest income for such business for the year ended December 31, 2000 was $231,000, offset by non-interest expense attributable to First Iowa Mortgage. Liquidity and Interest Rate Risk Management. Management seeks to manage the Company's interest rate risk exposure by monitoring the levels of interest rate sensitive assets and liabilities while maintaining an acceptable interest rate spread. At December 31, 2000, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $29.9 million, representing a one-year gap to total assets ratio of negative 7.7% as compared to a negative 14.7% at December 31, 1999. To reduce the potential volatility of the Company's earnings in a changing interest rate environment, the Company has emphasized the origination of 5 and 7-year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years, adjustable-rate loans, investment in short to medium term U. S. Government agencies, mortgage-backed securities and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. See "-- Discussion of Market Risk -- Interest Rate Sensitivity Analysis". -9- Liquidity and Capital Resources OTS regulations require that thrift institutions such as the Bank maintain an average daily balance of liquid assets (cash, certain time deposits, banker's acceptances and specified United States Government, state or federal agency obligations) equal to a monthly average of not less than 4% of its net withdrawable deposits plus short-term borrowings. At December 31, 2000, the amount of the Bank's liquid assets were $26.0 million, resulting in a liquidity ratio of 8.3%. The Company's primary sources of funds are deposits, amortization and prepayment of loans, maturities of securities and other investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Company invests in short-to- medium term interest-earning assets, which provide liquidity to meet lending requirements. At December 31, 2000, $362,000, or 1.2%, of the Company's investment portfolio, excluding equity and mortgage backed securities, was scheduled to mature in one year or less and $17.0 million, or 56.9%, was scheduled to mature in one to five years and $12.5 million, or 41.9%, was scheduled to mature in more than five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 2000, totaled $93.0 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds. The amount of eligible collateral for blanket lien pledges from the FHLB was $165.8 million as of December 31, 2000. For additional information about cash flows from the Company's operating, financing and investing activities, see the Statements of Cash Flows included in the Consolidated Financial Statements. At December 31, 2000, the Company had outstanding loan commitments of $3.2 million. This amount does not include undisbursed overdraft loan privileges and the undisbursed home equity lines of credit. The main sources of liquidity for the Holding Company are net proceeds from the sale of stock and payments from the Bank in the form of dividends and loan repayments. The main cash outflows are payments of dividends to shareholders and funds used to repurchase the Common Stock. During 2000, the Holding Company repurchased 349,862 shares of its Common Stock. The Holding Company's ability to pay dividends to shareholders depends substantially on dividends and loan payments received from the Bank. The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account. For a description of the liquidation account, see Notes 16 and 17 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, however, it is subject to the requirements of Iowa law. Iowa law generally prohibits the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the Holding Company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. The primary investing activities of the Company are the origination and purchase of mortgage and other loans and the purchase of securities. During the years ended December 31, 2000, 1999 and 1998, the Company's disbursements for loan originations and purchases totaled $86.3 million, $91.7 million and $85.2 million, respectively. These activities were funded primarily by net deposit inflows, principal repayments on loans, proceeds from the maturity and sale of securities and FHLB advances. Net cash flows used in investing activities amounted to $25.4 million, $37.2 million and $2.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Net cash flows provided by financing activities amounted to $16.4 million, $28.0 million and $9.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. The OTS regulations require savings associations, such as the Bank, to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations; a -10- leverage ratio requirement of 3% of core capital to such adjusted total assets; and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. The Bank satisfied these minimum capital standards at December 31, 2000 with tangible and leverage capital ratios of 7.4% and a total risk-based capital ratio of 14.0%. In determining the amount of risk-weighted assets for purposes of the risk- based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations. These capital requirements, which are applicable to the Bank only, do not consider additional capital held at the Holding Company level, and require certain adjustments to shareholder's equity to arrive at the various regulatory capital amounts. The table below presents the Bank's regulatory capital amounts as compared to the OTS regulatory capital requirements at December 31, 2000:
Capital Excess Amount Requirements Capital ------ ------------ ------- (In thousands) Tangible capital........... $ 28,456 $ 5,732 $ 22,724 Core capital............... 28,456 11,464 16,992 Risk-based capital......... 31,241 17,830 13,411
-11- Discussion of Market Risk--Interest Rate Sensitivity Analysis As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of the Company's interest-bearing liabilities and virtually all of the Company's interest-earning assets are located at the Bank, virtually all of the Company's interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank's real estate loan portfolio, within Iowa, is subject to risks associated with the local economy. The Company has sought to diversify its loan portfolio by purchasing loans secured by properties outside of Iowa. At December 31, 2000, 31.5% of the Company's loan portfolio was secured by properties outside the State of Iowa, located in twenty- six states. See "Asset Quality." The Bank does not own any trading assets. At December 31, 2000, neither the Company nor the Bank had any hedging transactions in place, such as interest rate swaps and caps. The Company seeks to manage its interest risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The "interest rate sensitivity gap" is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. The Company's policy in recent years has been to manage its exposure to interest rate risk generally by focusing on the maturities of its interest rate sensitive assets and by emphasizing adjustable-rate mortgage loans, and maintaining a level of liquidity by investing in short to medium term U.S. government agencies, mortgage-backed securities and short-term interest-earning deposits. The Company generally offers competitive rates on deposit accounts and prices certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. At December 31, 2000, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $29.9 million, representing a one-year gap ratio of negative 7.7%, compared to a one-year gap ratio of negative 14.7% at December 31, 1999. To manage the potential volatility of the Company's earnings in a changing interest rate environment, the Company has emphasized the origination of 5 and 7-year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. The Chief Executive Officer regularly meets with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending. The Chief Executive Officer also regularly meets with the investment committee to review the investment portfolio. The Chief Executive Officer reports quarterly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2000 which are expected to reprice or mature, based upon certain -12- assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term of repricing or the contractual terms of the asset or liability. Certain assumptions used in preparing the table are set forth in the following table. Management believes that these assumptions approximate actual experience and considers them appropriate and reasonable.
At December 31, 2000 (1) ------------------------------------------------------------------------------------------- Within 1-3 3-5 5-10 10-20 Over 20 1 Year Years Years Years Years Years Total ------ ----- ----- ----- ----- ----- ----- (Dollars in thousands) Interest-earning assets: First mortgage loans Adjustable (2)................. $ 87,648 $ 71,313 $ 43,450 $ -- $ -- $ -- $202,411 Fixed (2)...................... 18,041 26,103 16,008 20,541 1,658 21 82,372 Consumer and other loans.......... 18,516 18,667 8,074 525 25 1 45,808 Investment securities(3)(4)....... 17,159 6,219 14,835 3,121 -- -- 41,334 -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets.. $141,364 $122,302 $ 82,367 $ 24,187 $ 1,683 $ 22 $371,925 ======== ======== ======== ======== ======== ======== ======== Rate sensitive liabilities: Savings accounts.................. $ 3,693 $ 5,609 $ 3,864 $ 5,186 $ 2,848 $ 523 $ 21,723 NOW accounts...................... 11,183 11,484 4,558 2,702 295 3 30,225 Money market accounts............. 19,370 5,149 -- -- -- -- 24,519 Certificate accounts.............. 93,149 61,996 23,274 209 -- -- 178,628 Noninterest bearing deposits...... 6,071 -- -- -- -- -- 6,071 FHLB advances and other liabilities 37,803 44,769 983 5,038 -- -- 88,593 -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities $171,269 $129,007 $ 32,679 $ 13,135 $ 3,143 $ 526 $349,759 ======== ======== ======== ======== ======== ======== ======== Interest sensitivity gap............. $(29,905) $ (6,705) $ 49,688 $ 11,052 $ (1,460) $ (504) Cumulative interest-sensitivity gap.. $(29,905) $(36,610) $ 13,078 $ 24,130 $ 22,670 $ 22,166 Interest sensitivity gap to total assets (7.70)% (1.73)% 12.79% 2.85% (0.38)% (0.13)% Cumulative interest-sensitivity gap to total assets...................... (7.70) (9.42) 3.37 6.21 5.84 5.71 Ratio of interest-earning assets to interest-bearing liabilities...... 82.54 94.80 252.05 184.14 53.55 4.18 106.34 Cumulative ratio of interest-earning assets to interest-bearing liabilities 82.54% 87.81% 103.93% 106.97% 106.49% 106.34% 106.34% Total assets......................... $388,456 $388,456 $388,456 $388,456 $388,456 $388,456 $388,456 Cumulative interest bearing assets... $141,364 $263,666 $346,033 $370,220 $371,903 $371,925 $371,925 Cumulative interest sensitive $171,269 $300,276 $332,955 $346,090 $349,233 $349,759 $349,759 liabilities
[FN] (1) The following assumptions were used in regard to prepayment speed for loans: (i) multifamily adjustable rate loans will prepay at 10 percent per year, (ii) multifamily fixed rate loans and commercial real estate loans (both fixed and adjustable rate) will prepay at 12 percent, (iii) one-to-four family fixed rate loans will prepay at 15 percent, (iv) one-to-four family adjustable, mortgage backed securities, consumer and all other loans will prepay at 20 percent. Besides prepayment assumptions, the chart above also includes normal principal payments based upon the loan contractual agreements. Savings accounts are assumed to be withdrawn at an annual rate of 17 percent. NOW accounts are assumed to be withdrawn at an annual rate of 37 percent. Money Market accounts are assumed to be withdrawn at 79 percent during the first year with the balance being withdrawn within the one-to-three year category. These assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that may be experienced by the Company. Certain short comings are inherent in the analysis presented by the foregoing table. (2) Includes $417,000 and $7.8 million in mortgage-backed securities in adjustable and fixed first mortgage loans, respectively. (3) Includes other equity securities, interest-bearing deposits and FHLB stock, all of which are shown in the within-one-year category. Components include interest-bearing deposits of $6.3 million and securities available for sale of $28.9 million. (4) Includes FHLMC preferred stock and FNMA preferred stock, which are included in the appropriate repricing category based upon their call dates. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. -13- NPV Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the "market value of portfolio equity" ("NPV") methodology which the OTS has adopted as part of its capital regulations. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in Net Interest Income ("NII") and NPV which would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of December 31, 2000, is an analysis of the Company's interest rate risk ("IRR") as measured by changes in NPV and NII for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Company's current capital position.
Interest Rate Sensitivity of Net Portfolio Value (NPV)(1) Net Portfolio Value NPV as % of PV of Assets --------------------------------------- --------------------------- Change in Rates $ Amount $ Change % Change NPV Ratio Change --------------- -------- -------- -------- --------- ------ (Dollars in thousands) +300 bp 30,835 -2,693 -8 8.31 -35bp +200 bp 32,364 -1,165 -3 8.59 -7bp +100 bp 33,348 -180 -1 8.72 6bp 0 bp 33,529 -- -- 8.66 -- -100 bp 32,383 -1,146 -3 8.28 -38bp -200 bp 30,835 -2,694 -8 7.81 -84bp -300 bp 29,791 -3,738 -11 7.47 -119bp
[FN] (1) Denotes rate shock used to compute interest rate risk capital component. As is the case with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV Table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. Asset Quality Delinquencies. The Company's collection procedures provide that when a loan is 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment, plus a late charge for mortgage loans. If delinquency continues, on the 20th day past due, a telephone call is made to the borrower seeking payment. If the loan is 30 days past due, a delinquent notice is mailed along with a letter advising that the mortgagors are in violation of the terms of their mortgage contract. If a loan becomes 60 days past due, the loan becomes subject to possible legal action. After 90 days, if satisfactory payment terms are not reached with the borrower, foreclosure proceedings are initiated. To the extent required by the Department of Housing and Urban Development ("HUD") regulations, generally within 45 days of delinquency, a Section 160 HUD notice is given to the borrower which provides access to consumer counseling services. It is sometimes necessary and desirable to arrange special repayment schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The mortgagors are required to submit a written repayment schedule which is closely monitored for compliance. Under these terms, the account is brought to date, usually within a few months. -14- Nonperforming Assets. Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful. Mortgage loans and consumer loans are placed on nonaccrual status generally when either principal or interest is more than 90 days past due. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is deemed foreclosed real estate until such time as it is sold. In general, the Company considers collateral for a loan to be in substance foreclosed if: (i) the borrower has little or no equity in the collateral; (ii) proceeds for repayment of the loan can be expected to come only from the operation or sale of the collateral; and (iii) the borrower has either formally or effectively abandoned control of the collateral to the Company, or retained control of the collateral but is unlikely to be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. When foreclosed real estate is acquired or otherwise deemed foreclosed real estate, it is recorded at the lower of the unpaid principal balance of the related loan or its estimated fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations. At December 31, 2000, the Company's foreclosed real estate consisted of two properties with an aggregate value of $64,000. Delinquent Loans, Nonaccrual Loans and Nonperforming Assets. The following table sets forth information regarding loans on nonaccrual status and foreclosed real estate of the Company at the dates indicated. At the dates indicated, the Company did not have any material restructured loans within the meaning of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, and did not have any loans that were ninety days past due and still accruing interest.
At December 31, ----------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One-to-four family residential....... $ 237 $ 111 $ 403 $ 122 $ 149 Multifamily and commercial properties ........................ 556(2) -- 423(3) -- -- Consumer loans:......................... 244 102 130 25 35 -------- -------- -------- -------- -------- Total nonaccrual loans............... 1,037 213 956 147 184 Total foreclosed real estate(1)......... 64 503 187 67 128 Other nonperforming assets.............. -- -- 1 -- 2 -------- -------- -------- -------- -------- Total nonperforming assets........... $ 1,101 $ 716 $ 1,144 $ 214 $ 314 ======== ======== ======== ======== ======== Total nonaccrual loans to net loans receivable........................... 0.33% 0.07% 0.38% 0.08% 0.11% Total nonaccrual loans to total assets.. 0.27 0.06 0.28 0.07 0.09 Total nonperforming assets to total assets.............................. 0.28 0.19 0.34 0.10 0.15
[FN] (1) Represents the net book value of property acquired by the Company through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of cost or fair value less estimated selling expenses. (2) Includes a purchase loan which was secured by a commercial property that was 90 days past due in the amount of $488,822 (in actual dollars) (3) Includes a purchase loan which was secured by a commercial property that was 90 days past due in the amount of $364,636 (in actual dollars). This loan was repaid in March, 1999. -15- The following table sets forth information with respect to loans delinquent 60-89 days in the Company's portfolio at the dates indicated.
At December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Loans past due 60-89 days: First mortgage loans: One-to-four family residential................ $ 590 $ 521 $ 1,070 $ 275 $ 323 Multifamily and commercial properties......... -- 491 22 -- -- Consumer loans................................... 96 198 270 135 51 ------- ------- ------- ------- ------- Total past due 60-89 days................... $ 686 $ 1,210 $ 1,362 $ 410 $ 374 ======= ======= ======= ======= =======
The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2000.
At December 31, 2000 -------------------- Balance Number ------- ------ (Dollars in thousands) One-to-four family first mortgage loans: Loans 60 to 89 days delinquent................... $ 590 16 Loans 90 days or more delinquent................. 237 6 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent................... - - Loans 90 days or more delinquent................. 556 2 Consumer Loans: Loans 60 to 89 days delinquent................... 96 15 Loans 90 days or more delinquent................. 244 22 Foreclosed real estate............................. 64 2 Other nonperforming assets......................... - - - - Loans to facilitate sale of foreclosed real estate. 116 1 Special mention loans.............................. 924 33
Classification of Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. Loans designated as special mention are generally loans that, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future. At December 31, 2000, the Company had $924,000 of special mention loans, consisting of eighteen loans secured by one-to-four family residences, one commercial property and fifteen consumer loans. The following table sets forth the aggregate amount of the Company's classified assets at the dates indicated.
At December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Substandard assets............ $ 1,087(3) $ 689(2) $ 745(1) $ 208 $ 311 Doubtful assets............... -- -- -- -- -- Loss assets................... 53 60 35 18 9 --------- --------- --------- --------- --------- Total classified assets..... $ 1,140 $ 749 $ 780 $ 226 $ 320 ========= ========= ========= ========= ========= (Notes on following page)
-16- [FN] (1) Includes one purchase loan which was secured by a commercial property that was 90 days past due in the amount of $364,636 (in actual dollars). This loans was repaid in March, 1999. (2) Includes one loan secured by a commercial property that was not delinquent at December 31, 1999 (3) Includes one purchase loan which was secured by a commercial property that was 10 months past due in the amount of $489,000 (in actual dollars). Allowance for Loan Losses. It is management's policy to provide an allowance for estimated losses on the Company's loan portfolio based on management's evaluation of the prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are collateralized by properties located outside of the Company's market area, and other factors related to the collectibility of the Company's loan portfolio. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral. During the years ended December 31, 2000, 1999 and 1998 the Company's provision for loan losses were $120,000, $120,000 and $210,000, respectively. The Company's allowance for loan losses totaled $2.8 million, $2.8 million and $2.7 million at December 31, 2000, 1999 and 1998, respectively. Management believes that the allowances for losses on loans and foreclosed real estate are adequate. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for loan losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
For the Year Ended December 31, ---------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Total loans outstanding................. $ 322,408 $ 291,760 $ 259,360 $ 194,626 $ 168,921 Average net loans outstanding........... 307,104 265,553 246,510 175,284 156,708 Allowance balances (at beginning of period............................... 2,776 2,676 2,151 1,953 1,736 --------- --------- --------- --------- --------- Provisions for losses................... 120 120 210 240 240 Effect of- Valley Financial Corporation........ -- -- 343 -- -- Charge-Offs: First mortgage loans.................. 15 5 6 21 5 Consumer loans........................ 41 23 23 31 19 Recoveries: First mortgage loans.................. -- -- -- -- -- Consumer loans........................ 3 8 1 10 1 --------- --------- --------- --------- --------- Net charge-offs....................... 53 20 28 42 23 --------- --------- --------- --------- --------- Allowance balance (at end of period).... $ 2,843 $ 2,776 $ 2,676 $ 2,151 $ 1,953 ========= ========= ========= ======== ======== Allowance for loan losses as a percent of total loans receivable at end of period................................ 0.88% 0.95% 1.03% 1.10% 1.16% Net loans charged off as a percent of average net loans outstanding......... 0.02 0.01 0.01 0.02 0.01 Ratio of allowance for loan losses to total nonaccrual loans at end of period................................ 274.08 1,301.13 279.72 1,468.33 1,059.35 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period.......... 258.18 387.78 233.95 1,006.96 621.31
-17- Allocation of Allowance for Loan Losses. The following table sets forth the allocation for loan losses by loan category for the periods indicated:
At December 31, ---------------------------------------------------- 2000 1999 ---- ---- % of Loans % of Loans In Each In Each Category to Category to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in thousands) Balance at end of period applicable to: One-to-four family residential mortgage loans ....................... $ 731 54.78% $ 726 56.23% Multifamily residential mortgage loans . 1,145 23.45 1,332 25.16 Commercial mortgage loans .............. 303 7.56 252 6.07 Consumer loans ......................... 664 14.21 466 12.53 ------ ------ ------ ------ Total allowance for loan losses ...... $2,843 100.00% $2,776 100.00% ====== ====== ====== ======
At December 31, ------------------------------------------------------ 1998 1997 1996 ---- ---- ---- % of Loans % of Loans % of Loans In Each In Each In Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ----- ----------- (Dollars in thousands) Balance at end of period applicable to: One-to-four family residential mortgage loans ....................... $ 684 57.45% $ 675 59.48% $ 503 63.44% Multifamily residential mortgage loans . 1,298 25.02 1,026 26.38 948 20.42 Commercial mortgage loans .............. 228 4.39 76 1.95 157 3.09 Consumer loans ......................... 466 13.14 374 12.19 345 13.05 ------ ------ ------ ------ ------ ------ Total allowance for loan losses ...... $2,676 100.00% $2,151 100.00% $1,953 100.00% ====== ====== ====== ====== ====== ======
Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances were computed on a monthly basis. -18-
For the Year Ended December 31, ------------------------------- At December 31, 2000 2000 1999 1998 --------------- ------------------------- ---------------------------- --------------------------- Average Average Average Yield/ Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost -------- ----- ------- -------- ----- -------- -------- ---- -------- -------- (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1)....$275,061 7.92% $265,557 $20,586(8) 7.75% $233,457 $18,104(8) 7.75% $216,914 $17,318(8) 7.98% Consumer loans(1).......... 45,808 8.93 41,547 3,677 8.85 34,831 3,111 8.93 32,173 3,014 9.37 Investment securities...... 50,081(4) 5.99 51,097(5) 3,020 5.91 58,666(6) 3,341 5.69 57,826(7) 3,270 5.65 -------- ---- ------- ------- ------ ------- ------- ----- ------- ------- ---- Total interest-earning assets 370,950 7.78% $358,201 $27,283 7.62% 326,954 24,556 7.51% 306,913 23,602 7.69% Noninterest-earning assets.. 18,048 18,470 18,750 16,847 -------- -------- ------- ------- Total assets..............$388,998 $376,671 $345,704 $323,760 ======== ======== ======== ======== Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.............. $ 54,744 2.85% $ 48,262 $ 1,185 2.46% 47,551 $ 1,088 2.29% $ 44,622 $ 1,351 3.03% Passbook savings....... 21,724 1.83 24,571 485 1.97 27,189 562 2.07 25,591 594 2.32 Certificates of Deposit 178,628 6.01 186,292 10,599 5.69 173,329 9,463 5.46 159,701 8,948 5.60 Borrowed funds........ 88,592 6.11 71,602 4,438 6.20 43,711 2,491 5.62 34,020 1,976 5.81 -------- ----- -------- ------- ---- ------- ------ ----- ------- ------- ---- Total interest-bearing liabilities........ $343,688 5.27% $330,727 $16,707 5.05% $291,780 $13,604 4.65% $263,934 $12,869 4.88% Noninterest-bearing 8,912 9,739 9,776 9,587 liabilities ------- -------- ------- -------- Total liabilities.... $352,600 $340,466 $301,556 $273,522 Equity.................... 36,398 36,205 44,148 50,239 --------- --------- -------- -------- Total liabilities and $388,998 $376,671 $345,704 $323,760 equity ========= ======== ======== ========= Net interest income....... $10,576 $10,952 $10,733 ======= ======= ======= Net interest rate spread(2) 2.51% 2.57% 2.86% 2.81% ==== ==== ==== ==== Net interest margin (3).... 2.90 2.95 3.35 3.50 ==== ==== ==== ==== Ratio of average 107.93 108.31 112.05 116.28 interest-earning assets ====== ====== ====== ====== to average interest- bearing liabilities........
[FN] (1) Balance is net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the balances. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average total interest-earning assets. (4) Includes interest-bearing deposits of $6,331,000 and securities available for sale of $43,750,000. (5) Includes interest-bearing deposits of $4,392,000 and securities available for sale of $46,705,000. (6) Includes interest-bearing deposits of $7,309,000 and securities available for sale of $51,357,000. (7) Includes interest-bearing deposits of $8,235,000 and securities available for sale of $49,590,000. (8) Includes loan fee amortization of $(60,000), $(9,000) and $(29,000) for the years ended December 31, 2000, 1999 and 1998. -19- Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); (iii) changes in rate-volume (changes in rate multiplied by the changes in average volume); and (iv) the net change.
Year Ended Year Ended December 31, 2000 December 31, 1999 Compared to Compared to Year Ended Year Ended December 31, 1999 December 31, 1998 ---------------------------------------- --------------------------------------- Increase/(Decrease) Increase/(Decrease) Due to Due to ----------------------------- ---------------------------- Total Total Rate/ Increase Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) ------- ------- -------- -------- -------- -------- ------- -------- (In thousands) Interest income: First mortgage loans ................ $ 2,490 $ (7) $ (1) $ 2,482 $ 1,321 $ (496) $ (38) $ 787 Consumer loans ...................... 601 (29) (6) 566 249 (140) (12) 97 Investment securities ............... (408) 126 (39) (321) 77 6 (12) 71 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-earning assets .... $ 2,683 $ 90 $ (46) $ 2,727 $ 1,647 $ (630) $ (62) $ 955 ======= ======= ======= ======= ======= ======= ======= ======= Interest expense: NOW and money market savings ........ $ 16 $ 80 $ 1 $ 97 $ 89 $ (330) $ (22) $ (263) Passbook savings .................... (53) (26) 2 (77) 37 (65) (4) (32) Certificate of deposits ............. 708 398 30 1,136 763 (228) (19) 516 Borrowed funds ...................... 1,588 219 140 1,947 563 (38) (11) 514 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ 2,259 $ 671 $ 173 $ 3,103 $ 1,452 $ (661) $ (56) $ 735 ======= ======= ======= ======= ======= ======= ======= ======= Net change in net interest income ....... $ 424 $ (581) $ (219) $ (376) $ 195 $ 31 $ (6) $ 220 ======= ======= ======= ======= ======= ======= ======= =======
-20- PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (Unaudited) The unaudited pro forma consolidated statement of income is based on the historical financial statements of the Company and Valley Financial. The unaudited pro forma consolidated statement of income for the year ended December 31, 1998 was prepared as if the Acquisition had occurred as of the beginning of the period for purposes of the combined consolidated statements of income. The income statement for the year ended December 31, 1998 would therefore include the month January 31, 1998 for Valley Financial. 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. NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Years Ended December 31, -------------------------------------------------------------- Actual Actual Pro forma 2000 1999 1998 -------------- -------------- -------------- Interest income............................... $ 27,283,447 $ 24,556,267 $ 24,223,861 Interest expense.............................. 16,706,620 13,603,841 13,319,040 -------------- -------------- -------------- Net interest income....................... 10,576,827 10,952,426 10,904,821 Provision for loan losses..................... 120,000 120,000 210,000 -------------- -------------- -------------- Net interest income after provision for loan losses............................ 10,456,827 10,932,426 10,694,821 -------------- -------------- -------------- Noninterest income: Fees and service charges.................. 1,591,780 1,484,962 1,279,153 Abstract fees............................. 1,233,091 1,420,955 1,583,773 Gain on sale of securities available for sale, net................ 42 61,564 51,362 Mortgage banking income................... 231,170 367,696 454,992 Other income.............................. 957,935 727,869 599,159 -------------- -------------- -------------- Total noninterest income............... 4,014,018 4,063,046 3,968,439 -------------- -------------- -------------- Noninterest expense: Salaries and employee benefits............ 4,103,419 4,025,744 3,650,905 Premises and equipment.................... 1,091,653 930,988 846,223 Data processing........................... 455,389 522,122 583,111 SAIF deposit insurance premiums........... 55,332 147,243 148,226 Goodwill amortization..................... 472,290 472,290 472,290 Other expenses............................ 2,408,276 2,356,024 2,277,600 -------------- -------------- -------------- Total noninterest expense.............. 8,586,359 8,454,411 7,978,355 -------------- -------------- -------------- Income before income taxes.................... 5,884,486 6,441,061 6,684,905 Provision for income taxes.................... 1,873,369 2,240,886 2,439,432 -------------- -------------- -------------- Net Income.................................... $ 4,011,117 $ 4,200,175 $ 4,245,473 ============== ============== ==============
-21- Comparison of Financial Condition as of December 31, 2000, December 31, 1999 and December 31, 1998 Total assets increased $21.6 million, or 5.9%, from $367.4 million at December 31, 1999 to $389.0 million at December 31, 2000. Interest bearing cash increased $2.2 million, or 53.4%, from $4.1 million at December 31, 1999 to $6.3 million at December 31, 2000. Noninterest bearing cash decreased $6.0 million, or 70.5%, from $8.5 million at December 31, 1999 to $2.5 million at December 31, 2000. Securities available for sale decreased $6.3 million, or 12.8%, primarily due to the sales, calls, payments and maturities on U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of FHLB stock. Total loans receivable, net, increased by $31.3 million, or 10.9%, from $286.8 million at December 31, 1999 to $318.0 million at December 31, 2000, primarily due to the origination of $35.5 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans primarily secured by one-to-four family residences, multifamily residences and commercial real estate loans located out of state of $19.6 million, and originations of $21.5 million of second mortgage loans. These originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 2000. Deposits decreased $9.9 million, or 3.6%, from $271.0 million at December 31, 1999 to $261.2 million at December 31, 2000, primarily reflecting decreases in certificates of deposit accounts, due in part to decreases in deposits of certain public funds and decreases in savings accounts, offset in part by an increase in money market accounts. Other borrowings, primarily FHLB advances, increased $32.9 million, from $55.7 million at December 31, 1999 to $88.6 million at December 31, 2000. Total shareholders' equity decreased $1.7 million from $38.1 million at December 31, 1999 to $36.4 million at December 31, 2000, primarily due to dividends paid to shareholders and funds used for repurchases of Common Stock less, net income and decreased unrealized losses. Total assets increased $30.7 million, or 9.1%, from $336.7 million at December 31, 1998 to $367.4 million at December 31, 1999. Interest bearing cash decreased $9.1 million, or 68.7%, from $13.2 million at December 31, 1998 to $4.1 million at December 31, 1999. Noninterest bearing cash increased $6.1 million, or 250.7%, from $2.4 million at December 31, 1998 to $8.5 million at December 31, 1999. Securities available for sale decreased $190,000, or 0.4%, primarily due to the sales, calls, payments and maturities on U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies and mortgage-backed securities. Total loans receivable, net, increased by $32.7 million, or 12.9%, from $254.0 million at December 31, 1998 to $286.8 million at December 31, 1999, primarily due to the origination of $31.6 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans primarily secured by one-to-four family residences, multifamily residences and commercial real estate loans located out of state of $40.3 million, and originations of $12.3 million of second mortgage loans. These originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1999. Deposits increased $24.3 million, or 9.9%, from $246.7 million at December 31, 1998 to $271.0 million at December 31, 1999, primarily reflecting increases in certificates of deposit accounts, primarily due to deposits of certain public funds. Other borrowings, primarily FHLB advances, increased $16.9 million, from $38.8 million at December 31, 1998 to $55.7 million at December 31, 1999. Total shareholders' equity decreased $10.1 million from $48.2 million at December 31, 1998 to $38.1 million at December 31, 1999, primarily due to dividends paid to shareholders and funds used for repurchases of Common Stock less, net income and decreased unrealized losses. Comparison of Results of Operations for the Years Ended December 31, 2000 and 1999 Interest Income. Interest income increased by $2.7 million to $27.3 million for the year ended December 31, 2000 compared to $24.6 million for the year ended December 31, 1999. The increase in interest income was primarily due to a $31.2 million increase in average interest earning assets to $358.2 million for the year ended December 31, 2000, from $327.0 million for 1999. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first and second mortgage loans, partially offset by decreases in securities available for sale. These increases were primarily derived from originations of $35.5 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family residences, multifamily residences and commercial real estate located outside of the State of Iowa of $19.6 million and originations of $21.5 million of second mortgage loans, which originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 2000. The increase in average interest-earning assets reflects the Company's continued emphasis on residential lending. See "-Business Strategy." The decreases in available for sale -22- securities were primarily due to the sales, calls, payments and maturities on U.S. Treasury Notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of FHLB stock. The average yield on interest earning assets increased to 7.62% for the year ended December 31, 2000 from 7.51% for the year ended December 31, 1999, primarily due to a general increase in market interest rates. Interest Expense. Interest expense increased by $3.1 million to $16.7 million for the year ended December 31, 2000 compared to $13.6 million for the year ended December 31, 1999. The increase in interest expense was primarily due to a $38.9 million increase in the average balance of interest-bearing liabilities to $330.7 million for the year ended December 31, 2000, from $291.8 million for 1999. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the certificates of deposits and borrowed funds. The increases in certificates of deposits is primarily due to an increase in the average balance of deposits of certain public funds. The increase in borrowed funds was due to the borrowing of funds in part to fund the corresponding asset growth. The average cost of interest bearing liabilities increased to 5.05% for the year ended December 31, 2000 from 4.65% for the year ended December 31, 1999. The increase in the average cost of interest bearing liabilities is primarily due to an increase in the average cost of certificates of deposits and borrowed funds. The increase in the average cost of funds is due to the general increase in market interest rates. Net Interest Income. Net interest income before provision for loan losses decreased by $376,000 to $10.6 million for the year ended December 31, 2000 from $11.0 million for the year ended December 31, 1999. The decrease is primarily due to the increases in the average yield on the average interest-bearing assets being less than the increase in the cost of the average interest-bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 2.57% for the year ended December 31, 2000 from 2.86% for the year ended December 31, 1999. The decrease in the spread reflects the general increase in the overall costs on interest bearing liabilities in excess of the increase in yields on the interest-earning assets offset by the increase in the average interest bearing liabilities in excess of the increase in the interest earning assets. Provision for Loan Losses. The Company's provision for loan losses was $120,000 for each of the years ended December 31, 2000 and December 31, 1999, respectively. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily and commercial real estate loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The net charge offs were $53,000 for the year ended December 31, 2000 as compared to $20,000 for the year ended December 31, 1999. The resulting allowance for loan loss was $2.8 million at December 31, 2000 and December 31, 1999. The allowance for loan losses as a percentage of total loans receivable decreased to 0.88% at December 31, 2000 from 0.95% at December 31, 1999. The level of nonperforming loans has increased to $1.0 million at December 31, 2000 from $213,000 at December 31, 1999. See "Asset Quality". 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 no problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest income. Total noninterest income decreased by $49,000, or 1.2%, to $4.0 million for the year ended December 31, 2000 from $4.1 million for the year ended December 31, 1999. The decrease is due to decreases in abstract fees and mortgage banking fees, partially offset by an increase in fees and service charges and other income. Abstract fees decreased $188,000 due to decreased sales volume. Sales volume decreased in part due to a general decline in real estate activity. Mortgage banking fees decreased $137,000 due to higher interest rates during the year ended December 31, 2000. Fees and service charges increased $107,000 due to increases in overdraft fees on NOW accounts, service charges on NOW accounts and service charges on ATM/debit cards, offset by a decrease in loan prepayment fees. Other income increased $230,000 due to increases in annuity and mutual fund sales, insurance sales, gain on the sale of foreclosed real estate and interest -23- income on a disputed income tax item. Noninterest income for the year ended December 31, 1999 also reflects gains on the sales of securities available for sale of $62,000. See "-Business Strategy-Increased Noninterest Income". Noninterest Expense. Total non-interest expense increased by $132,000 to $8.6 million for the year ended December 31, 2000 from $8.5 million for the year ended December 31, 1999. The increase is primarily due to an increase in the premises and equipment, offset in part by a decrease in data processing and SAIF deposit insurance premiums. The increase in premises and equipment was primarily due to an increase in depreciation expense relating to the purchase of computer equipment and software, the opening of a branch located in Perry and Ames, Iowa and normal cost increases. The decrease in data processing is primarily due to the signing of a multi year data processing contract in 1999. The decrease in SAIF deposit insurance premiums is due to lower SAIF deposit premium rates. The Company's efficiency ratio for the year ended December 31, 2000 and 1999 were 58.85% and 56.30%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 1999 and 1998 were 2.28% and 2.45%, respectively. Income Taxes. Income taxes decreased by $368,000 to $1.9 million for the year ended December 31, 2000 as compared to $2.2 million for the year ended December 31, 1999. The decrease was principally due to a decrease in pre-tax earnings during the 2000 period as compared to the 1999 period and an income tax benefit of $100,000 received due to a state franchise tax refund related to an issue that had been under dispute for several years. Net Income. Net income totaled $4.0 million for the year ended December 31, 2000 compared to $4.2 million for the same period in 1999. Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998. The actual statement of income for the year ended December 31, 1999 was compared to the pro forma statement of income for the years ended December 31, 1998 for comparison purposes in order to more clearly present the changes in the results of operations. Interest Income. Interest income increased by $332,000 to $24.6 million for the year ended December 31, 1999 compared to $24.2 million for the year ended December 31, 1998. The increase in interest income was primarily due to a $11.9 million increase in average interest earning assets to $327.0 million for the year ended December 31, 1999, from $315.1 million for 1998. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first and second mortgage loans, partially offset by decreases in securities available for sale. These increases were primarily derived from originations of $31.6 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family residences, multifamily residences and commercial real estate located outside of the State of Iowa of $40.3 million and originations of $12.3 million of second mortgage loans, which originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1999. The increase in average interest-earning assets reflects the Company's continued emphasis on residential lending. See "-Business Strategy." The decreases in available for sale securities were primarily due to the sales, calls, payments and maturities on U.S. Treasury Notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies, mortgage-backed securities and certain equities. The impact of the increase in average interest-earning assets was offset in part by a decrease in the average yields. The average yield on interest earning assets decreased to 7.51% for the year ended December 31, 1999 from 7.69% for the year ended December 31, 1998, primarily due to a general decrease in market interest rates. Interest Expense. Interest expense increased by $285,000 to $13.6 million for the year ended December 31, 1999 compared to $13.3 million for the year ended December 31, 1998. The increase in interest expense was primarily due to a $18.5 million increase in the average balance of interest-bearing liabilities to $291.8 million for the year ended December 31, 1999, from $273.3 million for 1998. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the certificates of deposits and borrowed funds. The increases in certificates of deposits is primarily due to an increase in deposits of certain public funds. The increase in borrowed funds was due to the borrowing of funds in part to fund the corresponding asset growth. -24- The impact of the increase in the average balances of interest-bearing liabilities was offset in part by a decrease in the average cost of interest-bearing liabilities. The average cost of interest bearing liabilities decreased to 4.65% for the year ended December 31, 1999 from 4.87% for the year ended December 31, 1998. The decrease in the average cost of funds is due to the general decrease in market interest rates. Net Interest Income. Net interest income before provision for loan losses increased by $47,000 to $11.0 million for the year ended December 31, 1999 from $10.9 million for the year ended December 31, 1998. The increase is primarily due to the decreases in the average yield on the average interest-bearing assets being less than the decrease in the cost of the average interest-bearing liabilities. This was offset in part by a decrease in the excess of average interest earning assets over the average balances of interest-bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) increased to 2.86% for the year ended December 31, 1999 from 2.82% for the year ended December 31, 1998. The increase in the spread reflects the general decline in the overall costs on interest bearing liabilities in excess of the decline in yields on the interest-earning assets offset by the increase in the average interest bearing liabilities in excess of the increase in the interest earning assets. 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 the actual and pro forma average cost of liabilities for the years ended December 31, 1999 and 1998, respectively.
For Years Ended December 31, ---------------------------- 1999 1998 -------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans.................................... $ 268,288 $ 21,215 7.91% $ 253,863 $ 20,737 8.17% Securities available for sale............ 51,357 2,998 5.84 53,138 3,106 5.85 Interest bearing cash.................... 7,309 343 4.69 8,103 381 4.70 --------- --------- ------------ --------- --------- ------------ Total interest-earning assets.......... 326,954 24,556 7.51% 315,104 $ 24,224 7.69% --------- ------------ --------- ------------ Noninterest-earning assets................. 18,750 18,299 --------- --------- Total assets........................... $ 345,704 $ 333,403 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings............. $ 47,551 $ 1,088 2.29% $ 46,457 $ 1,416 3.05% Savings.................................. 27,189 562 2.07 26,329 616 2.34 Certificates of deposit.................. 173,329 9,463 5.46 165,207 9,236 5.59 Borrowed funds........................... 43,711 2,491 5.62 35,275 2,051 5.81 --------- --------- ------------ --------- --------- ------------ Total interest-bearing liabilities......... $ 291,780 $ 13,604 4.65% $ 273,268 $ 13,319 4.87% --------- ------------ --------- ------------ Noninterest-bearing liabilities............ 9,776 9,896 --------- --------- Total liabilities...................... 301,556 283,164 Equity..................................... 44,148 50,239 --------- --------- Total liabilities and equity .......... $ 345,704 $ 333,403 ========= ========= Net interest income......................... $ 10,952 $ 10,905 ========= ========= Net interest rate spread.................... 2.86% 2.82% ============ ============ Net interest margin......................... 3.35% 3.46% ============ ============ Ratio of average interest-earning assets to average interest-bearing liabilities....... 112.05% 115.31% ============ ============
Provision for Loan Losses. The Company's provision for loan losses was $120,000 and $210,000 for years ended December 31, 1999 and December 31, 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 Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The net charge offs were $20,000 for the year ended December 31, 1999 as compared to $28,000 for the year ended December 31, 1998. The resulting allowance for loan loss was $2.8 million at December 31, 1999 as compared to $2.7 million at December 31, 1998. -25- The increase in the allowance is primarily due to the increase in total loans from $259.4 million at December 31, 1998 to $291.8 million at December 31, 1999. The allowance for loan losses as a percentage of total loans receivable decreased to 0.95% at December 31, 1999 from 1.03% at December 31, 1998. The level of nonperforming loans has decreased to $716,000 at December 31, 1999 from $956,000 at December 31, 1998. See "Asset Quality". Noninterest income. Total noninterest income increased by $95,000, or 2.4%, to $4.1 million for the year ended December 31, 1999 from $4.0 million for the year ended December 31, 1998. The increase is due to increases in fees and service charges, partially offset by a decrease in abstract fees. Fees and service charges increased $206,000 due to increases in overdraft fees on NOW accounts, service charges on NOW and savings accounts, service charges on ATM/debit cards and loan prepayment fees. Abstract fees decreased $163,000 due to decreased sales volume. Sales volume decreased in part due to a general decline in real estate activity. Non interest income for the year ended December 31, 1999 also reflects gains on the sales of securities available for sale of $62,000, as compared to gains on the sale of such securities of $51,000 for the 1998 comparable period. See "-Business Strategy-Increased Noninterest Income". Noninterest Expense. Total non-interest expense increased by $476,000 to $8.5 million for the year ended December 31, 1999 from $8.0 million for the year ended December 31, 1998. The increase is primarily due to an increase in the employee salaries and benefits and premises and equipment, offset in part by a decrease in data processing. The increase in salaries and benefits was primarily a result of normal salary increases, the opening of a branch located in Perry, Iowa, additional employees and related insurance costs and payroll taxes. The increase in premises and equipment was primarily due to an increase in depreciation expense relating to the purchase of computer equipment and software, ATM's, the opening of a branch located in Perry, Iowa and normal cost increases. The decrease in data processing is primarily due to the signing of a multi year data processing contract in 1999, offset in part by additional data processing services utilized by the Bank due to the Acquisition, upgrading the Bank's operating systems and Year 2000 costs. The Company's efficiency ratio for the year ended December 31, 1999 and 1998 were 56.30% and 53.64%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 1999 and 1998 were 2.45% and 2.39%, respectively. Income Taxes. Income taxes decreased by $199,000 to $2.2 million for the year ended December 31, 1999 as compared to $2.4 million for the year ended December 31, 1998. The decrease was principally due to a decrease in pre- tax earnings during the 1999 period as compared to the 1998 period. Net Income. Net income totaled $4.2 million for the year ended December 31, 1999 compared to $4.2 million for the same period in 1998. Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards SFAS No. 133, Accounting for Derivatives Instruments and Hedging will, beginning with the quarter ended March 31, 2001, require an entity to recognize all derivatives as either assets or liabilities, and measure 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. 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. SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities was issued in September 2000, and replaces SFAS No. 125 of the same title. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The adoption of SFAS No. 140 is not expected to have a material impact on the results of operations or financial condition of the Company. -26- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT...........................................28 FINANCIAL STATEMENTS Consolidated statements of financial condition........................29 Consolidated statements of income.....................................30 Consolidated statements of shareholders' equity.......................31 Consolidated statements of cash flows.................................32 Notes to consolidated financial statements............................34 -27- Independent Auditor's Report To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We have audited the accompanying consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the three years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Central Bancshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the three years ended December 31, 2000, 1999 and 1998, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Des Moines, Iowa February 2, 2001 -28- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2000 and 1999
ASSETS 2000 1999 - ------ ---- ---- Cash and due from banks: Interest-bearing $ 6,330,525 $ 4,127,153 Noninterest-bearing 2,519,201 8,541,525 Securities available-for-sale (Notes 3 and 9) 43,351,850 49,692,857 Loans receivable, net (Notes 4, 5, 9 and 15) 318,025,782 286,759,101 Loans held for sale 498,387 335,564 Accrued interest receivable (Note 6) 2,257,153 2,082,598 Foreclosed real estate 63,866 503,150 Premises and equipment, net (Note 7) 6,660,783 5,356,097 Rental real estate 1,757,014 1,846,134 Title plant 925,256 925,256 Goodwill 5,443,091 5,915,381 Deferred taxes (Note 10) 556,913 921,057 Income taxes receivable 209,995 -- Prepaid expenses and other assets 397,970 426,772 ------------- ------------- Total assets $ 388,997,786 $ 367,432,645 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 8) $ 261,166,646 $ 271,030,791 Borrowed funds (Note 9) 88,592,226 55,715,289 Advances from borrowers for taxes and insurance (Note 5) 1,318,069 1,204,025 Dividend payable 240,235 226,174 Income taxes payable -- 74,214 Accrued expenses and other liabilities 1,282,495 1,055,228 ------------- ------------- Total liabilities 352,599,671 329,305,721 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Notes 14 and 17) STOCKHOLDERS' EQUITY (Notes 12 and 18) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 2000 and 1999 4,011,057 shares 40,111 40,111 Preferred stock, $.01 par value, authorized 3,000,000 shares; issued and outstanding 2000 and 1999 none -- -- Additional paid-in capital 38,378,315 38,278,872 Retained earnings, substantially restricted (Note 10) 33,345,852 30,290,488 Unearned shares, employee stock ownership plan (Note 11) (646,912) (825,484) Accumulated other comprehensive income (loss) (247,340) (921,138) Less cost of treasury stock, 2000 2,099,177 shares; 1999 1,749,315 shares (34,471,911) (28,735,925) ------------- ------------- Total stockholders' equity 36,398,115 38,126,924 ------------- ------------- Total liabilities and stockholders' equity $ 388,997,786 $ 367,432,645 ============= =============
See Notes to Financial Statements -29- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- Interest income: Loans receivable: First mortgage loans $20,585,997 $18,104,426 $17,317,988 Consumer loans 3,676,669 3,111,402 3,013,947 Securities and cash deposits 3,020,781 3,340,439 3,269,617 --------- --------- --------- 27,283,447 24,556,267 23,601,552 ---------- ---------- ---------- Interest expense: Deposits (Note 8) 12,268,726 11,113,533 10,893,081 Other borrowed funds 4,437,894 2,490,308 1,975,879 --------- --------- --------- 16,706,620 13,603,841 12,868,960 ---------- ---------- ---------- Net interest income 10,576,827 10,952,426 10,732,592 Provision for loan losses (Note 4) 120,000 120,000 210,000 - ------- ------- ------- Net interest income after provision for loan losses 10,456,827 10,832,426 10,522,592 ---------- ---------- ---------- oninterest income: Fees and service charges 1,591,780 1,484,962 1,243,248 Abstract fees 1,233,091 1,420,955 1,583,773 Mortgage banking fees 231,170 367,696 339,397 Gain on sale of securities available-for-sale, net 42 61,564 51,362 Other income 957,935 727,869 696,919 ------- ------- ------- Total noninterest income 4,014,018 4,063,046 3,914,699 --------- --------- --------- Noninterest expense: Salaries and employee benefits (Note 11) 4,103,419 4,025,744 3,482,210 Premises and equipment 1,091,653 930,988 811,725 Data processing 455,389 522,122 553,288 SAIF deposit insurance premiums 55,332 147,243 142,932 Goodwill amortization 472,290 472,290 435,817 Other expenses (Note 13) 2,408,276 2,356,024 2,145,854 --------- --------- --------- Total noninterest expense 8,586,359 8,454,411 7,571,826 --------- --------- --------- Income before income taxes 5,884,486 6,441,061 6,865,465 Provision for income taxes (Note 10) 1,873,369 2,240,886 2,480,620 --------- --------- --------- Net income $ 4,011,117 $ 4,200,175 $ 4,384,845 =========== =========== =========== Basic earnings per common share (Note 19) $ 2.04 $ 1.64 $ 1.44 Earnings per common share - assuming dilution (Note 19) 2.00 1.60 1.40 Dividends declared per common share (Note 12) 0.50 0.40 0.32
See Notes to Financial Statements. -30- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998
Employee Accumulated Additional Stock Other Total Comprehensive Common Paid-in Retained Ownership Compehensive Treasury Stockholders' Income Stock Capital Earnings Plan Income (Loss) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ 40,111 $37,949,598 $23,660,964 $(1,210,441) $354,781 $(10,377,937)$50,417,076 Comprehensive income: Net income $ 4,384,845 - - 4,384,845 - - - 4,384,845 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) 3,885 - 3,885 - 3,885 ----------- Total comprehensive income $ 4,388,730 =========== Purchase of treasury stock - - - - - (6,164,419) (6,164,419) Dividends on common stock - - (960,902) - (960,902) Effect of contribution to employee stock ownership plan - 206,636 - 197,157 - - 403,793 Effect of stock options exercised - (20,417) - - - 142,953 122,536 ------------------------------------------------------------------------------------ Balance, December 31, 1998 40,111 38,135,817 27,084,907 (1,013,284) 358,666 (16,399,403) 48,206,814 Comprehensive income: Net income $ 4,200,175 - - 4,200,175 - - - 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) (1,279,804) - - - - (1,279,804) - (1,279,804) ----------- Total comprehensive income $ 2,920,371 =========== Purchase of treasury stock - - - - - (12,336,522) (12,336,522) Dividends on common stock - - (994,594) - - - (994,594) Effect of contribution to employee stock ownership plan - 143,055 - 187,800 - - 330,855 ------------------------------------------------------------------------------------ Balance, December 31, 1999 40,111 38,278,872 30,290,488 (825,484) (921,138)(28,735,925) 38,126,924 Comprehensive income: Net income $ 4,011,117 - - 4,011,117 - - - 4,011,117 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) 673,798 - - - - 673,798 - 673,798 ---------- Total comprehensive income $ 4,684,915 =========== Purchase of treasury stock - - - - - (5,799,736) (5,799,736) Dividends on common stock - - (955,753) - - - (955,753) Effect of contribution to employee stock ownership plan - 108,723 - 178,572 - - 287,295 Issuance of treasury stock - (9,280) - - - 63,750 54,470 ----------------------------------------------------------------------------------- Balance, December 31, 2000 $ 40,111 $38,378,315 $33,345,852 $ (646,912) $(247,340)$(34,471,911)$36,398,115 ===================================================================================
See Notes to Financial Statements -31- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,011,117 $ 4,200,175 $ 4,384,845 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120,000 120,000 210,000 Depreciation 668,945 596,815 488,989 Amortization and accretion 488,021 483,546 539,878 Deferred taxes (38,062) (141,678) (164,846) Effect of contribution to employee stock ownership plan 287,295 330,855 403,793 (Gain) on sale of foreclosed real estate and loans, net (66,744) (28,827) (4,726) (Gain) on sale of securities available-for-sale (42) (61,564) (51,362) Loss on disposal of equipment 28,297 19,270 9,191 Proceeds from sales of loans held for sale 13,261,815 20,146,594 26,334,791 Originations of loans held for sale (13,424,638) (18,801,141) (28,015,808) Change in assets and liabilities: Accrued interest receivable (174,555) (149,361) 386,631 Income taxes receivable (209,995) -- -- Prepaid expenses and other assets 28,802 21,559 453,985 Income taxes payable (74,214) (125,010) 25,036 Accrued expenses and other liabilities 227,267 (403,163) (41,121) ------- -------- ------- Net cash provided by operating activities 5,133,309 6,208,070 4,959,276 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans (11,278,698) 7,376,603 20,168,334 Purchase of loans (19,625,170) (40,343,689) (24,644,011) Proceeds from sale of securities available-for-sale 224,792 438,915 4,445,868 Purchase of securities available-for-sale (1,594,100) (18,922,917) (18,371,558) Proceeds from maturities of securities available-for-sale 8,712,985 16,512,369 25,460,742 Purchase of premises, equipment and rental real estate (2,171,097) (2,259,834) (776,473) Proceeds from sale of equipment 258,289 3,807 58 Cash paid in connection with acquisition of Valley Financial Corporation net of cash received -- -- (8,568,743) Other 80,860 (975) 69,974 ------ ---- ------ Net cash (used in) investing activities (25,392,139) (37,195,721) (2,215,809) ----------- ----------- ----------
(Continued) -32- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits $ (9,864,145) $ 24,340,478 $ 6,297,514 Net increase (decrease) in advances from borrowers for taxes and insurance 114,044 138,000 (154,127) Net increase (decrease) in short-term borrowings (9,000,000) 14,000,000 -- Proceeds from other borrowed funds 64,000,000 8,000,000 16,542,000 Payments of other borrowed funds (22,123,063) (5,116,950) (6,259,761) Purchase of treasury stock (5,799,736) (12,336,522) (6,164,419) Proceeds from issuance of treasury stock 54,470 -- 114,963 Dividends paid (941,692) (1,005,553) (927,924) ---------- ---------- --------- Net cash provided by financing activities 16,439,878 28,019,453 9,448,246 ---------- ---------- --------- Net increase (decrease) in cash (3,818,952) (2,968,198) 12,191,713 CASH Beginning 12,668,678 15,636,876 3,445,163 ---------- ---------- --------- Ending $ 8,849,726 $ 12,668,678 $ 15,636,876 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 12,075,178 $ 11,181,280 $ 10,989,646 Interest paid on borrowings 4,461,883 2,414,957 1,975,691 Income taxes 2,195,640 2,507,574 2,628,003
See Notes to Financial Statements. -33- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 1. Significant Accounting Policies Organization, nature of business and basis of presentation: North Central Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and loan holding company that owns 100% of the outstanding stock of First Federal Savings Bank of Iowa (the Bank), which is a federally chartered stock savings bank that conducts its operations from its main office located in Fort Dodge, Iowa, and seven branch offices located in Fort Dodge, Nevada, Ames, Perry, Burlington and Mt. Pleasant, Iowa. Principles of consolidation: The consolidated financial statements, as described above, include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, First Federal Investment Services, Inc., formerly First Financial Service Corporation (which sells insurance, annuity products, mutual funds and originates equipment leases), First Iowa Title Services, Inc. (which provides real estate abstracting services), Northridge Apartments Limited Partnership (which owns a multifamily apartment building) and First Iowa Mortgage, Inc. (which originates and sells mortgage loans in the secondary market). All significant intercompany balances and transactions have been eliminated in consolidation. Accounting estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Securities available-for-sale: Securities classified as available-for-sale are those debt and equity securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income/(loss), net of the related deferred tax effect. The amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans held for sale: Loans held for sale are those loans held with the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Sales are made without recourse and any gain or loss is recognized at the settlement date. Loans receivable: Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan origination fees and unearned discounts. Discounts on first mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. -34- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Uncollectible interest on loans that are contractually past due is charged-off or an allowance is established based on management's periodic evaluation, generally when loans become 90 days past due. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loan origination fees and related costs: Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Foreclosed real estate: Real estate properties acquired through loan foreclosure are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its fair value less estimated selling costs. Premises and equipment: Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily by straight-line and double-declining balance methods over the estimated useful lives of the assets. Rental real estate: Rental real estate is comprised of a low-income housing, multifamily apartment building and equipment which is stated at cost, net of accumulated depreciation. Depreciation is computed primarily by the straight-line and double-declining balance methods over the estimated useful lives of the assets. Title plant: Title plant is carried at cost and, in accordance with FASB Statement No. 61, is not depreciated. Costs incurred to maintain and update the title plant are expensed as incurred. Goodwill: Goodwill is stated at cost, net of accumulated amortization and is being amortized over 10 - 15 years using the straight-line method. -35- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their income tax bases. Income taxes are allocated to the Company and its subsidiaries based on each entity's income tax liability as if it filed a separate return. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Earnings per share: Basic earnings per common share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the periods presented. The earnings per common share amounts - - assuming dilution were computed using the weighted average number of shares outstanding during the periods presented, adjusted for the effect of dilutive potential common shares outstanding, which consists of stock options granted. In accordance with Statement of Position 93-6, shares owned by the ESOP that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share. Stock-option plan: SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Fair value of financial instruments: The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a fixed liquidation. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. -36- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash: The carrying amount of cash represents the fair value. ---- Securities: Fair values for all securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Deposits: Fair values disclosed for demand, NOW, savings and money market savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. Borrowed funds: The fair value of borrowed funds is estimated based on discounted cash flows using currently available borrowing rates. Accrued interest receivable and payable: The fair values of both accrued interest receivable and payable are their carrying amounts. Commitments to extend credit: The fair values of commitments to extend credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties. At December 31, 2000 and 1999, the carrying amount and fair value of the commitments were not significant. Note 2. Business Combination As of the close of business on January 30, 1998, the Bank completed the acquisition of Valley Financial Corp. ("Valley Financial") pursuant to an Agreement and Plan of Merger, dated as of September 19, 1997. 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 branches of the Bank. -37- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 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 $14,726,250 in cash. The excess of the total acquisition cost over the fair value of the net assets acquired of $6,627,859 is being amortized over 15 years by the straight-line method. The acquisition was accounted for as a purchase transaction and therefore, the operating results of the former offices of Valley Savings Bank are included in the operating results of the Company from the date of acquisition. The following is a summary of the assets acquired and liabilities assumed in connection with the acquisition of Valley Financial Corporation:
Cash $ 6,157,507 Securities 41,818,057 Loans 58,567,364 Accrued interest receivable 1,019,373 Premises and equipment 1,081,890 Goodwill 6,627,859 Prepaid expenses and other assets 228,785 Deposits (99,269,092) Advances from borrowers for taxes and insurance (301,783) Deferred income taxes (262,738) Accrued taxes payable 12,565 Accrued expenses and other liabilities (953,537) ------------ Cash paid 14,726,250 Less: cash received (6,157,507) ------------ Cash paid, net of cash received $ 8,568,743 ============
Unaudited pro forma consolidated results of operations for the year ended December 31, 1998, as though Valley Savings Bank had been acquired as of January 1, 1998, follow:
1998 ---- Net interest income $ 10,904,821 Net income 4,245,473 Basic earnings per common share 1.39 Earnings per common share - assuming dilution 1.36
-38- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 3. Securities Securities available-for-sale as of December 31, 2000, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ----------------------------------------------------------- Equity securities: Federal Home Loan Bank stock $ 4,428,700 $ -- $ -- $ 4,428,700 FHLMC preferred stock 3,499,375 -- (104,375) 3,395,000 FNMA preferred stock 5,134,375 5,625 (9,625) 5,130,375 Other 474,533 14,400 (24,884) 464,049 ------- ------ ------- ------- 13,536,983 20,025 (138,884) 13,418,124 ---------- ------ -------- ---------- Debt securities: U.S. Government agencies 17,501,722 -- (223,647) 17,278,075 State and political subdivisions 4,472,262 597 (387) 4,472,472 Mortgage-backed securities 8,239,745 9,311 (65,877) 8,183,179 --------- ----- ------- --------- 30,213,729 9,908 (289,911) 29,933,726 ---------- ----- -------- ---------- $ 43,750,712 $ 29,933 $ (428,795) $ 43,351,850 ============ ============ ============ ============
Securities available-for sale as of December 31, 1999, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ----------------------------------------------------------- Equity securities: Federal Home Loan Bank stock $ 3,034,600 $ -- $ -- $ 3,034,600 FHLMC preferred stock 3,499,375 -- (241,875) 3,257,500 FNMA preferred stock 5,134,375 37,625 (15,000) 5,157,000 Other 499,283 16,300 (58,478) 457,105 ------- ------ ------- ------- 12,167,633 53,925 (315,353) 11,906,205 ---------- ------ -------- ---------- Debt securities: U.S. Treasury notes 4,270,840 -- (10,410) 4,260,430 U.S. Government agencies 19,582,382 -- (782,856) 18,799,526 State and political subdivisions 4,866,505 5,657 (100,165) 4,771,997 Mortgage-backed securities 10,280,363 -- (325,664) 9,954,699 ---------- ------ -------- --------- 39,000,090 43,282 (115,165) 37,786,652 ---------- ------ -------- ---------- $ 51,167,723 $ 59,582 $ (1,534,448) $ 49,692,857 ============ ============ ============ ============
39 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The amortized cost and fair value of debt securities as of December 31, 2000, by contractual maturity are shown below. Certain securities have call features, which allow the issuer to call the security prior to maturity. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:
Securities Available-for-Sale ------------------------------- Amortized Cost Fair Value ------------------------------- Due in one year or less $ 362,615 $ 361,729 Due from one to five years 17,244,047 17,027,614 Due from five to ten years 3,801,682 3,796,276 Due after ten years 565,640 564,928 Mortgage-backed securities 8,239,745 8,183,179 --------- --------- $30,213,729 $29,933,726 =========== ===========
Gross gains of $42, $61,564 and $71,923 were realized on the sale of available-for-sale securities in 2000, 1999 and 1998, respectively. There were no gross losses on the sale of available-for-sale securities in 2000 and 1999 and $20,561 in 1998. The components of other comprehensive income (loss) - net unrealized gains (losses) on securities for the years ended December 31, 2000, 1999 and 1998, were as follows:
2000 1999 1998 ----------------------------------------- Unrealized holding gains (losses) arising during the period $ 1,076,046 $(1,984,129) $ 57,558 Less reclassification adjustment for net gains realized in net income 42 61,564 51,362 ----------------------------------------- Net unrealized gains (losses) before tax (expense) benefit 1,076,004 (2,045,693) 6,196 Tax (expense) benefit (402,206) 765,889 (2,311) ----------------------------------------- Other comprehensive income (loss) - net unrealized gains (losses) on securities $ 673,798 $(1,279,804) $ 3,885 =========================================
-40- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 4. Loans Receivable Loans receivable at December 31, 2000 and 1999, are summarized as follows:
2000 1999 ------------------------------ First mortgage loans (principally conventional) Principal balances: Secured by one-to-four family residences $ 171,772,639 $ 159,970,037 Secured by: Multifamily properties 75,857,571 73,416,278 Commercial properties 24,127,064 17,723,455 Construction loans 4,842,706 4,087,495 --------- --------- Total first mortgage loans 276,599,980 255,197,265 ----------- ----------- Consumer loans Principal balances: Automobile 8,803,211 8,003,907 Second mortgage 31,910,144 23,603,060 Other 5,094,295 4,955,638 --------- --------- Total consumer loans 45,807,650 36,562,605 ---------- ---------- Total loans 322,407,630 291,759,870 Less: Undisbursed portion of construction loans (1,493,322) (1,981,962) Unearned discounts (68,693) (135,953) Net deferred loan origination fees 23,316 (106,315) Allowance for loan losses (2,843,149) (2,776,539) ---------- ---------- $ 318,025,782 $ 286,759,101 ============= =============
Activity in the allowance for loan losses us summarized as follows for the years ended December 31: 2000 1999 1998 ----------------------------------------- Balance, beginning $ 2,776,539 $ 2,676,438 $ 2,150,587 Provision charged to income 120,000 120,000 210,000 Effect of acquisition of Valley Financial Corporation -- -- 343,418 Loans charged-off (55,923) (28,032) (28,422) Recoveries 2,533 8,133 855 ----- ----- ----- --- Balance, ending $ 2,843,149 $ 2,776,539 $ 2,676,438 =========== =========== ===========
-41- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The following is a summary of information pertaining to impaired loans:
December 31, ----------------------- 2000 1999 ----------------------- Impaired loans without a valuation allowance $ -- $ -- Impaired loans with a valuation allowance 1,089,639 213,394 ----------------------- Total impaired loans $1,089,639 $ 213,394 ======================= Valuation allowance related to impaired loans $ 204,731 $ 32,009 =======================
Interest income recognized on impaired loans is insignificant. The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their immediate families (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Activity in loans receivable from certain executive officers and directors of the Bank consisted of the following for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ----------------------------------------- Beginning balance $ 1,685,101 $ 1,075,964 $ 1,045,188 New loans 283,688 825,200 166,701 Repayments (54,116) (216,063) (135,925) ------- -------- -------- Ending balance $ 1,914,673 $ 1,685,101 $ 1,075,964 =========== =========== ===========
Note 5. Servicing Mortgage loans serviced for FHLMC and other banks are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 2000 and 1999, are $6,803,472 and $6,673,921, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were $49,441 and $53,236 at December 31, 2000 and 1999, respectively. -42- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 6. Accrued Interest Receivable Accrued interest receivable at December 31, is summarized as follows:
2000 1999 ----------------------- Securities $ 375,335 $ 467,804 Loans receivable 1,943,946 1,642,479 --------- --------- 2,319,281 2,110,283 Less allowance for uncollectible interest 62,128 27,685 --------- --------- $2,257,153 $2,082,598 =======================
Note 7. Premises and Equipment Premises and equipment consisted of the following at December 31:
2000 1999 ----------------------- Land $1,641,371 $1,696,695 Buildings and improvements 5,532,342 4,236,326 Leasehold improvements 32,061 15,546 Furniture, fixtures and equipment 2,276,566 2,020,593 Vehicles 88,279 87,968 --------- --------- 9,570,619 8,057,128 Less accumulated depreciation 2,909,836 2,701,031 --------- --------- $6,660,783 $5,356,097 ========== ==========
-43- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 8. Deposits Deposits at December 31, were as follows:
Weighted- Weighted- Average Average Rate at Rate at December 2000 December 1999 Nature of Deposit 31, 2000 Amount Percentage 31, 1999 Amount Percentage - ------------------------------------------------------------------------------------------------------------------ Demand and NOW accounts: Noninterest bearing -% $ 6,071,103 2.3% -% $ 6,411,709 2.4% Interest-bearing 1.25 30,224,808 11.6 1.25 30,096,432 11.1 Savings accounts 1.83 21,723,847 8.3 2.00 25,829,919 9.5 Money market savings 4.92 24,518,731 9.4 3.61 17,463,869 6.4 ------------------------- ------------------------ 82,538,489 31.6 79,801,929 29.4 ------------------------- ------------------------ Certificates of deposit: Less than 4.0% 3.20 23,836 0.0 3.65 687,639 0.3 4.0% - 4.9% 4.72 15,550,125 6.0 4.65 30,875,083 11.4 5.0% - 5.9% 5.55 62,587,480 24.0 5.44 123,356,192 45.5 6.0% - 6.9% 6.47 91,429,871 35.0 6.24 30,506,154 11.3 7.0% - 7.9% 7.14 9,025,628 3.4 7.09 5,793,434 2.1 More than 8.0% 8.02 11,217 0.0 8.00 10,360 0.0 ------------------------- ------------------------ 178,628,157 68.4 191,228,862 70.6 ------------------------- ------------------------ 4.88% $261,166,646 100.0% 4.42% $271,030,791 100.0% ==================================================================================
At December 31, 2000, scheduled maturities of certificates of deposit were as follows:
One year One to Two to Three to Four to or less two years three years four years five years Thereafter ------------------------------------------------------------------------------------------------- Less than 4.0% $ 23,836 $ - $ - $ - $ - $ - 4.0 - 4.9% 13,987,797 1,540,226 22,102 - - - 5.0 - 5.9% 32,237,534 10,012,828 9,248,088 8,226,981 2,860,585 1,464 6.0 - 6.9% 40,892,381 31,598,757 7,309,055 2,072,181 9,546,980 10,517 7.0 - 7.9% 6,030,834 347,606 1,883,346 117,490 449,403 196,949 More than 8.0% - 11,217 - - - - ------------------------------------------------------------------------------------------------- $ 93,172,382 $ 43,510,634 $ 18,462,591 $ 10,416,652 $ 12,856,968 $ 208,930 =================================================================================================
-44- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Interest expense on deposits consisted of the following:
Years ended December 31, --------------------------------------- 2000 1999 1998 --------------------------------------- NOW accounts $ 345,100 $ 419,878 $ 554,031 Savings 484,774 562,178 594,276 Money market savings 839,957 668,340 797,372 Certificates of deposit 10,598,895 9,463,137 8,947,402 ---------- --------- --------- $12,268,726 $11,113,533 $10,893,081 =========== =========== ===========
The aggregate amount of certificates of deposit of $100,000 or more was $30,330,601 and $32,215,908 as of of December 31, 2000 and 1999, respectively. Note 9. Borrowed Funds Borrowed funds at December 31, 2000 included miscellaneous borrowings of $29,605 and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features - ------------------------------------------------------------------------------------------- 2001 6.49% $ 28,300,000 $5 million variable rate, renewable daily 2002 6.31 25,500,000 2003 5.72 5,000,000 2004 5.51 1,000,000 2008 5.31 9,000,000 All callable, various dates 2001 to 2003 2010 5.88 17,500,000 All callable, various dates 2001 to 2003 2013 5.25 2,262,621 5 - year amortizing, repayable 2003 ---------------------------------------- 6.11% $ 88,562,621 ========================================
-45- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Borrowed funds at December 31, 1999, included miscellaneous borrowings of $33,703 and borrowings from the FHLB of $55,681,586. Such borrowings carried a weighted-average interest rate of 5.59% with maturities ranging from 2000 through 2013. The borrowings are collateralized by the FHLB stock and qualifying first mortgage loans representing 125% of the total borrowings outstanding. Note 10. Income Taxes and Retained Earnings Under previous law, the provisions of the IRS and similar sections of Iowa Law Code permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996, and in all future years. The Bank is recapturing its tax bad debt reserves which have accumulated since 1987, amounting to approximately $1,659,000. The tax associated with the recaptured reserves is approximately $615,000 and is being paid in years beginning in 1996 and ending in 2003. Deferred income taxes have been established for the taxes associated with the recaptured reserves. Deferred taxes have been provided for the difference between tax bad debt reserves and the loan loss allowances recorded in the financial statements subsequent to December 31, 1987. However, at December 31, 2000, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $2,445,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then existing rates. The approximate amount of unrecognized tax liability associated with these historical additions is $929,000. Income tax expense is summarized as follows:
Years ended December 31, ----------------------------------------- 2000 1999 1998 ----------------------------------------- Current $ 1,911,431 $ 2,382,564 $ 2,645,466 Deferred (38,062) (141,678) (164,846) ------- -------- -------- $ 1,873,369 $ 2,240,886 $ 2,480,620 =========== =========== ===========
-46- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Deferred tax assets and liabilities consisted of the following components as of December 31, 2000 and 1999:
2000 1999 ----------------------- Deferred tax assets: Unearned shares, employee stock ownership plan $ 40,000 $ 40,000 Allowance for loan losses 796,000 668,000 Deferred directors fees and compensation 46,000 52,000 Unrealized losses on securities available-for-sale 149,000 551,000 Other 19,258 133,894 ------ ------- Total gross deferred tax assets 1,050,258 1,444,894 --------- --------- Deferred tax liabilities: Federal Home Loan Bank stock dividend 45,000 47,000 Loan costs 44,000 43,000 Premises and equipment 74,000 75,000 Title plant 119,000 99,000 Loans acquired 89,000 129,000 Investments acquired 42,000 63,000 Deferred directors' fees and compensation 72,000 60,000 Other 8,345 7,837 ----- ----- Total gross deferred tax liabilities 493,345 523,837 ------- ------- Net deferred tax assets $ 556,913 $ 921,057 ========== ==========
-47- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rates of 34% to income before income taxes as a result of the following:
Years Ended December 31, ------------------------ 2000 1999 1998 ------------------------------------------------------------------------ Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------- Income before income taxes $ 2,000,725 34.0% $ 2,189,961 34.0% $ 2,334,258 34.0% Nontaxable dividends (132,386) (2.2) (109,022) (1.7) (105,296) (1.5) State income tax, net of federal income tax benefit 165,680 2.7 233,647 3.6 226,613 3.1 State income tax refund, net of federal income tax benefit (66,233) (1.1) -- -- -- -- Municipal interest income (64,182) (1.1) (62,762) (1.0) (54,286) (0.8) Low income housing tax credit (153,680) (2.6) (153,680) (2.4) (148,867) (2.1) Goodwill amortization 145,547 2.5 145,546 2.3 137,536 2.1 Other (22,102) (0.4) (2,804) 0.0 90,662 1.3 ------- ---- ------ --- ------ --- $ 1,873,369 31.8% $ 2,240,886 34.8% $ 2,480,620 36.1% =========== ==== =========== ==== =========== ====
Note 11. Employee Benefit Plans Retirement plans: The Bank participates in a multiemployer defined benefit pension plan covering substantially all employees. This is a multiemployer plan and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. There was no pension expense for the years ended December 31, 2000, 1999 and 1998. The Bank has a defined contribution plan covering substantially all employees. The Bank does not contribute to this plan. Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion to stock ownership, the Bank established an ESOP for eligible employees. All employees of the Bank as of January 1, 1994, were eligible to participate immediately and employees of the Bank hired after January 1, 1994, are eligible to participate after they attain age 21 and complete one year of service during which they work at least 1,000 hours. The ESOP borrowed funds in the amount of $960,000 to purchase 104,075 shares of common stock issued in the conversion in 1994 and $840,000 to purchase 84,000 shares of common stock issued in the reorganization and conversion in 1996. These funds are borrowed from the Company. -48- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares are used to pay debt service. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. If the Bank's stock is not traded on an established market at the time of an ESOP participant's termination, the terminated ESOP participant has the right to require the Bank to purchase the stock at its current fair market value. Bank management believes there is an established market for the Bank's stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 2000 and 1999. As shares are released, the Bank reports compensation expense equal to the current market price of the shares. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. Dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense was $287,295, $330,855 and $403,793 for the years ended December 31, 2000, 1999 and 1998, respectively. Shares of the Company's common stock held by the ESOP, at December 31, 2000 and 1999, are as follows:
2000 1999 ----------------------- Allocated shares 117,943 98,626 Unreleased (unearned) shares 66,881 85,507 ------ ------ 184,824 184,133 ======= ======= Fair market value of unreleased (unearned) shares $1,162,057 $1,282,605 ========== ==========
Stock option plan: In 1996, the stockholders of the Company ratified the 1996 Incentive Option Plan (the Plan). The Plan provides for the grant of options at an exercise price equal to the fair market value on the date of grant. The Plan is intended to promote stock ownership by directors and selected officers and employees of the Company to increase their proprietary interest in the success of the Company and to encourage them to remain in the employment of the Company or its subsidiaries. Awards granted under the Plan may include incentive stock options, nonqualified stock options and limited rights which are exercisable only upon a change in control of the Bank or the Company. All awards to date are nonqualified stock options. The Plan authorizes the granting of stock options for a total of 401,105 shares of common stock or 10% of the shares issued in the 1996 conversion. All options are granted at an exercise price which was the market price of the common stock on the grant date. -49- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Options granted to officers and directors become exercisable in five equal annual installments commencing on the first anniversary of the grant date and continuing on each anniversary date thereafter. The options granted to officers expire ten years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. A person who becomes a director after September 21, 1996, receives an annual grant of options to purchase 2,000 shares of common stock. Options granted to directors are exercisable immediately and expire ten years from the date of grant, unless an earlier expiration date is triggered by removal for cause. The table below reflects option activity for the period indicated:
Weighted- Average Exercise Number Price per of Shares Share --------------------- Outstanding, December 31, 1997 231,000 $ 12.42 Granted 62,000 19.32 Forfeited -- -- Exercised (10,290) 12.38 ------- ----- Outstanding, December 31, 1998 282,710 13.93 Granted 12,000 15.76 Forfeited -- -- Exercised -- -- ------- ----- Outstanding, December 31, 1999 294,710 14.01 Granted 13,000 15.44 Forfeited (4,400) 14.84 Exercised (4,600) 12.82 ------ ----- Outstanding, December 31, 2000 298,710 $ 14.08 ======= ========= Options exercisable 201,610 $ 13.45 ======= ========= Remaining shares available for grant 73,605 ======
-50- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ As of December 31, 2000, the 298,710 options outstanding under the Plan have exercise prices between $12.375 and $20.00. The weighted average fair value per option of options granted during the years ended December 31, 2000, 1999 and 1998, were $3.88, $4.68 and $5.96, respectively. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate 2000, 1999 and 1998, reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
2000 1999 1998 --------------------------------------------- Net income: As reported $ 4,011,117 $ 4,200,175 $ 4,384,845 Pro forma 3,811,161 4,011,266 4,202,056 Earnings per common share: As reported 2.04 1.64 1.44 Pro forma 1.94 1.57 1.38 Earnings per common share - assuming dilution: As reported 2.00 1.60 1.40 Pro forma 1.90 1.53 1.34
The fair values of the grants are estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 2000, 1999 and 1998, respectively: dividend rate of 3.2%, 2.4% and 1.3%, price volatility of 21%, 25% and 17%, risk-free interest rates of 6.49%, 4.64% and 5.65% and expected lives of eight years for all years. Employment agreements: The Company and the Bank have entered into employment agreements with a key officer. Under the terms of the agreements, the officer is entitled to additional compensation in the event of certain conditions of involuntary termination. The agreements extend for up to 36 months. The Bank has entered into certain employment retention agreements with key officers. Under the terms of the agreements, the employees are entitled to additional compensation in the event of a change of control of the Bank or the Company and the employees are involuntarily terminated within the remaining unexpired employment period, up to 36 months. A change in control is generally triggered by the acquisition or control of 20% or more of the common stock. -51- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 12. Stockholders' Equity Regulatory capital requirements: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier I capital (as defined) to average assets (as defined) and tangible capital to adjusted assets. Management believes, as of December 31, 2000, the Bank meets all capital adequacy requirements to which it is subject. The Bank's actual capital amounts and ratios are also presented in the following table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------------------------------- (000's) (000's) (000's) As of December 31, 2000: Total Capital (to risk weighted assets) $ 31,241 14.0% $ 17,830 8.0% $ 22,287 10.0% Tier 1 Capital (to risk weighted assets) 28,456 12.8 8,915 4.0 13,372 6.0 Tier I (Core) Capital (to adjusted assets) 28,456 7.4 11,464 3.0 19,107 5.0 Tangible Capital (to adjusted assets) 28,456 7.4 5,732 1.5 - - As of December 31, 1999: Total Capital (to risk weighted assets) $ 33,168 16.7% $ 15,870 8.0% $ 19,837 10.0% Tier 1 Capital (to risk weighted assets) 30,685 15.4 7,935 4.0 11,902 6.0 Tier I (Core) Capital (to adjusted assets) 30,685 8.5 10,833 3.0 18,054 5.0 Tangible Capital (to adjusted assets) 30,685 8.5 5,416 1.5 - -
-52- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Limitations on Dividends and Other Capital Distributions: OTS regulations impose limitations on dividends and other capital distributions by savings institutions. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the savings association's shares, payments to stockholders of another institution in a cash out merger and other distributions charged against capital. The rule establishes three tiers of institutions. An institution such as the Bank that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Association") may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital at the beginning of the calendar year or (ii) 75% of its net income over the most recent four-quarter period, subject to certain limitations and restrictions as described in the regulations. Any additional capital distributions would require prior regulatory approval. A savings institution that does not meet its current regulatory capital requirement before or after payment of a proposed capital distribution may not make any capital distributions without the prior approval of the OTS. At December 31, 2000, the Bank was considered a Tier 1 Association. Note 13. Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31:
2000 1999 1998 --------------------------------------------------- Advertising and promotion $ 237,482 $ 191,828 $ 168,105 Professional fees 152,648 207,211 171,761 Printing, postage, stationery and supplies 364,308 441,243 369,877 Checking account charges 329,821 328,380 299,530 Insurance 84,058 80,400 85,987 OTS general assessment 77,831 73,168 80,337 Telephone 120,302 108,292 91,900 ATM costs 106,821 111,982 82,285 Other 935,005 813,520 796,072 --------------------------------------------------- $2,408,276 $ 2,356,024 $ 2,145,854 ===================================================
Note 14. Financial Instruments With Off-Statement of Financial Condition Risk The Bank is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-statement of financial condition instruments. -53- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The Bank does require collateral, or other security, to support financial instruments with credit risk. A summary of the contract amount of the Bank's exposure to off-statement of financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount --------------------------- December 31, 2000 1999 ---- ---- Mortgage loans (including one-to-four family and multifamily loans) $ 3,156,421 $ 5,440,249 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 1,761,048 952,000
At December 31, 2000, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 8.18% and fixed-rate commitments carrying a weighted-average interest rate of 8.76%. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts above do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. Note 15. Lending Activities and Concentrations of Credit Risk Most of the Bank's lending activity is with customers located within the state of Iowa. The Bank generally originates single family residential loans within its primary lending area of Webster, Story, Des Moines and Henry counties. The Bank's underwriting policies require such loans to be 80% loan to value based upon appraised values unless private mortgage insurance is obtained. Approximately 37% of the Bank's first mortgage loan portfolio at December 31, 2000, consisted of loans purchased or originated outside the state of Iowa. These are generally multifamily residential and commercial real estate loans for properties located primarily in Wisconsin, Colorado and California. These loans are secured by the underlying properties. The properties securing these loans are physically inspected. The loans are subject to the same underwriting guidelines as loans originated locally. The Bank is also active in originating secured consumer loans to its customers, primarily automobile and second mortgage loans. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code filings on the purchased asset. -54- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 16. Fair Values of Financial Instruments The carrying amount and fair value of the Company's financial instruments as of December 31, 2000 and 1999, were as follows:
2000 1999 ----------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------------------------------------- (nearest 000) (nearest 000) Financial assets: Cash $ 8,849,726 $ 8,850,000 $ 12,668,678 $ 12,669,000 Securities 43,351,850 43,352,000 49,692,857 49,693,000 Loans, net 318,025,782 320,667,000 286,759,101 285,004,000 Accrued interest receivable 2,257,153 2,257,000 2,082,598 2,083,000 Financial liabilities: Deposits 261,166,646 261,231,000 271,030,791 270,849,000 Borrowed funds 88,592,226 88,334,000 55,715,289 54,860,000 Accrued interest payable 601,309 601,000 431,750 432,000
Note 17. 1994 Reorganization and Conversion to Stock Ownership Effective August 31, 1994, First Federal Savings Bank of Iowa (a mutual savings bank) reorganized such that its assets and liabilities were transferred to a newly formed stock savings bank and a federal mutual holding company was formed under the name of North Central Bancshares, Inc. The stock savings bank issued approximately 65% of its shares of stock to the mutual holding company and the remainder were sold in a public offering. Persons who had membership or liquidation rights with respect to the mutual savings bank as of the date of reorganization shall, as long as they remain depositors of the Bank, continue to have such rights solely with respect to the mutual holding company after the reorganization (see Note 18). Note 18. The 1996 Reorganization and Conversion Effective March 20, 1996, the mutual holding company and the Bank executed a Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The Company became an Iowa corporation owning 100% of the stock of the Bank and offered shares to the public. The mutual holding company ceased to exist. -55- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The Plan provided that when the conversion was completed, a "Liquidation Account" would be established in an amount equal to the amount of any dividends waived by the mutual holding company (totaling approximately $1,897,000), plus 65.5% of the Bank's total stockholders' equity, as reflected in its latest statement of financial condition in the final prospectus utilized in the conversion. The Liquidation Account is established to provide a limited priority claim to the assets of the Bank to qualifying depositors as of specified dates (Eligible Account Holders and Supplemental Eligible Account Holders) who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such an event, Eligible Account Holders and Supplemental Eligible Account Holders would receive from the Liquidation Account a liquidation distribution based on their proportionate share of the then total remaining qualifying deposits. Note 19. Earnings Per Common Share Presented below is the reconciliation of the numerators and denominators of the computations for earnings per common share and earnings per common share - diluted, for the years ended December 31:
2000 1999 1998 ------------------------------------ Numerator, income available to common stockholders $4,011,117 $4,200,175 $4,384,845 ========== ========== ========== Denominator: Weighted-average shares outstanding 2,042,140 2,660,629 3,166,041 Less unallocated ESOP 78,454 97,689 117,894 ------ ------ ------- Weighted-average shares outstanding-basic 1,963,686 2,562,940 3,048,147 Dilutive effect of stock options 42,654 58,602 84,684 ------ ------ ------ Weighted-average shares outstanding-diluted 2,006,340 2,621,542 3,132,831 ========= ========= ========= Basic earnings per common share 2.04 1.64 1.44 Earnings per common share-assuming dilution 2.00 1.60 1.40
Note 20. Pending Accounting Pronouncements SFAS No. 133, Accounting for Derivatives Instruments and Hedging will, beginning with the quarter ended March 31, 2001, require an entity to recognize all derivatives as either assets or liabilities, and measure 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. 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. SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities was issued in September 2000, and replaces SFAS No. 125 of the same title. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The adoption of SFAS No. 140 is not expected to have a material impact on the results of operations or financial condition of the Company. -56- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 21. North Central Bancshares, INC. (Parent Company Only) Financial
STATEMENTS OF FINANCIAL CONDITION December 31, 2000 and 1999 2000 1999 ---------------------------- ASSETS Cash $ 346,592 $ 190,106 Securities available-for-sale 464,049 457,105 Loan receivables, net 1,101,000 951,000 Investment in First Federal Savings Bank of Iowa 34,648,865 36,765,460 Income taxes receivable 71,629 30,809 Deferred taxes 6,215 -- Prepaid expenses and other assets -- 11,549 ----- ------ Total assets $ 36,638,350 $ 38,406,029 ============ ============ LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 240,235 $ 226,174 Accrued expenses and other liabilities -- 32,639 Deferred taxes -- 20,292 ------- ------ Total liabilities 240,235 279,105 ------- ------- EQUITY Common stock 40,111 40,111 Additional paid-in capital 38,378,315 38,278,872 Retained earnings 33,345,852 30,290,488 Unearned shares, employee stock ownership plan (646,912) (825,484) Accumulated other comprehensive (loss) (247,340) (921,138) Treasury stock, at cost (34,471,911) (28,735,925) ----------- ----------- Total equity 36,398,115 38,126,924 ---------- ---------- Total liabilities and equity $ 36,638,350 $ 38,406,029 ============ ============
-57- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
STATEMENTS OF INCOME Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 ---------------------------------------- Operating income: Equity in net income of subsidiary $ 4,050,607 $ 4,173,425 $ 4,393,955 Interest income 118,392 286,915 200,055 Gain on sale of securities available-for-sale, net 42 61,564 71,923 ------- ------ ------ 4,169,041 4,521,904 4,665,933 --------- --------- --------- Operating expenses: Salaries and employee benefits 47,400 45,750 45,000 Other 145,921 267,979 265,088 ------- ------- ------- 193,321 313,729 310,088 ------- ------- ------- Income before income taxes 3,975,720 4,208,175 4,355,845 Provision for income taxes (35,397) 8,000 (29,000) ------- ----- ------- Net income $ 4,011,117 $ 4,200,175 $ 4,384,845 =========== =========== ===========
-58- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
STATEMENTS OF EQUITY Years Ended December 31, 2000, 1999 and 1998 Employee Accumulated Additional Stock Other Total Comprehensive Common Paid-in Retained Ownership Compehensive Treasury Stockholer's Income Stock Capital Earnings Plan Income (Loss) Stock Equity ------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $40,111 $37,949,598 $23,660,964 $(1,210,441) $354,781 $(10,377,937) $50,417,076 Comprehensive income: Net income $4,384,845 -- -- 4,384,845 -- -- -- 4,384,845 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment,net of tax (Note 3) 3,885 -- -- -- -- 3,885 -- 3,885 --------- Total comprehensive income $4,388,730 ========== Purchase of treasury stock -- -- -- -- -- (6,164,419) (6,164,419) Dividends on common stock -- -- (960,902) -- -- -- (960,902) Effect of contribution to employee stock ownership plan -- 206,636 -- 197,157 -- -- 403,793 Effect of stock options exercised -- (20,417) -- -- -- 142,953 122,536 ------------------------------------------------------------------------------------ Balance, December 31, 1998 40,111 38,135,817 27,084,907 (1,013,284) 358,666 (16,399,403) 48,206,814 Comprehensive income: Net income $4,200,175 -- -- 4,200,175 -- -- -- 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) (1,279,804) -- -- -- -- (1,279,804) -- (1,279,804) ----------- Total comprehensive income $2,920,371 ========== Purchase of treasury stock -- -- -- -- -- (12,336,522) (12,336,522) Dividends on common stock -- -- (994,594) -- -- -- (994,594) Effect of contribution to employee stock ownership plan -- 143,055 -- 187,800 -- -- 330,855 ------------------------------------------------------------------------------------ Balance, December 31, 1999 40,111 38,278,872 30,290,488 (825,484) (921,138) (28,735,925) 38,126,924 Comprehensive income: Net income $4,011,117 -- -- 4,011,117 -- -- -- 4,011,117 Other comprehensive (loss), unrealized (losses)on securities, net of reclassification adjustment, net of tax (Note 3) 673,798 -- -- -- -- 673,798 -- 673,798 ---------- Total comprehensive income $4,684,915 ========== Purchase of treasury stock -- -- -- -- -- (5,799,736) (5,799,736) Dividends on common stock -- -- (955,753) -- -- -- (955,753) Effect of contribution to employee stock ownership plan -- 108,723 -- 178,572 -- -- 287,295 Issuance of treasury stock -- (9,280) -- -- -- 63,750 54,470 ------------------------------------------------------------------------------------- Balance, December 31, 2000 $40,111 $38,378,315 $33,345,852 $ (646,912) $(247,340) $(34,471,911) $36,398,115 =====================================================================================
-59- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,011,117 $ 4,200,175 $ 4,384,845 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (4,050,607) (4,173,425) (4,393,955) Dividends received from First Federal Savings Bank of Iowa 7,100,000 12,398,262 3,295,694 (Gain) on sale of securities available-for-sale (42) (61,564) (71,923) Change in deferred income taxes (29,906) 43,318 (485) Change in assets and liabilities: Income taxes receivable (40,820) (2,319) (20,917) Prepaid expenses and other assets 11,549 (963) 2,191 Income taxes payable -- -- (2,723) Accrued expenses and other liabilities (32,639) (14,490) 5,836 ------- ------- ----- Net cash provided by operating activities 6,968,652 12,388,994 3,198,563 --------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans (150,000) 310,000 8,680,000 Proceeds from sale of securities available-for-sale 24,792 438,915 128,550 Purchase of securities available-for-sale -- (15,125) (361,058) Capital contributions to First Federal Savings Bank -- -- (5,000,000) -------- ------- --------- Net cash provided by (used in) investing activities (125,208) 733,790 3,447,492 -------- ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (5,799,736) (12,336,522) (6,164,419) Proceeds from issuance of treasury stock 54,470 -- 114,963 Dividends paid (941,692) (1,005,553) (927,924) -------- ---------- -------- Net cash (used in) financing activities (6,686,958) (13,342,075) (6,977,380) ---------- ----------- ---------- Net increase (decrease) in cash 156,486 (219,291) (331,325) CASH Beginning 190,106 409,397 740,722 ------- ------- ------- Ending $ 346,592 $ 190,106 $ 409,397 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payment (receipts) for income taxes $ 44,608 $ (32,998) $ 82,158
-60- QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended December 31, 2000 ---------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------- -------------------- ------------- (In thousands, except per share amounts) Interest income....................... $ 6,530 $ 6,731 $ 6,951 $ 7,071 Interest expense...................... 3,786 4,030 4,356 4,535 ----------- ----------- ----------- ----------- Net interest income................... 2,744 2,701 2,595 2,536 Provision for loan losses............. 30 30 30 30 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses....................... 2,714 2,671 2,565 2,506 ----------- ----------- ----------- ----------- Noninterest income: Fees and service charges.......... 354 380 424 434 Abstract fees..................... 304 354 305 270 Other income...................... 297 218 260 414 ----------- ----------- ----------- ----------- Total noninterest income........ 955 952 989 1,118 Noninterest expense: Salaries and employee benefits.... 1,043 992 1,005 1,063 Premises and equipment............ 237 245 283 327 Data Processing................... 113 116 112 114 SAIF deposit insurance premiums .. 13 14 14 14 Goodwill.......................... 118 118 118 118 Other............................. 588 625 546 650 ----------- ----------- ----------- ----------- Total noninterest expense....... 2,112 2,110 2,078 2,286 ----------- ----------- ----------- ----------- Income before income taxes............ 1,557 1,513 1,476 1,338 Provision for income tax expense...... 550 508 505 310 ----------- ----------- ----------- ----------- Net Income............................ $ 1,007 $ 1,005 $ 971 $ 1,028 =========== =========== =========== =========== Basic earnings per share.............. $ 0.48 $ 0.51 $ 0.50 $ 0.55 =========== =========== =========== =========== Diluted earnings per share............ $ 0.47 $ 0.50 $ 0.49 $ 0.53 =========== =========== =========== ===========
Year Ended December 31, 1999 ------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------ --------------------- ------------- (In thousands, except per share amounts) Interest income...................... $ 5,967 $ 6,005 $ 6,129 $ 6,455 Interest expense..................... 3,200 3,235 3,390 3,779 -------- -------- -------- -------- Net interest income.................. 2,767 2,770 2,739 2,676 Provision for loan losses............ 30 30 30 30 -------- -------- -------- -------- Net interest income after provision for loan losses...................... 2,737 2,740 2,709 2,646 -------- -------- -------- -------- Noninterest income: Fees and service charges......... 361 334 378 412 Abstract fees.................... 343 383 372 323 Other income..................... 216 338 379 224 -------- -------- -------- -------- Total noninterest income....... 920 1,055 1,129 959 Noninterest expense: Salaries and employee benefits... 973 1,007 1,033 1,013 Premises and equipment........... 207 216 236 272 Data Processing.................. 148 149 111 114 SAIF deposit insurance premiums . 37 36 36 38 Goodwill......................... 118 118 118 118 Other............................ 571 631 594 560 -------- -------- -------- -------- Total noninterest expense...... 2,054 2,157 2,128 2,115 -------- -------- -------- -------- Income before income taxes........... 1,603 1,638 1,710 1,490 Provision for income tax expense..... 545 564 622 510 -------- -------- -------- -------- Net income........................... $ 1,058 $ 1,074 $ 1,088 $ 980 ======== ======== ======== ======== Basic earnings per share............. $ 0.37 $ 0.39 $ 0.44 $ 0.44 ========= ========= ========= ========= Diluted earnings per share........... $ 0.36 $ 0.38 $ 0.43 $ 0.43 ========= ========= ========= =========
-61- MANAGEMENT OF THE HOLDING COMPANY AND THE BANK The Board of Directors of the Holding Company is divided into three classes, each of which contains approximately one-third of the Board. The Bylaws of the Holding Company currently authorize seven directors. Currently, all directors of the Holding Company are also directors of the Bank. Directors David M. Bradley, CPA is Chairman of the Board, President and Chief Executive Officer. Howard A. Hecht is a retired insurance executive, who was a Vice President with Principal Mutual Life Insurance Company in Des Moines, Iowa. Mr. Hecht will be retiring from the board of directors effective April 27, 2001. Melvin R. Schroeder is Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. KaRene Egemo is the owner of Egemo Realty, Inc. in Fort Dodge, Iowa. Robert H. Singer, Jr. is the co-owner of Calvert, Singer & Kelley Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa. Mark Thompson is the owner of Mark Thompson, CPA, P.C. , in Fort Dodge, Iowa and has been a certified public accountant since 1978. Craig R. Barnes is Executive Director of International Products for Principal Capital Management, a member of the Principal Financial Group. He has been employed with Principal in Des Moines, Iowa, since 1979. Executive Officers Who are Not Directors C. Thomas Chalstrom is Chief Operating Officer of the Bank and Executive Vice President of the Holding Company and the Bank. Jean L. Lake is Secretary of the Holding Company and the Bank. John L. Pierschbacher, CPA is Treasurer of the Holding Company and the Bank. Kirk A. Yung is Senior Vice President of the Holding Company and the Bank. -62- SHAREHOLDER INFORMATION Price Range of the Company's Common Stock The Company's Common Stock trades on The Nasdaq National Market System under the symbol "FFFD." The following table shows the high and low per share sales prices of the Company's Common Stock as reported by Nasdaq and the dividends declared per share during the periods indicated. Such quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Price Range ($) --------------- Dividends Declared Quarter Ended High Low Per Share ------------- ---- --- --------- 1999 - ---- First Quarter................ $ 17.250 $ 16.250 $ 0.10 Second Quarter............... 18.750 16.000 0.10 Third Quarter................ 17.625 16.188 0.10 Fourth Quarter............... 17.000 15.000 0.10 2000 - ---- First Quarter................ 16.688 12.750 0.125 Second Quarter............... 14.750 13.750 0.125 Third Quarter................ 16.938 13.750 0.125 Fourth Quarter .............. 17.750 16.625 0.125
The Company's Common Stock was traded at $20.00 as of March 12, 2001. Information Relating to the Company's Common Stock As of March 12, 2001, the Company had 1,437 shareholders of record, which does include the number of persons or entities who hold their Common Stock in nominee or "street" name through various brokerage firms. As of such date 1,897,380 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.15 per share. The Board of Directors of the Company plans to maintain a regular quarterly dividend in the future and will continue to review the dividend payment amount in relation to the Company's earnings, financial condition and other relevant factors (such as regulatory requirements). The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its shareholders' equity would be reduced below the amount required for the liquidation account. For information concerning federal regulations which apply to the Bank in determining the amount of proceeds which may be retained by the Company and regarding a savings institution's ability to make capital distributions including payment of dividends to its holding company, see Note 11 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, although the source of such dividends will be dependent on the net proceeds retained by the Holding Company and earnings thereon and may be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Iowa law, which prohibit the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Holding Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. -63- Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Friday, April 27, 2001 at the Trolley Center, 900 Central Avenue, Fort Dodge, Iowa. Stockholders and General Inquiries David M. Bradley North Central Bancshares, Inc. c/o First Federal Savings Bank of Iowa 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 www.firstfederaliowa.com General Counsel Independent Auditor Johnson, Erb, Bice, McGladrey & Pullen, LLP Kramer, Good & Mulholland, P.C. 400 Locust Street Suite 640 809 Central Avenue Des Moines, Iowa 50309 Fort Dodge, Iowa 50501 Special Counsel Transfer Agent Thacher Proffitt & Wood Computershare Investor Services 1700 Pennsylvania Avenue, N.W., Suite 800 12039 West Alameda Parkway Suite Z Washington, D.C. 20006 Lakewood, Colorado 80228 (303) 986-5400 www.asttrust.com Annual Report on Form 10-K A copy of the Company's Form 10-K (without exhibits) for the fiscal year ended December 31, 2000 will be furnished without charge to shareholders as of March 12, 2001 upon written request to Jean L. Lake, Corporate Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. -64- EX-23.1 5 0005.txt CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 Consent of McGladrey & Pullen, LLP To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We consent to the incorporation by reference in the North Central Bancshares, Inc. Registration Statement on Form S-8 of North Central Bancshares, Inc., pertaining to the North Central Bancshares, Inc. 1996 Stock Option Plan, of our report dated February 2, 2001, which appears in the annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 2000. /s/ McGladrey & Pullen, LLP ---------------------------- McGladrey & Pullen, LLP Des Moines, Iowa March 27, 2001 EX-99.1 6 0006.txt PRESS RELEASE Exhibit 99.1 Press Release PRESS RELEASE October 27, 2000 For further information contact: David M. Bradley Chairman, President and Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. ANNOUNCES STOCK REPURCHASE PROGRAM Fort Dodge, Iowa, October 27, 2000 - North Central Bancshares, Inc. (Nasdaq: "FFFD") (the "Company"), the holding company for First Federal Savings Bank of Iowa, announced today that it will commence a stock repurchase program. The program authorizes the Company to repurchase up to 100,000 shares of its outstanding shares of common stock during the next twelve months. The repurchases will be made from time to time, in open market transactions, at the discretion of management. This new program will commence at the completion of the Company's current repurchase program which began on April 12, 2000, of which 10,862 shares remain to be purchased. North Central Bancshares, Inc., with over $384 million in assets, is the holding company for First Federal Savings Bank of Iowa, a federally chartered stock savings bank. First Federal is a community-oriented institution serving Iowa through 8 full service locations in Fort Dodge, Nevada, Ames, Perry, Burlington and Mt. Pleasant, Iowa. First Federal's deposits are insured by the Federal Deposit Insurance Corporation. EX-99.2 7 0007.txt PRESS RELEASE Exhibit 99.2 Press Release PRESS RELEASE November 29, 2000 For further information contact: David M. Bradley Chairman, President & Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. ANNOUNCES DIVIDEND David M. Bradley, Chairman, President and Chief Executive Officer of North Central Bancshares, Inc. (the "Company") announced today that the Company declared a regular quarterly cash dividend of $0.125 per share on the Company's common stock for the fiscal quarter ended December 31, 2000. The dividend will be payable to all stockholders of record as of December 15, 2000 and will be paid on January 5, 2001. On November 20, 2000, the Company completed a 5.0% stock repurchase program. During that program the Company repurchased 102,862 shares of its outstanding common stock at the aggregate cost of $1,618,705 in open market transactions. Recently, the Company commenced a new stock repurchase program for 100,000 shares, of which 67,500 shares remain to be repurchased. The Company has 1,921,880 shares of common stock currently outstanding. North Central Bancshares, Inc. serves north central and southeastern Iowa at 8 full service locations in Fort Dodge, Nevada, Ames, Burlington, Mount Pleasant and Perry, Iowa through its wholly- owned subsidiary, First Federal Savings Bank of Iowa, headquartered in Fort Dodge, Iowa. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Company's stock is traded on The Nasdaq National Market under the symbol "FFFD". EX-99.3 8 0008.txt PRESS RELEASE Exhibit 99.3 Press Release PRESS RELEASE January 22, 2001 For further information contact: David M. Bradley Chairman, President and Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue PO Box 1237 Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. ANNOUNCES RECORD EARNINGS PER SHARE FOR FOURTH QUARTER AND YEAR END 2000 (Nasdaq: FFFD) Fort Dodge, Iowa -- North Central Bancshares, Inc. (the "Company"), the holding company for First Federal Savings Bank of Iowa (the "Bank"), announced today that the Company earned a record $2.00 diluted earnings per share for the year ended December 31, 2000, compared to diluted earnings per share of $1.60 for the year ended December 31, 1999, an increase in diluted earnings per share of 25.0%. In dollars, the Company's net income was $4.0 million for the year ended December 31, 2000, as compared to $4.2 million for the year ended December 31, 1999. The Company's net income was $1,028,000, or diluted earnings per share of $0.53, for the fourth quarter of 2000, compared to net income of $981,000, or diluted earnings per share of $0.43 for the fourth quarter of 1999, an increase in diluted earnings per share of 23.3%. During the quarter ended December 31, 2000, the Company recorded an income tax benefit of $100,000 and interest income on this tax item of $62,000, due to receipt of a state franchise tax refund related to an issue that had been under dispute for several years. Total assets at December 31, 2000 were $389.0 million as compared to $367.4 million at December 31, 1999. The increase in assets resulted primarily from increases in loans, offset by a decrease in cash and securities available-for- sale. Cash decreased by $3.8 million, or 30.1%, from $12.7 million at December 31, 1999 to $8.8 million at December 31, 2000. Securities available-for-sale decreased $6.3 million, or 12.8%, from $49.7 million at December 31, 1999 to $43.4 million at December 31, 2000. The decrease in securities available for sale was primarily due to calls and maturities in excess of purchases. Loans increased by $31.3 million, or 10.9%, to $318.0 million at December 31, 2000 from $286.8 million at December 31, 1999. Deposits decreased $9.9 million, or 3.6%, to $261.2 million at December 31, 2000 from $271.0 million at December 31, 1999. Other borrowed funds increased $32.9 million, or 59.0%, to $88.6 million at December 31, 2000 from $55.7 million at December 31, 1999. The increase in other borrowings was primarily due to the funding of asset growth and stock repurchases. - MORE- Nonperforming assets were 0.28% of total assets as of December 31, 2000 compared to 0.20% of total assets as of December 31, 1999. The allowance for loan losses was $2.8 million, or 0.88% of total loans, at December 31, 2000, compared to $2.8 million, or 0.95% of total loans, at December 31, 1999. The net interest spread of 2.59% for the year ended December 31, 2000 represented a decrease from the net interest spread of 2.86% for the year ended December 31, 1999. The net interest margin of 2.95% for the year ended December 31, 2000 represented a decrease from the net interest margin of 3.35% for the year ended December 31, 1999. Net interest income for the year ended December 31, 2000 was $10.6 million, compared to net interest income of $11.0 million for the corresponding period a year ago. The Bank's provision for loan losses was $120,000 for the years ended December 31, 2000 and 1999. 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 conditions, the volume and type of loans in the Bank's portfolio, and other factors related to the collectibility of the Bank's loan portfolio. Stockholders' equity was $36.4 million at December 31, 2000, compared to $38.1 million at December 31, 1999. Stockholders' equity decreased by $1.7 million primarily due to stock repurchases and declared dividends, which were offset in part by earnings. Book value, or stockholders' equity per share, at December 31, 2000 was $19.04 compared to $16.86 at December 31, 1999. The ratio of stockholders' equity to total assets was 9.4% at December 31, 2000, as compared to 10.4% at December 31, 1999. Stockholders of record on December 15, 2000, received a quarterly cash dividend of $0.125 per share on January 5, 2001. Recently, the Company commenced a new stock repurchase program for 100,000 shares, of which 57,500 shares remain to be repurchased. The Company has 1,911,880 shares of common stock currently outstanding. During the year ended December 31, 2000, the Company repurchased a total of 349,862 shares or approximately 15.5% of its outstanding shares of common stock at prevailing market prices averaging $16.40 per share. Since its formation in 1996, the Company has invested a total of $34.7 million in the repurchase of 2,116,967 shares of its outstanding stock. The Company announced a dividend reinvestment and stock purchase plan on September 22, 2000. Shareholders owning 100 or more shares registered in their name are eligible to enroll in this plan. North Central Bancshares, Inc. serves north central and southeastern Iowa at 8 full service locations in Fort Dodge, Nevada, Ames, Perry, Burlington and Mount Pleasant, Iowa through its wholly-owned subsidiary, First Federal Savings Bank of Iowa, headquartered in Fort Dodge, Iowa. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Company's stock is traded on The Nasdaq National Market under the symbol "FFFD". For more information contact: David M. Bradley, President, 515-576-7531 FINANCIAL HIGHLIGHTS OF NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, except per share and share data) December 31, 2000 December 31, 1999 Assets Cash and cash equivalents $ 8,850 $ 12,669 Securities available for sale 43,351 49,693 Loans (net of allowance of loan loss of $2.8 million and $2.8 million, respectively) 318,026 286,838 Goodwill 5,443 5,915 Other assets 13,328 12,318 --------------- --------------- Total Assets $ 388,998 $ 367,433 ================ ================ Liabilities Deposits $ 261,166 $ 271,031 Other borrowed funds 88,592 55,715 Other liabilities 2,842 2,560 --------------- --------------- Total Liabilities 352,600 329,306 Stockholders' Equity 36,398 38,127 --------------- --------------- Total Liabilities and Stockholders' Equity $ 388,998 $ 367,433 ================ ================ Stockholders' equity to total assets 9.36% 10.38% ================ ================ Book value per share $ 19.04 $ 16.86 ================ ================ Total shares outstanding 1,911,880 2,261,742 ================ ================
Condensed Consolidated Statements of Income
(Dollars in Thousands, except per share data) For the Three Months For the Year Ended December 31, Ended December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Interest income $ 7,071 $ 6,455 $ 27,284 $ 24,556 Interest expense 4,534 3,778 16,707 13,604 --------- -------- ------- -------- Net interest income 2,537 2,677 10,577 10,952 Provision for loan loss 30 30 120 120 --------- -------- ------- -------- Net interest income after provision for loan loss 2,507 2,647 10,457 10,832 Noninterest income 1,118 959 4,014 4,063 Noninterest expense 2,286 2,115 8,587 8,454 --------- -------- ------- -------- Income before income taxes 1,339 1,491 5,884 6,441 Income taxes 311 510 1,873 2,241 --------- -------- ------- -------- Net income $ 1,028 $ 981 $ 4,011 $ 4,200 ========== ========= ======== ========= Basic earnings per share $ 0.55 $ 0.44 $ 2.04 $ 1.63 ========== ========= ======== ========= Diluted earnings per share $ 0.53 $ 0.43 $ 2.00 $ 1.60 ========== ========= ======== =========
Selected Financial Ratios
For the Three Months For the Year Ended December 31, Ended December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Performance ratios Net interest spread 2.44% 2.79% 2.59% 2.86% Net interest margin 2.77% 3.11% 2.95% 3.35% Return on average assets 1.07% 1.07% 1.06% 1.21% Return on average equity 11.31% 10.07% 11.08% 9.51% Efficiency ratio (noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income) 62.54% 58.17% 58.85% 56.30%
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